Solutions for Financial & Managerial Accounting 15th Us Edition by Warren by 6alsm

CHAPTER2 ANALYZINGTRANSACTIONS

DISCUSSIONQUESTIONS

1. An account is a form designed to record changes in a particular asset, liability, stockholders’ equity, revenue, or expense. A ledger is a group of related accounts.

2. The terms debit and credit may signify either an increase or a decrease, depending upon the nature of the account. For example, debits signify an increase in asset, expense, and dividends accounts but a decrease in liability, common stock, retained earnings, and revenue accounts.

3.a. Assuming no errors have occurred, the credit balance in the cash account resulted from writing checks for $1,850 in excess of the amount of cash on deposit.

b. The $1,850 credit balance in the cash account as of December 31 is a liability owed to the bank. It is usually referred to as an “overdraft” and should be classified on the balance sheet as a liability.

4.a. The revenue was earned in October.

b. (1)Debit Accounts Receivable and credit Fees Earned or another appropriately titled revenue account in October.

(2)Debit Cash and credit Accounts Receivable in November.

5. No. Errors may have been made that had the same erroneous effect on both debits and credits, such as failure to record and/or post a transaction, recording the same transaction more than once, and posting a transaction correctly but to the wrong account.

6. The listing of $9,800 is a transposition; the listing of $100 is a slide.

7.a. No. Because the same error occurred on both the debit side and the credit side of the trial balance, the trial balance would not be out of balance.

b. Yes. The trial balance would not balance. The error would cause the debit total of the trial balance to exceed the credit total by $90.

8.a. The equality of the trial balance would not be affected.

b. On the income statement, total operating expenses (salary expense) would be overstated by $7,500, and net income would be understated by $7,500. On the statement of stockholders’ equity, the beginning and ending retained earnings would be correct. However, net income and dividends would be understated by $7,500. These understatements offset one another, and thus, ending retained earnings is correct. The balance sheet is not affected by the error.

9.a. The equality of the trial balance would not be affected.

b. On the income statement, revenues (fees earned) would be overstated by $300,000, and net income would be overstated by $300,000. On the statement of stockholders’ equity, the beginning retained earnings would be correct. However, net income and ending retained earnings would be overstated by $300,000. The balance sheet total assets is correct. However, liabilities (notes payable) is understated by $300,000, and stockholders’ equity (retained earnings) is overstated by $300,000. The understatement of liabilities is offset by the overstatement of stockholders’ equity (retained earnings), and thus, total liabilities and stockholders’ equity is correct.

10.a. From the viewpoint of Surety Storage, the balance of the checking account represents an asset.

b. From the viewpoint of Ada Savings Bank, the balance of the checking account represents a liability.

BASICEXERCISES

1.Debitandcreditentries,normalcreditbalance

2.Debitandcreditentries,normaldebitbalance

3.Debitentriesonly,normaldebitbalance

4.Debitentriesonly,normaldebitbalance

5.Debitentriesonly,normaldebitbalance

6.Creditentriesonly,normalcreditbalance

UsingthefollowingTaccount,solvefortheamountofsuppliesexpense(indicated by?below).

a.Thetotalsareequalbecauseboththedebitandcreditentrieswerejournalized andpostedfor$12,900.

b.Thetotalsareunequal.Thecredittotalishigherby$1,656($1,840–$184).

c.Thetotalsareunequal.Thedebittotalishigherby$4,500($8,300–$3,800).

Note: Thefirstentryin(b)reversestheincorrectentry,andthesecondentry recordsthecorrectentry.Thesetwoentriescouldalsobecombinedintoone entryasshownbelow;however,preparingtwoentrieswouldmakeiteasier forsomeonetounderstandlaterwhathappenedandwhytheentrieswere necessary.

EXERCISES

Ex.2–1

AdvancedPaymentsforEquipmentaCargoRevenue CashPassengerRevenue

FlightEquipment

FuelInventory

PartsandSuppliesInventories

PrepaidExpenses

AccountsPayableAircraftFuel(Expense)

AirTrafficLiabilitybAircraftMaintenance(Expense)

FrequentFlyer(Obligations)cAircraftRent(Expense)

TaxesPayableContractCarrierArrangements(Expense)d LandingFees(Expense)e PassengerCommissions(Expense)f

None

aAdvancepayments(deposits)onaircrafttobedeliveredinthefuture bPassengerticketsalesforfutureflights cObligationstoprovidefrequentflyersfuturetravelandotherbenefits dPaymentstootherairlinesforpassengertravelunderDeltatickets eFeespaidtoairportsforlandingrights fCommissionspaidtotravelagentsforpassengerbookings

Ex.2–3

11Cash41FeesEarned

12AccountsReceivable

13Supplies

14PrepaidInsurance51WagesExpense

15Equipment52RentExpense

53SuppliesExpense

59MiscellaneousExpense

21AccountsPayable

22UnearnedRent

31CommonStock

32RetainedEarnings

33Dividends

Note: Theorderofsomeoftheaccountswithinthemajorclassificationsis somewhatarbitrary,asinaccounts13–14,accounts21–22,andaccounts51–53. Inanewbusiness,theorderofmagnitudeofbalancesinsuchaccountsisnot determinableinadvance.Themagnitudemayalsovaryfromperiodtoperiod.

Ex.2–4

a.debitg.credit

b.debith.debit

c.debiti.debit

d.creditj.credit

e.debitk.debit

f.creditl.debit

Ex.2–5

1.debitandcreditentries(c)

2.debitandcreditentries(c)

3.debitandcreditentries(c)

4.creditentriesonly(b)

5.debitentriesonly(a)

6.debitentriesonly(a)

7.debitentriesonly(a)

Ex.2–6

a.Liability—creditf.Revenue—credit b.Asset—debitg.Asset—debit

c.Asset—debith.Expense—debit

d.Stockholders’equityi.Asset—debit (CommonStock)—creditj.Expense—debit

e.Stockholders’equity (Dividends)—debit Ex.2–7

CHAPTER 2 Analyzing Transactions

Ex.2–9(Concluded)

b. (3)88,220(4)3,100(4)3,100(2)4,500 (2)4,500(1)112,700 (1)112,700(3)88,220

c.No,anerrormaynothavenecessarilyoccurred.AcreditbalanceinAccounts Receivablecouldoccurifacustomeroverpaidhisorheraccount.Regardless, thecreditbalanceshouldbeinvestigatedtoverifythatanerrorhasnot occurred.

Ex.2–10

a.Theincreaseof$270,800($1,245,000–$974,200)inthecashaccountdoesnot indicatenetincomeofthatamount.Netincomeisthenetchangeinallassets andliabilitiesfromoperating(revenueandexpense)transactions.

b.$150,200($421,000–$270,800) or X974,200 1,245,000 421,000

X+$1,245,000–$974,200=$421,000 X=$421,000–$1,245,000+$974,200 X=$150,200

CHAPTER 2 Analyzing Transactions

Ex.2–11

a. Feb.1X 186,500201,400 Feb.2859,900

X+$201,400–$186,500=$59,900 X=$59,900+$186,500–$201,400 X=$45,000

b. Oct.1115,800449,600 X Oct.31130,770

$115,800+X–$449,600=$130,770 X=$130,770+$449,600–$115,800 X=$464,570

c. Apr.146,220X

$46,220+$248,600–X=$56,770 X=$46,220+$248,600–$56,770 X=$238,050

Ex.2–12

a.Debit(negative)balanceof$16,000($314,000–$10,000–$320,000).This negativebalancemeansthattheliabilitiesofthebusinessexceedthe assets.

b.Yes.ThebalancesheetpreparedatDecember31willbalance,withRetained Earningsbeingreportedinthestockholders’equitysectionasadebit (negative)balanceof$16,000.

Ex.2–16

Ex.2–17

Inequalityoftrialbalancetotalswouldbecausedbyerrorsdescribedin(c)and (e).For(c),thedebittotalwouldexceedthecredittotalby$9,900($4,950+$4,950). For(e),thecredittotalwouldexceedthedebittotalby$17,100($19,000–$1,900). Errors(b),(c),(d),and(e)wouldrequirecorrectingentries.Althoughitisnota correctingentry,theentrythatwasnotmadein(a)shouldalsobeenteredinthe journal.

Ex.2–20

1.TheDebitcolumntotalisaddedincorrectly.Thesumis$1,098,500ratherthan $1,801,500.

2.Thetrialbalanceshouldbedated“December31,20Y8,”not“FortheYear EndingDecember31,20Y8.”

3.TheAccountsReceivablebalanceshouldbeintheDebitcolumn.

4.TheAccountsPayablebalanceshouldbeintheCreditcolumn.

5.TheDividendsbalanceshouldbeintheDebitcolumn.

6.TheAdvertisingExpensebalanceshouldbeintheDebitcolumn. Acorrectedtrialbalancewouldbeasfollows:

a.Thecorrectioncouldbemadewithoneortwoentriesasfollows:

Prob.2–1A 1.and2.

CHAPTER 2 Analyzing Transactions

Prob.2–2A(Continued) 2.

(a)40,000(b)4,800(e)18,750 (e)18,750(d)1,100 (f)2,380 (g)3,500(b)4,800 (i)1,500 Bal.45,470

(d)1,100(c)2,150(f)1,580 Bal.1,050

(i)1,500(f)800 AutomobileExpense SuppliesExpense DividendsMiscellaneousExpense AccountsPayable CommonStock CashSalesCommissions SuppliesOfficeSalariesExpense RentExpense

(a)40,000(h)1,300

4.a.$18,750

b.$11,980($4,800+$3,500+$1,580+$1,300+$800)

c.$6,770($18,750–$11,980)

5.$5,270,whichistheexcessofnetincomeof$6,770overthedividendsof$1,500.

4.$16,250($33,800–$6,800–$4,000–$4,500–$1,250–$1,000)

5.SomesuppliesmayhavebeenusedduringNovember,butnosuppliesexpense hasbeenrecorded.

AswillbediscussedinChapter3,adjustmentsarenecessaryattheendofthe accountingperiodtobringtheaccountsuptodate.Forexample,adjustments forsuppliesused,insuranceexpired,anddepreciationwouldprobablybe requiredbyHeritageDesigns.

Note to Instructors: Atthispoint,studentshavenotbeenexposedtodepreciation, butsomeinsightfulstudentsmightrecognizetheneedforrecordingsuppliesused andinsuranceexpired.Youmightusethisasanopportunitytodiscusswhatis cominginChapter3.

Prob.2–4A(Concluded)

5.(a)Theunadjustedtrialbalancein(4)stillbalancesbecausethedebitsequaled thecreditsintheoriginaljournalentry.

(b)Thecorrectingentryfor$7,200($19,100–$11,900)wouldbeasfollows:

JOURNAL

Date

20Y3

Description

Apr.30SalaryandCommissionExpense517,200 Cash117,200

(c)Transposition

2.No.Thetrialbalanceindicatesonlythatthedebitsandcreditsareequal.Anyerrors thathavethesameeffectondebitsandcreditswillnotaffectthebalancingofthe trialbalance.

CHAPTER 2 Analyzing Transactions

Prob.2–2B(Continued) 2.

(a)17,500(d)3,000(c)13,300 (c)13,300(e)1,150 (f)1,800 (g)1,900(d)3,000 (h)2,800 Bal.20,150

(b)2,300(i)1,050(h)2,800 Bal.1,250 (e)1,150(b)2,300(g)1,500 Bal.1,150

(f)1,800(g)400 AutomobileExpense SuppliesExpense DividendsMiscellaneousExpense AccountsPayable CommonStock CashSalesCommissions SuppliesOfficeSalariesExpense RentExpense

(a)17,500(i)1,050

4.a.$13,300

b.$8,750($3,000+$2,800+$1,500+$1,050+$400) c.$4,550($13,300–$8,750)

5.$2,750,whichistheexcessofnetincomeof$4,550overthedividendsof$1,800.

5.SomesuppliesmayhavebeenusedduringOctober,butnosuppliesexpense hasbeenrecorded.

AswillbediscussedinChapter3,adjustmentsarenecessaryattheendofthe accountingperiodtobringtheaccountsuptodate.Forexample,adjustmentsfor suppliesused,insuranceexpired,anddepreciationwouldprobablyberequired byPioneerDesigns.

2.No.Thetrialbalanceindicatesonlythatthedebitsandcreditsareequal. Anyerrorsthathavethesameeffectondebitsandcreditswillnotaffectthe balancingofthetrialbalance.

FortheYearsEndedDecember31

(inmillions)

Increase/(Decrease)

Revenues:

Productsales$94,665$79,268$15,39719.4% Servicesales41,32227,73813,58449.0% Totalrevenues$135,987$107,006$28,98127.1%

Operatingexpenses:

b.Thehorizontalanalysisshowsthattotalrevenuesincreasedby27.1%betweenthe twoyears,withastrongincreaseinservicesales.Servicesalesarerevenues earnedfromAmazon’sWebhosting,Webdesign,andorderfulfillmentservices providedforotherbusinesses.ThispartofAmazonapparentlyhasbeengrowing rapidly.Totaloperatingexpenseshavegrownby25.8%betweenthetwoyears, indicatingthatexpensesaregrowingslowerthanrevenues.Theexpensegrowth appearstobeoccurringacrossallthemajorexpensecategories.Thenetresult isasignificantincreaseinoperatingincomebetweenthetwoyearsof87.5%. Thus,Amazondemonstratessignificantrevenueandoperatingincomegrowth fromYear1toYear2.

ChipotleMexicanGrill,Inc. IncomeStatements

FortheYearsEndedDecember31 (inthousands)

Increase/(Decrease)

Year2Year1AmountPercent

Revenue$3,904,384$4,501,223$(596,839)(13.3)%

Expenses:

Food,beverage,packing$(1,365,580)$(1,503,835)$(138,255)(9.2)%

Labor(1,105,001)(1,045,726)59,2755.7%

Rent(ocupancy)(293,636)(262,412)31,22411.9%

Generalandadministrative(641,953)(514,963)126,99024.7%

Other(463,647)(410,698)52,94912.9%

Totalexpenses$(3,869,817)$(3,737,634)$132,1833.5%

Operatingincome$34,567$763,589$(729,022)(95.5)%

c. Revenuedecreasedby13.3%inYear2,whiletotalexpensesincreased3.5%.

Food,beverage,packingexpensedecreasedby9.2%,whiletheother expensesincreasedfrom5.7%(labor)to24.7%(generalandadministrative).

Asaresult,operatingincomedecreasedby95.5%,asignificantdecreaseand unfavorableresult.

ThesignificantdecreaseinrevenueandoperatingincomeinYear2was causedbyfood-borneillnesses(E.Coli)inasmanyas15states.Asaresult, customersavoidedChipotle’srestaurantswitharelateddecreaseinrevenue. The9.2%decreaseinfood,beverage,packingexpenseisconsistentwiththe decreaseincustomersandrelatedrevenue.

MAD2–3

VeraBradley,Inc. IncomeStatements

FortheYearsEndedJanuary31 (inmillions)

Year2Year1AmountPercent Revenue$502.6$509.0$(6.4)(1.3)% Expenses: Costofmerchandisesold$(221.4)$(240.0)$(18.6)(7.8)% Selling,general,admin.expenses(236.8)(208.7)28.113.5% Otherexpenses(16.8)(21.9)(5.1)(23.3)% Totalexpenses$(475.0)$(470.6)$4.40.9% Operatingincome$27.6$38.4$(10.8)(28.1)%

Operatingincomedecreased$10.8millionor28.1%inYear2.Thisisasignificant decreaseandwouldbeviewedunfavorablybystockholders.Revenuedecreased by1.3%($6.4million),whichwasaccompaniedbya7.8%($18.6million)decrease incostofmechandisesold.However,selling,general,admin.expensesincreased by13.5%($28.1million),whichwaspartiallyoffsetbya23.3%($5.1million) decreaseinotherexpenses.

MAD2–4

a.1.Revenue:$73,785–$72,618=$1,167

2.Operatingexpenses:$68,875–$68,083=$792

3.Operatingincome:$4,910–$4,535=$375

b.Therevenueincreasedby1.6%betweenthetwoyears,whiletheoperating expensesgrewby1.2%.Thus,expensesgrewlessthanrevenues.Asaresult, operatingincomeincreased8.3%inYear2.

MAD2–5

a.1.Revenue:$482,130–$485,651=$(3,521)

$(3,521)

$485,651

2.Operatingexpenses:$458,025–$458,504=$(479)

$(479)

$458,504

$(3,042) $27,147

–6 =(0.7)%

=(0.1)% =(11.2)%

3.Operatingincome:$24,105–$27,147=$(3,042)

b.Revenuedecreasedby0.7%,whileoperatingexpensesdecreasdonly0.1%. Asaresult,operatingincomedecreasedby11.2%,whichisanunfavorable changeinYear2.

Target’soperatingresultsimprovedfromYear1toYear2,whileWal-Mart’s operatingresultsdeclined.Specifically,Target’srevenueandoperatingincome increasedby1.6%and8.3%.Incontrast,Wal-Mart’srevenueandoperating incomedecreasedby0.7%and11.2%.

MAD2

TAKEITFURTHER

TIF2–1

1.No.Forfinancialaccountinginformationtobeuseful,itmustaccuratelyreflectan entity’sbusinesstransactionsandeconomicactivity.Forthistohappen,each accountmustreflecttheincreasesordecreasesthatresultfromeachtransaction. Ifthetrialbalancedoesnotbalance,itmeansthatatransactionhasnotbeen accuratelyrecordedintheaccounts.Byknowinglysubmittingatrialbalancethat doesnotaccuratelyreflectthetransactionsintheaccounts,Buddyisdemonstrating afailureofindividualcharacterandisactingunethically.

2.Theusersofthefinancialinformationwhorelyuponthisinformationwillbe affected,astheinformationwillnotbeafaithfulrepresentationoftheentity’s economicactivity.

3.Buddyshouldhavediscussedtheissuewithhissupervisorandaskedformore timetofindtheerror.

TIF2–2

AsamplesolutionbasedonAppleInc.’sForm10-Kforthefiscalyearended September24,2016,follows:

1.$321,686million

2.$193,437

3.$128,249million($321,686milliontotalassets–$193,437milliontotalliabilities)

4.3

5.2

6.Theincomestatementreportsasummaryofrevenuesandexpensesfora specificperiodoftime,suchasamonthorayear.Thebalancesheetreportsa listofassets,liabilities,andstockholders’equityasofaspecificdate,usuallyat thecloseofthelastdayofamonthorayear.

TIF2–3

Note to Instructors: Thepurposeofthisactivityistofamiliarizestudentswiththejob opportunitiesavailableinaccounting,andallowthemtodemonstratetheirabilityto communicatetheroleofaccountinginthecontextofaspecificpositionthatrequires knowledgeofaccounting.Anexampleofanadvertisementforsuchapositionisshown below.Individualstudentanswerswillvarydependingonthespecificscenariothey select.

ABOUTTHECOMPANY

OurclientislookingtoaddaFinancialAnalyst.Withalargeandgrowingfinanceteam, thereissignificantopportunityforgrowthandadvancementwithinthedepartment. Thecompanyboastsateam-orientedcultureandprovidesitsemployeeswiththe toolsandtrainingnecessarytoperform.Ourclientislookingtobringonmoreofa junior-levelcandidatewhoislookingtogainexperienceinhisorherfieldofstudy. Therewillbehands-ontrainingfortherolethatwillevolvefromadataanalystintoa financialanalystandwillbereportingtothedirectoroffinance.Ourclientisinthe consumergoodsindustryandisaninternationalcompanythathasmultiple opportunitiesforgrowth.

RESPONSIBILITIESOFTHEFINANCIALANALYST

TheFinancialAnalystwill:

• Conductspecialstudiestoanalyzecomplexfinancialactionsandprepare recommendationsforpolicy,procedure,control,oraction.

• Analyzefinancialinformationtodeterminepresentandfuturefinancial performance.

• Evaluatecomplexprofitplans,operatingrecords,andfinancialstatements.

• Directpreparationofstudies,reports,analyses,andrecommendationsinareas suchasbudgets,forecasts,financialplans,statisticalreports,andbusiness forecasts.

• Coordinatewithalllevelsofmanagementtogather,analyze,summarize,and preparerecommendationsregardingfinancialplans,trendedfuturerequirements, andoperatingforecasts.

Source:CareerBuilder.com

TIF2–4

Thefollowinggeneraljournalentryshouldbeusedtorecordthereceiptoftuition paymentsreceivedinadvanceofclasses:

Cashisanassetaccount,andUnearnedTuitionDepositsisaliabilityaccount.As theclassesaretaughtthroughouttheterm,theunearnedtuitiondepositsbecome earnedrevenue.

TIF2–5

Thejournaliscalledthebookoforiginalentry.Itprovidesatime-orderedhistory ofthetransactionsthathaveoccurredforthefirm.Thistime-orderedhistoryis veryimportantbecauseitallowsonetotraceledgeraccountbalancesbackto theoriginaltransactionsthatcreatedthosebalances.Thisiscalledan“audit trail.”Ifthefirmrecordedtransactionsbypostingtoledgersdirectly,itwouldbe nearlyimpossibletoreconstructactualtransactions.Thedebitsandcredits wouldallbeseparatedandaccumulatedintotheledgerbalances.Oncethe transactionsbecomepartoftheledgerbalances,theoriginaltransactionswould belost.Thatis,therewouldbenoaudittrail,andanyerrorsthatmightoccurin recordingtransactionswouldbealmostimpossibletotrace.Thus,firmsfirst recordtransactiondebitsandcreditsinajournal.Thesetransactionsarethen postedtotheledgertoupdatetheaccountbalances.Thejournalandledgerare linkedusingpostingreferences.Thisallowsananalysttotracethetransaction flowforwardorbackward,dependingontheneed.

TIF2–6

1.Therulesofdebitandcreditmustbememorized.Dotiscorrectinthatthe rulesofdebitandcreditcouldbereversedaslongaseveryoneaccepted andabidedbytherules.However,theimportantpointisthateveryone acceptstherulesasthewayinwhichtransactionsshouldberecorded.This generatesuniformityacrosstheaccountingprofessionandreduceserrors andconfusion.Becausethecurrentrulesofdebitandcredithavebeenusedfor centuries,Dotshouldadapttothecurrentrulesofdebitandcredit,rather thandeviseherown.

Theprimaryreasonthatallaccountsdonothavethesamerulesfor increasesanddecreasesisforcontroloftherecordingprocess.Thedoubleentryaccountingsystem,whichincludesboth(1)therulesofdebitand creditand(2)theaccountingequation,guaranteesthat(1)debitsalways equalcreditsand(2)assetsalwaysequalliabilitiesplusowner’sequity.Ifall increasesintheaccountwererecordedbydebits,thenthecontrolthat debitsalwaysequalcreditswouldberemoved.Inaddition,thecontrolthat thenormalbalanceofassetsisadebitwouldalsoberemoved.The accountingequationwouldstillhold,butthecontroloverrecording transactionswouldbeweakened.

Dotiscorrectthatwecouldcalltheleftandrightsidesofanaccount differentterms,suchas“LE”or“RE.”Again,centuriesoftraditiondictate thecurrentterminologyused.Onemightnote,however,thatinLatin, debere (debit)meansleftand credere (credit)meansright.

2.Theaccountingsystemmaybedesignedtocaptureinformationaboutthe buyinghabitsofvariouscustomersorvendors,suchasthequantity normallyordered,averageamountordered,numberofreturns,etc.Thus,in asense,therecanbeother“sides”of(informationabout)atransactionthat arerecordedbytheaccountingsystem.Suchinformationwouldbeviewed assupplementaltothebasicdouble-entryaccountingsystem.