Financial Accounting IFRS, Global Edition, 12th edition Walter T. Harrison Solution Manual.pdf (12)

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Solution Manual

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Financial Accounting IFRS

Edition: Author(s):

12th Edition Walter T. Harrison Charles Horngren C. William Thomas Wendy M. Tietz

Chapter 1 Conceptual Framework and Financial Statements Short Exercises (10 min.) S 1-1 a. Corporation and Limited-liability partnership (LLP). If any of these businesses fails and cannot pay its liabilities, creditors cannot force the owners to pay the business’s debts from the owners’ personal assets.

b. Proprietorship. There is a single owner of the business, so the owner is answerable to no other owner. c. Partnership.

If the partnership fails and cannot pay its liabilities, creditors can force the partners to pay the business’s debts from their personal assets. A partnership affords more protection for creditors than a proprietorship because there are two or more owners to share this liability.

Chapter 1

Conceptual Framework and Financial Statements

(5 min.) S 1-2 1. Assets are the economic resources of a business that are expected to produce a benefit in the future.

Owners’ equity represents the insider claims of a business, the owners’ interest in its assets.

Assets and owners’ equity differ in that assets are resources and owners’ equity is a claim to assets.

Assets must be at least as large as owners’ equity, so equity can be smaller than assets.

2. Both liabilities and owners’ equity are claims to assets.

Liabilities are the outsider claims to the assets of a business; they are obligations to pay creditors.

Owners’ equity represents the insider claims to the assets of the business; they are the owners’ residual interest in its assets after claims from its creditors.

(5-10 min.) S 1-3 a. Cash and cash equivalents A

g. Accounts payable L

b. Long-Term investment A

h. Share capital E

Financial Accounting: IFRS 12/e Solutions Manual

c. Income tax payables L

i. Short term bank borrowings L

d. Notes payable L

j. Retained earnings E

e. Wages payable L

k. Buildings A

f. Trademarks A

l. Prepaid expenses A

(5 min.) S 1-4 1. Assets and liabilities 2. Equity

(5 min.) S 1-5 1. The entity assumption applies.

2. Application of the entity assumption will separate Newman’s personal assets from the assets of Quality Food Brands. This will help Newman, investors, and lenders know how much in assets the business controls, and this knowledge will help all parties evaluate the business realistically.

Chapter 1

Conceptual Framework and Financial Statements

(5-10 min.) S 1-6 a. Going concern assumption b. Accrual accounting assumption, relevance characteristic c. Comparability characteristic d. Accrual accounting assumption

(5 min.) S 1-7 Computed amounts in boxes Total Assets

= Total Liabilities + Shareholders’ Equity

$211,000

=

$50,200

+

$160,800

b. 270,000

=

50,290

+

219,710

c.

=

96,000

+

76,800

a.

172,800

(5 min.) S 1-8 1. Owners’ Equity = Assets − Liabilities This way of determining the amount of owners’ equity applies to any company, your household, or a single Burger King outlet.

2. Liabilities = Assets − Owners’ Equity

Financial Accounting: IFRS 12/e Solutions Manual

(5 min.) S 1-9 Maxis Play Income Statement Year Ended December 31, 20X6 Millions Revenues…………………………………….. $ 262 Expenses……………………………………..

108 Net income…………………………………... $ 154

(5 min.) S 1-10 Idea Corp.

Statement of Changes in Equity Year Ended December 31, 20X6 Millions

Total Equity, January 1, 20X6 ($900 + $375)………

Add: Net income ($1,530 − $975)………

$1,275 555 1,830

Less: Dividends………………………...

(45)

Total Equity, December 31, 20X6……

$1,785

Chapter 1

Conceptual Framework and Financial Statements

(10 min.) S 1-11 Atlantia Products Balance Sheet As at December 31, 20X6 ASSETS Current assets: Cash……………………………………………………

Receivables…………………………………………...

Inventory………………………………………………

Total current assets…………………………………

Equipment……………………………………………….

Total assets……………………………………………...

LIABILITIES Current liabilities: Accounts payable……………………………………

Total current liabilities……………………………...

Long-term liabilities: Long-term notes payable…………………………..

Total liabilities………………………………………...

SHAREHOLDERS’ EQUITY Share Capital…………………………………………….

Retained earnings………………………………………

Total shareholders’ equity…………………………

Total liabilities and shareholders’ equity…………..

$ 7,500 11,000 10,000 28,500 24,500 $53,000

$ 10,500 10,500 25,000 $35,500

17,500 0* 17,500 $53,000

_____ *Computation of retained earnings: Total assets ($53,000) − current liabilities ($10,500) − longterm notes payable ($25,000) − share capital ($17,500) = $0

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) S 1-12 Apollo Medical Inc. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income………………………………………...

$ 216,300

Adjustments to reconcile net income to net cash provided by operating activities….

(66,000)

Net cash provided by operating activities…

150,300

Cash flows from investing activities: Purchases of equipment…………

$ (135,000)

Net cash used for investing activities……..

(135,000)

Cash flows from financing activities: Payment of dividends…………….

$ (32,100)

Net cash used for financing activities…….

(32,100)

Net decrease in cash………………………………..

(16,800)

Cash balance, December 31, 20X5………………

90,000

Cash balance, December 31, 20X6………………

$ 73,200

Chapter 1

Conceptual Framework and Financial Statements

(10 min.) S 1-13 a. Bank balance BS, SCF b. Net cash used for investing activities SCF c. Accounts receivable BS d. Share capital BS e. Interest expense IS f. Long-term investment BS g. Dividend paid

SCE, SCF

h. Reserves SCE, BS i. Rent expense

IS

j. Property, plant and equipment k. Notes payable

BS

BS

l. Retained earnings SCE,

BS

m. Rental income IS n. Net income IS, SCE, SCF

(15-20 min.) S1-14 a. Paying large dividends will cause retained earnings to be low. b. Heavy investing activity and paying off debts can result in a cash shortage even if net income has been high. c. The single best source of cash for a business is operating activities — net income and the related cash receipts. This Financial Accounting: IFRS 12/e Solutions Manual

source of cash is best because it is a result of the core operations of the business. d. Borrowing, issuing shares, and selling plant, property and equipment (PPE) can bring in cash even when the company has experienced losses. Reducing accounts receivable and inventory can also increase cash flow.

(5 min.) S 1-15 Ethics is a factor that should be included in every business and accounting decision, beyond the potential economic and legal consequences. and

Ideally,

for

each

decision,

honesty

truthfulness should prevail, considering the rights of others.

The decision guidelines at the end of chapter 1 spell out the considerations we should take when making decisions. Simply, we might ask ourselves three questions: (1) Is the action legal?

(2) Who will be affected by the decision? (3) How will the decision make me feel afterward?

Chapter 1

Conceptual Framework and Financial Statements

Exercises Group A

(10-15 min.) E 1-16A Amounts in thousands; computed amounts in boxes)

Alpha Bravo Charlie

Assets $32 21 44

=

Liabilities + Owners’ Equity $12 $20 16 5 21 23

Alpha appears to have the strongest financial position because its liabilities make up the smallest percentage of company assets ($12 / $32 = 0.375); Alpha’s equity is the highest percentage of company assets ($20 / $32 = 0.625).

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 1-17A Req. 1

(Amounts in millions) Assets

=

Total Req. 2

=

Shareholders’ + Equity

Liabilities $240 $500 600 880 $840 200 $1,580 + $740

Resources Req. 3 Amount to work with

owed to creditors

Req. 4 Actually owned by company shareholders

(10-20 min.) E 1-18A

Total shareholders’ equity, January 31, 20X6 ($60 − $12)………...

Add: Issuances of shares.……………...

Net income………………………..

Less: Dividends…………………………...

Net loss…………………………….

Total shareholders’ equity, January 31, 20X7 ($74 − $16)…………

1

Situation 2 Millions

3

$48 16 -0(6)*

$48 -026* (16)

$48 4 18* (12)

$58

$58

$58

_____ *Must solve for these amounts.

Chapter 1

Conceptual Framework and Financial Statements

(10-15 min.) E 1-19A 1. Galaxy Hotels, Inc. Shareholders’ Equity Assets = Liabilities + Beginning amount $150,000 = $80,000 + $70,000 Multiplier for × 0.80 increase $120,000 Ending amount

2. Sky Airlines, Ltd.

Beginning amount Net income Dividends Ending amount

Shareholders’ Equity Assets − Liabilities = $110,000 − $25,000 = $85,000 18,000 (3,000) $100,000

(10-15 min.) E 1-20A a. b. c. d. e. f. g. h. i. j. k. l.

Statement of cash flows Income statement Statement of cash flows Balance sheet, Statement of cash flows Balance sheet Income statement, Statement of changes in equity, Statement of cash flows Balance sheet Balance sheet Statement of changes in equity, Statement of cash flows Income statement Balance sheet Balance sheet Financial Accounting: IFRS 12/e Solutions Manual

m. n.

Balance sheet Income statement

(10-20 min.) E 1-21A Allianz Inc. Balance Sheet (Amounts in millions) As at January 31, 20X6 ASSETS LIABILITIES Cash and cash Current liabilities $5.0 equivalent Receivables 1.6 Long-term liabilities Inventories 10.0 Total liabilities Investment assets 30.0 33.2 Property and SHAREHOLDERS’ EQUITY equipment, net Share capital Retained earnings Total shareholders’ equity Total liabilities and Total assets $79.8 shareholders’ equity

$4.0 6.0 10.0

28.6 41.2* 69.8 $79.8

_____ *Computation of retained earnings: Total assets ($79.8) − Total liabilities ($10.0) − Share capital ($28.6) = $41.2

Chapter 1

Conceptual Framework and Financial Statements

(15-25 min.) E 1-22A Req. 1 Allianz Inc. Income Statement (Amounts in millions) Year Ended January 31, 20X6 Total revenue……………………………………….

Expenses: Interest expense………………………………..

Salary and other employee expenses………

Other expenses…………………………………

Total expenses………………………………….

Net income………………………………………….

$77.6 $ 1.4 35.0 13.4 49.8 $27.8

Req. 2 Looking at retained earnings movements, we can calculate dividend paid.

Retained Earnings (Amounts in millions) Retained earnings, beginning of year………………

$16.4

Add: Net income for the year (Req. 1)…………………

27.8

Less: Dividends*…………………………………………...

Retained earnings, end of year (from Exercise 1-21A)….

44.2 3.0 $41.2

_____ * Solve for dividends Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) E 1-23A Neptune Ltd. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income……………………………………. $(210,000) Adjustments to reconcile net income to net cash provided by operating activities.

120,000 Net cash used by operating activities…….. $(90,000) Cash flows from investing activities: Net cash used provided by investing activities…

250,000

Cash flows from financing activities: Net cash provided by financing activities……..

Net increase in cash………………………………………...

Beginning cash balance……………………………………

(136,000) 24,000 176,000

Ending cash balance………………………………………..

$200,000

Items given that do not appear on the statement of cash flows: Total assets − Balance sheet Total liabilities − Balance sheet

Chapter 1

Conceptual Framework and Financial Statements

(15-20 min.) E 1-24A Fast Copy Center, Inc. Income Statement Month Ended July 31, 20X6 Revenue: Service revenue……………

Expenses: Salary expense………………

Rent expense…………………

Utilities expense…………….

Total expenses………………

Net income………………………

$604,500 $168,000 2,300 12,000 182,300 $ 422,200

Fast Copy Center, Inc. Statement Of Changes In Equity Month Ended July 31, 20X6 Total Equity, July 1, 20X6……………… $ 69,500 Add: Net income for the month………. 422,200 Less: Dividends…………………………. 491,700 Total Equity, July 31, 20X6………..

(4,200) $487,500

(15-20 min.) E 1-25A

Assets Cash…………

Office supplies Equipment……

Fast Copy Center, Inc. Balance Sheet As at July 31, 20X6 Liabilities $ 9,800 Accounts payable……… $ 16,000 13,700 480,000 Shareholders’ Equity Share capital.……………

69,500 Retained earnings………

418,000

Financial Accounting: IFRS 12/e Solutions Manual

Total assets….

Total shareholders’ equity 487,500 Total liabilities and $503,500 shareholders’ equity…… $503,500

(15-20 min.) E 1-26A Fast Copy Center, Inc. Statement Of Cash Flows Month Ended July 31, 20X6

Cash flows from operating activities: Net income………………………………………

Adjustments to reconcile net income to net cash provided by operations…………

Net cash provided by operating activities Cash flows from investing activities: Acquisition of equipment……………………

Net cash used for investing activities…

$ 422,200 2,300 424,500

$(480,000)

Cash flows from financing activities: Issuance (sale) of shares to owners………… $ 69,500 Payment of dividends…………………………..

(4,200) Net cash provided by financing activities.

Net increase in cash………………………………

Cash balance, July 1, 20X6…………………….

Cash balance, July 31, 20X6…………………….

(480,000)

65,300 $ 9,800 0 $ 9,800

The ending cash balance on statement of cash flow corresponds with the balance sheet. Total income increases total equity on the statement of changes in equity, which tallies with the ending equity on the balance sheet.

Chapter 1

Conceptual Framework and Financial Statements

(10-15 min.) E 1-27A TO:

Owner of Fast Copy Center, Inc.

FROM:

Student Name

SUBJECT: Opinion of net income, dividends, financial position, and cash flows Your first month of operations was successful. Revenues totaled $604,500 and net income was $422,200. These operating results look very strong.

The company was able to pay a $4,200 dividend, and this should make you happy with so quick a return on your capital investment of $69,500.

Your financial position looks secure, with assets of $503,500 and liabilities of only $16,000. Your shareholders’ equity is $487,500.

Operating activities generated cash of $424,500, which is respectable. You ended the month with cash of $9,800. Based on the above facts, I believe you should continue to well in your business.

Student responses may vary.

Financial Accounting: IFRS 12/e Solutions Manual

Exercises Group B

(10-15 min.) E 1-28B Amounts in thousands; computed amounts in boxes)

Delta video rentals Echo entertainment Portal gift & cards

Assets = Liabilities + Owners’ Equity $9 $19 $28 30 5 35 16 17 33

Delta appears to have the strongest financial position because its liabilities make up the smallest percentage of company assets ($9 / $28 = 0.32). Stated differently, Delta’s equity is the highest percentage of company assets ($19 / $28 = 0.68).

Chapter 1

Conceptual Framework and Financial Statements

(10-15 min.) E 1-29B Req. 1 (Amounts in millions) Assets

Total Req. 2

= €300 420 110 €830 =

Shareholders’ Equity

Liabilities + €200 340 €540 +

Resources Req. 3 Amount to work with owed to creditors

$290

Req. 4 Actually owned by company shareholders

(10-20 min.) E 1-30B

Total shareholders’ equity, January 31, 20X6 (€40 − €6)…………..

Add: Issuances of shares.……………..

Net income……………………..

Less: Dividends…………………………...

Net Loss…………………………….

Total shareholders’ equity, January 31, 20X7 (€78 − €24)…………. _____ *Must solve for these amounts.

Financial Accounting: IFRS 12/e Solutions Manual

1

Situation 2 Millions

3

€34 20 -0*-0-

€34 -040* (20)

€34 12 16* (8)

€54

€54

€54

(10-15 min.) E 1-31B 1. Sapphire Hotels, Inc.

Beginning amount Multiplier for increase Ending amount

Shareholders’ Equity Assets = Liabilities + €35,000 €135,000 = €100,000 + × 0.80 €108,000

2. Dolphin Travel Ltd.

Beginning amount Net income Dividends Ending amount

Assets − Liabilities = €95,000 − €30,000 =

Chapter 1

Shareholders’ Equity €65,000 24,000 (4,000) €85,000

Conceptual Framework and Financial Statements

(10-15 min.) E 1-32B a. b. c. d. e. f. g. h. i.

Statement of changes in equity, Statement of cash flows Balance sheet Balance sheet Income statement Statement of cash flows Statement of cash flows Balance sheet Income statement, Statement of changes in equity, Statement of cash flows j. k. Balance sheet Balance sheet l.

Balance sheet Balance sheet m. Income statement n. Balance sheet, Statement of cash flows

Financial Accounting: IFRS 12/e Solutions Manual

(10-20 min.) E 1-33B Jackson Company Balance Sheet (Amounts in millions) As at May 31, 20X6 ASSETS LIABILITIES Cash and Cash Current liabilities € 5.0 €12.0 Equivalent 6.0 Receivables 0.4 Long-term liabilities 18.0 Inventories 10.0 Total liabilities Investments 32.2 Property and SHAREHOLDERS’ 36.0 EQUITY equipment, net Share capital 31.8 Retained earnings 33.8 Total shareholders’ equity 65.6 ____ Total liabilities and _ Total assets shareholders’ equity €83.6 €83.6 _____ *Computation of retained earnings: Total assets (€83.6) − Total liabilities (€18.0) − Share capital (€31.8) = €33.8

Chapter 1

Conceptual Framework and Financial Statements

(15-25 min.) E 1-34B Req. 1 Jackson Company Income Statement (Amounts in millions) Year Ended May 31, 20X6 Total revenue………………………………………. €68.0 Expenses: Interest expense……………………………….. € 0.4 Salary and other employee expenses………

31.0 Other expenses…………………………………

13.6 Total expenses………………………………….

45.0 €23.0 Net income………………………………………….

Req. 2 The statement of changes in equity helps to compute dividends, as follows: Statement of Changes in Equity (Amounts in millions) Total Equity, beginning of year…………………………

Add: income for the year (Req. 1)…………………

Less:Net Dividends…………………………………………...

Total Equity, end of year (from Exercise 1-33B)….

Financial Accounting: IFRS 12/e Solutions Manual

€50.4 23.0 73.4 (7.8) €65.6

(15-20 min.) E 1-35B Alpina Inc., Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income……………………………… € (630,000 ) Adjustments to reconcile net income to 360,000 net cash provided by operating activities.

Net cash used by operating activities…….. € (270,000) Cash flows from investing activities: Net cash used provided by investing activities….

750,000

Cash flows from financing activities: Net cash provided by financing activities……..

(408,000)

Net increase in cash………………………………………...

Beginning cash balance……………………………………

Ending cash balance………………………………………..

72,000 528,000 € 600,000

Items given that do not appear on the statement of cash flows: Total assets − Balance sheet Total liabilities − Balance sheet

Chapter 1

Conceptual Framework and Financial Statements

(15-20 min.) E 1-36B EXPRESS COPY CENTER, INC. INCOME STATEMENT MONTH ENDED JULY 31, 20X7 Revenue: Service revenue……………

Expenses: Salary expense………………

Rent expense…………………

Utilities expense…………….

Total expenses………………

Net income………………………

€544,450 €161,800 5,750 11,000 178,550 € 365,900

EXPRESS COPY CENTER, INC. STATEMENT OF CHANGES IN EQUITY MONTH ENDED JULY 31, 20X7 Total equity, July 1, 20X7……………… €0 Add: Issuance of shares Add: Net $54,000 income for the month………. Less: 365,900 Dividends………………………….

419,900 (3,100) Total equity, July 31, 20X7…………….. €416,800

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) E 1-37B EXPRESS COPY CENTER, INC. BALANCE SHEET As at JULY 31, 20X7 Assets Liabilities Cash………… € 8,600 Accounts payable……… € 17,000 Office supplies 14,200 Equipment……

411,000 Shareholders’ Equity Share capital..……………

54,000 Retained earnings………

362,800 Total shareholders’ equity 416,800 Total liabilities and Total assets…. €433,800 shareholders’ equity…… €433,800

Chapter 1

Conceptual Framework and Financial Statements

(15-20 min.) E 1-38B EXPRESS COPY CENTER, INC. STATEMENT OF CASH FLOWS MONTH ENDED JULY 31, 20X7 Cash flows from operating activities: Net income………………………………………

Adjustments to reconcile net income to net cash provided by operations…………

Net cash provided by operating activities Cash flows from investing activities: Acquisition of equipment……………………

Net cash used for investing activities…

Cash flows from financing activities: Issuance of shares to owners…………

Payment of dividends…………………………..

Net cash provided by financing activities.

Net increase in cash………………………………

Cash balance, July 1, 20X7…………………….

Cash balance, July 31, 20X7…………………….

Financial Accounting: IFRS 12/e Solutions Manual

365,900 2,800 368,700 €(411,000) (411,000) € 54,000 (3,100) 50,900 € 8,600 0 € 8,600

(10-15 min.) E 1-39B TO:

Owner of Express Copy Center, Inc.

FROM:

Student Name

SUBJECT: Opinion of net income, dividends, financial position, and cash flows Your first month of operations was successful. Revenues totaled €544,450 and net income was €365,900. These operating results look very strong.

The company was able to pay a €3,100 dividend, and this should make you happy with so quick a return on your investment.

Your financial position looks secure, with assets of €433,800 and liabilities of only €17,000. Your shareholders’ equity is €416,800.

Operating activities generated cash of €368,700, which is respectable. You ended the month with cash of €8,600. Based on the above facts, I believe you should stay in business.

Student responses may vary.

Chapter 1

Conceptual Framework and Financial Statements

Quiz Q1-40 Q1-41 Q1-42 Q1-43

b a b c Assets = Liabilities + $18,000 = + $5,000

Q1-44 Q1-45 Q1-46 Q1-47 Q1-48 Q1-49 Q1-50 Q1-51 Q1-52 Q1-53

d d c c b a b a b d

Shareholders’ + Equity + $13,000

($133,000 − $56,000 − $10,000 − $5,000 = $62,000) ($150,000 + $120,000 − $20,000 = $250,000)

Assets = $25,000 =

Liabilities $9,000* + 8,000 $17,000*

Begin.

Changes End. $38,000* = _____ *Must solve for these amounts.

Q1-54

b or c

+ +

Shareholders’ Equity $16,000

+

$21,000

Total shareholders’ equity

Begin. bal. $520,000 − $180,000 = $340,000 + Net income X = $180,000 − 50,000 − Dividends $750,000 − $280,000 = $470,000 End. bal.

Financial Accounting: IFRS 12/e Solutions Manual

Problems Group A (15-30 min.) P 1-55A Req. 1 Division A of Smith Corporation Income Statement Year Ended December 31, 20X7 Service revenue………………………….. $250,000 Sales revenue……………………………..

55,000 Total revenue……………………………... $305,000 Cost of goods sold………………………. 323,00,00 0 Depreciation expense 3,000 Other expenses……………………….…..

245,000 $280,000 Net income………………………………... $ 25,000

Chapter 1

Conceptual Framework and Financial Statements

(continued) P 1-55A Req. 2 a. Faithful representation characteristic. Report revenues at their actual sale value because that amount represents more faithfully what actually happened than what management believes the services are worth. b. Accrual accounting. While cash was only received later on, revenue

is

recognized

because

services

have

been

performed. c. Entity concept. If the reporting entity is Division A, then the revenue is recognized. If the reporting entity is Smith Corporation as a whole, then sales from one division to another alone is not recognized as revenue. d. Faithful representation characteristics. New information is a more faithful representation rather than old information. e. Accrual accounting. While cash was only paid later on, expenses are

recognized because

consumed or goods have been used.

Financial Accounting: IFRS 12/e Solutions Manual

services have been

(30 min.) P 1-56A Req. 1 Computed amounts in boxes Swift

Brezza Millions

Ritz

Balance sheets: Beginning: Assets………………………...

Liabilities……………………..

Share capital………………...

Retained earnings………….

$ 160 86 18 56

$ 80 50 6 24

$ 16 2 4 10

Ending: Assets………………………...

Liabilities……………………..

Share capital………………...

Retained earnings………….

$ 168 96 6 66

$ 84 48 4 32

$ 16 0 2 14

Income statement: Revenues…………………….

Expenses…………………….

Net income…………………..

$436 420 $ 16

$322 304 $ 18

$24 16 $ 8

Statement of changes in equity: Beginning RE……………….. + Net income………………….. − Dividends……………………. = Ending RE……………………

$ 56 16 (6) $ 66

$ 24 18 (10) $ 32

$ 10 8 (4) $ 14

Chapter 1

Conceptual Framework and Financial Statements

(continued) P 1-56A Req. 2 Swift

Brezza Millions

Ritz

Net income………….

$16

$18 Highest

$8

% of net income

$16

to revenues………

$436

= 3.7%

$18 $322

= 5.6%

$8

= 33%

$24 Highest

The company that has the highest net income is Brezza Corp.

The company that has the highest percentage of net income to revenues is Ritz Corp.

Financial Accounting: IFRS 12/e Solutions Manual

(20-25 min.) P 1-57A Req. 1 Baselines, Inc. Balance Sheet As at June 30, 20X6 ASSETS Cash Accounts receivable Notes receivable Office supplies Equipment Land Total assets

LIABILITIES $ 14,000 Accounts payable $ 15,000 110,000 5,500 Note payable 125,000 3,000 Total liabilities 2,400 SHAREHOLDERS’ 80,000 EQUITY 156,000 Shareholders’ equity 135,900* Total liabilities and ________ $260,900 $260,900 shareholders’ equity

_____ *Total assets ($260,900) − Total liabilities ($125,000) = Shareholders’ equity ($135,900).

Req. 2 Baseline, Inc. is in better financial position than the erroneous balance sheet reports. Liabilities are less, and assets and equity are greater than reported originally.

Req. 3 The following accounts are not reported on the balance sheet because they are expenses. Expenses are reported on the income statement.

Utilities expense Advertising expense Salary expense Interest expense Chapter 1

Conceptual Framework and Financial Statements

(20-25 min.) P 1-58A Req. 1 Sandy Healey Realtor Balance Sheet As at April 30, 20X7 ASSETS LIABILITIES Cash $ 70,000 Accounts payable $ 32,000 Office supplies 36,000 13,000 Note payable Franchise 68,000 22,000 Total liabilities Furniture 38,000 SHAREHOLDERS’ Land 112,000 EQUITY Share capital 85,000 Retained earnings 102,000* Total shareholders’ equity 187,000 Total liabilities and $255,000 Total assets $255,000 shareholders’ equity _____ *Total assets ($255,000) − Total liabilities ($68,000) − Share capital ($85,000) = Retained earnings ($102,000).

Req. 2 It appears that Sandy Healy’s business can pay its debts. Total assets far exceed total liabilities.

Req. 3 Personal items not reported on the balance sheet of the business: a. Personal cash ($15,000) e. Personal residence ($360,000) and mortgage payable ($142,000) f. Personal account payable ($2,000) Financial Accounting: IFRS 12/e Solutions Manual

(30-45 min.) P 1-59A Req. 1 Venus Rollers, Inc. Income Statement Year Ended December 31, 20X6 Revenue Service revenue……………….

Expenses Salary expense………………...

Rent expense…………………..

Interest expense………………

Utilities expense………………

Property tax expense…………

Total expenses…………………

Net income………………………...

$576,000 $132,800 52,000 16,000 14,800 6,400 222,000 $ 354,000

Req. 2 Venus Rollers, Inc. Statement of Changes in Equity Year Ended December 31, 20X6 Total Equity, January 1, 20X6…………….

Add: Net income for the year……….…..

Less: Dividends…………………………....

Total Equity, December 31, 20X6………

Chapter 1

$468,800 354,000 822,800 (166,400) $ 656,400

Conceptual Framework and Financial Statements

(continued) P 1-59A Req. 3

ASSETS Cash Accounts receivable Supplies Equipment Building Land

Total assets

Venus Rollers, Inc. Balance Sheet As at December 31, 20X6 LIABILITIES $ 56,000 Accounts payable $ 40,000 7,200 88,000 Interest payable 9,200 Note payable 110,000 126,800 Total liabilities 157,200 501,600 SHAREHOLDERS’ 32,000 EQUITY Share capital 4,800 Retained earnings 651,900 Total shareholders’ equity 656,400 Total liabilities and $813,600 $813,600 shareholders’ equity

Req. 4 a. Venus Rollers was profitable; net income was $354,000. b. Retained earnings increased by $187,600 — from $464,000 to $651,600. c. Total equity ($656,400) exceeds total liabilities ($157,200).

Therefore, the shareholders own more of the company’s assets than the creditors.

Financial Accounting: IFRS 12/e Solutions Manual

(20 min.) P 1-60A Req. 1 Water Fountain Company Statement of Cash Flows Year Ended May 31, 20X7 Millions Cash flows from operating activities: Net income…………………………………………

Adjustments to reconcile net income to cash provided by operations…………….

Net cash provided by operating activities..

$ 3,000 2,250 5,250

Cash flows from investing activities: Purchases of property, plant, and equipment. $(3,500) Sales of property, plant, and equipment……..

50 Other investing cash payments………………..

(320) Net cash used for investing activities……..

(3,770)

Cash flows from financing activities: Issuance of common shares..………………….. $ 200 Payment of dividends……………………………

(300) Net cash used for financing activities……..

(100)

Net increase in cash…………………………………

Cash, beginning……………………………………

Cash, ending………………………………………….

1,380 300 $ 1,680

Req. 2 Operating activities provided the bulk of Water Fountain Company's cash. This is a sign of strength because operations should be the main source of cash.

Chapter 1

Conceptual Framework and Financial Statements

(40-50 min.) P 1-61A 20X7 20X6 (Thousands) INCOME STATEMENT Income revenues Cost of goods sold Other expenses Income before income taxes Income taxes (35% tax rate) Net income STATEMENT OF CHANGES IN EQUITY Beginning balance Shares bought back Net income Dividends Ending balance BALANCE SHEET Assets: Cash Property, plant and equipment Other assets Total assets Liabilities: Current liabilities Notes payable and long-term debt Other liabilities Total liabilities Shareholders’ Equity: Share capital Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity STATEMENT OF CASH FLOWS Net cash provided by operating activities Net cash provided by investing activities Net cash used for financing activities Increase (decrease) in cash Cash at beginning of year Cash at end of year

Financial Accounting: IFRS 12/e Solutions Manual

13,850 =

$ k $16,020 (11,000) (a) = (12,900) (1,250) (1,200) 1,600 1,920 672 560 = (l) b = 1,248 m$ 1,040 = $

3,874 =

$

1,040 = 4,788 =

$

n $ 2,826 (30) 0 o C = (96) (200) p $ d =

1,080 = $

q $ e = 1,680 1,725 11,628 = 10,184 r 14,388 = $ s $13,069

5,290 =

$

$ 4,388 = 4,788 = 14,388 = $

715 =

1,160 = 1,080 =

$

t 4,250 60 9,600

$ 5,725 3,400 70 f

400 $ 410 u g v 3,874 w $ h

=

1,248 3,874

1,160

9,195

= = 13,069 3,464

x $ 850 (220) (320) (575) (570) ( 80) (i) = (40) 1,200 y j = 1,160 z $ $

Problems Group B (15-20 min.) P 1-62B Req. 1 Division X of Paris Corporation Income Statement Year Ended December 31, 20X7 Thousands Service revenue………………….. € 262 Sales revenue………………………..

20 Total revenue………………………...

17 € 282 Cost of goods sold………………….

7 Depreciation expense…………….. 230 Other expenses……………………...

Total expenses………………………

254 Net income…………………………… € 28

Chapter 1

Conceptual Framework and Financial Statements

(continued) P 1-62B Req. 2 a. Faithful representation characteristic. Report revenues at their actual sale value because that amount represents more faithfully what actually happened than what management believes the services are worth. b. Accrual accounting. While cash was only received later on, revenue

is

recognized

because

services

have

been

performed. c. Entity concept. If the reporting entity is Division X, then the revenue is recognized. If the reporting entity is Paris Corporation as a whole, then sales from one division to another alone is not recognized as revenue. d. Faithful representation characteristics. New information is a more faithful representation rather than old information. e. Accrual accounting. While cash was only paid later on, expenses are

recognized because

consumed or goods have been used.

Financial Accounting: IFRS 12/e Solutions Manual

services have been

(30 min.) P 1-63B Req. 1 Computed amounts in boxes.

Dylan

Zachary Millions

Eunice

Balance sheets: Beginning: Assets………………………... € 320 Liabilities……………………..

172 Share capital ……………...

36 Retained earnings………….

112

€ 160 100 12 48

€ 32 4 8 20

Ending: Assets………………………... € 336 Liabilities……………………..

192 Share capital ……………...

12 Retained earnings………….

132

€ 168 96 8 64

€ 32 2 2 28

Income statement: Revenues……………………. €872 Expenses…………………….

840 Net income………………….. $ 32

€644 608 $ 36

€48 32 16

€ 48 36 (20) $ 64

€ 20 16 (8) $ 28

Statement of changes in equity:

Beginning RE……………….. € 112 + Net income…………………..

32 − Dividends…………………….

(12) = Ending RE…………………… $ 132

Chapter 1

Conceptual Framework and Financial Statements

Req. 2

Net income………….

Dylan

Zachary Millions

Eunice

€32

€36 Highest

€16

€36

€16

% of net income €32 to revenues……… €872

= 3.7%

= 33%

€48 Highest The company that has the highest net income is Zachary Corp.

The company that has the highest percentage of net income to revenues is Eunice Corp.

Financial Accounting: IFRS 12/e Solutions Manual

€644

= 5.6%

(20-25 min.) P 1-64B Req. 1 Red Tape, Inc. Balance Sheet As at June 30, 20X6 ASSETS Cash Accounts receivable Notes receivable Office supplies Equipment Land Total assets

LIABILITIES €14,400 Accounts payable € 10,000 112,000 6,400 Note payable 122,000 29,200 Total liabilities 1,400 SHAREHOLDERS’ 76,400 EQUITY 162,000 Shareholders’ equity 167,800* €289,800 Total liabilities and €289,800 shareholders’ equity

_____ *Total assets (€289,800) − Total liabilities (€122,000) = Shareholders’ equity (€167,800).

Req. 2 Red Tape, Inc. is in better financial position than the erroneous balance sheet reports. Liabilities are less, and assets and equity are greater than reported originally.

Req. 3 The following accounts are not reported on the balance sheet because they are expenses. Expenses are reported on the income statement.

Utilities expense Advertising expense Salary expense Interest expense

Chapter 1

Conceptual Framework and Financial Statements

(20-25 min.) P 1-65B Req. 1 Jeana Hart, Inc. Balance Sheet As at September 30, 20X7 ASSETS LIABILITIES Cash €31,000 Accounts payable € 30,000 Office supplies 35,000 5,000 Note payable Franchise 65,000 28,000 Total liabilities Furniture 40,000 SHAREHOLDERS’ Land 115,000 EQUITY Share capital 80,000 Retained earnings 74,000* Total shareholders’ equity 154,000 Total liabilities and ________ €219,000 Total assets €219,000 shareholders’ equity _____ *Total assets (€219,000) − Total liabilities (€65,000) − Share capital (€80,000) = €74,000.

Req. 2 It appears that the business can pay its debts. Total assets far exceed total liabilities.

Req. 3 Personal items not reported on the balance sheet of the business: a. Personal cash (€11,000) b. Personal account payable (€1,000) g. Personal residence (€375,000) and mortgage payable (€141,000) Financial Accounting: IFRS 12/e Solutions Manual

(30-45 min.) P 1-66B Req. 1 Green Lotus Income Statement Year Ended December 31, 20X6 Revenue Service revenue………………… €429,000 Expenses Salary expense…………………. €111,000 Rent expense……………………

39,600 Utilities expense……………...

14,550 Interest expense………………..

9,000 Property tax expense…………..

4,500 Total expenses…………………..

178,650 € 250,350 Net income………………………….

Req. 2 Green Lotus Statement of Changes in Equity Year Ended December 31, 20X6 Total equity, January 1, 20X6……….........

Add: Net income for the year……………

Less: Dividends…………………………….

Total equity, December 31, 20X6……….…

Chapter 1

€ 398,250 250,350 648,600 (138,000) € 510,600

Conceptual Framework and Financial Statements

(continued) P 1-66B Req. 3

ASSETS Cash Accounts receivable Supplies Equipment Building Land

Total assets

Green Lotus Balance Sheet As at December 31, 20X6 LIABILITIES € 45,000 Accounts payable € 40,500 3,000 81,000 Interest payable 97,500 5,100 Note payable 141,000 108,900 Total liabilities 387,600 SHAREHOLDERS’ 24,000 EQUITY Share capital 48,750 Retained earnings 461,850 Total shareholders’ equity 510,600 Total liabilities and €651,600 €651,600 shareholders’ equity

Req. 4 a. Green Lotus was profitable; net income was €250,350. b. Retained earnings increased by €112,350 — from €349,500 to €461,850. c. Total equity (€510,600) exceeds total liabilities (€141,000).

Therefore, the shareholders own more of the company’s assets than do the creditors.

Financial Accounting: IFRS 12/e Solutions Manual

(20 min.) P 1-67B Req. 1 The High Tide Company Statement of Cash Flows Year Ended May 31, 20X7 Millions Cash flows from operating activities: Net income…………………………………………

Adjustments to reconcile net income to cash provided by operations…………….

Net cash provided by operating activities..

€ 3,000 2,420 5,420

Cash flows from investing activities: Purchases of property, plant, and equipment. €(3,500) Sales of property, plant, and equipment……..

50 Other investing cash payments………………..

(180) Net cash used for investing activities……..

(3,630) Cash flows from financing activities: Issuance of common shares..………………….. € 175 Payment of dividends……………………………

(290) Net cash provided by financing activities…

Net increase in cash…………………………………

Cash, beginning……………………………………

Cash, ending………………………………………….

(115) $ 1,675 150 € 1,825

Req. 2 Operating activities provided the largest amount of cash. This signals financial strength because operations should be the main source of cash.

Chapter 1

Conceptual Framework and Financial Statements

(40-50 min.) P 1-68B 20X7 INCOME STATEMENT Revenues Cost of goods sold Other expenses Income before income taxes Income taxes (35% tax rate Net income STATEMENT OF CHANGES IN EQUITY Beginning balance Shares bought back Net income Dividends Ending balance BALANCE SHEET Assets: Cash Property, plant and equipment Other assets Total assets Liabilities: Current liabilities Notes payale and long-term debt Other liabilties Total liabilities Shareholders’ Equity: Share capital Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity STATEMENT OF CASH FLOWS Net cash provided by operating activities Net cash used for investing activities Net cash provided by financing activities Increase (decrease) in cash Cash at beginning of year Cash at end of year

Financial Accounting: IFRS 12/e Solutions Manual

20X6

560 = 1,040 =

k $ (11,010) (1,300) 1,600 (l) € m

€15,300 (a) = (12,300) (1,200) 1,800 (630) € b= 1,170

4,400 =

€

$ 3,430 0 c= (200) € d=

1,170

5,219 =

n (100) o (121) € p

1,155 =

€

€

1,235

11,044 = 14,205 =

q 2,006 r € s

4,326 =

€

€ 5,800 3,300 65 f=

9,165

€13,910 =

1,040 =

€ 4,740 = 5,219 = 14,205 =

€

630 =

€

1,235 = 1,155 =

t 4,600 60 8,986 479 u v w

e= 1,830 10,500 €13,565

556 g= 4,400 € h=

4,400

€

x € 840 (230) (330) (480) (475) i= ( 80) 1,200 y € j = z €

3,844 13,565

35 1,235

Decision Cases (30-40 min.) Decision Case 1 Based solely on these balance sheets, Open Road appears to be the better credit risk because: 1. Blue Skies has more assets ($150,000) than Open Road ($65,000), but Blue Skies owes much more in liabilities ($130,000 versus $15,000 for Open Road). Open Road’s shareholders’ equity is far greater than that of Blue Skies’ owners’ equity ($50,000 compared to $20,000). Open Road is not heavily in debt, but Blue Skies is.

2. You would be better off granting the loan to Open Road. You should consider what will happen if the borrower cannot pay you back as planned. Blue Skies has far more liabilities to pay, and it may be hard for Blue Skies to come up with the money to pay you. On the other hand, Open Road has little debt to pay to others before paying you.

Chapter 1

Conceptual Framework and Financial Statements

(20-30 min.) Decision Case 2 Req. 1 GrandPrize Unlimited, Inc. GrandPrize Unlimited, Inc. Income Statement Balance Sheet Year Ended Dec. 31, 20X6 Dec. 31, 20X6 Revenues……….. $145,0001 Cash…………… $ 7,000 Liabilities……… $66,0004 120,0002 Other assets….

79,0003 Equity………….. 20,0005 Expenses………..

Net income……… $ 25,000 Total liabilities and equity…….. $86,000 Total assets…... $86,000 _____ 1$120,000 + $25,000 = $145,000 2$75,000 + $45,000 = $120,000 3$99,000 − $45,000 + $25,000 = $79,000 4$56,000 + $10,000 = $66,000 5$86,000 − $66,000 = $20,000

Req. 2 The company’s financial position is much weaker than originally reported. Assets and equity are lower and liabilities are higher. Results of operations are worse than reported. The company did not earn as much profit as reported.

Req. 3 Based on the actual figures, I would not invest in Grand Prize for reasons given in Req. 2.

Financial Accounting: IFRS 12/e Solutions Manual

Ethical Issue Note to instructor: student responses will vary on this problem. Keep the discussion pointed toward use of the multiple-criteria model for making good ethical decisions, pointing out elements of students’ reasoning that may be faulty or incomplete. It might be useful to have a debate or role play, assigning students to different sides of the issue (for or against accepting a copy of the exam).

Req. 1

The fundamental ethical issue in this situation is whether you should accept a copy of the old exam from your friend.

Req. 2 The stakeholders are: a. You b. Your friend c. The remainder of the students in the class d. The professor e. The University f. Your family (This may not be a complete list; you may think of more.)

Consequences are discussed in requirement 3.

Chapter 1

Conceptual Framework and Financial Statements

Req. 3 Analysis of the problem: a. Economic perspective: If use of the old exam turns out to help you (it may not) you might improve your grade and allow you to retain your scholarship. This might help you and your family financially. If you use the exam to your unfair advantage, and you are reported, you and possibly your friend might receive grades of F in the class although you might otherwise have passed. This could cause adverse economic consequences to you, your friend and your families. b. Legal perspective: Although it may not violate local or federal law, giving or accepting copies of old exams may violate the university’s honor code, which serves the same purpose of a legal code in this case. If you use the old exam and it turns out that you violated the University’s honor code, both you and your friend could be in trouble.

Your family and your friend’s family could also be impacted by any adverse consequences to you or her.

Academic institutions establish policies against academic dishonesty because cheating hurts everyone—the student who commits the act, the other students in the class whose rights to fair treatment are violated by cheating, the professor, who must endure hours of investigating, reporting, and perhaps testifying.

Financial Accounting: IFRS 12/e Solutions Manual

c. Ethical perspective. Receiving questionable help from others in the face of policies that prohibit it is, at best, risky, and at worst, downright wrong. Cheating is similar to stealing, since it is stealing the work of another without their permission. It is usually accompanied by lying to cover it up, or at least, not concealing the truth. Cheating violates other students’ rights to fair and equal treatment.

It violates the instructor’s rights to run a course as a “fair game” for all participants. Because the students and faculty are hurt by cheating, the university is hurt too. If cheating goes unpunished, grades are inflated, ultimately damaging the academic reputation of the institution and eroding the value of its degrees. Parents of students who are caught cheating have to endure the agony of working through the problem with their son or daughter, and perhaps the social stigma that comes from adverse publicity.

These are just some of the arguments against cheating. Of course, there is a question in this case as to whether taking the test actually violates the professor’s or the university’s policies.

Chapter 1

Conceptual Framework and Financial Statements

Req. 4

It would be helpful to find out what the professor’s policies are with respect to use of fraternity and sorority test files. The university might have a blanket policy on this. (Some students might spend a little time researching this by reading the university’s honor code on their web site; just reading the honor code will be an eye-opening experience for most students). Advise your students to research the use of fraternity and sorority test files on the university web site, or to discuss the issue with the head of the department or the chair of the university honor council.

Unfortunately, in this case, there is not much time.

Researching the issue in the university’s honor code takes valuable time away from studying for the exam, which, if you do, could help you raise your grade and solve the whole problem!

Probably the best solution to this problem is “when in doubt, don’t.” You may not do well on the test, but at least you won’t have to live with the terrible consequences of being accused as a cheater. It should make you feel better in the long run that, although you may not make the highest grades in the class, at least you are not a cheater.

Financial Accounting: IFRS 12/e Solutions Manual

Req. 5 Cheating is very closely related to stealing, which is a form of fraud. When employees steal from their companies, they steal property that belongs to others. There are economic, legal, and ethical consequences to the company, the employee and their families, and customers (who ultimately have to pay for fraud through higher prices). We will study fraud in depth in Chapter 4.

Chapter 1

Conceptual Framework and Financial Statements

Focus on Financials: Nestlé (30 min.)

1. Suggested to

item-

Net

Profit

(profit

attributable

shareholders of the parent) – The net profit, or earnings, of Nestlé is derived by subtracting out expenses and losses from total revenues (sales and other revenues). This income determines (to a certain extent), the dividends that can be paid out. Although revenues are also extremely important to shareholders, profitability should be more important to Nestlé’s shareholders as its large market share inhibits high organic growth rates. The profitability of Nestlé should thus be afforded more consideration than their ability to grow their revenues. From 2020 to 2021, though the net profit of Nestlé increased by 39% indicating increased profitability, this is mainly due to significantly higher share of income from associates and joint ventures.

In fact, the profit before taxes, associates and joint ventures was down by 22.38% due to comparatively higher rate of increase in expenses vis-à-vis the revenues. This is troubling news for investors.

Financial Accounting: IFRS 12/e Solutions Manual

2. The largest expense item was cost of goods sold. This refers to all the direct costs that are incurred

in

manufacturing and selling a good.

3. Both sales and net income have increased over the 5-year period of 2017–2021. Note that in 2021, the sharp rise in net profit of CHF 16,905 million from CHF 12,232 million the past year was due mainly to higher share of income from the associates and joint ventures. As we analyse trends in financial statements, it is crucial that we seek to remove these non-recurring events that could cloud the observed trends.

4. At December 31, 2021: a. Nestlé owned total assets worth CHF 139,142 million. b. Of these, CHF 85,415 million was owed to external parties in the form of liabilities. c. Shareholders owned a total of CHF 53,727 million in the form of shareholders’ equity.

Thus, the accounting equation can be simplified as follows: Assets (CHF 139,142 m) = Liabilities (CHF 85,415 m) + Shareholders’ equity (CHF 53,727 m)

5. Retained earnings increased from CHF 76,812 million in 2020 to CHF 81,363 million in 2021. Although the company made Chapter 1

Conceptual Framework and Financial Statements

CHF 16,905 million in net profits and paid out dividends of CHF 7,681 million to equity owners, other items like changes in the balance sheet do affect retained earnings.

6. Nestlé started out with CHF 5,235 million in cash in 2020 and ended that year with CHF 6,988 million. It is necessary for Nestlé to have a healthy cash balance to fund working capital needs (paying salaries, utilities bills, repayment of principal and interest on loans) and also, to act quickly on acquisition opportunities.

Financial Accounting: IFRS 12/e Solutions Manual

Group Projects Student responses will vary.

Chapter 1

Conceptual Framework and Financial Statements

Chapter 2 Transaction Analysis Short Exercises (5 min.) S 2-1 Norton’s payment was not an expense. Norton acquired an asset, Equipment, because the computer is an economic resource that could produce future benefit to the business.

(5 min.) S 2-2 a. €28,000 (€25,000 + €3,000 + €6,000 − €6,000) b. €3,000

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) S 2-3

Bal.

Cash 10,000 2,000 10,750

1,250

(5 min.) S 2-4 Increased total assets: August 1 (Cash) August 1 (Stationery and other supplies) August 3 (Cash, Accounts Receivable)

(5-10 min.) S 2-5 a. b. c. d. e.

Purchase of asset for cash Sale of asset for cash Collection of an account receivable Payment of dividends to owners Expense transaction Pay a liability Issuance of shares Revenue transaction Purchase of asset on account Borrow money (Answers may vary.)

Chapter 2

Transaction Analysis

(10 min.) S 2-6

Journal DATE

Jul.

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

15 Cash…………………………………… 35,000 Note Payable………………………

Borrowed money from the bank.

35,000

22 Accounts Receivable……………….

Service Revenue………………….

Performed service on account.

9,200 9,200

28 Cash……………………………………

Accounts Receivable…………….

Received cash on account.

6,300

29 Utilities Expense…………………….

Accounts Payable………………..

Received utility bill.

500

31 Salary Expense………………………

Cash…………………………………

Paid salary expense.

3,200

Financial Accounting: IFRS 12/e Solutions Manual

6,300

500

3,200

(10-15 min.) S 2-7 Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Accounts Receivables …………….. 6,000 Sales Revenue ……………………

Sales on account.

6,000

Cash ……………………………………

1,100

Accounts Receivable ……………

Received cash on account.

1,100

Req. 2 Accounts Payable 6,000 Bal.

1,100 4,900

Req. 3 The customer owes to the business $4,900, as shown in the Accounts Receivable account.

Chapter 2

Transaction Analysis

(10-15 min.) S 2-8 Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Accounts Receivable……………….. 5,200 Service Revenue…………………..

Performed service on account.

5,200

Cash……………………………………. 2,400 Accounts Receivable……………..

Received cash on account.

2,400

Req. 2 Cash 2,400 Bal. 2,400

Accounts Receivable 5,200 2,400 Bal. 2,800

Financial Accounting: IFRS 12/e Solutions Manual

Service Revenue 5,200 Bal. 5,200

(10 min.) S 2-9 Supreme Electronics Trial Balance As at December 31, 20X6 ACCOUNT DEBIT CREDIT Cash……………………….…...

Millions Other assets………………….. $ 21 Accounts payable……………

42 Other liabilities………………. $6 Shareholders’ equity………..

12 Revenues……………………...

6 Expenses……………………...

99 Total……………………….…… ___ 60 $123 $123 Supreme Electronics’ net income: $39 million ($99 − $60)

(10 min.) S 2-10 1. Total assets

= $95,000 ($5,000 + $12,000 + $2,000 + $26,000 + $50,000)

2. Total liabilities = $51,000 ($20,000 + $31,000) 3. Net income

= $29,000 ($62,500 − $27,000 − $4,500 − $2,000)

Chapter 2

Transaction Analysis

(10 min.) S 2-11 1. Total debits

= $83,500 ($128,500 + $5,000 − $50,000)

Total credits = $128,500 Difference

= $45,000 ($128,500 − $83,500) $45,000 / 9 = $5,000 (an integer), which suggests either a transposition or a slide.

2. Total debits

= $137,500 ($128,500 + $21,000 − $12,000)

Total credits = $128,500 Difference

= $9,000 ($137,000 − $128,500) $9,000 / 9 = $1,000 (an integer), which suggests either a transposition or a slide.

3. Total debits

= $116,500 ($128,500 − $12,000)

Total credits = $140,500 ($128,500 + $12,000) Difference

= $24,000 ($140,500 − $116,500) $24,000 / 2 = $12,000 (original amount of accounts receivable).

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) S 2-12 D 1. Normal balance G 2. Payable A 3. Journal B 4. Receivable J 5. Owners’ equity C F 6.

7. Debit Expense H 8. Net income

I

A. B. C. D. E. F. G. H. J.I.

9. Ledger

E 10. Posting

Record of transactions Always an asset Left side of an account Side of an account where increases are recorded Copying data from the journal to the ledger A decrease in shareholders’ equity Always a liability Revenues – Expenses Collection of accounts used in a business Assets – Liabilities

(5 min.) S 2-13 Cash 400,000

Accounts Payable 240,000

Equipment 240,000

Share Capital 400,000

Total debits = $640,000 ($400,000 + $240,000) Total credits = $320,000 ($400,000 + $240,000)

Chapter 2

Transaction Analysis

Exercises Group A

(10-15 min.) E 2-14A TO:

Home Office

FROM:

Store Manager

During the first week, I used the store’s beginning cash to purchase equipment and supplies. I signed a note payable to buy land and a building. After all these transactions, the store’s balance sheet appears as follows:

ASSETS Cash Supplies Equipment Land Building Total assets

M. Crew Hong Kong Store Balance Sheet Date $ 14,000* 7,000 60,000 75,000 101,000 $257,000

LIABILITIES Note payable ($75,000 + $101,000) $176,000 SHAREHOLDERS’ EQUITY Share capital 81,000 Total liabilities and ________ shareholders’ equity $257,000

_____ *81,000 – 7,000 – 60,000 = 14,000 Cash 81,000 60,000 14,000 7,000

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 2-15A a. b. c. d. e. f. g. h. i. j. k.

No effect on total assets. Increase in cash offsets the decrease in accounts receivable.

No effect (a personal transaction) No effect on total assets. Increase in cash offsets the decrease in land.

Increased assets (cash) Increased assets (land).

Increased assets (cash) Decreased assets (cash) Increased assets (equipment) Increased assets (merchandise inventory) Decreased assets (cash) Decreased assets (cash)

Chapter 2

Transaction Analysis

(10-20 min.) E 2-16A Req. 1 Analysis of Transactions ASSETS Date

Cash

Accounts Medical + Receivable + Supplies +

=

Accounts Land = Payable +

Mar. 6 40,000 9 (22,000) 22,000 12 15,000 15 Not a transaction of the business.

15-31 4,250 4,250 15-31 (750) (700) (300) 31 300 (300) 17,000 31 31 (1,200) Bal. 36,600 4,250 14,700 22,000

77,550

Financial Accounting: IFRS 12/e Solutions Manual

LIABILITIES

+

SHAREHOLDERS’ EQUITY

Note Share Payable + Capital +

Retained Earnings

40,000

Type of Shareholders’ Equity Transaction

Issued shares

15,000 8,500 (750) (700) (300)

(1,200) 13,800

17,000 17,000 40,000

77,550

6,750

Service revenue Salary expense Rent expense Utilities expense

(continued) E 2-16A Req. 2 a. $77,550 b. $4,250 c. $30,800 ($13,800 + $17,000) d. $46,750 ($77,550 − $30,800, or $40,000 + $6,750) e. $6,750 (Revenue, $8,500 minus total expenses of $1,750, equals net income, $6,750.)

Chapter 2

Transaction Analysis

(10-15 min.) E 2-17A

Journal DATE

Mar.

6

9

ACCOUNT TITLES AND EXPLANATION

DEBIT

Cash………………………………………..

Share Capital……………………….

Issued shares to owner.

40,000 40,000

Land………………………………………... 22,000 22,000

Cash…………………………………….

Paid cash for land.

12

Medical Supplies………………………… 15,000 Accounts Payable……………………

Purchased supplies on account.

Not a business transaction.

15-31 Salary Expense…………………………..

Rent Expense……………………………..

Utilities Expense…………………………

Cash…………………………………….

Paid cash expenses.

750 700 300

Cash………………………………………..

Medical Supplies……………………..

Sold medical supplies.

300

Cash………………………………………..

Note Payable…………………………..

Borrowed money.

17,000

Accounts Payable……………………….

Cash…………………………………….

Paid on account.

1,200

31

31

Financial Accounting 8/e Solutions Manual

15,000

15

15-31 Cash……………………………………….. 4,250 Accounts Receivable…………………… 4,250 Service Revenue……………………...

Performed service for cash and on account.

31

CREDIT

8,500

1,750

300

17,000

1,200

(10-20 min.) E 2-18A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Apr. 1 Cash……………………………………………

Share Capital……………………………..

Issued ordinary shares to owner.

9,100

2 Office Supplies………………………………

Accounts Payable………………………..

Purchased office supplies on account.

100

4 Equipment ……………………………………

Cash………………………………………..

Paid cash for land.

7,600

6 Cash……………………………………………

Service Revenue…………………………

Performed services for cash.

1,650

9 Accounts Payable…………………………...

Cash………………………………………..

Paid cash on account.

50

17 Accounts Receivable……………………….

Service Revenue…………………………

Performed service on account.

1,050

23 Cash……………………………………………

Accounts Receivable……………………

Received cash on account.

500

30 Salary Expense………………………………

Rent Expense………………………………...

Electricity Expense……………….…………

Cash………………………………………..

Paid cash expenses.

600 300 200

Chapter 2

CREDIT

9,100

100

7,600

1,650

50

1,050

500

1,100

Transaction Analysis

(20-30 min.) E 2-19A Req. 1

Apr. 1 6 23 Bal.

Cash 9,100 Apr. 4 1,650 9 500 30 2,500

7,600 50 1,100

Office Supplies Apr. 2 100 Bal. 100

Accounts Payable Apr. 9 50 Apr. 2 Bal.

Accounts Receivable Apr. 17 1,050 Apr. 23 500 Bal. 550

Apr. Bal.

100 50

Service Revenue Apr. 6 1,650 17 1,050 Bal. 2,700

Rent Expense Apr. 30 300 Bal. 300

Financial Accounting 8/e Solutions Manual

Equipment 4 7,600 7,600

Share Capital Apr. 1 Bal.

Salary Expense Apr. 30 600 Bal. 600

Electricity Expense Apr. 30 200 Bal. 200

9,100 9,100

(10-15 min.) E 2-20A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

1.

Cash…………………………………..

Share capital……………………..

Issued shares.

9,200

2. Cash…………………………………..

Note Payable……………………..

Borrowed money by signing a note payable.

7,500

3. Land…………………………………..

Cash………………………………..

Note Payable……………………..

Purchased land by paying cash and signing a note payable.

40,000

4. Supplies………………………………

Accounts Payable……………….

Purchased supplies on account.

600

5. Cash…………………………………..

Supplies…………………………...

Sold supplies for cash.

200

6. Equipment……………………………

Cash………………………………..

Paid cash for equipment.

3,200

7. Accounts Payable…………………..

Cash………………………………..

Paid cash on account.

200

CREDIT

9,200

7,500

10,000 30,000

600

200

3,200

200

Cash balance = $3,500 Company owes $37,900 ($7,500 + $30,000 + $600 − $200) Chapter 2

Transaction Analysis

(10-20 min.) E 2-21A Req. 1 Great Eastern Bakery, Inc. Trial Balance ACCOUNT DEBIT CREDIT $ 4,500 Cash…………………………...

8,000 Accounts receivable………..

13,950 Equipment …………………...

Accounts payable………….. $ 2,100 Note payable…………………

5,800 Share capital…………………

4,250 Retained earnings…………..

13,050 10,600 Dividends……………………..

3,500 Sales…………………………..

4,050 Salary expense………………

1,500 Utilities expense…………….

300 Delivery expense…………… $35,800 Total…………………………... $35,800 Req. 2 Great Eastern Bakery, Inc. Income Statement Month Ended June 30, 20X6 Sales………………...…….…...…

Salary expense………………… $4,050 Utilities expense………………..

1,500 Delivery expense……………….

300 Total expenses………………….

Net income………………………

Financial Accounting 8/e Solutions Manual

$10,600

5,850 $4,750

(15-25 min.) E 2-22A Carver, Inc. Trial Balance As at September 30, 20X6 ACCOUNT DEBIT CREDIT Cash…………………………... $ 4,700* Accounts receivable……….. 12,700* Inventory……………………... 16,700 Supplies………………………

100 Land…………………………... 52,100 Accounts payable………….. $14,600* Share capital…………………

47,300* Sales revenue………………..

32,500 Salary expense………………

1,200 Insurance expense………….

4,000* Rent expense………………...

1,400 Utilities expense…………….

1,500* _______ Total…………………………... $94,400 $94,400 _____ *Explanations: Cash: $4,200 + $500 = $4,700 Accounts Receivable: $13,200 − $500 = $12,700 Accounts Payable: $11,800 + $2,000 − $200 + $1,000 = $14,600 Share capital: $45,000 + $2,300 = $47,300 Insurance Expense: $0 + $4,000 = $4,000 Utilities Expense: $500 + $1,000 = 1,500

Chapter 2

Transaction Analysis

(5-15 min.) E 2-23A

Bal.

Cash 26,000 (b) (d) (e) (g) 13,200

(c) Bal.

Office Supplies 1,200 1,200

(a)

2,400 3,400 400 6,600

Accounts Receivable (f) 16,400 Bal. 16,400

(a) Bal.

Share Capital (a) 41,000 Bal. 41,000

Accounts Payable 400 (c) 1,200 800 Bal.

(e)

(g) Bal.

Dividends 6,600 6,600

(d) Bal.

Salary Expense 3,400 3,400

Financial Accounting 8/e Solutions Manual

Office Furniture 15,000 15,000

Service Revenue (f) 16,400 Bal. 16,400

(b) Bal.

Rent Expense 2,400 2,400

(10-20 min.) E 2-24A Req. 1 John Carter Inc. Trial Balance As at May 31, 20X6 ACCOUNT DEBIT Cash…………………………... $ 13,200 Accounts receivable………..

16,400 Office supplies………………

1,200 Office furniture………………

15,000 Accounts payable…………..

Share capital…………………

Dividends……………………..

6,600 3,400 Service revenue……………..

2,400 Salary expense………………

Rent expense………………..

Total…………………………... $58,200

CREDIT

$

800 41,000 16,400

$58,200

Req. 2 The business performed well during May. The result of operations was net income of $10,600, as shown by the income statement accounts: Service revenue…………………. $ 16,400 Salary expense……….. $3,400 Rent expense…………. 2,400 Total expenses………………..

(5,800) Net income……………………….. $ 10,600

Chapter 2

Transaction Analysis

Exercises Group B

(10-15 min.) E 2-25B TO:

Home Office

FROM:

Store Manager

During the first week, I used the store’s beginning cash to purchase equipment and supplies. I signed a note payable to buy land and a building. After all these transactions, the store’s balance sheet appears as follows:

ASSETS Cash Supplies Equipment Land Building Total assets

T. Crew Frankfurt Store Balance Sheet Date € 14,000* 12,000 59,000 87,000 123,000 €295,000

LIABILITIES Note payable (€87,000 + €123,000) €210,000 SHAREHOLDERS’ EQUITY Share capital 85,000 Total liabilities and ________ shareholders’ equity €295,000

_____ *85,000 – 12,000 – 59,000 = 14,000 Cash 85,000 59,000 14,000 12,000

Financial Accounting 8/e Solutions Manual

(10-15 min.) E 2-26B

a. Increased assets (cash) b. No effect on total assets. Increase in equipment offsets the decrease in cash. c. Decreased assets (cash) d. No effect (a personal transaction) e. Increased assets (land) f. Increased assets (cash) g. No effect on total assets. Increase in notes receivable offsets the decrease in land. h. Increased assets (accounts receivable) i. Increased assets (supplies) j. Decreased assets (cash)

Chapter 2

Transaction Analysis

(10-20 min.) E 2-27B Req. 1 Analysis of Transactions ASSETS Date

Cash

=

Accounts Medical + Receivable + Supplies +

Land =

Mar. 6 54,000 9 (21,000) 21,000 12 3,200 15 Not a transaction of the business.

15-31 4,200 4,200 15-31 (700) (750) (500) 31 500 (500) 31 17,000 31 (800) Bal.

€51,950

€4,200

€2,700 €21,000

€79,850

Financial Accounting 8/e Solutions Manual

LIABILITIES Accounts Payable +

+

Note Payable +

SHAREHOLDERS’ EQUITY Share Capital +

Retained Earnings

54,000

Type of Shareholders’ Equity Transaction

Issued shares

3,200 8,400 (700) (750) (500) 17,000 (800) €2,400

€17,000

€54,000

€79,850

€6,450

Service revenue Salary expense Rent expense Utilities expense

(continued) E2-27B Req. 2 a. €79,850 b. €4,200 c. €19,400 (€2,400 + €17,000) d. €60,450 e. €6,450 (Revenue, €8,400 minus total expenses of €1,950, equals net income, €6,450.)

Chapter 2

Transaction Analysis

(10-15 min.) E 2-28B

Journal DATE

Mar.

6

9

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Cash……………………………………….. 54,000 Share capital….……………………….

Issued ordinary shares to owner.

54,000

Land………………………………………... 21,000 21,000

Cash…………………………………….

Purchased land.

12

Medical Supplies…………………………

Accounts Payable……………………

Purchased supplies on account.

Not a transaction of the business.

3,200 3,200

15

15-31 Cash……………………………………….. 4,200 Accounts Receivable…………………… 4,200 Service Revenue……………………...

Performed service for cash and on account.

15-31 Salary Expense…………………………..

Rent Expense……………………………..

Utilities Expense…………………………

Cash…………………………………….

Paid expenses.

700 750 500

Cash………………………………………..

Medical Supplies……………………..

Sold medical supplies.

500

Cash………………………………………..

Note Payable…………………………..

Borrowed money.

17,000

Accounts Payable……………………….

800

31

31

31

Cash…………………………………….

Paid on account.

Financial Accounting 8/e Solutions Manual

8,400

1,950

500

17,000

800

(10-20 min.) E 2-29B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Apr. 1 Cash…………………………………………… 10,050 Share capital……………………………...

Issued ordinary shares to owner.

10,050

2 Office Supplies………………………………

Accounts Payable………………………..

Purchased office supplies on account.

350

4 Equipment ……………………………………

Cash………………………………………..

Paid cash for land.

3,800

6 Cash……………………………………………

Service Revenue…………………………

Performed services for cash.

1,150

9 Accounts Payable…………………………...

Cash………………………………………..

Paid cash on account.

75

17 Accounts Receivable……………………….

Service Revenue…………………………

Performed service on account.

550

23 Cash……………………………………………

Accounts Receivable……………………

Received cash on account.

425

30 Salary Expense………………………………

Rent Expense………………………………...

Electricity Expense....................................

Cash………………………………………..

Paid cash expenses.

850 650 350

Chapter 2

CREDIT

350

3,800

1,150

75

550

425

1,850

Transaction Analysis

(20-30 min.) E 2-30B Req. 1 Cash Apr. 1 10,050 Apr. 4 3,800 9 75 6 1,150 30 1,850 23 425 Bal. 5,900

Office Supplies Apr. 2 350 Bal. 350

Accounts Payable Apr. 9 75 Apr. 2 Bal.

Accounts Receivable Apr. 17 550 Apr. 23 425 Bal. 125

Apr. Bal.

350 275

Service Revenue Apr. 6 1,150 550 17 Bal. 1,700

Rent Expense Apr. 30 650 Bal. 650

Financial Accounting 8/e Solutions Manual

Equipment 4 3,800 3,800

Share Capital Apr. 1 10,050 Bal. 10,050

Salary Expense Apr. 30 850 Bal. 850

Electricity Expense Apr. 30 350 Bal. 350

(10-15 min.) E 2-31B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

1.

Cash…………………………………..

Share capital……………………..

Issued ordinary shares.

DEBIT

CREDIT

9,000 9,000

2. Cash…………………………………..

6,300 Note Payable……………………..

Borrowed money; signed note payable.

3. Land…………………………………..

Cash………………………………..

Note Payable……………………..

Purchased land by paying cash and signing a note payable.

28,500

4. Supplies………………………………

Accounts Payable……………….

Purchased supplies on account.

750

5. Cash…………………………………..

Supplies…………………………...

Sold supplies for cash.

90

6. Equipment……………………………

Cash………………………………..

Paid cash for equipment.

7,000

7. Accounts Payable…………………..

Cash………………………………..

Paid cash on account.

70

6,300

6,500 22,000

750

90

7,000

70

Cash balance = $1,820 Company owes = $28,980 Chapter 2

Transaction Analysis

(10-20 min.) E 2-32B Req. 1 Sprinkles Bake Shop, Inc. Trial Balance As at June 30, 20X6 ACCOUNT DEBIT CREDIT Cash…………………………... € 10,200 Accounts receivable………..

16,900 Equipment …………………...

26,100 Accounts payable………….. € 6,700 Note payable…………………

8,200 Share capital…………………

8,000 Retained earnings…………..

26,300 24,100 Dividends……………………..

8,100 Service revenue……………..

8,500 Salary expense………………

3,000 Utilities expense…………….

500 Delivery expense…………… €73,300 Total…………………………... €73,300 Req. 2 Sprinkles Bake Shop, Inc. Income Statement Month Ended June 30, 20X6 Service revenue………………...

Salary expense………………… €8,500 Utilities expense………………..

3,000 Delivery expense……………….

500 Total expenses…………………

Net income………………………

Financial Accounting 8/e Solutions Manual

€24,100

(12,000) €12,100

(15-25 min.) E 2-33B Farris, Inc. Trial Balance As at June 30, 20X6 ACCOUNT DEBIT CREDIT Cash…………………………... € 4,300* Accounts receivable……….. 12,500* Inventory……………………... 17,000 Supplies………………………

500 Land…………………………... 50,100 Accounts payable………….. €15,300* Share capital…………………

45,500* Sales revenue……………….

30,300 Salary expense………………

2,100 Insurance expense………….

3,100* Rent expense………………...

800 Utilities expense…………….

700* _______ Total…………………………... €91,100 €91,100 _____ *Explanations: Cash: €4,000 + €300 = €4,300 Accounts Receivable: €12,800 − €300 = €12,500 Accounts Payable: €14,200 + €1,000 − €100 + €200 = €15,300 Share Capital: €45,300 + €200 = €45,500 Insurance Expense: €0 + €3,100 = €3,100 Utilities Expense: €500 + €200 = €700

Chapter 2

Transaction Analysis

(5-15 min.) E 2-34B

Bal.

Cash 24,000 (b) (d) (e) (g) 12,000

(c) Bal.

Office Supplies 1,200 1,200

(a)

3,000 4,200 800 4,000

Accounts Receivable (f) 18,200 Bal. 18,200

(a) Bal.

Share Capital (a) 41,800 Bal. 41,800

Accounts Payable 800 (c) 1,200 400 Bal.

(e)

(g) Bal.

Dividends 4,000 4,000

(d) Bal.

Salary Expense 4,200 4,200

Financial Accounting 8/e Solutions Manual

Office Furniture 17,800 17,800

Service Revenue (f) 18,200 Bal. 18,200

(b) Bal.

Rent Expense 3,000 3,000

(10-20 min.) E 2-35B Req. 1 Jeanne Aubert Inc Trial Balance As at January 31, 20X6 ACCOUNT DEBIT CREDIT Cash…………………………... € 12,000 Accounts receivable………..

18,200 Office supplies………………

1,200 Office furniture………………

17,800 Accounts payable………….. € 400 Share capital…………………

41,800 Dividends……………………..

4,000 18,200 4,200 Service revenue……………..

3,000 Salary expense………………

Rent expense………………..

Total…………………………... €60,400 €60,400

Req. 2 The business performed well during January. The result of operations was net income of €11,000, as shown by the income statement accounts: Service revenue…………………. € 18,200 Salary expense……….. €4,200 Rent expense…………. 3,000 Total expenses………………..

(7,200) Net income……………………….. € 11,000

Chapter 2

Transaction Analysis

Serial Exercise (20-30 min.) E 2-36 Req. 2

Mar. 2 9 Bal.

Cash 6,500 Mar. 2 1,500 3 12 4,600

Mar. 5

Supplies 400

Mar. 4

Furniture 7,200

Share Capital Mar. 2

500 2,500 400

Accounts Receivable Mar. 18 1,900

Mar. 3

Equipment 2,500

Accounts Payable Mar. 4 7,200 5 400 7,600 Bal.

Dividends 6,500

Service Revenue Mar. 9 1,500 18 1,900 3,400 Bal.

Utilities Expense Mar. 12 400 Financial Accounting 8/e Solutions Manual

Rent Expense Mar. 2 500

(continued) E 2-36 Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Mar. 2 Cash…………………………………….. 6,500 Share Capital………………………..

2 Rent Expense………………………….

Cash………………………………….

6,500 500 500

3 Equipment……………………………... 2,500 Cash………………………………….

4 Furniture………………………………..

7,200 Accounts Payable………………….

5 Supplies………………………………...

Accounts Payable………………….

CREDIT

2,500

7,200

400 400

9 Cash…………………………………….. 1,500 Service Revenue…………………...

12 Utilities Expense………………………

Cash………………………………….

400 400

18 Accounts Receivable………………… 1,900 Service Revenue…………………...

Chapter 2

1,500

1,900

Transaction Analysis

(continued) E 2-36 Req. 3 Jerome Smith, CPA, PC. Trial Balance As at March 18, 20X6 ACCOUNT DEBIT Cash…………………………... $ 4,600 Accounts receivable………..

1,900 Supplies………………………

400 Equipment……………………

2,500 Furniture……………………...

7,200 Accounts payable…………..

Share capital…………………

Dividends……………………..

— Service revenue……………..

500 Rent expense………………..

400 Utilities expense…………….

— Salary expense……………… $17,500 Total…………………………...

Financial Accounting 8/e Solutions Manual

CREDIT

$ 7,600 6,500 3,400

$17,500

Challenge Exercises (20-40 min.) E 2-37 a. Total cash paid during October:

Sept. 30 Bal. Oct. receipts Oct. 31 Bal.

Cash 12,000 85,000 Oct. payments 6,000

X = $91,000

$12,000 + $85,000 − X = $ 6,000 X = $91,000 b. Cash collections from customers during October: Accounts Receivable Sept. 30 Bal. 27,500 50,000 Oct. collections Oct. sales 26,000 on account Oct. 31 Bal.

X = $51,500

$27,500 + $50,000 − X = $26,000 X = $51,500 c. Cash paid on notes payable during October: Notes Payable Sept. 30 Bal. 16,100 Oct. Oct. X = 8,100 payments on notes X new borrowing 15,000 23,000 Oct. 31 Bal. $16,100 + $15,000 − X = $23,000 X = $8,100 Chapter 2

Transaction Analysis

(20-30 min.) E 2-38 Req. 1 Circle 360, Inc. Trial Balance As at October 31, 20X6 Cash…………………………... $ 4,200 Accounts receivable………..

6,900 Land…………………………...

35,100 Accounts payable………….. $ 6,200 Note payable…………………

5,100 Share capital…………………

20,800 Retained earnings…………..

7,900 Service revenue……………..

9,100 Salary expense……………… 3,000 Advertising expense……….. 1,100 _______ Totals…………………………. $50,300 $49,100

Out of balance by $1,200

The correct balance of Accounts Receivable is $5,700($6,900 − $1,200). After this correction, total debits will be $49,100 ($50,300 − $1,200), the same as total credits.

Financial Accounting 8/e Solutions Manual

(continued) E 2-38 Req. 2 a. Total assets

= $45,000 ($4,200 + $5,700* + $35,100)

b. Total liabilities = $11,300 ($6,200 + $5,100) c. Net income

= $ 5,000 ($9,100 − $3,000 − $1,100)

_____ * $6,900 − $1,200 = $5,700 (Req. 1)

Chapter 2

Transaction Analysis

(10-15 min.) E 2-39 [Errata: Medical expense mentioned in the print book should be 35,000 and not 3,000. We have used the correct figure in the solution. The print book error will be revised] Nashua Co.: Income statement September October Medical expense…………. $35,000 $ -0Sept. 30 $43,000 35,000

Oct. 31 $19,000* 11,000**

Ditka Hospital: Income statement Service revenue…………..

September $35,000

October $ -0-

Balance sheet Cash…………………………

Accounts receivable……..

Sept. 30 $ -035,000

Oct 31 $24,000 11,000**

Balance sheet Cash…………………………

Accounts payable…………

Explanation: Nashua’s expense is Ditka’s revenue.

Nashua’s cash payment is Ditka’s cash receipt.

Nashua’s account payable is Ditka’s account receivable. __________ *$43,000 − $24,000 = $19,000 **$35,000 − $24,000 = $11,000

Financial Accounting 8/e Solutions Manual

Quiz Q2-40 Q2-41 Q2-42 Q2-43 Q2-44 Q2-45 Q2-46 Q2-47 Q2-48 Q2-49 Q2-50 Q2-51 Q2-52 Q2-53 Q2-54 Q2-55 Q2-56 Q2-57 Q2-58 Q2-59

c d d d c b a c a a d a b b a d a d a a

($45,000 + $28,000 + $20,000) = $93,000

Chapter 2

Transaction Analysis

Problems Group A

(15-30 min.) P 2-60A [Errata: Rent expense in the print book should be 28,000 and not 308,000. We have used the correct figure in the solution.

The print book error will be revised] Dear Ashley, This trial balance lists the accounts of the company, along with their balances at December 31, 20X6. The trial balance provides the data for computing total assets, total liabilities, and net income or net loss.

Amusement Specialties a. Total assets

=

$407,000 ($12,000 + $46,000 + $3,000 + $245,000 + $101,000)

b. Total liabilities =

$202,000 ($107,000 + $95,000)

c. Net income

$157,000 ($255,000 − $28,000 − $5,000

=

− $58,000 − $7,000)

Student responses may vary.

Financial Accounting 8/e Solutions Manual

(45-60 min.) P 2-61A Req. 1 Analysis of Transactions ASSETS Cash

Bal. a) b) c) d) e) f) g)

Accounts + Receivable + Supplies +

2,700 16,200 14,400 (10,200)

LIABILITIES

=

Accounts Payable +

Share Capital +

Retained Earnings

14,400

9,000 16,200

4,800 14,400

25,200

4,800 Service revenue (2,400) Rent expense (1,800) Salary expense (2,800) Dividends 17,000

23,000

(2,400) (1,800) (2,800) 18,100

(2,000) 4,800 ____ 5,300

____ 1,400

+

SHAREHOLDERS’ EQUITY Type of Shareholders’ Equity Transaction

Issued shares Service revenue

(10,200) 1,400

1,400 2,000

h) Bal.

2,500

Land

=

23,000

$47,800

5,600

$47,800

Chapter 2

Transaction Analysis

(continued) P 2-61A Req. 2 Starlite Resources, Inc. Income Statement Month Ended June 30, 20X6 Revenues: Service revenue ($14,400 + $4,800) Expenses: Rent expense…………………………

Salary expense ……………………...

Total expenses……………………….

Net income……………………………….

$19,200 $2,400 1,800 (4,200) $15,000

Req. 3 Starlite Resources, Inc. Statement of Changes in Equity Month Ended June 30, 20X6 Total Equity, May 1, 20X6…….........................

Add: Share Issued……………………………..

Add: Net income………………………………..

Less: Dividends………………………………….

$ 13,800 16,200 15,000 45,000 (2,800) Total Equity, May 31, 20X6………..……………. $ 42,200

Financial Accounting 8/e Solutions Manual

(continued) P 2-61A Req. 4 Starlite Resources, Inc. Balance Sheet As at June 30, 20X6 ASSETS LIABILITIES Cash………………………. $18,100 Accounts payable………… $ 5,600 Accounts receivable……

5,300 SHAREHOLDERS’ Supplies…………………..

1,400 EQUITY Land……………………….

23,000 Share capital……………….

25,200 Retained earnings………… 17,000 Total shareholders’ equity. 42,200 Total liabilities and Total assets……………… $47,800 shareholders' equity…. $47,800

Chapter 2

Transaction Analysis

(30-40 min.) P 2-62A Req. 1

Journal ACCOUNT TITLES

a.

b.

c.

d.

e.

f.

g.

h.

DEBIT

CREDIT

Cash……………………………………. 16,200 Share Capital...…………………….

16,200

Cash……………………………………. 14,400 Service Revenue…………………..

14,400

Accounts Payable…………………… 10,200 Cash…………………………………

10,200

Supplies………………………………..

1,400 Accounts Payable…………………

1,400

Cash…………………………………….

Accounts Receivable…………….. 2,000 Accounts Receivable………………..

Service Revenue………………….. 4,800 Rent Expense…………………………

Salary Expense.……………………...

Cash………………………………… 2,400 1,800 Dividends……………………………...

Cash…………………………………

2,800

2,000

4,800

4,200

2,800

Financial Accounting 8/e Solutions Manual

(continued) P 2-62A Reqs. 2 and 3

Cash 2,700 10,200 16,200 4,200 14,400 2,800 2,000 18,100

Accounts Payable 10,200 14,400 1,400 5,600 Service Revenue 14,400 4,800 19,200

Accounts Receivable 2,500 2,000 4,800 5,300

Share Capital 9,000 16,200 25,200

Rent Expense 2,400

Supplies 1,400

Land 23,000

Retained Earnings 4,800

Dividends 2,400

Advertising Expense 1,800

The balances of all the accounts Cash through Share Capital agree with the ending balances obtained in Problem 2-61A.

Chapter 2

Transaction Analysis

(40-50 min.) P 2-63A Req. 1 Classification of Transactions Nov. 4

b

5

c

6

c

7

c

10

b

11

b

12

a

18

c

21

c

25

c

30

c

Financial Accounting 8/e Solutions Manual

(continued) P 2-63A Req. 2 Analysis of Transactions ASSETS Date

=

LIABILITIES

+

Accounts Office Accounts Share Cash + Receivable+ Supplies + Equipment = Payable + Capital +

Nov. 4* 5 45,000 6 (700) 7 (13,000) 10* 11* 12* 18 21 (3,500) 25 (1,500) 30 (2,100) Bal. 24,200

SHAREHOLDERS’ EQUITY Retained Type of Shareholders’ Earnings Equity Transaction

45,000

Issued shares

700 20,000

7,000

4,000

4,000

Service revenue

(3,500)

4,000

___ 700

20,000

$48,900

3,500

45,000

$48,900

_____ *Not a transaction of the business.

Chapter 2

Transaction Analysis

(1,500) Rent expense (2,100) Dividends 400

(continued) P 2-63A Req. 3

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Nov. 5 Cash…………………………………….. 45,000 Share Capital………………………..

Issued ordinary shares to owner.

45,000

6 Supplies………………………………...

Cash………………………………….

Purchased supplies.

700

700

7 Office Equipment…………………….. 20,000 Cash………………………………….

Accounts Payable………………….

Purchased equipment.

13,000 7,000

18 Accounts Receivable………………… 4,000 Service Revenue…………………...

Performed service on account.

4,000

21 Accounts Payable…………………….

Cash………………………………….

Paid on account.

3,500 3,500

25 Rent Expense………………………….

Cash………………………………….

Paid rent.

1,500

30 Dividends………………………………. 2,100 Cash………………………………….

Paid dividend.

Financial Accounting 8/e Solutions Manual

1,500

2,100

(15-20 min.) P 2-64A Req. 1

Journal DATE

ACCOUNT TITLES

DEBIT

Dec. 1 Cash…………………………………….. 25,000 Share capital………………………..

5 Rent Expense………………………….

CREDIT

25,000

1,200

Cash…………………………………..

1,200

9 Land…………………………………….. 38,200 Cash…………………………………..

Notes Payable……………………....

7,200 31,000

10 Supplies………………………………… 1,500 Accounts Payable………………….

1,500

19 Accounts Payable…………………….

700

Cash…………………………………..

700

22 Cash…………………………………….. 21,000 Notes Payable……………………....

21,000

31 Cash…………………………………….. 13,000 Accounts Receivable………………...

7,000 Service Revenue……………………

20,000 31 Salary Expense……………………….. 2,200 Advertising Expense………………… 1,600 Utilities Expense…………………….... 1,500 Cash…………………………………..

31 Dividends………………………………. 6,200 Cash…………………………………..

Chapter 2

5,300

6,200

Transaction Analysis

(continued) P 2-64A Req. 2 Cash 25,000 21,000 13,000

1,200 7,200 700 5,300 6,200

38,400

Accounts Payable 700

1,500 800

Notes Payable 31,000 21,000 52,000

Req. 3 Cash: $38,400 Total amount owed: $52,800 ($800 + $52,000)

Financial Accounting 8/e Solutions Manual

(50-60 min.) P 2-65A Req. 1

Journal DATE

Jan.

ACCOUNT TITLES

DEBIT

2 Cash…………………………………… 45,000 Share Capital………………………

3 Supplies……………………………….

Equipment…………………………….

Accounts Payable………………...

300 5,200

4 Cash……………………………………

Service Revenue………………….

2,400

16 Accounts Payable…………………

Cash…………………………………

17 Utilities Expense…………………….

Cash…………………………………

18 Cash……………………………………

Accounts Receivable…………….

45,000

5,500

2,400

7 Land…………………………………… 25,000 Cash………………………………...

11 Accounts Receivable……………….

Service Revenue………………….

CREDIT

25,000

1,100 1,100 5,200 5,200 200 200 540 540

Chapter 2

Transaction Analysis

(continued) P 2-65A Req. 1

Journal DATE

ACCOUNT TITLES

DEBIT

Jan. 22 Utilities Expense……………………

Cash………………………………..

130

29 Cash…………………………………..

Service Revenue………………

1,500

130

31 Salary Expense……………………..

2,800 Cash………………………………..

31 Dividends…………………………….

2,500 Cash………………………………..

Financial Accounting 8/e Solutions Manual

CREDIT

1,500

2,800

2,500

(continued) P 2-65A Req. 2 Cash Jan. 2 45,000 Jan. 7 25,000 4 2,400 16 5,200 200 18 540 17 130 29 1,500 22 31 2,800 31 2,500 Bal. 13,610

Jan. 3 Bal.

Equipment 5,200 5,200

Accounts Payable Jan. 16 5,200 Jan. 3 5,500 300 Bal.

Accounts Receivable Jan. 11 1,100 Jan. 18 540 Bal. 560

Jan. 3 Bal.

Jan. 7 Bal.

Supplies 300 300 Land 25,000 25,000 Share Capital Jan. 2 45,000 Bal. 45,000

Dividends Jan. 31 2,500 2,500 Service Revenue Jan. 4 2,400 11 1,100 29 1,500 5,000 Bal.

Salary Expense Jan. 31 2,800 Bal. 2,800

Utilities Expense Jan. 17 200 130 22 330 Bal. Chapter 2

Transaction Analysis

(continued) P 2-65A Req. 3 Simmons Heating and Air Conditioning, Inc. Trial Balance As at January 31, 20X6 ACCOUNT DEBIT CREDIT Cash…………………………... $ 13,610 Accounts receivable………..

560 Supplies………………………

300 Equipment……………………

5,200 Land…………………………...

25,000 Accounts payable………….. $ 300 Share capital…………………

45,000 5,000 Dividends……………………..

2,500 Service revenue……………..

2,800 Salary expense………………

330 Utilities expense…………….

Total…………………………... $50,300 $50,300

Req. 4 Total resources (assets)

= $44,670 ($13,610 + $560 + $300 + $5,200 + $25,000)

Amount owed (total liabilities) = $300 Profit (net income)

Financial Accounting 8/e Solutions Manual

= $1,870 ($5,000 − $2,800 − $330)

(40-50 min.) P 2-66A Req. 1

(a) (b) (f) (j) Bal.

Cash 64,000 (c) 70,000 (e) 4,600 (h) 4,200 (k) 70,000

(d) Bal.

Supplies 800 800

(a) Bal.

Vehicle 102,000 102,000

66,000 3,000 400 3,400

Note Payable (b) 70,000 Bal. 70,000

Accounts Receivable (g) 6,000 (j) 4,200 Bal. 1,800

(c) Bal.

(h)

Containers 66,000 66,000

Accounts Payable 400 (d) 800 1,100 (i) 1,500 Bal.

Share capital (a) 166,000 Bal. 166,000

Service Revenue (f) 4,600 (g) 6,000 Bal. 10,600

Chapter 2

Transaction Analysis

(continued) P 2-66A (e) Bal.

Salary Expense 3,000 3,000

Advertising Expense (k) 1,200 Bal. 1,200

Financial Accounting 8/e Solutions Manual

(k) Bal.

Rent Expense 2,200 2,200

(i) Bal.

Utilities Expense 1,100 1,100

(continued) P 2-66A Req. 2 Delhivery Transport Services Corporation Trial Balance As at November 30, 20X6 DEBIT ACCOUNT CREDIT Cash…………………………... $ 70,000 Accounts receivable………..

1,800 Supplies………………………

800 Containers…………..............

66,000 Vehicle.……………………….

102,000 Accounts payable………….. $ 1,500 Note payable…………………

70,000 Share capital…………………

166,000 Service revenue……………..

10,600 Salary expense………………

3,000 Rent expense………………...

2,200 Advertising expense………..

1,200 Utilities expense…………….

1,100 Total…………………………... $248,100 $248,100

Chapter 2

Transaction Analysis

Problems Group B

(15-30 min.) P 2-67B Dear Rebecca, This trial balance lists the accounts of the company, along with their balances at December 31, 20X6. The trial balance provides the data to prepare a balance sheet and an income statement.

Advantage Specialties a. Total assets = $386,100 ($12,100 + $48,000 + $6,000 + $225,000 + $95,000) b. Total liabilities =

$192,500 ($105,000 + $87,500)

c. Net income

$143,600 ($244,600 − $23,000 − $5,000

=

− $67,000 − $6,000)

Student responses may vary.

Financial Accounting 8/e Solutions Manual

(45-60 min.) P 2-68B Req. 1 Analysis of Transactions ASSETS Cash

2,400 Bal. a) b) 15,000 c) d) 12,600 e) f) (10,400) g) h) 600 Bal. (1,400) (1,800) (4,400) 12,600

Accounts + Receivable + Supplies +

3,000

Land

=

LIABILITIES

=

Accounts Payable +

Share Capital +

Retained Earnings

12,600

10,400 15,000

7,400 12,600 Issued shares Service revenue

25,000

(600) 6,200

8,600

SHAREHOLDERS’ EQUITY Type of Shareholders’ Equity Transaction

(10,400) 1,000

1,000

___ 1,000

+

25,000

€47,200

3,200

25,400

€47,200

Chapter 2

Transaction Analysis

6,200 Service revenue (1,400) Rent expense (1,800) Salary expense (4,400) Dividends 18,600

(continued) P 2-68B Req. 2 Schneider Resources, Inc. Income Statement Month Ended June 30, 20X6 Revenues: Service revenue (€12,600+€6,200)….

Expenses:

€18,800

Rent expense………………………... €1,400 Salary expense………..…………….. 1,800 Total expenses……………………… Net (3,200) income……………………………… €15,600

Req. 3 Schneider Resources, Inc. Statement of Changes in Equity Month Ended June 30, 20X6 Total equity, May 1, 20X6…………………...

Add: Share capital…………………………

Add: Net income……………………………

Less: Dividends……………………………..

Total Equity, May 31, 20X6………….

Financial Accounting 8/e Solutions Manual

€17,800 15,000 15,600 48,400 (4,400) €44,000

(continued) P 2-68B Req. 4 Schneider Resources, Inc. Balance Sheet As at June 30, 20X6 ASSETS LIABILITIES Cash……………………. €12,600 Accounts payable…………. € 3,200 Accounts receivable…

8,600 SHAREHOLDERS’ Supplies…………….….

1,000 EQUITY Land…………………….

25,000 Share capital..……………..

25,400 18,600 Retained earnings………....

44,000 Total shareholders’ equity. €47,200 Total liabilities and Total assets…………... €47,200 shareholders' equity…...

Chapter 2

Transaction Analysis

(30-40 min.) P 2-69B Req. 1

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

a. Cash……………………………………. 15,000 Share capital……………………….

15,000

b. Cash…………………………………… 12,600 Service Revenue…………………..

12,600

c. Accounts Payable ………………….. 10,400 Cash…………………………………

10,400

d. Supplies ………………………………

Accounts Payable………………..

1,000 1,000

e. Cash…………………………………….

Accounts Receivable…………….

600

f. Accounts Receivable………………..

Service Revenue………………..

6,200

g. Rent Expense…………………………

Salary Expense………………..

Cash…………………………………

1,400 1,800

i. Dividends……………………………...

Cash…………………………………

4,400

Financial Accounting 8/e Solutions Manual

600

6,200

3,200

4,400

(continued) P 2-69B Reqs. 2 and 3

Cash 2,400 10,400 15,000 3,200 12,600 4,400 600

Accounts Receivable 3,000 600 6,200 8,600

Supplies 1,000

Land 25,000

Retained Earnings 7,400

Dividends 4,400

12,600

Accounts Payable 10,400 12,600 1,000 3,200

Service Revenue 12,600 6,200 18,800

Share Capital 10,400 15,000 25,400

Rent Expense 1,400

Salary Expense 1,800

The balances of all the accounts Cash through Share Capital agree with the ending balances obtained in Problem 2-68B.

Chapter 2

Transaction Analysis

(40-50 min.) P 2-70B Req. 1 Classification of Transactions Nov

4

b

5

c

6

c

7

c

10

b

11

b

12

a

18

c

21

c

25

c

30

c

Financial Accounting 8/e Solutions Manual

(continued) P 2-70B Req. 2 Analysis of Transactions ASSETS Date

Cash +

= LIABILITIES

Accounts Office Accounts Receivable + Supplies + Equipment= Payable +

Nov. 4* 5 61,000 6 (700) 7 (13,500) 10* 11* 12* 18 21 (3,750) 25 (700) 30 (2,000) 40,350 Bal.

+

SHAREHOLDERS’ EQUITY

Share Capital

Retained + Earnings

61,000

Type of Shareholders’ Equity Transaction

Issued shares

700 21,000

7,500

5,000

5,000

Service revenue

(3,750)

5,000

___ 700

21,000

3,750

61,000

€67,050

(700) Rent expense (2,000) Dividend 2,300

€67,050

_____ *Not a transaction of the business.

Chapter 2

Transaction Analysis

(continued) P 2-70B Req. 3

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Nov. 5 Cash…………………………………….. 61,000 Share capital………………………..

Issued shares to owner.

61,000

6 Supplies………………………………...

Cash………………………………….

Purchased supplies.

700

700

7 Office Equipment…………………….. 21,000 Cash………………………………….

Accounts Payable………………….

Purchased furniture.

13,500 7,500

18 Accounts Receivable………………

Service Revenue…………………...

Performed service on account.

5,000

5,000

21 Accounts Payable……………………. 3,750 Cash………………………………….

Paid on account.

25 Rent Expense………………………….

Cash………………………………….

Paid rent.

700

30 Dividends………………………………. 2,000 Cash………………………………….

Paid dividend.

128 Financial Accounting 8/e Solutions Manual

3,750

700

2,000

(15-20 min.) P 2-71B Req. 1

Journal DATE

Dec

ACCOUNT TITLES

DEBIT

CREDIT

1 Cash…………………………………….. 27,000 Share capital………………………..

27,000

5 Rent Expense………………………….

3,000 Cash…………………………………

3,000

9 Land…………………………………….. 44,100 Cash………………………………….

Notes Payable………………………

12,100 32,000

10 Supplies………………………………... 1,600 Accounts Payable………………….

1,600

19 Accounts Payable…………………….

Cash………………………………….

500 500

22 Cash……………………………………. 19,000 Notes Payable……………………..

19,000

31 Cash……………………………………. 15,200 Accounts Receivable……………….. 5,000 Service Revenue………………….

20,200 31 Salary Expense……………………….. 2,200 Advertising Expense…………………

900 Utilities Expense……………………… 1,300 Cash………………………………….

30 Dividends………………………………

Cash………………………………….

Chapter 2

4,400

3,000 3,000 Transaction Analysis

129

(continued) P 2-71B Req. 2 Cash 27,000 19,000 15,200

3,000 12,100 500 4,400 3,000

38,200

Accounts Payable 500

1,600 1,100

Notes Payable 32,000 19,000 51,000

Req. 3 Cash: $38,200 Total amount owed: $52,100 ($1,100 + $51,000)

130 Financial Accounting 8/e Solutions Manual

(50-60 min.) P 2-72B Req. 1

Journal DATE

Jan.

ACCOUNT TITLES

DEBIT

CREDIT

2 Cash……………………………………. 28,000 Share capital……………………….

28,000

3 Supplies………………………………..

Equipment……………………………..

Accounts Payable…………………

500 3,100

3,600

4 Cash…………………………………….

Service Revenue…………………..

3,000 3,000

7 Land……………………………………. 20,000 Cash…………………………………

11 Accounts Receivable………………..

Service Revenue…………………..

16 Accounts Payable……………………

Cash…………………………………

17 Utilities Expense……………………..

Cash…………………………………

18 Cash…………………………………….

Accounts Receivable……………..

20,000

1,200 1,200 3,100 3,100 120 120 570 570

Chapter 2

Transaction Analysis

131

(continued) P 2-72B Req. 1

Journal DATE

ACCOUNT TITLES

Jan. 22 Utilities Expense…………………….

Cash………………………………..

DEBIT

CREDIT

120 120

29 Cash…………………………………… 1,300 Service Revenue………………….

1,300

31 Salary Expense……………………… 1,800 Cash………………………………...

1,800

31 Dividends……………………………..

Cash………………………………... 2,500

132 Financial Accounting 8/e Solutions Manual

2,500

(continued) P 2-72B Req. 2 Cash Jan. 2 28,000 Jan. 7 20,000 4 3,000 16 3,100 120 18 570 17 120 29 1,300 22 31 1,800 31 2,500 Bal. 5,230

Jan. 3 Bal.

Equipment 3,100 3,100

Accounts Receivable Jan. 11 1,200 Jan. 18 570 Bal. 630

Sept. 3 Bal.

Supplies 500 500

Jan. 7 Bal.

Land 20,000 20,000

Accounts Payable Jan. 16 3,100 Jan.3 3,600 500 Bal.

Share Capital Jan. 2 28,000 Bal. 28,000

Dividends 2,500 2,500

Service Revenue Jan. 4 3,000 11 1,200 29 1,300 5,500 Bal.

Jan. 31 Bal.

Chapter 2

Transaction Analysis

133

(continued) P 2-72B Req. 2 Salary Expense Jan. 31 1,800 Bal. 1,800

Utilities Expense Jan. 17 120 120 22 240 Bal.

134 Financial Accounting 8/e Solutions Manual

(continued) P 2-72B Req. 3 O’Shea Plumbing, Inc. Trial Balance As at January 31, 20X6 ACCOUNT DEBIT CREDIT Cash…………………………... € 5,230 Accounts receivable………..

630 Supplies………………………

500 Equipment…………………...

3,100 Land…………………………...

20,000 Accounts payable………….. € 500 Share capital………………

28,000 5,500 Dividends……………………..

2,500 Service revenue……………..

1,800 Salary expense………………

240 Utilities expense…………….

Total…………………………... €34,000 €34,000

Req. 4 Total resources (assets)

= €29,460 (€5,230 + €630 + €500 + €3,100 + €20,000)

Amount owed (total liabilities) = €500 Profit (net income)

= €3,460 (€5,500 − €1,800 − €240)

Chapter 2

Transaction Analysis

135

(40-50 min.) P 2-73B Req. 1

(a) (b) (f) (j) Bal.

Cash 105,000 (c) 96,900 (e) 5,400 (h) 4,500 (k) 105,300

(d) Bal.

Supplies 900 900

(a) Bal.

Vehicle 165,000 165,000

94,500 6,300 600 5,100

Note Payable (b) 96,900 Bal. 96,900

Accounts Receivable (g) 8,100 (j) 4,500 Bal. 3,600

(c) Bal.

(h)

Container 94,500 94,500

Accounts Payable 600 (d) 900 2,100 (i) 2,400 Bal.

Share capital (a) 270,000 Bal. 270,000

Service Revenue (f) 5,400 (g) 8,100 Bal. 13,500

136 Financial Accounting 8/e Solutions Manual

(continued) P 2-73B (e) Bal.

Salary Expense 6,300 6,300

(k) Bal.

Rent Expense 3,000 3,000

Advertising Expense (i) 2,100 (k) 2,100 Bal. 4,200

Utilities Expense

Chapter 2

Transaction Analysis

137

(continued) P 2-73B Req. 2 YRF Transport Corporation Trial Balance As at March 31, 20X6 ACCOUNT DEBIT Cash…………………………… € 105,300 Accounts receivable………...

3,600 Supplies……………………….

900 Music equipment………….....

94,500 Building………………………..

165,000 Accounts payable……………

Note payable………………….

Share capital………………….

Service revenue………………

Salary expense……………….

6,300 Advertising expense………...

4,200 Rent expense…………………

3,000 Utilities expense…………….. _______ Total……………………………. €382,800

138 Financial Accounting 8/e Solutions Manual

CREDIT

€

2,400 96,900 270,000 13,500

_______ €382,800

Decision Cases (40-50 min.) Decision Case 1 Reqs. 1 and 2 (a) (b) (h) (i) Bal.

(c)

(j)

Cash 5,000 (c) 5,000 (d) 2,500 (f) 1,200 (f) (j) 6,400

1,300 1,800 2,000 1,200 1,000

Supplies 1,300

Accounts Receivable (g) 7,000 (i) 1,200 Bal. 5,800

(e)

Notes Payable (b)

Accounts Payable 1,000 (e) 4,400 3,400 Bal.

Share Capital (a)

Furniture 4,400

5,000

5,000

Service Revenue (g) 7,000 (h) 2,500 Bal. 9,500

Advertising Expense (d) 1,800

(f)

Salary Expense 2,000

(f)

Rent Expense 1,200 Chapter 2

Transaction Analysis

139

(continued) Decision Case 1 Req. 3 Barlow Networks, Inc. Trial Balance Current Date ACCOUNT DEBIT CREDIT Cash…………………………... $6,400 Accounts receivable………..

5,800 Supplies………………………

1,300 Furniture……………………...

4,400 Accounts payable………….. $ 3,400 Notes payable………………..

5,000 Share capital…………………

5,000 Service revenue……………..

9,500 Salary expense………………

2,000 Advertising expense………..

1,800 Rent expense………………...

1,200 Total…………………………... $22,900 $22,900

140 Financial Accounting 8/e Solutions Manual

(continued) Decision Case 1 Req. 4 (net income or loss for first month of operations) Revenues: Service revenue…………...

Expenses: Salary expense……………

Advertising expense……..

Rent expense………………

Total expenses…………….

Net income for month……….

$9,500 $2,000 1,800 1,200 5,000 $4,400

Recommendation: Barlow may want to review his criteria for keeping the business open. His criterion for remaining in operation was a net income of $5,000. His actual result was close to his goal.

Perhaps he was unrealistic in his expectations.

Most businesses, large and small, incur losses in their first months of operation. Barlow Networks actually earned a profit!

The author suggests that Barlow stick it out for another few months, at least.

Chapter 2

Transaction Analysis

141

(20-30 min.) Decision Case 2 Little Italy, Inc. Income Statement Month Ended December 31, 20X7 Sales revenue……………………………..

$42,000

Cost of goods sold (expense)………….

Rent expense……………………………...

Advertising expense……………………..

Total expenses…………………………

22,000 6,000 5,000 33,000

Net income…………………………………

$ 9,000

Little Italy, Inc. Balance Sheet As at December 31, 20X7 ASSETS LIABILITIES Cash……………….. $ 12,000Accounts payable……… $ 8,000 Food inventory…...

5,000 OWNERS’ EQUITY Furniture…………...

10,000Share capital……………. 10,000 Retained earnings……...

9,000* Total owners’ equity...

19,000 $27,000 Total liabilities Total assets……. $27,000 and equity…………. *Must solve for this amount. It is also the amount of net income, which is the only change in retained earnings for the month.

Recommendation: Do not expand this month. The business falls short of the goals for both net income and total assets.

However, Little Italy, Inc. appears to be profitable, and assets are building toward Sophia’s goals. Maybe next month.

142 Financial Accounting 8/e Solutions Manual

Ethical Issue 1 1. The ethical issue is whether these alternatives of financing the business are proper from an economic, legal, and ethical standpoint.

2. The stakeholders are Scruffy Murphy, the bank, potential new creditors, and the friend who may become a shareholder.

Option 1:

Option 2:

Cash…………………………. 100,000 Share Capital……………

100,000

Land…………………………. 100,000 Share Capital……….……

100,000

Share Capital...…………….. 100,000 Land……………………….

100,000

Option 1 is economically sound, perfectly legal, and also ethical because the sale of the shares is a valid transaction between the business and a shareholder. The consequences of this decision are that Murphy obtains additional financing at a cost (he now shares ownership of the business with his friend).

The friend gives up cash in exchange for an

ownership interest in the business.

The bank and future

creditors obtain complete and truthful disclosure of the manner in which the business has been financed.

Option 2 represents “window dressing” (making the company look like an entity that it is not). Although it might be legal in the strictest sense of the word (and it might not), this option Chapter 2

Transaction Analysis

143

does not faithfully represent economic reality. Thus, it is not in accordance with the IFRS, which is a substitute for the legal criterion. This option is also unethical because the receipt of the land by the business is not a real transaction. The transfer of the land back to Murphy means that the business never actually has the land for its use. It violates the rights of the bank and future creditors to give them information that is inaccurate and that does not faithfully represent economic reality. The best option to take is definitely Option 1. The decision maker can walk away from this transaction confident that he or she told the truth.

144 Financial Accounting 8/e Solutions Manual

Ethical Issue 2 Part A. 1. The ethical issue is whether you should question your grade, which is higher than you expected. Your choices are (a) discuss the grade with the professor; and (b) do not discuss the grade with the professor.

2, 3. Stakeholders are you, the professor, the other students in the class, and the university. The possible consequence to you of discussing the grade with the professor is that it may lead to the discovery that the professor made a mistake in calculating the grade, which may lead to a downward adjustment. While this could possibly have adverse economic consequences (i.e., perhaps loss of scholarship if the grade is substantially lowered), it is unlikely that a letter-grade drop in one course would have such an impact on grade point average as to cause loss of a scholarship. There is no legal consequence to reporting a grade that is too high. The ethical consequence is generally positive on all concerned, as it leads to clarification of the true grade.

4. Student opinions will vary on this part.

Part B. 1. The ethical issue in this case is whether you should question your grade, which is now lower than you expected.

Chapter 2

Transaction Analysis

145

Your choices are (a) discuss the grade with the professor; and (b) do not discuss the grade with the professor.

2, 3. Like part a, the stakeholders are you, the professor, the other students in the class, and the university. The possible consequence to you of discussing the grade with the professor is that it may lead to the discovery that the professor made a mistake in calculating the grade, which may lead to an upward adjustment. This could have positive economic consequences (i.e., perhaps keeping a scholarship).

Like part a, the ethical consequence of this action is generally positive on all concerned, as it leads to clarification of the true grade.

4. Most students would probably respond “take it to the professor.” But shouldn’t we be just as concerned about knowing the true grade either way? The author recommends discussing the grade with the professor one way or the other.

Part C. Both course grades and financial statements report results that people use in order to make decisions that can carry both positive and negative consequences. In both situations, it is important that the user receive relevant information, and that the information faithfully represent facts as they actually occurred.

146 Financial Accounting 8/e Solutions Manual

Focus on Financials: Nestlé (20-30 min.)

Reqs. 1 and 3

Beg Bal (b) (g)

End bal

Cash Dr Cr 5,235 86,679 47,349 (c) 7,919 (e) 9982 17,294 (f) 2,261 (h) 20,085 (j) 6,988 6,988

Trade Receivables Dr Cr Beg Bal 10,746 87,088 86,679 (b) (a)

Beg Bal (c)

End Bal

End Bal

11,155 11,155

Sales

Inventories Dr Cr 10,101 47,349 45,468 (d)

11,982 11,982

Cost of Sales Dr Cr 45,468 45,468

Distribution Expenses Dr Cr (e) 7,919 End Bal 7,919

Marketing and Administrative Expenses Dr Cr (f) 17,294 End Bal 17,294

Other Income Dr Cr 9,982 (g) 9,982 End Bal

Income Tax Expenses Dr Cr (h) 2,261 End Bal 2,261

Other Non-Cash Expenses Dr Cr (i) 7,223 End Bal 7,223

Accrued Expenses Dr Cr 7,223 (i) 7,223 End Bal

Other Assets Dr Cr 20,085 (j) 20,085 End Bal

Dr

Cr 87,088 (a) 87,088 End Bal

(d) End Bal

Chapter 2

Transaction Analysis

147

Req. 2

a. Trade receivables, net ..……………….

Net Sales (Revenue)……………………

(Millions) 87,088 87,088

b. Cash………………………………..………... 86,679 Accounts receivable, net……………...

86,679

c. Inventories………………………………….. 47,349 Cash……………………………………….

47,349

d. Cost of Sales……………..………………… 45,468 Inventories……………….………………

45,468

e. Selling and distribution expense……….

7,919

Cash……………………………………….

7,919

f. Administrative expense…………………

Cash………………………………….…..

17,294

g. Cash………………

Other income……………………….……

9,982

h. Income Tax Expense Cash…………………………….

2,261

i. Other non-cash expense………………...

Accrued expense…………………

7,223

17,294

9,982

2,261

j. Other assets……………………………….. 20,085 Cash………………………………………….

148 Financial Accounting 8/e Solutions Manual

7,223

20,085

Req. 4 Sales

87,088

Other income

9,982

Total income

97,070

Cost of sales

(45,468)

Selling and distribution expenses

(7,919)

Administration expenses

(17,294)

Other expenses

(7,223)

Net income before tax

19,166

Income tax expense

(2,261)

Net income

16,905

The net income as per the summary Income Statement as above is exactly equal to Nestlé’s actual net income.

Chapter 2

Transaction Analysis

149

Group Projects Student responses will vary.

150 Financial Accounting 8/e Solutions Manual

Chapter 3 Accrual Accounting & Income Short Exercises (10 min.) S 3-1 Sales revenue…………………………………………….

Cost of goods sold………………………………………

All other expenses………………………………………

Net income………………………………………………..

Millions $ 1,700 (450) (710) $ 540

Beginning cash…………………………………………..

Collections ($1,700 − $60).……………………………..

Payments for: inventory………………………………. everything else……………………….

Ending cash………………………………………………

$ 280 1,640 (640) (530) $ 750

Chapter 3

Accrual Accounting & Income

(10 min.) S 3-2 Statement Income statement

Reports (Amounts in millions) Interest expense……………. $4.5

Balance sheet

Notes payable ($12.6 + $8.4 − $7.2).………. $13.8 0.9 Interest payable………………..

(10 min.) S 3-3 At the end of each accounting period, the business reports its performance through the preparation of financial statements. In order to be useful to the various users of financial statements, they must be up-to-date. Accounts such as Cash, Equipment, Accounts Payable, Share Capital and Dividends are up-to date and require no adjustment at the end of the accounting period. Accounts such as Accounts Receivable, Supplies, Salary Expense and Salaries Payable may not be up to date as of the last day of the accounting period. Why? Because certain transactions that took place in the month may not have been recorded.

The accrued salaries, which are owed to the employees yet have not been paid, are an expense related to the current period. The salaries that are owed to the employees but are unpaid also represent a liability or debt that is owed by the business. The business must make an adjusting entry to record the accrued salary owed as both an increase in Salary Expense and an increase in Salaries Payable. If the business does not make this adjustment the expenses will be understated and net income will be overstated. In addition, liabilities will be understated.

Chapter 3

Accrual Accounting & Income

(10 min.) S 3-4 The large auto manufacturer should record sales revenue when the revenue is earned by delivering automobiles to Lewis or Clark. The large auto manufacturer should not record any revenue prior to delivery of the vehicles because the large auto manufacturer hasn’t earned the revenue yet. The revenue recognition principle governs this decision.

When the large auto manufacturer records the revenue from the sale, at that time — not before or after — the large auto manufacturer should also record cost of goods sold, the expense. The matching principle tells when to record expenses.

(10 min.) S 3-5 Depreciation is the periodic allocation of the cost of a tangible non-current asset, less its estimated residual value, over its estimated useful life. All non-current assets, except for land, decline in usefulness during their life and this decline is an expense. Accountants must allocate the cost of each noncurrent asset, except for land, over the asset’s useful life.

Depreciation is the process of allocating the cost of a noncurrent asset to expense. Depreciation also decreases the book value of the asset over the asset’s useful life to reflect its usage.

Chapter 3

Accrual Accounting & Income

(10 min.) S 3-6 a. The Revenue Recognition Principle b. The Time Period Concept c. The Matching Principle d. The Matching Principle e. The Revenue Recognition Principle

(10 min.) S 3-7 a.

Mar. 31

Rent Expense ($10,800 / 6).……... 1,800 Prepaid Rent……………………..

To record rent expense.

Prepaid Rent Mar. 1 10,800 Mar. 31 Bal. 9,000

1,800

1,800

Rent Expense Mar. 31 1,800 Bal. 1,800

b.

Mar. 31

Supplies Expense ($1,960 − $1,500) Supplies…………………………….

To record supplies expense.

Chapter 3

460 460

Accrual Accounting & Income

Dec. 1 Bal.

Supplies 1,960 Mar. 31 1,500

460

Supplies Expense Marc. 31 460 Bal. 460

(10 min.) S 3-8 Req. 1 (a) Jan. 1 Computer Equipment…………….….. 60,000 Cash…………………………………..

Purchased computer equipment. (b) Dec. 31 Depreciation Expense − Computer Equipment ($60,000 / 4)… 15,000 Accumulated Depreciation − Computer Equipment……………...

60,000

15,000

Req. 2

Computer Equipment Jan. 1 60,000 Bal. 60,000

Accumulated Depreciation − Computer Equipment

Depreciation Expense − Computer Equipment

Dec. 31 15,000 Bal. 15,000

Chapter 3

Dec. 31 15,000 Bal. 15,000

Accrual Accounting & Income

Req. 3 Computer equipment………………………………….

Less Accumulated depreciation…………………….

Book value………………………………………………

$60,000 (15,000) $45,000

(10 min.) S 3-9 (Amounts in millions) Income statement: Salary expense ($39.7 + $3.1)…..

20X6 $42.8

Balance sheet: Salary payable………………...

20X6 $ 3.1

(10 min.) S 3-10 Req. 1 Oct. 31 Interest Expense………………………………. 1,600 Interest Payable……………………………..

To accrue interest expense for October.

Nov. 30 Interest Expense………………………………. 1,600 Interest Payable……………………………..

To accrue interest expense for November.

Dec. 31 Interest Expense………………………………. 1,600 Interest Payable……………………………..

To accrue interest expense for December.

Chapter 3

Accrual Accounting & Income

1,600

1,600

1,600

Req. 2 Interest Payable Oct. Nov. 31 30 Dec. 31 Bal.

1,600 1,600 1,600 4,800

Req. 3 Dec. 31 Interest Payable……………………………

Cash………………………………………

To pay interest.

Chapter 3

4,800

Accrual Accounting & Income

4,800

(10 min.) S 3-11 Req. 1 Oct. 31 Interest Receivable………………………….. 1,600 Interest Revenue…………………………..

To accrue interest revenue for October.

1,600

Nov. 30 Interest Receivable………………………….. 1,600 Interest Revenue……...…………………..

To accrue interest revenue for November.

1,600

Dec. 31 Interest Receivable………………………….. 1,600 Interest Revenue……...……………….…..

To accrue interest revenue for December.

1,600

Req. 2 Interest Receivable Oct. 31 1,600 Nov. 30 1,600 Dec. 31 1,600 Bal. 4,800

Req. 3 Dec. 31 Cash…………………………………………

Interest Receivable……………………

To collect interest.

Chapter 3

4,800

Accrual Accounting & Income

4,800

(5-10 min.) S 3-12 Unearned revenues are liabilities because The Asahi Shimbun has received cash from subscribers in advance of providing them with newspapers. Receiving the cash in advance creates an obligation (to deliver the newspapers, which is a liability) for The Asahi Shimbun. As The Asahi Shimbun delivers newspapers to subscribers, it earns the revenue, and the dollar amount of the unearned revenue then goes into the revenue account.

a. Cash………………………………………

5,000,000 Unearned Subscription Revenue….

5,000,000 Received cash for revenue in advance.

b. Unearned Subscription Revenue...........

Subscription Revenue…………………

To record the earning of subscription revenue that was collected in advance.

Chapter 3

5,000,000 5,000,000

Accrual Accounting & Income

(5-10 min.) S 3-13 Prepaid Rent at December 31: a. Unadjusted amount…………………………. b. Adjusted amount ($24,000 − $6,000)……….

$24,000 18,000

Rent Expense at December 31: c. Unadjusted amount…………………………. d. Adjusted amount ($24,000 / 4)……………….

$

0 6,000

(10 min.) S 3-14 a. Accounts Receivable……………………. 75,000 Service Revenue…………………….

Cash………………………………………… 50,000 Accounts Receivable…………………

b. Cash…………………………………………

Unearned Service Revenue………….

8,000

Unearned Service Revenue…………….

Service Revenue…………………….

3,600

Chapter 3

75,000

50,000

8,000

3,600

Accrual Accounting & Income

(15-30 min.) S 3-15 Atlantic Sports Goods Company Income Statement Year Ended March 31, 20X8 Thousands $376,000 Net revenues…………………………….

Cost of goods sold…………………….

(285,000) All other expenses……………………..

(48,600)) Net income……………………………… $ 42,400

Atlantic Sports Goods Company Statement of Changes in Equity Year Ended March 31, 20X8 Thousands $ 68,000 Total equity, March 31, 20X7….............

42,400 Add: Net income………………………. $110,400 Less: Dividends…………………………

(2,400) Total equity, March 31, 20X8.………….. $108,000

Chapter 3

Accrual Accounting & Income

(continued) S 3-15 Atlantic Sports Goods Company Balance Sheet March 31, 20X8 Thousands ASSETS Current: Cash………………………………………

Accounts receivable…………………..

Inventories………………………………

Other current assets…………………..

Total current assets………………..

Property and equipment, net…………

Other assets……………………………….

Total assets…………………………………...

LIABILITIES Current liabilities………………………….

Long-term liabilities……………………

Total liabilities………………………………..

SHAREHOLDERS’ EQUITY Share capital………………………………

Retained earnings………………………..

Total shareholders’ equity………….….......

Total liabilities and shareholders’ equity..

Chapter 3

$ 3,400 75,600 50,000 12,800 141,800 15,000 63,200 $220,000 $96,000 16,000 112,000 60,000 48,000 108,000 $220,000

Accrual Accounting & Income

(5-10 min.) S 3-16 CLOSING ENTRIES Mar. 31 Net Revenues…………………

Retained Earnings…………

31 Retained Earnings………………

Cost of Goods Sold…………

All Other Expenses…………

Thousands 376,000 376,000 333,600 285,000 48,600

Retained Earnings Mar. 31, 20X8 Expenses 333,600 Mar. 31, 20X7 Bal. 8,000 Mar. 31, 20X8 Dividends 2,400 Mar. 31, 20X8 Revenues 376,000 Mar. 31, 20X8 Bal. 48,000

Retained Earnings’ ending balance agrees with the amount reported on the retained earnings T-account and the balance sheet (in S 3-15).

Chapter 3

Accrual Accounting & Income

Exercises Group A

(5-10 min.) E 3-17A Statement 1. Income statement

Reports Sales revenue……… $4,600 Operating expenses… 1,100

Balance sheet

Accounts receivable.. $ 500 Accounts payable…… 1,200

2. Cash basis would report only the cash collections of $4,800 from customers and the payment of operating expenses ($1,100). Their balance sheet should have included neither accounts receivable nor accounts payable.

(5-10 min.) E 3-18A a. Cash Basis Revenues…………………...

Expenses…………………...

Net income…………………

$305,000 230,000 $75,000

b. Accrual Basis $295,000 225,000 $70,000

The accrual basis measures net income better because its information on revenues and expenses is more complete than the information provided by the cash basis. The accrual basis also clearly states what the business is expecting in terms of

Chapter 3

Accrual Accounting & Income

its knowable obligations.

future economic benefits and economic

(5-10 min.) E 3-19A Millions a.

Revenue……………………………………………….

$425

The revenue of $425 million is fully earned. The revenue recognition principle says to record revenue when it has been earned, regardless of when cash is collected.

Therefore, report the amount of revenue earned, regardless of when the company collects cash. b.

Total expense…………………………………….…..

$280

The matching principle governs accounting for expenses. c.

The income statement reports revenues and expenses.

The statement of cash flows reports cash receipts and cash payments.

Chapter 3

Accrual Accounting & Income

(15-20 min.) E 3-20A Req. 1 Adjusting Entries DATE

ACCOUNT TITLES

DEBIT

a. Insurance Expense…………………………...

Prepaid Insurance ($600+$1,800−$1,000)..

1,400 1,400

b. Interest Receivable……………………...……

1,500 Interest Revenue…………………………...... c. Unearned Service Revenue ($1,200 − $800)..

CREDIT

1,500

400

Service Revenue……………………………

400

d. Depreciation Expense……………………..….. 4,400 Accumulated Depreciation………………...

4,400

e. Salary Expense ($20,000 × 3/5)……………… 12,000 Salary Payable……………………….…..…..

12,000

f. Income Tax Expense ($24,000 × .25)……..… 6,000 Income Tax Payable…………………..…….

6,000

Chapter 3

Accrual Accounting & Income

(continued) E 3-20A Req. 2 Net income understated by omission of: Interest revenue…………………………….. $ 1,500 Service revenue…………………………...

400 Total understatement……………………….

$ 1,900

Net income overstated by omission of: Insurance expense………………………….

Depreciation expense………………………

Salary expense………………………………

Income tax expense…………………………

Total overstatement…………………………

23,800

Overall effect — net income overstated by..

Chapter 3

$1,400 4,400 12,000 6,000 $21,900

Accrual Accounting & Income

(10-15 min.) E 3-21A Missing amounts in italics.

1 2 3 4 $ 400 $1,800 $ 3,000 $ 1,600 2,800

Beginning Supplies Add: Payments for supplies Total amount to account for 3,200 during the year Less: Ending Supplies Supplies Expense

2,400 0 1,400 5,400 3,000 3,000 (1,000) (2,400) (2,400) (600) $ 2,200 $2,600 $ 600 $2,400

Journal entries: Situation 1: Supplies……………………………

Cash………………………….….

Paid cash for supplies Situation 2: Supplies Expense………………..

Supplies………………………...

To record supplies expense

Chapter 3

2,800 2,800

2,600

Accrual Accounting & Income

2,600

(10-20 min.) E 3-22A Adjusting Entries DATE

ACCOUNT TITLES

DEBIT

CREDIT

a. Interest Expense……………………………… 8,400 Interest Payable…………………………….

8,400

b. Interest Receivable…………………………… 5,000 Interest Revenue…………………….……..

5,000

c. Unearned Rent Revenue ($12,800 / 2 × 6/12) 3,200 Rent Revenue………………………………. d. Salary Expense ($1,600 × 3)………………....

4,800 Salary Payable………………………………

3,200

4,800

e. Supplies Expense……………………………..

2,200 Supplies ($3,500 − 1,300)……………….….

2,200

f. Depreciation Expense ($110,000 / 5)………... 22,000 Accumulated Depreciation……………….

22,000

Book value = $88,000 ($110,000 − $22,000)

Chapter 3

Accrual Accounting & Income

(10-20 min.) E 3-23A Accounts Receivable 4,500 1,800 (c) 6,300 Bal.

Salary Payable (b) 1,500 Bal. 1,500

Bal.

(c) (d) Bal.

2,100

Unearned Service Revenue (d) 1,200 2,100 900 Bal.

Service Revenue 15,000 1,800 1,200 18,000

Supplies 2,700 (a) 600

(b) Bal.

Salary Expense 7,500 1,500 9,000

Chapter 3

Accrual Accounting & Income

Supplies Expense (a) 2,100 Bal. 2,100

(20-30 min.) E 3-24A Yummy Eats, Inc. Income Statement Year Ended December 31, 20X8 Thousands Revenues: Sales revenue………………... $83,600 Expenses: Cost of goods sold………….. $52,600 Selling, administrative, and general expense…………..

20,400 Total expenses………….

Income before tax………………

Income tax expense…………….

Net income……………………….

73,000 10,600 2,800 $ 7,800

Yummy Eats, Inc. Statement of Changes in Equity Year Ended December 31, 20X8 Thousands Total equity, January 1, 20X8…………….. $19,000 Add: Net income ………………………….

7,800 26,800 Less: Dividends…………………………….

(3,000) Total equity, December 31, 20X6………. $$23,800

Chapter 3

Accrual Accounting & Income

(continued) E 3-24A Yummy Eats, Inc. Balance Sheet December 31, 20X8 Thousands ASSETS LIABILITIES Cash……………………………. $ 7,800 Accounts payable……… $ 7,700 Accounts receivable…………

3,200 Income tax payable……..

500 Inventories…………………….

2,400 Other liabilities…………..

2,300 Prepaid expenses…………….

3,600 Total liabilities…………...

10,500 Prop., plant & equip.$ 13,200 SHAREHOLDERS’ Less: Accum.

EQUITY deprec……. (4,400) 8,800 Share capital…………..

9,600 14,200 Other assets…………………..

19,000 Retained earnings………

Total shareholders’ equity 23,800 Total liabilities and Total assets…………………… $44,800 shareholders’ equity... $44,800

Chapter 3

Accrual Accounting & Income

(10-20 min.) E 3-25A One mechanism for solving this exercise is to prepare the relevant T-accounts, insert the given information, and solve for the unknown amounts, shown in italics.

Amounts in millions

Beg. bal.

Sales revenue End. bal.

Beg. bal.

Payment End. bal.

Payments

Receivables 290 20,480 Collections 370

Prepaid Insurance 190 450 Insurance expense 160 Accrued Liabilities Payable Beg. bal.

Other operating 4,100 expenses End. bal.

Chapter 3

20,400

480

630 4,180 710

Accrual Accounting & Income

(10 min.) E 3-26A Req. 1 Mother Catherine’s income statement: Service revenue ($6,000 × 1/2)…………………..... $3,000 Mother Catherine’s balance sheet: Unearned service revenue ($6,000 × 1/2)………

$3,000

Req. 2 Cologne’s income statement: Medical expense ($6,000 × 1/2)…………………… $3,000 Cologne’s balance sheet: Prepaid medical expense ($6,000 × 1/2)………… $3,000

Chapter 3

Accrual Accounting & Income

(10-15 min.) E 3-27A Req. 1 Millions Income statement Service revenue (£410 − £160)…………………… £250 Balance sheet Unearned service revenue………………………... £160

Req. 2 Income statement Service revenue (£65 + £410 − £160)……………. £315 Balance sheet Unearned service revenue………………………... £160

Service revenue is greater in (2) because New Age Mobile began the year owing more phone service to customers. With collections for the year and the amount of the ending liability unchanged, New Age Mobile must have earned more revenue in situation 2 than in situation 1.

Not required, but helpful: Unearned Service Revenue Beg. bal.

Earned revenue 315 Collected cash End. bal.

Chapter 3

65 410 160

Accrual Accounting & Income

(10-20 min.) E 3-28A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Closing Entries Dec. 31 Service Revenue………………………… 49,800 Other Revenue…………………………… 1,600 Retained Earnings…………………….

51,400 31 Retained Earnings………………………. 46,000 Cost of Services Sold………………...

Selling, General, and Administrative Expense……………………………...

Depreciation Expense………………..

Income Tax Expense……………….

23,000 12,400 9,600 1,000

31 Retained Earnings………………………. 1,800 Dividends…………………………….…

Net income for 20X8 was $5,400 ($51,400 − $46,000).

Expenses Dividends

Retained Earnings 46,00 Dec. 31, 20X7 1,800 Revenues Dec. 31, 20X8

Chapter 3

5,200 51,400 8,800

Accrual Accounting & Income

1,800

(15-25 min.) E 3-29A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Adjusting Entries Dec. 31 Unearned Service Revenue………………. 6,800 Service Revenue ($20,400 − $13,600)...

CREDIT

6,800

31 Salary Expense ($5,200 − $4,600)………...

Salary Payable……………………….…...

600

31 Rent Expense ($1,400 − $1,000)…………..

Prepaid Rent………………………………

400

31 Depreciation Expense ($500 − $0)………..

Accumulated Depreciation……………..

500

600

400

500

31 Income Tax Expense ($1,000 − $0)………. 1,000 Income Tax Payable……………………..

1,000

Closing Entries 31 Service Revenue……………………………. 20,400 Retained Earnings……………………….

20,400

31 Retained Earnings………………………….. 8,100 Salary Expense…………………………...

Rent Expense……………………………..

Depreciation Expense…………………...

Income Tax Expense…………………….

5,200 1,400 500 1,000

31 Retained Earnings………………………….. 1,300 Dividends…………………………….……

1,300

Chapter 3

Accrual Accounting & Income

Exercises Group B

(5-10 min.) E 3-30B Statement 1. Income statement

Reports Sales revenue………

Operating expenses..

€4,200 1,400

Balance sheet

Accounts receivable..

Accounts payable…

€ 400 800

2. Cash basis would report only the cash collections of €4,800 from customers and the payment of operating expenses (€1,400).The balance sheet would include neither accounts receivable nor accounts payable.

(5-10 min.) E 3-31B a. Cash Basis Revenues…………………

Expenses…………………

Net income………………

€325,000 220,000 €105,000

b. Accrual Basis €345,000 250,000 € 95,000

The accrual basis measures net income better because its information on revenues and expenses is more complete than the information provided by the cash basis. The accrual basis also clearly states what the business is expecting in terms of its knowable future economic benefits and economic obligations.

Chapter 3

Accrual Accounting & Income

(5-10 min.) E 3-32B Millions a.

Revenue……………………………………………….

€400

The revenue of €400 million is fully earned. The revenue recognition principle says to record revenue when it has been earned, regardless of when cash is collected.

Therefore, report the amount of revenue earned, regardless of when the company collects cash. b.

Total expense…………………………………….…..

€295

The matching principle governs accounting for expenses. c.

The income statement reports revenues and expenses.

The statement of cash flows reports cash receipts and cash payments.

(15-20 min.) E 3-33B Req. 1 Adjusting Entries DATE

ACCOUNT TITLES

DEBIT

a. Insurance Expense……………………………... 1,900 Prepaid Insurance (€800+€2,500-€1,400)… b. Interest Receivable…………………..………… 1,200 Chapter 3

Accrual Accounting & Income

CREDIT

1,900

Interest Revenue……………………..……... c. Unearned Service Revenue (€1,500 − €600) Service Revenue……………………..………

1,200 900 900

d. Depreciation Expense…………………..…….. 4,700 Accumulated Depreciation…………..…….

4,700

e. Salary Expense (€24,000 × 3/5)………….…… 14,400 Salary Payable……………………….…..…...

14,400

f. Income Tax Expense (€21,000 × .25)………

5,250 Income Tax Payable………………………….

5,250

Chapter 3

Accrual Accounting & Income

(continued) E 3-33B Req. 2 Net income understated by omission of: Interest revenue…………………………….. € 1,200 Service revenue……………………………...

900 Total understatement……………………….

€ 2,100

Net income overstated by omission of: Insurance expense………………………….

Depreciation expense………………………

Salary expense………………………………

Income tax expense…………………………

Total overstatement…………………………

26,250

Overall effect — net income overstated by

Chapter 3

€1,900 4,700 14,400 5,250

€24,150

Accrual Accounting & Income

(10-15 min.) E 3-34B Missing amounts in italics.

1 $ 200

2 3 4 $1,200 $ 2,200 $ 1,400

Beginning Supplies Add: Payments for supplies during the year 3,000 2,000 3,200 Total amount to account for 3,200 Less: Ending Supplies (800) (400) Supplies Expense $ 2,400 $ 1,400

400 1,200 2,600 2,600 (1,600) (1,000) $ 1,000 $ 1,600

Journal entries: Situation 1: Supplies……………………………

Cash………………………….….

Paid cash for supplies Situation 2: Supplies Expense………………..

Supplies………………………...

To record supplies expenses

Chapter 3

3,000 3,000

2,800

Accrual Accounting & Income

2,800

(10-20 min.) E 3-35B Adjusting Entries DATE

ACCOUNT TITLES

DEBIT

CREDIT

a. Interest Expense……………………………… 9,000 Interest Payable…………………………….

9,000

b. Interest Receivable…………………………… 4,800 Interest Revenue…………………….……..

4,800

c. Unearned Rent Revenue ($13,200 / 2 × 6/12) 3,300 Rent Revenue………………………………. d. Salary Expense ($1,800 × 3)………………....

5,400 Salary Payable………………………………

3,300

5,400

e. Supplies Expense……………………………..

2,100 Supplies ($3,300 − 1,200)……………….….

2,100

f. Depreciation Expense ($150,000 / 5)………... 30,000 Accumulated Depreciation……………….

30,000

Book value = $120,000 ($150,000 − $30,000)

Chapter 3

Accrual Accounting & Income

(10-20 min.) E 3-36B Accounts Receivable 2,800 400 (c) 3,200 Bal.

Salary Payable (b) 1,600 Bal. 1,600

Bal.

(c) (d) Bal.

400

Unearned Service Revenue (d) 200 1,200 1,000 Bal.

Service Revenue 9,800 400 200 10,400

Supplies 1,000 (a) 600

(b) Bal.

Salary Expense 3,400 1,600 5,000

Chapter 3

Accrual Accounting & Income

Supplies Expense (a) 400 Bal. 400

(20-30 min.) E 3-37B Chocolate Hut, Inc. Income Statement Year Ended December 31, 20X8 Thousands Revenues: Sales revenue………………... $81,800 Expenses: Cost of goods sold………….. $52,800 Selling, administrative, and general expense………….. 21,000 Total expenses…………….

Income before tax………………

Income tax expense…………….

Net income……………………….

73,800 8,000 4,800 $ 3,200

Chocolate Hut, Inc. Statement of Changes in Equity Year Ended December 31, 20X8 Thousands Total equity, January 1, 20X8… $19,400 Add: Net income ………………………….

3,200 Less: Dividends…………………………….

22,600 Total equity, December 31, 20X6…

(2,400) $20,200

Chapter 3

Accrual Accounting & Income

(continued) E 3-37B Chocolate Hut, Inc. Balance Sheet December 31, 20X8 Thousands ASSETS LIABILITIES Cash……………………………. € 7,200 Accounts payable……… € 15,800 Accounts receivable…………

3,200 Income tax payable……..

2,000 Inventories…………………….

2,600 Other liabilities…………..

5,600 Prepaid expenses…………….

3,400 Total liabilities…………...

23,400 Prop., plant & equip.€ 13,600 SHAREHOLDERS’ EQUITY Less: Accum. deprec……. (5,600) 8,000 Share capital…………..

9,800 10,400 Other assets…………………..

19,200 Retained earnings………

Total shareholders’ equity 20,200 Total liabilities and Total assets…………………… $43,600 shareholders’ equity... $43,600

Chapter 3

Accrual Accounting & Income

(10-20 min.) E 3-38B One mechanism for solving this exercise is to prepare the relevant T-accounts, insert the given information, and solve for the unknown amounts, shown in italics.

Amounts in millions

Beg. bal.

Sales revenue End. bal.

Receivables 230 20,620 Collections 350

Beg. bal.

Payment End. bal.

Prepaid Insurance 140 420 Insurance expense 130

Payments

Accrued Liabilities Payable Beg. bal.

Other operating 4,300 expenses End. bal.

Chapter 3

20,500

430

660 4,340 700

Accrual Accounting & Income

(10 min.) E 3-39B Req. 1 Mother Claire’s income statement: Service revenue (€8,600 × 1/2)………………….... $4,300 Mother Claire’s balance sheet: Unearned service revenue (€8,600 × 1/2)………

$4,300

Req. 2 Murcia’s income statement: Medical expense ($8,600 × 1/2)…………………… $4,300 Murcia’s balance sheet: Prepaid medical expense ($8,600 × 1/2)………… $4,300

Chapter 3

Accrual Accounting & Income

(10 min.) E 3-40B Req. 1 Millions Income statement Service revenue (£500 − £125)…………………… £375 Balance sheet Unearned service revenue………………………... £125

Req. 2 Income statement Service revenue (£85 + £500 − £125)……………. £460 Balance sheet Unearned service revenue………………………... £125

Service revenue is greater in (2) because GTel began the year owing more phone service to customers. With collections for the year and the amount of the ending liability unchanged, GTel must have earned more revenue in situation 2 than in situation 1.

Not required, but helpful: Unearned Service Revenue Beg. bal.

Earned revenue 460 Collected cash End. bal.

Chapter 3

85 500 125

Accrual Accounting & Income

(10-20 min.) E 3-41B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Closing Entries Dec. 31 Service Revenue………………………… 49,600 Other Revenue…………………………… 1,800 Retained Earnings…………………….

51,400 31 Retained Earnings………………………. 46,800 Cost of Services Sold………………...

Selling, General, and Administrative Expense……………………………...

Depreciation Expense………………..

Income Tax Expense………………….

23,200 12,800 9,400 1,400

31 Retained Earnings……………………….

1,600 Dividends…………………………….…

Net income for 20X8 was €4,600 (€51,400 − €46,800).

Expenses Dividends

Retained Earnings 46,800 Dec. 31, 20X7 1,600 Revenue Dec. 31, 20X8

Chapter 3

5,000 51,400 8,000

Accrual Accounting & Income

1,600

(15-25 min.) E 3-42B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

Adjusting Entries Dec. 31 Unearned Service Revenue……………….

Service Revenue (€19,600 − €13,300)..

DEBIT

6,300 6,300

31 Salary Expense (€5,200 − €4,500)………...

Salary Payable……………………….…...

700

31 Rent Expense (€1,500 − €800)…………..

Prepaid Rent………………………………

700

31 Depreciation Expense (€600 − €0)………..

Accumulated Depreciation……………..

600

31 Income Tax Expense (€900 − €0)……….

Income Tax Payable……………………..

CREDIT

700

700

600 900 900

Closing Entries 31 Service Revenue……………………………. 19,600 Retained Earnings……………………….

19,600

31 Retained Earnings………………………….. 8,200 Salary Expense…………………………...

Rent Expense……………………………..

Depreciation Expense…………………...

Income Tax Expense…………………….

5,200 1,500 600 900

31 Retained Earnings………………………….. 1,100 Dividends…………………………….……

1,100

Chapter 3

Accrual Accounting & Income

Serial Exercises (3 hours) E 3-43 Reqs. 2, 4, 5, and 7 [refer to Exercise 2-36, p. 102]

Bal.

Cash 6,500 Mar. 2 1,500 3 2,000 12 1,900 26 31 6,100

Mar. 5 Bal.

Supplies 400 Adj. 300

Mar. 2 9 21 28

500 2,500 400 800 1,600

100

Accumulated Depreciation – Equipment Adj. 70

Accumulated Depreciation – Furniture Adj. 125

Accounts Receivable Mar. 18 1,900 Mar. 28 1,900 Bal. 0 Adj. 1,800 Bal. 1,800

Mar. 3

Equipment 2,500

Mar. 4

Furniture 7,200

Accounts Payable Mar. 26 800 Mar. 4 7,200 5 400 Bal. 6,800

Chapter 3

Accrual Accounting & Income

(continued) E 3-43 Reqs. 1, 3, 6, and 8 Salary Payable Adj.

Share Capital Mar. 2

Dividends Mar. 31 1,600 Clo.

620

6,500

Unearned Service Revenue Adj. 600 Mar. 21 2,000 1,400 Bal. Retained Earnings Clo. 1,815 Clo. 5,800 2,385 Clo. 1,600 Bal.

1,600

Clo. Rent Expense Mar. 2 500 Clo.

Adj.

Salary Expense 620 Clo.

Service Revenue Mar. 9 1,500 18 1,900 3,400 Bal. 1,800 Adj. 600 Adj. 5,800 5,800 Bal.

500

Utilities Expense Mar. 12 400 Clo.

620

Depreciation Expense – Equipment Adj. 70 Clo. 70

Depreciation Expense – Furniture Adj. 125 125 Clo.

Supplies Expense Adj. 100 Clo.

Chapter 3

Accrual Accounting & Income

400

100

(continued) E 3-43 Req. 1 March 2 through 18 entries are repeated from Solution to Exercise 2-36.

Journal DATE

Mar.

ACCOUNT TITLES AND EXPLANATION

2 Cash……………………………………..

Share Capital……………………..

DEBIT

6,500 6,500

2 Rent Expense…………………………..

Cash…………………………………..

500

3 Equipment………………………………

Cash…………………………………..

2,500

4 Furniture………………………………..

Accounts Payable………………….

7,200

5 Supplies…………………………………

400

500

2,500

7,200

Accounts Payable………………….

400

9 Cash……………………………………..

Service Revenue……………………

1,500

12 Utilities Expense………………………

Cash…………………………………..

400

18 Accounts Receivable…………………

Service Revenue……………………

1,900

Chapter 3

CREDIT

1,500

400

Accrual Accounting & Income

1,900

(continued) E 3-43 Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Mar. 21 Cash…………………………………….. 2,000 Unearned Service Revenue………

CREDIT

2,000

21 No entry; no transaction yet 26 Accounts Payable…………………….

Cash………………………………….

800

28 Cash…………………………………….. 1,900 Accounts Receivable……………

31 Dividends……………………………… 1,600 Cash………………………………….

Chapter 3

800

1,900

1,600

Accrual Accounting & Income

(continued) E 3-43 Reqs. 3 and 4 Jerome Smith, Certified Public Accountant, P.C. Adjusted Trial Balance March 31, 20X6 ACCOUNT TITLE

Cash Accounts receivable Supplies Equipment Accumulated depr. – equip.

Furniture Accumulated depr. – furn.

Accounts payable Salary payable Unearned service revenue Share capital Retained earnings Dividends Service revenue Rent expense Utilities expense Salary expense Depreciation expense – equip.

Depreciation expense – furn.

Supplies expense

TRIAL BALANCE DEBIT CREDIT

ADJUSTMENTS DEBIT CREDIT

6,100 — 400 2,500 7,200

—

(d1) 70 (d2) 125

1,600

— 6,800 — 2,000 6,500 — 3,400

(a) 1,800 (c) 100

Chapter 3

18,700

6,100 1,800 300 2,500 7,200

1,600

500 400 620 70 125 100 21,315

21,315

(b) 600

(a)1,800 (b) 600 (e) 620 (d1) 70 (d2) 125 (c) 100 3,315

Accrual Accounting & Income

3,315

70 125 6,800 620 1,400 6,500 — 5,800

(e) 620

500 400

18,700

ADJUSTED TRIAL BALANCE DEBIT CREDIT

(continued) E 3-43 Req. 5

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT CREDIT

Adjusting Entries (a) Mar. 31 Accounts Receivable………………….. 1,800 Service Revenue…………………….. (b)

(c)

31 Unearned Service Revenue…………

Service Revenue……………………..

31 Supplies Expense ($400 − $300)……..

1,800

600 600 100

Supplies……………………………….. (d1)

(d2)

(e)

31 Depreciation Expense – Equipment…

Accumulated Depreciation – Equip

100 70 70

31 Depreciation Expense – Furniture…

125 Accumulated Depreciation – Furn..

125

31 Salary Expense………………………….

620 Salary Payable………………………..

620

Chapter 3

Accrual Accounting & Income

(continued) E 3-43 Req. 6 Jerome Smith, Certified Public Accountant, P.C. Income Statement Month Ended March 31, 20X6 Revenues: Service revenue $5,800 Expenses: Salary expense $620 Supplies expense 100 Rent expense 500 Utilities expense 400 Depreciation expense – furniture 70 Depreciation expense – equipment 125 Total expenses 1,815 $3,985 Net income

Jerome Smith, Certified Public Accountant, P.C. Statement of Changes in Equity Month Ended March 31, 20X6 Total equity, March 1, 20X6 $ 0 6,500 Add: Share capital 3,985 Net income 10,485 Less: Dividends (1,600) Total equity, March 31, 20X6 $ 8,885

Chapter 3

Accrual Accounting & Income

(continued) E 3-43 Req. 6 Jerome Smith, Certified Public Accountant, P.C. Balance Sheet March 31, 20X6 ASSETS LIABILITIES Current assets: Current liabilities: Cash $ 6,100 Accounts payable $ 6,800 Accounts receivable 1,800 Salary payable 620 Supplies 300 Unearned service 1,400 8,200 8,820 Total current assets revenue Prop., plant & equip.: Total current liabilities Equipment $2,500 Less accum.

SHAREHOLDERS’ EQUITY depr.

(70) 2,430Share capital 6,500 2,385 Furniture $7,200 Retained earnings 8,885 Total shareholders’ equity Less accum. ______ depr.

(125) 7,075Total liabilities and $17,705 Total assets $17,705 shareholders’ equity

Chapter 3

Accrual Accounting & Income

(continued) E 3-43 Req. 7

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Closing Entries Mar. 31 Service Revenue………………………….. 5,800 Retained Earnings……………………..

5,800

31 Retained Earnings……………………….. 1,815 Rent Expense…………………………..

Utilities Expense……………………….

Salary Expense…………………………

Depreciation Expense – Equipment..

Depreciation Expense – Furniture….

Supplies Expense……………………...

500 400 620 70 125 100

31 Retained Earnings……………………….. 1,600 Dividends………………………………..

1,600

Chapter 3

Accrual Accounting & Income

(60 min.) E 3-44 a. Net income: Service revenue: ($165,000 + $1,820 + $34,000).

Expenses: Salary ($38,000 + $3,300)……… $ 41,300 Depreciation expense— building………..

2,500 3,400 Supplies…………………………..

1,400 Insurance…………………………

7,700 Advertising……………………….

2,400 Utilities……………………………

Net income………………………….. b. Total assets: Cash…………………………………..

Accounts receivable ($7,200 + $34,000)………….....

Supplies ($4,100 − $3,400)………..

Prepaid insurance ($3,500 − $1,400)………………...

Building……………………………… $110,000 Less: Accum. Depr. ($15,000 + $2,500)………….…… (17,500) Land…………………………………..

Total assets………………….…..

Chapter 3

$200,820

58,700 $142,120 16,700 41,200 700 2,100

92,500 50,000 $203,200

Accrual Accounting & Income

(continued) E 3-44 c. Total liabilities:

d. Total shareholders’ equity:

Accounts payable……………………. $ 7,700 Salary payable…………………………

3,300 Unearned service revenue 3,580 Total liabilities………………………… ($5,400 − $1,820)…………………... $ 14,580

Share capital………………………... $ 14,500 Retained earnings, beginning….…...

45,000 Add: Net income….…………………... 142,120 201,620 Less: Dividends.............................. (13,000) Total shareholders’ equity………….. $188,620

e. Total assets = Total liabilities + Total shareholders’ equity $203,200 = $14,580 + $188,620

Chapter 3

Accrual Accounting & Income

Quiz Q3-45 Q3-46 Q3-47 Q3-48 Q3-49 Q3-50 Q3-51 Q3-52 Q3-53

b b b d d c c a a

Q3-54

b

Q3-55 Q3-56 Q3-57 Q3-58 Q3-59

d c a a c

Q3-60

c

($1,200 / 6 = $200)

($3,200 × 9/12 = $2,400) $3,000 + $27,000 − $18,000 = revenue of $12,000

($7,800 − $680 − $120 + $940 − $360)

Payment

Salary Payable Beg. bal.

141,000 Salary exp.

End. bal.

Chapter 3

27,000 132,000 18,000

Accrual Accounting & Income

Problems Group A (15-20 min.) P 3-61A (All amounts in millions) 1.

R – E = NI $45 – E = $8 E = $45 – $8 = $37

2.

Revenues……………..

Expenses……………..

Net income…………...

3.

Beginning receivables……… $ 6 Add: Sales…………………..

45 Less: Collections…………... (25) Ending receivables…………. $26

$45 37 $8

Balance sheet ASSETS Current assets: Receivables…………. $ 26 4.

Beginning accounts payable………. $ 8 Add: Expenses……………………… 37 Less: Payments……………………... (41) Ending accounts payable…………… $ 4 Balance sheet LIABILITIES Current liabilities: Accounts payable…………… $ 4

Chapter 3

Accrual Accounting & Income

(20-30 min.) P 3-62A Req. 1 Ethan Consulting Amount of Revenue (Expense) for May Date Cash Basis Accrual Basis $(1,200) May 1 Expense $0 4 Expense 0 (2,100) 5 Revenue 2,400 2,400 8 Expense (1,500) (1,500) 11 Revenue 0 10,800 19 0 0 24 Revenue 10,800 0 26 Expense 0 (3,900) 29 Expense (1,800) (1,800) 31 Expense 0 $1,200 ÷ 5 = (240) 31 Revenue 0 1,200

Req. 2 Income (loss) before tax $ 2,700

Chapter 3

$10,860

Accrual Accounting & Income

(continued) P 3-62A Req. 3 The accrual-basis measure of net income is preferable because it accounts for revenues and expenses when they occur, not when they are received or paid in cash. For example, on May 11, the company earned $10,800 of revenue and increased its total equity as a result. The accrual basis records this revenue, but the cash basis ignores it. On May 24, the business collected the receivable that was created by the revenue earned on account at May 11. The accrual basis records no revenue on May 24 because the company’s increase in total equity occurred back on May 11. The cash basis waits until cash is received, on May 24, to record the revenue. This is too late.

Chapter 3

Accrual Accounting & Income

(10-20 min.) P 3-63A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Dec. 31 a. Insurance Expense………………….. 2,800* Prepaid Insurance……………......

To record insurance expense.

2,800

31 b. Salary Expense.……………….……..

Salary Payable…………………….

To accrue salary expense.

2,480

31 c. Interest Receivable………………….

Interest Revenue………………….

To accrue interest revenue.

2,480**

500

31 d. Supplies Expense…………………… 6,700*** Supplies…………………………….

To record supplies expense.

500

6,700

31 e. Unearned Service Revenue……….. 10,500**** Service Revenue…………….……

10,500 To record revenue that was collected in advance.

31 f. Dep. Expense – Office Furniture….. 3,200 Dep. Expense – Equipment………… 5,000 Acc. Dep. – Office Furniture…….

Acc. Dep. – Equipment…………..

To record depreciation expense.

3,200 5,000

_____ * $ 900 + $3,600 − $1,700= $2,800 ** ($6,200 × 2/5) = $2,480 *** $2,500 + $6,300 − $2,100 = $6,700 **** ($15,000 × 70%) = $10,500

Chapter 3

Accrual Accounting & Income

(45-60 min.) P 3-64A Req. 1

ACCOUNT TITLE

Cash Accounts receivable Prepaid rent Supplies Furniture Accumulated depreciation Accounts payable Salary payable Share capital Retained earnings Dividends Service revenue Salary expense Rent expense Utilities expense Depreciation expense Supplies expense

Michigan, Inc. Adjusted Trial Balance December 31, 20X6 TRIAL BALANCE ADJUSTMENTS DEBIT CREDIT DEBIT CREDIT

ADJUSTED TRIAL BALANCE DEBIT CREDIT

17,800 2,600 4,800 5,200 144,000

17,800 7,000 3,200 1,000 144,000

7,200 4,800 1,300

187,700

(a) 4,400 (b) 1,600* (c) 4,200 (d) 4,000**

8,000 6,800 24,000 126,500 22,400

(e) 6,000***

7,200 (a) 4,400

187,700

(e) 6,000*** (b) 1,600* (d) 4,000** (c) 4,200 20,200

_____ * $4,800 ÷ 3 = $1,600 ** $144,000 ÷ 3 = $48,000 ÷ 12 = $4,000 *** $10,000 × 3/5 = $6,000 Chapter 3

Accrual Accounting & Income

_____ 20,200

12,000 6,800 6,000 24,000 126,500 26,800

10,800 1,600 1,300 4,000 4,200 202,100

202,100

(continued) P 3-64A Req. 2 Michigan, Inc. Income Statement Month Ended December 31, 20X6 Revenues: Service revenue $26,800 Expenses: Salary expense $10,800 Supplies expense 4,200 Depreciation expense 4,000 Rent expense 1,600 Utilities expense 1,300 Total expenses 21,900 $ 4,900 Net income

Michigan, Inc. Statement of Changes in Equity Month Ended December 31, 20X6 Total equity, December 1, 20X6 $150,500 Add: Net income 4,900 Less: Dividends 155,400 Total equity, December 31, 20X6 (7,200) $148,200

Chapter 3

Accrual Accounting & Income

(continued) P 3-64A Req. 2 (continued) Moscow, Inc. Balance Sheet December 31, 20X6 ASSETS Current assets: Cash Accounts receivable Prepaid rent Supplies

LIABILITIES Current liabilities: Accounts payable $ $6,800 Salary payable17,800 6,000 7,000 12,800 3,200 Total current liabilities 1,000 29,000 Total current assets Furniture $144,000 SHAREHOLDERS’ EQUITY Less: Accum.

Share capital 24,000 124,200 deprec.(12,000) 132,000 Retained earnings 148,200 Total shareholders’ equity $161,000 Total liabilities and Total assets $161,000 shareholders’ equity

Chapter 3

Accrual Accounting & Income

(10-20 min.) P 3-65A [Errata: Interest revenue credited under Adjusted Trial Balance should be 800, not 600] Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT CREDIT

Apr. 30 Accounts Receivable ($7,580 − $5,900)... 1,680 Rental Revenue………………………….

To accrue rental revenue.

30 Interest Receivable ($400 − $0)…………..

Interest Revenue ($800 − $400)…….…

To accrue interest revenue.

1,680

400 400

30 Supplies Expense ($1,000 − $0)………… 1,000 Supplies ($1,800 − $800)……………….

To record supplies expense.

1,000

30 Insurance Expense ($1,800 − $0)……….. 1,800 Prepaid Insurance ($2,300 − $500)…...

To record insurance expense.

1,800

30 Depreciation Expense ($1,500 − $0)……. 1,500 Accumulated Depreciation ($8,900 − $7,400)……………………...

To record depreciation expense.

30 Wage Expense ($2,400 − $1,300)………... 1,100 Wages Payable ($1,100 − $0)……….…

To accrue wage expense.

30 Unearned Rental Revenue ($2,100 − 1,400)…………………………………………

Chapter 3

1,500

1,100

700

Accrual Accounting & Income

Rental Revenue………………………….

700 To record revenue that was collected in advance.

Chapter 3

Accrual Accounting & Income

(continued) P 3-65A Req. 2 Total assets

= $83,680 ($8,900 + $7,580 + $400 + $4,400 + $800 + $500 + $70,000 − $8,900)

Total liabilities

= $ 9,200 ($6,700 + $1,100 + $1,400)

Total equity

= $74,480 ($83,680 − $9,200)

Net income

= $ 20,780 ($27,480 + $800 − $1,500 − $1,000 − $400 − $2,400 − $400 − $1,800)

Chapter 3

Accrual Accounting & Income

(20-30 min.) P 3-66A Req. 1 Seinfield Corporation Income Statement Year Ended September 30, 20X6 Revenues: Service revenue $102,600 Expenses: Salary expense $39,800 Rent expense 10,400 Insurance expense 3,500 Interest expense 3,400 Supplies expense 2,900 Depreciation expense 1,800 61,800 40,800 Income before tax 6,500 Income tax expense $ 34,300 Net income

Seinfield Corporation Statement of Changes in Equity Year Ended September 30, 20X6 Total equity, October 1, 20X5 $ 9,200 Add: Net income 34,300 Less: Dividends 43,500 Total equity, September 30, 20X6 (20,000) $23,500

Chapter 3

Accrual Accounting & Income

continued) P 3-66A Req. 1 (continued) Seinfield Corporation Balance Sheet September 30, 20X6 ASSETS

LIABILITIES Cash $ 2,200 Accounts payable $ 3,500 Accounts receivable 300 9,500 Interest payable Supplies 900 2,600 Unearned service revenue Prepaid rent 2,000 1,300 Income tax payable 19,800 Note payable Equipment 26,500 Total liabilities $38,800 Less: Accum. deprec.

(4,400) 34,400 SHAREHOLDERS’ EQUITY Share capital 4,000 Retained earnings 19,500 Total shareholders’ equity 23,500 Total liabilities and Total assets $50,000 $50,000 shareholders’ equity

Chapter 3

Accrual Accounting & Income

(20 min.) P 3-67A Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Closing Entries Jun. 30 Service Revenue…………………….. 190,800 Retained Earnings………………...

190,800

30 Retained Earnings…………………… 70,400 Advertising Expense……………..

Depreciation Expense……………

Interest Expense………..…………

Salary Expense……………………

Supplies Expense…………………

21,000 3,600 1,600 35,200 9,000

30 Retained Earnings…………………… 42,400 Dividends…………………………...

42,400

Req. 2 Retained Earnings Jun. 30, 20X6 Expenses 70,400 Jun. 30, 20X5 Bal. 42,000 Jun. 30, 20X6 Dividends 42,400 Jun. 30, 20X6 Revenues 190,800 120,000 Jun. 30, 20X6 Bal. Net income

= $120,400 (revenues of $190,800 − expenses of $70,400)

Req. 3 Retained Earnings increased during the year because net income of $120,400 exceeded dividends of $42,400.

Chapter 3

Accrual Accounting & Income

(25-40 min.) P 3-67A Req. 4 Fashmob Services, Inc. Balance Sheet June 30, 20X6 ASSETS Current assets: Cash Accounts receivable Prepaid expenses Supplies Total current assets Property, plant & equipment: Equipment Less: Accumulated depreciation Other assets Total assets Current liabilities:

$ 15,800 33,200 12,000 7,800 68,800 $103,200 (13,800)

89,400 28,800 $187,000

LIABILITIES

Current portion of note payable Accounts payable Salary payable Unearned service revenue Total current liabilities Note payable, non-current Total liabilities SHAREHOLDERS’ EQUITY Share capital Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity _____

Chapter 3

$

2,000 28,800 4,400 5,600 41,800 12,000 53,800

13,200 120,000* 133,200 $187,000

Accrual Accounting & Income

Problems Group B (15-20 min.) P 3-68B (All amounts in millions) 1.

R–E=I $38 – E = $4 E = $38 – $4 = $34

2.

Revenues……………..

Expenses……………..

Net income…………...

3.

$9 Beginning receivables……...

38 Add: Revenues…………….

(27) Less: Collections…………..

Ending receivables…………. $ 20

$38 34 $4

Balance sheet ASSETS Current assets: Receivables…………. $ 20 4.

Beginning accounts payable……….. $ 10 Add: Expenses……………………….

34 Less: Payments……………………....

(28) Ending accounts payable……………. $ 16 Balance sheet LIABILITIES Current liabilities: Accounts payable……………. $ 16

Chapter 3

Accrual Accounting & Income

(20-30 min.) P 3-69B Req. 1 Empire Consulting Amount of Revenue (Expense) for August Date Cash Basis Accrual Basis €0 Aug 1 Expense € (1,500) 4 Expense (2,400) 0 5 Revenue 1,800 1,800 8 Expense (2,100) (2,100) 11 Revenue 0 9,600 19 0 0 24 Revenue 9,600 0 26 Expense (3,300) 0 29 Expense (1,500) (1,500) 31 Expense 0 (300) 31 Revenue 900 0 € 1,500 ÷ 5 = Req. 2 Income (loss) before tax

€600

Income before tax €8,400

Req. 3 The accrual-basis measure of net income is preferable because it accounts for revenues and expenses when they occur, not when they are received or paid in cash. For example, on August 11, the company earned € 9,600 of revenue and increased its total equity as a result. The accrual basis records this revenue, but the cash basis ignores it. On August 24, the business collected the receivable that was created by the revenue earned on account at August 11. The accrual basis records no revenue on August 24 because the company’s increase in total equity Chapter 3

Accrual Accounting & Income

occurred back on August 11. The cash basis waits until cash is received, on August 24, to record the revenue. This is too late.

(10-20 min.) P 3-70B Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Mar 31 a. Insurance Expense………………… 3,600* Prepaid Insurance……………….

To record insurance expense 31 b. Salary Expense………………..……... 3,240** Salary Payable……………………..

To accrue salary expense.

31 c. Interest Receivable…………………..

Interest Revenue…………………..

To accrue interest revenue.

3,600

3,240

800 800

31 d. Supplies Expense……………………. 6,800*** Supplies……………………………..

To record supplies expense.

6,800

31 e. Unearned Service Revenue 7,500**** Service Revenue…………………..

7,500 To record revenue that was collected in advance.

31 f. Dep. Expense – Office Furniture…..

Dep. Expense – Equipment…………

Acc. Dep. – Office Furniture…….

Acc. Dep. – Equipment…………..

3,500 5,400

To record depreciation expense.

Chapter 3

Accrual Accounting & Income

3,500 5,400

_____ * €500 + 3,800 − €700 = €3,600 ** (€5,400 × 3/5) = €3,240 *** €2,900 + €6,200 − €2,300 = €6,800 **** (€12,500 × 60%) = €7,500

Chapter 3

Accrual Accounting & Income

(45-60 min.) P 3-71B Req. 1 Hamburg, Inc. Adjusted Trial Balance August 31, 20X6 ACCOUNT TITLE

Cash Accounts receivable Prepaid rent Supplies Furniture Accumulated depreciation Accounts payable Salary payable Share capital Retained earnings Dividends Service revenue Salary expense Rent expense Utilities expense Depreciation expense Supplies expense

TRIAL BALANCE DEBIT CREDIT

18,600 3,200 4,800 4,400 162,000

7,600 6,400 1,200

208,200

(a) 4,400 (b) 1,600* (c) 4,200 (d) 4,500**

8,000 7,000 30,400 142,000 20,800

ADJUSTED TRIAL BALANCE DEBIT CREDIT

18,600 7,600 3,200 200 162,000

(e) 6,600*** 7,600 (a) 4,400

208,200

___ * ** ***

ADJUSTMENTS DEBIT CREDIT

(e) 6,600*** (b) 1,600* (d) 4,500** (c) 4,200 21,300

_____ 21,300

€4,800 ÷ 3 = €1,600 €162,000 ÷ 3 = €54,000 ÷ 12 = €4,500 €11,000 × 3/5 = €6,600 Chapter 3

Accrual Accounting & Income

12,500 7,000 6,600 30,400 142,000 25,200

13,000 1,600 1,200 4,500 4,200 223,700

223,700

(continued) P 3-71B Req. 2 (continued) Hamburg, Inc. Income Statement Month Ended August 31, 20X6 Revenues: €25,200 Service revenue Expenses: Salary expense €13,000 Rent expense 4,200 Depreciation expense 4,500 Utilities expense 1,600 Supplies expense 1,200 Total expenses 24,500 Net income €700 Hamburg, Inc. Statement of Changes in Equity Month Ended August 31, 20X6 Total equity, August 1, 20X6 €172,400 Add: Net income 700 Less: Dividends 173,100 Total equity, Aug 31, 20X6 (7,600) €165,500

Chapter 3

Accrual Accounting & Income

(continued) P 3-71B Req. 2 (continued) Hamburg, Inc. Balance Sheet August 31, 20X6 ASSETS Current assets: Cash Accounts receivable Prepaid rent Supplies Total current assets Furniture $162,000 Less: Accum. deprec. (12,500)

Total assets

LIABILITIES Current liabilities: €18,600 7,600 Accounts 3,200 payable Total current liabilities Salary payable

€7,000 6,600 13,600

200 29,600 SHAREHOLDERS’ EQUITY Share capital 30,400 135,100 149,500 Retained earnings 165,500 Total shareholders’ ______ equity €179,100 ______ Total liabilities and €179,100 shareholders’ equity

Chapter 3

Accrual Accounting & Income

(10-20 min.) P 3-72B Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT CREDIT

Apr. 30 Accounts Receivable (€7,850 − €6,000)….. 1,850 Rental Revenue……………………….……

To accrue rental revenue.

30 Supplies Expense (€700 − €0)……………...

Supplies (€1,500 − €800)………………….

To record supplies expense.

700 700

30 Insurance Expense (€1,900 − €0)………….. 1,900 Prepaid Insurance (€2,500 − €600)……..

To record insurance expense.

30 Depreciation Expense (€1,500 − €0)……… 1,500 Accumulated Depreciation (€10,300 − €8,800)………………………….

To record depreciation expense.

30 Wage Expense (€3,000 − €1,900)………….

Wages Payable (€1,100 − €0)…………..

To accrue salary expense.

1,100

30 Interest Receivable (€750 − 0)……….…….

Interest Revenue (€950 − €200)…………

To accrue interest expense.

750

1,900

1,500

1,100

30 Unearned Rental Revenue (€1,500 − €1,200)……………………………

300 Rental Revenue………………………….

To record revenue that was collected in advance.

Chapter 3

1,850

Accrual Accounting & Income

750

300

(continued) P 3-72B Req. 2 Total assets

=

$79,600 ($7,900 + $7,850 + $750 + $5,000 + $800 + $600 + $67,000 − $10,300)

Total liabilities

=

$8,800 ($6,500 + $1,100 + $1,200)

Total equity

=

$70,800 ($79,600 − $8,800)

Net income

=

$13,700 ($20,450 + $950 − $1,500 − $700 − $300 − $3,000 − $300 − $1,900)

Chapter 3

Accrual Accounting & Income

(20-30 min.) P 3-73B Req. 1 Murray Corporation Income Statement Year Ended December 31, 20X6 Revenues: Service revenue $103,800 Expenses: Salary expense $40,600 Rent expense 10,300 Insurance expense 3,700 Interest expense 3,300 Supplies expense 2,800 1,200 Depreciation expense 61,900 41,900 Income before tax 7,600 Income tax expense $ 34,300 Net income

Murray Corporation Statement of Changes in Equity Year Ended December 31, 20X6 Total equity, January 1, 20X6 $12,500 Add: Net income 34,300 Less: Dividends 46,800 Total equity, December 31, 20X6 (25,000) $21,800

Chapter 3

Accrual Accounting & Income

(continued) P 3-73B Req. 1 (continued) Murray Corporation.

Balance Sheet December 31, 20X6 ASSETS Cash Accounts receivable Supplies Prepaid rent Equipment $38,700 Less: Accum. deprec.

(4,500)

Total assets

LIABILITIES $ 1,700 Accounts payable $ 8,900 Unearned service 2,300 revenue 1,200 Interest payable Income tax payable Note payable Total liabilities 34,200

$48,300

3,900 700 500 2,600 18,800 26,500

SHAREHOLDERS’ EQUITY Share capital 8,000 Retained earnings 13,800 Total shareholders’ equity 21,800 Total liabilities and $48,300 shareholders’ equity

Chapter 3

Accrual Accounting & Income

(20 min.) P 3-74B Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Closing Entries Mar. 31 Service Revenue……………………… 191,200 Retained Earnings…………………

191,200 31 Retained Earnings……………………. 74,000 Salary Expense……………………..

Depreciation Expense…..……..….

Interest Expense………………..….

Salary Expense……………..…..….

Supplies Expense………………....

22,400 4,400 1,800 36,400 9,000

31 Retained Earnings………………..….

Dividends……………………………

60,000

60,000

Req. 2 Retained Earnings Mar. 31, 20X6 Expenses Mar. 31, 20X6 Dividends

Net income

74,000 Mar. 31, 20X5 Bal. 60,000 Mar. 31, 20X6 Revenues Mar. 31, 20X6 Bal.

45,000 191,200 102,200

= €117,200 (revenues of €191,200 − expenses of €74,000)

Req. 3 Retained Earnings increased during the year because net income of €117,200 exceeded dividends of €60,000.

Chapter 3

Accrual Accounting & Income

Technocrat, Inc. Balance Sheet March 31, 20X6 ASSETS Current assets: Cash Accounts receivable Prepaid expenses Supplies Total current assets Property, plant & equipment: Equipment Less: Accumulated depreciation Other assets Total assets Current liabilities:

€ 14,400 33,800 11,600 6,600 66,400 $88,000 (14,400)

73,600 28,000 €168,000

LIABILITIES

Current portion of note payable Accounts payable Salary payable Unearned service revenue Total current liabilities Note payable, non-current Total liabilities SHAREHOLDERS’ EQUITY Share capital Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

Chapter 3

€

1,000 29,600 5,200 5,800 41,600 11,800 53,400

12,400 102,200 133,200 €168,000

Accrual Accounting & Income

Decision Cases (25 min.) Decision Case 1 Req. 1 Unadjusted trial balance: Cash…………………………………….. $8,200 Accounts receivable………………….

4,300 Supplies………………………………...

900 Prepaid rent……………………………

1,200 Land…………………………………….. 43,000 Accounts payable……………………. $12,100 Salary payable…………………………

–0– Unearned service revenue………..

500 Note payable, due in 3 years………..

23,400 Share capital………………………...

5,000 Retained earnings…………………….

9,500 Service revenue……………………….

9,900 Salary expense………………………..

3,600 Rent expense………………………..

–0– Advertising expense……………….

800 Supplies expense…………………..

–0– Totals…………………………………… $62,000 $60,400 Out of balance $1,600

Chapter 3

Accrual Accounting & Income

(continued) Decision Case 1 Req. 2 Adjusted trial balance: Cash……………………………………………...

Accounts receivable…………………………..

Supplies ($900 -600)..……………………….

Prepaid rent ($1,200 x 11/12)………………

Land …………………………………………….

Accounts payable……………………………...

Salary payable………………………………….

Unearned service revenue ($500 - $300)….

Note payable, due in 3 years ($23,400 + $1,600) Share capital…………………………………

Retained earnings……………………………..

Service revenue ($9,900 + $300)…………….

Salary expense ($3,600 + $1,200)…………..

Rent expense ($1,200 x 1/12)………………..

Advertising expense…………………………..

Supplies expense……………………………...

Total………………………………………………

Chapter 3

$8,200 4,300 300 1,100 43,000 12,100 1,200 200 25,000 5,000 9,500 10,200 4,800 100 800 600 $63,200 $63,200

Accrual Accounting & Income

(20-30 min.) Decision Case 2 Tiger Restaurant, Inc. Income Statement Month Ended October 31, 20X7 Sales revenue Cost of goods sold $12,500 Wages expense 6,000 Rent expense 4,500 Insurance expense 1,000 Depreciation expense 1,000 Net income

Tiger Restaurant, Inc. Statement of Changes in Equity Month Ended October 31, 20X7 Total equity, October 1, 20X7 + Net income - Dividends Total equity, October 31, 20X7

Chapter 3

$33,000

25,000 $ 8,000

$25,000 8,000 (3,000) $30,000

Accrual Accounting & Income

(continued) Decision Case 2 Tiger Restaurant, Inc. Balance Sheet October 31, 20X7 ASSETS Cash Food inventory Prepaid insurance Dishes, silver Fixtures $25,000 Less: Accum. deprec. (1,000) Total assets

LIABILITIES $ 8,000 Accounts payable 6,000 Unearned revenue 2,000 4,000

$ 9,000 5,000 14,000

OWNERS’ EQUITY Share capital $25,000 7,000 24,000 Retained earnings 30,000 $44,000 $44,000 Total liabilities and equity

Recommendation: Do It isnot notexpand the business. meeting Lou Clark’s goals for net income or for total assets.

Chapter 3

Accrual Accounting & Income

(30-40 min.) Decision Case 3 Req. 1 (your highest price) Advertising revenue ($20,000 + $5,000) Expenses: Salary Utilities Other (unrecorded) Salary of your manager Your expected monthly net income Multiplier to compute price Your highest price

$25,000 $4,000 800 1,200 5,000 11,000 $14,000 X 16 $224,000

Req. 2 (Williams’ asking price) SW Advertising, Inc. Statement of Changes in Equity June 30, 20X6 Beginning total equity $ 142,000 Add: Net income Revenue ($20,000 + $5,000) $25,000 Less: Expenses ($4,000 + $800 + $1,200) (6,000) 19,000 Less: Dividends 161,000 Ending total equity (9,000) Multiplier to compute price $152,000 Williams’ asking price X 2__ $304,000

Chapter 3

Accrual Accounting & Income

(continued) Decision Case 3 Req. 3 You may start by offering Stanley Williams approximately $200,000 for the business. His asking price is $304,000 so you are starting out quite far apart. If Williams appears especially eager to sell out, you may be able to buy the firm for closer to your highest price of $224,000. However, if he is not so eager to sell and if you want the business badly enough, you may have to pay somewhere between $224,000 and $304,000. It might pay to hire an expert to value the business’s assets. You may find that Williams’ price is inflated based on the value of its assets.

You can always raise your offer, but you cannot decrease it, so start the negotiating process with an offer around $200,000.

Chapter 3

Accrual Accounting & Income

Ethical Issues Ethical Issue 1 1. The journal entry to record the revenue is: Dec. Accounts Receivable……….. XXX Sales Revenue……………..

XXX

The debit to Accounts Receivable will increase total current assets and, as a result, increase (improve) the current ratio.

The credit to Sales Revenue will increase total owner equity and, as a result, decrease (improve) the debt ratio.

2. a. – c. The issue is whether it is ethical to record the revenue in the current year. The contract has been signed, but the implication is that the company will not have done everything it needs to do in order to earn the revenue in the current year.

The stakeholders are the company, the bank, the shareholders, and the company’s other creditors. From an economic standpoint, the entry would obviously improve the company’s short term financial position.

However, the advantage would probably be short-lived. When the bank finds out about this entry, they will likely protest, and demand immediate payment, so the longer-term economic impact will likely be negative. From a “legal” standpoint, to record this transaction in December violates IFRS by violating the revenue principle. In this case Cross Timbers has not made the sale (has not delivered the merchandise) to the customer and, therefore, has not earned the revenue prior to December 31 of the current year. From an ethical standpoint, recording this revenue violates the bank’s rights for proper disclosure of the company’s income and assets.

Revenue should be recorded no earlier than when it is earned. Cross Timbers expects to earn the revenue in Chapter 3

Accrual Accounting & Income

January of next year. Cross Timbers clearly cannot record this revenue until it is earned. To do so is not in their best economic, legal or ethical best interests.

3. The authors would suggest either of two actions. Cross Timbers can either: a. Report the current ratio of 1.47 and the debt ratio of .51 because these are the true values. Then tell the bank of the signed contract for additional work and the hope for a better set of ratio values next year. In some cases, banks will agree to sign a waiver of the terms of loan covenants, meaning that, although the company is in violation, the bank will not move to enforce the covenant. They may give Cross Timbers a “grace period” to cure the violation in the covenant. b. Pay off some current liabilities before year end. This will improve both the current ratio and the debt ratio. This may enable Cross Timbers to bring its ratio values into compliance with the bank’s requirements.

Chapter 3

Accrual Accounting & Income

Ethical Issue 2 1. These transactions — recorded as directed by Almond — overstate the reported income of the company by $21,000 ($10,000 + $10,000 + $1,000).

2. It appears that Almond wants to improve the company’s reported income in order to borrow on favorable terms. Her action is unethical and probably illegal as well because she is deliberately overstating the company’s reported income.

Almond appears to be letting the potential short term economic advantage of these deliberate misstatements take precedence.

She

needs

to

remember

that

these

misstatements violate IFRS, and that, depending on what use is made of the financial statements, could subject the company If this to civil or criminal legal proceedings. happens, the short term economic gains ($21,000) would not even come close to the long-term economic costs associated with the legal actions, not to mention the negative publicity.

The business will need a bank loan, and perhaps the money would be used to pay bills, expand the business, and so on.

However, based on Almond’s lack of integrity, the money may be destined for her own use. Regardless of its use, the money is obtained under false pretenses and cannot be headed for a good outcome.

Chapter 3

Accrual Accounting & Income

The bank is harmed by Almond’s and Lail’s actions. Lending money to Almond under false pretenses may lead the bank to charge an unrealistically low interest rate that robs the bank’s owners of interest revenue. In the extreme, the public is robbed if taxpayers wind up financing the bailout of a failed institution.

3. Personal advice will vary from student to student. The purpose of asking this question is to challenge students to take the high road of ethical conduct by having nothing to do with Almond’s scheme. The authors would advise Lail, the accountant, to take these actions, in order: a. Refuse to take any part in Almond’s scheme, explaining that the result is overstatement of reported income. This is both illegal and unethical, and will ultimately have a negative economic impact on the company, as well.

Accountants are bound to standards of ethical conduct that these actions violate. They can go to prison when caught falsifying financial statements. b. To remain ethical, the accountant must be willing to lose his/her job. It is better to protect one’s reputation even if that causes a short-term hardship.

Chapter 3

Accrual Accounting & Income

Focus on Financials: Nestlé Corporation (15-20 min.)

1. Nestlé’s provisions consist of restructuring, environmental, legal and indirect tax and other provisions, which themselves are made up of onerous contracts and damage claims that have occurred but are not covered by insurance companies.

2. (Amounts are in millions of CHF)

DATE

Journal ACCOUNT TITLES AND EXPLANATION

a. Provisions for warranties …….…

Cash…………………..

DEBIT

CREDIT

513 513

b. Warranty expenses….……………….

Provisions for warranties.………...

892

c. Warranty adjustment….……………

Provisions for warranties.………...

336

892

336

3. After posting, the balance of accrued expenses agrees with the financial statements at December 31, 2016.

Provisions Dr Cash Adjustments

Cr 1,537 Beginning balance Warranty expense 513 892 278 1,638 Ending balance

Chapter 3

Accrual Accounting & Income

4. Total depreciation and impairment for the year ending Dec 31, 2021 was CHF 2,674 million. However, the actual increase in accumulated depreciation is CHF 1,428 million.

The reason why total depreciation and impairment is CHF 1,246 million higher would mainly be due to PPE disposals in the year ending Dec 31, 2021 that resulted in corresponding accumulated depreciation being removed from the account. Additionally, currency translation effects, consolidation and reclassification effects also contributed to the deviance between these two figures.

Group Project Req. 1 Davis Lawn Service, Inc. Income Statement Four Months Ended August 31, 2010 Service revenue ($5,600 + $600)

$6,200

Expenses: Wage expense ($1,900 + $200)

$2,100

Rent expense ($600 × 4/6)

400

Supplies expense ($400 − $50)

350

Repair expense

300

Depreciation expense ($300× 1/3)

100

Total expenses

3,250 $2,950

Net income

Chapter 3

Accrual Accounting & Income

Req. 2 Davis Lawn Service, Inc. Balance Sheet August 31, 20X6 ASSETS Current: Cash Accounts receivable Receivable from Ludwig (or Prepaid rent) Supplies Total current assets Non-current: Mower $300 Less accum. deprec.

(100) Total assets

Current: $2,040 600

LIABILITIES

Wages payable Total current liabilities

$ 200 200

200 50 2,890

SHAREHOLDERS’ EQUITY Share capital Retained earnings ($2,950 − $460) 200 Total shareholders’ equity Total liabilities and $3,090 shareholders’ equity

Chapter 3

Accrual Accounting & Income

400 2,490 2,890 $3,090

Chapter 4 Presentation of Financial Statements Short Exercises (5-10 min.) S 4-1 Despite some similarities between annual reports and marketing brochures, they are not ‘just like’ marketing brochures. Both annual reports and marketing brochures serve to provide information that is useful for decision-making to shareholders, lenders and other stakeholders. However, annual reports often provide more detailed information about the company (including its visions, goals and strategies, its financial statements) than marketing brochures. Annual reports also reveal information about how the company has grown or declined and how its management team or strategy has changed over the years. Finally, there is a greater focus on substance over style in annual reports.

Student responses may vary.

Financial Accounting: IFRS 12/e Solutions Manual

(5 min.) S 4-2 To: Bobby Young Subject: Viewing of accounting records Thank you for your email, Mr. Young. The records that you have requested for may be obtained from our annual report. In it, you may find the following sections – our corporate information, analysis and commentaries, other statements or disclosures, and finally, our financial statements. Together, these will provide an idea of our company’s history, board of directors, key management personnel, markets and products, operating statistics and other financial information. Our annual report may be obtained from the company’s corporate website (Investor relations page).

Student responses may vary.

(20-30 min.) S 4-3 IAS 1 requires that a complete set of financial statements to compromise a statement of financial position at the end of the period, a statement of comprehensive income for the period, a statement of changes in equity for the period, a statement of cash flows for the period, and notes which show a summary of significant accounting policies and explanatory information.

These statements must be displayed with equal prominence.

Chapter 4

Presentation of Financial Statements

The standard does not prescribe the exact order of how they should appear but most companies begin with the statement of financial position or statement of comprehensive income, followed by either the statement of changes in equity or the statement of cash flows, and then the notes to the financial statements.

The financial statements must be properly labeled to clearly identify the name of the reporting entity, if it is a consolidated or an individual entity’s account, the date of the end of the reporting period, the presentation currency used, and the level of rounding used in presenting the amounts in the financial statements.

(10 min.) S4-4 A subsidiary ledger account will show the detailed transactions of an individual customer. A general ledger account shows the summary of all customer transactions (calculated from the subsidiary ledger accounts).

(5-10 min.) S 4-5 Corporate governance refers to a set of principles adopted or practiced by organizations to ensure a clear corporate direction, responsibility and accountability of those managing Financial Accounting: IFRS 12/e Solutions Manual

the organizations. It prescribes matters such as the composition, duties, and responsibilities of the board of directors, oversight of management and its dealings with the shareholders. The statement of responsibility communicates to the employees that the preparation of financial statements is everyone’s responsibility, regardless of job functions. This helps to create a culture in which everyone is involved in ensuring the integrity of the financial statements.

(20-30 min.) S 4-6 Receivables = $13,600; Payables = $8,700.

The company is not allowed to offset assets and liabilities as this reduces the financial statement user’s ability to understand the two separate business phenomena. Offsetting is also different from netting. Examples of netting including netting off accumulated depreciation from property, plant and equipment cost or netting receivables with allowances for uncollectable amounts.

(10 min.) S 4-7

Total current assets = 70,400 + 36,400+ 65,800 + 24,000 = 196,600 Chapter 4

Presentation of Financial Statements

Total non-current assets = 40,000 + 80,000 – 8,400 + 156,000 – 45,600 + 42,000 = 264,000

(5 min.) S 4-8 Current liabilities = 48,000 + 6,200 + 5,200 + 5,600 + 12,000 + 110,000 = 187,000

Non-current liabilities = 110,000

(5 min.) S 4-9 Congo. The net income is more relevant to accessing a company’s profitability from its core operations and ability to generate operating cash flows.

(5 min.) S 4-10 The items that would appear as other comprehensive items are: a. Change in revaluation surplus for PPE and intangible assets; c. Actuarial gains and losses on defined benefit plans; d. Gains and losses from translating financial statements of a foreign operation;

Financial Accounting: IFRS 12/e Solutions Manual

f. Gains and losses from investment in equity instruments measured at fair value through other comprehensive income; g. Effective portion of gains and losses on hedging instruments in a cash flow hedge; h. liabilities designed as at fair value through profit or loss, changes in fair value attributable to changes in credit risks.

(5-10 min.) S 4-11 Audits will ensure the integrity of the financial statements.

Companies engage external auditors who are certified public accountants to examine their financial statements. These auditors will express an opinion about whether the company’s financial statements comply with the applicable accounting standards and regulations, and the opinion is contained in an auditor’s report. Through the auditor’s report, the bank will be assured that the company is indeed in a sound financial state.

Student responses may vary.

(10 min.) S 4-12 Reconciliation between Opening and Closing Total equity In dollars Total equity at the end of 20X5

$183,500

Issue of new shares

105,000

Profit during the year

102,000

Other comprehensive income

3,900

Dividend paid

(32,000) Chapter 4

Presentation of Financial Statements

Total equity at the end of 20X6

Financial Accounting: IFRS 12/e Solutions Manual

$362,400

Exercises Group A

(5 min.) E 4-13A a. Revenue recognition policy – 4 b. Company history – 1 c. Listing of company’s subsidiaries and associated entities –1 d. Review of segment performance – 2 e. New upcoming product launches – 2 f. Breakdown of trade and other payables – 4 g. Chairmen’s letter to shareholder – 2

(5-10 min) E 4-14A It has not revealed the name of the financial statement (Statement of Comprehensive Income or Income Statement), date of the end of the reporting period, if the Income Statement is relates to its own financials or the consolidated one that includes the performance of associated companies and subsidiaries. Furthermore, the functional presentation currency used, level of rounding used in presenting the amounts are not shown too.

(5 min.) E 4-15A Items b, c, and d are material. Item d should be disclosed in the Notes to the accounts as a contingent liability.

Chapter 4

Presentation of Financial Statements

(15-20 min.) E 4-16A Accounts

Aggregated account

Cash on hand, deposits at banks Cash Trade receivables, Notes

Trade and other receivables

receivables, Other receivables Inventory – raw materials,

Inventory

Inventory – work-in-progress, Inventory – finished goods Equipment, Furniture and

Plant, Property, and

fixtures, Motor vehicles,

Equipment

Building (if part of PPE and not held as investment property) Patent rights, Goodwill

Intangible assets

The remaining accounts not mentioned above are to be presented separately.

(10 min.) E 4-17A

Current assets • Cash on hand and cash at bank - $242,000 Financial Accounting: IFRS 12/e Solutions Manual

• Inventories - $162,000 • Trade receivables - $122,500 • Loans to employees - $24,000 • Short-term investment in publicly traded bonds of listing companies - $5,000 Non-current assets • Fixed term deposits with banks - $71,000 • Loans to employees - $36,000 • PPE - $58,500 (64,500 – 6,000) • Investment in associate companies - $17,500

(10 min.) E 4-18A Current liability: • Trade payable - $158,500 • Interest accrued for note payable - $12,000 (4,000 x 3) • Provisions for unbilled expense - $20,000 • Interest-free loan from a shareholder - $75,000 (200,000/8 x 3) Non-current liability: • Note payable - $122,500 • Provision for employee benefit - $124,000 • Interest-free loan from a shareholder - $125,000

Chapter 4

Presentation of Financial Statements

(5-10 min.) E 4-19A In single-statement format: Nyka Enterprises Statement of Comprehensive Income For year ended 31 December, 20X5 In dollars Sales revenue 20X5 20X4 Cost of goods sold 75,600 45,800 Gross profit -24,400 -18,600 Other income 51,200 27,200 Distribution expenses 10,600 9,400 Marketing expenses -4,600 -4,400 Administrative expenses -7,400 -6,000 Finance expense -5,600 -4,800 Net operating income -1,200 -1,000 Tax expense 43,000 20,400 Net income -3,000 -2,000 Other comprehensive income 40,000 18,400 Total comprehensive income 8,800 7,200 48,800 25,600 In double-statement format: Nyka Enterprises Income Statement For year ended 31 December, 20X5 In dollars Sales revenue Cost of goods sold

Financial Accounting: IFRS 12/e Solutions Manual

20X5 75,600 -24,400

20X4 45,800 -18,600

Gross profit Other income Distribution expenses Marketing expenses Administrative expenses Finance expense Net operating income Tax expense Net income

51,200 10,600 -4,600 -7,400 -5,600 -1,200 43,000 -3,000 40,000

27,200 9,400 -4,400 -6,000 -4,800 -1,000 20,400 -2,000 18,400

Nyka Enterprises Statement of Comprehensive Income For year ended 31 December, 20X5 In dollars Net income 20X5 20X4 Other comprehensive income 40,000 18,400 Total comprehensive income 8,800 7,200 48,800 25,600

Chapter 4

Presentation of Financial Statements

(10-20 min.) E 4-20A Req. 1 Classification by nature: Pentonic Income Statement For year ended 31 December, 20X5 In dollars Sales revenue Expenses: Wages and salaries Depreciation 278,000 Advertising expense 36,000 Motor vehicle expense 64,000 Utilities expense 150,000 Interest expense 54,000 Income before tax 15,600 Tax expense Net income

Req. 2 Classification by function: Pentonic Income Statement For year ended 31 December 20X5 In dollars Sales revenue 20X5 Cost of sales 960,000 Gross profit (114,000) Sales and marketing 846,000 (160,000) Financial Accounting: IFRS 12/e Solutions Manual

20X5 960,000

597,600 362,400 6,400 356,000

Distribution and logistics Administrative expense Interest expense Net operating income Tax expense Net income

(186,000) (122,000) (15,600) 362,400 (6,400) 356,000

(10-20 min) E 4-20A Req. 3

Classification by function is better as it presents more relevant information.

Chapter 4

Presentation of Financial Statements

Exercises Group B

(5-20 min.) E 4-21B a. Auditor’s opinion – 4 b. Members of board of directors – 1 c. CEO’s letter to shareholder – 2 d. Information on the company’s latest business acquisitions –1 e. Report on environmental impact – 2 f. Estimates on depreciation allocation – 4 g. Awards and accolades received – 1

(5-20 min.) E 4-22B It has not revealed the name of the financial statement (Statement of Comprehensive Income or Income Statement), date of the end of the reporting period, if the Income Statement is relates to its own financials or the consolidated one that includes the performance of associated companies and subsidiaries. Furthermore, the functional presentation currency used, level of rounding used in presenting the amounts are not shown too.

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) E 4-23B Items b, c, and d are material. Item d should be disclosed in the Notes to the accounts as a contingent liability.

(10 min.) E 4-24B Accounts

Aggregated account

Accounts receivables, Notes

Trade and other receivables

receivables, Other receivables Prepayments, Term deposits Prepayments and deposits Inventory – raw materials,

Inventory

Inventory – work-in-progress, Inventory Machinery

–

finished and

goods

Equipment, Plant, Property, and

Furniture and fittings, Motor Equipment vans,

Factory

Copyrights, Goodwill

building Intangible assets

The remaining accounts not mentioned above are to be presented separately.

Chapter 4

Presentation of Financial Statements

(5-10 min.) E 4-25B Current assets • Cash on hand and cash at bank - €120,500 • Inventories - €63,500 • Trade receivables - €79,000 • Loans to employees - €8,000 • Short-term investment in publicly traded shares of listing companies - €12,000 Non-current assets • Fixed term deposits with banks - €90,000 • Loans to employees - €12,000 • PPE - €40,000 (64,000 – 24,000) • Investment in associate companies - €27,500

(10-20 min.) E 4-26B Current liability: • Trade payable - €58,500 • Interest accrued for note payable - €6,300 (2,100 x 3) • Provisions for unbilled expense - €11,200 • Interest-free loan from a shareholder - €37,500 (100,000/8 x 3) Non-current liability: • Note payable - €90,000 • Provision for employee benefit - €99,250 • Interest-free loan from a shareholder - €62,500 Financial Accounting: IFRS 12/e Solutions Manual

(10-20 min.) E 4-27B In single-statement format: Myntra Limited Statement of Comprehensive Income For year ended 31 December, 20X5 In Euros Sales revenue Cost of goods sold Gross profit Other income Distribution expenses Marketing expenses Administrative expenses Finance expense Net operating income Tax expense Net income Other comprehensive income Total comprehensive income

20X5 57,400 -18,400 39,000 8,600 -4,600 -7,400 -5,600 -1,200 28,800 -3,000 25,800 6,800 32,600

20X4 65,800 -24,600 41,200 11,400 -4,400 -8,000 -6,800 -1,600 31,800 -3,600 28,200 9,200 37,400

Myntra Limited Income Statement For year ended 31 December, 20X5 In Euros Sales revenue 20X5 20X4 Cost of goods sold 57,400 65,800 Gross profit -18,400 -24,600 Other income 39,000 41,200 Distribution expenses 8,600 11,400 Marketing expenses -4,600 -4,400 Administrative expenses -7,400 -8,000 -5,600 -6,800 Chapter 4

Presentation of Financial Statements

Finance expense Net operating income Tax expense Net income

-1,200 -1,600 28,800 31,800 -3,600 -3,000 25,800 28,200

Myntra Limited Statement of Comprehensive Income For year ended 31 December, 20X5 In Euros Net income 20X5 20X4 Other comprehensive income 25,800 28,200 Total comprehensive income 9,200 6,800 32,600 37,400

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 4-28B Req. 1 Classification by nature: Galaxy Income Statement For year ended 31 December, 20X5 In Euros Sales revenue Expenses: Wages and salaries Depreciation Advertising expense 226,000 Motor vehicle expense 34,000 Utilities expense 54,000 Interest expense 152,000 Income before tax 62,000 Tax expense 17,400 Net income

Chapter 4

20X5 900,000

545,400 354,600 8,600 346,000

Presentation of Financial Statements

(10-20 min) E 4-28B Req. 2 Classification by function:

Galaxy Income Statement For year ended 31 December 20X5 In dollars Sales revenue 20X5 Cost of sales 900,000 Gross profit (96,400) Sales and marketing 803,600 Distribution and logistics (185,600) Administrative expense (158,000) Interest expense (88,000) Net operating income (17,400) Tax expense 354,600 Net income (8,600) 346,000

Req. 3

Classification by function is better as it presents more relevant information.

Financial Accounting: IFRS 12/e Solutions Manual

Quiz Q4-29 Q4-30 Q4-31 Q4-32 Q4-33 Q4-34 Q4-35 Q4-36 Q4-37 Q4-38

c b d b c a c d d a

Chapter 4

Presentation of Financial Statements

Problems Group A (15-20 min.) P 4-39A Summer: Qualified opinion Autumn: Adverse opinion Winter: Adverse opinion Spring: Unqualified opinion

(10-20 min.) P 4-40A Mandarin Nature Resort Ltd. Statement of Financial Position For year ended June 30, 20X5 In dollars Current assets Cash Supplies Accounts receivable Prepaid expenses Non-current assets Equipment (net) Other assets Total assets Current liabilities Accounts payable Current portion of note payable Salary payable Financial Accounting: IFRS 12/e Solutions Manual

23,700 11,700 49,800 18,000 103,200 134,100* 43,200 177,300 280,500

43,200 3,000 8,100

Unearned service revenue

8,400 62,700

Non-current liabilities Note payable, long term Non-current liabilities Total liabilities

18,000 18,000 80,700

Equity Share Capital Retained earnings

19,800 180,000 199,800 280,500

Total liabilities and equity

Computation *154,800 – 20,700 = 134,100

Chapter 4

Presentation of Financial Statements

(20-30 min.) P 4-41A Req. 1 Fixit Home Repair Services Statement of Comprehensive Income For year ended 31 December 20X5 In dollars 20X5 20X4 Sales revenue 81,600 65,800 Service revenue 42,600 35,400 Cost of goods sold -34,400 -26,800 Gross profit 89,800 74,400 Wages and salaries -24,600 -20,400 Depreciation -5,400 -5,400 Supplies expense -17,600 -14,800 Interest expense -1,000 -1,200 Motor vehicle expense -6,200 -9,000 Fuel expense -2,800 -5,200 Utilities expense -5,000 -2,200 Advertising expense -6,200 -7,400 Net operating income 12,600 17,200 Interest income 5,800 6,600 Profit before tax 18,400 23,800 Tax expense -2,000 -4,800 Net income 16,400 19,000

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) P 4-41A Req. 2 This would result in a lack of information that stakeholders require in order to make decisions. IAS 1 requires that an entity present separately each material class of similar items. It also requires that an entity present separately items of a dissimilar nature or function unless they are immaterial.

Req. 3 Fixit should look at materiality of the items presented. An item is material when its omission or misstatement could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements.

Chapter 4

Presentation of Financial Statements

(continued) P 4-42A Robert's Home Repair Services Income Statement For year ended 31 December 20X5 In dollars Sales revenue 20X5 20X4 Service revenue 40,800 32,900 Cost of goods sold 21,300 17,700 Gross profit -17,200 -13,400 Wages and salaries 44,900 37,200 Depreciation -12,300 -10,200 Supplies expense -2,700 -2,700 Interest expense -6,900 -8,300 Motor vehicle expense -500 -600 Fuel expense -3,500 -4,900 Utilities expense -1,000 -2,200 Advertising expense -2,500 -1,100 Net operating income -3,600 -4,200 Interest income 6,300 8,600 Profit before tax 2,900 3,300 Tax expense 9,200 11,900 Net income -1,000 -2,400 8,200 9,500

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) P 4-43A Req. 1 It would report $24.75 million of PPE (net, cost less accumulated depreciation) on the balance sheet.

The notes will be as shown:

Cost Additions Disposals Accumulated depreciation Net book value as of Dec 31, 20X6

Furniture and Motor fittings vehicle Equipment Total $10,800,000 $7,200,000 $13,500,000 $31,500,000 -3,600,000 -1,800,000 -1,350,000 -6,750,000

$7,200,000 $5,400,000 $12,150,000 $24,750,000

All items of property, plant and equipment are initially recorded at cost. The cost of an item of property, plant and equipment is recognized as an asset if, and only if, it is probable that future economic benefits associated with the items will flow to the Group and the cost of the item can be measured reliably.

Subsequent to recognition, property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.

Depreciation is computed on a straight line basis over the estimated useful life of the asset as follows: Chapter 4

Presentation of Financial Statements

Equipment – 3 years Furniture and fittings – 4 years Motor vehicles – 10 years

(20-30 min) P 4-44A Yes, this is a material error, as the size of the error constitutes 10% of J&J’s equity and such misstatement will impact a user’s ability to make decisions based on the financial statements. For example, ratios calculated with equity figures will provide an erroneous picture of the company’s financials.

According to IAS 8, J&J has to do retrospective restatement, either by restating the opening balances of assets, liabilities, and equity for the earliest prior-period presented in the a set of financial statements, or, if impractical, through a ‘prior-period adjustment’ to the beginning retained earnings in the statement of changes in equity. Hence J&J has to restate the amounts of PPE, and equity on the balance sheet, and present comparative amounts for years ended 20X6 and 20X7. Furthermore, it has to restate the depreciation expense figures for years ended 20X7 and 20X8 as well.

Financial Accounting: IFRS 12/e Solutions Manual

( 10-15 min.) P 4-45A TO:

Accountant, Trevor Smith

FROM:

Prof X

A change in estimate of useful life of an asset will be reported prospectively. You only need to report the amounts for the current and future periods on the new basis.

For a change in accounting policy due to the publication of a new IFRS, the changes should be done in accordance with the specific transitional provisions in the new IFRS. For a change in accounting policy on depreciation, you have to report figures for all periods presented in the income statement – past as well as current – on the new basis. Hence, retrospective application is required of all prior-period amounts that are presented for comparative purposes with the current year, as though the new accounting method has been in effect all along. IAS 8 has additional provisions when such retrospective application is impractical.

For the error in 20X5 financial statement, if material, a retrospective restatement is needed. This is either by restating the opening balances of assets, liabilities, and equity for the earliest prior-period presented in a set of financial statements, or, if impractical, through a prior-period adjustment to the beginning retained earnings in the statement of changes in equity.

Chapter 4

Presentation of Financial Statements

Problems Group B (5 min.) P 4-46B North: Unqualified opinion East: Adverse opinion West: Qualified opinion South: Adverse opinion

Financial Accounting: IFRS 12/e Solutions Manual

(10-20 min.) P 4-47B Quick Wash Laundry Services Ltd Statement of Financial Position For year ended March 31, 20X5 In Euros Current assets Cash 14,600 Supplies 6,600 Accounts receivable 33,800 Prepaid expenses 11,600 66,600 Non-current assets 73,400 Equipment (net) 28,000 Other assets 101,400 168,000 Total assets Current liabilities Accounts payable Current portion of note payable Salary payable Unearned service revenue

29,600 1,000 5,200 5,800 41,600 11,800 11,800 53,400

Non-current liabilities Note payable, long term Current liabilities Total liabilities Equity Share Capital Retained earnings Total liabilities and equity

12,400 102,200 114,600 168,000 Chapter 4

Presentation of Financial Statements

(20-30 min.) P 4-48B Req. 1 EasyMaint Home Repair Services Statement of Comprehensive Income For year ended 31 December 20X5 In Euros Sales revenue 20X5 20X4 Service revenue 79,600 85,800 Cost of goods sold 22,600 55,400 Gross profit -26,400 -34,800 Wages and salaries 75,800 106,400 Depreciation -20,600 -24,400 Supplies expense -5,800 -5,800 Interest expense -15,600 -16,800 Motor vehicle expense -800 -1,200 Fuel expense -7,000 -8,200 Utilities expense -3,200 -4,800 Advertising expense -4,200 -3,000 Net operating income -5,400 -6,400 Interest income 13,200 35,800 Profit before tax 4,600 7,800 Tax expense 17,800 43,600 Net income -2,800 -4,000 15,000 39,600

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 4-48B Req. 2 This would result in a lack of information that stakeholders require in order to make decisions. IAS 1 requires that an entity present separately each material class of similar items. It also requires that an entity present separately items of a dissimilar nature or function unless they are immaterial.

Req. 3 Rupert should look at materiality of the items presented. An item is material when its omission or misstatement could influence, individually or collectively, the economic decisions that users make on the basis of the financial statements.

Chapter 4

Presentation of Financial Statements

(20-30 min.) P 4-49B Req. 1 Rupert’s Home Repair Services Statement of Comprehensive Income For year ended 31 December 20X5 In Euros Sales revenue 20X5 20X4 Service revenue 39,800 42,900 Cost of goods sold 11,300 27,700 Gross profit -13,200 -17,400 Wages and salaries 37,900 53,200 Depreciation -10,300 -12,200 Supplies expense -2,900 -2,900 Interest expense -7,000 -7,600 Motor vehicle expense -400 -600 Fuel expense -3,800 -4,400 Utilities expense -1,300 -2,100 Advertising expense -2,100 -1,500 Net operating income -3,500 -4,000 Interest income 6,600 17,900 Profit before tax 2,300 3,900 Tax expense 8,900 21,800 Net income -1,400 -2,000 7,500 19,800

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 4-50B

Req. 1 It would report ¥1.58 million of PPE (net, cost less accumulated depreciation) on the balance sheet.

The notes will be as shown:

Furniture and

Motor

Equipment

fittings

vehicle

¥1,000,000

¥320,000

¥600,000 ¥1,920,000

Additions

-

-

-

-

Disposals

-

-

-

-

-200,000

-80,000

-60,000 -6,750,000

¥800,000

¥240,000

¥540,000 ¥1,580,000

Cost

Total

Accumulated depreciation Net book value as of Dec 31, 20X6

All items of property, plant and equipment are initially recorded at cost. The cost of an item of property, plant and equipment is recognized as an asset if, and only if, it is probable that future economic benefits associated with the items will flow to the Group and the cost of the item can be measured reliably.

Subsequent to recognition, property, plant and equipment are Chapter 4

Presentation of Financial Statements

stated at cost less accumulated depreciation and any accumulated impairment losses.

Depreciation is computed on a straight line basis over the estimated useful life of the asset as follows: Equipment – 5 years Furniture and fittings – 4 years Motor vehicles – 10 years

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) P 4-51B Yes, this is a material error, as the size of the error constitutes 10% of Kit & Kat’s (K&K) equity and such misstatement will impact a user’s ability to make decisions based on the financial statements. For example, ratios calculated with equity figures will provide an erroneous picture of the company’s financials.

According to IAS 8, K&K has to do retrospective restatement, either by restating the opening balances of assets, liabilities, and equity for the earliest prior-period presented in the a set of financial statements, or, if impractical, through a ‘prior-period adjustment’ to the beginning retained earnings in the statement of changes in equity. Hence, K&K has to restate the amounts of PPE, and equity on the balance sheet, and present comparative amounts for years ended 20X6 and 20X7. Furthermore, it has to restate the depreciation expense figures for years ended 20X7 and 20X8 as well.

Chapter 4

Presentation of Financial Statements

(30-45 min.) P 4-52B Req. 1 TO:

Accountant, Adal Weber

FROM:

Prof X

A change in estimate of useful life of an asset will be reported prospectively. You only need to report the amounts for the current and future periods on the new basis.

For a change in accounting policy due to the publication of a new IFRS, the changes should be done in accordance with the specific transitional provisions in the new IFRS. For a change in accounting policy on revenue recognition, you have to report figures for all periods presented in the income statement – past as well as current – on the new basis. Hence, retrospective application is required of all prior-period amounts that are presented for comparative purposes with the current year, as though the new accounting method has been in effect all along. IAS 8 has additional provisions when such retrospective application is impractical.

For the error in 20X5 financial statements, if material, a retrospective restatement is needed. This is either by restating the opening balances of assets, liabilities, and equity for the earliest prior-period presented in a set of financial statements, or, if impractical, through a prior-period adjustment to the Financial Accounting: IFRS 12/e Solutions Manual

beginning retained earnings in the statement of changes in equity.

Chapter 4

Presentation of Financial Statements

Decision Cases (20-30 min.) Decision Case 1 Majestic Limited Statement of Comprehensive Income For year ended 31 December 20X5 In Swiss Franc (CHF) 20X5 20X4 Sales revenue 166,700 151,100 Commission revenue 32,900 26,500 Cost of goods sold -41,600 -39,800 Gross profit 158,000 137,800 Logistics and distribution -26,900 -34,200 expense -16,300 -35,700 Sales and marketing expenses -21,700 -22,200 Finance expense -29,100 -46,300 Other administrative expense 64,000 -600 Profit before tax -23,700 -20,800 Tax expense 40,300 -21,400 Net income

Majestic Limited Statement of Change in Equity For year ended 31 December 20X5 In Swiss Francs (CHF) Balance as at January 1, 20X5 Dividends Net income Issuance of shares Balance as at December 31, 20X5 Financial Accounting: IFRS 12/e Solutions Manual

Capital 150,000 19,500 169,500

earnings 74,800 -80,000 89,600

Total equity 224,800 -80,000 89,600 19,500

84,400

253,900

Retained

Balance as at January 1, 20X4 Dividends Net income Balance as at December 31, 20X4

150,000 150,000

87400 -45,000 32,400 74,800

237,400 -45,000 32,400 224800

Majestic Limited Statement of Financial Position For year ended December 31, 20X5 In Swiss Francs (CHF) Current assets 20X5 20X4 Cash Prepayments 144,900 106,200 Trade receivables 50,900 39,500 Interest receivable 47,000 80,300 Other receivables 25,300 26,100 Inventory 60,300 46,000 Advances to employees 47,000 50,300 49,400 Non-current assets 43,600 430,700 386,100 Property, plant and equipment 106,500 118,000 Total assets 106,500 118,000 Current liabilities 537,200 504,100 Trade payables Dues to employees Unearned revenue Deferred income Note payable 39,900 34,900 Accrued liabilities 27,200 17,700 22,900 29,100 Non-current liabilities 25,000 24,000 Bank loan 40,000 0 8,300 13,600 163,300 119,300 120,000 120,000

Chapter 4

Presentation of Financial Statements

Note payable

0 40,000 120,000 160,000 283,300 279,300 74,800 169,500 150,000 84,400 253,900 224,800 537,200 504,100

Total liabilities Equity Retained earnings Share Capital Total liabilities and equity Notes to the financial statements: PPE Vehicles and trucks Cost (Swiss Franc) Balance as of January 1, 20X5 Additions Disposals Accumulated depreciation Net carrying amount as of Dec 31, 20X5

60,000 -35,000 25,000

Furniture and fittings

Office equipment

Store equipment

Total

43,000

47,000

36,000

186,000

-13,500

-16,000

-15,000

-79,500

29,500

31,000

21,000

106,500

-

Financial Accounting: IFRS 12/e Solutions Manual

Ethical Issues IAS 1 prohibits the use of the label ‘extraordinary’ to describe items of income and expenses. This is because such ‘extraordinary’ items actually result from normal business risks and should not be used to signal to readers to ignore these items.

Furthermore, he should not aggregate the large expenses into a single category without giving a detailed breakdown. This is because the expenses, by nature of their size, are material and will influence the economic decisions that users make on the basis of financial statements.

The bank loan should be classified as a current liability, since it is not reasonably certain that PAS Software would be able to extend the term of the loan. The erroneous classification will distort the underlying economic reality of the transaction.

IAS 8 requires that he disclose the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods.

Chapter 4

Presentation of Financial Statements

Focus on Financials: Nestlé (20-30 min.)

1. Yes, they conform to the requirements of IAS 1. Among other things, Nestlé has reported items that are sufficiently distinct in nature under separate line items. Moreover, its income statement has presented all items of income and expense recognized in the period.

2. Nestlé used 2 separate statements. A Consolidated Income Statement and a Consolidated Statement of Comprehensive Income.

3. For Nestlé, not all financial debt is expected to be repaid within 12 months after the reporting date or during the normal operating cycle of the firm. For instance, the company has many long-term bonds that they expect to repay only up to 2028. Even there are two USD bonds with face value $2,100 and $500 which are repayable in 2048 and 2051 respectively.

Although Nestlé only has current trade and receivables, many companies tend to report trade and receivables under both current and non-current portions of assets as a portion of them are expected to be realised only after 12 months from the reporting period or the normal operating cycle. For example, they might have agreements with the customers such that the receivables are due more than 24 months after the end of this reporting period.

4. Nestlé might want to provide more information that is relevant and useful for decision-making for users of its financial statements.

Financial Accounting: IFRS 12/e Solutions Manual

Group Project Student responses will vary.

Chapter 4

Presentation of Financial Statements

Chapter 5 Internal Control, Cash, and Receivables Short Exercises (5 min.) S 5-1 Fraud is an intentional misrepresentation of facts, made for the purpose of persuading another party to act in such a way that causes injury or damage to that party.

The Three Components of the Fraud Triangle 1. Motive - Fraud generally results from either critical need or greed on the part of the perpetrator. Regardless of whether the driving force is need or greed most perpetrators are driven to attempt to acquire something that belongs to others.

2. Opportunity - The opportunity to commit fraud usually arises through weak internal controls.

3. Rationalization - The perpetrator(s) is (are) convinced, in their own minds, that they deserve the object of the fraudulent behavior. They may believe no one else will

Financial Accounting: IFRS 12/e Solutions Manual

ever know or even that everybody else is engaging in fraudulent behavior.

(5-10 min.) S 5-2 Separation of duties is essential for safeguarding assets. The person who has custody of an asset should not also account for the asset. A person who performs both duties can steal the asset and hide the theft by making a fraudulent entry in the accounting records.

Student responses may vary.

Chapter 5

Internal Control, Cash, and Receivables

(5-10 min.) S 5-3 Cash is important not because of its amount as reported on the balance sheet, but because of its effect on a business. All transactions ultimately affect cash. Businesses purchase assets and must pay cash. They make sales and collect cash.

All expenses ultimately require cash. Also, cash is susceptible to theft because it is a medium of exchange.

These factors combine to give cash more importance than the relative size of the account balance to the other non-cash assets would suggest.

Student responses may vary.

(10 min.) S5-4 Stephanie will notice a gap in the sequence of sales receipts for the receipt that Cassidy destroyed. This knowledge will lead Stephanie to investigate what happened to the missing receipt and what happened to the related cash.

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) S 5-5 1. Paying by check carries three controls over cash: • The check provides a record of the payment.

• The check must be signed by an authorized official.

• Before signing the check, the official should study the evidence supporting the payment.

2. A dishonest purchasing agent could: • Purchase goods and have them delivered to his home or other location that he controls.

• Approve payment by the company for goods that he spent too much on, and then split the excess with the supplier.

Companies avoid this internal control weakness by separating the following duties related to the purchase of, and payment for, goods: • purchasing goods • receiving goods • approving and paying for goods

Chapter 5

Internal Control, Cash, and Receivables

(10 min.) S 5-6 Phoenix Corp.

Bank Reconciliation October 31, 20X5 BANK Balance, October 31 Add: Deposit in transit

BOOKS $8,200 Balance, October 31 Add: 875 Bank collection 9,075 Interest revenue Less: Service charge NSF check

Less: Outstanding check Adjusted bank balance

(1,500) $7,575 Adjusted book balance

Phoenix has cash of $7,575.

Financial Accounting: IFRS 12/e Solutions Manual

$6,250 1,400 75 7,725 (50) (100) $7,575

(5 min.) S 5-7 31 Cash………………………………………..

75 Interest Revenue

Journal Date ACCOUNT TITLES AND EXPLANATION Oct. 31 Cash………………………………………..

Accounts Receivable………………...

75

DEBIT CREDIT 1,400 1,400

Collection on account. ……………………...

Interest earned on bank balance.

31 Miscellaneous Expense………………...

Cash…………………………………….

Bank service charge.

50

31 Accounts Receivable……………………

Cash……………………………………..

NSF check.

100

50

100

(5 min.) S 5-8 It appears that the employee has stolen $500 (adjusted book balance, $5,000 − adjusted bank balance, $4,500). The adjusted bank balance is the company’s true cash balance, and the company books show more cash on hand. Therefore, the books must be incorrect.

Chapter 5

Internal Control, Cash, and Receivables

(5-10 min.) S 5-9 Star Avocado Growers Cash Budget Year 20X6 Cash balance, beginning Estimated cash receipts—total Estimated cash payments—total Cash available (needed) before new financing Budgeted cash balance needed Cash available for additional investments

Financial Accounting: IFRS 12/e Solutions Manual

(in millions) $ 28 248 276 (212) 64 (44) $ 20

(5 min.) S 5-10 1.

Beg. bal.

Net credit sales End. bal.

Accounts Receivable 24,000 600,000 Collections Write-offs 125,000

490,000 9,000

Amount customers owe the company

2.

Write-offs

Allowance for Uncollectible Accounts Beg. bal.

9,000 Allowance for Uncollectible accounts End. bal.

5,240 20,000 16,240

3.

Net Accounts Receivable = Accounts Receivable − Allowance for Uncollectible Accounts = $125,000 − $16,240 = $108,760

(10 min.) S 5-11 Journal Chapter 5

Internal Control, Cash, and Receivables

DEBIT CREDIT Date ACCOUNT TITLES AND EXPLANATION (a) Accounts Receivable……………………….. 471,000 471,000 Sales Revenue………………………….

Cash…………………………………………….

Accounts Receivable………………….

363,000 (b) 363,000 (c)

(d)

Allowance for Uncollectible Accounts…..

Accounts Receivable………………….

9,600

Uncollectible-Account Expense…………..

Allowance for Uncollectible Accounts……………………………….

2,550

9,600

2,550

Allowance for Uncollectible Accounts Beg. bal.

Write-offs 9,600 Uncollectible – account exp.

End. bal.

12,600 X = 2,550 5,550

(5-10 min) S 5-12

Req. 1 and 2 Beg. bal.

Net credit sales End. bal.

Accounts Receivable 178,000 1,506,000 Collections Write-offs 120,000

Allowance for Uncollectible Accounts Financial Accounting: IFRS 12/e Solutions Manual

1,548,000 16,000

Write-offs

Beg. bal.

16,000 Uncollectible – account expense End. bal.

12,000 24,000 20,000

Req. 3 BALANCE SHEET Accounts receivable………………………

Less Allowance for uncollectible accounts Accounts receivable, net…………………

$120,000 (20,000) $100,000

(10 min.) S 5-13 1. False. The direct write-off method overstates assets because it fails to take into account the likelihood of uncollectible receivables until it actually becomes uncollectible.

2. California Bank has interest receivable and interest revenue.

Sacramento Company has interest payable and interest expense.

Interest for one month ($240,000 × .08 × 1/12)…...$1,600 3. California Bank: Accrual of interest

Assets = Liabilities + Equity 0

4. True.

5. The net amount of receivables — the amount the company expects to collect — is more interesting because the company will probably collect this amount in cash.

6. Accounts receivable……………………. $XXX Less Allowance for uncollectibles……

(X) Chapter 5

Internal Control, Cash, and Receivables

Accounts receivable, net……………….

$ XX

(10 min.) S 5-14 20X6 a. Aug.31 Note Receivable — E. Garcia ……

Cash…………………………………

6,600 6,600

To loan money.

20X7 b. June30 Interest Receivable ($6,600 × .08 × 10/12)……………………..

Interest Revenue…………………..

440 440

To accrue interest revenue.

20X7 c. Aug.31 Cash ($6,600 + $528)……………………

Interest Receivable……………….

Interest Revenue ($6,600 × .08 × 2/12)…………….

Note Receivable…………………..

To collect on note receivable.

Financial Accounting: IFRS 12/e Solutions Manual

7,128 440 88 6,600

(5 min.) S 5-15 The estimated bad debt allowance will be = $120,000 × 0.5% + $60,000 × 2.0% + $30,000 × 4.0% + $30,000 × 30.0% = $600 + $1,200 + $1,200 + $9,000 = $12,000

Exercises Group A

(5-20 min.) E 5-16A a. Morris has access to the cash collected, and he also prepares the cash report. With access to both items, Morris can steal cash and falsify his cash report to conceal his theft. b. Albom prepares the purchase order and also receives the goods. She can add some items to the purchase order and have these extra items shipped to a location she controls.

When the goods come in, she checks the incoming shipment, so there’s no outside party to learn of her dishonesty.

Student responses may vary.

Chapter 5

Internal Control, Cash, and Receivables

(10 min.) E 5-17A Cash payments: a. Weak internal control. Supervisors both request purchase and pay for equipment with little oversight by the home office. b. Strong internal control. There is a good separation of duties.

Supervisors request equipment and the home office purchases the equipment.

Cash receipts: a. Strong internal control. There is a good separation of duties.

Different people handle cash and account for cash. b. Weak internal control. The accountant both handles cash and accounts for cash.

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) E 5-18A To prevent Floyd’s embezzlement, Downtown Kalamazoo’s board of directors could have: a. Not permitted Floyd to write Downtown Kalamazoo checks by requiring checks to have two signatories from the board. Dual signatories meant it is difficult to cash checks without collusion. b. Not permitted Floyd to receive cash that came to Downtown Kalamazoo. Have cash sent to a lock box at the bank and appoint a board member to get the cash from the lock box. c. Supervised Floyd’s work by examining Downtown Kalamazoo’s documents such as paid checks. d. Have regular periodic audits of Downtown Kalamazoo’s transactions and financial statements.

Student responses may vary.

Chapter 5

Internal Control, Cash, and Receivables

(5-10 min.) E 5-19A

TO:

Store Manager

FROM:

[Student’s Name]

SUBJECT: Evaluation of internal control and plan for improvement There is a weakness in internal control over cash receipts. The cash registers do not keep a record of sales. With no record, there is no way to determine how much cash should be in the cash drawer. This omission makes it easy for the cashier to steal cash and not get caught.

To improve internal control, the company should use cash registers that record each sale. The manager can prove the amount of cash in the cash drawer against this recorded amount.

Financial Accounting: IFRS 12/e Solutions Manual

(10-20 min.) E 5-20A The main internal control weakness is that the payroll department both prepares and distributes the paychecks. With both duties, a dishonest person in the payroll department can create a time sheet for a fictitious employee and then keep the related paycheck after the treasurer returns the signed checks to the payroll department.

To correct this weakness, New Pastures Golf should have someone other than the payroll department or have the shop foreman distribute paychecks to employees. For example, the human resources department, which has no control over the time sheets or the paychecks, could distribute paychecks to the workers.

Chapter 5

Internal Control, Cash, and Receivables

(10-20 min.) E 5-21A 1.

d

2.

a

3.

4.

5.

c

b

6.

d

b

7.

c (10-15 min.) E 5-22A M. K. Werner Bank Reconciliation August 31, 20XX

BANK: Balance, August 31 Add: Deposit in transit Less: Outstanding checks: Check No. 856 857 Adjusted bank balance BOOKS: Balance, August 31 Less: Correction of book error — Recorded $85 check as $58 NSF check Service charge Adjusted book balance

Financial Accounting: IFRS 12/e Solutions Manual

$ 1,060 2,020

$ 190 550

(740) $2,340

$2,454

$ 54 40 20

(114) $2,340

(10-15 min.) E 5-23A Charles Rodriguez Bank Reconciliation April 30, 20X5 BANK: Balance, April 30 Add: Deposit in transit

$ 1,170 3,796 4,966 (1,244) $3,722

Less: Outstanding checks Adjusted bank balance BOOKS: Balance, April 30 Add: EFT collection — rent

$3,872 660 4,532

Less: Service charge NSF checks Charge for printed checks Correction of book error — recorded $280 check as $28 Adjusted book balance

$ 16 270 20 504

(810) $3,722

Charles’ actual cash balance is $3,722

Chapter 5

Internal Control, Cash, and Receivables

(10-15 min.) E 5-24A

DATE

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT

Apr. 30 Cash…………………………………….

Fee Revenue………………………

EFT collection of rent.

660

30 Miscellaneous Expense ($16 + $20)...

Cash ……………………………….

Bank service charge and charge for printed checks.

36

30 Accounts Receivable………………...

Cash ……………………………….

NSF checks returned by bank.

270

30 Salary Expense ($560 − $56)………..

Cash ……………………………….

Correction of book error.

504

Financial Accounting: IFRS 12/e Solutions Manual

CREDI T 660

36

270

504

(20-30 min.) E 5-25A Starlink Communications, Inc. Cash Budget Year Ended December 31, 20X7 Cash balance, December 31, 20X6

Millions $ 164

Budgeted cash receipts: Collections from customers Sale of assets

22,616 232 23,012

Budgeted cash payments: Payments for cost of services and products Payments of operating expenses Investment in equipment Payment of debt Payment of dividends Cash available (needed) before financing Budgeted cash balance, December 31, 20X7 Cash available for additional investments, or (New financing needed)

$12,330 5,086 3,632 1,208 66

22,322 690 (172)

$

518

Starlink Communications has cash available for additional investments of $518 million during 20X7 so there is no need for additional financing.

Chapter 5

Internal Control, Cash, and Receivables

(10 min.) E 5-26A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X6 Dec. 31 Year-end entry: Doubtful-Account Expense ($85,000 × .08 - 680)…………………

Allowance for Doubtful Accounts BALANCE SHEET Current assets: Accounts receivable, net of allowance for doubtful accounts of $6,800**…………. _____

6,120 6,120

$78,2002

2$85,000 − $6,800 = $78,200

**$6,120+ $680 = $6,800

Financial Accounting: IFRS 12/e Solutions Manual

(15 min.) E 5-27A Req. 1

Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Accounts Receivable……………………... 81,500 Oct. Sales Revenue………………………..

81,500 Oct. Oct. Oct.

Cash………………………………………….

Accounts Receivable………………..

71,000

Allowance for Uncollectible Accounts…

Accounts Receivable………………..

1,600

Uncollectible-Account Expense ($2,250 + $1,600 – $1,150)………………...

Allowance for Uncollectible Accounts

71,000 1,600 2,700 2,700

Req. 2

Bal

Accounts Receivable 17,500 71,000 81,500 1,600 26,400

Allowance for Uncollectible Accounts 1,150 2,700 1,600 2,250

Net accounts receivable = $24,150 ($26,400 − $2,250) Inspire Yellow Gift Corner expects to collect the net receivable amount.

Req. 3 BALANCE SHEET Current assets: Accounts receivable, net of allowance for uncollectible accounts of $2,250…………

Chapter 5

$24,150

Internal Control, Cash, and Receivables

(15-30 min.) E 5-28A Req. 1 The credit balance at December 31 in Allowance for Doubtful Accounts should be $37,400. ($200,000 × .005) + ($160,000 × .015) + ($100,000 × .04) + ($60,000 × .5) = $37,400. The current balance is $25,000. Thus, the balance of the allowance account is too low.

Req. 2 DATE

Journal ACCOUNT TITLES AND EXPLANATION Doubtful-Account Expense……………..

Allowance for Doubtful Accounts Allowance for Doubtful Accounts

Bal.

DEBIT 12,400

CREDIT 12,400

25,000 12,400 37,400

Req. 3 BALANCE SHEET Current assets: Cash……………………………………….

Short-term investments………………..

Accounts receivable, net of allowance for doubtful accounts of $37,400……… _____ *Another way to report accounts receivable is Accounts receivable…………………… $520,000 Less Allowance for doubtful accounts………………………………..

(37,400)

Financial Accounting: IFRS 12/e Solutions Manual

$

XX XX

482,600*

482,600

(10-15 min.) E 5-29A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Sept. 1 Note Receivable — Cristy Rocker….. 12,000 Cash……………………………….

12,000

Nov. 6 Note Receivable — Top Masters.……. 10,000 Service Revenue…………………

10,000

16 Note Receivable — Veron, Inc.……

Accounts Receivable - Veron Inc.

5,000 5,000

30 Interest Receivable……………………..

Interest Revenue…………………. _____

299* 299

($12,000 × .08 × 90/365) + ($10,000 × .06 × 24/365) + ($5,000 × .12 × 14/365) = $299 $237**

$39**

$23**

Aegean Realty earned interest revenue of $299 this year. ** Rounded to nearest dollar.

Chapter 5

Internal Control, Cash, and Receivables

(10 min.) E 5-30A Req 1 The amount of cash collected can be ascertained by preparing the Accounts Receivable account as follows: Accounts Receivable Beg. bal.

70,000 Write-offs 12,000 Service revenue 370,000 Collections X = 343,000 End. bal.

85,000

Req 2 Dec. 31 Accounts Receivable Service Revenue Earned revenue on account

$ $ 370,000 370,000

31 Cash………………………………………..

343,000 Accounts Receivable………………...

343,000 Collection on account.

31 Allowance for Impairment of Accounts Receivable Accounts Receivable Wrote off uncollectible receivables

Financial Accounting: IFRS 12/e Solutions Manual

12,000 12,000

(10 min.) E 5-31A Total cost of speeding up the collection process is as follows: $ 7,500 18,000 25,500

Credit card processing cost ($250,000 × 3%) Factoring expenses ($360,000 × 5%) Total cost Journal $ 242,500 7,500

Cash Credit Card Processing Cost Sales Revenue Recorded bankcard sales

250,000

Cash Financing Expense Accounts Receivable Sold accounts receivable to the factor

Chapter 5

$

342,000 18,000

360,000

Internal Control, Cash, and Receivables

Exercises Group B

(5-20 min.) E 5-32B a. Michaels has access to the cash collected, and he also prepares the cash report. With access to both items, Michaels can steal cash and falsify his cash report to conceal his theft.

b. Ahern prepares the purchase order and also receives the goods. She can add some items to the purchase order and have these extra items shipped to a location she controls.

When the goods come in, she checks the incoming shipment, so there’s no outside party to learn of her dishonesty.

Student responses may vary.

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) E 5-33B Cash payments: a. Weak internal control. Supervisors request, purchase, and pay for equipment with little oversight by the home office. b. Strong internal control. There is a good separation of duties.

Supervisors request equipment and the home office purchases the equipment.

Cash receipts: a. Weak internal control. The accountant both handles cash and accounts for cash. b. Strong internal control. There is a good separation of duties.

Different people handle cash and account for cash.

Chapter 5

Internal Control, Cash, and Receivables

(10 min.) E 5-34B To prevent Stuart’s embezzlement, Downtown Scanlon’s board of directors could have: a. Not permitted Stuart to write Downtown Scanlon checks by requiring checks to have two signatories from the board.

Dual signatories meant it is difficult to cash checks without collusion.

b. Not permitted Stuart to receive cash that came to Downtown Scanlon. Have cash sent to a lock box at the bank and appoint a board member to get the cash from the lock box. c. Supervised Stuart’s work by examining Downtown Scanlon’s documents such as paid checks. d. Have regular periodic audits of Downtown Scanlon’s transactions and financial statements.

Student responses may vary.

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) E 5-35B

TO:

Store Manager

FROM:

[Student Name]

SUBJECT: Evaluation of internal control and plan for improvement There is a weakness in internal control over cash receipts. The cash registers do not keep a record of sales. With no record, there is no way to determine how much cash should be in the cash drawer. This omission makes it easy for the cashier to steal cash and not get caught.

To improve internal control, the company should use cash registers that record each sale. The manager can prove the amount of cash in the cash drawer against this recorded amount.

Chapter 5

Internal Control, Cash, and Receivables

(10-20 min.) E 5-36B The main internal control weakness is that the payroll department both prepares and distributes the paychecks. With both duties, a dishonest person in the payroll department can create a time sheet for a fictitious employee and then keep the related paycheck after the treasurer returns the signed checks to the payroll department.

To correct this weakness, Long Range Golf should have someone other than the payroll department or have the shop foreman distribute paychecks to employees. For example, the human resources department, which has no control over the time sheets or the paychecks, could distribute paychecks to the workers.

Financial Accounting: IFRS 12/e Solutions Manual

(10-20 min.) E 5-37B 1.

d

5.

b

2.

d

6.

a

3.

b

7.

a

4.

c (10-15 min.) E 5-38B

Y. M. David Bank Reconciliation March 31, 20XX BANK: Balance, March 31 Add: Deposit in transit Less: Outstanding checks: Check No. 856 857 Adjusted bank balance

€ 980 2,240

€ 160 510

BOOKS: Balance, March 31 Less: Correction of book error — Recorded €65 check as €56 NSF check Service charge Adjusted book balance

Chapter 5

(670) €2,550

$2,628

€ 18 40 20

(78) €2,550

Internal Control, Cash, and Receivables

(10-20 min.) E 5-39B Nathan Harris Bank Reconciliation September 30, 20X5 BANK: Balance, September 30 Add: Deposit in transit

€ 1130 3,940 5,070 (1,278) €3,792

Less: Outstanding checks Adjusted bank balance BOOKS: Balance, September 30 Add: EFT collection — fee Less: Service charge NSF checks Charge for printed checks Correction of book error — recorded €640 check as €64 Adjusted book balance Nathan’s actual cash balance is €3,792

Financial Accounting: IFRS 12/e Solutions Manual

€3,990 690 4,680 € 18 270 24 576

(888) €3,792

(10-15 min) E 5-40B DATE

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT

Sept30 Cash……………………………………. .

Fee Revenue………………………

EFT collection of rent.

690

30 Miscellaneous Expense (€18 + €24)...

Cash ……………………………….

Bank service charge and charge for printed checks.

42

30 Accounts Receivable………………...

Cash ……………………………….

NSF checks returned by bank.

270

30 Salary Expense (€640 − €64)………..

Cash ……………………………….

Correction of book error.

576

Chapter 5

CREDIT

690

42

270

576

Internal Control, Cash, and Receivables

(20-30 min.) E 5-41B Idea Communications, Inc. Cash Budget Year Ended December 31, 20X7 Cash balance, December 31, 20X6

Millions € 170

Budgeted cash receipts: Collections from customers Sale of assets Budgeted cash payments: Payments for cost of services and products Payments of operating expenses Investment in equipment Payment of debt Payment of dividends Cash available (needed) before financing Budgeted cash balance, December 31, 20X7 Cash available for additional investments, or (New financing needed)

22,634 250 23,054

€12,368 5,092 3,682 1,204 642

22,988 66 (164)

€

(98)

Idea Communications, Inc., expects to need new financing of €98 million during 20X7.

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) E 5-42B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Year-end entry: Doubtful-Account Expense (€90,000 × .08 - 700)………………

Allowance for Doubtful Accounts

6,500

CREDIT

20X5 Dec. 31

BALANCE SHEET Current assets: Accounts receivable, net of allowance for doubtful accounts of €7,200…… _____

6,500

€82,8002

2€90,000 − €7,200 = €82,800

Chapter 5

Internal Control, Cash, and Receivables

(15 min.) E 5-43B Req. 1 Journal DATE ACCOUNT TITLES AND EXPLANATION May Accounts Receivable……………………...

Sales Revenue………………………..

Cash…………………………………………..

Accounts Receivable………………..

Allowance for Uncollectible Accounts…

Accounts Receivable………………..

May May May

Uncollectible-Account Expense (€2,000 + €1,150 − €2,250) ………………

Allowance for Uncollectible Accounts

DEBIT CREDIT 73,000 73,000 61,500 61,500 1,150 1,150 900 900

Req. 2

Bal.

Accounts Receivable 19,000 61,500 73,000 1,150 29,350

Allowance for Uncollectible Accounts 2,250 900 1,150 2,000

Net accounts receivable = €27,350 (€29,350 − €2,000) Charming Treasures Gift Corner expects to collect the net receivable amount.

Req. 3 BALANCE SHEET Current assets: Accounts receivable, net of allowance for uncollectible accounts of €2,000…………

Financial Accounting: IFRS 12/e Solutions Manual

€27,350

(15 min.) E 5-44B Req. 1 The credit balance at December 31 in Allowance for Doubtful Accounts should be €23,600. (€160,000 × .005) + (€100,000 × .020) + (€60,000 × .08) + (€40,000 × .40) = €23,600. The current balance is €13,000. Thus, the balance of the allowance account is too low.

Req. 2 Journal ACCOUNT TITLES AND DATE EXPLANATION Doubtful-Account Expense……………..

Allowance for Doubtful Accounts

DEBIT 10,600

CREDIT

10,600

Allowance for Doubtful Accounts 13,000 10,600 23,600

Bal. Req. 3 BALANCE SHEET Current assets: Cash………………………………………

Short-term investments……………….

Accounts receivable, net of allowance for doubtful accounts of €23,600……… _____ *Another way to report accounts receivable is Accounts receivable………………….

Less: Allowance for doubtful accounts

Chapter 5

€

XX XX

336,400* €360,000 (23,600)

336,400

Internal Control, Cash, and Receivables

(10-15 min.) E 5-45B

Journal DATE

Apr.

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

1 Note Receivable — Boyle Denvers… 18,000 Cash…………………………………

18,000

6 Note Receivable — Pot Masters.……. 15,000 Service Revenue…………………..

15,000

16 Note Receivable — Veron, Inc.……

Accounts Receivable - Veron Inc.

4,000 4,000

30 Interest Receivable……………………..

Interest Revenue…………………. _____

541*

Jun.

541

($18,000 × .10 × 90/365) + ($15,000 × .08 × 24/365) + ($4,000 × .12 × 14/365) = $541 $444** $79** $18**

Celtic Realty earned interest revenue of $541 this year. ** Rounded to nearest dollar.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 5-46B Req. 1 The amount of cash collected can be ascertained by preparing the Accounts Receivable account as follows: Beg. bal.

Service revenue End. bal.

Accounts Receivable € 80,000 Write-offs 280,000 Collections

€ 17,000 X = 247,000

96,000

Req. 2 € € 280,000 280,000

Dec. 31 Accounts Receivable Service Revenue Earned revenue on account

31 Cash………………………………………..

247,000 Accounts Receivable………………...

247,000 Collection on account.

31 Allowance for Impairment of Accounts Receivable Accounts Receivable Wrote off uncollectible receivables

Chapter 5

17,000 17,000

Internal Control, Cash, and Receivables

(10 min.) E 5-47B Total cost of speeding up the collection process is as follows: € 8,000 31,200 39,200

Credit card processing cost (€400,000 × 2%) Factoring expenses (€520,000 × 6%) Total cost Journal Cash Credit Card Processing Cost Sales Revenue Recorded bankcard sales Cash Financing Expense Accounts Receivable Sold accounts receivable to the factor

Financial Accounting: IFRS 12/e Solutions Manual

€ 392,000 8,000

€

400,000 488,800 31,200

520,000

Challenge Exercises (15-25 min.) E 5-48 Temple could be: 1. Writing business checks to herself.

Hopper could investigate by: 1. Performing the bank reconciliation and examining all checks written by the business.

2. Submitting purchase invoices 2. Examining purchase invoices a second time for duplicate for authenticity and comparing payment, perhaps altering the invoices to receiving reports to mailing address on the determine that the business duplicate invoice and sending received all goods it paid for. the check to a post office box Any invoice with a hole that Temple controls. indicates it was paid earlier.

Calling the suppliers directly to inquire about any questionable invoices.

3. Paying suppliers excess 3. Comparing the business’s amounts and arranging for ratio of cost of goods sold to suppliers to kick back part of retail selling price to the costthe excess to Temple. to-retail ratio in the past. A kickback scheme would show up in higher cost figures and a lower profit percentage.

4. Making small cash payments 4. Examining all cash records to herself. and comparing the records to actual quantities of supplies and other items needed by the business.

Student responses may vary.

Chapter 5

Internal Control, Cash, and Receivables

(20-30 min.) E 5-49 Req. 1 The Furniture Mart, Inc. Cash Budget Year Ended December 31, 20X6 Cash balance, December 31, 20X5

Thousands $ 150

Budgeted cash receipts: Collections from customers Issuance of shares Budgeted cash payments: Purchases of inventory items Payment of operating expenses Purchase of property and equipment Payment of long-term and short-term debt Payment of dividends Cash available (shortage) before financing Budgeted cash balance, December 31, 20X6 Cash available for additional investments

Financial Accounting: IFRS 12/e Solutions Manual

22,100 674 22,924 $14,655 2,438 1,257 984 371

19,705 3,219 (160) $ 3,059

(continued) E 5-49 (15-20 min.) E 5-50 T-accounts are helpful, as follows (in millions):

(a) Write-offs

Allowances Beg. bal.

13* Expense End. bal.

Receivables Beg. bal. ($2,628 + $69) 2,697 Total revenue 54,333 Write-offs Collections End. bal. ($2,856 + $74) 2,930

Chapter 5

69 18 74

13 54,087 (b)

Internal Control, Cash, and Receivables

Quiz Q5-51 Q5-52 Q5-53 Q5-54 Q5-55 Q5-56 Q5-57 Q5-58 Q5-59 Q5-60

b c c a d d b c a a

[($180,000 × .02) + ($50,000 × .08) + ($10,000 × .20) − $5,000 = $4,600] ($240,000 − $9,600 = $230,400) ($5,600 - $2,900 = $2,700)

Financial Accounting: IFRS 12/e Solutions Manual

Problems Group A

(10-20 min.) P 5-61A Requirement 1 Missing Internal Control Characteristic

Requirement 2

Requirement 3

Possible Problem Solution

a. Separation of duties

Theft of diamonds — the purchasing agent could have diamonds sent to a location he controls.

Separate purchasing, approval, and check-signing duties.

b. Assignment of responsibility

Lost revenue because too many employees are managing the office and neglecting their duties.

Assign a single employee to manage the office when the owner is absent.

c. Separation of duties

Theft of cash.

Chapter 5

Separate accounting and cash-handling duties.

Internal Control, Cash, and Receivables

(20-30 min.) P 5-62A Req. 1 Dursley Automotive Bank Reconciliation July 31, 20X6 BANK: Balance, July 31, 20X6 Add: Deposits in transit ($934 + $2,028) Less: Outstanding checks — Check No. 3119 3120 3121 3122 Adjusted bank balance, July 31, 20X6 BOOKS: Balance, July 31, 20X6 Add: EFT collection of rent Bank collection of note receivable Book error — $1,260 check recorded as $1,620 Less: EFT payment of insurance Unauthorized signature check Service charge Adjusted book balance, July 31, 20X6

Financial Accounting: IFRS 12/e Solutions Manual

$10,487 2,962 13,449

$ 450 975 215 2,250

(3,890) $ 9,559

$ 7,957 $ 760 1,270 360 $ 343 417 28

2,390 10,347

(788) $ 9,559

(10-15min) P 5-63A TO:

President, Smooth Skin Care

FROM: Concerned Employee It is unwise to have the employee who opens the mail also grant allowances to customers. Suppose a customer pays an invoice in full. The mailroom employee can steal the customer check and grant an allowance to cover the theft. To correct this internal control weakness, deny the mailroom employee access to all accounting records. Also, appoint a separate employee to grant allowances to customers.

Notes: 1. Student responses may vary.

2. The mailroom employee obviously has access to the accounting records—to know that a customer has paid less than the full amount.

3. It may be necessary to explain to students that the mailroom employee must forge the company endorsement on customer checks stolen. This person must also open— and control—a bank account in the company’s name. This may be quite easy.

Chapter 5

Internal Control, Cash, and Receivables

(20-30 min) P 5-64A Req. 1 Jupiter Engineering Works Bank Reconciliation August 31, 20X5 BANK: Balance, August 31 Add: Deposit of August 31 in transit

$17,578.46 708.76 18,287.22

Less: Outstanding cheques ($802.00 + $149.64 + $66.50 + $331.10 + $472.00 + $95.50 + $215.70) Correction of bank error, which credited our account for the deposit of another company Adjusted bank balance, August 31

$2132.44

536.80

(2669.24) $$15,617.98

BOOKS: Balance, August 31 Add: Interest revenue earned on bank balance Bank collection of account receivable

$8,158.71 $

37.16 1,790.30 1,827.46 18,144.88

Less: EFT (utilities $1,480, insurance $580) Service charge Returned check due to unauthorized signature NSF check Adjusted book balance, August 31 Financial Accounting: IFRS 12/e Solutions Manual

$2,060.00 15.00 317.00 134.90

(2,526.90) $15,617.98

(continued) P 5-64A Req. 2 (entries based on the reconciliation) DATE

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT CREDIT

Aug 31 Cash………………………………………………… 37.16 Interest Revenue……………………………….

Interest earned on bank balance.

37.16

31 Cash………………………………………………… 1,790.30 Accounts Receivable………………………….

1,790.30 Account receivable collected by bank.

31 Utilities Expense………………………………….. 1,480.00 Cash……………………………………………...

1,4800.0 0 Monthly utilities.

31 Insurance Expense………………………………. 580.00 Cash……………………………………………...

Monthly insurance.

580.00

31 Miscellaneous Expense…………………………. 15.00 Cash……………………………………………...

Bank service charge.

15.00

31 Accounts Receivable ($317.00 + $134.90)…… 451.90 Cash……………………………………………...

NSF customer checks returned by bank.

451.90

Chapter 5

Internal Control, Cash, and Receivables

(30-45 min.) P 5-65A Req. 1 Sigma Wireless Cash Budget 20X7 Cash balance, beginning

(In thousands) $ 3,000

Budgeted cash receipts: Collections from customers ($128,000 × 1.15) Receipt of interest Budgeted cash payments: Purchases of inventory ($98,000 × 1.30) Operating expenses Purchases of equipment Payment of dividends Purchases of investments Payment of long-term debt Cash available (needed) before financing Budgeted cash balance, ending Cash available for additional investments, or (New financing needed)

Financial Accounting: IFRS 12/e Solutions Manual

147,200 600 147,800 $127,400 27,000 9,600 600 800 800 (166,200) $ (15,400) (7,000) $ (22,400)

(continued) P 5-65A Req. 2 Sigma Wireless appears to be growing. The company expects a 15% increase in collections from customers and a 30% increase in the purchases of inventory. It is also continuing to invest in new equipment, with no sales of long-term assets. Sigma’s cash budget shows a need for new financing of $22.40 million. Needing new financing is typical of companies in their growth stage.

Chapter 5

Internal Control, Cash, and Receivables

(15-20 min.) P 5-66A (All amounts in $millions) Reqs. 1 and 3 Accounts Receivable 3,345 31,779 32,491 354 3,703

Allowance for Uncollectibles 166 327 354 139

Req. 2

Journal DATE

a.

b.

c.

d.

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Accounts Receivable……………… 32,491 Service Revenue……………..

32,491

Cash………………………………….. 31,779 Accounts Receivable………

31,779

Uncollectible-Account Expense…

Allowance for Uncollectibles

327

Allowance for Uncollectibles……..

Accounts Receivable………

354

327

354

Req. 4 These balances agree with the actual Mail Time amounts.

Req. 5 INCOME STATEMENT Service revenue………………….

Uncollectible-account expense…

Financial Accounting: IFRS 12/e Solutions Manual

$32,491 327

(25-35 min.) P 5-67A Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Nov. 30 Allowance for Doubtful Accounts……….. 1,600 Accounts Receivable — Black Carpets Accounts Receivable — Old Timer…...

1,100 500

Dec. 31 Doubtful-Account Expense……………..... 6,900 Allowance for Doubtful Accounts…. _____

6,900*

*Computation: Required credit balance in Allowance for Doubtful Accounts based on aging of Accounts Receivable ($150,000 × .002) + ($35,000 × .02) + ($20,000 × .08) + ($30,000 × .40)……………………..

$14,600

Credit balance in Allowance for Doubtful Accounts before the December 31 adjusting entry — (see the T-account in the answer to Req. 2; $9,100 − $1,400)………………………………………...

7,700

Credit entry needed to produce the required credit balance in Allowance for Doubtful Accounts……..

$6,900

Chapter 5

Internal Control, Cash, and Receivables

(continued) P 5-67A Req. 2 Allowance for Doubtful Accounts Nov. 30 Write-offs 1,400 Sept. 30 Balance Dec. 31 Adjusting Dec. 31 Balance

Req. 3 Effective Communications Balance Sheet December 31, 20X7 Accounts receivable……………………....

Less: Allowance for doubtful accounts.

Accounts receivable, net…………………

Financial Accounting: IFRS 12/e Solutions Manual

20X7 $235,000 (14,600) $220,400

9,100 6,900 14,600

(20-30 min.) P 5-68A Journal DATE 20X6

ACCOUNT TITLES AND EXPLANATION DEBIT

Oct. 31 Note Receivable — Tasty Grillz ….

Sales Revenue……………………

CREDI T

72,000 72,000

Dec. 31 Interest Receivable ($72,000 × .0650 × 2/12)…………………

Interest Revenue………………

20X7 Jan. 31 Cash………………………………………...

Note Receivable — Tasty Grillz……

Interest Receivable………………

780 780

73,170 72,000 780

Interest Revenue ($72,000 × .0650 × 1/12)…

390

Feb. 18 Note Receivable — Arissa Nutrition …… 14,800 Accounts Receivable — Arissa Nutrition ……………………

14,800

19 Cash…………………………………….

Financing Expense………………………

Note Receivable — Arissa Nutrition

14,800

14,600 200

Nov. 11 Note Receivable — City Provisions ….

Cash……………………………………

32,800

Dec. 31 Interest Receivable………………………...

427

Interest Revenue ($32,800 × .095 × 50/365) Chapter 5

32,800

427

Internal Control, Cash, and Receivables

Req 2 BALANCE SHEET Current assets: Note receivable…………………

Interest receivable……………

Financial Accounting: IFRS 12/e Solutions Manual

December 31, 20X7 20X6 $32,800 427

$72,000 780

(continued) P 5-68A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X7 Nov. 11 Note Receivable — Street Provisions …. 16,400 Cash……………………………………

16,400 213 Dec. 31 Interest Receivable………………………...

Interest Revenue ($16,400 × .095 × 50/365)

213

Req. 2 BALANCE SHEET Current assets: Note receivable…………………

Interest receivable……………

Chapter 5

December 31, 20X7 20X6 $16,400 213

$36,000 390

Internal Control, Cash, and Receivables

(15-20 min.) P 5-69A Pincon Inc. Cash Budget For the Year Ended December 31, 20X7 Cash balance, beginning

$ 20,000

Budgeted cash receipts: Cash Sales Collections from customers ($240,000 × 0.80) Issue of shares Sale of investment ($60,000 × 1.10) Dividend from investments

Budgeted cash payments: Cash purchase Payment to suppliers ($200,000 × 0.75) Operating expenses ($75,000 × 0.80) Purchases of equipment Payment of dividends Cash available (needed) before new financing Budgeted cash balance, ending Cash available for additional investments

Financial Accounting: IFRS 12/e Solutions Manual

20,000 192,000 250,000 66,000 10,000 558,000

$15,000 150,000 60,000 150,000 5,000 (380,000) $178,000 25,000 $ 153,000

Problems Group B

(10-20 min.) P 5-70B Requirement 1 Requirement 2 Missing Internal Control Characteristic Possible Problem

Requirement 3 Solution

a. Separation of duties

Theft of cash by the purchasing agent.

b. Assignment of responsibilities

Lost revenue due Assign one senior to delay of architect to fulfill architectural management duties drawings. while White is absent. Other senior architect should focus on producing architectural drawings.

c. Separation of duties

Theft of cash.

Chapter 5

Have a manager, not the purchasing agent approve invoices for payment and sign the checks

Keep accounting and cash handling duties separate.

Internal Control, Cash, and Receivables

(20-30 min.) P 5-71B Req. 1 Dudley Automotive Bank Reconciliation January 31, 20X6 BANK: Balance, January 31, 20X6 Add: Deposits in transit ($865 + $2,073) Less: Outstanding checks Check No. 3119 3120 3121 3122 Adjusted bank balance, January 31, 20X6 BOOKS: Balance, January 31, 20X6 Add: EFT collection of rent Bank collection of note receivable Book error — $1,350 check recorded as $1,530 Less: NSF check EFT payment of insurance Service charge Adjusted book balance, January 31, 20X6

Financial Accounting: IFRS 12/e Solutions Manual

$ 8,883 2,938 11,821

$ 483 995 249 2,332

(4,059) $ 7,762

$ 6,333 $ 680 1,340 180

$ 436 313 22

2,200 8,533

(771) $ 7,762

(continued) P 5-71B Req. 2 A bank account helps control cash by providing a place for safekeeping. The bank also provides a detailed list of the company’s cash Automotive

transactions

that

Dudley

managers can compare to the company’s own cash records and thus correct any book errors quickly.

The bank reconciliation helps control cash by ensuring that the company accounts for its cash transactions correctly and that the bank and book records of cash are correct. Also, the bank reconciliation establishes the balance of cash to report on the balance sheet.

Chapter 5

Internal Control, Cash, and Receivables

(5-10min) P 5-72B TO:

President, Glowing Skin Care

FROM: Concerned Employee It is unwise to have the employee who opens the mail also grant allowances to customers. Suppose a customer pays an invoice in full. The mailroom employee can steal the customer check and grant an allowance to cover the theft. To correct this internal control weakness, deny the mailroom employee access to all accounting records. Also, appoint a separate employee to grant allowances to customers.

Notes: 1. Student responses may vary.

2. The mailroom employee obviously has access to the accounting records — to know that a customer has paid less than the full amount.

3. It may be necessary to explain to students that the mailroom employee must forge the company endorsement on customer checks stolen. This person must also open — and control — a bank account in the company’s name.

This may be quite easy.

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) P 5-73B Req. 1 Neptune Engineering Works Bank Reconciliation October 31, 20X5 BANK: Balance, October 31 Add: Deposit of October 31 in transit

$16,707.74 $701.60

Less: Outstanding checks ($806.30 + $157.96 + $72.78 + $310.90 + $468.00 + $95 + $213.58) Correction of bank error — credited our account for the deposit of another company

2124.52

992.20

Adjusted bank balance, October 31 BOOKS: Balance, October 31 Add: Bank collection on account Interest revenue on bank balance Less: Service charge EFT Payment of utility bill EFT Payment of insurance bill NSF check Returned item due to unauthorized signature Adjusted book balance, October 31 Chapter 5

$701.60 $17409.34

(3,116.72) $14292.62

$15013.72 $1850.40 31.30

1881.70 16895.42

$ 16.50 1560.00 520.00 135.30 371.00

(2602.80) $14292.62

Internal Control, Cash, and Receivables

(continued) P 5-73B Req. 2 (entries based on the reconciliation) Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT CREDIT

Oct. 31 Cash…………………………………………...

Accounts Receivable………..…………

Accounts Receivable collected by bank.

1,850.40

31 Cash…………………………………………...

Interest Revenue………………………...

Interest earned on bank balance.

31.30

31 Utility Expense …………………………..…

Prepaid Insurance …………………...……

Cash ………………………………………

1,560.00

1,850.40

31.30

520.00 2,080.00

EFT payments 31 Miscellaneous Expense……………………

Cash………………………………………..

Bank service charge.

16.50

31 Accounts Receivable (€135.30 + €371)..

Cash…………………………………………

506.30

NSF customer checks returned by bank.

Financial Accounting: IFRS 12/e Solutions Manual

16.50

506.30

(30-45 min.) P 5-74B Req. 1 Sputnik Wireless Cash Budget 20X7 Cash balance, beginning

€ 3,800

Budgeted cash receipts: Collections from customers (€124,000 × 1.2) Receipt of interest Budgeted cash payments: Purchases of inventory (€94,000 × 1.25) Operating expenses Purchase of property and equipment Purchases of investments Payment of dividends Payments of long-term debt Cash available (needed) before financing Budgeted cash balance, ending Cash available for additional investments, or (New financing needed)

148,800 1,400 150,200 €117,500 27,400 8,200 600 800 1,000 155,500 (5,300) (7,300) € (12,600)

Chapter 5

Internal Control, Cash, and Receivables

(continued) P 5-74B Req. 2 Sputnik Wireless appears to be growing. The company expects a 20% increase in collections from customers and a 25% increase in purchases of inventory. It is maintaining its purchases of property and equipment, with no sales of long-term assets. Sputnik’s cash budget shows a need for new financing of €12.6m. Needing new financing is typical of companies in their growth stage.

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) P 5-75B (All amounts in thousands) Reqs. 1 and 3 Accounts Receivable 3,435 31,979 32,587 350 3,693

Allowance for Uncollectibles 156 323 350 129

Req. 2

Journal DATE

a.

b.

c.

d.

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Accounts Receivable………………. 32,587 Service Revenue………………

32,587

Cash…………………………………… 31,979 Accounts Receivable………

31.979

Uncollectible-Account Expense….

Allowance for Uncollectibles

323

Allowance for Uncollectibles……...

Accounts Receivable………

350

323

350

Req. 4 These balances agree with the On-time Delivery amounts.

Chapter 5

Internal Control, Cash, and Receivables

(continued) P 5-75B Req. 5 INCOME STATEMENT Service revenue……………………

Uncollectible-account expense…

Financial Accounting: IFRS 12/e Solutions Manual

€32,587 323

(25-35 min.) P 5-76B Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Dec. 28 Allowance for Doubtful Accounts………….. 2,000 Accounts Receivable — Blue Carpets Accounts Receivable — Show-N-Tell

1,300 700

Dec. 31 Doubtful-Account Expense………………….. 5,300 Allowance for Doubtful Accounts……

5,300*

_____ *Computation: Required credit balance in Allowance for Doubtful Accounts based on aging of Accounts Receivable (€160,000 × .005) + (€40,000 × .01) + (€18,000 × .10) + (€20,000 × .50)…………………………

€13,000

Credit balance in Allowance for Doubtful Accounts before the December 31 entry — (see the T-account in the answer to Req. 2; €9,700 − €2,000)……………………………………………

7,700

Credit entry needed to produce the required credit balance in Allowance for Doubtful Accounts………...

€5,300

Chapter 5

Internal Control, Cash, and Receivables

(continued) P 5-76B Req. 2 Allowance for Doubtful Accounts Dec. 28 Write-offs 2,000 Sept. 30 Balance Dec. 31 Adjusting Dec. 31 Balance

Req. 3 Image Communications Balance Sheet December 31, 20X7 Accounts receivable………………………

Less: Allowance for doubtful accounts.

Accounts receivable, net…………………

20X7 238,000 (13,000) €225,000

Financial Accounting: IFRS 12/e Solutions Manual

9,700 5,300 13,000

(20-30 min.) P 5-77B Req. 1 Journal ACCOUNT TITLES AND EXPLANATION

DATE 20X6 Nov. 30 Note Receivable — New Market……….

Service Revenue…………………….

Dec. 31 Interest Receivable (€60,000 × .0425 × 1/12).

Interest Revenue………………………

20X7 Feb. 28 Cash……………………………………………

Note Receivable — New Market Interest Receivable…………………

Interest Revenue (€60,000 × .0425 × 2/12)……………….

Mar. 1

1

DEBIT CREDIT 60,000 60,000 213 213

60,638 60,000 213 425

Note Receivable — Old Market ………...

Accounts Receivable — Old Market

15,000

Cash…………………………………………….

Financing Expense…………………………..

Note Receivable — Old Market …

14,800 200

15,000

15,000

20X7 Dec. 16 Note Receivable — Stratford Provisions Cash…………………………………….

28,800

Dec. 31 Interest Receivable……………………….

118

Interest Revenue (€28,800 × .10 × 15/365)

Chapter 5

28,800

118

Internal Control, Cash, and Receivables

(continued) P 5-77B Req. 2 BALANCE SHEET Current assets: Note receivable…………………

Interest receivable……………

Financial Accounting: IFRS 12/e Solutions Manual

December 31 20X7 20X6 €28,800 118

€60,000 213

(15-20 min.) P 5-78B Fountain Inc. Cash Budget For the Year Ended December 31, 20X7 Cash balance, beginning

€ 40,000

Budgeted cash receipts: Cash Sales Collections from customers (€480,000 × 0.80) Issue of shares Sale of investment (€120,000 × 1.10) Dividend from investments

Budgeted cash payments: Cash purchase Payment to suppliers (€400,000 × 0.75) Operating expenses (€150,000 × 0.80) Purchases of equipment Payment of dividends Cash available (needed) before financing Budgeted cash balance, ending Cash available for additional investments

Chapter 5

40,000 384,000 500,000 132,000 20,000 1,116,000

€30,000 300,000 120,000 300,000 10,000 (760,000) €356,000 50,000 € 306,000

Internal Control, Cash, and Receivables

Decision Cases (20-30 min.) Decision Case 1 Environmental Concerns, Inc. Bank Reconciliation September 30 BANK: Balance, September 30 Add: Deposit of September 30 in transit

$ 8,324 3,994 12,318

Less: Outstanding checks ($116 + $150 + $853 + $990 + $206 + $145) Adjusted bank balance, September 30

(2,460) $ 9,858

BOOKS: Balance, September 30 Add: Bank collection Less: Service charge NSF check Adjusted book balance, September 30

$10,912 200 11,112 $ 13 41

Adjusted balances do not agree.

(54) $11,058

Based on the above reconciliation, it appears the bookkeeper has stolen $1,200, the difference between the adjusted bank and book amounts ($9,858 − $11,058). He understated the total of outstanding checks by $1,200 to cover his theft. Benz should assign an employee with no cash-handling duties to prepare the bank reconciliation. The bookkeeper should not perform this duty, because a person who handles cash and also prepares the reconciliation can steal cash and manipulate Financial Accounting: IFRS 12/e Solutions Manual

the reconciliation to cover the theft. Perhaps Benz should prepare the reconciliation himself.

Chapter 5

Internal Control, Cash, and Receivables

(15-30 min.) Decision Case 2 The internal control weakness in this case is a lack of separation of duties. The foreman performs too many duties.

1. The foreman hires the workers.

2. The foreman controls workers’ employment documents.

3. The foreman fills out workers’ time sheets and transmits all documents to the home office.

4. The foreman passes out paychecks to workers.

5. The workers never go to the home office, so home-office personnel do not even know whether all workers exist.

The foreman could steal from the company as follows: 1. The foreman could enter a fictitious worker into the payroll system and fill out bogus time sheets for the fictitious employee. Then the foreman could pocket the paycheck written to the employee.

2. The foreman could enter more time than actually worked by an employee and arrange to split the extra pay received by the worker.

3. The foreman could pad his own hours to receive pay for time that he did not work.

Financial Accounting: IFRS 12/e Solutions Manual

(continued) Decision Case 2 The following actions will correct the internal control weakness: 1. The home office could have the construction workers come to the office for processing their employee documents. Then home office would at least know that all the workers exist.

2. Have employees sign their own time sheets.

3. Have a home-office employee compare signatures on the workers’ time sheets to their signatures on file and, occasionally, to their endorsements on the backs of their paychecks.

4. Occasionally — or always — have a home-office employee go to the construction site to pass out paychecks.

5. Have a home-office employee go to the construction site occasionally to “take attendance” of workers on duty that day. Then match the names of workers on duty to the time sheets turned in at the end of the week.

Chapter 5

Internal Control, Cash, and Receivables

(5-10 min) Decision Case 3 Joel’s recommendation seems more appropriate to use in this situation. Having learned of a possible “loss event” about Customer C who is very likely to enter into bankruptcy, he used a combination of aging and specific customer credit information in determining the required allowance of uncollectible accounts at year-end. If only the aging method was used, this possible “loss event” will not be captured even if there is a high possibility of impairment.

Financial Accounting: IFRS 12/e Solutions Manual

Ethical Issue 1 1. The ethical issue: Smith, Godfroy, and Hannaford must decide whether it is ethical for them to not require Sunrise Bank to record the loss in order to keep the bank as a client.

2. The alternatives: Require the client to record the

loss,

or

permit the client not to record the loss.

3. The stakeholders: The auditor, the bank, and the public at large can be affected. The auditor’s reputation is on the line.

The bank’s financial statements are in question. The public can be affected if the bank issues financial statements that include erroneous amounts since these notes receivables are relatively large.

Assess the possible outcomes. If the auditors require the bank to record the loss, the auditor will keep its reputation intact. But the auditor may lose the client and hence lose the revenue from this large client. The accounting firm may then be unable to expand the firm as it had hoped to do.

Chapter 5

Internal Control, Cash, and Receivables

(continued) Ethical Issues If the auditors sanction the bank’s financial statements even after the bank did not record the loss, the auditor would keep the bank as a client, earn the audit revenue, and be able to expand the firm as planned. But the bank’s financial statements would report erroneous amounts for the notes receivable. People relying on the bank’s financial statements may suffer losses as a result. The accounting firm’s reputation may be damaged beyond recovery if the notes eventually go bad and it was discovered that Smith allowed the bank not to record the loss.

4. Make the decision. The auditor should require the bank to record the loss even if that means losing the bank as a client.

By sticking to its belief that the bank should record the loss, the auditors’ reputation will not be harmed as it would by sanctioning financial statements that include errors. It’s far better to lose a client than to lose your reputation.

Financial Accounting: IFRS 12/e Solutions Manual

(continued) Ethical Issues

Ethical Issue 2 1. Identify the ethical issue. Galvin’s ethical issue is whether to use his knowledge of The Salvation Army’s plans and of Nadar’s (or

situation

to

either

party’s

advantage

disadvantage). Should Galvin help The Salvation Army buy the land at the lowest price? Should he help Nadar sell the land at the highest price? Galvin’s position presents him with a conflict of interest.

2. What are the alternatives? There are several: (a) Let other members of the Salvation Army board of directors know of Nadar’s situation in order to help The Salvation Army buy the land at a bargain price. (b) Disclose Nadar’s situation to fellow board members and insist that The Salvation Army pay market price ($2.2 million) for the land. (c) Advise Nadar of The Salvation Army’s plans and encourage her to hold out for a high price on the sale of the land. (d) Reveal nothing to The Salvation Army’s board or to Nadar and take no part in the negotiation between the two parties.

Chapter 5

Internal Control, Cash, and Receivables

(e) Take a temporary leave of absence from The Salvation Army board for unspecified “personal reasons.”

3. Identify the stakeholders involved. Galvin, The Salvation Army, Nadar, and Community Bank.

Assess the possible consequences.

Disclosing Nadar’s

personal difficulties to The Salvation Army board may help The Salvation Army buy the land at a low price, depending on the ethical bearing of fellow board members. This would help The Salvation Army and hurt Nadar, relative to her ability to sell the land at market value of $2.2 million. Insisting that The Salvation Army offer market price for the land would seem fair to both parties, but that would betray the trust of Nadar.

And it may or may not sway the board to go along with a $2.2 million offer for the land.

Making Nadar aware of The Salvation Army’s plans may help Nadar get a higher price for the land than she would get otherwise. This would betray the trust of other members of The Salvation Army’s board.

Remaining silent would preserve Galvin’s integrity. However, if either The Salvation Army or Nadar ever learned of Galvin’s

Financial Accounting: IFRS 12/e Solutions Manual

relationship with the other party, they would wonder whether Galvin used the information against them.

Taking a temporary leave of absence would preserve Galvin’s integrity and remove him from the conflict of interest. It would also preserve Galvin’s reputation for fairness and the reputation

of

Community

Bank

for

keeping

depositor

information confidential.

4. Make the decision. The authors would take the leave of absence and hope other Salvation Army board members do not probe Galvin’s “personal reasons.” This way neither The Salvation Army nor Nadar can accuse Galvin of using inside information to the advantage of the other party.

Chapter 5

Internal Control, Cash, and Receivables

(continued) Ethical Issues

Ethical Issue 3 1. Identify the ethical issue. French’s ethical issue is whether to tell IMS personnel about Snicker Foods’ possible bankruptcy.

2. What are the alternatives? (a)

Keep quiet and let nature take its course, or

(b) Tell IMS’s top managers to warn them of Snicker’s possible bankruptcy.

3. Identify the stakeholders involved. IMS, Snicker Foods, Community Bank, and everyone connected to these organizations — owners, employees, creditors, depositors, and their communities.

Assess

the

possible

consequences.

Telling

IMS

about

Snicker’s possible bankruptcy may help IMS avoid wasted effort on Snicker or worse, exposing IMS to Snicker’s financial difficulties. This may enable IMS to seek more profitable ventures and aid IMS’s recovery. In turn, this may help IMS pay its loan to Community Bank.

Financial Accounting: IFRS 12/e Solutions Manual

4. Make the decision. French should not tell IMS of Snicker’s financial difficulties (after all, Snicker isn’t bankrupt yet).

French should let nature take its course. Then she will protect the bank’s (and her own) reputation for keeping client information confidential. In her aiding IMS through the loanrestructuring process, French may try to help IMS find other customers that can take up the slack if the contract with Snicker doesn’t go through.

Chapter 5

Internal Control, Cash, and Receivables

Focus on Financials: Nestlé (20-30 min.)

Req. 1 (All answers are in CHF millions) Bank Balance, Dec. 31, 2021 + Deposit in transit - Outstanding checks Adjusted bank balance

CHF 7,068 CHF 30 CHF 80 CHF 7,018

Books CHF Balance, 6,988 Dec. 31, 2021 CHF 10 earned + Interest + Bank collections CHF 20 Adjusted book balance

CHF 7,018

Req. 2 “Net” means the amount is the difference between carrying amount of receivable and allowance for expected credit loss.

The receivables presented on the balance sheet is at its net realizable value, that is, the amount that is likely to be collected, rather than how much the company is legally owed.

Nestlé determines its allowance for expected credit loss by applying the IFRS 9 simplified approach to measuring expected credit losses (ECLs) for trade receivables at an amount equal to lifetime ECLs. The ECLs on trade receivables are calculated based on actual credit loss experience over the preceding three Financial Accounting: IFRS 12/e Solutions Manual

to five years on the total balance of noncredit impaired trade receivables, adjusted considering forward looking information where relevant (such as a significant deterioration in the economic environment).

Req. 3 According to the Balance Sheet and footnote 7, the allowance of expected credit loss was CHF 276 million in 2021 and CHF 306 million in 2020. The corresponding accounting entries are as follows.

Loss allowance for bad debt ……………….. CHF 100 million Accounts receivable …………………………….. CHF 100 million Loss on bad debts …………………………………. CHF 70 million Loss allowance for bad debt …………. CHF 70 million

Group Project Student responses will vary.

Chapter 5

Internal Control, Cash, and Receivables

Chapter 6 Inventory and Merchandising Operations Short Exercises (10 min.) S 6-1 Inventory…………………………

Cash…………………………...

$ Millions 7.2 7.2

Accounts Receivable…………. 39.0 Sales Revenue……………….

39.0

Cost of Goods Sold……………

Inventory……………………...

9.6

9.6

Cash……………………………… 38.2 Accounts Receivable……….

Financial Accounting: IFRS 12/e Solutions Manual

38.2

(10-15 min.) S 6-2 1. (Journal entries) Inventory…………………………………..

Accounts Payable…………………….

Amounts Receivable……………………

150,000 150,000 180,000

Sales Revenue………………………...

Cost of Goods Sold……………………..

Inventory ($150,000 × .75)…………..

180,000 112,500

Cash ($180,000 × .40)…………………...

Accounts Receivable………………...

112,500 72,000 72,000

2. (Financial statements) BALANCE SHEET Current assets: Inventory ($150,000 − $112,500)…………

$ 37,500

INCOME STATEMENT Sales revenue………………………………

Cost of goods sold…………………………

$180,000 112,500 $67,500

Gross profit…………………………………

Chapter 6

Inventory and Merchandising Operations

(15-20 min.) S 6-3 a Average Cost Cost of goods sold: Average (26 × $374.70) FIFO $3,240 + (17 × $380) LIFO $9,500 + (1 × $360) Ending inventory: Average (8 × $374.70) FIFO (8 × $380) LIFO (8 × $360)

b

c

FIFO

LIFO

$9742.2 $9,700 $9,860

$ 2,997.6 $3,040 $2,880

Computations: Units sold = (9 + 25 – 8) = 26 Units in ending inventory = 8 Average cost per unit = ($3,240+ $9,500) ÷ (9 + 25) = $374.70 Cost per unit: First purchase = $360 ($3,240 ÷ 9 = $360) Second purchase = $380 ($9,500 ÷ 25 = $380)

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) S 6-4 Hudson’s Photocopying Center Income Statement Year Ended December 31, 20XX Average FIFO LIFO Sales revenue (290 × $23.50) $6,815 $6,815 $6,815 3,205 Cost of goods sold (290 × $11.17*) 3,610 3,239 (46 × $9.75) + (244 × $11.30) 2,570 (290 × $11.30) 3,277 $1,040 3,538 Gross profit 3,576 2,570 Operating expenses 2,570 $ 968 Net income $ 1,006 _____ * Average cost per unit: Beginning inventory (46 @ $10.20)…………….. $ 469.20 Purchases (340 @ $11.30)………………………..

3,842.00 Goods available…………………….……………… $4,311.20 $ 11.17 Average cost per unit $4,311.20 / 386 units..

Chapter 6

Inventory and Merchandising Operations

(10-15 min.) S 6-5 Hudson’s Photocopying Center Income Statement Year Ended December 31, 20XX Sales revenue (290 × $23.50) Cost of goods sold (290 × $11.17*) (16 × $9.75) + (244 × $11.30) (290 × $11.30) Gross profit Operating expenses Income before income tax Income tax expense (35%) *From S 6-4

Financial Accounting: IFRS 12/e Solutions Manual

Average $6,815 3,239 ______ 3,576 2,570 $1,006 $ 352

FIFO $6,815

LIFO $6,815

3,205 ______ 3,610 2,570 $ 1,040 $ 364

3,277 3,538 2,570 $ 968 $ 338

Method to maximize reported income (before tax).

Method to minimize income tax expense.

(5 min.) S 6-6 Managers at Macrodata.com can purchase lots of inventory before year end. Under LIFO, these high inventory costs go directly to cost of goods sold in the current year. As a result, the current year’s net income drops and that saves on income tax. Saving on taxes is one reason companies want to decrease their income.

Student responses may vary.

(5-10 min.) S 6-7 BALANCE SHEET Current assets: Inventories, at market (which is lower than cost)……. $ 48,000 INCOME STATEMENT Cost of goods sold [$470,000 + ($54,000 − $48,000)]…… $476,000

Chapter 6

Inventory and Merchandising Operations

(15-20 min.) S 6-8 DATE:

_____________

TO: Company

Jason Stone, President of Stone Saxophone

FROM:

[Student Name]

SUBJECT: Proposal for Increasing Net Income We can increase net income by not buying our normal quantities of inventory as we make sales. Inventory costs are rising, and the company uses the LIFO inventory method.

Under LIFO, the high cost of our inventory purchases goes straight into cost of goods sold. By slowing our purchases of inventory, we can keep those high costs out of cost of goods sold this year. That will keep net income from going lower and will help net income be as high as possible. Also, our inventory quantities are above normal, so we don’t need to buy a lot of inventory before year end.

Student responses will vary.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) S 6-9 LIFO

1. Matches the most current cost of goods sold against sales revenue.

LIFO

2. Results in an old measure of the cost of ending inventory.

LCM

3. Writes inventory down when replacement cost drops below historical cost.

LIFO

4. Enables a company to buy high-cost inventory at year end and thereby to decrease reported income and income tax.

FIFO

5. Enables a company to keep reported income from dropping lower by liquidating older layers of inventory.

LIFO

6. Generally associated with saving income taxes.

FIFO

7. Results in a cost of ending inventory that is close to the current cost of replacing the inventory.

Specific unit cost

8. Used to account for automobiles, jewelry, and art objects.

Average 9. Provides a middle-ground measure of ending inventory and cost of goods sold.

FIFO

10. Maximizes reported income.

Chapter 6

Inventory and Merchandising Operations

(5-10 min.) S 6-10

Gross profit percentage

=

Dollars in Millions $77,084 − $33,086 $77,084

= 0.571

(5-10 min.) S 6-11 Beginning inventory……………………………... $ 762,000 4,740,000 + Purchases……………………………………….…

5,502,000 = Goods available…………………………………... − Cost of goods sold: Sales revenue………………………. $12,600,000 Less estimated gross profit (60%) (7,560,000) Estimated cost of goods sold………………. (5,040,000) = Estimated cost of ending inventory…………... $ 462,000

Financial Accounting: IFRS 12/e Solutions Manual

(5 min.) S 6-12 Correct Amount (Thousands) a. Net sales (unchanged)………………………………. b. Inventory ($1,440 − $42)…………………………….. c. Cost of goods sold ($3,450 + $42)………………… d. Gross profit ($6,300 − $3,492)………………………

$6,300 $1,398 $3,492 $ 936

(5 min.) S 6-13 1. Last year’s reported gross profit was understated.

Correct gross profit last year was $5.1 million ($3.2 + $1.9).

2. This year’s gross profit is overstated.

Correct gross profit for this year is $3.7 million ($5.6 − $1.9).

Chapter 6

Inventory and Merchandising Operations

(5-10 min.) S 6-14 1. Ethical. There is nothing wrong with buying inventory whenever a company wishes.

2. Unethical. The company falsified its ending inventory in order to cheat the government (and the people) out of taxes.

3. Unethical. The company falsified its purchases, cost of goods sold, and net income in order to cheat the government (and the people) out of income tax.

4. Unethical. The company falsified its ending inventory and net income.

5. Ethical. Same analysis as 1.

Financial Accounting: IFRS 12/e Solutions Manual

Exercises Group A

(15-20 min.) E 6-15A Req. 1 Perpetual System 1. Purchases: Inventory…………………….……….…

Accounts Payable………………….

96,000

2. Sales: Cash ($154,000 × .25)…….…………

Accounts Receivable ($154,000 × .75).

Sales Revenue…………….……….

38,500 115,500

Cost of Goods Sold…………………..

Inventory………………….………....

96,000

154,000 82,000 82,000

Req. 2

BALANCE SHEET Current assets: Inventory………………………………. $ 32,000 INCOME STATEMENT Sales revenue……………………………. $154,000 Cost of goods sold………………………

82,000 Gross profit………………………………. $72,000

Chapter 6

Inventory and Merchandising Operations

(15-25 min.) E 6-16A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

1 Inventory ($1,320 + $4,320).………….. 5,640 Accounts Payable…………………...

5,640

2 Accounts Receivable (24 × $520)…..

12,480 Sales Revenue……………………….

12,480

Cost of Goods Sold……………………. 4,000* Inventory………………………………

4,000

_____ *(10 × $160) + (8 × $165) + (6 × $180) = $4,000 Req. 3 Sales revenue…………………………... $12,480 Cost of goods sold……………………..

4,000 Gross profit……………………………... $8,480 Ending inventory ($1,600 + $1,320 + $4,320 − $4,000) $3,240** **Or, (18 × $180) = $3,240

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 6-17A 1.

Begin. Bal. Purchases

(10 units × $160) 1,600

Dec. 15 26 Ending bal.

(8 units × $165) 1,320 Cost of goods sold (24 units × $180) 4,320 (24 units × $?) ?

(18 units × $?)

Inventory

Cost of Goods Sold

?

Ending Inventory

(a) Specific unit cost (4 × $160) + (8 × $165) + = $4,120 (6 × $160) + (12 × $180) = $3,120

(12 × $180) (b) Average cost

24 × $172*

= $4,128

18 × $172*

= $3,096

_____ *Average cost per unit (c) FIFO

(d) LIFO

=

($1,600 + $1,320 + $4,320) (10 + 8 + 24)

= $4,000 (10 × $160) + (8 × $165) + (6 × $180) (24 × $180) =

$4,320

=

$172

(18 × $180)

= $3,240

$165) (10 × $160) + (8 × = $2,920

2. LIFO produces the highest cost of goods sold, $4,320.

FIFO produces the lowest cost of goods sold, $4,000.

The increase in inventory cost from $160 to $180 per unit causes the difference in cost of goods sold.

Chapter 6

Inventory and Merchandising Operations

(10 min.) E 6-18A Cost of goods sold: LIFO ($4,320) − FIFO ($4,000)…………………… × Income tax rate……………………………………

LIFO advantage in tax savings………………………

$320 .35 $ 112

(15 min.) E 6-19A 1. a. FIFO Cost of goods sold: (18 × $34)… ……………...............

Ending inventory: (3 × $34) + (6 × $65)……………... b. LIFO Cost of goods sold: (6 × $65) + (9 × $34)….................

Ending inventory: (9 × $34)……………......................

$612 $ 492

$696 $ 306

Req. 2 MusicSheet.net Income Statement Month Ended April 30, 20XX Sales revenue (18 × $122) …………………………..

Cost of goods sold…………………………………….

Gross profit……………………………………………..

Operating expenses…………………………………...

Income before income tax……………………………

Income tax expense (32%)……………………………

Net income………………………………………………

Financial Accounting: IFRS 12/e Solutions Manual

$2,196 612 1,584 280 1,304 417 $ 887

(15 min.) E 6-20A Millions 1. Gross profit: Sales revenue……………………………

Cost of goods sold FIFO: 600,000 × $5…………………..

LIFO: (500,000 × $3) + (100,000 × $4)…

Gross profit………………………………

FIFO $5.2

LIFO $5.2

3.0

$2.2

1.9 $3.2

2. Gross profit under FIFO and LIFO differ because inventory costs decreased during the period.

3. Valuing the ending inventory at $5.00 per unit will, result in an ending inventory valued at $4,500,000 (900,000 @ $5) while the FIFO inventory was valued at $3,300,000 (500,000 @ $3) + (200,000 @ $4) + (200,000 @ $5). This would amount to changing the method of accounting for inventories from FIFO to LIFO. The difference of $1,200,000 between the ending inventories would reduce cost of goods sold by $1,200,000 and increase net income by the same amount.

While

accounting changes like this are permissible under GAAP, they must be for a business purpose, and not merely to increase the manager’s bonus. The company’s auditors will likely In addition, view the such change a change unfavorably. will likely increase the company’s tax bill, so it is unlikely that the owners of the company will go along with it either.

Chapter 6

Inventory and Merchandising Operations

(5-10 min.) E 6-21A Blue Rose Garden Supply Income Statement (partial) Year Ended July 31, 20X6 Sales revenue ……………………………………………… $322,000 Cost of goods sold [$152,000 + ($36,000 − $29,600)].

158,400 Gross profit………………………………………………… $ 163,600

Note: Cost is used for beginning inventory because cost is lower than market. Market (replacement cost) is used for ending inventory because market is lower than cost at year end.

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) E 6-22A a. b. c. d. c. e. f. g. h.

(Amounts in thousands) $ 67 $21 + $65 − $19 = $67 $ 58 $125 − $67 = $58 Must first solve for d $ 94 $138 − $44= $94 $ 95 $26 + c − $94 = $27; c = $95 $ 98 $60 + $38 = $98 $ 27 f + $65 − $32 = $60; f = $27 $11 + $32 − g = $38; g = $5 $ 5 $94 − $38 = $56 $ 56

Chris Company Income Statement Year Ended December 31, 20X6 (Thousands) Net sales $ 125 Cost of goods sold Beginning inventory $ 21 Net purchases 65 Goods available 86 Ending inventory (19) Cost of goods sold 67 58 Gross profit 42 Operating and other expenses $16 Net income (Net loss)

Chapter 6

Inventory and Merchandising Operations

(20-30 min.) E 6-23A Company Chris

Gross Profit Percentage $58

= 0.464

$125 Ford

$44

= 0.319

$138 Arthur

$38

= 0.388

$98 Michaels

$56

= 0.596

$94 Michaels has the highest gross profit percentage, 59.6%.

Based on these data, Michaels looks the most profitable because Michaels gross profit percentage is approximately 1½ times the other companies’ gross profit percentage.

Financial Accounting: IFRS 12/e Solutions Manual

(15 min.) E 6-24A Req. 1 and 2

Gross profit percentage =

1 FIFO $444,000 − $247,500 $444,000 = 0.443

2 LIFO $444,000 − $294,600 $444,000 = 0.336

Req. 3 FIFO makes the company look better on the gross profit percentage.

Chapter 6

Inventory and Merchandising Operations

(10-15 min.) E 6-25A

Year ended January 31, 20X5

Millions

Budgeted cost of goods sold ($6,700 × 1.10)………..

$7,370

Budgeted ending inventory……………………………..

2,500

Budgeted goods available………….……………………

9,870

Actual beginning inventory……………………………..

(2,200)

Budgeted purchases……………………………………..

$7,670

(10-15 min.) E 6-26A

Beginning inventory………………………

Net purchases………………………………

Goods available……….…………………...

Estimated cost of goods sold: Net sales revenue……………………… $ 64,000 Less estimated gross profit of 35%…

(22,400) Estimated cost of goods sold………...

Estimated cost of inventory destroyed..

$ 48,500 32,900 81,400

41,600 $ 39,800

Another reason managers use the gross profit method to estimate ending inventory is to test the reasonableness of ending inventory.

Financial Accounting: IFRS 12/e Solutions Manual

10-15 min.) E 6-27A

Mighty Sea Marine Supply Income Statement (Corrected) Years Ended September 30, 20X6 and 20X5 20X6 20X5 Sales revenue $143,000 $120,000 Cost of goods sold: Beginning inventory $22,000* $ 9,000 67,000 Net purchases 74,000 76,000 Goods available 96,000 (19,000) Ending inventory (22,000)* Cost of goods sold 77,000 54,000 66,000 66,000 Gross profit 28,000 24,000 Operating expenses $ 38,000 $ 42,000 Net income

*$14,500 + $7,500 = $22,000

Mighty Sea actually performed poorly in 20X6, compared to 20X5, with net income down from $42,000 to $38,000, despite the increase in sales revenue.

Chapter 6

Inventory and Merchandising Operations

Exercises Group B

(15-20 min.) E 6-28B Req. 1 Perpetual System 1. Purchases: Inventory…………………….……….…

Accounts Payable………………….

90,000 90,000

2. Sales: Cash (€144,000 × .24)…….…………

34,560 Accounts Receivable (€144,000 × .76). 109,440 Sales Revenue…………….……….

144,000 Cost of Goods Sold…………………..

Inventory………………….………....

80,000

Req. 2

BALANCE SHEET Current assets: Inventory………………………………. € 38,000 INCOME STATEMENT Sales revenue……………………………. € 144,000 Cost of goods sold………………………

80,000 Gross profit………………………………. € 64,000

Financial Accounting: IFRS 12/e Solutions Manual

80,000

(15-25 min.) E 6-29B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

1 Inventory (€1,500 + €4,160).………….. 5,660 Accounts Payable…………………...

5,660

2 Accounts Receivable (32 × €640).….. 20,480 Sales Revenue……………………….

20,480

Cost of Goods Sold……………………. 4,860* Inventory………………………………

4,860*

_____ *(26 × €150) + (6 × €160) = €4,860 Req. 3 Sales revenue…………………………... $20,480 Cost of goods sold……………………..

4,860 Gross profit……………………………... $15,620 Ending inventory (€2,400 + €1,500 + €4,160 − €4,860)..

$3,200**

**Or, (20 × €160) = €3,200

Chapter 6

Inventory and Merchandising Operations

(10-15 min.) E 6-30B 1.

Begin. Bal. Purchases

Inventory (16 units× 150) 2,400

May 15 26 Ending bal.

(10 units € 150) 160) (26 units (20 units × ?)

1,500 4,160 ?

Cost of goods sold ?

(32 units × €?)

€ Cost of Goods Sold × €

Ending Inventory

(a) Specific × unit cost (18 × €150) + (14 × €160) = €4,940 (8 × €150) + (12 × €160) = €3,120

€

(b) Average cost

32 × €155*

= €4,960

20 × €155*

= €3,100

_____ *Average cost per unit

=

(€2,400 + €1,500 + €4,160)

=

€155

(16 + 10 + 26) (c) FIFO

(d) LIFO

(26 × (26 $150) + (6 + × = €160) × $160) (6 × €150)

€4,860

(20 × €160)

= €3,200

=

€5,060

(20 × €150)

= €3,000

2. LIFO produces the highest cost of goods sold, €5,060.

FIFO produces the lowest cost of goods sold, €4,860.

The increase in inventory cost from €150 to €160 per unit causes the difference in cost of goods sold.

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) E 6-31B Cost of goods sold: LIFO (€5,060) − FIFO (€4,860)………………………… × Income tax rate………………………………………..

LIFO advantage in tax savings…………………………..

€200 .38 € 76

(15 min.) E 6-32B 1. a. FIFO Cost of goods sold: (14 × €38) ……………...................

Ending inventory: (3 × €38) + (5 × €68)……………..

€532

b. LIFO Cost of goods sold: (5 × €68) + (9 × €38)……………..

Ending inventory: (8 × €38) …………….....................

€682

€454

€304

2.

MusicLife.net Income Statement Month Ended April 30, 20X6 Sales revenue (9 × €106) + (5 × €92)…………….

Cost of goods sold…………………………………….

Gross profit……………………………………………..

Operating expenses…………………………………...

Income before income tax……………………………

Income tax expense (30%)……………………………

Net income………………………………………………

Chapter 6

€1,414 532 882 430 452 136 € 316

Inventory and Merchandising Operations

(15 min.) E 6-33B 1. Gross profit: Sales revenue…………………………….

Cost of goods sold FIFO: 1,300,000 × €9………………

LIFO: (600,000 × €7) + (100,000 × €8) + (600,000 × €9) Gross profit………………………………………

Millions FIFO LIFO €14.1 €14.1 11.7

€2.4

10.4 €3.7

2.Gross profit under FIFO and LIFO differ because inventory costs decreased during the period.

3. Valuing the ending inventory at €9.00 per unit will result in an ending inventory valued at €8,100,000 (900,000 × €9) while the FIFO inventory was valued at €6,800,000 (200,000 × €9) + (100,000 × €8) + (600,000 × €7). The difference of €1,300,000 between the ending inventories would reduce cost of goods sold by 1,300,000 € and increase net income by the same amount.

While accounting changes like this are permissible under GAAP, they must be for a business purpose, and not merely to increase the manager’s bonus. The company’s auditors will likely view the change unfavorably. In addition, such a change will likely increase the company’s tax bill, so it is unlikely that the owners of the company will go along with it either.

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) E 6-34B

Magnolia Garden Supply Income Statement (partial) Year Ended May 31, 20X6 Sales revenue ……………………………………………… €304,000 Cost of goods sold [€126,000129,800 + (€30,600 − €26,800)].

Gross profit………………………………………………… € 174,200

Note: Cost is used for beginning inventory because cost is lower than market. Market (replacement cost) is used for ending inventory because market is lower than cost at year end.

Chapter 6

Inventory and Merchandising Operations

(15-20 min.) E 6-35B

a. b. c. d. c. e. f. g. h.

(Amounts in thousands) € 65 €18 + €64 − €17 = €65 € 56 €121 − €65 = €56 Must first solve for d € 87 €135 − €48 = €87 € 89 €26 + c − €87 = €28; c = €89 € 93 €61 + €32 = €93 € 27 f + €56 − €22 = €61; f = €27 €8 + €33 − g = €36; g = €5 € 5 €89 − €36 = €53 € 53

Frank Company Income Statement Year Ended December 31, 20X6 (Thousands) Net sales € 121 Cost of goods sold Beginning inventory € 18 Net purchases 64 Goods available 82 Ending inventory (17) Cost of goods sold 65 56 Gross profit 48 Operating and other expenses €8 Net income (Net loss)

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) E 6-36B

Company Frank

Gross Profit Percentage €56

= 0.463

€121 Hill

€48

= 0.356

€135 Fort

€32

= 0.344

€93 Orville

€53

= 0.596

€89 Orville has the highest gross profit percentage, 59.6%.

Based on these data, Orville looks the most profitable because Ogden’s gross profit percentage is greater than 1 ½ times the other companies’ gross profit percentage.

Chapter 6

Inventory and Merchandising Operations

(15 min.) E 6-37B Req. 1 and 2

Gross profit percentage =

1 FIFO €290,000 − €175,000 €290,000

2 LIFO €290,000 − €190,400 €290,000 = 0.343

= 0.397

Req. 3 FIFO makes the company look better on the gross profit percentage.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 6-38B

Year ended January 31, 20X6:

Millions

Budgeted cost of goods sold (€6,400 × 1.10)…

€7,040

Budgeted ending inventory………………………

2,200

Budgeted goods available………….………………

9,240

Actual beginning inventory…………………………

(1,900)

Budgeted purchases……………………………………..

€7,340

Chapter 6

Inventory and Merchandising Operations

(10-15 min.) E 6-39B Beginning inventory………………………

Net purchases………………………………

Goods available……….…………………...

Estimated cost of goods sold: Net sales revenue……………………… €68,400 Less estimated gross profit of 40%… (27,360) Estimated cost of goods sold………...

Estimated cost of inventory destroyed..

€ 45,700 39,100 84,800

41,040 € 43,760

Another reason managers use the gross profit method to estimate ending inventory is to test the reasonableness of ending inventory.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 6-40B Friendly Harbor Marine Supply Income Statement (Corrected) Years Ended September 30, 20X6 and 20X5 20X6 20X5 Sales revenue €139,000 €121,000 Cost of goods sold: Beginning inventory €19,800* €12,000 Net purchases 74,000 69,000 81,000 Goods available 93,800 (18,500) Ending Cost of inventory goods sold (19,800)* Gross profit Operating expenses Net income

75,300 63,700 26,000 € 37,700

61,200 59,800 19,000 €40,800

*€13,000 + €6,800 = $19,800

Friendly Harbor actually performed poorly in 20X6, compared to 20X5, with net income down from €40,800 to €37,700, despite the increase in sales revenue.

Chapter 6

Inventory and Merchandising Operations

Challenge Exercises (5-10 min.) E 6-41 a.

Use average cost.

b.

Use FIFO.

c.

Use FIFO.

d.

Use any method. They all produce the same results because costs are stable.

e.

Buy inventory late in the year.

f.

Company is using LIFO.

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) E 6-42 Sales increased, the gross profit dropped, and net income slid into a net loss, as shown here: Dollars in millions

20X6

20X5

20X4

Sales Cost of sales Gross profit

$36.2 28.6 7.6

$35.8 27.7 8.1

$34.3 26.8 7.5

Net income (net loss)

(0.4)

0.2

0.7

Gross profit percentage =

$7.6 $36.2

= 0.210

$8.1 $35.8

= 0.226

$7.5 $34.3

= 0.219

The gross profit percentage dropped during this period. This suggests that L Mart had to discount its merchandise more and more just to sell the goods. The end result was a net loss in 20X6.

Selling expenses increased significantly, which suggests that L Mart had to advertise heavily in order to sell its inventory.

Chapter 6

Inventory and Merchandising Operations

Quiz Q6-43 Q6-44 Q6-45 Q6-46 Q6-47 Q6-48 Q6-49 Q6-50 Q6-51 Q6-52 Q6-53 Q6-54 Q6-55 Q6-56

c d a c b a a d a c

Q6-57 Q6-58 Q6-59

b a b

b c d c

($3,500 + $6,300 − $5,400 = $4,400) ($7,600 − $5,400 = $2,200) (1,100 @ $15.00 + 1,300 @ $15.20 = $36,260) (1,300 @ $15.20 + 200 @ $15 = $22,760) ($154,000 + $213,000 = $367,000)

[$632,000 − ($68,000 + $480,000 − $45,000) = $129,000] ($26,000 + X − $14,000 = $103,000; X = $91,000) [$330,000 ÷ ($29,000 + $34,000) / 2] = 10.5 times Net sales = $453,000 ($460,000 − $7,000) COGS = $57,000 + ($215,000 + $24,000 − $4,800 − $6,200) − $48,000 = $237,000 = ($453,000 − $237,000) / $453,000 GP% = .477 $50,000 + $74,000 − $96,000 (1 − .50) = $76,000

Financial Accounting: IFRS 12/e Solutions Manual

Problems Group A

(20-30 min.) P 6-60A Req. 1 Inventory……………………………………. 8,107,000 Accounts Payable………………………

8,107,000

Accounts Payable…………………………. 7,907,000 Cash……………………………………….

7,907,000

Cash…………………………………………. 4,800,000 Accounts Receivable……………………... 9,900,000 Sales Revenue…………………………..

14,700,000

Cost of Goods Sold (150,000 × $55.77*). 8,365,500 Inventory………………………………….

8,365,500 _____ *($1,150,000 + $8,107,000) ÷ (23,000 + 31,000 + 51,000 + 61,000) = $55.77

Operating Expenses………………………. 3,550,000 Cash ($3,550,000 × .70)………………...

Accrued Liabilities ($3,550,000 × .30).

2,485,000 1,065,000

Income Tax Expense………………………

835,350 Income Tax Payable……………………

835,350 [($14,700,000 − $8,365,500 − $3,550,000)] × .30 = $835,350

Chapter 6

Inventory and Merchandising Operations

(continued) P 6-60A Req. 2

Beg. bal.

Purchases End. bal.

Inventory 1,150,000 8,107,000 COGS 891,500

8,365,500

Req. 3 Nice Buy Income Statement Year Ended February 28, 20X6 Sales revenue ……………………………… $ 14,700,000 Cost of goods sold………………………..

8,365,500 Gross profit…………………………………

6,334,500 Operating expenses……………………….

3,550,000 Income before tax………………………….

2,784,500 Income tax expense (30%)……………….

835,350 Net income…………………………………. $ 1,949,150

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) P 6-61A Req. 1 The store uses FIFO. This is apparent from the flow of costs out of inventory. For example, the October 11 sale shows unit cost of $35, which came from the beginning inventory. This is how FIFO, and only FIFO, works.

Req. 2 Cost of goods sold: 39 117 15 120

× × × ×

$35 35 36 36

= = = =

$ 1,365 4,095 540 4,320 $10,320

Sales 13 + 117 = 156 units × $70

= $10,920

$20,505 15 + 120 = 135 units × $71 = 9,585 Cost of goods sold………………………………………. 10,320 Gross profit……………………………………………….. $10,185 Req. 3 Cost of October 31 inventory (117* × $36) + (72 × $37). $6,876 *Goods remaining from Oct 8 purchase: 252 units - 15 - 120 = 117

Chapter 6

Inventory and Merchandising Operations

(20-30 min.) P 6-62A Req. 1

Begin. bal.

Purchases: Oct. 4 19 25 Ending bal.

Inventory (78 units × $19) 1,482

(99 units × $20) 1,980 (155 units × $22) 3,410 Cost of goods sold (48 units × $23) (334 units × $?)

1,104 (46 units × $?) ?

Cost of Goods Sold Average cost 334 × $20.9895* = $7,010 ____ *Average cost per unit

FIFO

=

LIFO

Ending Inventory 46 × $20.9895*

($1,482 + $1,980 + $3,410 + $1,104) (78+ 99 + 155 + 48)

(78 × $19) + (99 × $20) + (155 × $22) + (2 × $23) = $ 6,918

?

= $966 = $20.9895

(46 × $23)

= $1,058

(48 × $23) + (155 × $22) + (99 × $20) + (32 × $19) = $7,102 (46 × $19)

= $874

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 6-62A Req. 2 LIFO results in the highest cost of goods sold because (a) the company’s prices are rising and (b) LIFO assigns to cost of goods sold the cost of the latest inventory purchases. When costs are rising, these latest inventory costs are the highest, and that makes cost of goods sold the highest under LIFO.

Student responses may vary.

Req. 3 Fatigues Surplus Income Statement Month Ended October 31, 20X6 Sales revenue (334 × $52)………………………..

Cost of goods sold………………………………..

Gross profit…………………………………………

Operating expenses………………………………

Income before income taxes…………………….

Income tax expense (40%)……………………….

Net income………………………………………….

Chapter 6

$17,368 7,010 10,358 5,400 4,958 1,983 $ 2,975

Inventory and Merchandising Operations

(30-40 min.) P 6-63A Req. 1 (partial income statements)

Sales revenue Cost of goods sold Gross profit

Eagle Aviation Income Statement Year Ended December 31, 20X6 AVERAGE FIFO $66,224 $66,224 36,625 36,343 $ 29,599 $ 29,881

LIFO $66,224 36,777 $ 29,447

Computations of cost of goods sold: Average cost = per unit

($3,042 + $1,225 + $33,858 + $2,484) (390 + 155 + 4,180 + 270)

=

$8.1298

COGS at average cost = 4,505 × $8.1298

=

$36,625

FIFO COGS

= (390 × $7.80) + (155 × $7.90) + (3,960 × $8.10)

=

$36,343

LIFO COGS

= (270 × $9.20) + (4,180 × $8.10) + (55 × $7.90)

=

$36,777

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 6-63A Req. 2 Use the LIFO method to minimize income tax because cost of goods sold is highest (gross profit is lowest) under LIFO when inventory costs are rising.

Chapter 6

Inventory and Merchandising Operations

(15-30 min.) P 6-64A Everything Trade Mart should apply the lower-of-cost-or-market rule to account for inventories. The current replacement cost of ending inventory is less than Everything’s actual cost, so Everything Trade Mart must write the inventory down to current replacement cost, with the following journal entry: Cost of Goods Sold………………

Inventory………………………...

To write inventory down to NRV.

78,000 78,000

Everything should report the following amounts in its financial statements: BALANCE SHEET

Inventory at market (which is lower than cost of $210,000)………………………………...

INCOME STATEMENT Cost of goods sold ($750,000 + $78,000)…… _____ *$210,000 − $78,000 = $132,000

$132,000*

$828,000

Reliability qualitative characteristic is the reason to account for inventory at the lower of cost or NRV. Not revaluing the inventory to the lower NRV lends biasness to the ending inventory which violates the reliability requirement.

The Matching principle (from Chapter 3: Accrual Accounting & Income) requires costs/losses to be recorded in the period in which they contributed to revenue/gains. Since the impairment in inventory occurred during this accounting period, not recording the impairment would mean a misstatement of both this year’s and the subsequent year’s net income.

Student responses may vary.

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) P 6-65A Req. 1

Sprinkle Top, Inc. Millions

Coffee Shop Corp.

Millions

$554 487 $ 67

$7,720 3,170 $4,550

Gross profit percentage: Sales…………………….

Cost of sales…………...

Gross profit…………….

Gross profit

$67

percentage:

$554

= 12.1%

$4,550

= 58.9%

$7,720

Req. 2 From these statistics, it’s hard to tell whether Sprinkle Top or Coffee Shop is more profitable. To adequately evaluate profitability, we will need to also consider the companies’ selling, general, and administrative expenses.

Chapter 6

Inventory and Merchandising Operations

(25-30 min.) P 6-66A Req. 1 (estimate of ending inventory by the gross profit method) Beginning inventory……………………... $ 114,400 $980,800 Purchases………………………………….

(22,200) Less: Purchase discounts………….

(141,600) Purchase returns……………...

Net purchases………………………….

817,000 Goods available…………………………..

931,400 Cost of goods sold: Sales revenue………………………….. $1,336,000 (23,000) Less: Sales returns…………………

1,313,000 Net sales…………………………….…..

(525,200) Less: Estimated gross profit of 40%.

Estimated cost of goods sold……….

787,800 $ 143,600 Estimated cost of ending inventory…...

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 6-66A Req. 2 (income statement through gross profit) Ultron Company Income Statement (partial) Month of October, 20X6 Sales revenue……………………………….

Less: Sales returns……………………..

Net sales revenue……………………….

Cost of goods sold…………………………

Gross profit…………………………….…… _____ *Cost of goods sold: Beginning inventory…………………………...

Purchases………………………. $980,800 Less: Purchases discounts...

(22,200) (141,600) Purchase returns……..

Net purchases…………………………………..

Cost of goods available for sale…………….

Less: Estimated ending inventory………….

Cost of goods sold…………………………….

Chapter 6

$1,336,000 (23,000) 1,313,000 787,800* $525,200

$ 114,400

817,000 931,400 (143,600) $787,800

Inventory and Merchandising Operations

(20-25 min.) P 6-67A Req. 1 Cost of sales, budgeted ($720,000 × 1.08)… $ 777,600 + Ending inventory, budgeted………………….

78,000 = Cost of goods available……………………….

855,600 − Beginning inventory…………………………..

(68,000) = Purchases, budgeted ………………………… $ 787,600

Req. 2 Grammy’s Convenience Store Budgeted Income Statement Year Ended December 31, 20X5 Sales ($957,000 × 1.08)……………………….… $1,033,560 Cost of sales ($720,000 × 1.08)………………

777,600 Gross profit……………………………………

255,960 Operating expenses ($114,000 − $16,040)…

97,960 Net income…………………………………….… $158,000

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) P 6-68A Req. 1 (corrected income statements) R. B. Video Sales Income Statement (adapted; amounts in millions) Years Ended 20X6, 20X5, and 20X4 20X6 20X5 Net sales revenue……………... $43 $40 Cost of goods sold: Beginning inventory……….. $ 9* $ 8* Purchases……………………

29 27 Goods available……………..

38 35 Ending inventory……………

(7) (9)* Cost of goods sold…………

31 26 12 14 Gross profit……………………..

7 7 Operating expenses.. …………. $5 $7 Net income………………………

20X4 $37 $4 25 29 (8)*

*Throughout the period from year end 20X4 to year beginning 20X6, inventory was understated by $3 million.

Chapter 6

Inventory and Merchandising Operations

21 16 7 $9

(continued) P 6-68A Req. 2 The corrections did not change total net income over the threeyear period. But the corrections drastically altered the trend of net income — from an increasing pattern to a decreasing pattern.

Req. 3 The shareholders will not be happy with a declining trend of net income because the company is losing ground with its profits.

Financial Accounting: IFRS 12/e Solutions Manual

Problems Group B

(20-30 min.) P 6-69B Req. 1 Inventory……………………………………

Accounts Payable……………………

9,782,000

Accounts Payable………………………

Cash………………………………………

9,492,000

9,782,000

9,492,000

5,400,000 Cash…………………………………………

Accounts Receivable……………………… 10,084,000 Sales Revenue………………………….

15,484,000

Cost of Goods Sold………………………... 10,191,000* Inventory………………………………

10,191,000 *(€990,000 + €9,782,000) ÷ (18,000 + 33,000 + 53,000 + 63,000) = €64.50 €64.50 x 158,000 = €10,191,000 Operating Expenses……………………

Cash (€2,860,000 × 0.70)……………

Accrued Liabilities (€2,860,000 × 0.30).

2,860,000 2,002,000 858,000

Income Tax Expense……………………….

851,550 Income Tax Payable…………………

851,550 [(€15,484,000 − €10,191,000 − €2,860,000) × .35 = €851,550]

Chapter 6

Inventory and Merchandising Operations

(continued) P 6-69B Req. 2

Beg. bal.

Purchases End. bal.

Inventory 990,000 9,782,000 COGS 581,000

10,191,000

Req. 3 Best Guy Income Statement Year Ended February 28, 20X6 Sales revenue …………………………… €15,484,000 Cost of goods sold……………………..

10,191,000 Gross profit………………………………

5,293,000 Operating expenses……………………

2,860,000 Income before tax………………………

2,433,000 Income tax expense (35%)…………….

851,550 Net income………………………………. € 1,581,450

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) P 6-70B Req. 1 The store uses FIFO. This is apparent from the flow of costs out of inventory. For example, the March 11 sale shows a unit cost of $38, which came from the beginning inventory. This is how FIFO, and only FIFO, works.

Req. 2 Cost of goods sold: 36 × €38 60 × 38 24 × 39 74 × 39

= = = =

€ 1,368 2,280 936 2,886 €7,470

Sales

36 + 60 = 96 units × €66 = €6,336 €13,098 24 + 74 = 49 units × €69 = €6,762 Cost of goods sold…………………………………….

(7,470) Gross profit……………………………………………... €5,628 Req. 3 Cost of March 31 inventory (56 × €39 + 34 x €40) =

€3,544

*Goods remaining from Oct 8 purchase: 154 - 24 - 74 = 56

Chapter 6

Inventory and Merchandising Operations

(20-30 min.) P 6-71B Req. 1 Inventory (69 units × €24) 1,656

Begin. bal.

Purchases: July 4 (108 units × €26) 2,808 12 (153 units × €28) 4,284 Cost of goods sold 25 (38 units × €29) 1,102 (316 units × €?)

Ending bal. (52 units × €?) ?

Cost of Goods Sold

Ending Inventory

Average cost 316 × €26.7663* €8,458 52× €26.7663* ____ (€1,656 + €2,808 + €4,284 + €1,102) *Average cost per unit

FIFO

=

(69 + 108 + 153 + 38)

(69 × €24) + (108 × €26) = €8,356 + ( 139 × €28)

LIFO (38 × €29) + (153 × €28) + = €8,602 ( 108 × €26) + (17 × €24)

Financial Accounting: IFRS 12/e Solutions Manual

?

€1,392 =

€26.7663

(14 × €28) + (38 × €29) = €1,494

52 × €24

= €1,248

(continued) P 6-71B Req. 2 LIFO cost of goods sold is highest because (a) prices are rising and (b) LIFO assigns to cost of goods sold the cost of the latest inventory purchases. When costs are rising, these latest inventory costs are the highest, and that makes cost of goods sold the highest under LIFO.

Student responses may vary.

Req. 3 Swat Team Surplus Income Statement Month Ended July 31, 20X6 Sales revenue (316 × €55)……………………..

Cost of goods sold………………………………..

Gross profit…………………………………………

Operating expenses………………………………

Income before income taxes…………………….

Income tax expense (32%)……………………….

Net income………………………………………….

Chapter 6

€17,380 8,458 8,922 3,500 5,422 1,735 € 3,687

Inventory and Merchandising Operations

(30-40 min.) P 6-72B Req. 1 (partial income statements

Sales revenue Cost of goods sold Gross profit

Green Aviation Income Statement Year Ended December 31, 20X6 AVERAGE FIFO €64,113 €64,113 36,567 36,302 € 27,546 € 27,811

LIFO €64,113 36,819 € 27,294

Computations of cost of goods sold: Average cost = per case

(€2,775 + €1,248 + €33,939 + €2,412) (370 + 160 + 4,190 + 265)

=

€8.0990

COGS at average cost = 4,515 × €8.0990

=

€36,567

FIFO COGS

= (370 × €7.50) + (160 × €7.80) + (3,985 × €8.10)

=

€36,302

LIFO COGS

= (265 × €9.10) + (4,190 × €8.10) + (60 × €7.80)

=

€36,819

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 6-72B Req. 2 Use FIFO to report the highest net income because cost of goods sold is lowest (gross profit is highest) under FIFO when inventory costs are rising.

Chapter 6

Inventory and Merchandising Operations

(15-20 min.) P 6-73B Ariel Trade Mart should apply the lower-of-cost-or-market rule to account for inventories. The current replacement cost of ending inventory is less than Ariel Trade Mart’s actual cost, so Ariel Trade Mart must write the inventory down to current replacement cost, with the following journal entry: Cost of Goods Sold…………

72,000 Inventory…………………...

To write inventory down to NRV.

72,000

Ariel Trade Mart should report the following in its financial statements: BALANCE SHEET Inventory, at market (which is lower than cost of €270,000)……………………………………...

€198,000*

INCOME STATEMENT Cost of goods sold (€830,000 + €72,000)………

€902,000

*€270,000 − €72,000 = €198,000

Faithful representation qualitative characteristic is the reason to account for inventory at the lower of cost or NRV. Not revaluing the inventory to the lower NRV lends a biasness to the ending inventory which violates the reliability requirement.

The Matching principle (from Chapter 3: Accrual Accounting & Income) requires costs to be recorded in the period in which they contributed to gains. Since the impairment occurred during this period, not recording it would mean a misstatement of both this year’s and the subsequent year’s net income.

Student responses may vary.

Financial Accounting: IFRS 12/e Solutions Manual

(20-25 min.) P 6-74B Req. 1 Pastry People, Coffee Grind Inc. Corp.

Dollars in Millions Gross profit percentage: Sales……………………

Cost of goods sold….

Gross profit……………

$558 486 $ 72

Gross profit

$72

percentage:

$558

$7,270 3,290 $3,980

= 12.9%

$3,980

= 54.7%

$7,270

Req. 2 From these statistics, it is hard to tell whether Pastry People or Coffee Grind is more profitable. To adequately evaluate profitability, we will need to also consider the companies’ selling, general, and administrative expenses.

Chapter 6

Inventory and Merchandising Operations

(25-30 min.) P 6-75B Req. 1 (estimate of ending inventory by the gross profit method) Beginning inventory………………………

Purchases………………………………….. €981,600 (24,400) Less: Purchase discounts…………..

Purchase returns……………… (140,400) Net purchases…………………………...

Goods available……………………………

Cost of goods sold: Sales revenue…………………………… €1,330,000 Less: Sales returns………………….

(33,000) Net sales…………………………………. 1,297,000 Less: Estimated gross profit of 45%.. (583,650) Estimated cost of goods sold………...

Estimated cost of ending inventory……

Financial Accounting: IFRS 12/e Solutions Manual

€115,400

816,800 932,200

713,350 €218,850

(continued) P 6-75B Req. 2 (income statement through gross profit) Thanos Company Income Statement (partial) For the Period Up to the Fire Sales revenue………………………….. €1,330,000 Less: Sales returns…………………

(33,000) Net sales revenue…………………...

1,297,000 Cost of goods sold…………………….

713,350* Gross profit…………………………….. €583,650 _____ *Cost of goods sold: Beginning inventory………………………... €115,400 Purchases……………………... €981,600 Less: Purchases discounts.

(24,400) (140,400) Purchase returns…….

Net purchases………………………………..

816,800 Goods available……………………………...

932,200 Less: Estimated ending inventory……….

(218,850) Cost of goods sold…………………………. €713,350

Chapter 6

Inventory and Merchandising Operations

(20-25 min.) P 6-76B Req. 1 Cost of sales, budgeted (€722,000 × 1.10).. € 794,200 + Ending inventory, budgeted………………...

76,000 = Cost of goods available……………………...

870,200 − Beginning inventory………………………….

(65,000) = Purchases, budgeted ……………………….. € 805,200

Req. 2 Chris’ Convenience Stores Budgeted Income Statement Year Ended December 31, 20X6 Sales (€964,000 × 1.10)……………………… €1,060,400 Cost of sales (€722,000 × 1.10)…………….

794,200 Gross profit…………………………………....

266,200 Operating expenses (€110,000 − €4,800)…

105,200 Net income…………………………………….. € 161,000

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) P 6-77B Req. 1 (corrected income statements) Waterville Video Sales Income Statement (adapted; amounts in millions) Years Ended 20X6, 20X5, and 20X4 20X6 20X5 Net sales revenue……………... €38 €35 Cost of goods sold: Beginning inventory……….. € 11* € 10* Purchases……………………

32 30 Goods available……………..

43 40 Ending inventory……………

(10) (11)* Cost of goods sold…………

33 29 5 6 Gross profit……………………..

3 3 Operating expenses…………... €2 €3 Net income………………………

20X4 €32 €7 28 35 (10)*

*Throughout the period from year end 20X4 to year beginning 20X6, inventory was understated by €2 million.

Chapter 6

Inventory and Merchandising Operations

25 7 3 € 4

(continued) P 6-77B Req. 2 The corrections did not change total net income over the threeyear period. But the corrections made the company’s trend of net income reflect a downward trend — with 20X5 net income decreasing from that of 20X4 and then continuing the drop in 20X6.

Req. 3 The shareholders will not be happy with the downward trend, since it appears to be continuing.

442

Financial Accounting: IFRS 12/e Solutions Manual

Decision Cases (50-60 min.) Decision Case 1 Req 1 Duracraft Corporation Income Statement Sales revenue Cost of goods sold: Gross profit Operating expenses Income before income tax expense Income tax expense ($415,000 × .40) ($355,000 × .40) Net income

FIFO $1,200,000 585,000* 615,000 200,000

LIFO $1,200,000 645,000** 555,000 200,000

415,000

355,000

166,000 $ 249,000

142,000 $ 213,000

_____ *$100,000 + $485,000 = $585,000 **$160,000 + $485,000 = $645,000

Chapter 6

Inventory and Cost of Goods Sold

443

(continued) Decision Case 1 Req. 2

Net income…………

FIFO $249,000

LIFO $213,000

FIFO net income is higher because (1) prices are rising (from $100 to $121.25 to $160), and (2) FIFO and LIFO assign costs to expense (cost of goods sold) in opposite patterns.

Student responses may vary.

444

Financial Accounting: IFRS 12/e Solutions Manual

(15-25 min.) Decision Case 2 Req. 1 This question provides a rich setting for a class discussion.

There’s no single correct answer to this question. Some students may favor Company B because it reports higher net income than Company A. B may be preferred because it appears more successful than A, and B’s share price may therefore rise more than A’s share price. Thus it may appear that Company B would be a better investment than A. Other students may prefer Company A because it discloses the inventory method it uses. Company B does not let outsiders know which method it uses to account for its inventory. These students may trust Company A more than B because A is more willing to “bare its soul to the public.”

Professors can point out that A, the LIFO company, may be better off because of the lower income taxes that A pays by using the LIFO method. We don’t know whether Company B is making the most of this cash-flow advantage of LIFO. Student responses will vary.

Req. 2 Yes, the authors would prefer managers to be conservative in accounting for inventory — for all the reasons accountants use conservatism. If any errors occur, we would prefer to be pleasantly surprised rather than negatively shocked.

Chapter 6

Inventory and Cost of Goods Sold

445

Ethical Issue Req. 1 Changing accounting methods year after year hurts a company’s credibility, which makes it hard for the company to borrow or raise money from outside investors. The question that arises about such a company is: What is the business trying to hide?

Req. 2 The comparability principle is violated.

Req. 3 Creditors and outside investors could be harmed by accounting changes year after year. It becomes difficult to tell which changes in the business are real and which changes result from the shift in the accounting method. Outsiders find it difficult to track the company’s operating results and financial position over time. Ultimately the company suffers because lenders will not want to lend it money, and outsiders will be reluctant to invest money in the business. This may deprive the entity of needed funds and hurt its chances for success or survival.

446

Financial Accounting: IFRS 12/e Solutions Manual

Focus on Financials: Nestlé (30 min.)

Req. 1

Nestlé measures its inventories at the lower of Cost or Net Realizable Value. Cost is determined using the FIFO (First in First Out) method for raw materials and purchased finished goods, while the Weighted average cost method is used for work in progress, sundry supplies and manufactured finished goods.

Req. 2 If Nestlé adopted FIFO with rising inventory prices, profit would rise due to lower COGS. This is because the older, cheaper inventory would be sold first.

Req. 3 Cost of goods sold: CHF 44,199 million Cost of inventory purchased: 8,401 – 8,153 + 44,199 = CHF 44,447 million Ending Inventory – Beginning Inventory + Cost of goods sold Req. 4 Gross profit margin @ 2015: 88,785 – 44,730 / 88,785 = 49.62% Gross profit margin @ 2016: 89,469 – 44,199 / 89,469 =50.60% Gross profit margin improved over the two years

Req. 5 Understatement of gross profit due to undervaluation of ending inventory = 11,982 × 10/90 = CHF1,331.33 million.

Chapter 6

Inventory and Cost of Goods Sold

447

Overstatement of gross profit due to undervaluation of opening inventory = 10,101 × 10/90 = CHF1,122.33 million.

Net understatement in gross profit = (1,331.33 – 1,122.33) = CHF209 million.

Group Project Student responses will vary.

448

Financial Accounting: IFRS 12/e Solutions Manual

Chapter 6 Appendix Appendix Short Exercises (10-15 min.) S6A-1

(Journal entries)

General Journal 1,270

1. Purchases Accounts Payable

1,270

Purchased inventory on account.

3,400

2. Accounts Receivable Sales Revenue

3,400

Sold inventory on account.

3. End-of-period entries to update inventory and record Cost of Goods sold: 460

a. Cost of Goods Sold Inventory (beginning balance)

460

Transfer beginning inventory to COGS.

b. Inventory (ending balance) Cost of Goods Sold

630 630

Set up ending inventory based on physical count.

c. Cost of Goods Sold Purchases

1,270 1,270

Transfer purchases to COGS.

Chapter 6

Inventory and Cost of Goods Sold

449

(10-15 min.) S6A-2

Req. 1 Posting general journal entries Inventory 460* 460 630 630 * Beginning inventory was $460 Cost of Goods Sold 460 1,270 1,100

630

Req. 2 Cost-of-Goods-Sold Model Beginning inventory Add: Purchases Goods available for sale Less: Ending inventory Cost of goods sold

$

460 1,270 1,730 630 $1,100

Req. 3 Paxton Technologies Income Statement (Partial) Sales revenue Cost of goods sold: Beginning inventory Purchases Goods available Ending inventory Cost of goods sold Gross profit

450

Financial Accounting: IFRS 12/e Solutions Manual

$3,400 460 1,270 1,730 (630) 1,100 $2,300

Appendix Exercises (10-15 min.) E6A-3A

Begin. Bal. Purchases Jul 1 15 26 Ending Bal.

Inventory (6 units × $60) 360 (3 units × $60) (14 units × $70) (2 units × $80) (7 units × $?)

180 980 160 ?

Cost of goods sold (18 units × $?)

Cost of Goods Sold (1) Specific unit cost

(2) Average cost

Ending Inventory

(7 × $60) + (9 × $70) + = $1,210 (2 × $80)

(18 × $67.20*)

_____ *Average cost per unit

=

?

= $1,209.6 0

(2 × $60) + (5 × $70)= $470

(7 × $67.20*)

($360 + 180 + 980 + 160) (6 + 3 + 14 + 2)

=

= $470.40

$67.20

(3) FIFO

(9 × $60) + (9 × $70) =

$1,170

(4) LIFO (2 × $80) + (14 × $70) + = $1,260 (2 × $60)

Chapter 6

(5 × $70) + (2 × $80)= $510

(7 × $60)

= $420

Inventory and Cost of Goods Sold

451

(10-15 min.) E6A-4A Reqs. 1 & 2 (Journal entries) General Journal 1. Purchases Accounts Payable

1,320 1,320

Purchased inventory on account.

2. Accounts Receivable Sales Revenue

5,066 5,066

Sold inventory on account.

3.

End-of-period entries to update inventory and record Cost of Goods Sold:

a. Cost of Goods Sold Inventory (beginning balance)

360 360

Transfer beginning inventory to COGS.

b. Inventory (ending balance)

420

Cost of Goods Sold

420

Set up ending inventory based on physical count.

c. Cost of Goods Sold Purchases Transfer purchases to COGS.

452

Financial Accounting: IFRS 12/e Solutions Manual

1,320 1,320

(continued) E6A-4A Req.3

Posting general journal entries

Cost of Goods Sold Beginning Inventory 360 Ending Inventory 1,320 Purchases 1,260 Cost of goods sold

420

Req. 4 Cost-of-Goods-Sold Model Beginning inventory Add: Purchases Goods available Less: Ending inventory Cost of goods sold

Chapter 6

360 1,320 1,680 420 1,260

Inventory and Cost of Goods Sold

453

(10-15 min.) E6A-5B

Begin. Bal. Purchases Dec 8 15 26 Ending Bal.

Inventory (7 units × $62) 434 (5 units × $62) 310 (14 units × $72) 1,008 ( 3 units × $82) 246 ( 9 units × $?) ?

Cost of Goods Sold (1) Specific unit cost

(8 × $62) + (9 × $72) + (3 × $82)

(20 × $68.90*)

_____ *Average cost per unit

=

?

Ending Inventory

= $1,390

(2) Average cost

Cost of goods sold (20 units × $?)

= $1,378

(4 × $62) + (5 × $72)= $608

(9 × $68.90*)

($434 + 310 + 1,008 + 246) (7 + 5 + 14 + 3)

=

= $620

$68.90

(3) FIFO

(12 × $62) + (8 × $72) = $1,320

(4) LIFO (3 × $82) + (14 × $72) + = $1,440 (3 × $62)

454

Financial Accounting: IFRS 12/e Solutions Manual

(6 × $72) + (3 × $82)= $678

(9 × $62)

= $558

(10-15 min.) E6A-6B Reqs. 1 & 2 (Journal entries) General Journal 1. Purchases Accounts Payable

1,564 1,564

Purchased inventory on account

6,360

2. Accounts Receivable Sales Revenue

6,360

Sold inventory on account 3.

End-of-period entries to update inventory and record Cost of Goods Sold:

a. Cost of Goods Sold Inventory (beginning balance)

434 434

Transfer beginning inventory to COGS

b. Inventory (ending balance)

558

Cost of Goods Sold

558

Set up ending inventory based on physical count

c. Cost of Goods Sold Purchases

1,564 1,564

Transfer purchases to COGS

Chapter 6

Inventory and Cost of Goods Sold

455

(continued) E6A-6B Req.3

Posting general journal entries

Cost of Goods Sold Beginning Inventory 434 Ending Inventory 1,564 Purchases 1,440 Cost of goods sold

558

Req. 4 Cost-of-Goods-Sold Model Beginning inventory Add: Purchases Goods available Less: Ending inventory Cost of goods sold

456

Financial Accounting: IFRS 12/e Solutions Manual

$

434 1,564 1,998 558 $1,440

Appendix Problems (20-25 min.) P6A-7A Req. 1 Inventory (50 units × $18) 900

Begin. Bal. Purchases Jul 8 30 Ending Bal.

(80 units × $19) (21 units × $20) (56 units × $?)

1,520 420 ?

Cost of goods sold (95 units × $?)

Cost of Goods Sold

?

Ending Inventory

FIFO (50 × $18) + (45 × $19)=

$1,755

(21 × $20) + (35 × $19) = $1,085

Req. 2 Date July 3 July 11 July 19 July 24 July 30 Total

Units Sold 18 32 4 36 5 95

Selling Price $70 $70 $72 $72 $72

Total Revenue $1,260 $2,240 $ 288 $2,592 $ 360 $6,740

Watercress Outlet Income Statement (Partial)

Sales revenue Cost of goods sold: Beginning inventory Purchases Goods available Ending inventory Cost of goods sold Gross profit

$6,740 $ 900 1,940 2,840 (1,085) 1,755 $4,985 Chapter 6

Inventory and Cost of Goods Sold

457

(20-30 min.) E6A-8A Req. 1 (Journal entries) General Journal 1. Purchases Accounts Payable

(Amounts in Thousands) $2,240 2,240

Purchased inventory on account

2. Accounts Receivable Cash Sales Revenue Sold inventory for cash and on account

2,520 1,080

3,600

3. End-of-period entries to update inventory and record Cost of Goods Sold: a. Cost of Goods Sold Inventory (beginning balance) Transfer beginning inventory to COGS

580

b. Inventory (ending balance) Cost of Goods Sold Set up ending inventory based on physical count

700

c. Cost of Goods Sold Purchases Transfer purchases to COGS

458

Financial Accounting: IFRS 12/e Solutions Manual

580

700

2,240 2,240

(continued) E6A-8A Req. 2 Decadent Desserts, Inc. Income Statement (Partial) Sales revenue Cost of goods sold: Beginning inventory Purchases Goods available Ending inventory Cost of goods sold Gross Profit

$3,600 $580 2,240 2,820 (700) 2,120 $1,480

Cost-of-Goods-Sold Model Beginning inventory Add: Purchases Goods available Less: Ending inventory Cost of goods sold

$580 2,240 2,820 700 $2,120

Chapter 6

Inventory and Cost of Goods Sold

459

(20-25 min.) P6A-9B Req. 1 Inventory (52 units × $20) 1,040

Begin. Bal. Purchases Jan 8 30 Ending Bal.

(75 units × $21)

1,575

(20 units × $22) (45 units × $?)

440 ?

Cost of goods sold (102 units × $?)

Cost of Goods Sold FIFO

Ending Inventory

= $2,090 (52 × $20) + (50 × $21)

(20 × $22) + (25 × $21) =$965

Req. 2 Date Jan 3 Jan 11 Jan 19 Jan 24 Jan 31 Total

Units Sold 19 33 3 40 7 102

Selling Price $75 $75 $77 $77 $77

Total Revenue $1,425 $2,475 231 $ $3,080 $ 539 $7,750

Trendy Outlet Income Statement (Partial) Sales revenue Cost of goods sold: Beginning inventory $1,040 Purchases 2,015 Goods available 3,055 Ending inventory (965) Cost of goods sold Gross profit

460

?

Financial Accounting: IFRS 12/e Solutions Manual

$7,750

2,090 $5,660

(20-30 min.) E6A-10B Req. 1 (Journal entries) (thousands)

General Journal 1.

2.

3.

Purchases Accounts Payable Purchased inventory on account

2,100

Accounts Receivable Cash Sales Revenue Sold inventory for cash and on account End-of-period entries to update inventory and record Cost of Goods Sold: Cost of Goods Sold

2,800 1,200

2,100

a.

4,000

520 520

Inventory (beginning balance) Transfer beginning inventory to COGS. b.

c.

Inventory (ending balance) Cost of Goods Sold Set up ending inventory based on physical count.

Cost of Goods Sold

680 680

2,100 2,100

Purchases Transfer purchases to COGS.

Chapter 6

Inventory and Cost of Goods Sold

461

(continued) E6A-10B Req. 2 Sinful Desserts, Inc. Income Statement (Partial) Sales revenue Cost of goods sold: Beginning inventory Purchases Goods available Ending inventory Cost of goods sold Gross Profit

$ 4,000 $ 520 2,100 2,620 (680)

1,940 $ 2,060

Cost-of-Goods-Sold Model Beginning inventory Add: Purchases Goods available Less: Ending inventory Cost of goods sold

462

Financial Accounting: IFRS 12/e Solutions Manual

520 2,100 2,620 680 1,940

Chapter 7 PPE & Intangibles Short Exercises (5 min.) S 7-1 1. Hard Stone’s largest asset category is Property and Equipment.

Property and Equipment, at Cost Millions Aircraft………………………………………………… $ 2,394 Package handling and ground support equipment………………………………………….

12,225 Computer and electronic equipment…………….

28,165 Vehicles……………………………………………….

586 Facilities and other………………………………….

1,435 Total cost…………………………………………..

44,805 Less: Accumulated depreciation……………….. (14,903) Net property and equipment…………………… $ 29,902

2. Cost = $44,805 million Book value = $29,902 million Book value is less than cost because accumulated depreciation is subtracted from cost to compute book value.

Chapter 7

PPE & Intangibles

(5 min) S 7-2 The related costs (real estate commission, back property tax, removal of a building, and survey fee) are included as part of the cost of the land because the buyer of the land must incur these costs to get the land ready for its intended use.

After the land is ready for use, the related costs (listed above) would be expensed.

(10 min.) S 7-3 Land ($220,000 × .50*)………………………

Building ($220,000 × .30*)………………….

Equipment ($220,000 × .20*)……………….

Note Payable………………………………

110,000 66,000 44,000 220,000

* Compute relative sales value ratios:

Land………………….

Building……………...

Equipment…………..

Total……………….…

Current Market Value $150,000 90,000 60,000 $300,000

Percent of Total $150,000 / $300,000 = 50.0% $90,000 / $300,000 = 30.0% $60,000 / $300,000 = 20.0% 100.0%

Financial Accounting: IFRS 12/e Solutions Manual

(5 min.) S 7-4 Income Statement CORRECT Revenues UNDERSTATED Expenses OVERSTATED Net income

(10 min.) S 7-5 1. First-year depreciation: Straight-line ($66,000,000 − $7,200,000) / 6 years….

$9,800,000

Units-of-production [($66,000,000 − $7,200,000) / 8,400,000 miles] × 1,050,000 miles…………………

$7,350,000

Double-declining-balance ($66,000,000 / 6 years × 2).

$22,000,000

2. Book value:

StraightLine

Units-ofProduction

DoubleDecliningBalance

Cost…………………... $66,000,000 $66,000,000 $66,000,000 Less Accumulated Depreciation……...

(9,800,000) (7,350,000) (22,000,000)

Book value………….. $56,200,000 $58,650,000 $44,000,000

Chapter 7

PPE & Intangibles

(10 min.) S 7-6 Third-year depreciation: a. Straight-line ($66,000,000 − $7,200,000) / 6 years….

$9,800,000

b. Units-of-production [($66,000,000 − $7,200,000) / 8,400,000 miles] × 1,770,000 miles…………………

$12,390,000

c. Double-declining-balance: Year 1 ($66,000,000 × 2/6) = $22,000,000 Year 2 ($66,000,000 − $22,000,000) × 2/6 = $14,666,667 Year 3 ($66,000,000 − $22,000,000 − $14,666,667)= $29,333,333; $29,333,333 × 2/6……………………………… $9,777,778 Alternatively: Year 3 ($66,000,000 x 3/5 x 3/5 x 2/5) = $9,777,778

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) S 7-7 1. Double-declining-balance (DDB) depreciation offers the tax advantage for the first year of an asset’s use. DDB’s advantage results from the greater amount of DDB depreciation (versus the other methods’ depreciation) during the first year, hence reducing reported net income. DDB saves cash that the taxpayer can invest to earn a return.

2.

DDB depreciation…………………………………..

Straight-line depreciation………………………...

Excess depreciation tax deduction…………….

Income tax rate……………………………………..

$22,000,000 (9,800,000) $ 12,200,000 × .35

Income tax savings for first year……………….. $ 4,270,000

Chapter 7

PPE & Intangibles

(5-10 min.) S 7-8 First-year depreciation (for a partial year): a. Straight-line (€72,000,000 − €9,000,000) / 6 years × 3/12……………………………………………… €2,625,000 b. Units-of-production (€72,000,000 − €9,000,000) / 4,500,000 miles × 420,000 miles……………. €5,880,000 c. Double-declining-balance (€72,000,000 × 2/6 × 3/12)….………………………………………….

€6,000,000

SL depreciation produces the highest net income (lowest depreciation). DDB depreciation produces the lowest net income (highest depreciation).

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) S 7-9 Year 4: Depreciation Expense — Concession Stand………... 17,000 Accumulated Depreciation — Concession Stand..

17,000

Depreciation for years 1-3: $120,000 / 20 years $6,000 × 3 years

= $ 6,000 per year = $18,000 for years 1-3

As at beginning of year 4: Asset’s remaining depreciable ÷ (New) Estimated = (New) Annual book value useful life remaining depreciation $120,000 − $18,000 ÷

6 years

= $17,000 per year

$102,000 ____

Chapter 7

PPE & Intangibles

(5-10 min.) S 7-10 1. ($38,700,000 − $3,500,000) / 6 years × 3 = $17,600,000 2.

20X9 Jan. 1 Cash………………………………..

Accumulated Depreciation……..

Loss on Sale of Airplane……….

Airplane…………………………

9,300,000 17,600,000 11,800,000 38,700,000

(5-10 min.) S 7-11 1. Units-of-production depreciation method is used to compute depletion.

Billions 2. Depletion Expense [($160 / 10) × 0.4]………… 6.4 Accumulated Depletion………………………

6.4

3. At December 31, 20X6: Cost of mineral assets………………………..

Less Accumulated depletion ($58.0 + $6.4).

Book value of mineral assets………………..

Billions $160.0 (64.4) $ 95.6

Abundant’s minerals are less than 41% (64.4/160) used up.

Accumulated depletion is low relative to the cost of the mineral assets.

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) S 7-12 Req. 1 Cost of goodwill purchased: Purchase price paid for Snicker Snacks, Inc. Market value of Snicker Snack’s net assets:

$21,600,000

Market value of Snicker Snacks’ assets…. $36,000,000 Less: Snicker Snack’s liabilities…………..

(24,000,000) Market value of Crunchy Snacks’ net assets 12,000,000 $9,600,000 Cost of goodwill…………………………………..

Req. 2 In future years Wilson, Inc. will determine whether its goodwill has increased or decreased in value. If the goodwill’s value has increased, there is nothing to record. But if goodwill’s value has decreased, Wilson, Inc. will record an impairment of goodwill loss and write down the book value of the goodwill.

Chapter 7

PPE & Intangibles

(10 min.) S 7-13 Sunrise Automobiles Limited Income Statement Year Ended December 31, 20X6 Revenues: Sales revenue……………………………… $11,200,000 Expenses: Cost of goods sold……………………….. $7,800,000 Research and development 1,400,000 120,000 expense…..

Amortization of patent ($840,000 / 7)... 1,160,000 Selling expenses…………………………..

Total expenses……………………………. Net 10,480,000 income……………………………………. $720,000

(5 min.) S 7-14 Orion Satellite Systems, Inc. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from investing activities: Millions Purchase of other companies………………………… $(18.0) Capital expenditures……………………………….…...

(8.0) Proceeds from sale of North American operations.

16.0 Net cash (used) by investing activities…………... $(10.0)

Financial Accounting: IFRS 12/e Solutions Manual

Exercises Group A (5-10 min.) E 7-15A Land: Cash down payment Note payable Property tax Title insurance Land leveling

Land improvements:

$370,000 400,000 9,000 6,000 20,000 $805,000

Fence Company sign Ground lightings

Building: Soil foundation Office building

$114,000 30,000 18,000 $162,000

$ 126,000 1,280,000 $1,406,000

Chapter 7

PPE & Intangibles

(10-15 min.) E 7-16A Allocation of cost to individual machines: Appraised Machine Value

1 2 3 Totals

Percentage of Total Market Value

Cost of Each Total Machine Cost

$ 38,250 $38,250 / $170,000 = .225 $154,000 × .225 = $ 34,650 73,100 / 170,000 = .430 154,000 × .430 = 66,220 73,100 58,650 58,650 / 170,000 = .345 154,000 × .345 = 53,130 $170,000 1.000 $154,000

Sale price of machine No. 2…………….

Cost………………………………………….

Gain on sale of machine…………………

$73,100 66,220 $ 6,880

(5-10 min.) E 7-17A Capital expenditures: (b) major overhaul, (d) lubrication before machine is placed in service, (f) Sales tax, (g) transportation and insurance, (h) purchase price, (i) installation, (j) training of personnel, (k) reinforcement to platform

Immediate expenses: (a) Income tax, (c) ordinary recurring repairs, (e) periodic lubrication

Financial Accounting: IFRS 12/e Solutions Manual

(15 min.) E 7-18A

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

1. a. Land………………………………………

1,455,000 Cash……………………………………..

1,455,000 b. Building ($4,500 + $45,200 + $2,010,000 + 2,142,000 $81,900)…

Note Payable…………………………

2,010,000 Cash ($4,500 + $45,600 + $81,900)….

132,000 c. Depreciation Expense…………………

Accumulated Depreciation ($2,142,000 − $1,014,000) / 35 × 3/12

8,057 8,057

2. BALANCE SHEET PPE: Land…………………………………… $1,455,000 Building………………………………… $2,142,000 Less Accumulated depreciation……

(8,057) Building, net………………………….

2,133,943

3. INCOME STATEMENT Expense: Depreciation expense………………...

Chapter 7

PPE & Intangibles

$ 8,057

(15-20 min.) E 7-19A Year 20X6 20X7 20X8 20X9

Units-ofProduction $ 5,000 6,000 2,000 3,000 $16,000

Straight-Line $ 4,000 4,000 4,000 4,000 $16,000

Double-DecliningBalance $ 9,600 4,800 1,600 -0$16,000

_____ Computations: Straight-line: ($19,200 − $3,200) ÷ 4 = $4,000 per year.

Units-of-production: ($19,200 − $3,200) ÷ 32,000 miles = $.50 per mile; 20X6 20X7 20X8 20X9

10,000 12,000 4,000 6,000

× × × ×

$.50 .50 .50 .50

= = = =

$5,000 6,000 2,000 3,000

Double-declining-balance — Twice the straight-line rate: 1/4 × 2 = 2/4 = 50% 20X6 $19,200 × .50 = $9,600 $4,800 $4,800 − 20X7 ($19,200 − $9,600) × .50 = residual value of $3,200 = 20X8 $4,800 − $3,200 = $1,600

The units-of production method tracks the wear and tear on the van most closely. For income tax purposes, the doubledeclining-balance method is best because it provides the most depreciation and, thus, the largest tax deductions in the early life of the asset. The company can invest the tax savings to earn a return on the investment.

Financial Accounting: IFRS 12/e Solutions Manual

(15 min.) E 7-20A INCOME STATEMENT Expenses: Depreciation expense — Building [($171,000 + $324,000 + $180,000) − $165,000] / 20.. $ 25,500 Depreciation expense — Furniture and Fixtures ($162,000 × 2/5)………………………………………

64,800

Supplies expense ($30,600 − $5,700)……………………………………

24,900

BALANCE SHEET Current assets: Supplies………………………………………………….. $ 5,700 PPE: Building ($171,000 + $324,000 + $675,000 $180,000)..

Less Accumulated depreciation………… (25,500)* $649,500 Furniture and fixtures……………………... $ 162,000 Less Accumulated depreciation…………

(64,800)

97,200

*($675,000 – 165,000)/20

STATEMENT OF CASH FLOWS Cash flows from investing activities: Purchase of buildings ($171,000* + $180,000)…… $(351,000) Purchase of furniture and fixtures………………… (162,000) _____ *Does not include the $324,000 note payable because Great Eastern Bakery paid no cash on the note.

Chapter 7

PPE & Intangibles

(10-15 min.) E 7-21A SHORT-CUT SOLUTION: SL DDB Depreciation by the two methods… $65,000* $29,250* Extra depreciation provided by DDB ($65,000 − $29,250)…………………………… $35,750 × .40 Multiply by the income tax rate………………… $ 14,300 Tax saved by using DDB = Extra cash to invest.

Depreciation method for income tax: Double-decliningbalance Cash saved by using Double-declining-balance depreciation: SL Cash revenues………………………………… $250,000 Cash expenses………………………………... 150,000 Cash provided by operations before income tax…………………………………... 100,000 Depreciation expense (a noncash expense): 29,250 *SL: 70,750 [($520,000 − $52,000) / 8 × 6/12]…

Income *DDB:tax ($520,000 expense× (40%)…………………..

2/8 × 6/12)……………. $ 28,300 Income before income tax…………………...

Cash-flow analysis:

Cash provided by operations before income tax……………………………….. $100,000 Income tax expense…………………….…. (28,300) Cash provided by operations……………. $ 71,700

DDB $250,000 150,000 100,000

65,000 35,000 $ 14,000

$ 100,000 (14,000) $ 86,000

Extra cash available for investment if DDB is used ($86,000 − $71,700)…………………….. $ 14,300

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 7-22A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Year 20 Depreciation Expense [($840,000 − $112,000) ÷ 40]……………. 18,200 Accumulated Depreciation — Building 18,200 Year 21 Depreciation Expense…………………… 30,000* Accumulated Depreciation — Building _____ *Computation: Depreciable cost: $840,000 − $112,000 = $728,000 Depreciation through year 20: $728,000 ÷ 40 = $18,200 $18,200 × 20 = $364,000 Asset’s remaining depreciable book value: $840,000 − $364,000 − $26,000 = $450,000 New estimated useful life remaining: 15 years New annual depreciation: $450,000÷ 15 = $30,000

Chapter 7

PPE & Intangibles

30,000

(15-20 min.) E 7-23A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X7 Depreciation for 8 months: Aug. 31 Depreciation Expense………………… 1,424* Accumulated Depreciation — Fixtures………………………………..

Sale of fixtures: 31 Cash……………………………………… 2,800 Accumulated Depreciation — Store Fixtures ($3,560 + $1,424)…….. 4,984 Loss on Sale of Fixtures……………… 1,116** Fixtures………………………………..

CREDIT

1,424

8,900

_____ *20X6 depreciation: $8,900 × 2/5 = $3,560 20X7 depreciation: ($8,900 − $3,560) × 2/5 × 8/12 = $1,424

**Loss is computed as follows:

Sale price of old fixtures……………………….

Book value of old fixtures: Cost…………………………………………….. $8,900 Less: Accumulated depreciation…………. (4,984) Loss on sale……………………………………...

Financial Accounting: IFRS 12/e Solutions Manual

$2,800

3,916 $ (1,116)

(10-15 min.) E 7-24A Cost of old truck……………………………………

$780,000

Less Accumulated depreciation: ($780,000 − $200,000) × 78 + 118 + 156 + 38 1,000

(226,200)a _______ $553,800

Book value of old truck……………………………

_____ aAlternate solution setup for accumulated depreciation: ($780,000 − $200,000)

= $.58 per mile

2,000,000 miles 78,000 + 118,000 + 156,000 + 38,000 = 390,000 miles driven Accumulated depreciation = 390,000 miles × $.58 =

$226,200

Calculation of gain or loss: Purchase price of Freightliner truck Cash paid for Freightliner truck Trade in value of Mack truck Book Value of Mack truck Net loss on disposal of Mack truck

Chapter 7

$600,000 54,000 546,000 553,800 $ (7,800)

PPE & Intangibles

(Continued) E 7-24A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X9 Truck-Freightliner………………….

600,000 226,200 Accumulated Depreciation – Max 7,800 Truck……………………………….

Loss on Disposal of Mack truck…

Truck – Max .……………………

Cash……………………………...

Financial Accounting: IFRS 12/e Solutions Manual

CREDIT

780,000 54,000

(10-15 min.) E 7-25A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

(a) Purchase of mineral assets: Mineral Asset………………………. 428,000 Cash………………………………

428,000

(b) Payment of fees and other costs: Mineral Asset………………………

Cash………………………………

67,300

67,300*

(c) Depletion Expense………………… 71,600** Accumulated Depletion — Mineral Asset……………………

71,600

_____ * $180 + $2,120 + $65,000 = $67,300

**$428,000 + $67,300 = $495,300; $495,300 ÷ 275,000 tons = $1.80 per ton; 45,000 tons × $1.80 = $81,000

Mineral asset book value = $414,300 ($495,300 − $81,000).

Chapter 7

PPE & Intangibles

(10-15 min.) E 7-26A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Part 1(a) Purchase of patent: Patents……………………………….. 920,000 Cash………………………………..

920,000

(b) Amortization for each year: Amortization Expense — Patents ($920,000 ÷ 10)……………………….92,000 Patents…………………………….

92,000

Part 2

Amortization for year 6: Amortization Expense — Patents.. 230,000* Patents…………………………….

_____ *Asset remaining book value: $920,000 − ($92,000 × 5) = $460,000 New estimated useful life remaining: 2 years New annual amortization: $460,000 ÷ 2 = $230,000

Financial Accounting: IFRS 12/e Solutions Manual

230,000

(5-10 min.) E 7-27A Req. 1 Cost of goodwill purchased:

Purchase price paid for Northshore.com…………...

Market value of Northshore’s net assets: Market value of Northshore’s assets ($13 + $20). $33 Less: Northshore’s liabilities………………………. (25) Market value of Northshore’s net assets…………

Cost of goodwill………………………………………….

Millions $15

8 $7

Req. 2

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT CREDIT

Current Assets………………………………….. 13 Long-Term Assets……….……………………... 20 Goodwill…………………………….……………. 7 Liabilities………………………………………

Cash…………………………………………….

Purchased Northshore.com

25 15

Req. 3 Holden will determine whether its goodwill has increased or decreased in value. If the goodwill’s value has increased, there is nothing to record. But if goodwill’s value has decreased, Holden will record an impairment of goodwill and write down the book value of the goodwill.

Chapter 7

PPE & Intangibles

(10 min.) E 7-28A a.

b.

c.

d.

Sale of building (or disposal of building)…………………….

$ 680,000

Insurance proceeds from fire (or disposal of building)…………………….

140,000

Renovation of store (or capital expenditures)……………………

(170,000)

Purchase of store fixtures (or capital expenditures)……………………

(80,000)

Financial Accounting: IFRS 12/e Solutions Manual

Exercises Group B (5-10 min.) E 7-29B Land: Cash down payment Note payable Property tax Title insurance Land leveling

Land improvements:

€330,000 384,000 9,000 6,000 12,000 €741,000

Fence Company sign Ground lightings

Building: Soil foundation Office building

€96,000 44,000 4,000 €144,000

€ 116,000 1,240,000 €1,356,000

Chapter 7

PPE & Intangibles

(10-15 min.) E 7-30B Allocation of cost to individual machines: Cost of EachTotal Machine Cost

Appraised Machine Value

Percentage of Total Market Value

1 2 3 Totals

84,000 / 240,000 = .350 79,100 226,000 × .350 = 127,200 / 240,000 = .530 226,000 × .530 = 119,780 28,800 / 240,000 = .120 226,000 × .120 = 27,120 1.000 226,000

84,000 127,200 28,800 240,000

Sale price of machine no. 2……………..

Cost………………………………………….

Gain on sale of machine…………………

€127,200 119,780 € 7,420

(5-10 min.) E 7-31B Capital expenditures: (a) training of personnel, (b) reinforcement to platform, (d) major overhaul, (e) Sales tax, (f) transportation and insurance, (g) purchase price, (h) installation, (i) lubrication before machine is placed in service Immediate expenses: (c) Income tax, (j) ordinary recurring repairs, (k) periodic lubrication

Financial Accounting: IFRS 12/e Solutions Manual

(15 min.) E 7-32B

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT

1. a. Land………………………………………

Cash…………………………………...

CREDIT

978,000 978,000

b. Building (3,200 + 31,400 + 1,440,000 + 60,200).. 1,534,800 Note Payable…………………………

1,440,000 Cash (3,200 + 31,400 + 60,200)…….

94,800 c. Depreciation Expense…………………

Accumulated Depreciation (1,534,800 − 688,000) / 35 × 3/12…

6,048 6,048

2. BALANCE SHEET PPE: Land………………………………………...

978,000 Building…………………………………. 1,534,800 Less Accumulated depreciation………

(6,048) Building, net…………………………….

1,528,752

3. INCOME STATEMENT Expense: Depreciation expense…………………...

Chapter 7

PPE & Intangibles

6,048