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SOLUTION MANUAL

Chapter 1 Environment and Theoretical Structure of Financial Accounting Question 1–1 Financial accounting is concerned with providing relevant financial information about various kinds of organizations to different types of external users. The primary focus of financial accounting is on the financial information provided by profitoriented companies to their present and potential investors and creditors.

Question 1–2 Resources are efficiently allocated if they are given to enterprises that will use them to provide goods and services desired by society and not to enterprises that will waste them. The capital markets are the mechanism that fosters this efficient allocation of resources.

Question 1–3 Two extremely important variables that must be considered in any investment decision are the expected rate of return and the uncertainty or risk of that expected return.

Question 1–4 In the long run, a company will be able to provide investors and creditors with a rate of return only if it can generate a profit. That is, it must be able to use the resources provided to it to generate cash receipts from selling a product or service that exceed the cash disbursements necessary to provide that product or service.

Question 1–5 The primary objective of financial accounting is to provide investors and creditors with information that will help them make investment and credit decisions.

Question 1–6 Net operating cash flows are the difference between cash receipts and cash disbursements during a period of time from transactions related to providing goods and services to customers. Net operating cash flows may not be a good indicator of future cash flows because, by ignoring uncompleted transactions, they may not match the accomplishments and sacrifices of the period.

Question 1–7 GAAP (generally accepted accounting principles) are a dynamic set of both broad and specific guidelines that a company should follow in measuring and reporting the information in their financial statements and related notes. It is important that all companies follow GAAP so that investors can compare financial information across companies to make their resource allocation decisions.

Question 1–8 In 1934, Congress created the SEC and gave it the job of setting accounting and reporting standards for companies whose securities are publicly traded. The SEC has retained the power, but has relied on private sector bodies to create the standards. The current private sector body responsible for setting accounting standards is the FASB.

Question 1–9 Auditors are independent, professional accountants who examine financial statements to express an opinion. The opinion reflects the auditors‘ assessment of the statements' fairness, which is determined by the extent to which they are prepared in compliance with GAAP. The auditor adds credibility to the financial statements, which increases the confidence of capital market participants relying on that information.

Question 1–10 Key provisions included in the text are:  Creation of the Public Company Accounting Oversight Board  Regulate types of non-audit audit services  Require lead audit partner rotation every 5 year  Corporate executive accountability  Addresses conflicts of interest for security analysts  Internal control reporting and auditor opinion about controls

Question 1–11 New accounting standards, or changes in standards, can have significant differential effects on companies, investors and creditors, and other interest groups by causing redistribution of wealth. There also is the possibility that standards could harm the economy as a whole by causing companies to change their behavior.

Question 1–12 The FASB undertakes a series of elaborate information gathering steps before issuing an accounting standard to determine consensus as to the preferred method of accounting, as well as to anticipate adverse economic consequences.

Question 1–13 The purpose of the conceptual framework is to guide the Board in developing accounting standards by providing an underlying foundation and basic reasoning on which to consider merits of alternatives. The framework does not prescribe GAAP.

Question 1–14 Relevance and faithful representation are the primary qualitative characteristics that make information decision-useful. Relevant information will possess predictive and/or confirmatory value. Faithful representation is the extent to which there is agreement between a measure or description and the phenomenon it purports to represent.

Question 1–15 The components of relevant information are predictive value, confirmatory value and materiality. The components of faithful representation are completeness, neutrality, and freedom from error.

Question 1–16 The benefit from providing accounting information is increased decision usefulness. If the information is relevant and possesses faithful representation, it will improve the decisions made by investors and creditors. However, there are costs to providing information that include costs to gather, process, and disseminate that information. There also are costs to users in interpreting the information as well as possible adverse economic consequences that could result from disclosing information. Information should not be provided unless the benefits exceed the costs.

Question 1–17 Information is material if it is deemed to have an effect on a decision made by a user. The threshold for materiality will depend principally on the relative dollar amount of the transaction being considered. One consequence of materiality is that GAAP need not be followed in measuring and reporting a transaction if that transaction is not material. The threshold for materiality has been left to subjective judgment.

Question 1–18 1.

Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. 2. Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions. 3. Equity is the residual interest in the assets of any entity that remains after deducting its liabilities. 4. Investments by owners are increases in equity resulting from transfers of resources, usually cash, to a company in exchange for ownership interest. 5. Distributions to owners are decreases in equity resulting from transfers to owners. 6. Revenues are inflows of assets or settlements of liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity‘s ongoing major or central operations. 7. Expenses are outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity‘s ongoing major or central operations. 8. Gains are defined as increases in equity from peripheral or incidental transactions of an entity. 9. Losses represent decreases in equity arising from peripheral or incidental transactions of an entity. 10. Comprehensive income is defined as the change in equity of an entity during a period from nonowner transactions.

Question 1–19 The four basic assumptions underlying GAAP are (1) the economic entity assumption, (2) the going concern assumption, (3) the periodicity assumption, and (4) the monetary unit assumption.

Question 1–20 The going concern assumption means that, in the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely. This assumption is important to many broad and specific accounting principles such as the historical cost principle.

Question 1–21 The periodicity assumption relates to needs of external users to receive timely financial information. This assumption requires that the economic life of a company be divided into artificial periods for financial reporting. Companies usually report to external users at least once a year.

Question 1–22 Four accounting practices, often referred to as principles, that guide accounting practice are (1) revenue recognition, (2) expense recognition, (3) mixed-attribute measurement (including historical cost), and (4) full disclosure.

Question 1–23 Two advantages to basing valuation on historical cost are (1) historical cost provides important cash flow information since it represents the cash or cash equivalent paid for an asset or received in exchange for the assumption of a liability, and (2) historical cost valuation is the result of an exchange transaction between two independent parties and the agreed upon exchange value is, therefore, objective and possesses a high degree of verifiability.

Question 1–24 Companies recognize revenue when goods or services are transferred to customers. However, no revenue is recognized if it isn‘t probable that the seller will collect the amounts it‘s entitled to receive. The amount of revenue recognized is the amount the company expects to be entitled to receive in exchange for those goods or services. Revenue is recognized at a point in time or over a period of time, depending on when goods or services are transferred to customers. So, revenue for the sale of most goods is recognized upon delivery, but revenue for services like renting apartments or lending money is recognized over time as those services are provided.

. Question 1–25 The four different approaches to implementing expense recognition are: 1. Recognizing an expense based on an exact cause-and-effect relationship between a revenue and expense event. Cost of goods sold is an example of an expense recognized by this approach. 2. Recognizing an expense by identifying the expense with the revenues recognized in a specific time period. Office salaries are an example of an expense recognized by this approach. 3. Recognizing an expense by a systematic and rational allocation to specific time periods. Depreciation is an example of an expense recognized by this approach. 4. Recognizing expenses in the period incurred, without regard to related revenues. Advertising is an example of an expense recognized by this approach.

Question 1–26 In addition to the financial statement elements arrayed in the basic financial statements, information is disclosed by means of parenthetical or modifying comments, notes, and supplemental schedules and tables.

Question 1–27 GAAP prioritizes the inputs companies should use when determining fair value. The highest and most desirable inputs, Level 1, are quoted market prices in active markets for identical assets or liabilities. Level 2 inputs are other than quoted prices that are observable, including quoted prices for similar assets or liabilities in active or inactive markets and inputs that are derived principally from observable related market data. Level 3 inputs, the least desirable, are inputs that reflect the entity‘s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.

Question 1–28 Common measurement attributes are historical cost, net realizable value, current cost, present value, and fair value.

Answers to Questions (concluded) Question 1–29 Under the revenue/expense approach, revenues and expenses are considered primary, and assets, liabilities, and equities are secondary in the sense of being recognized at the time and amount necessary to achieve proper revenue and expense recognition. Under the asset/liability approach, assets and liabilities are considered primary, and revenues and expenses are secondary in the sense of being recognized at the time and amount necessary to allow recognition and measurement of assets and liabilities as required by their definitions.

Question 1–30 Under IFRS, the conceptual framework provides guidance to accounting standard setters but also provides GAAP when more specific accounting standards do not provide guidance.

Question 1–31 The International Accounting Standards Board (IASB) is responsible for determining IFRS. The IASB is funded by the IFRS Foundation. .

Complete Solution Manual for Intermediate Accounting, 11th Edition

BRIEF EXERCISES Brief Exercise 1–1 Revenues ($340,000 + 60,000) Expenses: Rent ($40,000  2) Salaries Utilities ($50,000 + 2,000) Net income

$400,000 (20,000) (120,000) (52,000) $208,000

Brief Exercise 1–2 (1) Liabilities (2) Assets (3) Revenues (4) Losses

Brief Exercise 1–3 1. The periodicity assumption 2. The economic entity assumption 3. Revenue recognition 4. Expense recognition

Brief Exercise 1–4 1. Expense recognition 2. The historical cost (original transaction value) principle 3. The economic entity assumption

Brief Exercise 1–5 1. Disagree 2. Agree 3. Disagree 4. Agree

— — — —

The full disclosure principle The periodicity assumption Expense recognition Revenue recognition

Brief Exercise 1–6 1. Obtains funding for the IFRS standard setting process: IFRS Foundation 2. Determines IFRS: International Accounting Standards Board (IASB) 3. Oversees the IFRS Foundation: Monitoring Board 4. Provides input about the standard setting agenda: IFRS Advisory Council. 5. Provides implementation guidance about relatively narrow issues: IFRS Interpretations Committee.

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EXERCISES Exercise 1–1 Requirement 1 Perez Associates Operating Cash Flow Cash collected Cash disbursements: Salaries Utilities Purchase of insurance policy Net operating cash flow

Year 1 $160,000

Year 2 $190,000

(90,000) (30,000) (60,000) $(20,000)

(100,000) (40,000) -0$ 50,000

Requirement 2 Perez Associates Income Statements Revenues Expenses: Salaries Utilities Insurance Net Income

Year 1 $170,000

Year 2 $220,000

(90,000) (35,000) (20,000) $ 25,000

(100,000) (35,000) (20,000) $ 65,000

Requirement 3 Year 1: Amount billed to clients Less: Cash collected Ending accounts receivable

$170,000 (160,000) $ 10,000

Year 2: Beginning accounts receivable Plus: Amounts billed to clients

$ 10,000 220,000 $230,000 (190,000) $ 40,000

Less: Cash collected Ending accounts receivable

Exercise 1– 12 Requirement 1

Revenues Expenses: Rent ($80,000  2) Salaries Utilities Advertising Net Income

Year 2 $350,000

Year 3 $450,000

(40,000) (140,000) (30,000) (25,000) $115,000

(40,000) (160,000) (40,000) (20,000)* $190,000

Requirement 2 Amount owed at the end of year one Advertising costs incurred in year two Amount paid in year two Liability at the end of year two Less cash paid in year three Advertising expense in year three

$ 5,000 25,000 30,000 (15,000) 15,000 (35,000) $20,000*

Complete Solution Manual for Intermediate Accounting, 11th Edition

Exercise 1–3 Requirement 1 FASB ASC 820: ―Fair Value Measurements‖ Requirement 2 The specific citation that describes the information that companies must disclose about the use of fair value to measure assets and liabilities for recurring measurements is FASB ASC 820–10–50: ―Fair Value Measurements -Overall-Disclosures.‖

Exercise 1– 14 The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. The specific citation for each of the following items is: 1. The topic number for business combinations: FASB ASC 805: ―Business Combinations.‖ 2. The topic number for related-party disclosures: FASB ASC 850: ―Related Party Disclosures.‖ 3. The topic, subtopic, and section number for the initial measurement of internal-use software: FASB ASC 350–40–30: ―Intangibles–Goodwill and Other– Internal–Use Software– Initial Measurement.‖ 4. The topic, subtopic, and section number for the subsequent measurement of asset retirement obligations: FASB ASC 410– 20–35: ―Asset Retirement and Environmental Obligations–Asset Retirement Obligations–Subsequent Measurement.‖ 5. The topic, subtopic, and section number for the recognition of stock compensation: FASB ASC 718– 10–25: ―Compensation– Stock Compensation–Overall– Recognition.‖

Exercise 1–5 Organization 1. Securities and Exchange Commission 2. Financial Executives International 3. American Institute of Certified Public Accountants 4. Institute of Management Accountants 5. Association of Investment Management and Research

Group Users Preparers Auditors Preparers Users

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Exercise 1–6 1. Liability 2. Distribution to owners 3. Revenue 4. Assets, liabilities and equity 5. Comprehensive income 6. Gain 7. Loss 8. Equity 9. Asset 10. Net income 11. Investment by owner 12. Expense

Exercise 1–7 List A o

1. Predictive value

2. Relevance

g a j

3. Timeliness 4. Distribution to owners 5. Confirmatory value

6. Understandability

n 7. Gain f 8. Faithful representation k 9. Comprehensive income p 10. Materiality c 11. Comparability m 12. Neutrality l d

13. Recognition 14. Consistency

b i

15. Cost effectiveness 16. Verifiability

List B a. Decreases in equity resulting from transfers to owners. b. Requires consideration of the costs and value of information. c. Important for making interfirm comparisons. d. Applying the same accounting practices over time. e. Users understand the information in the context of the decision being made. f. Agreement between a measure and the phenomenon it purports to represent. g. Information is available prior to the decision. h. Pertinent to the decision at hand. i. Implies consensus among different measurers. j. Information confirms expectations. k. The change in equity from nonowner transactions. l. The process of admitting information into financial statements. m. The absence of bias. n. Increases in equity from peripheral or incidental transactions of an entity. o. Information is useful in predicting the future. p. Concerns the relative size of an item and its effect on decisions.

Complete Solution Manual for Intermediate Accounting, 11th Edition

Exercise 1–8 1. Materiality 2. Neutrality 3. Consistency 4. Timeliness 5. Predictive value and/or confirmatory value 6. Faithful representation 7. Comparability (Consistency) 8. Cost effectiveness

Exercise 1–9 List A d

1. Expense recognition

g e i

2. 3. 4.

h c

5. 6.

a f

8. 9.

List B

a. The enterprise is separate from its owners and other entities. Periodicity assumption b. A common denominator is the dollar. Historical cost principle c. The entity will continue indefinitely. Materiality d. Record expenses in the period the related revenue is recognized. Revenue recognition e. The original transaction value upon acquisition. Going concern assumption f. All information that could affect decisions should be reported. Monetary unit assumption g. The life of an enterprise can be divided into artificial time periods. Economic entity assumption h. Criteria usually satisfied for products at point of sale. Full-disclosure principle i. Concerns the relative size of an item and its effect on decisions.

Exercise 1–10 1. The economic entity assumption 2. The periodicity assumption 3. Expense recognition (also the going concern assumption) 4. The historical cost (original transaction value) principle 5. Revenue recognition 6. The going concern assumption 7. Materiality

Exercise 1–11 1. The historical cost (original transaction value) principle 2. The periodicity assumption 3. Revenue recognition 4. The economic entity assumption 5. Expense recognition; materiality 6. The full disclosure principle

Exercise 1–12 — — — — — — —

Monetary unit assumption Full disclosure principle Expense recognition Historical cost (original transaction value) principle Revenue recognition Materiality Periodicity assumption

1. Disagree

—

2. Disagree 3. Disagree 4. Agree

— — —

5. Agree 6. Disagree

— —

This is a violation of the historical cost (original transaction value) principle. This is a violation of the economic entity assumption. This is a violation of appropriate revenue recognition. The company is conforming to appropriate expense recognition. The company is conforming to the full disclosure principle. This is a violation of the periodicity assumption.

1. Disagree 2. Disagree 3. Agree 4. Disagree 5. Agree 6. Agree 7. Disagree

Exercise 1–13

Complete Solution Manual for Intermediate Accounting, 11th Edition

Exercise 1–14 Statement 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

d. h. g. e. c. a. i. j. f. b.

Concept Monetary unit assumption Full-disclosure principle Expense recognition Historical cost principle Periodicity assumption Economic entity assumption Cost effectiveness Materiality Conservatism Going concern assumption

Exercise 1–15 1. 2. 3. 4. 5. 6.

b d c d b b

Research Case 1–3 Requirement 1 7 - As of the time this book was printed, the FASB had seven members. Requirement 2 1 - As of the time this book was printed, the FASB had 1 academic member, Christine Botosan. By custom the FASB has had an academic member as one of the seven members of the Board. Requirement 3 The mission of the Financial Accounting Standards Board is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information.

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Research Case 1–4 Requirement 1 14 - The IASB has 14 Board members. Requirement 2 London, United Kingdom Requirement 3 The IASB is committed to developing, in the public interest, a single set of highquality, understandable, and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. In addition, the IASB cooperates with national accounting standard-setters to achieve convergence in accounting standards around the world.

Research Case 1-5 The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. Requirement 1 The part of the citation title associated with the sixth and seventh digits: a. ASC 505-10-50: Disclosure b. ASC 310-10-35: Subsequent Measurement c. ASC 730-10-25: Recognition d. ASC 330-10-45: Other Presentation Matters e. ASC 805-10-30: Initial Measurement f. ASC 320-10-45: Other Presentation Matters g. ASC 606-10-25: Recognition h. ASC 710-10-30: Initial Measurement i. ASC 718-10-35: Subsequent Measurement j. ASC 360-10-50: Disclosure Requirement 2 Yes, the Codification associates the sixth and seventh digits of a citation with the same categories, regardless of the account or transaction in Question. That approach makes it more efficient to find content relevant to each of the categories.

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Judgment Case 1–6 Disagree. Wolf has been paid, so collectability is not a concern. However, Wolf performs its rental service over time, and at the beginning of the period has not yet fulfilled its obligation to its renters to provide rent services. Under accrual accounting, revenue should be recognized over the rental period, not at the beginning of the period.

Real World Case 1–7 Requirement 1 a. Total net revenues b. Total operating expenses c. Net income (earnings) d. Total assets e. Total stockholders' equity

= = = = =

$ 16,383 million $ 5,559 million $ 351 million $ 13,679 million $ 3,316 million

Requirement 2 The balance sheet reports 371 million shares of common stock issued and outstanding as of February 1, 2020. Requirement 3 Yes, GAP Inc. presents more than one year of data, The presentation of more than one year facilitates the ability of investors and creditors to compare the profitability of the company over time. This, in turn, provides important information for predicting future results.

Judgment Case 1–8 Requirement 1 The two primary qualitative characteristics of accounting information are relevance and faithful representation. Requirement 2 No, GAAP does not routinely require disclosure of forecasts. The qualities of relevance and faithful representation often can conflict, requiring a trade-off between them. A forecast of a financial variable may possess a high degree of relevance to investors and creditors. However, a forecast necessarily contains subjectivity in the estimation of future events. Since a forecast is involved, information could be more easily biased and may contain material errors. Therefore, generally accepted accounting principles do not require companies to provide forecasts of financial variables.

Judgment Case 1–9 Requirement 1 The cost effectiveness constraint governs whether the FASB should require companies to provide additional financial information. Requirement 2 The cost effectiveness constraint is discussed in Concepts Statement No. 8. Requirement 3 The costs could include (1) increased information-gathering, processing and dissemination costs to the companies affected, (2) increased interpreting costs to users, and (3) adverse economic consequences to the companies, their investors, creditors, employees, other interest groups as well as to society as a whole.

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Communication Case 1–10 In the long run, a company will be able to provide investors with a return only if it can generate a profit. That is, it must be able to use the resources provided by investors and creditors to generate cash receipts from selling a product or service that exceed the cash disbursements necessary to provide that product or service. If this excess cash can be generated, the marketplace is implicitly saying that society‘s resources have been efficiently allocated. The marketplace is assigning a value to the product or service that exceeds the value assigned to the resources used to produce that product or service. Pollution costs to society should be borne by the company/individual causing the costs to be incurred. If they are, and the pollutioncausing company can still generate a profit, then society‘s resources are still being allocated efficiently. From this perspective, it appears that information on pollution costs is relevant information to financial statement users. However, even though this information might be relevant, it would not possess faithful representation. For example, how could we objectively measure the costs to society of dumping hazardous waste into a river? Fish and other river-life will die, drinking water will contain more pollutants, and the river will be a less desirable place for recreation. Some of these costs can be quantified (estimated), but others can‘t. It is important that each student actively participate in the process of arriving at a solution. Domination by one or two individuals should be discouraged. Students should be encouraged to contribute to the group discussion by (a) offering information on relevant issues, and (b) clarifying or modifying ideas already expressed, or (c) suggesting alternative direction.

Communication Case 1–11 Suggested Grading Concepts and Grading Scheme: Content (70%) 30 Briefly outlines the standard setting process. Role of FASB, SEC. The process. 20 Explains the meaning of economic consequences. 20 Discusses the need to balance accounting considerations and economic consequences. 70 points Writing (30%) 6 Terminology and tone appropriate to the audience of a business journal. 12 Organization permits ease of understanding. Introduction that states purpose. Paragraphs that separate main points. 12 English Sentences grammatically clear and well organized, concise. Word selection. Spelling. Grammar and punctuation. 30 points

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Communication Case 1–12 Requirement 1 Pro-convergence arguments include: 1. U.S. financial markets would be more attractive to companies with uniform accounting standards. 2. More comparable financial statements are easier for users. 3. Less costly information systems to prepare financial statements for multinational companies. 4. Cooperation with the rest of the world is good. Cooperating on accounting standards could facilitate progress on other political dimensions. 5. Preference for principles-based reporting under IFRS. 6. One common set of standards makes it easier for employers to obtain accountants from other countries or to locate accounting operations in other parts of the world. 7. Balancing of political interests (which could temper effect of U.S. political environment). Requirement 2 Anti-convergence arguments include: 1. Regulatory requirements (like Sarbanes-Oxley) are more important than accounting standards for discouraging use of U.S. capital markets. 2. Actual comparability depends on regulatory enforcement and how IFRS is applied in particular countries; could make financial statements seem more comparable than they really are. 3. For local companies, transition to IFRS would be expensive. 4. May be difficult to cooperate with the rest of the world when standards don‘t favor U.S. interests. How will U.S. Congress react when the French are pressuring the IASB to obtain accounting favorable to them? 5. Rules-based U.S. regime has developed because companies and their auditors want protection against litigation and regulators. If switch for IFRS, companies and their auditors will want implementation guidance that preserves the rules. 6. IASB is more vulnerable to political pressure from various governments like the EU. Solutions Manual, Chapter 2 2–29 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Ethics Case 1–13 Requirement 1 Company executives. It is the responsibility of management to apply GAAP appropriately. Requirement 2 No. While auditors are paid by the company, they must be an independent party to help ensure that management has in fact appropriately applied GAAP in preparing the company’s financial statements. Requirement 3 Yes. Some feel that it is impossible for an auditor to give an independent opinion on a company‘s financial statements because the auditors‘ fees for performing the audit are paid by the company. In addition to the audit fee, some perceive independence is further impaired when the auditors are paid to provide additional services to the company. Requirement 4 The standard audit arrangement can jeopardize independence by leaving auditors vulnerable to the following pressures: 1. Pressure from management to bias the audit opinion by threatening to withhold audit fee payment, to hire another audit firm, or to assign tax preparation work to another audit firm. 2. Pressure from management to bias the audit opinion by providing an expensive gift or an outright bribe to the auditor. Auditors should refuse all but nominal gifts from their clients. 3. Pressure to bias the audit opinion in favor of the client because the auditor, or family member, has a financial interest in the client beyond the audit fee. The interest could be in the form of an investment or a loan to or from the client. 4. Pressure to bias the audit opinion in favor of the client because the auditor, or family member, has current or future employment or is in a position of influence with the client. 5. An unfavorable opinion may provoke a lawsuit by investors and other injured parties against both the company and the auditors. Fear of litigation may prompt the auditors to give a favorable or clean opinion, when misleading information exists in the financial statements.

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Continuing Cases Target Case Requirement 1 a. Total revenues = $77,130 million b. Income from current operations = $ 3,269 million c. Net income or net loss = $ 3,281 million d. Total assets = $42,779 million e. Total equity = $11,833 million Requirement 2 Target‘s basic earnings per share was $6.42. Requirement 3 Target‘s fiscal year end is February 1, 2020. The accounting profession and the SEC encourage companies to adopt a fiscal year that corresponds to a natural business year, ending when a company‘s business cycle is at its lowest point. December 31 is in the hectic holiday shopping season at a time when stores are processing Christmas returns and offering after-holiday and New Year‘s sales, so it clearly is not at a low point in the business cycle. February 1 occurs after the holiday shopping season concludes, so it makes sense for Target to use that date as its fiscal year end. Requirement 4 a. Target‘s auditor is Ernst & Young LLP. b. Target received a ―clean‖ (unmodified) audit opinion. Specifically: ―In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation at February 1, 2020 and February 2, 2019, and the results of its operations and its cash flows for each of the three years in the period ended February 1, 2020, in conformity with U.S. generally accepted accounting principles.‖ c. Target‘s audit report includes 2 critical audit matters: (1) Target‘s use of the retail inventory accounting method, and (2) Target‘s use of vendor income receivables.

Air France–KLM Case Requirement 1 a. Total revenues = b. Income from current operations = c. Net income (Group part) = d. Total assets = e. Total equity =

€ 27,189 million € 1,141 million € 290 million € 30,735 million € 2,299 million

Requirement 2 AF‘s basic earnings per share was € 0.64.

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Chapter 2 Review of the Accounting Process QUESTIONS FOR REVIEW OF KEY TOPICS

Question 2– 34 External events involve an exchange transaction between the company and a separate economic entity. For every external transaction, the company is receiving something in exchange for something else. Internal events do not involve an exchange transaction but do affect the financial position of the company. Examples of external events are the purchase of inventory, a sale to a customer, and the borrowing of cash from a bank. Examples of internal events include the recording of depreciation expense, the expiration of prepaid rent, and the accrual of salary expense.

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Question 2–2 According to the accounting equation, there is equality between the total economic resources of an entity, its assets, and the claims to those resources, liabilities, and equity. This implies that, since resources must always equal claims, the net effect of any transaction cannot affect one side of the accounting equation differently than the other side.

Question 2– 36 The purpose of a journal is to capture, in chronological order, the dual effect of a transaction in storage areas called accounts. A general ledger is an organized collection of accounts. The purpose is to keep track of the increases, decreases, and balances in each account.

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Question 2– 38 Permanent accounts represent the financial position of a company—assets, liabilities and owners' equity—at a particular point in time. Temporary accounts represent the changes in shareholders‘ equity, the retained earnings component of equity for a corporation, caused by revenue, expense, gain, loss, and dividend transactions. It would be cumbersome and less informative to record revenue/expense, gain/loss, and dividend transactions directly into the permanent retained earnings account. Recording these transactions in temporary accounts facilitates the preparation of the financial statements.

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Question 2–5 Assets are increased by debits and decreased by credits. Liabilities and equity accounts are increased by credits and decreased by debits.

Question 2– 40 Revenues and gains are increased with credits and decreased with debits.

Expenses, losses, and dividends are increased with debits (thus causing owners‘ equity to decrease) and decreased with credits (thus causing owners‘ equity to increase).

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Question 2–7 The first step in the accounting processing cycle is to identify external transactions affecting the accounting equation. Source documents, such as sales invoices, bills from suppliers, and cash register tapes, help to identify the transactions and then provide the information necessary to process the transaction.

Question 2– 42 Transaction analysis is the process of reviewing the source documents to determine the dual effect on the accounting equation and the specific elements involved.

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Question 2–44 After transactions are recorded in a journal, the debits and credits must be transferred to the appropriate general ledger accounts. This transfer is called posting.

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Question 2–10 In Transaction 1 we record the purchase of $20,000 of inventory on account. In Transaction 2 we record a credit sale of $30,000 and the corresponding cost of goods sold of $18,000.

Question 2–46 An unadjusted trial balance is a list of the general ledger accounts and their balances at a time before any end-of-period adjusting entries have been recorded. An adjusted trial balance is prepared after adjusting entries have been recorded and posted to the accounts.

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Question 2–12 We use adjusting entries to record the effect on financial position of internal events, those that do not involve an exchange transaction with another entity. We record them at the end of any period when financial statements are prepared to properly reflect financial position and results of operations according to the accrual accounting model, that is, to update accounts to their proper balances before we report those balances in the financial statements.

Question 2–48 Closing entries transfer the balances in the temporary owners‘ equity accounts (revenues, expenses, gains, losses, dividends) to a permanent owners‘ equity account, retained earnings for a corporation. This occurs only at the end of a reporting period in order to reduce the temporary accounts to zero before beginning the next reporting year.

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Question 2–50 Prepaid expenses represent assets recorded when a cash disbursement creates benefits that extend beyond the current reporting period. Examples are supplies on hand at the end of a period, prepaid rent, and prepaid insurance.

Complete Solution Manual for Intermediate Accounting, 11th Edition

Question 2–15 The adjusting entry required when deferred revenues are recognized is a debit to the deferred revenue liability and a credit to revenue.

Question 2–52 Accrued liabilities are recorded when an expense has been incurred that will not be paid until a subsequent reporting period. The adjusting entry needed to record an accrued liability is a debit to an expense and a credit to a liability.

Complete Solution Manual for Intermediate Accounting, 11th Edition

Question 2–17 Income statement—The purpose of the income statement is to summarize the profit-generating activities of a company during a particular period of time. It is a ―change statement‖ that reports the changes in shareholders‘ (owners‘) equity that occurred during the period as a result of revenues, expenses, gains, and losses. Statement of comprehensive income—The statement of comprehensive income extends the income statement to report changes in shareholders‘ equity during the reporting period that were not a result of transactions with owners. This statement includes net income and also other comprehensive income items. Balance sheet—The purpose of the balance sheet is to present the financial position of a company at a particular point in time. It is an organized list of assets, liabilities, and permanent shareholders‘ equity accounts. Statement of cash flows—The purpose of the statement of cash flows is to disclose the events that caused cash to change during the period. Statement of shareholders’ equity—The purpose of the statement of shareholders‘ equity is to disclose the sources of the changes in the various shareholders‘ equity accounts that occurred during the period. This statement includes changes resulting from investments by owners, distributions to owners, net income, and other comprehensive income.

Complete Solution Manual for Intermediate Accounting, 11th Edition

Question 2–18 A worksheet provides a way to organize the accounting information needed to prepare adjusting and closing entries and the financial statements. This error would result in an overstatement of revenue and thus net income and thus retained earnings, and an understatement of liabilities.

Question 2–19 Reversing entries are recorded at the beginning of a reporting period. They reverse the effects of some of the adjusting entries recorded at the end of the previous reporting period. This simplifies the journal entries recorded during the new period by allowing cash payments or cash receipts to be entered directly into the expense or revenue account without regard to the accrual recorded at the end of the previous period.

Complete Solution Manual for Intermediate Accounting, 11th Edition

Question 2–20 The purpose of special journals is to record, in chronological order, the dual effect of repetitive types of transactions, such as cash receipts, cash disbursements, credit sales, and credit purchases. Special journals simplify the recording process in the following ways: (1) journalizing the effects of a particular transaction is made more efficient through the use of specifically designed formats; (2) individual transactions are not posted to the general ledger accounts, but are accumulated in the special journals and a summary posting is made on a periodic basis; and (3) the responsibility for recording journal entries for the repetitive types of transactions is placed on individuals who have specialized training in handling them.

Answers to Questions (concluded)

Complete Solution Manual for Intermediate Accounting, 11th Edition

Question 2–21 The general ledger is a collection of control accounts representing assets, liabilities, and permanent and temporary shareholders‘ equity accounts. The subsidiary ledger contains a group of subsidiary accounts associated with a particular general ledger control account. For example, there will be a subsidiary ledger for accounts receivable that will keep track of the increases and decreases in the account receivable balance for each of the company‘s customers purchasing goods or services on credit. At any point in time, the balance in the accounts receivable control account should equal the sum of the balances in the accounts receivable subsidiary ledger accounts.

BRIEF EXERCISES

Complete Solution Manual for Intermediate Accounting, 11th Edition

Brief Exercise 2-1 + Stockholders’ Equity

Assets

Liabilities

(a)

+$50,000

(b)

+$35,000

(c)

−$10,000

(d)

−$5,000

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Brief Exercise 2-2

Dual Effect

1. Issue 10,000 shares of common stock in exchange for $32,000 in cash.

Assets increase

Stockholders’ equity increases

2. Purchase land for $19,000. A note payable is signed for the full amount.

Assets increase

Liabilities increase

3. Purchase equipment for $8,000 cash.

One asset (equipment) increases and another asset (cash) decreases

4. Hire three employees for $2,000 per month. Salaries are not paid until the end of the month.

No effect on the accounting equation

5. Receive cash of $12,000 in rental fees for the current month.

Assets increase

Stockholders’ equity increases

6. Purchase office supplies for $2,000 on account.

Assets increase

Liabilities increase

Pay employees $6,000 for the first month‘s salaries.

Assets decrease

Stockholders’ equity decreases

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Brief Exercise 2-3

Complete Solution Manual for Intermediate Accounting, 11th Edition

(1)

Debit

Equipment Cash (Purchase equipment with cash)

23,400

Credit 23,400

(2)

Cash

6,800 Service Revenue (Provide services for cash)

6,800

(3) Rent Expense Cash (Pay current month’s rent)

1,300 1,300

(4) Supplies 1,000 Accounts Payable (Purchase office supplies on account)

1,000

(5) Salaries Expense Cash (Pay current month’s salaries)

2,100 2,100

Brief Exercise 2-4 (1)

Debit

Advertising Expense Cash (Pay advertising for current month)

700

Credit 700

(2) Supplies Accounts Payable (Purchase supplies on account)

1,300 1,300

(3) Cash

2,900 Service Revenue (Provide services for cash)

2,900

(4) Salaries Expense Cash (Pay salaries for current month)

900 900

(5) Accounts Receivable Service Revenue (Provide services on account)

1,000 1,000

(6) Utilities Expense Cash (Pay utilities for current month)

300 300

Complete Solution Manual for Intermediate Accounting, 11th Edition

Brief Exercise 2-5 (1)

Debit

Cash

21,000 Common Stock (Issue common stock)

Credit 21,000

(2) Cash

9,000 Notes Payable (Obtain bank loan)

9,000

(3) Equipment Cash (Purchase equipment for cash)

25,000 25,000

(4) Advertising Expense 1,100 Cash (Purchase advertising for current month)

1,100

(5) Accounts Receivable Service Revenue (Provide services on account)

18,000 18,000

(6) Cash

13,000 Accounts Receivable (Receive cash on account)

13,000

(7) Salaries Expense Cash (Pay salaries for current month)

6,000 6,000

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Brief Exercise 2-6

(1) (4) (6)

Cash 5,000 15,000 9,000 (2) 8,000 3,000 (3) 4,000 1,000 (5) 7,000 (7) 12,000

Transaction (8) is not posted to the Cash T-account because a purchase on account does not involve cash.

Brief Exercise 2–7 Assets

Liabilities + Paid-in Capital + Retained Earnings

165,000

(inventory)

–

40,000

(cash)

+ 200,000(accounts receivable)

+ 200,000 (revenue)

–

120,000

(inventory)

–

180,000

(cash)

–

180,000

(accounts receivable)

–

145,000

(cash)

+ 165,000 (accounts payable) –

40,000 (expense)

120,000 (expense)

– 145,000 (accounts payable)

Brief Exercise 2–8 1. 2. 3.

4. 5.

Inventory ............................................................................ Accounts payable ........................................................... Salaries expense.................................................................. Cash .............................................................................. Accounts receivable ............................................................ Sales revenue ................................................................. Cost of goods sold .............................................................. Inventory........................................................................ Cash ................................................................................... Accounts receivable ...................................................... Accounts payable ............................................................... Cash ...............................................................................

165,000 165,000 40,000 40,000 200,000 200,000 120,000 120,000 180,000 180,000 145,000 145,000

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Brief Exercise 2–9 BALANCE SHEET ACCOUNTS Cash Accounts receivable 6/1 Bal. 4.

6/30 Bal.

65,000 180,000

43,000 200,000

6/30 Bal.

63,000

6/1 Bal. 40,000

145,000

60,000

Inventory 6/1 Bal.

165,000

6/30 Bal.

45,000

Accounts payable

180,000

6/1 Bal. 120,000

145,000

6/30 Bal.

22,000 165,000

42,000

INCOME STATEMENT ACCOUNTS Sales revenue

Cost of goods sold

6/1 Bal.

200,000

6/30 Bal.

6/1 Bal. 3.

0 120,000

6/30 Bal. 120,000

Salaries expense 6/1 Bal.

40,000

6/30 Bal.

40,000

Brief Exercise 2–10 1. 2. 3.

Prepaid insurance................................................................ Cash .............................................................................. Notes receivable ................................................................ Cash .............................................................................. Equipment ......................................................................... Cash ..............................................................................

12,000 12,000 10,000 10,000 60,000 60,000

Brief Exercise 2–11 1. 2. 3.

Insurance expense ($12,000 x 3/12) ..................................... Prepaid insurance .......................................................... Interest receivable ($10,000 x 6% x 6/12) ............................ Interest revenue .............................................................. Depreciation expense .......................................................... Accumulated depreciation ..............................................

3,000 3,000 300 300 12,000 12,000

Brief Exercise 2–12

1. 2. 3. Net effect

Higher (lower) $ 3,000 (300) 12,000 $14,700

Complete Solution Manual for Intermediate Accounting, 11th Edition

Brief Exercise 2–13 1. 2. 3. 4.

Deferred service revenue .................................................... Service revenue............................................................... Advertising expense ($2,000 x 1/2) ...................................... Prepaid advertising ......................................................... Salaries expense .................................................................. Salaries payable .............................................................. Interest expense ($60,000 x 8% x 4/12) ................................ Interest payable ...............................................................

4,000 4,000 1,000 1,000 16,000 16,000 1,600 1,600

Brief Exercise 2–14 Assets 1. 2. 3. 4. Net effect

Liabilities $ 4,000

$1,000

(16,000) (1,600) $(13,600)

Shareholders‘ Equity $(4,000) 1,000 16,000 1,600 $14,600

Brief Exercise 2–15 1. 2. 3. 4.

Interest receivable ............................................................... Interest revenue ($50,000 x 6% x 9/12) ...........................

2,250

Rent expense ($12,000 x 3/12)............................................. Prepaid rent .................................................................... Supplies expense ($3,000 + $5,000 – $4,200) ...................... Supplies .......................................................................... Salaries expense .................................................................. Salaries payable ..............................................................

3,000

2,250 3,000 3,800 3,800 6,000 6,000

Brief Exercise 2–16

BOWLER CORPORATION Income Statement For the Year Ended December 31, 2024 Sales revenue .............................................

$325,000

Cost of goods sold ......................................

168,000

Gross profit ................................................

157,000

Operating expenses: Salaries expense .......................................

$45,000

Rent expense ............................................

20,000

Depreciation expense ...............................

30,000

Miscellaneous expense .............................

12,000

Total operating expenses .............

107,000

Net income .................................................

$ 50,000

Complete Solution Manual for Intermediate Accounting, 11th Edition

Brief Exercise 2–17

BOWLER CORPORATION Balance Sheet At December 31, 2024 Assets Current assets: Cash ........................................................ Accounts receivable ................................ Inventory ................................................. Total current assets ............................. Property and equipment: Equipment ............................................... Less: Accumulated depreciation .............. Total assets ......................................

$ 5,000 10,000 16,000 31,000

$100,000 (40,000)

60,000 $91,000

Liabilities and Shareholders' Equity Current liabilities: Accounts payable .................................... Salaries payable ....................................... Total current liabilities ....................... Shareholders‘ equity: Common stock ........................................ Retained earnings .................................... Total shareholders‘ equity .................. Total liabilities and shareholders‘ equity

$20,000 12,000 32,000

$50,000 9,000 59,000 $91,000

Brief Exercise 2–18

Sales revenue.............................................................................. Retained earnings...................................................................

850,000

Retained earnings ....................................................................... Cost of goods sold.................................................................. Salaries expense ..................................................................... Rent expense .......................................................................... Interest expense......................................................................

815,000

Retained earnings ....................................................................... Dividends...............................................................................

12,000

850,000

580,000 180,000 40,000 15,000

12,000

Complete Solution Manual for Intermediate Accounting, 11th Edition

Brief Exercise 2-19

Accrual-Basis Revenue Recognition

Cash-Basis Revenue Recognition

1. August 16.

June 12.

2. January 27.

February 2.

3. April 2.

April 2.

4. Revenue is recognized as each magazine is delivered.

July 1.

Complete Solution Manual for Intermediate Accounting, 11th Edition

Accrual-Basis Expense Recognition

Cash-Basis Expense Recognition

1. August 16.

September 2.

2. January 27.

January 6.

3. One month‘s worth of insurance expense is recognized each month.

January 1.

4. February 4.

February 23.

Complete Solution Manual for Intermediate Accounting, 11th Edition

Brief Exercise 2–21 Revenue

$428,000*

Expenses: Salaries Utilities Advertising Net Income

(240,000) (33,000)** (12,000) $143,000

Explanation: *$420,000 cash received plus $8,000 increase ($60,000 – $52,000) in amount due from customers: Cash .................................................................................. Accounts receivable (increase in account)............................ Service revenue (to balance)............................................

420,000 8,000 428,000

** $35,000 cash paid less $2,000 decrease in amount owed to utility company: Utilities expense (to balance) .............................................. Utilities payable (decrease in account) ................................. Cash ...............................................................................

33,000 2,000 35,000

EXERCISES Exercise 2–1 Assets

Liabilities + Paid-in Capital + Retained Earnings

300,000

(cash)

+ 300,000 (common stock)

– +

10,000 40,000

(cash) (equipment)

+ 30,000 (notes payable)

90,000

(inventory)

+ 90,000 (accounts payable)

+ –

120,000 70,000

(accounts receivable) (inventory)

+ –

120,000 70,000

(revenue) (expense)

–

5,000

(cash)

–

5,000

(expense)

– +

6,000 6,000

(cash) (prepaid insurance)

–

70,000

(cash)

+ –

55,000 55,000

(cash) (accounts receivable)

–

1,000

(accumulated depreciation)

–

1,000

(expense)

– 70,000 (accounts payable)

Complete Solution Manual for Intermediate Accounting, 11th Edition

Exercise 2–2 1.

Cash .................................................................................... Common stock ................................................................

300,000

Equipment ........................................................................... Notes payable ................................................................. Cash ...............................................................................

40,000

Inventory............................................................................. Accounts payable ............................................................

90,000

Accounts receivable............................................................. Sales revenue .................................................................. Cost of goods sold ............................................................... Inventory ........................................................................

120,000

Rent expense ....................................................................... Cash................................................................................

5,000

Prepaid insurance ................................................................ Cash................................................................................

6,000

Accounts payable ................................................................ Cash................................................................................

70,000

Cash .................................................................................... Accounts receivable ........................................................

55,000

Depreciation expense........................................................... Accumulated depreciation ...............................................

1,000

300,000

30,000 10,000

90,000

120,000 70,000 70,000

5,000

6,000

70,000

55,000

1,000

Exercise 2–3

BALANCE SHEET ACCOUNTS Cash

3/1 Bal. 1. 8.

0 300,000 55,000

3/31 Bal.

264,000

10,000 5,000 6,000 70,000

Accounts receivable

2. 5. 6. 7.

3/1 Bal. 4.

0 120,000

3/31 Bal.

65,000

Inventory 3/1 Bal. 3.

0 90,000

3/31 Bal.

20,000

70,000

55,000

Prepaid insurance

Equipment

3/1 Bal. 6.

0 6,000

3/31 Bal.

6,000

Accumulated depreciation

3/1 Bal. 2.

0 40,000

0 1,000

3/1 Bal. 9.

3/31 Bal.

40,000

1,000

3/31 Bal.

Accounts payable

70,000

Notes payable

0 90,000

3/1 Bal. 3.

0 30,000

3/1 Bal. 2.

20,000

3/31 Bal.

30,000

3/31 Bal.

Common stock 0 300,000

3/1 Bal. 1.

300,000

3/31 Bal.

Complete Solution Manual for Intermediate Accounting, 11th Edition

Exercise 2–3 (concluded) INCOME STATEMENT ACCOUNTS Sales revenue

Cost of goods sold

0 120,000

3/1 Bal. 4.

0 70,000

120,000

3/31 Bal.

70,000

Rent expense

Depreciation expense

3/1 Bal. 5.

0 5,000

3/1 Bal. 9.

0 1,000

3/31 Bal.

5,000

3/31 Bal.

1,000

Account Title Cash Accounts receivable Inventory Prepaid insurance Equipment Accumulated depreciation Accounts payable Notes payable Common stock Sales revenue Cost of goods sold Rent expense Depreciation expense Totals

Debits $264,000 65,000 20,000 6,000 40,000

Credits

70,000 5,000 _ 1,000 $471,000

1,000 20,000 30,000 300,000 120,000

$471,000

Exercise 2–92 1.

10.

Cash ............................................................................... Common stock ............................................................

500,000

Office equipment............................................................ Cash ............................................................................ Notes payable .............................................................

100,000

Inventory........................................................................ Accounts payable ........................................................

200,000

Accounts receivable ....................................................... Sales revenue............................................................... Cost of goods sold .......................................................... Inventory.....................................................................

280,000

Rent expense .................................................................. Cash ............................................................................

6,000

Prepaid insurance ........................................................... Cash ............................................................................

3,000

Accounts payable ........................................................... Cash ............................................................................

120,000

Cash ............................................................................... Accounts receivable ....................................................

55,000

Dividends ....................................................................... Cash ............................................................................

5,000

Cash ............................................................................... Deferred service revenue .............................................

2,000

500,000

40,000 60,000

200,000

280,000 140,000 140,000

6,000

3,000

120,000

55,000

5,000

2,000

Complete Solution Manual for Intermediate Accounting, 11th Edition

Exercise 2–5

List A 1. Source documents

2. Transaction analysis

3. Journal

4. Posting

5. Unadjusted trial balance e. Determine the dual effect on the accounting equation. 6. Adjusting entries f. List of accounts and their balances before recording adjusting entries. 7. Adjusted trial balance g. List of accounts and their balances after recording closing entries. 8. Financial statements h. List of accounts and their balances after recording adjusting entries. 9. Closing entries 10. Post-closing trial balance i. Transferring balances from the journal to the ledger. j. Used to identify and process external transactions.

b h c d g

List B a. Record of the dual effect of a transaction in debit/credit form. b. Updates to account balances recorded at the end of a reporting period. c. Primary means of disseminating information to external decision makers. d. To zero out the temporary accounts.

Exercise 2–94 Increase (I) or

Decrease (D)

Account

Inventory

Depreciation expense

Accounts payable

Prepaid rent

Sales revenue

Common stock

Salaries payable

Cost of goods sold

Utilities expense

10.

Equipment

11.

Accounts receivable

12.

Utilities payable

13.

Rent expense

14.

Interest expense

15.

Interest revenue

Complete Solution Manual for Intermediate Accounting, 11th Edition

Exercise 2–7

Example: Purchased inventory for cash 1. Paid a cash dividend.

Account(s) Account(s) Debited Credited 3 5 19 5

Paid rent for the next three months.

Sold goods to customers on account.

4, 16

9, 3

Purchased inventory on account.

Purchased supplies for cash.

Issued common stock in exchange for cash.

Collected cash from customers for goods sold in 3.

Borrowed cash from a bank and signed a note.

Paid salaries for the month of October.

10.

Received cash for advance payment from customer.

Exercise 2–96 1. Insurance expense ($12,000 × 6/36) ....................................... Prepaid insurance .............................................................

2,000

Depreciation expense ............................................................ Accumulated depreciation ...............................................

15,000

Salaries expense.................................................................... Salaries payable................................................................

18,000

4. Interest expense ($200,000 × 12% × 2/12) ............................. Interest payable ................................................................

4,000

5. Deferred rent revenue ........................................................... Rent revenue (1/3 × $3,000) ..............................................

1,000

2,000

15,000

18,000

4,000

1,000

Complete Solution Manual for Intermediate Accounting, 11th Edition

Exercise 2–9 1. Interest receivable ($90,000 x 8% x 3/12) .............................. Interest revenue................................................................

1,800

2. Rent expense ($6,000 x 2/3) .................................................. Prepaid rent......................................................................

4,000

3. Deferred rent revenue ($12,000 x 5/12).................................. Rent revenue ($12,000 x 5/12)...........................................

5,000

Depreciation expense............................................................ Accumulated depreciation ................................................

4,500

Salaries expense .................................................................. Salaries payable ...............................................................

8,000

6. Supplies expense ($2,000 + $6,500 – $3,250) ....................... Supplies ...........................................................................

5,250

1,800

4,000

5,000

4,500

8,000

5,250

Exercise 2–98 1. $7,200 represents nine months of interest on a $120,000 note, or 75% of annual interest. $7,200 ÷ 0.75 = $9,600 annual interest $9,600 ÷ $120,000 = 8% interest rate Or, $7,200 ÷ $120,000 = .06 nine-month rate To annualize the nine-month rate: .06 x 12/9 = .08 or 8%

2. $60,000 ÷ 12 months = $5,000 rent per month $35,000 ÷ $5,000 = 7 months expired. The rent was paid on June 1, seven months ago.

3. $500 represents two months (November and December) accrued interest, or $250 per month. $250 x 12 months = $3,000 annual interest Principal x 6% = $3,000 Principal = $3,000 ÷ .06 = $50,000 note

Complete Solution Manual for Intermediate Accounting, 11th Edition

Exercise 2–11 1. Prepaid insurance ................................................................ 2,500 Insurance expense ............................................................ (Five months remaining, July 1 through December 1, $500/month × 5)

2,500

2. Prepaid advertising .............................................................. 3,200 Advertising expense ......................................................... (Four months remaining, July 1 through November 1, $800/month × 4)

3,200

3. Rent revenue ........................................................................ 12,000 Deferred rent revenue....................................................... 12,000 (Six months remaining, July 1 through December 31, $2,000/month × 6) 4.

Supplies ............................................................................... Supplies expense.............................................................. (Supplies remaining = $7,200 – $4,100 = $3,100)

3,100

5. Delivery revenue ................................................................. 1,200 Deferred delivery revenue ................................................ (Remaining delivery services owed = $3,000 – $1,800 = $1,200)

3,100

1,200

SOLUTIONS MANUAL for Intermediate Accounting 11th Edition by Spiceland, Nelson, Thomas & Winchel