SOLUTIONS MANUAL For Financial Accounting Tools for Business Decision-Making 6th Canadian Edition 6e

Part 1 CHAPTER 1 The Purpose and Use of Financial Statements ASSIGNMENT CLASSIFICATION TABLE Questions

Brief Exercises

Exercises

A Problems

B Problems

BYP

1. Identify the uses and users of accounting.

1, 2, 3, 4

1

1

1A

1B

3, 5, 7

2. Describe the primary forms of business organization.

5, 6, 7, 8

2

2

2A

2B

3, 7

3. Explain the three main types of business activity.

9, 10, 11, 12

3, 4

3, 4

3A

3B

7

4. Describe the purpose and content of each of the financial statements.

13, 14, 15, 16, 17, 18, 19, 20

5, 6, 7, 8, 9, 10

5, 6, 7, 8, 9, 10, 11, 12, 13

4A, 5A, 6A, 7A, 8A, 9A, 10A

4B, 5B, 6B, 7B, 8B, 9B, 10B

1, 2, 4, 6

Study Objectives

Solutions Manual .

1-1

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A

Description Identify uses of accounting information.

Difficulty Level Moderate

Time Allotted (min.) 30-40

2A

Determine forms of business organization and accounting standards.

Moderate

20-30

3A

Identify business activities.

Simple

25-30

4A

Classify accounts.

Simple

20-30

5A

Prepare accounting equation.

Simple

20-30

6A

Determine missing amounts; answer questions.

Complex

30-40

7A

Prepare financial statements.

Moderate

35-45

8A

Prepare statement of cash flows; comment on adequacy of cash.

Moderate

25-35

9A

Calculate missing amounts; explain statement interrelationships.

Moderate

40-50

10A

Prepare corrected statement of financial position; identify financial statements for ASPE.

Complex

35-45

1B

Identify users of accounting information.

Moderate

30-40

2B

Determine forms of business organization and accounting standards.

Moderate

20-30

3B

Identify business activities.

Simple

25-30

4B

Classify accounts.

Simple

20-30

5B

Prepare accounting equation.

Simple

20-30

6B

Determine missing amounts; answer questions.

Complex

30-40

7B

Prepare financial statements.

Moderate

35-45

8B

Prepare statement of cash flows; comment on adequacy of cash.

Moderate

25-35

Solutions Manual .

1-2

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

9B

Calculate missing amounts; explain statement interrelationships.

Moderate

40-50

10B

Prepare corrected statement of financial position; identify financial statements for ASPE.

Complex

35-45

Solutions Manual .

1-3

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ANSWERS TO QUESTIONS 1.

Accounting is the information system that identifies and records the economic events of an organization, and then communicates them to a wide variety of interested users.

2.

Internal users of accounting information work for the company and include finance directors, marketing managers, human resource personnel, production supervisors, and company officers. External users of accounting information do not work for the company. The primary external users are investors, lenders, and other creditors. Other external users include labour unions, customers, the Canada Revenue Agency (CRA), and securities commissions.

3.

Internal users may want the following questions answered: • Is there enough cash to purchase a new piece of equipment? • What price should we sell our product for to cover costs and to maximize profits? • How many employees can we afford to hire this year? • Which product line is the most profitable? • How much of a pay raise can the company afford to give me? External users may want the following questions answered: • Is the company earning enough to give me my required return on investment? • Will the company be able to repay its debts as the debts come due? • Will the company stay in business long enough to service the products I buy from it?

4.

Ethics are important because, without the expectation of ethical behaviour, the information presented in the financial statements would have no credibility for the accounting profession. Without credibility, financial statement information would be useless to financial statement users.

5.

(a) Proprietorship: Proprietorships are easier to form (and dissolve) than other types of business organizations. They are not taxed as separate entities; rather, the proprietor pays personal income tax on the company’s profits. Depending on the circumstances, this may be an advantage or disadvantage. Disadvantages of a proprietorship includes unlimited liability (proprietors are personally liable for all debts of the business) and difficulty in obtaining financing compared to other forms of organization. In addition, the life of the proprietorship is limited as it is dependent on the willingness and capability of the proprietor to continue operations.

Solutions Manual .

1-4

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 5. (Continued) (b) Partnership: Partnerships are easier to form (and dissolve) than a corporation; although not as easy as a proprietorship. Similar to a proprietorship, partnerships are not taxed as separate entities. Instead, the partners pay personal income tax on their share of profits. Depending on the circumstances this may be an advantage or disadvantage. Disadvantages of partnerships include unlimited liability (partners are jointly and severally liable for all debts of the business) and difficulty in obtaining financing compared to corporations. In addition, the life of a partnership can be limited depending on the terms of the partnership agreement and actions of the other partners. (c) Private corporation: Advantages of a private corporation include limited liability (shareholders not being personally liable for corporate debts), indefinite life, and transferability of ownership. In many cases, depending on the size of the corporation, a creditor such as a bank will ask for a personal guarantee which will void the limited liability advantage. In addition, transferability of ownership may be limited since shares are not publicly traded. Disadvantages of a private corporation include increased government regulations and paperwork. The fact that corporations are taxed as a separate legal entity may be an advantage or a disadvantage and corporations often receive more favourable income tax treatment than other forms of business organizations. As mentioned above, depending on the size of the corporation, many of the advantages of the corporate form are not available to a small private corporation. (d) Public corporation: The advantages of a public corporation include limited liability, indefinite life, and transferability of ownership. These features make it easier for publicly-traded corporations to raise financing compared to other forms of business organizations. Corporations often receive more favourable income tax treatment than other forms of business organizations. Disadvantages include increased government regulations and paperwork. In addition, because the shares of public companies are listed and traded on Canadian or other exchanges such as the Toronto Stock Exchange (TSX), these corporations are required to distribute their financial statements to investors, lenders, creditors and other interested parties and the general public. This requirement involves greater costs to the corporation.

Solutions Manual .

1-5

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 6.

While both public and private corporations enjoy many of the same advantages and disadvantages, one key difference is that public corporations list their shares for sale to the public on Canadian or other stock exchanges. In contrast, while private corporations issue shares, they do not make them available to the general public or trade them on public stock exchanges. Private corporations may also not enjoy the advantages of limited liability and ease of transfer of ownership that public corporations generally experience because of their size and distribution of shares.

7.

(a)

Public corporations must apply International Financial Reporting Standards (IFRS). Private corporations can apply either IFRS or Accounting Standards for Private Enterprises (ASPE).

(b)

The information needs of users of public corporations and private corporations are different. Users of financial information of public corporations require more extensive disclosure. They may also be benefit from the enhanced comparability to global companies provided by international standards. Since private corporations tend to be smaller with easier access to company information, their users do not require as extensive reporting.

8.

The reporting entity concept means that economic activity of any business organization or economic entity is kept separate and distinct from the activities of the owner and all other economic entities. In the case of corporations such as Shoppers Drug Mart, it also means that economic activities of related corporations that are owned or controlled by one corporation are consolidated. The results of these individual companies are also reported separately as separate economic entities.

9.

(a) (b) (c)

(d) (e)

Solutions Manual .

Assets are what the company owns such as cash and equipment. A liability is an amount the company owes such as accounts payable and income tax payable. Shareholders’ equity represents the residual interest (assets less liabilities) of a company at a point in time and includes share capital and retained earnings, in addition to other possible components. Revenues are an increase in a company’s economic resources from operating activities such as the sale of a product. Expenses are the cost of assets that are consumed or services that are used in the process of generating revenues. Examples include cost of goods sold, rent expense, and salaries expense.

1-6

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 10.

Operating activities are the activities that the organization undertakes to earn a profit. They include the day-to-day activities which generate revenues and cause expenses to be incurred. In order to earn profits, a company must first purchase resources they need to operate. The purchase of these resources (assets) are considered to be investing activities. Finally, the company must have sufficient funds to purchase assets and to operate. While some of the necessary cash will be generated from operations, often the company has to raise external funds by either issuing shares or borrowing money. Financing activities involve the activities undertaken by the company to raise cash externally.

11.

(a)

Two examples of operating activities are revenue generated from providing auto repair services and the expenses related to paying employee salaries.

(b)

Two examples of investing activities are the purchase of property, plant, and equipment, such as a building, and the sale of a long-term investment.

(c)

Two examples of financing activities for a corporation are borrowing money (debt) and selling shares (equity).

12.

Local companies providing services and therefore generate service revenue would include doctors, dentists, law practices and accountants. The names of these businesses would likely include the name of the practitioners or groups providing these services. Local companies providing sales revenue would include farms that provide produce or milk products and the retail stores selling the local produce to customers.

13.

A fiscal year is an accounting time period that is one year in length, but does not have to end on December 31. Corporations can select their fiscal year end based on when their operations are low or when inventory is low. Selecting a fiscal year end when operations are low provides more time for accounting staff to complete the year-end reporting requirements. If inventories are low, this simplifies the inventory count and minimizes the business disruption caused by counting the inventory.

14.

The internal accounting records do use exact figures. However, for presentation purposes, it is unlikely that the use of rounded figures would change a decision made by the users of the financial statements. As well, presenting the information in this manner makes the statements easier to read and analyze thereby increasing their utility to the users. Rounding the numbers to the nearest million does not have a material impact on decision-making using the financial statements.

Solutions Manual .

1-7

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 15.

Assets = Liabilities + Shareholders’ Equity $7,473,721 = $3,150,394 + $4,323,327 (amounts are in thousands of dollars)

16.

A statement of changes in equity explains the changes in the components of shareholders’ equity, such as share capital and retained earnings. Examples of items that increase the components are issue of shares (increases share capital) and profit (increases retained earnings). Examples of items that decrease the components are repurchases of shares (decreases share capital) and payment of dividends (decrease retained earnings).

17.

(a)

The primary purpose of the statement of cash flows is to provide financial information about the cash receipts (inflows) and cash payments (outflows) of a company for a specific period of time.

(b)

The three categories of the statement of cash flows are operating activities, investing activities, and financing activities. These categories represent the three principal types of business activities.

18.

The statement of financial position is prepared as at a specific point in time because it shows what the business owns (its assets) and what it owes (its liabilities). These items are constantly changing. It is necessary to select one point in time at which to present them. The other statements (income statement, statement of changes in equity, and statement of cash flows) cover a period of time as they report activities and measure performance that takes place over time.

19.

(a)

The income statement reports profit for the period. The profit figure from the income statement is shown on the statement of changes in equity as an addition to beginning retained earnings. If there is a loss it is deducted from the opening balance of retained earnings.

(b)

The statement of changes in equity explains the change in the balances of the components of shareholders’ equity (for example, common shares and retained earnings) from one period to the next. The ending balances are reported in the shareholders’ equity section of the statement of financial position.

(c)

The statement of cash flows explains the change in the cash balance from one period to the next. The ending balance of cash reported in the statement of cash flows agrees with the ending cash balance reported in the current assets section on the statement of financial position.

Solutions Manual .

1-8

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 20.

(a)

Companies using IFRS must report an income statement, statement of changes in equity, statement of financial position, and statement of cash flows. In addition, companies using IFRS may also need to prepare a statement of comprehensive income.

(b)

Companies using ASPE must report an income statement, statement of retained earnings, statement of financial position, and a statement of cash flows.

Solutions Manual .

1-9

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1-1

Investor Marketing manager Creditor Chief financial officer Canada Revenue Agency Labour union

(a) Type of Evaluation

(b) Type of User

5 4 3 6 1 2

External Internal External Internal External External

BRIEF EXERCISE 1-2 (a) (b) (c) (d) (e)

1 4 3 2 4

Proprietorship Private corporation Public corporation Partnership Private corporation

BRIEF EXERCISE 1-3 (a) (b) (c) (d) (e) (f)

O F* F F I O

Note to instructors: As we will learn later in Chapter 13, companies reporting under IFRS have a choice in classifying dividends paid as an operating or financing activity. We have chosen to classify dividends paid as financing activities in this textbook.

Solutions Manual .

1-10

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 1-4

1. 2. 3. 4. 5. 6.

(a)

(b)

O F O O O I

NE + + -

BRIEF EXERCISE 1-5 (a)

Total assets

= = =

Total liabilities + Shareholders’ equity $55,000 + $120,000 $175,000

(b)

Total assets

=

Total liabilities + Shareholders’ equity (share capital + retained earnings) $170,000 + ($100,000 + $90,000) $360,000

= = (c)

(d)

Total liabilities

Shareholders’ equity

Solutions Manual .

= =

Total assets – Shareholders’ equity (share capital + retained earnings) $150,000 – ($50,000 + $25,000) $75,000

= = =

Total assets – Total liabilities $500,000 – ($500,000 ÷ 2) $250,000

=

1-11

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 1-6 Beginning of Year: Assets = Liabilities + Shareholders’ equity Beginning of Year: $800,000 = $500,000 + Shareholders’ equity Beginning of Year: Shareholders’ equity = $300,000 (a)

($800,000 + $150,000) = ($500,000 – $80,000) + Shareholders’ equity Shareholders’ equity = $530,000

(b)

Assets = ($500,000 – $50,000) + ($300,000 + $50,000 + $75,000) Assets = $875,000

(c)

($800,000 – $80,000) = Liabilities + ($300,000 + $110,000) Liabilities = $310,000

BRIEF EXERCISE 1-7 (a) (b) (c) (d) (e) (f) (g) (h)

IS SFP SCE SCF SFP SCF IS SCE

BRIEF EXERCISE 1-8 (a) (b) (c) (d) (e) (f) (g) (h)

A L A A SE L SE A

Solutions Manual .

1-12

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 1-9

(a) (b) (c) (d) (e) (f)

Profit Issue of common shares Dividends paid to shareholders Cash Loss Issue of long-term debt

Share Capital

Retained Earnings

Total Shareholders' Equity

NE + NE NE NE NE

+ NE NE NE

+ + NE NE

BRIEF EXERCISE 1-10 (a)

Beginning balance Issue additional shares Profit Dividends paid Ending balance (b)

Beginning balance Issue additional shares Loss Dividends paid Ending balance

Solutions Manual .

(1)

(2)

Common Shares $100,000 25,000

Retained Earnings $350,000

$125,000

75,000 (5,000) $420,000

(1)

(2)

Common Shares $100,000 25,000

Retained Earnings $350,000

$125,000

(75,000) (5,000) $270,000

1-13

(3) Total Shareholders' Equity $450,000 25,000 75,000 (5,000) $545,000 (3) Total Shareholders' Equity $450,000 25,000 (75,000) (5,000) $395,000

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 1-1 (a)

Chief Financial Officer – Does Facebook generate enough cash to expand its product line? Human Resource Manager – What is Facebook’s annual salary expense?

(b)

Creditor – Does Facebook have enough cash available to make its monthly debt payments? Investor – How much did Facebook pay in dividends last year?

Other examples are also possible.

EXERCISE 1-2 Public Private Proprietorship Partnership Corporation Corporation 1. 2. 3.

No personal liability Owner(s) pay(s) personal income tax on company profits Generally easiest form of organization to raise capital

F

F

T

T

T

T

F

F

F

F

T

F

4.

Ownership indicated by shares

F

F

T

T

5.

Required to issue quarterly financial statements

F

F

T

F

6.

Owned by one person

T

F

F

F

7.

Limited life

T

T

F

F

T

F

F

F

F

F

T

F

F

F

F

T

8. 9.

Usually easiest form of organization to set up Requires the use of IFRS as its accounting standards

10. Shares are closely held

Solutions Manual .

1-14

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 1-3 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

O I O F F F O O O F

EXERCISE 1-4

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

(a)

(b)

O I F I O F I F F O

+ + + + -

EXERCISE 1-5 1. 2. 3. 4. 5. 6. 7. 8.

SFP IS, SCE IS SCE, SFP IS SCE SFP IS

Solutions Manual .

9. 10. 11. 12. 13. 14. 15.

SFP IS SCF SCF SFP SFP SCE, SFP

1-15

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 1-6 (a)

Assets – Liabilities = Shareholders’ equity 2014: $440,000 – $290,000 = $150,000 2015: $520,000 – $350,000 = $170,000

(b)

Change in shareholders’ equity $170,000 – $150,000 = $20,000 increase

(c)

1. Profit is $20,000 = the increase in shareholders’ equity 2. Profit is $25,000 = the increase in shareholders’ equity + dividends paid of $5,000 3. Loss of $5,000 = the increase in shareholders’ equity – common shares issued of $25,000 4. Profit is $15,000 = the increase in shareholders’ equity + dividends paid of $5,000 – common shares issued of $10,000

Solutions Manual .

1-16

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 1-7 [1]

Total revenues – Profit = Total expenses $1,000,000 – $150,000 = $850,000

[2]

Common shares, end of year $100,000 = Beginning balance of common shares + Issue of shares of $100,000

[3]

$150,000 equal to profit given above

[4]

Beginning balance of retained earnings plus profit less dividends = Ending balance of retained earnings. $0 + $150,000 – Dividends = $100,000 Dividends = $50,000

[5]

Beginning balance in shareholders' equity + Issue of shares + Profit – Dividends = Ending balance in shareholders’ equity $0 + $100,000 + $150,000 – $50,000 = $200,000

[6]

Total Assets – Total liabilities = Shareholders’ equity $1,050,000 – $850,000 = $200,000 or [5] above

[7]

Total revenues – Total expenses = Profit Total revenues – $250,000 = $50,000 Total revenues = $300,000

[8]

Beginning balance of common shares + Issue of shares = Common shares, end of year $0 + Issue of shares = $20,000 Issue of shares = $20,000

[9]

$50,000 equal to profit given above

[10]

Common shares, end of year + Retained Earnings, end of year $20,000 + $40,000 = $60,000

[11]

Liabilities + Shareholders’ equity = Total assets $150,000 + $60,000 (from [10]) = $210,000

[12]

$60,000 (from [10]) or $210,000 (from [11]) − $150,000 total liabilities = $60,000 total shareholders’ equity

Solutions Manual .

1-17

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 1-8 ($ in thousands) (a)

Assets – Liabilities = Shareholders’ equity 2012: $3,243,696 – $2,285,697 = $957,999 2011: $2,940,459 – $2,010,346 = $930,113

(b)

Assets = Liabilities + Shareholders’ equity 2012: $3,243,696 = $2,285,697 + $957,999 Assets = Liabilities + Shareholders’ equity 2011: $2,940,459 = $2,010,346 + $930,113

(c)

Change in shareholders’ equity $957,999 – $930,113 = $27,886 increase

(d)

Shareholders’ equity, Dec. 31, 2011 Add: Profit Deduct: Dividends Other shareholders’ equity items Shareholders’ equity, December 31, 2012

$930,113 ? 22,229 65,181 $957,999

Solving for profit: $957,999 + $65,181 + $22,229 − $930,113 = $115,296

Solutions Manual .

1-18

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 1-9 (a) L A L A A SE A

Accounts payable Accounts receivable Bank loan payable Buildings Cash Common shares Equipment

L A A L SE A

Income tax payable Land Merchandise inventory Mortgage payable Retained earnings Supplies

(b) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders’ equity classifications as they have not yet learned how to classify/order accounts. AVENTURA INC. Statement of Financial Position November 30, 2015 Assets Cash Accounts receivable Merchandise inventory Supplies Land Buildings Equipment Total assets

$ 20,000 19,500 18,000 700 44,000 100,000 30,000 $232,200 Liabilities and Shareholders’ Equity

Liabilities Accounts payable Income tax payable Bank loan payable Mortgage payable Total liabilities Shareholders’ equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

Solutions Manual .

$ 26,200 6,000 34,000 97,500 163,700 20,000 48,500 68,500 $232,200

1-19

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 1-10 (a) E E NR E R E E R

(b)

Administrative expenses Cost of goods sold Dividends Finance expenses Finance income Income tax expense Selling and distribution expenses Sales

REITMANS (Canada) Limited Income Statement Year Ended February 2, 2013 (in millions) Revenues Sales Finance income Total revenues Expenses Selling and distribution expenses Cost of goods sold Administrative expenses Finance expenses Total expenses Profit before income tax Income tax expense Profit

Solutions Manual .

$1,000.5 5.6 1,006.1 $550.2 372.1 47.4 1.3 971.0 35.1 8.5 $ 26.6

1-20

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 1-11 KON INC. Income Statement Year Ended December 31, 2015 Revenues Service revenue Expenses Salaries expense Rent expense Utilities expense Office expense Total expenses Profit before income tax Income tax expense Profit

$61,000 $30,000 12,400 2,400 1,600 46,400 14,600 3,000 $11,600 KON INC. Statement of Changes in Equity Year Ended December 31, 2015

Balance, January 1 Issued common shares Profit Dividends Balance, December 31

Solutions Manual .

Common Shares $20,000 10,000

Retained Earnings $58,000 11,600 (5,000) $64,600

$30,000

1-21

Total Equity $78,000 10,000 11,600 (5,000) $94,600

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 1-12 (a)

Camping revenue Expenses Operating expenses Income tax expense Profit

(b)

$168,000 $130,000 10,000

140,000 $ 28,000

SEA SURF CAMPGROUND, INC. Statement of Changes in Equity Year Ended December 31, 2015

Balance, January 1 Issued common shares Profit Dividends Balance, December 31

Common Shares $30,000 10,000

Retained Earnings $18,000

Total Equity $48,000 10,000 28,000 (12,000) $74,000

28,000 (12,000) $34,000

$40,000

Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders’ equity classifications as they have not yet learned how to classify/order accounts. SEA SURF CAMPGROUND, INC. Statement of Financial Position December 31, 2015 Assets Cash Supplies Equipment Total assets

$

7,500 2,500 119,000 $129,000

Liabilities and Shareholders’ Equity Liabilities Accounts payable Bank loan payable Total liabilities Shareholders’ equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

Solutions Manual .

1-22

$

5,000 50,000 55,000

40,000 34,000 74,000 $129,000

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 1-13 1.

Yu Corporation is distributing nearly all of this year's profit as dividends. This suggests that Yu is not pursuing rapid growth. Companies that are pursuing opportunities for growth normally retain their profit and pay low, or no, dividends.

2.

Surya Corporation is not generating sufficient cash from operating activities to fund its investing activities. The company is borrowing to finance its investing activities. This is common for companies in their early years of existence. It could also be in an expansion stage.

3.

Naguib Ltd. is financing its assets in a slightly higher proportion through equity than through debt. The company has $450,000 ($200,000 + $250,000) of total assets, which are funded 44.4% ($200,000 ÷ $450,000) by liabilities and 55.6% ($250,000 ÷ $450,000) by equity. Since equity does not have to be repaid and does not require interest payments, the company appears to be in a healthy financial position.

4.

Rijo Inc. does not have any liabilities and its assets are completely financed by equity. This places it in a very strong financial position since there are no outside claims on the company’s assets. This also means that the company is using its own funds to finance assets. While this reduces risk, it may also reduce return if borrowed funds can be employed to generate an internal return higher than the cost of borrowing.

Solutions Manual .

1-23

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 1-1A (a)

1. The South Face Inc. is an external user of accounting information in assessing the credit-worthiness of their customer. 2. An investor purchasing common shares of Orbite Online, Inc. is an external user. 3. In deciding whether to extend a loan, the Caisse d’Économie Base Montréal is an external user. 4. As an employee of Tech Toy Limited, the CEO is an internal user.

(b)

1. In deciding to extend credit, South Face would focus its attention on the statement of financial position of the new customer. The terms of credit they are extending require repayment in a short period of time. Funds to repay the credit would come from cash on hand and other current assets. The statement of financial position of the new customer will show if the company has enough current assets to meet its current obligations. 2. Since the investor intends to hold the shares for a long period of time (at least five years), s(he) should focus on the company’s income statement. The income statement reports the company’s past performance in terms of revenues, expenses, and profit. This is generally regarded as a good indicator of the company’s future performance. 3. The Caisse is interested in two things—the ability of the company to make interest payments on a monthly basis for the next three years and the ability to repay the principal amount at the end of the three years. In order to evaluate both of these factors, the focus should be on the statement of cash flows. This statement provides information on the cash the company generates from its operations on an ongoing basis. It also tells whether the company is currently borrowing or repaying debt. 4. The CEO should focus on the statement of cash flows as this statement clearly sets out the cash generated from operating activities and the amount the company has spent in the past on purchasing equipment and paying dividends.

Note to instructors: Other answers may be valid provided they are properly supported.

Solutions Manual .

1-24

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-2A (a)

(b)

1.

The professors should incorporate their business as a private corporation because of their concerns about legal liabilities. A corporation is the only form of business that provides limited liability. Since the professors do not need access to large amounts of investment capital, a private corporation provides the limited liability advantage the professors need.

2.

Joseph should run his bicycle rental shop as a proprietorship because this is the simplest and least costly form of business organization to establish and eventually dissolve. He is the only person involved in the business and is planning to operate for a limited time.

3.

Robert and Tom should form a public corporation when they combine their operations. This is the best form of business for them to choose because they expect to raise funds in the coming year. A public corporation will enable them to raise significant amounts of funds for their manufacturing company. A corporation may also receive more favourable income tax treatment.

4.

A partnership would be the most likely form of business for Darcy, Ellen, and Meg to choose. It is simpler to form than a corporation and less costly.

5.

Hervé is most likely to select to operate his business as a private corporation. This will assist him with the liability of storing goods for others. He will also be able to raise funds to purchase equipment, rent space in airports, and hire employees. It is easier to raise funds through a private corporation rather than a proprietorship or partnership.

1. 2. 3. 4. 5.

ASPE ASPE IFRS ASPE ASPE

Solutions Manual .

1-25

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-3A (a) Operating

(b)

Investing

Financing

Indigo Books & Music

Sale of books

Purchase of store equipment

Issue of shares

High Liner Foods

Payment for fish

Purchase of production equipment

Borrowing money from a bank

Mountain Equipment Co-op

Payment for inventory

Purchase of store fixtures

Borrowing money from a bank

Ganong Bros.

Payment of salaries and benefits

Purchase of production equipment

Payment of dividends to shareholders

Royal Bank

Payment of interest on savings accounts

Purchase of office Issue of bonds equipment

Financing Issuing shares is common to all corporations. Issuing debt is common to most corporations. Borrowing from a bank is common to most companies. Payment of dividends is common to many, but not all, corporations. Issuing bonds is common to large public corporations. Investing Purchasing property, plant, and equipment is common to most companies—the types of assets would vary according to the nature of the business. Some types of companies require a larger investment in long-lived assets. A new business or expanding business would be more apt to be acquiring assets. Operating The general activities identified above would be common to most corporations with the exception of the payment of interest on savings accounts. The source of the cash receipt (for example, from the sale of books) and cash payment (for example, for the payment for fish) would vary by the nature of the business.

Solutions Manual .

1-26

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-4A

Accounts payable Accounts receivable Bank loan payable Cash Common shares Equipment Income tax expense Income tax payable Interest expense Office expense Prepaid insurance Rent expense Repairs and maintenance expense Salaries payable Service revenue Vehicles

Solutions Manual .

1-27

(a)

(b)

L A L A SE A E L E E A E E L R A

SFP SFP SFP SFP SFP, SCE SFP IS SFP IS IS SFP IS IS SFP IS SFP

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-5A (a) and (b) Assets Accounts payable Accounts receivable Bank loan payable Cash Common shares Equipment Income tax payable Interest payable Prepaid insurance Retained earnings Salaries payable Supplies Unearned revenue

$6,400 10,800 9,000 1,250 1,000 19,400 2,000 100 600 12,250 1,000 1,200 1,500

(a) L A L A SE A L L A SE L A L

(b) Liabilities

Shareholders’ Equity

$ 6,400 $10,800 9,000 1,250 $ 1,000 19,400 2,000 100 600 12,250 1,000 1,200 ______ $33,250

Totals

1,500 ______ $20,000

______ $13,250

Assets = Liabilities + Shareholders’ equity $33,250 = $20,000 + $13,250 (c)

Beginning balance in Retained Earnings + Revenues – Expenses – Dividends = Ending balance in Retained Earnings $2,250 + $72,000 – $50,000 – $12,000 = $12,250

Solutions Manual .

1-28

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-6A

(a)

(All amounts are in millions of dollars)

Sears [1]

Total assets = Total liabilities + Total shareholders’ equity Total assets = $1,638.7 + $1,092.0 Total assets = $2,730.7

[2]

Total liabilities = Total assets – Total shareholders’ equity Total liabilities = $2,479.1 – $1,076.4 Total liabilities = $1,402.7

[3]

Shareholders’ equity, beginning of year – Repurchase of shares – Dividends + Total revenues – Total expenses – Other decreases in shareholders’ equity = Shareholders’ equity, end of year $1,092.0 − $0.1 − $101.9 + $4,511.1 – [3] − $14.8 = $1,076.4 [3] Total expenses = $4,409.9

Canadian Tire [4]

Total liabilities = Total assets – Total shareholders’ equity Total liabilities = $12,338.8 – $4,409.0 Total liabilities = $7,929.8

[5]

Total assets = Total liabilities + Total shareholders’ equity Total assets = $8,417.8 + $4,574.6 [6] Total assets = $12,992.4

[6]

Shareholders’ equity, beginning of year – Repurchase of shares – Dividends + Total revenues – Total expenses – Other decreases in shareholders’ equity = Shareholders’ equity, end of year $4,409.0 − $225.0 – $97.7 + $11,451.0 – $10,951.8 − $10.9 = $4,574.6

Solutions Manual .

1-29

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-6A (Continued) (b)

At the end of the most recent fiscal year, Canadian Tire has a higher proportion of debt financing and Sears has a higher proportion of equity financing. Canadian Tire financed 35.2% ($4,574.6 million ÷ $12,992.4 million) of its assets with equity and 64.8% of its assets with debt ($8,417.8 million ÷ $12,992.4 million). For the same period, 43.4% ($1,076.4 million ÷ $2,479.1 million) of Sears’s assets were financed by equity and 56.6% ($1,402.7 million ÷ $2,479.1 million) by debt. Canadian Tire is slightly more risky because more of its assets are financed by debt.

(c)

Both retailers typically have low inventories at the end of December and at the end of January as a result of the Christmas sales, with little or no new inventory purchased during the month of January so no major differences in financial position at the end of December compared to January would be anticipated. As long as there were no significant economic events that affected one company more than the other in the intervening period (January), it is unlikely that the different year-end dates would affect the comparison in (b).

Solutions Manual .

1-30

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-7A (a) ONE PLANET COSMETICS CORP. Income Statement Month Ended June 30, 2015 Revenues Service revenue Expenses Salaries expense Office expense Utilities expense Supplies expense Interest expense Total expenses Profit before income tax Income tax expense Profit

$12,000 $3,400 1,500 1,300 1,200 800 8,200 3,800 700 $ 3,100

ONE PLANET COSMETICS CORP. Statement of Changes in Equity Month Ended June 30, 2015

Balance, June 1 Issued common shares Profit Dividends paid Balance, June 30

Solutions Manual .

Common Shares $ 0 25,000

$25,000

1-31

Retained Earnings $ 0 3,100 (1,000) $ 2,100

Total Equity $ 0 25,000 3,100 (1,000) $27,100

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-7A (Continued) (a) (Continued) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders’ equity classifications as they have not yet learned how to classify/order accounts. ONE PLANET COSMETICS CORP. Statement of Financial Position June 30, 2015 Assets Cash Accounts receivable Supplies Equipment Total assets

$ 6,000 4,000 1,400 32,000 $43,400 Liabilities and Shareholders’ Equity

Liabilities Accounts payable Bank loan payable Total liabilities Shareholders’ equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

(b)

$ 2,300 14,000 16,300

0

25,000 2,100 27,100 $43,400

The financial statements must be prepared in the order of (1) income statement, (2) statement of changes in equity, and (3) statement of financial position. This is because each subsequent financial statement depends on information contained in the previous statement. The profit from the income statement flows to the retained earnings account on the statement of changes in equity. The shareholders’ equity totals in the statement of changes in equity (for example, for common shares and retained earnings) then flow to the shareholders’ equity section of the statement of financial position.

Solutions Manual .

1-32

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-8A

(a) Cash dividends paid Cash paid to purchase equipment Cash payments for operating activities Cash receipts from operating activities Cash received from issue of long-term debt Cash received from issue of shares

$ 10,000 35,000 120,000 140,000 20,000 20,000

Activity financing investing operating operating financing financing

(b) MAISON CORPORATION Statement of Cash Flows Year Ended December 31, 2015 Operating activities Cash receipts from operating activities Cash payments for operating activities Net cash provided by operating activities

$140,000 (120,000)

Investing activities Purchase of equipment Net cash used by investing activities

$(35,000)

Financing activities Issue of long-term debt Issue of shares Payment of dividends Net cash provided by financing activities

$ 20,000 20,000 (10,000)

(35,000)

Net increase in cash Cash, January 1 Cash, December 31 (c)

$20,000

30,000 15,000 12,000 $27,000

The company is generating less cash from operating activities (+$20,000) than it is using in total for its investing activities (–$35,000) and the payment of dividends (– $10,000). The company, however, is making up the deficiency by generating cash from financing activities. Cash from financing activities is not a renewable source of cash and usually entails future cash payments in the form of interest on debt, principal repayment, and dividend payments for shares.

Solutions Manual .

1-33

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-9A (a) [1]

Operating expenses = Revenue – Profit before income tax Operating expenses = $90,000 – $30,000 Operating expenses = $60,000

[2]

Profit = Profit before income tax – Income tax expense Profit = $30,000 – $6,000 Profit = $24,000

[3]

Profit (from [2]) = $24,000

[4]

Ending retained earnings = Beginning retained earnings + Profit – Dividends Ending retained earnings = $0 + $24,000 (from [2]) – $10,000 Ending retained earnings = $14,000

[5]

Total issued common shares = $12,000

[6]

Total profit = $24,000 (from [3])

[7]

Total equity = Beginning balance + Issued common shares + Profit – Dividends Total equity = $0 + $12,000 (from [5]) + $24,000 (from [6]) – $10,000 Total equity = $26,000

[8]

Land = Total assets (from [9]) – Cash – Accounts receivable – Building – Equipment Land = $110,000 – $5,000 – $10,000 – $60,000 – $25,000 Land = $10,000

[9]

Total assets = Total liabilities + Shareholders' equity Total Assets = $110,000

[10]

Accounts payable = Total liabilities – Bank loan payable Accounts payable = $84,000 – $50,000 Accounts payable = $34,000

[11]

Common shares = $12,000 (from the Statement of Changes in Equity)

[12]

Retained earnings = $14,000 (from [4])

[13]

Shareholders’ equity = Total liabilities and shareholders' equity – Total liabilities Total shareholders' equity = $110,000 – $84,000 Total shareholders' equity = $26,000

Solutions Manual .

1-34

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-9A (Continued) (b)

(1)

In preparing the financial statements, the first statement to be prepared is the income statement, followed by the statement of changes in equity, and then the statement of financial position. Note to instructors: While the statements must be prepared in this sequence, these statements can be presented in a variety of orders. Often the statement of financial position is presented first, as the most “permanent” statement.

(2)

Solutions Manual .

The reason the statements must be prepared in a certain order as indicated above, is that each statement depends on information in the previously prepared statement. For example, the profit figure from the income statement is used in the statement of changes in equity to calculate the ending balance of retained earnings. The shareholders’ equity section of the statement of financial position is then completed using the ending balances of common shares and retained earnings as calculated in the statement of changes in equity.

1-35

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-10A (a)

1. Remove the boat from the listing of assets since it does not belong to the corporation. Remove the boat loan payable from the listing of liabilities since this is a personal loan of Guy Gélinas. 2. Remove the $10,000 outstanding receivable from Guy’s brother. This is not a company receivable and should not be listed on the company’s statement of financial position. 3. Correct the Common Shares account to remove the extra amount that had been added to “balance”: Remove accounts receivable Remove boat asset Remove bank loan Net adjustment to common shares

$10,000 24,000 (40,000) $ 6,000

Provide separate totals for liabilities and shareholders’ equity as the two components that are financing the assets of the company. (b)

GG CORPORATION Statement of Financial Position July 31, 2015 Assets

Cash Accounts receivable ($50,000 − $10,000) Merchandise inventory Total assets

$20,000 40,000 36,000 $96,000

Liabilities and Shareholders’ Equity Liabilities Accounts payable Total liabilities Shareholders’ equity Common shares [$50,000 + $6,000 (from (3) above)] Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity (c)

$34,000 34,000

0

56,000 6,000 62,000 $96,000

As a private company, GG Corporation should also prepare an income statement, a statement of retained earnings, and a statement of cash flows.

Solutions Manual .

1-36

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-1B (a)

1. An investor purchasing common shares of Fight Fat Ltd. is an external user. 2. As a potential creditor, Comeau Ltée is an external user. 3. The chief financial officer is an internal user. 4. As a potential creditor, Drummond Bank is an external user.

(b)

1. In making an investment in common shares, the Ontario investor is becoming a partial owner (shareholder) of the company. In this case, the investment will be held for at least three years. The information that will be most relevant to him/her will be on the income statement. The income statement reports the past performance of the company in terms of its revenue, expenses and profit. This is the best indicator of the company’s future potential. 2. In deciding to extend credit to a new customer, Comeau would focus its attention on the new customer's statement of financial position. The terms of credit they are extending require repayment in a short period of time. Funds to repay the credit would come from current assets. The statement of financial position of the new customer will show whether the company has enough current assets to meet its current obligations. 3. In order to determine whether the company is generating enough cash to increase the amount of dividends paid to investors, the CEO of Private Label needs information on the amount of cash generated and used in various activities of the business. The statement of cash flows is the most useful statement for this purpose. This statement presents the amount of cash at the beginning and end of the period as well as the details of the amount of cash generated by operating activities and the amount spent on expanding operations (investing activities). 4. In deciding whether to extend a loan, the Drummond Bank is interested in two things: the ability of the company to make its monthly interest payments for the next five years and the ability to repay the principal amount at the end of five years. In order to evaluate both of these factors the focus should be on the statement of cash flows. This statement provides information on the cash the company generates from its operating activities on an ongoing basis. This will be the most important factor in determining if the company will survive and be able to repay the principal and interest on the loan.

Note to instructors: Other answers may be valid provided they are properly supported.

Solutions Manual .

1-37

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-2B (a)

1. Dawn will likely operate her vegetable stand as a proprietorship because she is planning on operating it for a short time period. A proprietorship is the simplest and least costly business organization to form and dissolve. 2. Joseph and Sabra should form a private corporation when they combine their operations. A private corporation will be easier and less expensive to form than a public corporation. It will also be an easier type of organization in which to raise funds than a proprietorship or partnership. A corporation may also receive more favourable income tax treatment. 3. The professors should incorporate their business as a private corporation because of their concerns about the legal liabilities. A corporation is the only form of business that provides limited liability to the shareholders. 4. Abdur would likely form a public corporation because he needs to raise funds to invest in inventories and property, plant, and equipment. He has no savings or personal assets and it is normally easier to raise funds through a corporation than through a proprietorship or partnership. A public corporation will allow Abdur to raise larger amounts of funds by selling shares to the public. 5. A partnership would be the most likely form of business for Mary, Richard and Jigme to choose. It is simpler to form than a corporation and less costly.

(b)

1. ASPE 2. ASPE 3. ASPE 4. IFRS 5. ASPE

Solutions Manual .

1-38

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-3B (a) Operating

Investing

Financing

WestJet Airlines

Payment for jet fuel

Purchase of airplanes

Issue of shares

University of Calgary Students’ Union

Payment of salaries and benefits Payment of research expenses Payment for facilities rentals

Purchase of office equipment Purchase of other companies Purchase of equipment

Borrowing money from a bank Issue of bonds

Receipt of revenue from sales of food from Sobeys

Purchase of real estate to build Sobeys store

Repaying money to a bank

GlaxoSmithKline

Maple Leaf Sports & Entertainment

Empire Company

(b)

Payment of dividends to shareholders

Financing Issuing shares is common to all corporations. Borrowing from and repaying money to a bank is common to most companies. Payment of dividends is common to many, but not all, corporations. Issuing bonds is common to large corporations. Investing Purchasing property, plant, and equipment would be common to most companies—the types of assets would vary according to the type of business. Some types of businesses require a larger investment in long-lived assets. A new business or expanding business would be more likely to engage in investing activities (for example, acquiring assets). The purchase of other companies would not be common to all companies. Operating The general activities identified above (sales and expenditures) would be common to most businesses, although the service or product might change.

Solutions Manual .

1-39

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-4B

Accounts payable Accounts receivable Bank loan payable Buildings Cash Common shares Cost of goods sold Equipment Income tax expense Income tax payable Interest expense Land Merchandise inventory Mortgage payable Office expense Prepaid insurance Salaries payable Sales

Solutions Manual .

(a)

(b)

L A L A A SE E A E L E A A L E A L R

SFP SFP SFP SFP SFP SFP, SCE IS SFP IS SFP IS SFP SFP SFP IS SFP SFP IS

1-40

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-5B (a) and (b)

Assets Accounts payable Accounts receivable Bank loan payable Cash Common shares Income tax payable Interest payable Prepaid insurance Retained earnings Salaries payable Supplies Unearned revenue Vehicles

$10,800 16,400 40,000 11,250 5,000 2,000 400 700 42,250 2,050 1,250 2,500 75,400

(a) L A L A SE L L A SE L A L A

(b) Liabilities

Shareholders’ Equity

$10,800 $ 16,400 40,000 11,250 $ 5,000 2,000 400 700 42,250 2,050 1,250 2,500 75,400 _______ $105,000

Totals

______ $57,750

______ $47,250

Assets = Liabilities + Shareholders’ equity $105,000 = $57,750 + $47,250 (c)

Beginning balance in Retained Earnings + Revenues – Expenses – Dividends = Ending balance in Retained Earnings $22,250 + $172,000 – $140,000 – $12,000 = $42,250

Solutions Manual .

1-41

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-6B (a)

(All amounts are in millions of dollars) Tim Hortons [1]

Total liabilities = Total assets – Total shareholders’ equity Total liabilities = $2,204.0 – $1,154.4 Total liabilities = $1,049.6

[2]

Total shareholders' equity = Total assets – Total liabilities Total shareholders' equity = $2,284.2 – $1,094.1 Total shareholders' equity = $1,190.1

[3]

Shareholders’ equity, beginning of year – Repurchase of shares – Dividends + Total revenues – Total expenses – Other decreases in shareholders’ equity = Shareholders’ equity, end of year $1,154.4 − $18.7 − $[3] + $3,123.8 – $2,716.0 − $222.9 = $1,190.1 [3] Dividends = $130.5

Starbucks [4]

Total assets = Total liabilities + Total shareholders’ equity Total assets = $2,973.1 + $4,387.3 Total assets = $7,360.4

[5]

Total assets = Total liabilities + Total shareholders’ equity Total assets = $3,104.7 + $5,114.5 (from [6]) Total assets = $8,219.2

[6]

Shareholders’ equity, beginning of year – Repurchase of shares – Dividends + Total revenues – Total expenses – Other decreases in shareholders’ equity = Shareholders’ equity, end of year $4,387.3 − $1.1 − $543.7 + $13,604.6 – $12,219.9 − $112.7 = $5,114.5

Solutions Manual .

1-42

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-6B (Continued) (b)

At the end of the most recent fiscal year, Tim Hortons has a higher proportion of debt financing and Starbucks has a higher proportion of equity financing. Starbucks financed 62.2% (U.S. $5,114.5 million ÷ U.S. $8,219.2 million) of its assets with equity and 37.8% of its assets with debt (U.S. $3,104.7 million ÷ U.S. $8,219.2 million). For the same period, 52.1% ($1,190.1 million ÷ $2,284.2 million) of Tim Hortons’ assets were financed by equity and 47.9% ($1,094.1 million ÷ $2,284.2 million) by debt. Tim Hortons is slightly more risky because more of its assets are financed by debt.

(c)

As long as there are no unusual transactions or economic events that affect one company differently than another during the intervening period of time (October through December), or at each company’s year-end date, the differing year ends should not have a significant impact on the assessment of the financial position and performance for the two companies. If there are significant currency fluctuations between U.S. and Canadian dollars, it will not be possible to compare absolute amounts unless they are converted to the same currency. However, if the amounts were converted into percentages, such as was done in (b) above, percentages can be compared despite different currencies or sizes of the two companies.

Solutions Manual .

1-43

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-7B (a)

AERO FLYING SCHOOL LTD. Income Statement Month Ended May 31, 2015

Revenues Service revenue Expenses Fuel expense Rent expense Office expense Salaries expense Repair and maintenance expense Interest expense Profit before income tax Income tax expense Profit

$12,600 $3,300 2,200 2,300 1,000 700 100

9,600 3,000 600 $ 2,400

AERO FLYING SCHOOL LTD. Statement of Changes in Equity Month Ended May 31, 2015

Balance, May 1 Issued common shares Profit Dividends Balance, May 31

Solutions Manual .

Common Shares $ 0 50,000

$50,000

1-44

Retained Earnings $ 0 2,400 (800) $1,600

Total Equity $ 0 50,000 2,400 (800) $51,600

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-7B (Continued) (a) (Continued) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders’ equity classifications as they have not yet learned how to classify/order accounts. AERO FLYING SCHOOL LTD. Statement of Financial Position May 31, 2015 Assets Cash Accounts receivable Equipment Total assets

$ 5,300 10,200 60,300 $75,800 Liabilities and Shareholders’ Equity

Liabilities Accounts payable Bank loan payable Total liabilities Shareholders’ equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

(b)

$ 2,200 22,000 24,200 50,000 1,600 51,600 $75,800

The financial statements must be prepared in the order of (1) income statement, (2) statement of changes in equity, and (3) statement of financial position. This is because each subsequent financial statement depends on information contained in the previous statement. The profit from the income statement flows to the retained earnings in the statement of changes in equity. The shareholders’ equity totals (for example, for common shares and retained earnings) in the statement of changes in equity then flow to the shareholders’ equity section of the statement of financial position.

Solutions Manual .

1-45

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-8B (a) Cash payments for operating activities Cash paid for equipment Repayment of long-term debt Cash dividends paid Cash receipts from operating activities

$109,000 40,000 15,000 13,000 158,000

Activity operating investing financing financing operating

(b) FURLOTTE CORPORATION Statement of Cash Flows Year Ended June 30, 2015 Operating activities Cash received from customers Cash paid to suppliers Net cash provided by operating activities

$158,000 (109,000)

Investing activities Cash paid to purchase equipment Net cash used by investing activities

$(40,000)

Financing activities Repayment of long-term debt Cash dividends paid Net cash used by financing activities

$(15,000) (13,000)

(40,000)

(28,000)

Decrease in cash Cash, July 1, 2014 Cash, June 30, 2015

(c)

$49,000

(19,000) 40,000 $21,000

The company is not generating sufficient cash from its operating activities ($49,000) to pay for the total of its investing activities ($40,000) and dividend payments ($13,000). If the company expects to continue to use cash for investing activities and dividend payments in future years, it will either have to generate more cash from its operating activities or from its financing activities (for example, borrow money) as its ending cash balance will not sustain this cash outflow on its own.

Solutions Manual .

1-46

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

(b) (a)

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-9B [1]

Operating expenses = Service revenue – Profit before income tax Operating expenses = $85,000 – $35,000 Operating expenses = $50,000

[2]

Profit = Profit before income tax – Income tax expense Profit = $35,000 – $9,000 Profit = $26,000

[3]

Profit = $26,000 (same as [2])

[4]

Dividends = Beginning retained earnings + Profit – Ending retained earnings Dividends = $20,000 + $26,000 – $31,000 Dividends = $15,000

[5]

Beginning total equity = Beginning common shares + Beginning retained earnings Beginning total equity = $25,000 + $20,000 Beginning total equity = $45,000

[6]

Total common shares issued = $10,000

[7]

Profit = $26,000 (same as [3])

[8]

Dividends = $15,000 (same as [4])

[9]

Ending total equity = Ending common shares + Ending retained earnings Ending total equity = $35,000 + $31,000 Ending total equity = $66,000

[10]

Cash = Total assets – (Accounts receivable + Land + Buildings + Equipment) Cash = $85,000 (from [11]) – ($15,000 + $20,000 + $40,000 + $5,000) Cash = $5,000

[11]

Total assets = Total liabilities and shareholders’ equity Total assets = $85,000

[12]

Common shares = Total liabilities and shareholders’ equity – (Liabilities + Retained earnings) Common shares = $85,000 – ($19,000 + $31,000) Common shares = $35,000

[13]

Retained earnings = $31,000 (as per statement of changes in equity)

Solutions Manual .

1-47

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-9B (Continued) (b)

(1)

In preparing the financial statements, the first statement to be prepared is the income statement, followed by the statement of changes in equity, and then the statement of financial position. While the statements must be prepared in this sequence, these statements can be presented in a variety of orders. Often the statement of financial position is presented first, as the most “permanent” statement.

(2)

The reason the statements must be prepared in a certain order as indicated above, is that each statement depends on information in the previously prepared statement. For example, the profit figure in the income statement is used in the statement of changes in equity to calculate the ending balance of retained earnings. The shareholders’ equity section of the statement of financial position is then completed using the ending balances of the shareholders’ equity components (such as common shares and retained earnings) as calculated in the statement of changes in equity.

Solutions Manual .

1-48

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 1-10B (a) 1.

Remove the $3,000 of service revenue that has not yet occurred.

2.

Remove the $12,000 rent expense. This is not an actual transaction and cannot be listed on the company’s income statement.

3.

Remove the $4,000 vacation expense. This is not a business expense but rather a personal expense of the business owner.

4.

Remove accounts receivable from the revenue section of the income statement since it is a current asset and does not belong on the income statement.

(b)

INDEPENDENT BOOK SHOP LTD. Income Statement Year Ended March 31, 2015

Revenues Service revenue ($41,000 – $3,000) Expenses Office expense Profit before income tax Income tax expense Profit

(c)

$38,000 5,000 33,000 5,000 $28,000

As a private company, Independent Book Shop should also prepare a statement of financial position, a statement of retained earnings, and a statement of cash flows.

Solutions Manual .

1-49

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 1-1 FINANCIAL REPORTING (a)

Shoppers presents the following five statements: Statement of Earnings (which we call income statement in the chapter), Statement of Comprehensive Income, Balance Sheet (which we call statement of financial position), Statement of Changes in Shareholders’ Equity (which we call statement of changes in equity), and Statement of Cash Flows. All of the above financial statements, except the Statement of Comprehensive Income, were discussed in this chapter.

(b)

As demonstrated in the table below, while Shoppers’ sales increased in 2012, its profit decreased. ($ in thousands) Sales Profit (net earnings)

2012

2011

Change

$10,781,848 608,481

$10,458,652 613,934

$323,196 (5,453)

Profit is affected by revenue and expenses incurred by Shoppers during the year. An increase in sales does not always translate into an increase in profit. For Shoppers, an increase in operating and administrative expenses in 2012 offset the increase in sales and contributed to an overall decrease in profit (net earnings).

(c) ($ in thousands) Total assets Total liabilities Total shareholders’ equity

Solutions Manual .

(1) December 29, 2012

(2) December 31, 2011

$7,473,721 3,150,394 4,323,327

$7,300,310 3,032,480 4,267,830

1-50

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP1-1 (Continued) (d)

($ in thousands) Share capital Retained earnings

December 29, 2012 $1,431,315 2,916,348

December 31, 2011 $1,486,455 2,806,078

Yes, the above balances taken from the statement of changes in equity agree to the same amounts reported in the shareholders’ equity section of the balance sheet. Note that these do not comprise all of Shoppers’ shareholders’ equity. Other shareholders’ equity items make up the remainder of the total shareholders’ equity balances reported on both statements as shown below. ($ in thousands)

December 29, 2012

Share capital $1,431,315 Retained earnings 2,916,348 Sub-total 4,347,663 Other shareholders’ equity accounts (24,336) Total shareholders’ equity $4,323,327

(e)

($ in thousands) Cash

December 29, 2012 $104,529

December 31, 2011 $1,486,455 2,806,078 4,292,533 (24,703) $4,267,830

December 31, 2011 $118,566

This information can be obtained on the balance sheet (statement of financial position) or on the statement of cash flows.

Solutions Manual .

1-51

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 1-2 COMPARATIVE ANALYSIS (a) and (b)

[Shoppers ($ in thousands)]

1. Assets Liabilities Shareholders’ equity

2012 $7,473,721 3,150,394 4,323,327

2011 $7,300,310 3,032,480 4,267,830

% change 2.4% 3.9% 1.3%

2. Sales Profit

2012 $10,781,848 608,481

2011 $10,458,652 613,934

% change 3.1% (0.9)%

1. Assets Liabilities Shareholders’ equity

2013 $1,392.7 281.9 1,110.8

2012 $1,072.8 423.6 649.2

% change 29.8% (33.5)% 71.1%

2. Net sales revenue Profit

2013 $2,468.0 558.4

2012 $2,463.2 230.0

% change 0.2% 142.8%

Jean Coutu ($ in millions)

(c)

Shoppers experienced growth in assets, liabilities, and shareholders’ equity, however its liabilities grew faster than its assets which is not always a positive sign. In addition, despite a 3.1% increase in sales, there was a slight decrease in profit as a result of increased operating and administrative expenses. Jean Coutu experienced a much larger growth rate than Shoppers. Not only did its assets increase by 29.8% but its liabilities declined by 33.5% in the same period. While there was only a small increase in sales revenue, its profit increased by 142.8%. However, it is important to note that the majority of this increase was the result of a one-time gain on the sale of Rite Aid (a drugstore chain in the U.S. formerly owned by Jean Coutu) and is not expected to recur.

(d)

In 2013, Jean Coutu’s fiscal year (March 2012 through February 2013) covers the majority of the same period as Shoppers’ fiscal year (January 2012 through December 2012). The same is true for Jean Coutu’s 2012 fiscal year and Shoppers 2011 fiscal year. Consequently, unless there was a significant economic impact that affected the drugstores in the non-overlapping period of two months (January and February), I would have no concerns about the comparisons made in (c) as they both cover a oneyear period..

Solutions Manual .

1-52

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 1-3 COMPARING IFRS AND ASPE (a)

Both public and private companies are separate legal entities owned by shareholders. One of the key differences between the two types of companies is the availability of the shares. Shares of public companies are traded on organized stock exchanges and are available to the general public. In contrast, shares of a private company are not made available to the general public nor are they traded on a public stock exchange. Another difference is access to capital. Since public companies are traded on organized stock exchanges, they generally have more access to capital than private companies. Private companies tend to rely upon bank financing for capital. Public and private companies also differ in terms of the amount of information they disclose publicly. Public companies are required to file financial statements with the regulators of the stock exchange. This makes their statements widely available. In contrast, private companies do not have any requirement to make their financial statements publicly available.

(b)

The key users of public company financial statements are shareholders, lenders and other creditors, regulators, analysts, and the general public. In contrast, the key users of private company financial statements are generally lenders and other creditors as well as private shareholders.

(c)

The key difference between the users of users of public and private financial statements is the different areas of emphasis of the users’ objectives and needs when reviewing the financial statements. Users of public company financial statements can represent a wide range with varying levels of understanding about the company and its operations. They tend to be a broad group of users who benefit from detailed disclosure that will help them make the appropriate financial decision to invest or to lend, etc. On the other hand, users of private company financial statements tend to be a small group, who usually have a high degree of understanding of the company and its operations. They consist mostly of lenders and other creditors and a small group of shareholders. These users tend to place a greater emphasis on liquidity, solvency, and short-term cash flow planning.

Solutions Manual .

1-53

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP1-3 (Continued) (d)

One of the main reasons that Canada adopted IFRS is that these global set of standards will be beneficial to investors, lenders, other creditors, and other financial statement users by increasing the comparability and quality of financial statements. In other words, users will be able to make an “apples to apples” comparison. If Canadian public companies had a choice of which GAAP to use then it would entirely defeat the purpose of increasing comparability among public companies.

(e)

Since most private companies in Canada are small to medium-sized businesses, the Accounting Standards Board (AcSB) decided that IFRS, with its extensive disclosure reporting requirements and sophisticated reporting, was not appropriate for most of these companies. However, since private companies can represent a wide range of companies – from large multinationals to small local restaurants, the AcSB decided it was best if private companies have a choice of which standard to adopt. A company’s choice of which GAAP to adopt is generally driven by users’ objectives and needs.

Solutions Manual .

1-54

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 1-4 CRITICAL THINKING ACTIVITY Note to instructors: All of the material supplementing this group activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook as well as in the Prepare and Present section of WileyPLUS.

(a) Divide revenue by the hourly rate charged to clients: IMS: $1,020,000 ÷ $17 per hour = 60,000 hours PCS: $900,000 ÷ $30 per hour = 30,000 hours (b) Knowing the hours worked from the above, we can derive the hourly salary by dividing total salary expense for each company by the hours worked as follows: IMS: $600,000 ÷ 60,000 hours = $10 per hour PCS: $450,000 ÷ 30,000 hours = $15 per hour (c) IMS uses larger facilities because its rent expense is higher. This makes sense because they have larger types of cleaning equipment that will need to be stored. Furthermore, the company has a larger staff given the size of its operations and may need more office. (d) PCS has higher other operating expenses because that company owns and operates vehicles. (e) Given that both companies pay interest at the same rate, IMS has the larger bank loan because its interest expense higher. (f) The most significant factor that makes PCS more profitable is the fact that this company charges its clients an hourly rate that is double the hourly wage rate paid to its employees. IMS is not able to charge its clients at double the wage rate?

Solutions Manual .

1-55

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 1-5 ETHICS CASE (a)

The stakeholders in this situation are the new CEO and CFO, and the creditors and investors who rely on the financial statements to make business decisions.

(b)

The CEO and CFO should not sign the certification until they have taken steps to assure themselves that the most recent reports accurately and completely reflect the activities of the business. However, as the current management of the company, they cannot refuse to sign the certification just because they are new. They are the management team now and must assume the responsibilities that go with these positions.

(c)

The CEO and CFO have no alternative other than to take the steps necessary to assure themselves of the accuracy and completeness of the financial information, and, if accurate, sign the certification. If the information is not accurate or complete, they need to make the required corrections to the financial information.

Solutions Manual .

1-56

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 1-6 “ALL ABOUT YOU” ACTIVITY Note to instructors: Answers will vary by student. (a)

You may want to be working as • An accountant working towards an accounting designation • A financial analyst • A financial advisor • A manager The steps needed to get there will vary depending on the work destination identified.

(b)

The basic elements of a resume include: • An objective (your goals) • A summary of your qualifications/accomplishments • Experience highlights • Employment history • Education and training • Other matters such as continuous education, languages, awards, memberships, affiliations and community involvement, as applicable

(c)

You can provide references which can substantiate the information on your resume and evidence of education (diplomas and transcripts).

Solutions Manual .

1-57

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

BYP 1-7 (a)

Financial Accounting, Sixth Canadian Edition

SERIAL CASE

Cookie Creations is a proprietorship. A proprietorship has a lower administrative burden than a corporation—fewer regulations and procedures to adhere to. She may also have more flexibility in working for herself (or less depending on the demands of the business). In addition, as a separate proprietorship, all of the profits of the business belong to Natalie. However, she also has personal and unlimited liability for the debts of the business. She may also have difficulty in raising capital to grow the business. Koebel’s Family Bakery Ltd. is a private corporation. It would have limited liability for the shareholders’ investments in the business compared to a proprietorship. However, this feature may be negated by a demand from creditors (such as the bank) for a personal guarantee by the shareholders. Profits would be shared with the other shareholders by way of dividends. More regulations and paperwork would be required as a corporation compared to that of a proprietorship, however, more opportunities would also exist to share the administrative burdens and to grow the business.

(b)

Cookie Creations may use a simple form of accounting, possibly even the cash basis of accounting. Given its current size, it likely has no requirements to produce financial statements to external creditors. It could also choose to follow Accounting Standards for Private Enterprises (ASPE) if it was required to produce financial statements for external users. Koebel’s Family Bakery Ltd. would most likely use Accounting Standards for Private Enterprises (ASPE).

(c)

Natalie will need information on the revenues and cost of the cupcake services and supplies so she can determine if the new contract is profitable. She will need this information more often initially (for example, on a weekly basis) so she can monitor the results of the contract and its impact on the operations of the bakery. She will also need forecasts of cupcake orders to plan the work, determine staffing and delivery schedules, and purchases of supplies. If the cupcake contract requires a loan to expand to meet demand, she will need financial statements so lenders can assess the financial health of the business. Natalie would also find financial statements useful to better understand her business and identify financial issues as early as possible. Monthly financial statements would be best because they are more timely.

Solutions Manual .

1-58

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 1-7 (Continued) (d)

The users of Koebel’s Family Bakery would include the existing shareholders (Natalie’s parents), potential shareholders such as Natalie, creditors such as the bank, taxing authorities, such as CRA, and major customers such as the national coffee shop. Natalie’s parents are internal users and they need information to plan, organize and run the company and determine if they can obtain the financing to meet the increase demand. Natalie needs information to determine if her parents’ business is a sound investment for her and what her responsibilities as administrator would be. The national coffee shop needs information to determine if Koebel’s Family Bakery is able to deliver the quantities of cupcakes needed, The users would need all four financial statements—income statement, statement of retained earnings (since it is assumed that Koebel's Family bakery follows ASPE, however, if it follows IFRS then it would be required to prepare a statement of changes in equity), statement of financial position, and statement of cash flows—to assess the financial health of the company.

(e)

The following are examples of activities that Koebel’s Family Bakery is likely to be engaged in: Operating activities would include revenue generated from the sale of cookies or from providing cookie-making lessons, paying for ingredients and supplies to make cupcakes, the payment of utilities for the bakery and interest on bank loans. Investing activities may include the purchase of equipment for the bakery. Financing activities may include borrowing money from the bank (debt) and paying dividends to shareholders (equity).

Solutions Manual .

1-59

Chapter 1

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

CHAPTER 2 A Further Look at Financial Statements ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

B Problems

BYP

Study Objectives

Questions

1. Identify the sections of a classified statement of financial position.

1, 2, 3, 4, 5, 6, 7

1, 2, 3, 4

1, 2, 3, 4, 5

1, 2, 3, 4

1, 2, 3, 4

1, 4, 6

2. Identify and calculate ratios for analyzing a company's liquidity, solvency and profitability.

8, 9, 10, 11, 12, 13, 14, 15

5, 6, 7

6, 7, 8

5, 6, 7, 8

5, 6, 7, 8

2, 4, 7

3. Describe the framework for the preparation and presentation of financial statements.

16, 17, 18, 19, 20, 21, 22, 23, 24, 25

8, 9, 10

9, 10

9, 10

9, 10

3, 5, 7

Solutions Manual .

2-1

Exercises

A Problems

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

1A

Classify accounts.

Moderate

15-25

2A

Prepare assets section.

Simple

15-25

3A

Prepare liabilities and equity sections.

Moderate

15-25

4A

Prepare financial statements; discuss relationships.

Moderate

15-25

5A

Calculate ratios and comment on liquidity, solvency, and profitability.

Simple

10-20

6A

Calculate ratios and comment on liquidity, solvency, and profitability.

Moderate

20-30

7A

Calculate ratios and comment on liquidity, solvency, and profitability.

Simple

10-20

8A

Comment on liquidity, solvency, and profitability.

Moderate

15-20

9A

Discuss financial reporting objective, qualitative characteristics, and elements.

Moderate

15-20

10A

Discuss bases of measurement.

Moderate

20-30

1B

Classify accounts.

Moderate

15-25

2B

Prepare assets section.

Simple

15-25

3B

Prepare liabilities and equity sections.

Moderate

15-25

4B

Prepare financial statements; discuss relationships.

Moderate

15-25

5B

Calculate ratios and comment on liquidity, solvency, and profitability.

Simple

10-20

6B

Calculate ratios and comment on liquidity, solvency, and profitability.

Moderate

20-30

Solutions Manual .

2-2

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

7B

Calculate ratios and comment on liquidity, solvency, and profitability.

Simple

10-20

8B

Comment on liquidity, solvency, and profitability.

Moderate

15-20

9B

Discuss financial reporting objective, qualitative characteristics, and elements.

Moderate

15-20

Moderate

20-30

10B Identify bases of measurement. ASSIGNMENT CHARACTERISTICS TABLE

Solutions Manual .

2-3

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ANSWERS TO QUESTIONS 1.

Current assets are assets that are expected to be converted into cash, sold, or used up within one year of the company’s financial statement date or its operating cycle, whichever is longer. Examples of current assets include: cash, accounts receivable, merchandise inventory and supplies.

2.

The term operating cycle stands for the average time it takes to go from cash to cash in producing revenue. In a merchandising business, this means the time it takes to purchase inventory, pay cash to suppliers, sell the inventory on account, and then collect cash from customers. In a service business, it stands for the time it takes to pay employees, provide services on account, and then collect the cash from customers.

3.

(a)

Current assets are assets that are expected to be converted into cash, sold, or used up within one year of the company’s financial statement date or its operating cycle, whichever is longer. Non-current assets are assets that are not expected to be converted into cash, sold, or used up by the business within one year of the financial statement date or its operating cycle. In other words, noncurrent assets are all assets that are not classified as current assets.

(b)

Current assets are assets that are expected to be converted into cash, sold, or used up within one year of the company’s financial statement date or its operating cycle, whichever is longer. Current liabilities are obligations that are to be paid or settled within one year of the company’s financial statement date or its operating cycle, whichever is longer. Ideally, current assets will exceed current liabilities for a company. Showing items as current in nature matters because doing so assists the user of the financial statements to assess the business’s liquidity.

4.

(a)

Current liabilities are obligations that are to be paid or settled within one year of the company’s financial statement date or its operating cycle, whichever is longer.

(b)

Examples of current liabilities include: bank indebtedness, accounts payable, accrued liabilities and current maturities of long-term debt.

Solutions Manual .

2-4

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 5.

(a)

(b)

The major differences between current liabilities and non-current liabilities are: Difference Source of payment

Current Liabilities Existing current assets or other current liabilities

Non-Current Liabilities Other than existing current assets or other current liabilities

Time of expected payment

Within one year

Beyond one year

Nature of items

Debts pertaining to the Mortgages, notes, loans, operating cycle and other bonds, and other nonshort-term debts current liabilities

Some liabilities, such as bank loans, appear on the statement of financial position with a current and non-current portion. Included in the balance of the bank loan payable are principal payments that will be due in the next year. That amount must be shown as a current liability as of the company’s financial statement date. The remaining principal balance is classified as a non-current liability.

6.

The two components of shareholders' equity and the purpose of each are: (1) Share capital is used to record investments of assets, ie. cash, in the business by the owners (shareholders). If there is only one class of shares, it is known as common shares. (2) Retained earnings is used to record accumulated profit, net of any losses and dividends paid, retained in the business.

7.

Statements, using the common practice among North American companies, are prepared by classifying the items on the statement of financial position in order of liquidity, ranking the items with the most liquidity first. The statement of financial position prepared using a reverse-liquidity order shows assets first, followed by shareholders’ equity and liabilities. The assets section starts with non-current assets followed by current assets. Non-current assets include goodwill and intangible assets; property, plant, and equipment; and long-term investments, which are normally grouped under a non-current heading. This differs from the separate disclosure of non-current assets without a heading that is more usual in North America. Within the current assets section, items are listed in reverse order of liquidity; that is, cash is normally shown last. Items within the property, plant, and equipment section are normally listed in order of permanency. Shareholders’ equity is shown next, followed by liabilities. The liabilities section presents non-current liabilities before current liabilities, and current liabilities are listed in reverse order of liquidity similar to current assets.

Solutions Manual .

2-5

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 8.

(a)

Liquidity ratios measure a company’s short-term ability to pay its current liabilities and meet its unexpected needs for cash. Examples of liquidity ratios include: Working capital and current ratio.

(b)

Solvency ratios measure a company’s ability to survive over a long period of time. An example of a solvency ratio is the debt to total assets ratio.

(c)

Profitability ratios measure a company’s operating success for a given period of time. Examples of profitability ratios include: Earnings per share and priceearnings ratio.

9.

The current ratio is a better measure of liquidity than working capital when making comparisons between different businesses. The amount of working capital is an absolute amount. It could vary tremendously depending on the size of the operations of the business. The current ratio on the other hand presents a relationship of the amount of current assets compared to current liabilities and is therefore appropriate as a tool to compare the liquidity of different size businesses.

10.

Current assets include accounts receivable and inventory. These may have increasing balances because of uncollectible receivables or slow-moving inventory. This would cause the current ratio to increase. Even though the current ratio may seem high, it is an artificial measure of liquidity if receivables and inventory cannot be easily or quickly convertible into cash. Consequently, the current ratio alone does not provide a complete assessment of liquidity.

11.

Dong Corporation is more solvent as only 45% of its assets are financed by debt whereas 55% of Du's assets are financed by debt. A company carrying a higher proportion of debt has an increased likelihood of encountering financial difficulties and is therefore considered less solvent.

12.

Raising money using debt adds more risk to a company than raising money through equity because the terms of repayment of debt require cash outflows for the payment of interest and repayment of principal. These payments tap into cash balances that could hurt the company’s liquidity. In contrast to debt, equity does not have to be repaid.

13.

Earnings per share comparisons among different companies are difficult due to variations in the financing structure of the companies and in the number of shares issued. Hence, there is no industry average for earnings per share. On the other hand, since the price-earnings ratio uses earnings per share relative to the market price of the common shares, the ratio can be compared among companies.

Solutions Manual .

2-6

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 14.

Investors appear to favour TD Bank. Its higher price-earnings ratio indicates that investors are willing to pay more for the company's shares and have more favourable expectations of future growth.

15.

Increases in the earnings per share, price-earnings ratio, and the current ratio are considered to be signs of improvement because: •

An increase in the earnings per share means that the amount of profit per share is greater than in the previous period.

•

An increase in the price-earnings ratio means that the share price has increased at a greater rate than the company’s earnings per share, which implies the market believes future profit will continue to increase.

•

An increase in the current ratio indicates that the company has more current assets available to settle its current liabilities and is more liquid (assuming the components of current assets (e.g., receivables and inventory) are also liquid.

On the other hand, the debt to total assets ratio measures how much of the company is financed by debt. The more debt a company has, the higher the debt to total assets ratio. A company with a higher debt level has increased financial risk due to higher fixed interest and principal repayments, and is less solvent than a company with a lower level of debt. 16.

(a) The conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards. The framework prescribes the nature, function, and limits of financial accounting statements. It guides choices about what to present in financial statements, decisions about alternative ways of reporting economic events, and the selection of appropriate ways of communicating such information. (b) Internationally, the conceptual framework may vary from country to country. Canadian companies use the same framework, whether they are reporting under IFRS or under ASPE.

17.

(a) The primary objective of financial reporting is to provide information useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company. (b) The main users of financial reporting are investors, lenders, and other creditors.

Solutions Manual .

2-7

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 18.

The going concern assumption states that the business will remain in operation for the foreseeable future. The timing of when the asset will be converted to cash or used in operations and when liabilities are to be paid determines their classification on the statement of financial position. Since the business is expected to remain in operation for the foreseeable future, these elements can continue to be reported in accordance with their respective current or non-current classifications. If the company were about to be shut down, all of its assets and liabilities would be classified as current.

19.

The fundamental qualitative characteristics are (1) relevance and (2) faithful representation. Relevant information will impact a user’s decision by having predictive value, confirmatory value or both. Faithful representation means that the financial statements should reflect the economic reality of what really exits or has happened. The information must be complete, neutral, and free from material error.

20.

Materiality is related to relevance in that they are both defined in terms of what influences or makes a difference to the decision-maker. In order to be relevant to a financial statement user, a transaction or amount must make a difference to the user in the making of a decision. An item is considered to be material if its omission or misstatement could influence the decision.

21.

The four enhancing qualitative characteristics are (1) comparability, (2) verifiability, (3) timeliness, and (4) understandability. There is no prescribed order in applying these characteristics.

22.

The cost constraint means that information will be presented only when the benefit associated with it exceeds the cost of providing it. In attempting to fulfill a completeness objective when obtaining financial information, one could expend considerable resources. The cost of this search may greatly outweigh any benefit in achieving the completeness objective. Consequently, the search for completeness will be restricted by this constraint.

23.

The elements of financial statements are broad categories or classes of financial statement effects of transactions and other events. They include assets, liabilities, equity, income (including gains), and expenses (including losses). The grouping is selected in accordance with the economic characteristics of the transactions.

Solutions Manual .

2-8

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 24.

The two bases are historical cost and fair value. The fair value basis of accounting is applied to those assets which are intended to be sold and whose fair value is readily available. Securities traded on the stock exchanges would be a good example of assets reported at their fair value. The historical cost basis of accounting is used for most of the remaining assets used by the business. Since in most cases the intention is to use the assets to earn revenue, the fair value of the asset is not as relevant as its cost.

25.

In order to be relevant for decision making, the measurement of elements of financial statements need to reflect amounts that are reliable. For assets that are intended to be sold, the current fair value of the assets becomes the most relevant measurement as it approximates the current amount of cash that could be obtained on the sale of the asset. On the other hand, for assets held for use by the corporation, the value at resale is not as relevant to the financial statement user. In that case, the cost of the assets is the better measurement for reporting the financial statement element. For example, inventory will become cost of goods sold when sold. It is relevant to compare the actual cost of the inventory to the amount of the revenue generated from its sale. Using the cost basis of accounting gives a faithful representation of the transaction that has occurred from the sale of inventory.

Solutions Manual .

2-9

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2-1 (a) (b) (c) (d) (e) (f) (g) (h)

5 1 3 3 1 4 8 5

Accounts payable Accounts receivable Accumulated depreciation Buildings Cash Patents Dividends Income tax payable

(i) (j) (k) (l) (m) (n) (o) (p) (q)

2 3 1 7 1 6 5 1 5

Long-term Investments Land Merchandise inventory Common shares Supplies Mortgage payable, due in 20 years Current portion of mortgage payable Prepaid insurance Unearned revenue

BRIEF EXERCISE 2-2 SWANN LIMITED Statement of Financial Position (Partial) Assets Current assets Cash Accounts receivable Merchandise inventory Supplies Prepaid insurance Total current assets

$16,400 14,500 9,000 4,200 3,900 $48,000

BRIEF EXERCISE 2-3 SHUM CORPORATION Statement of Financial Position (Partial) Property, plant, and equipment Land Buildings Less: Accumulated depreciation—buildings Equipment Less: Accumulated depreciation—equipment Total property, plant, and equipment

Solutions Manual .

2-10

$ 65,000 $110,000 33,000 $70,000 25,000

77,000 45,000 $187,000

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 2-4 HIRJIKAKA INC. Statement of Financial Position (Partial) Current liabilities Accounts payable Salaries payable Interest payable Income tax payable Unearned revenue Current portion of mortgage payable Total current liabilities

$22,500 3,900 5,200 6,400 900 5,000 $43,900

BRIEF EXERCISE 2-5 (a)

(b)

($ in thousands) 2012

2011

Working capital:

Working capital:

$453,629 – $229,503 = $224,126

$336,980 – $235,365 = $101,615

Current ratio:

Current ratio:

$453,629 = 2.0:1 $229,503

$336,980 = 1.4:1 $235,365

The working capital more than doubled in 2012 and the current ratio increased substantially when compared to 2011. Indigo's liquidity has improved in 2012 compared with 2011.

Solutions Manual .

2-11

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 2-6 (a)

(in USD millions) 2012

2011

Debt to total assets ratio:

Debt to total assets ratio:

($1,566.8 + $711.8) = 51.2% ($1,337.4 + $3,115.8) (b)

($977.4 + $969.4) = 49.6% ($1,242.2 + $2,684.0)

The company’s solvency was weaker in 2012 compared with 2011 because total debt has increased as a proportion of total assets.

BRIEF EXERCISE 2-7 (a)

($ in thousands) 2012

(b)

2011

Earnings per share:

Earnings per share:

$46,782 = $0.67 per share 70,033

$56,666 = $0.81 per share 69,969

Price-earnings ratio:

Price-earnings ratio:

$12.99 = 19.4 times $ 0.67

$12.40 = 15.3 times $ 0.81

The decrease in profit and in the earnings per share during the year would indicate that profitability has deteriorated in 2012. In spite of the decline in profit, investors appear to have more confidence in Leon’s future profit as indicated by the increase in the price-earnings ratio in 2012.

Solutions Manual .

2-12

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 2-8 (a) (b) (c) (d) (e) (f)

Faithful representation Verifiability Understandability Cost Going concern Fair value

BRIEF EXERCISE 2-9 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m)

10 5 1 2 4 13 8 12 9 3 11 6 7

BRIEF EXERCISE 2-10 (a)

Sosa Ltd. has purchased the land for sale and not for use. The current fair value of the land becomes the most relevant measurement as it approximates the current amount of cash that could be obtained on the sale of the asset.

(b)

Mohawk has purchased land for use and not for sale. The current fair value is not as relevant to the financial statement user in this case. The historical cost of the land is the better measurement for reporting the land on the statement of financial position.

Solutions Manual .

2-13

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 2-1 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n)

5 1 3 3 7 5 5 4 5 1 1 3 6 1

Solutions Manual .

Accounts payable and accrued liabilities Accounts receivable Accumulated depreciation Buildings and leasehold improvements Common shares Current maturities of long-term debt Dividends payable Goodwill Income and other taxes payable Income and other taxes receivable Inventories Land Long-term debt Prepaid expenses

2-14

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 2-2 BIG ROCK BREWERY INC. Statement of Financial Position (partial) December 31, 2012 (in thousands) Assets Current assets Cash Accounts receivable Inventories Prepaid expenses and other Total current assets Property, plant, and equipment Land Buildings Less: Accumulated depreciation Machinery and equipment Less: Accumulated depreciation Mobile equipment Less: Accumulated depreciation Office furniture Less: Accumulated depreciation Total property, plant, and equipment Intangible assets Total assets

Solutions Manual .

2-15

$4,281 2,358 3,892 364 $10,895 $ 2,516 $11,070 827 $20,800 6,480 $645 149 $310 140

10,243 14,320 496 170 27,745 128 $38,768

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 2-3 SAPUTO INC. Statement of Financial Position (partial) March 31, 2012 (in thousands) Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities Income taxes payable Bank loans payable Total current liabilities Non-current liabilities Long-term debt Deferred income taxes payable Other long-term liabilities Total non-current liabilities Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity

Solutions Manual .

2-16

$571,814 163,996 166,631 $ 902,441 $379,875 156,632 54,486 590,993 1,493,434 $ 629,606 1,467,108 2,096,714 $3,590,148

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 2-4 (a)

Profit

= Revenues – Expenses = $73,040 – $5,000 – $4,750 – $48,680 = $14,610

Retained earnings = Beginning retained earnings + Profit – Dividends = $66,520 + $14,610 – $0 = $81,130 (b)

SUMMIT LTD. Statement of Financial Position December 31, 2015 Assets

Current assets Cash Accounts receivable Supplies Prepaid insurance Total current assets Long-term investments Property, plant, and equipment Land Buildings Less: Accumulated depreciation Equipment Less: Accumulated depreciation Total property, plant, and equipment Total assets

$ 15,040 13,780 740 390 29,950 30,000 $54,000 $128,800 45,600 $62,400 17,770

83,200 44,630 181,830 $241,780

Liabilities and Shareholders' Equity Current liabilities Accounts payable Interest payable Current portion of mortgage payable Total current liabilities Mortgage payable ($95,000 – $13,600) Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity

Solutions Manual .

$14,050 1,600 13,600 $ 29,250 81,400 110,650 $50,000 81,130 131,130 $241,780

2-17

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 2-5 BATRA CORPORATION Income Statement Year Ended July 31, 2015 Revenues Service revenue Rent revenue Total revenues Expenses Salaries expense Rent expense Depreciation expense Utilities expense Interest expense Supplies expense Total expenses Profit before income tax Income tax expense Profit

$81,100 18,500 99,600 $44,700 10,800 3,000 2,600 2,000 900 64,000 35,600 5,000 $30,600 BATRA CORPORATION Statement of Changes in Equity Year Ended July 31, 2015

Balance, August 1, 2014 Issued common shares Profit Dividends Balance, July 31, 2015

Solutions Manual .

Common Shares

Retained Earnings

$ 6,000 4,000

$17,940

000 000 $10,000

2-18

30,600 (12,000) $36,540

Total Equity $23,940 4,000 30,600 (12,000) $46,540

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 2-5 (Continued) BATRA CORPORATION Statement of Financial Position July 31, 2015 Assets Current assets Cash Trading investments Accounts receivable Supplies Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total property, plant, and equipment Total assets

$ 5,060 20,000 17,100 1,500 $43,660 $35,900 6,000 29,900 $73,560

Liabilities and Shareholders' Equity Current liabilities Accounts payable Interest payable Bank loan payable Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity

Solutions Manual .

$ 4,220 1,000 21,800 $27,020 $10,000 36,540 46,540 $73,560

2-19

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 2-6 (a)

Current ratio: $60,000 $40,000

(b)

= 1.5:1

Current ratio: ($60,000 – $20,000 )= 2:1 ($40,000 – $20,000)

(c)

The request of the CFO to pay off an accounts payable ahead of the due date is clearly done to manipulate the current ratio. His instructions to make the payment came after he was presented with the calculation of the current ratio. In this case the current ratio which is meant to show Padilla’s liquidity position has been artificially altered by a simple payment on account. That said, it is not unethical to pay an account payable in advance of its due date. Rather, it is the motivation for the transaction that would lead one to conclude that the CFO is acting unethically.

Solutions Manual .

2-20

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 2-7 (a)

(in millions)

2012

2011

Working capital: $103.5 – $30.8 = $72.7

Working capital: $77.3 – $78.0 = $(0.7)

Current ratio: $103.5 $30.8

= 3.4:1

$77.3 $78.0

= 1.0:1

Debt to total assets ratio: ($30.8 + $114.8) = 45.3% ($103.5 + 217.8)

(b)

($78.0 + $218.2) ($77.3 + $422.5)

= 59.3%

Huntingdon’s liquidity and solvency improved dramatically in 2012 when compared to 2011.

(c) 2012

Working capital (in millions) Current ratio Debt to total assets ratio

Huntingdon $72.7 3.4:1 45.3%

Plazacorp $(48.6) 0.1:1 58.6%

First Capital $12.8 1.0:1 55.4%

Industry n/a 0.9:1 65.0%

First Capital $(276.6) 0.5:1 58.7%

Industry n/a 2.0:1 71.0%

2011

Working capital (in millions) Current ratio Debt to total assets ratio

Solutions Manual .

Huntingdon $(0.7) 1.0:1 59.3%

2-21

Plazacorp $(8.9) 0.7:1 63.9%

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 2-7 (Continued) (c) (Continued) Based on working capital and the current ratio, Huntingdon’s liquidity is the best (highest) of the three companies, as the current ratio far exceeds the ratios for Plazacorp and First Capital as well as the industry average. Compared to 2011, all companies improved working capital and the current ratio except Plazacorp which has the worst (lowest), with insufficient current assets to cover its current liabilities and with a negative working capital position. Based on the debt to total assets ratio, which improved for all three companies and for the industry as a whole, Huntingdon’s solvency is the best of the three companies, exceeding the industry average by a large margin. Plazacorp’s solvency is the worst of the three companies, as is its liquidity.

EXERCISE 2-8 (a)

(in thousands)

2012

2011

Earnings per share:

Earnings per share:

$264,583 = $0.67 per share 395,234

$449,844 394,662

Price-earnings ratio:

Price-earnings ratio:

$19.59 $0.67

(b)

= 29.2 times

$18.41 $1.14

= $1.14 per share

= 16.1 times

The decrease in the earnings per share during the year would indicate that profitability has deteriorated dramatically in 2012. However, investors appear to have more confidence in Cameco's future profitability as indicated by the increase in the priceearnings ratio in 2012 and by the increase in the share price in 2012.

Solutions Manual .

2-22

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 2-9 (a) (b) (c) (d) (e) (f)

7 10 11 3 2 8

(g) (h) (i) (j) (k) (l)

1 6 4 5 9 12

EXERCISE 2-10 1.

(a) The cost basis of accounting is involved in this situation. (b) The cost basis of accounting has been violated. The land was reported at its fair value when it should have remained at its historical cost.

2.

(a) The fair value basis of accounting is involved in this situation. (b) The principle has not been violated since the parcel of land is being held for resale and not for use.

3.

(a) The assumption involved in this situation is the going concern assumption. (b) The going concern assumption has been violated. The elements on the statement of financial position should have been classified between current and non-current.

Solutions Manual .

2-23

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 2-1A Statement of Financial Position Category

Item Accumulated depreciation

Cash

Contra asset to plant, equipment, and vehicles in the property, plant, and equipment section Current assets

Common (ordinary) shares Current income tax payable Current income tax recoverable Interest-bearing loans and borrowings (current) Interest-bearing loans and borrowings (non-current) Inventories Investments Plant, equipment, and vehicles Trade and other payables

Share capital Current liabilities Current assets Current liabilities Non-current liabilities Current assets Non-current assets Property, plant, and equipment Current liabilities

Trade and other receivables Trademarks

Current assets Intangible assets

Solutions Manual .

2-24

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-2A (a) Statement of Financial Position Category

Item Accounts receivable Accumulated depreciation—aircraft Accumulated depreciation—buildings

Current assets Property, plant, and equipment (contra account) Property, plant, and equipment (contra account)

Accumulated depreciation—ground property and equipment Accumulated depreciation—leasehold Improvements Accumulated depreciation—spare engines and parts Aircraft Buildings Cash Ground property and equipment Inventory

Property, plant, and equipment (contra account)

Intangible assets Leasehold improvements Other assets Prepaid expenses, deposits, and other Spare engines and parts

Intangible assets Property, plant, and equipment Other assets Current assets Property, plant, and equipment

Solutions Manual .

2-25

Property, plant, and equipment (contra account) Property, plant, and equipment (contra account) Property, plant, and equipment Property, plant, and equipment Current assets Property, plant, and equipment Current assets

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-2A (Continued) (b) WESTJET AIRLINES LTD. Statement of Financial Position (partial) December 31, 2012 (in thousands) Assets Current assets Cash Accounts receivable Inventory Prepaid expenses, deposits and other Total current assets Property, plant, and equipment Aircraft Less: Accumulated depreciation Ground property and equipment Less: Accumulated depreciation Spare engines and parts Less: Accumulated depreciation Buildings Less: Accumulated depreciation Leasehold improvements Less: Accumulated depreciation Total property, plant, and equipment Intangible assets Other assets Total assets

Solutions Manual .

2-26

$1,459,822 37,576 35,595 101,802 $1,634,795 $2,605,277 1,127,889 $136,167 79,052 $146,422 44,713 $135,924 20,025 $16,538 5,536

$1,477,388 57,115 101,709 115,899 11,002 1,763,113 50,808 297,899 $3,746,615

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-3A (a)

Statement of Financial Position Category Current liabilities Current liabilities Current liabilities Non-current liabilities Non-current liabilities Current liabilities Non-current liabilities Shareholders’ equity Shareholders’ equity Shareholders’ equity

Item Accounts payable and accrued liabilities Advance ticket sales Current portion of long-term debt Deferred income tax (long-term) Long-term debt Other current liabilities Other long-term liabilities Other shareholders’ equity items Retained earnings Share capital (b)

WESTJET AIRLINES LTD. Statement of Financial Position (partial) Liabilities and Shareholders' Equity December 31, 2012 (in thousands)

Current liabilities Accounts payable and accrued liabilities Advanced ticket sales Other current liabilities Current portion of long-term debt Total current liabilities Non-current liabilities Long-term debt Other long-term liabilities Deferred income tax Total non-current liabilities Total liabilities Shareholders' equity Share capital Retained earnings Other shareholders’ equity items Total shareholders’ equity Total liabilities and shareholders' equity

$460,003 480,947 47,859 199,044 $1,187,853 $574,139 155,570 356,748 1,086,457 2,274,310 $614,899 793,296 64,110 1,472,305 $3,746,615

(c) Yes, these two amounts agree. Assets of $3,746,615 thousand equal total liabilities plus shareholders’ equity of the same amount.

Solutions Manual .

2-27

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-4A (a) MBONG CORPORATION Income Statement Year Ended December 31, 2015 Revenues Service revenue Interest revenue Total revenues Expenses Salaries expense Depreciation expense Repair and maintenance expense Insurance expense Utilities expense Interest expense Supplies expense Total expenses Profit before income tax Income tax expense Profit

$81,700 500 $82,200 $37,000 6,200 2,800 2,200 2,000 1,500 1,000 52,700 29,500 6,000 $23,500

MBONG CORPORATION Statement of Changes in Equity Year Ended December 31, 2015

Balance, January 1 Issued common shares Profit Dividends Balance, December 31

Solutions Manual .

Common Shares

Retained Earnings

$30,000 4,200

$105,000

_ _____ $34,200

2-28

23,500 (5,000) $123,500

Total Equity $135,000 4,200 23,500 (5,000) $157,700

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-4A (Continued) (a) (Continued) MBONG CORPORATION Statement of Financial Position December 31, 2015 Assets Current assets Cash Trading investments Accounts receivable Supplies Prepaid insurance Total current assets Property, plant, and equipment Land Building Less: Accumulated depreciation—building Equipment Less: Accumulated depreciation—equipment Total property, plant, and equipment Total assets

$ 5,200 20,000 14,200 200 2,000 $ 41,600 $40,000 $72,000 18,000 $66,000 17,600

54,000 48,400 142,400 $184,000

Liabilities and Shareholders' Equity Current liabilities Accounts payable Salaries payable Current portion of bank loan payable Total current liabilities Non-current liabilities Bank loan payable ($15,000 - $1,500) Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity (b)

$8,300 3,000 1,500 $ 12,800 13,500 26,300 $ 34,200 123,500 157,700 $184,000

The income statement reports the profit or loss for the period. This figure is then used in the statement of changes in equity, along with dividends and any issues (or repurchases) of shares to calculate the balances in common shares and retained earnings at the end of the period. These ending balances are then used in the statement of financial position to determine shareholders’ equity and complete the accounting equation.

Solutions Manual .

2-29

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-5A (a) 1.

Working capital

Current assets – Current liabilities $ 446,900 – $142,500 = $304,400

2.

Current ratio

Current assets Current liabilities $446,900

=

3.1 :1

$142,500

3.

Debt to total assets

Total liabilities Total assets $452,500

= 42.2%

$1,072,200 Profit available to common shareholders 4.

Earnings per share

5.

Price-earnings ratio

Weighted average number of common shares $160,000 = $4.00 40,000

Market price per share Earnings per share $35.00 = 8.8 times $4.00

(b)

Johanssen’s liquidity has improved dramatically as the working capital is greater in 2015 and the current ratio is almost double that of 2014. On the other hand, the solvency has deteriorated as the debt to total assets ratio is higher in 2015. Johanssen’s profitability has improved as the earnings per share ratio has increased in 2015, as has investors’ expectations for future profitability as indicated by the increasing price-earnings ratio.

Solutions Manual .

2-30

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-6A (a) Working capital Chen Caissie

= = =

Current ratio

Current assets – Current liabilities $407,200 – $166,325 = $190,400 – $133,700 = Current assets Current liabilities

=

Chen $407,200

$240,875 $56,700

Caissie =

$190,400

2.4 :1

$166,325

=

1.4 :1

$133,700

Chen is significantly more liquid than Caissie. It has a higher current ratio and more current assets available to pay current liabilities as they come due. (b) Debt to total assets

=

Total liabilities Total assets

Chen ($166,325 + $108,500)

Caissie = 29.3%

($407,200 + $532,000)

($133,700 + $40,700)

=

52.8%

($190,400 + $139,700)

Caissie is considerably less solvent than Chen. Caissie's debt to total assets ratio of 52.8% is almost double that of Chen’s ratio of 29.3%. The lower the percentage of debt to total assets the lower the risk that a company may be unable to pay its debts as they come due.

Solutions Manual .

2-31

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-6A (Continued) (c) Sales revenue Cost of goods sold Operating expenses Interest expense Income tax expense Total expenses

Chen $1,800,000 1,175,000 283,000 10,000 85,000 1,553,000

Caissie $620,000 340,000 98,000 4,000 35,400 477,400

Profit

$ 247,000

$142,600

Profit available to common shareholders

Earnings per share =

Weighted average number of common shares Chen

Caissie

$247,000 = $3.25 76,000

Price-earnings ratio

$142,600 62,000

=

Market price per share Earnings per share

Chen $25.00 $3.25

= 7.7 times

= $2.30

Caissie $15.00 $2.30

= 6.5 times

Based on the price-earnings ratio, investors believe that Chen will be more profitable than Caissie in the future. It is difficult to compare earnings per share because Caissie has more common shares issued than Chen, as well as having a different debt structure.

Solutions Manual .

2-32

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-7A (a)

(in thousands) Le Château

Reitmans

1.

Working capital

$132,223 – $47,382 = $84,841

2.

Current ratio

$132,223 = 2.8:1 $47,382

$301,374 $86,914

= 3.5:1

3.

Debt to total assets

$80,412 = 36.5% $220,210

$139,537 $594,555

= 23.5%

4.

Earnings per share

$(8,717) 25,659

= $(0.34)

$26,619 65,188

= $0.41

5.

Price-earnings ratio

= N/A

$12.39 $0.41

= 30.2 times

(b)

$301,374 – $86,914 = $214,460

Liquidity With a current ratio of 2.8:1, Le Château is less liquid than Reitmans and both have stronger ratios than the industry average of 2.0:1. Solvency Reitmans is more solvent than Le Château as evidenced by its lower debt to total assets ratio, which is almost identical to the industry average of 24%. Profitability Although the earnings per share ratio does not provide a basis for comparison investors appear to have more confidence in the future profit of Reitmans as evidenced by its price-earnings ratio, which is also much higher than that of the industry. Le Château does not have a price-earnings ratio because it has negative earnings.

Solutions Manual .

2-33

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-8A (a)

The higher the amount of working capital, the better a company’ liquidity. From 2013 to 2014 Pitka Corporation’s working capital significantly deteriorated. It then went on to deteriorate even further from 2014 to 2015, decreasing by $15,000. A higher current ratio is evidence of better liquidity for a company (assuming the components of the current assets are also liquid). The current ratio for Pitka has been steady from 2013 to 2014, but deteriorated slightly from 2014 to 2015. A smaller (lower) debt to total assets ratio shows evidence of better solvency. The percentage of total liabilities to total assets increased from 2013 to 2014, showing deterioration in the solvency for Pitka. On the other hand, the ratio improved substantially from 2014 to 2015. The higher the earnings per share, the better the profitability. Profitability decreased from 2013 to 2014, but improved from 2014 to 2015. The investors appeared to have less confidence in the future profit of Pitka as evidenced by Pitka's price-earnings ratio, which declined from 2013 to 2014. This view changed as demonstrated by the climb in the price-earnings ratio from 2014 to 2015.

(b)

Liquidity Pitka’s current ratio, although steady in 2013 and 2014, declined slightly in 2015. This trend is of concern given the low level of liquidity the company has with a current ratio of 1.1:1. Solvency Pitka’s debt to total assets ratio improved in the last year. It appears to be reasonable in size, as does the solvency of the company in 2013. Profitability Pitka’s profitability declined and then recovered as is demonstrated by the earnings per share ratio. The price-earnings ratio indicates expectations of improving profitability in 2015.

Solutions Manual .

2-34

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-9A (a)

The objective of financial reporting is to provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company. In this case, the information will be used by the team’s bank. Bucky’s suggestions concerning how elements should be reported on the financial statements do not meet the objective of financial reporting. His suggestions would lead to a violation of the fundamental basis on which financial statements are prepared: accrual accounting. The suggested changes to the financial statements would not portray economic reality and would not faithfully represent the performance of the team and the financial position at December 31, 2015. Bucky’s suggestions show bias and an attempt to portray a financial picture that would be perceived as more favourable than it is in reality.

(b)

1. Failing to include the estimated expenses for utilities and the corresponding liability for the utilities already consumed by December 31, 2015 violates accrual accounting. The expense was incurred and a liability exists and although the exact amount is not known, a reasonable estimate can be made as this type of expense occurs often. The definitions of the elements have been met. Failing to include the expense would represent an error of omission done on purpose to increase the profitability and reduce the liabilities of the team at December 31, 2015. 2. Unless the company uses the revaluation model for all of its long-lived assets, the suggestion of increasing the value of building to its fair value would violate the cost basis of accounting. It is likely far more relevant to the financial statement user of this type of company to see the original purchase price of the building rather than its fair value as it is unlikely to be resold soon. Consequently, assets and revenue (from the recording of an unrealized gain from the increase in the value of the asset) would be overstated if the Bucky’s instructions were followed. 3. The signing bonus paid to Wayne Crosby does not represent an asset at December 31, 2015. No future benefit can be derived from this payment as it was not conditional upon the occurrence of a future event. Consequently, the expenditure does not fit the definition of an asset.

Solutions Manual .

2-35

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-10A (a)

The advantage of the fair value basis of accounting is that it represents a more up-todate measurement of the value of the asset reported. Consequently, the amounts reported are more relevant to the financial statement users. The disadvantage of the fair value basis of accounting and corresponding advantage of historical cost is that historical cost is more reliable and shows the amount paid for the asset. The historical cost might provide a more faithful representation because it can be easily verified and is neutral.

(b)

The reason a company might choose to adopt the fair value basis of accounting for real estate is that assets reported on the statement of financial position will have higher values than they would using the historical cost of these assets. It is inherent in the nature of real estate that the land will increase in value over time. Creditors will find the fair value a more relevant basis for making lending decisions. The increase in the assets will have a corresponding increase in equity.

(c)

The reason a company might choose to adopt the cost basis of accounting for real estate is that assets reported on the statement of financial position will have more faithful representation because it reports the actual cost of the asset when it was acquired and this measurement can be easily verified and it is neutral. There is also a significant cost to obtaining reliable fair value information on a regular basis to be reported in the financial statements.

(d)

When comparing real estate companies, the reader is well advised to read the accounting policy note to the financial statements disclosing the measurement policy used for the real estate property. One would need to determine the corresponding fair value for real estate for the company using the cost basis of accounting. In fact, this information is required to be disclosed for real estate companies even if they adopted the cost basis of accounting to improve comparability and disclosure. Otherwise, trying to compare businesses that use different bases of accounting would be very difficult.

Solutions Manual .

2-36

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-1B Item

Statement of Financial Position Category

Accumulated amortization—patents and trademarks Accumulated depreciation—industrial machinery and equipment Bank overdraft Cash Common (ordinary) shares Current borrowings and debts Income tax payable (current) Industrial machinery and equipment Inventories Investments Land Non-current borrowings and debts Patents and trademarks Prepaid expenses Trade accounts payable Trade accounts receivable

Solutions Manual .

Intangible assets (contra account) Property, plant, and equipment (contra account) Current liabilities Current assets Share capital Current liabilities Current liabilities Property, plant, and equipment Current assets Non-current assets Property, plant, and equipment Non-current liabilities Intangible assets Current assets Current liabilities Current assets

2-37

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-2B (a) Item

Statement of Financial Position Category

Accounts receivable Accumulated amortization—patents Accumulated depreciation—buildings Accumulated depreciation—equipment Buildings Cash Equipment Goodwill Patent Land Trading investments Merchandise inventory Prepaid expenses

Solutions Manual .

2-38

Current assets Intangible assets (contra account) Property, plant, and equipment (contra account) Property, plant, and equipment (contra account) Property, plant, and equipment Current assets Property, plant, and equipment Goodwill (after intangibles) Intangible assets Property, plant, and equipment Current assets Current assets Current assets

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-2B (Continued) (b) DEVON LIMITED Statement of Financial Position (partial) December 31, 2015 (in thousands) Assets Current assets Cash Trading investments Accounts receivable Merchandise inventory Prepaid expenses Total current assets Property, plant, and equipment Land Buildings Less: Accumulated depreciation Equipment Less: Accumulated depreciation Total property, plant, and equipment Intangible assets Patents Less: Accumulated amortization Goodwill Total assets

Solutions Manual .

2-39

$97,625 71,630 4,145 93,320 25,950 $292,670 $ 5,860 $53,150 22,470 $166,750 85,900

30,680 80,850 117,390 $29,415 10,190

19,225 42,425 $471,710

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-3B (a) Item

Category

Accounts payable Current portion of mortgage payable Mortgage payable Retained earnings Common shares Unearned revenue

Current liabilities Current liabilities Non-current liabilities Shareholders’ equity Shareholders’ equity Current liabilities

(b) DEVON LIMITED Statement of Financial Position (partial) December 31, 2015 (in thousands) Liabilities and Shareholders' Equity Current liabilities Accounts payable Unearned revenue Current portion of mortgage payable Total current liabilities Non-current liabilities Mortgage payable Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity

(c)

$ 2,900 16,295 3,570 $ 22,765 71,430 94,195 $ 39,225 338,290 377,515 $471,710

Yes, the total assets of $471,710 agree to total liabilities and shareholders’ equity of the same amount.

Solutions Manual .

2-40

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-4B (a) BEAULIEU LIMITED Income Statement Year Ended December 31, 2015 Revenues Service revenue Interest revenue Total revenues Expenses Salaries expense Interest expense Depreciation expense Utilities expense Insurance expense Total expenses Profit before income tax Income tax expense Profit

$80,500 500 $81,000 $33,000 8,000 5,400 3,700 2,400 52,500 28,500 5,000 $23,500

BEAULIEU LIMITED Statement of Changes in Equity Year Ended December 31, 2015

Balance, January 1 Issued common shares Profit Dividends Balance, December 31

Solutions Manual .

Common Shares

Retained Earnings

$15,000 5,000

$34,000

_ _____ $20,000

2-41

23,500 (3,500) $54,000

Total Equity $49,000 5,000 23,500 (3,500) $74,000

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-4B (Continued) (a) (Continued) BEAULIEU LIMITED Statement of Financial Position December 31, 2015 Assets Current assets Cash Accounts receivable Prepaid insurance Total current assets Investments Property, plant, and equipment Land Buildings Less: Accumulated depreciation—buildings Equipment Less: Accumulated depreciation—equipment Total property, plant, and equipment Total assets

$8,000 7,500 250 $ 15,750 20,000 $50,000 $80,000 12,000 $32,000 19,200

Liabilities and Shareholders' Equity Current liabilities Accounts payable Salaries payable Current portion of mortgage payable Total current liabilities Non-current liabilities Mortgage payable ($80,000 - $10,000) Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity (b)

68,000 12,800 130,800 $166,550

$ 9,550 3,000 10,000 $ 22,550 70,000 92,550 $20,000 54,000 74,000 $166,550

The income statement reports the profit or loss for the period. This figure is then used in the statement of changes in equity, along with dividends and issues (or repurchases) of shares to calculate the balances in common shares and retained earnings at the end of the period. These ending balances are then used in the statement of financial position to determine shareholders’ equity and complete the accounting equation.

Solutions Manual .

2-42

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-5B (a) 1.

2.

Working capital

Current ratio

Current assets – Current liabilities $253,850 – $156,550 =

$97,300

Current assets Current liabilities $253,850

=

1.6 :1

=

40.1%

$156,550

3.

Debt to total assets

Total liabilities Total assets $288,550 $719,150 Profit available to common shareholders

4.

Earnings per share

Weighted average number of common shares $96,600

=

$2.42

40,000

5.

Price-earnings ratio

Market price per share Earnings per share $30.00 = 12.4 $2.42

(b)

times

Fast’s liquidity has improved as the working capital is larger in 2015 and the current ratio is greater than that of 2014. The solvency has improved as the debt to total assets ratio is a smaller percentage in 2015 than in 2014. Fast’s profitability has improved dramatically as the earnings per share ratio has increased by a large amount in 2015, as has the price-earnings ratio, suggesting that investors are excited about the company’s future prospects.

Solutions Manual .

2-43

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-6B (a) Working capital Belliveau

= = =

Shields Current ratio

Current assets – Current liabilities $180,000 – $75,000 = $700,000 – $300,000 = Current assets Current liabilities

=

Belliveau $180,000

$105,000 $400,000

Shields =

$700,000

2.4 :1

$75,000

=

2.3 :1

$300,000

Belliveau is slightly more liquid than Shields as it has a higher current ratio, even though its absolute working capital amount is lower. (b) Debt to total assets

=

Total liabilities Total assets

Belliveau ($75,000 + $190,000) ($180,000 + $600,000)

Shields = 34.0%

($300,000 + $200,000) ($700,000 + $800,000)

= 33.3%

The debt to asset ratios are similar and both companies are solvent. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they come due.

Solutions Manual .

2-44

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-6B (Continued) (c) Sales revenue Cost of goods sold Operating expenses Interest expense Income tax expense

Belliveau $450,000 260,000 130,000 6,000 10,000

Shields $890,000 620,000 59,000 10,000 65,000

Total expenses

406,000

754,000

Profit

$ 44,000

$136,000

Profit available to common shareholders

Earnings per share =

Weighted average number of common shares Belliveau $44,000 200,000

Shields

= $0.22

Price-earnings ratio

$136,000 200,000

=

Market price per share Earnings per share

Belliveau $2.50 $0.22

= 11.4 times

= $0.68

Shields $6.00 $0.68

= 8.8 times

Investors have higher expectations for Belliveau’s future profitability, as evidenced by the price-earnings ratio. It is difficult to compare the earnings per share even though both companies have the same number of shares because of the different financing avenues each company has used (for example, Shields has a lot more debt).

Solutions Manual .

2-45

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-7B (a)

(in USD millions) Walmart $59,940 – $71,818 = $(11,878)

Target $16,388 – $14,031 = $2,357

1.

Working capital

2.

Current ratio

$59,940 $71,818

= 0.8:1

$16,388 $14,031

= 1.2:1

3.

Debt to total assets

$121,367 $203,105

= 59.8%

$31,605 $48,163

= 65.6%

4.

Earnings per share

$16,999 3,374

= $5.04

$2,999 657

= $4.56

5.

Price-earnings ratio

$69.95 $5.04

= 13.9 times

$61.15 $4.56

= 13.4 times

(b)

Liquidity With a current ratio of 1.2:1, Target is more liquid than Walmart. Both Walmart and Target have current ratios that are lower (worse) than the industry average. Solvency Walmart is more solvent than Target as evidenced by its lower debt to total assets ratio. However, since both companies have a debt to total assets ratio that is much higher than the industry average, they are less solvent than the average company in the industry. Profitability Although the earnings per share ratio does not provide a basis for comparison, investors appear to have slightly more confidence in the future profit of Walmart as evidenced by Walmart's price-earnings ratio. Both Target and Walmart have lower price-earnings ratio than the industry.

Solutions Manual .

2-46

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-8B

(a)

The higher the amount of working capital, the better a business’ liquidity. From 2013 to 2014, Giasson Corporation’s working capital improved. It then deteriorated from 2014 to 2015, decreasing by $6,000. A higher current ratio is evidence of better liquidity for a business, assuming all components of current assets are also liquid. The current ratio for Giasson has been deteriorating steadily from 2013 to 2015. A smaller debt to total assets ratio shows evidence of better solvency. The percentage of total liabilities to total assets increased from 2013 to 2014, showing deterioration in the solvency for Giasson. On the other hand the ratio remained somewhat stable from 2014 to 2015, declining (improving) slightly. The higher the earnings per share, the better evidence of an improved profitability. Profitability increased from 2013 to 2014 but declined significantly from 2014 to 2015 indicating poorer profitability. The investors appear to have less confidence in the future profitability of Giasson as evidenced by Giasson's price-earnings ratio which declined from 2013 to 2015.

(b)

Liquidity Giasson’s current ratio, although declining over the last two years, demonstrates adequate liquidity. There are $1.50 of current assets available to cover each $1 of current liabilities. Solvency Giasson’s debt to total assets ratio, although deteriorating remains modest in size and so the solvency of the company continues to be good. Profitability Giasson’s profitability is declining steadily as is demonstrated by the earnings per share ratio and the price-earnings ratio.

Solutions Manual .

2-47

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-9B (a)

The objective of financial reporting is to provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company. Virginia’s suggestions concerning how elements should be reported on the financial statements do not meet the objective of financial reporting. Her suggestions would lead to a violation of the fundamental basis on which financial statements are prepared: accrual accounting. The suggested changes to the financial statements would not portray the economic reality and would not faithfully represent the performance of the construction company and the financial position at its year end. Virginia’s suggestions show bias and an attempt to portray a financial picture that would be perceived as more favourable than it is in reality.

(b)

1. Failing to include the estimated expense and the related liability for the damages that have already occurred by the end of the year violates accrual accounting. The expense was incurred and a liability exists that can be estimated. The definitions of the elements have been met. Failing to include the expense would represent an error of omission done on purpose to increase the profitability and reduce the liabilities of the construction company at its year end. 2. The suggestion of increasing the revenues from construction would result not only in the recording of revenue but the recording of an accounts receivable. The revenue from construction has not been earned as no work has been performed. Furthermore, no account receivable should be recorded because no asset exists yet. Because revenue would be overstated if recorded, equity would also be overstated if the Virginia’s instructions were followed. Virginia’s suggestions would not faithfully represent the reality of the performance of Ace Construction Limited for the current fiscal year. 3. Although there are no fixed repayment terms for the bank overdraft, the bank can require repayment on demand since no contract or agreement has been entered into to delay the repayment of the overdraft. For this reason, the classification of the bank overdraft as a non-current liability would falsely portray the financial position of Ace Construction Limited at the year end. When assessing the construction company’s liquidity, the users of the financial statements would be misinterpreting the financial position because of this misclassification. Classifying the debt as non-current would not faithfully represent the economic reality of the construction company’s liquidity position.

Solutions Manual .

2-48

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 2-10B (a)

The advantage of the fair value basis of accounting it that it represents a more up-todate measurement of the value of the asset reported. Consequently, the amounts reported are more relevant to the financial statement users. The disadvantage of the fair value basis of accounting and corresponding advantage of historical cost is that historical cost is more reliable and shows the amount paid for the asset. The historical cost might provide a more faithful representation because it can be easily verified and is neutral.

(b)

The following is the recommended basis of measurement that should be used for the following purchases: 1. Due the nature of the asset, a textbook purchase should be recorded at the cost basis of accounting because of its intended use. The objective of owning the asset is to use it and not to resell it. 2. In the case of an iPad, the use of the asset will be limited due to technological obsolescence. Because of this obsolescence, the iPad purchase should be recorded and reported using the cost basis of accounting. 3. Software is very similar to the iPad of item 2 above in that it becomes technologically obsolete very quickly. On the other hand, the manufacturer has recognized this problem and has included in the sale of the software, automatic upgrades to attempt to deal with the future needs and demands of the purchaser. This asset is purchased for use and not for resale at a gain and consequently the cost basis of accounting should be used for its recording and reporting. 4. If the purchase of the used car is for use in the business, the cost basis of accounting should be used. On the other hand, if the purchase is for resale, the fair value basis of accounting should be used. 5. Since the intention of the buyer of land is to eventually build a home on the land, the purchase of the land should be recorded using the cost basis of accounting. If the intention changes over the years and the buyer decides to resell the property and intends to hold the land for resale at a gain, the reporting of the asset should change to the fair value basis of accounting used for investments, assuming the fair value is readily available.

Solutions Manual .

2-49

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 2-1 FINANCIAL REPORTING

(a)

Total current assets were $2,764,997,000 at December 29, 2012, and $2,695,647,000 at December 31, 2011. Total assets were $7,473,721,000 at December 29, 2012, and $7,300,310,000 at December 31, 2011.

(b)

Current assets are listed in the order of liquidity from most to least liquid. Cash is the most liquid asset and is reported first. Non-current assets are listed in order of permanency, with property, plant, and equipment listed first.

(c)

The current liabilities total $2,334,917,000 at December 29, 2012 and $1,776,238,000 at December 31, 2011. The total liabilities at December 29, 2012 and December 31, 2011 were in the amount of $3,150,394,000 and $3,032,480,000, respectively.

(d)

The current liabilities are listed in order of due date from those due first to those due last, with bank indebtedness and commercial paper listed first. It is not clear what order was chosen for non-current liabilities. Accounting standards do not suggest any particular order for the presentation of non-current liabilities.

Solutions Manual .

2-50

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 2-2 COMPARATIVE ANALYSIS (a) Jean Coutu (in millions, except per share information) 1. Working capital

$421.9 – $265.3 = $156.6

Shoppers Drug Mart (in thousands, except per share information) $2,764,997 – $2,334,917

= $430,080

2. Current ratio

$421.9 $265.3

= 1.6:1

$2,764,997 $2,334,917

= 1.2:1

3. Debt to total assets

$281.9 $1,392.7

= 20.2%

$3,150,394 $7,473,721

= 42.2%

4. Earnings per share

$2.57

5. Price-earnings ratio

$15.78 $2.57

(b)

$2.92

= 6.1 times

$42.80 $2.92

= 14.7 times

Liquidity: Working capital is not comparable, because of the differing sizes of the two companies involved. However, using the current ratio to assess liquidity, we can determine that Jean Coutu is significantly more liquid than Shoppers and well ahead of the industry average. Solvency: The higher a company’s percentage of debt to total assets is, the greater the risk that this company may be unable to meet its maturing obligations. Jean Coutu’s debt to total assets is very low at 20.2%, which means that it is primarily financed by equity. Shoppers’ debt to total assets ratio of 42.2% is higher (worse) than that of Jean Coutu and the industry average of 30.6%. Profitability: The earnings per share between two companies are not comparable. However, based on the price-earnings ratio, Shoppers is favoured by investors. Jean Coutu’s price-earnings ratio falls far below that of Shoppers, but both are well below the industry average of 42.0 times.

Solutions Manual .

2-51

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 2-3 COMPARING IFRS AND ASPE (a)

McCain’s multinational structure means that accounting personnel from various countries are involved with preparing financial statements. Since IFRS is a global standard, most of the accounting personnel would be familiar with IFRS. Also, by using one standard across all subsidiaries, there is no need to make adjustments for various GAAP differences (this was often the case for Canadian multinationals prior to the adoption of IFRS). For McCain, it means that the company will reduce cost as well as the chance for errors. In addition, the users of McCain’s financial statements are located throughout the world. Those located in countries using IFRS, or wishing to compare McCain’s statements to other global companies, would better understand financial statements prepared using this standard.

(b)

Relevance – Researchers have found that companies who voluntarily adopt IFRS find that IFRS’ accounting measures are better tools for evaluating performance. Therefore IFRS statements are more relevant to McCain’s management. Also, when global lenders are looking at financial statements prepared according to IFRS, they are no longer concerned about differences in GAAP. This increases the relevance to lenders. Faithful Representation – In comparison to ASPE, IFRS has a requirement for more detailed information to be disclosed in the notes to the financial statements. From a user’s perspective, more information and explanation is provided to help understand the economic event being depicted. Comparability - McCain Foods is a global company that competes against various other global companies (most of whom follow IFRS). By adopting IFRS, it is easier for McCain to compare its results to other similar companies. This information would be useful to both internal users (management and shareholders) as well as external (lenders). Understandability – When different accounting standards are used by various companies within a corporate group they are less understandable. Furthermore, when users are not resident in the country where the head office of the company is located, they often have a difficult time understanding financial statements that are presented using standards that they are not familiar with. For instance, a McCain manager in a United States subsidiary that follows U.S. GAAP may have difficulty understanding the statements of a McCain subsidiary located in the U.K. (that follows IFRS).

Solutions Manual .

2-52

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 2-3 (Continued) (c)

Examples of why private companies may adopt IFRS: ▪ Private companies that plan to be public sometime in the near future or who have foreign private investors, may choose to adopt IFRS. ▪ Private companies that have global shareholders or lenders (who are more familiar with IFRS). They may also want to provide financial statements to customers.

Solutions Manual .

2-53

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 2-4 CRITICAL THINKING CASE Note to instructors: All of the material supplementing this group activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook as well as in the Prepare and Present section of WileyPLUS. (a)

Sheila paid $25,000 for 10,000 common shares of Kenmare Architects Ltd. (or $2.50 per share) when the company was formed. This amount is reported as the balance in the Common Shares account on the statement of financial position of December 31, 2014. Sheila’s mother paid $10,000 for 1,000 common shares (or $10.00 per share) in early 2015. This amount paid can be determined by calculating the increase of $10,000 ($35,000 less $25,000) in the Common Shares account on the statement of financial position of December 31, 2015.

(b)

By December 31, 2014, Uncle Harry wanted $8,000 of the loan paid off in 2015. This amount is classified as the current portion of the loan due at December 31, 2014. The actual amount of principal paid in 2015 was $30,000. This amount paid can be determined by calculating the total decrease in the loan payable from December 31, 2014 to December 31, 2015: [($52,000 + $8,000) less ($26,000 + $4,000)]. During 2014 Uncle Harry received interest only in the amount of $3,600 as indicated in the statement of income for interest expense. In 2015, Uncle Harry received $32,700. This amount is equal to the principal repayment of $30,000 and the interest of $2,700.

(c) Current ratio

2015 $46,000 $33,580

= 1.4:1

2014 $31,000 $22,490

= 1.4:1

Although the current ratio is unchanged, we need to examine further, the account balances that make up the ratio components. There has been deterioration in liquidity due to the declining cash balance and the significant rise in accounts receivable which may indicate difficulty in collecting amounts owed from customers. This decreased cash flow from customers has probably caused the increase in accounts payable as the company seems to have delayed payment to suppliers.

Solutions Manual .

2-54

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 2-4 (Continued) (d) Debt to total assets

2015 $59,580 $106,000

= 56.2%

2014 $74,490 $103,000

= 72.3%

Kenmare’s solvency improved significantly. The decrease in the ratio occurred mainly because of changes in the numerator rather than in the denominator. Total liabilities fell because of the large pay down of the loan from the uncle even though accounts payable rose. This had an impact on the income statement by lowering interest expense because of the lower loan balance. Because Kenmare’s debt level is lower, the amount of interest expense is also lower making the business more profitable. (e) Earnings per share

2015 $7,910 11,000

= $0.72

2014 $3,510 10,000

= $0.35

The earnings per share more than doubled because profit more than doubled while there was only a 10% increase in the number of shares. (f)

Sheila paid $2.50 per share for her shares ($25,000 ÷ 10,000). The amount Sheila’s mother paid for her shares was $10.00 per share ($10,000 refer to part (a) above ÷ 1,000). 2015 2014 Price-earnings $10.00 = 13.9 times $2.50 = 7.1 times ratio $0.72 $0.35 The service revenue increased 20% from 2014 to 2015 [($120,000 – $100,000) ÷ $100,000]. The profit increased by 125% from 2014 to 2015 [($7,910 – $3,510) ÷ $3,510]. Sheila’s salary increased by 25% from 2014 to 2015 [($74,000 – $59,000) ÷ $59,000]. The value of the price-earnings ratio changed mostly because of the price difference paid by the two shareholders. Sheila’s mother paid four times the price Sheila paid for her shares. This increase is very dramatic taking into account other ratios for measurement of performance. The fourfold increase in the share price is not justified by the financial performance of the business. The future profitability of the business is based on the amount of service revenue that can be generated by the single employee, Sheila, and is therefore limited.

Solutions Manual .

2-55

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 2-4 (Continued) (g)

The likely reason for the sale in shares in 2015 was to obtain $10,000, which was used to repay the debt to Uncle Harry earlier than originally scheduled.

Solutions Manual .

2-56

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 2-5 ETHICS CASE

(a)

The stakeholders in this case are: Kathy Onishi, controller Redondo’s vice-president Users of the company's financial statements, including shareholders and creditors

(b)

The ethical consideration in this situation is whether or not switching from ASPE to IFRS would affect the decisions of the users of the financial statements. Because Redondo Corporation is a private corporation, the use of IFRS is not required. It is ethically preferable to disclose the most financially relevant information to the users of the financial statements so that they can make informed decisions. One should question the reasoning of Redondo’s vice-president who is focusing on the effect of the implementation on the profit for the year.

(c)

As the controller, by supporting the conversion from ASPE to IFRS, Kathy could gain the trust and respect of the board of directors and the shareholders in general. The users of the company’s financial statements will find the information provided under IFRS to be more useful in making comparisons with Redondo’s competitors. This in turn will lead to better decisions being made by users of the financial statements.

Solutions Manual .

2-57

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 2-6 “ALL ABOUT YOU” ACTIVITY (a) NAME Personal Statement of Financial Position Date Assets Current assets Cash Total current assets Property, plant, and equipment Vehicle Laptop and accessories Clothes and furniture Total property, plant and equipment Total assets

$1,500 1,500 $3,000 750 4,500 8,250 $9,750

Liabilities and Personal Equity (Deficit) Current liabilities Student fees Credit cards Total current liabilities Non-current liabilities Student loan Due to parents Total liabilities Personal deficit Total liabilities and personal equity (deficit)

$2,300 900 $ 3,200 $20,500 2,400

22,900 26,100 (16,350) $ 9,750

Note: Technically, this person is insolvent because they have such a large personal deficit— not an infrequent occurrence for students in this age group. Debt to total assets

$26,100

=

267.7%

$9,750 (b)

Answers will vary with each student.

Solutions Manual .

2-58

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

BYP 2-7

(a)

Financial Accounting, Sixth Canadian Edition

SERIAL CASE

Biscuits’ financial statements likely include the statement of financial position, income statement, statement of changes in equity, and statement of cash flows. It may or may not also include a statement of comprehensive income combined with, or separate from, the income statement (not covered as yet in the text). It will also include the notes to the financial statements. The statement of financial position reports the assets, liabilities, and shareholders’ equity of a company at a specific date. The income statement presents the revenues and expenses and resulting profit or loss of a company for a specific period of time. The statement of changes in equity summarizes the changes in equity accounts, including common shares and retained earnings, for a specific period of time. Finally, the statement of cash flows provides information about the cash inflows and cash outflows for a specific period of time.

(b)

Because Biscuits is public company, it is required to have its financial statements audited by an independent licensed public accountant. The date appearing on the auditor’s report which appears immediately before the financial statements is the date when the audit was completed and the financial statements were made available to the public.

(c)

By looking at the statement of financial position and determining the composition of Biscuits’ current assets and current liabilities, we can assess its ability to pay its shortterm obligations. We can also calculate liquidity ratios, such as working capital and the current ratio, for the current and prior periods to help determine its ability to meet its current obligations. This will not guarantee that Biscuits will be able to pay your invoices in the future but will provide some assurance with respect to how they have performed in the past. The statement of cash flows will also provide information to determine if Biscuits generates positive cash flows from its operations.

(d)

By looking at the types of revenues and expenses reported in the income statement, we can determine if Biscuits is profitable. If revenues earned by Biscuits exceed expenses incurred, then Biscuits is profitable. As well, profitability ratios can be determined which measure a company’s ability to generate profit over a period of time. These profitability ratios include earnings per share and price-earnings ratio. The latter measures investors’ expectations about Biscuits’ future profitability.

Solutions Manual .

2-59

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BYP 2-7 (Continued) (e)

By looking at the statement of financial position, we can determine if Biscuits has any non-current debt. We can also calculate solvency ratios, such as the debt to total assets ratio, to determine whether Biscuits has the ability to repay its non-current debt. Solvency ratios help measure a company’s ability to survive over a long period of time. Reviewing the company’s income statement and statement of cash flows will help in determining whether Biscuits is able to pay its interest expense. The more profitable the company, the better able it is to make the interest payments on its debt and generate sufficient cash to repay its non-current obligations.

(f)

Be aware that the financial statements of Biscuits provide a historical perspective of what has already taken place. The financial statements may not prove to be the best indicator of what will happen in the future. Consumer tastes change and as a result the demand for Biscuits’ product may also change. As well, consider this business opportunity from your perspective. Ask yourself if the price obtained for the cookies is reasonable considering some of the risks involved. There is a risk that by taking on this obligation, additional opportunities cannot be pursued. Does Koebel’s Family Bakery have the ability to meet the demands of Biscuits? Is it able to produce 1,500 dozen cookies a week? Does it have enough staff to enable the company to do so? Does it have a large enough oven and other equipment required to do so? Does it have enough cash to pay for the staff that will be required, for supplies, for utilities, etc., and wait 30 days from the time in which the invoice is received by Biscuits until it is paid?

Solutions Manual .

2-60

Chapter 2

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

CHAPTER 3 The Accounting Information System ASSIGNMENT CLASSIFICATION TABLE Study Objectives

Questions

Brief Exercises

Exercises

A Problems

B Problems

BYP

1. Analyze the effects of transactions on the accounting equation.

1, 2, 3, 4, 5 1, 3

1, 2, 4, 8

1A, 2A, 4A 1B, 2B, 4B

1, 3, 4, 6

2. Define debits and credits and explain how they are used to record transactions.

6, 7, 8, 9, 10

2, 3, 4

3, 4, 8

3A, 4A

2, 4

3. Journalize transactions.

11, 12, 13, 14, 15

5, 6, 7

5, 6, 8

4A, 5A, 4B, 5B, 6A, 7A, 8A 6B, 7B, 8B

3, 4, 6, 7

4. Post transactions.

14, 15, 16, 17, 18

8, 9, 10

7, 8, 9,

6A, 7A, 8A 6B, 7B, 8B

3, 4, 7

5. Prepare a trial balance.

19, 20, 21, 22, 23

11, 12, 13

9, 10, 11, 12

7A, 8A, 9A, 10A, 11A

4, 5, 7

Solutions Manual .

3-1

3B, 4B

7B, 8B, 9B, 10B, 11B

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

1A

Analyze effects of transactions.

Moderate

25-30

2A

Analyze transactions and prepare financial statements.

Moderate

40-50

3A

Identify normal balance and statement classification.

Simple

20-30

4A

Analyze and record transactions.

Moderate

30-40

5A

Record transactions.

Moderate

30-40

6A

Record and post transactions.

Moderate

40-50

7A

Record and post transactions; prepare trial balance.

Moderate

40-50

8A

Record and post transactions; prepare trial balance.

Moderate

40-50

9A

Prepare trial balance.

Moderate

20-30

10A

Prepare financial statements.

Moderate

20-30

11A

Prepare corrected trial balance.

Complex

40-50

1B

Analyze effects of transactions.

Moderate

25-30

2B

Analyze transactions and prepare financial statements.

Moderate

40-50

3B

Identify normal balance and statement classification.

Simple

20-30

4B

Analyze and record transactions.

Moderate

30-40

5B

Record transactions.

Moderate

30-40

6B

Record and post transactions.

Moderate

40-50

7B

Record and post transactions; prepare trial balance.

Moderate

40-50

8B

Record and post transactions: prepare trial balance.

Moderate

40-50

Solutions Manual .

3-2

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number 9B

Prepare trial balance.

Difficulty Level Moderate

Time Allotted (min.) 20-30

10B

Preparefinancial statements.

Moderate

20-30

11B

Prepare corrected trial balance.

Complex

40-50

Solutions Manual .

Description

3-3

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ANSWERS TO QUESTIONS 1.

An accounting information system is a system of collecting and processing transaction data and communicating financial information to decision-makers. Some factors that shape these systems are the type of business and its transactions, the size of the company, the amount of data, and the information that management and other users need.

2.

Only events that cause a change in an asset, liability, or shareholders’ equity account are recorded as accounting transactions. Other events, such as the agreement to provide a service, do not immediately impact an asset, liability, or shareholder’s equity account and, therefore, are not considered an accounting transaction.

3.

Accounting transactions are the economic events of the company recorded by accountants because they affect the accounting equation assets = liabilities + shareholders’ equity. (a) (b)

(c) (d)

(e)

Winning an award is not an accounting transaction, as it does not affect the accounting equation. The award did not involve the receipt of an asset, such as cash. Supplies purchased on account is an accounting transaction because it affects the accounting equation (assets are increased because supplies were received and liabilities are increased because accounts payable were incurred). A shareholder dying is not an accounting transaction, as it does not affect the accounting equation. Paying a cash dividend to shareholders is an accounting transaction as it does affect the accounting equation (shareholders’ equity is decreased and assets (cash) are decreased). The agreement to provide legal services to the company is not an accounting transaction as it does not affect the accounting equation. No expense has been incurred yet and no liabilities like accounts payable have been affected.

4.

Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset. A decrease in the Accounts Receivable account which is offset by an increase in the Cash account is a specific example (that is, a customer paying for goods previously purchased on account).

5.

(a) (b) (c) (d) (e)

Decrease assets and decrease shareholders' equity (an expense has been increased). Increase assets and increase liabilities. Increase assets and increase shareholders' equity (common shares has increased). Decrease shareholders' equity (an expense has been increased) and decrease assets. Increase one asset (cash) and decrease another asset (accounts receivable).

Solutions Manual .

3-4

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 6.

Natalie is incorrect. A debit balance only means that debit amounts or transactions affecting an account exceed the credit amounts or transactions in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favourable nor unfavourable.

7.

Shareholders' equity consists of different components, and they do not all move in the same direction. Shareholders’ equity is usually comprised of share capital (which is increased by credits) and retained earnings. Retained earnings can be further subdivided into revenues and expenses and dividends which are then added to opening retained earnings. Revenues are increased by credits while expenses and dividends are increased by debits.

8.

Account

9.

(a) Normal Balance

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Accounts Receivable Accounts Payable Equipment Dividends Supplies Service Revenue Unearned Revenue Income Tax Expense Prepaid Rent Bank Loan Payable

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Debit Supplies and credit Accounts Payable Debit Accounts Payable and credit Cash Debit Cash and credit Bank Loan Payable Debit Salaries Expense and credit Cash Debit Cash and credit Unearned Revenue Debit Prepaid Expense and credit Cash Debit Accounts Receivable and credit Revenue Debit Cash and credit Accounts Receivable Debit Dividends and credit Cash Debit Income Tax Expense and credit Cash

10. (a) (b) (c) (d) (e) (f) (g)

Cash Accounts Receivable Dividends Accounts Payable Service Revenue Salaries Expense Unearned Revenue

Solutions Manual .

Debit balance Credit balance Debit balance Debit balance Debit balance Credit balance Credit balance Debit balance Debit balance Credit balance

(b) Statement Classification Statement of financial position (Asset) Statement of financial position (Liability) Statement of financial position (Asset) Statement of changes in equity Statement of financial position (Asset) Income statement (Revenue) Statement of financial position (Liability) Income statement (Expense) Statement of financial position (Asset) Statement of financial position (Liability)

Both debit and credit entries Both debit and credit entries Debit entries only Both debit and credit entries Credit entries only Debit entries only Both debit and

3-5

credit

entries

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 11. (a) (b)

12. (a)

(b) (c)

(d)

A general journal is a book of original entry, in which transactions are recorded in chronological order. The general journal facilitates the recording process by documenting the debit and credit effects on specific accounts. The general journal discloses the complete effect of a transaction in one place, including an explanation and, where applicable, identification of the source document. The general journal provides a chronological record of transactions and it helps to prevent and locate errors, because the debit and credit amounts for each entry can be quickly compared. Including a date in a journal entry is important because it is necessary to identify which accounting period is affected by a transaction. Other transactions may follow which are based on the date of the journal entry. For example, the date a sales invoice is recorded may determine when the date of payment for the invoice is due. Recording debit entries first is important because it visually separates the accounts involved in the left side of the transaction. Indenting credit entries is important because the indentation differentiates debits from credits and decreases the chance of switching the debit and credit amounts by mistake. Including a brief explanation to the journal entry is important because it provides the background information that might be necessary to interpret the transaction recorded.

13. While the account title choices suggested by Meghan provide details of the type of truck the company purchased, the title of the account used to record the purchase should be more generic to include all types of trucks that can be owned and used by the business. Ambiguous or multiple account titles with similar names can lead to incorrect financial reporting. Unless the business is intending on purchasing more than one type of truck the name of the account that should be used is Trucks or Vehicles. 14. This would not be efficient because the journal provides a record that shows both “sides” of the transaction along with a description of the transaction. This information is vital to the understanding of the event. Furthermore, if there is a large volume of transactions, a company will not post individual transactions to the general ledger; instead totals of transactions are posted. For example, if 1,000 sales transactions occurred in a month, only one amount (the total of sales for the month) would be posted to the sales account in the general ledger (there would still be 1,000 journal entries in the general journal, however). 15. Posting should be done on a timely basis, at least monthly, so that account balances can be monitored and reconciled.

Solutions Manual .

3-6

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 16. (a)

(b)

17. (a)

(b)

The general ledger is the entire group of accounts maintained by a company, including all the asset, liability, and shareholders' equity accounts, including share capital, retained earnings, dividend, revenue, and expense accounts. The general ledger is often arranged in the order in which accounts are presented in the financial statements, beginning with the statement of financial position accounts. The asset accounts come first, followed by liability accounts, and then shareholders’ equity accounts, including the share capital, retained earnings, dividend, revenue, and expense accounts. The chart of accounts is a list of a company’s accounts. The chart of accounts is important, particularly for a company that has a large number of accounts because it helps organize the accounts and identify their location in the ledger. Numbering the accounts helps identify and sort the accounts.

18. Cash, supplies, prepaid insurance, unearned revenue, common shares, dividends, service revenue, and income tax expense. 19. (a)

(b)

A trial balance is a list of accounts and their balances at a point in time. The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after all journalized transactions have been posted. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements. The trial balance is prepared using the account balances from the general ledger.

20. While it does not matter in what order the accounts are listed in the trial balance, it is usual for the accounts in the trial balance to be listed in the same order as they are listed in the general ledger (asset accounts, liability accounts, and shareholders’ equity accounts, including share capital, retained earnings, dividend, revenue, and expense accounts). This makes it easier to compare the trial balance accounts to the general ledger accounts, as well as later to prepare the financial statements from the trial balance. 21. The retained earnings account in the trial balance shows the beginning balance of the period as it has not yet been updated for the effect that the revenues, expenses, and dividends have on retained earnings for the current accounting period. (Note to instructors: This chapter only includes references to a pre-closing trial balance; the post-closing trial balance is not introduced until Chapter 4.)

Solutions Manual .

3-7

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 22. (a)

(b) (c)

The trial balance will not balance because two debits were posted instead of a debit to Supplies and a credit to Accounts Payable. Total debits will exceed total credits by an amount that is equal to twice the value of the entry that was not posted correctly. The trial balance will still balance as a debit and a credit have been recorded for the same amount. Total debits will equal total credits. No, the trial balance will not balance as the amount posted as a debit is greater than the amount posted as a credit. The total debits will be higher by the difference in the two amounts posted.

23. The first four steps in the accounting cycle are: (1) (2) (3) (4)

Analyze the business transactions and determine their effects on the accounting equation and also determine when and how to record the transactions. Journalize the transactions in the general journal to record the effects of the transactions on the accounts involved in the transactions. Post to the general ledger accounts to provide an accumulation of the effect of several journalized transactions in the individual accounts. Prepare a trial balance to prove that the sum of the debit account balances equals the sum of the credit account balances after posting.

Solutions Manual .

3-8

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3-1 Assets Transaction 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Total

Cash

Accounts Receivable

=

Supplies +$250

Prepaid Insurance

Liabilities

= Accounts Payable +$250

+

Unearned Revenue

Common + Shares

+$500 –$300 +5,000 –400 +500 −250 –100 +300

Shareholders’ Equity Retained Earnings + – – Revenues Expenses Dividends +$500 −$300

+$5,000 −$400 −500 −250 +$100

$4,750

+ $0

+$250

+ $100 =

3-9 .

+ $5,000

+300 + $800

– $300

TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $5,100

TOTAL ASSETS = $5,100

Solutions Manual

$0

+$300 −300 + $0

Chapter 3

– $400

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-2 Debit Effect

(a) Credit Effect

(b) Normal Balance

(c) Statement Classification

1. Accounts payable

Decrease

Increase

Credit

2. Advertising expense

Increase

Decrease

Debit

Statement of financial position Income statement

3. Service revenue

Decrease

Increase

Credit

Income statement

4. Accounts receivable

Increase

Decrease

Debit

5. Unearned revenue

Decrease

Increase

Credit

6. Cash

Increase

Decrease

Debit

7. Dividends

Increase

Decrease

Debit

8. Common shares

Decrease

Increase

Credit

9. Prepaid insurance

Increase

Decrease

Debit

10. Equipment

Increase

Decrease

Debit

11. Retained earnings

Decrease

Increase

Credit

12. Income tax expense

Increase

Decrease

Debit

Statement of financial position Statement of financial position Statement of financial position Statement of changes in equity Statement of changes in equity/Statement of financial position Statement of financial position Statement of financial position Statement of changes in equity/Statement of financial position Income statement

Solutions Manual .

3-10

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-3 Transaction 1

June 1: Issued common shares to shareholders in exchange for $2,500 cash.

(a) Basic Analysis

The asset account Cash is increased by $2,500; the shareholders’ equity account Common Shares is increased by $2,500.

(b) Equation Analysis

Assets

=

Liabilities

+

Cash +$2,500

Shareholders’ Equity Common Shares +$2,500

(c) Debit−Credit Analysis

Debits increase assets: debit Cash $2,500. Credits increase share capital (shareholders’ equity): credit Common Shares $2,500.

Transaction 2

June 2: Purchased supplies on account for $250.

(a) Basic Analysis

The asset account Supplies is increased by $250; the liability account Accounts Payable is increased by $250.

(b) Equation Analysis

Assets

Supplies +$250 (c) Debit−Credit Analysis

Solutions Manual .

=

Liabilities

+

Shareholders’ Equity

Accounts Payable +$250

Debits increase assets: debit Supplies $250. Credits increase liabilities: credit Accounts Payable $250.

3-11

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-3 (Continued) Transaction 3

June 12: Billed J. Kronsnoble $300 for welding work done.

(a) Basic Analysis

The asset account Accounts Receivable is increased by $300; the revenue account Service Revenue is increased by $300.

(b) Equation Analysis

Assets

=

Liabilities

+

Accounts Receivable +$300

Shareholders’ Equity Service Revenue +$300

(c) Debit−Credit Analysis

Debits increase assets; debit Accounts Receivable $300. Credits increase revenues; credit Service Revenue $300.

Transaction 4

June 22: Received cash from J. Kronsnoble for work billed on June 12.

(a) Basic Analysis

The asset account Cash is increased by $300; the Asset account Accounts Receivable is decreased by $300.

(b) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Cash +$300 Accounts Receivable -$300

(c) Debit−Credit Analysis

Solutions Manual .

Debits increase assets: debit Cash $300. Credits decrease assets: credit Accounts Receivable $300.

3-12

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-3 (Continued) Transaction 5

June 25: Hired an employee to start work on July 2.

(a) Basic Analysis

An accounting transaction has not occurred. There is only an agreement of employment to start on July 2.

Transaction 6

June 28: Received cash of $200 from K. Jones as a deposit for welding work to be done in July.

(a) Basic Analysis

The asset account Cash is increased by $200; the liability account Unearned Revenue is increased by $200.

(b) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Unearned Revenue +$200

Cash +$200 (c) Debit−Credit Analysis

Debits increase assets: debit Cash $200. Credits increase liabilities: credit Unearned Revenue $200.

Transaction 7

June 29: Paid for supplies purchased on June 2.

(a) Basic Analysis

The asset account Cash is decreased by $250; the liability account Accounts Payable is decreased by $250.

(b) Equation Analysis

Assets

Cash -$250 (c) Debit−Credit Analysis

Solutions Manual .

=

Liabilities

+

Shareholders’ Equity

Accounts Payable -$250

Debits decrease liabilities: debit Accounts Payable $250. Credits decrease assets: credit Cash $250.

3-13

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-3 (Continued) Transaction 8

June 30: Paid $100 for income tax.

(a) Basic Analysis

The expense account Income Tax Expense is increased by $100; the asset account Cash is decreased by $100.

(b) Equation Analysis

Assets

=

Liabilities

Cash -$100 (c) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Income Tax Expense -$100

Debits increase expenses: debit Income Tax Expense $100. Credits decrease assets: credit Cash $100.

3-14

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-4 (a) Transaction

Account Debited (b)

Basic Type

Specific Account

(c)

(a)

Account Credited (b)

Effect

Basic Type

Specific Account

(c) Effect

1.

Asset

Cash

Increase

Shareholders’ Equity

Common Shares

Increase

2.

Asset

Prepaid Rent

Increase

Asset

Cash

Decrease

3.

Shareholders’ Salaries Equity Expense

Decrease

Asset

Cash

Decrease

4.

Asset

Accounts Receivable

Increase

Shareholders’ Equity

Revenue

Increase

5.

Asset

Cash

Increase

Asset

Accounts Receivable

Decrease

6.

Asset

Supplies

Increase

Liability

Accounts Payable

Increase

7.

Liability

Accounts Payable

Decrease

Asset

Cash

Decrease

8.

Asset

Cash

Increase

Liability

Bank Loan Payable

Increase

Solutions Manual .

3-15

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-5 1.

2

3

4.

5.

6.

7.

8.

9.

10.

Solutions Manual .

Supplies ....................................................... Accounts Payable .................................

250

Accounts Receivable ................................... Service Revenue ...................................

500

Salaries Expense ......................................... Cash ......................................................

300

Cash ............................................................ Common Shares ...................................

5,000

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

400

Cash ............................................................ Accounts Receivable .............................

500

Accounts Payable ........................................ Cash ......................................................

250

Prepaid Insurance ........................................ Cash ......................................................

100

Cash ............................................................ Unearned Revenue ...............................

300

Unearned Revenue ...................................... Service Revenue ...................................

300

3-16

250

500

300

5,000

400

500

250

100

300

300

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-6 June

1

2

12

22

Cash ....................................................... Common Shares..........................

2,500

Supplies ................................................. Accounts Payable ........................

250

Accounts Receivable .............................. Service Revenue .........................

300

Cash ....................................................... Accounts Receivable ...................

300

2,500

250

300

300

25

No transaction – no asset, liability or equity account affected

28

Cash....................................................... Unearned Revenue ........................

200

Accounts Payable .................................. Cash ............................................

250

Income Tax Expense.............................. Cash ............................................

100

29

30

Solutions Manual .

3-17

200

250

100

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-7 1.

2.

3.

4.

5.

6.

7.

8.

Solutions Manual .

Cash ....................................................... Common Shares..........................

5,000

Prepaid Rent .......................................... Cash ............................................

2,100

Salaries Expense ................................... Cash ............................................

500

Accounts Receivable .............................. Service Revenue .........................

1,200

Cash ....................................................... Service Revenue .........................

900

Supplies ................................................. Accounts Payable ........................

500

Accounts Payable .................................. Cash ............................................

500

Cash ....................................................... Bank Loan Payable .....................

1,000

3-18

5,000

2,100

500

1,200

900

500

500

1,000

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-8 Accounts Receivable Aug. 10 17,500 15 6,500 Aug. 23 (a) 15,000 Bal. 9,000 Sept. 5 (b) 4,000 Sept. 15 8,000 Bal. 5,000

Accounts Payable Aug. 5 (c) 6,000 18 3,400 Aug. 29 5,800 Bal. 3,600 Sept. 12 7,700 Sept. 23 5,900 Bal. (d) 5,400

(a)

$17,500 + $6,500 – $9,000 = $15,000

(b)

$5,000 – $9,000 + $8,000 = $4,000

(c)

$3,600 + $5,800 – $3,400 = $6,000

(d)

$3,600 + $7,700 – $5,900 = $5,400

(e)

$50,000 – $500 + $45,000 = $94,500

(f)

$99,000 + $450 – $94,500 = $4,950

Solutions Manual .

3-19

Sales Aug. 10 50,000 Aug. 12 500 15 45,000 Bal. (e) 94,500 Sept. 5 (f) 4,950 Sept. 25 450 Bal. 99,000

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-9 Cash June 1 June 22 June 28 Bal.

2,500 300 200 2,650

June 29 June 30

250 100

Accounts Receivable June 12 Bal.

300 0

June 22

300

Supplies June 2

250 Accounts Payable

June 29 Bal.

250 0

June 2

250

Unearned Revenue June 28

200

Common Shares June 1

2,500

Service Revenue June 12

300

Income Tax Expense June 30

Solutions Manual .

100

3-20

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-10 (a) May 5 May 12 May 15 May 20 May 25 May 28 May 30

Billed clients $3,200 for services provided on account Collected $1,900 from customer on account Purchased supplies on account $200 Received $2,000 from client for services provided Paid salaries of $2,500 Paid supplier $200 on account Paid income tax of $750

(b) Cash 1,900 May 25 2,000 May 28 May 30 450

2,500 200 750

May 5 Bal.

Accounts Receivable 3,200 May 12 1,300

1,900

May 15

Supplies 200

May 12 May 20 Bal.

May 28

Accounts Payable 200 May 15 Bal.

200 0

Service Revenue May 5 May 20 Bal.

3,200 2,000 5,200

May 30

Income Tax Expense 750

May 25

Salaries Expense 2,500

Solutions Manual .

3-21

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-11 CARLAND INC. Trial Balance June 30, 2015 Debit Cash Accounts receivable Trading investments Equipment Accumulated depreciation—equipment Accounts payable Unearned revenue Common shares Retained earnings Dividends Service revenue Salaries expense Rent expense Income tax expense Totals

Credit

$ 4,400 4,000 6,000 17,000 $ 3,600 3,000 150 10,000 12,650 200 7,600 4,000 1,000 400 $37,000

_ $37,000

BRIEF EXERCISE 3-12

Error 1. 2. 3. 4. 5. 6.

Solutions Manual .

(a) In Balance No No Yes Yes Yes No

(b) Difference $ 900 1,000 N/A N/A N/A 1,000

3-22

(c) Larger Column Debit Credit N/A N/A N/A Debit

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 3-13 (a)

No, the trial balance is not correct, because some accounts with debit balances are listed in the credit column and vice versa.

(b) BOURQUE LIMITED Trial Balance December 31, 2015 Debit Cash Accounts receivable Supplies Accounts payable Unearned revenue Common shares Retained earnings Dividends Service revenue Salaries expense Office expense Supplies expense Rent expense Income tax expense Totals

Solutions Manual .

Credit

$10,000 6,500 3,500 $ 1,500 2,200 5,000 13,000 4,500 20,000 9,100 4,400 1,200 2,000 500 $41,700

3-23

_ $41,700

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 3-1

Assets TransAccounts action Cash Receivable Supplies 1. +$5,000 2. +$250 3. +$2,500 4. −100 5. +1,800 −1,800 6. −500 7. +1,200 8. −250 9. −750 10. −600 Total $5,800 + $700 +$250

=

Liabilities Bank Prepaid = Accounts Loan Insurance Equipment Payable Payable

+

Shareholders’ Equity Retained Earnings Common + – – Shares Revenues Expenses Dividends +$5,000

+$250 +$2,500 −$100 +$3,500

+$3,000 +1,200 −250 −$750

+$600 + $600

+ $3,500 =

+ $0

+$3,000

+ $5,000

+ $3,700

– $750

TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $10,850

TOTAL ASSETS = $10,850

Solutions Manual .

+

3-24

Chapter 3

– $100

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-2 (a) Assets

Trans. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Total

Cash

Accounts Receivable

Prepaid Insurance

=

Liabilities

+

= Computer Equipment +$8,000

Accounts Payable +$8,000

+

Common Shares

−$1,600

-$1,600 +$3,800

−300 +20,000 −8,000 −500 +3,000 −500 −250 $11,850

+$3,800 −300 +$20,000 −8,000 +$500

−3,000 −$500 + $800

+ $500

+ $8,000 =

+ $0

+ $20,000

(b) Revenues Less: Expenses Profit

+ $3,800

−250 – $2,150

TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $21,150

TOTAL ASSETS = $21,150

Solutions Manual .

Shareholders’ Equity Retained Earnings + – – Revenues Expenses Dividends

$3,800 2,150 $1,650

3-25

Chapter 3

– $500

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-3

Account Accounts payable and accrued liabilities

(a) Type of account Liability

(b) Normal Balance Credit Credit

Bank loan payable

Liability

Cash

Asset

Debit

Dividends

Dividend

Debit

Dividends payable

Liability

Credit

Asset

Debit

Expense

Debit

Asset

Debit

Income tax expense

Expense

Debit

Income taxes payable

Liability

Credit

Interest expense

Expense

Inventories

Asset

Debit

Prepaid expenses

Asset

Debit

Receivables

Asset

Debit

Revenues

Revenue

Credit

Trademarks

Asset

Debit

Furniture, machinery, and equipment General and administrative expenses Goodwill

Solutions Manual .

Debit

3-26

(c) Financial Statement Statement of Financial Position Statement of Financial Position Statement of Financial Position Statement of Changes in Equity Statement of Financial Position Statement of Financial Position Income Statement Statement of Financial Position Income Statement Statement of Financial Position Income Statement Statement of Financial Position Statement of Financial Position Statement of Financial Position Income Statement Statement of Financial Position

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-4 Transaction 1

March 2: Issued common shares for $11,000 cash.

(a) Basic Analysis

The asset account Cash is increased by $11,000; the shareholders’ equity account Common Shares is increased by $11,000.

(b) Equation Analysis

Assets

=

Liabilities

+

Cash +$11,000

Shareholders’ Equity Common Shares +$11,000

(c) Debit−Credit Analysis

Debits increase assets: debit Cash $11,000. Credits increase share capital (shareholders’ equity): credit Common Shares $11,000.

Transaction 2

March 4: Purchased used car for $1,000 cash and $9,000 on account, for use in the business.

(a) Basic Analysis

The asset account Vehicles is increased by $10,000; the liability account Accounts Payable is increased by $9,000; the asset account Cash is decreased by $1,000.

(b) Equation Analysis

Assets Cash -$1,000

=

Liabilities

+

Shareholders’ Equity

Account Payable +$9,000

Vehicles +$10,000

(c) Debit−Credit Analysis

Solutions Manual .

Debits increase assets: debit Vehicles $10,000. Credits increase liabilities: credit Accounts Payable $9,000. Credit decrease assets: credit Cash $1,000

3-27

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-4 (Continued) Transaction 3

March 10: Billed customers $2,300 for services performed.

(a) Basic Analysis

The asset account Accounts Receivable is increased by $2,300; the revenue account Service Revenue is increased by $2,300.

(b) Equation Analysis

Assets

=

Liabilities

+

Accounts Receivable +$2,300

Shareholders’ Equity Service Revenue +$2,300

(c) Debit−Credit Analysis

Debits increase assets: debit Accounts Receivable $2,300. Credits increase revenues: credit Service Revenue $2,300.

Transaction 4

March 13: Paid $225 cash to advertise business opening.

(a) Basic Analysis

The expense account Advertising Expense is increased by $225; the asset account Cash is decreased by $225.

(b) Equation Analysis

Assets

=

Liabilities

Cash -$225 (c) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Advertising Expense -$225

Debits increase expenses: debit Advertising Expense $225. Credits decrease assets: credit Cash $225.

3-28

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-4 (Continued) Transaction 5

March 25: Received $1,000 cash from customers billed on March 10.

(a) Basic Analysis

The asset account Cash is increased by $1,000; the Asset account Accounts Receivable is decreased by $1,000.

(b) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Cash +$1,000 Accounts Receivable -$1,000

(c) Debit−Credit Analysis

Debits increase assets: debit Cash $1,000. Credits decrease assets: credit Accounts Receivable $1,000.

Transaction 6

March 27: Paid amount owing for used car purchased on March.

(a) Basic Analysis

The liability account Accounts Payable is decreased by $9,000; the asset account Cash is decreased by $9,000.

(b) Equation Analysis

Assets

Cash -$9,000 (c) Debit−Credit Analysis

Solutions Manual .

=

Liabilities

+

Shareholders’ Equity

Accounts Payable -$9,000

Debits decrease liabilities: debit Accounts Payable $9,000. Credits decrease assets: credit Cash $9,000.

3-29

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-4 (Continued) Transaction 7

March 30: Received $700 cash from a customer for services to be performed in April.

(a) Basic Analysis

The asset account Cash is increased by $700; the liability account Unearned Revenue is increased by $700.

(b) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Unearned Revenue +$700

Cash +$700 (c) Debit−Credit Analysis

Debits increase assets: debit Cash $700. Credits increase liabilities: credit Unearned Revenue $700.

Transaction 8

March 31: Paid dividends of $500 to shareholders.

(a) Basic Analysis

The asset account Cash is decreased by $500; the Dividends account is increased by $500.

(b) Equation Analysis

Assets

=

Liabilities

Cash -$500 (c) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Dividends -$500

Debits increase dividends: debit Dividends $500. Credits decrease assets: credit Cash $500.

3-30

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-5 1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Solutions Manual .

Computers .............................. Accounts Payable ..............

8,000

Rent Expense ......................... Cash ................................

1,600

Accounts Receivable .............. Service Revenue .............

3,800

Utilities Expense ..................... Cash ................................

300

Cash ....................................... Common Shares ..............

20,000

Accounts Payable ................... Cash ................................

8,000

Prepaid Insurance................... Cash ................................

500

Cash ....................................... Accounts Receivable .......

3,000

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

500

Income Tax Expense .............. Cash ................................

250

3-31

8,000

1,600

3,800

300

20,000

8,000

500

3,000

500

250

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-6 Mar. 2

4

10

13

25

27

30

31

Solutions Manual .

Cash ........................................ Common Shares .................

11,000

Vehicles ................................... Cash .................................. Accounts Payable .............

10,000

Accounts Receivable ............... Service Revenue ..............

2,300

Advertising Expense ................ Cash .................................

225

Cash ........................................ Accounts Receivable ........

1,000

Accounts Payable .................... Cash .................................

9,000

Cash ........................................ Unearned Revenue ..........

700

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

500

3-32

11,000

1,000 9,000

2,300

225

1,000

9,000

700

500

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-7 Cash Mar.

Mar.

2

11,000 Mar.

4

1,000

25

1,000

13

225

30

700

27

9,000

31

500

25

1,000

31 Bal.

1,975 Accounts Receivable

Mar.

10

2,300 Mar.

Mar.

31 Bal.

1,300 Vehicles

Mar.

4

10,000 Accounts Payable

Mar.

27

9,000 Mar. 4

9,000

Mar. 31 Bal.

0

Unearned Revenue Mar.

30

700

Common Shares Mar.

2

11,000

Dividends Mar. 31

500 Service Revenue Mar.

10

2,300

Advertising Expense Mar. 13

Solutions Manual .

225

3-33

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-8 (a), (b), and (c) Transaction 1

Sept. 1: Issued common shares for $20,000 cash.

(a) Basic Analysis

The asset account Cash is increased by $20,000; the shareholders’ equity account Common Shares is increased by $20,000.

(b) Equation Analysis

Assets

=

Liabilities

+

Cash +$20,000

Shareholders’ Equity Common Shares +$20,000

(c) Debit−Credit Analysis

Debits increase assets: debit Cash $20,000. Credits increase share capital (shareholders’ equity): credit Common Shares $20,000.

Transaction 2

Sept.2: Performed $9,000 of services on account for a customer.

(a) Basic Analysis

The asset account Accounts Receivable is increased by $9,000; the revenue account Service Revenue is increased by $9,000.

(b) Equation Analysis

Assets

=

Liabilities

Accounts Receivable +$9,000 (c) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Service Revenue +$9,000

Debits increase assets; debit Accounts Receivable $9,000. Credits increase revenues; credit Service Revenue $9,000.

3-34

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-8 (Continued) (a), (b), and (c) (Continued) Transaction 3

Sept. 4: Purchased equipment for $12,000 paying $5,000 in cash and borrowing the balance from the bank.

(a) Basic Analysis

The asset account Equipment is increased by $12,000; the Asset account Cash is decreased by $5,000 and the liability account Bank Loan Payable increased by $7,000.

(b) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Bank Loan Payable +$7,000

Cash -$5,000 Equipment +$12,000

(c) Debit−Credit Analysis

Debits increase assets: debit Equipment $12,000. Credits decrease assets: credit Cash $5,000 Credits increase liabilities: credit Bank Loan Payable $7,000.

Transaction 4

Sept. 10: Purchased supplies on account for $500.

(a) Basic Analysis

The asset account Supplies is increased by $500; the liability account Accounts Payable is increased by $500.

(b) Equation Analysis

Assets

Supplies +$500 (c) Debit−Credit Analysis

Solutions Manual .

=

Liabilities

+

Shareholders’ Equity

Accounts Payable +$500

Debits increase assets: debit Supplies $500. Credits increase liabilities: credit Accounts Payable $500.

3-35

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-8 (Continued) (a), (b), and (c) (Continued) Transaction 5

Sept. 25: Received $4,500 cash in advance for architectural services to be provided next month.

(a) Basic Analysis

The asset account Cash is increased by $4,500; the liability account Unearned Revenue is increased by $4,500.

(b) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Unearned Revenue +$4,500

Cash +$4,500 (c) Debit−Credit Analysis

Debits increase assets: debit Cash $4,500. Credits increase liabilities: credit Unearned Revenue $4,500.

Transaction 6

Sept. 30: Paid amount owing for supplies purchased Sept. 10.

(a) Basic Analysis

The liability account Accounts Payable is decreased by $500; the asset account Cash is decreased by $500.

(b) Equation Analysis

Assets

Cash -$500 (c) Debit−Credit Analysis

Solutions Manual .

=

Liabilities

+

Shareholders’ Equity

Accounts Payable -$500

Debits decrease liabilities: debit Accounts Payable $500. Credits decrease assets: credit Cash $500.

3-36

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-8 (Continued) (a), (b), and (c) (Continued) Transaction 7

Sept. 30: Collected $5,000 on account owing from a customer.

(a) Basic Analysis

The asset account Cash is increased by $5,000; the Asset account Accounts Receivable is decreased by $5,000.

Assets

(b) Equation Analysis

=

Liabilities

+

Shareholders’ Equity

Cash +$5,000 Accounts Receivable -$5,000

(c) Debit−Credit Analysis

Debits increase assets: debit Cash $5,000. Credits decrease assets: credit Accounts Receivable $5,000.

(d)

Cash................................................... Common Shares .........................

20,000

Accounts Receivable.......................... Service Revenue.........................

9,000

Equipment .......................................... Cash ........................................... Bank Loan Payable .....................

12,000

Supplies ............................................. Accounts Payable .......................

500

Cash................................................... Unearned Revenue .....................

4,500

Accounts Payable .............................. Cash ...........................................

500

Cash................................................... Accounts Receivable ..................

5,000

Sept. 1

2

4

10

25

30

30

Solutions Manual .

3-37

20,000

9,000

5,000 7,000

500

4,500

500

5,000 Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-8 (Continued) (e)

Sept. 1 Sept. 25 Sept. 30 Bal.

Cash 20,000 Sept. 4 4,500 Sept. 30 5,000 24,000

Sept. 2 Bal.

Accounts Receivable 9,000 Sept. 30 4,000

Sept. 10 Bal.

Supplies 500 500

Sept. 4 Bal.

Equipment 12,000 12,000

Sept. 30

Solutions Manual .

5,000 500

5,000

Accounts Payable 500 Sept. 10 Bal.

500 0

Bank Loan Payable Sept. 4 Bal.

7,000 7,000

Unearned Revenue Sept. 25 Bal.

4,500 4,500

Common Shares Sept. 1 Bal.

20,000 20,000

Service Revenue Sept. 2 Bal.

9,000 9,000

3-38

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-9 (a) Aug. 1 Aug. 7 Aug. 11 Aug. 14 Aug. 16 Aug. 28 Aug. 30 Aug. 31

Solutions Manual .

Issued shares in exchange for cash Provided services and was paid cash Purchased equipment with a down payment of $1,500 and the balance from a bank loan payable Performed services on account Collected cash in advance of providing services Received a collection on account Paid salaries Paid dividends

3-39

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-9 (Continued) (b) Cash Aug. 1 7 16 28

3,000 1,800 900 700

Bal.

2,400

Aug. 11 30 31

Common Shares 1,500 2,000 500

Aug. 1

3,000

Dividends Accounts Receivable Aug. 14 Bal.

1,450

Aug. 28

Aug. 31

500

700

750

Service Revenue

Equipment Aug. 11

4,000

1,800 1,450

Bal.

3,250

Salaries Expense

Unearned Revenue Aug. 16

Aug. 7 14

Aug. 30

900

2,000

Bank Loan Payable Aug. 11

Solutions Manual .

2,500

3-40

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-9 (Continued) (c) KANG, INC. Trial Balance August 31, 2015 Debit Cash Accounts receivable Equipment Unearned revenue Bank loan payable Common shares Dividends Service revenue Salaries expense Totals

Solutions Manual .

Credit

$2,400 750 4,000 $ 900 2,500 3,000 500 2,000 $9,650

3-41

3,250 _ $9,650

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-10 (a) Oct. 1 Oct. 2 Oct. 5 Oct. 6 Oct. 9 Oct. 12 Oct. 15 Oct. 16 Oct. 20 Oct. 20 Oct. 28 Oct. 30 Oct. 30 Oct. 31

Issued shares in exchange for cash Purchased equipment on account Purchased supplies for cash Performed services on account Provided services and was paid cash Made a partial payment on account Borrowed cash using a bank loan Paid dividends Received a collection on account Performed services on account Purchased advertising on account Paid rent for the month of October Paid salaries Recorded income tax owing

(b) HOLLY CORP. Trial Balance October 31, 2015 Debit Cash Accounts receivable Supplies Equipment Accounts payable Income tax payable Bank loan payable Common shares Dividends Service revenue Salaries expense Advertising expense Rent expense Income tax expense Totals

Solutions Manual .

Credit

$ 4,200 2,240 400 2,000 $

900 180 5,000 2,000

300 3,390 500 400 1,250 180 $11,470

3-42

0 $11,470

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-11 (a) SPEEDY DELIVERY SERVICE, INC. Trial Balance July 31, 2015 Debit Cash Trading investments Accounts receivable Prepaid insurance Equipment Accumulated depreciation—equipment Accounts payable Salaries payable Bank loan payable, due 2017 Common shares Retained earnings, Aug. 1, 2014 Dividends Service revenue Salaries expense Depreciation expense Rent expense Repairs and maintenance expense Vehicles expense Interest expense Insurance expense Income tax expense Totals

Solutions Manual .

3-43

Credit

$ 8,000 20,000 14,000 200 99,000 $ 21,400 9,500 800 39,000 38,000 20,850 800 75,000 25,000 9,700 9,000 5,700 4,750 3,600 1,800 3,000 $204,550

0 $204,550

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-11 (Continued) (b) SPEEDY DELIVERY SERVICE, INC. Income Statement Year Ended July 31, 2015 Revenues Service revenue Expenses Salaries expense Depreciation expense Rent expense Repair and maintenance expense Vehicles expense Interest expense Insurance expense Total expenses Profit before income tax Income tax expense Profit

$75,000 $25,000 9,700 9,000 5,700 4,750 3,600 1,800 59,550 15,450 3,000 $12,450

SPEEDY DELIVERY SERVICE, INC. Statement of Changes in Equity Year Ended July 31, 2015

Balance, August 1, 2014 Issued common shares Profit Dividends Balance, July 31, 2015

Solutions Manual .

Common Shares

Retained Earnings

Total Equity

$27,000 11,000

$20,850

$47,850 11,000 12,450 (800) $70,500

$38,000

3-44

12,450 (800) $32,500

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-11 (Continued) (b) (Continued) SPEEDY DELIVERY SERVICE, INC. Statement of Financial Position July 31, 2015 Assets Current assets Cash Trading investments Accounts receivable Prepaid insurance Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total property, plant, and equipment Total assets

$ 8,000 20,000 14,000 200 $ 42,200 $99,000 21,400 77,600 $119,800

Liabilities and Shareholders' Equity Current liabilities Accounts payable Salaries payable Total current liabilities Non-current liabilities Bank loan payable, due 2017 Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

(c)

$9,500 800 $ 10,300 39,000 49,300 $38,000 32,500 70,500 $119,800

If the amount of the retained earnings was not known, it would be more difficult to prepare the three financial statements in part (b) above. However, the beginning balance of retained earnings could either be derived from the trial balance or worked backwards from a balanced statement of financial position.

Solutions Manual .

3-45

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

EXERCISE 3-12

Solutions Manual .

Error

(a) In Balance

(b) Difference

(c) Larger Column

1. 2. 3. 4. 5. 6.

No Yes Yes No No No

$400 0 0 500 225 9

Debit n/a n/a Credit Debit Credit

3-46

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 3-1A (a) Assets Transaction 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Total

(b)

Cash +$24,000 +7,000 –11,000 –1,200 –1,450

Accounts Receivable

Supplies

=

Equipment

Liabilities Bank = Accounts Loan Payable Payable

+

+

Common Shares +$24,000

+$7,000 +$11,000 –$1,200 +$1,450 –600

+$600 +2,000 –400 –2,000 –600 –40 –6,400 +12,000 –1,500 $20,410

+$16,000

+$18,000 –$400 –2,000 –600 –40 –6,400

–12,000 + $4,000

+$1,450

+ $11,000 =

$0 + $7,000

+ $24,000

TOTAL ASSETS = $36,860 TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $7,000 + $29,860 = $36,860 PROFIT = $18,000 – $11,740 = $6,260

Solutions Manual .

Shareholders’ Equity Retained Earnings + – – Revenues Expenses Dividends

3-47

Chapter 3

+ $18,000

–1,500 –$11,740

–$400

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-2A (a) Assets

Liabilities

Accounts Bank Loan Accounts Common Cash + Receivable +Supplies+Equipment= Payable + Payable + Shares + July 31 $4,000 Aug. 3 +1,200 5 +1,300 6 −2,700 7 +3,000 12 –400 14 –4,675

18 +3,500 20 –500 24 26 +2,000 28 31 –500 $6,225+

$1,500 –1,200

$500

$5,000

$4,100

Shareholders’ Equity Retained Earnings Opening Retained Earnings +Revenues – Expenses–Dividends

$3,500

$3,400

+1,300 −2,700 +3,500

+$6,500 +1,200

+800 –$3,500 –900 –275

–3,500 –$500 +1,000

+1,000 +$2,000

$1,300 $1,300+

0 0 $500+

00 00 $6,200=

700 000 $2,000+

+275 00 000 $2,475+

00 000 $4,800 +

00 000 $3,400 +

00 000 $7,500 –

–275 −500 $5,450 –

00 0 $500

TOTAL ASSETS $14,225 = TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY $14,225 Note: The August 27th transaction does not affect the accounting equation and is therefore not recorded in the accounting records.

Solutions Manual .

3-48

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-2A (Continued) (b) HILLS LEGAL SERVICES INC. Income Statement Month Ended August 31, 2015 Revenues Service revenue Expenses Salaries expense Rent expense Advertising expense Utilities expense Total expenses Profit before income tax Income tax expense Profit

$7,500 $3,500 900 275 275 4,950 2,550 500 $2,050

HILLS LEGAL SERVICES INC. Statement of Changes in Equity Month Ended August 31, 2015

Balance, August 1 Issued common shares Profit Dividends Balance, August 31

Solutions Manual .

Common Shares

Retained Earnings

$3,500 1,300

$3,400

00 $4,800

3-49

2,050 (500) $4,950

Total Equity $6,900 1,300 2,050 (500) $9,750

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-2A (Continued) (b) (Continued)

HILLS LEGAL SERVICES INC. Statement of Financial Position August 31, 2015 Assets Current assets Cash Accounts receivable Supplies Total current assets Property, plant, and equipment Equipment Total assets

$6,225 1,300 500 $ 8,025 6,200 $14,225

Liabilities and Shareholders' Equity Current liabilities Accounts payable Bank loan payable Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity

Solutions Manual .

3-50

$2,475 2,000 $ 4,475 $4,800 4,950 9,750 $14,225

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-3A (a)

Solutions Manual .

Account

(1) Increases with

(2) Normal Balance

Accounts payable and accrued liabilities Accounts receivable Buildings Cash Common shares, beginning of year Cost of sales Furniture and equipment Income tax expense Income tax payable Interest expense Inventories Land Prepaid expenses Retained earnings, beginning of year Sales Selling, general, and administrative expenses

Credit Debit Debit Debit Credit Debit Debit Debit Credit Debit Debit Debit Debit Credit Credit Debit

Credit Debit Debit Debit Credit Debit Debit Debit Credit Debit Debit Debit Debit Credit Credit Debit

3-51

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-3A (Continued) (b)

Account Accounts payable and accrued liabilities Accounts receivable Buildings Cash Common shares, beginning of year Cost of sales Furniture and equipment Income tax expense Income tax payable Interest expense Inventories Land

(1) Classification Current liabilities

Statement of Financial Position

Current assets Non-current assets (property, plant, and equipment) Current assets Share capital

Statement of Financial Position Statement of Financial Position

Expenses Non-current assets (property, plant, and equipment) Expenses Current liabilities Expenses Current assets Non-current assets (property, plant, and equipment) Current assets N/A

Income Statement Statement of Financial Position

Prepaid expenses Retained earnings, beginning of year Sales Revenues Selling, general, and Expenses administrative expenses

Solutions Manual .

(2) Financial Statement

Statement of Financial Position Statement of Changes in Equity

Income Statement Statement of Financial Position Income Statement Statement of Financial Position Statement of Financial Position Statement of Financial Position Statement of Changes in Equity Income Statement Income Statement

3-52

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4A (a) Transaction 1

Feb.2: Purchased supplies on account for $600.

(1) Basic Analysis

The asset account Supplies is increased by $600; the liability account Accounts Payable is increased by $600.

(2) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Accounts Payable +$600

Supplies +$600 (3) Debit−Credit Analysis

Debits increase assets: debit Supplies $600. Credits increase liabilities: credit Accounts Payable $600.

Transaction 2

Feb.3: Purchased equipment for $10,000 by signing a bank loan due in three months.

(1) Basic Analysis

The asset account Equipment is increased by $10,000; the liability account Bank Loan Payable is increased by $10,000.

(2) Equation Analysis

Assets Equipment +$10,000

(3) Debit−Credit Analysis

Solutions Manual .

=

Liabilities

+

Shareholders’ Equity

Bank Loan Payable +$10,000

Debits increase assets: debit Equipment $10,000. Credits increase liabilities: credit Bank Loan Payable $10,000.

3-53

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4A (Continued) (a) (Continued) Transaction 3

Feb.6: Earned service revenue of $50,000. Of this amount, $30,000 was received in cash. The balance was on account.

(1) Basic Analysis

The asset account Cash is increased by $30,000; the asset account Accounts Receivable is increased by $20,000; the shareholders’ equity account Service Revenue is increased by $50,000.

(2) Equation Analysis

Assets

=

Liabilities

+

Cash +$30,000

Shareholders’ Equity Service Revenue +$50,000

Accounts Receivable +$20,000

(3) Debit−Credit Analysis

Debits increase assets: debit Cash $30,000. Debits increase assets: debit Accounts Receivable $20,000. Credits increase revenues: credit Service Revenue $50,000.

Transaction 4

Feb.13: Paid dividends of $500 to shareholders.

(1) Basic Analysis

The asset account Cash is decreased by $500; the Dividends account is increased by $500.

(2) Equation Analysis

Assets

=

Liabilities

Cash -$500 (3) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Dividends -$500

Debits increase dividends: debit Dividends $500. Credits decrease assets: credit Cash $500.

3-54

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4A (Continued) (a) (Continued) Transaction 5

Feb. 18: Received cash of $2,000 from a customer as a deposit for services to be provided next month.

(1) Basic Analysis

The asset account Cash is increased by $2,000; the liability account Unearned Revenue is increased by $2,000.

(2) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Unearned Revenue +$2,000

Cash +$2,000

(3) Debit−Credit Analysis

Debits increase assets: debit Cash $2,000. Credits increase liabilities: credit Unearned Revenue $2,000.

Transaction 6

Feb. 20: Paid amount owing from the supplies purchased on Feb. 2.

(1) Basic Analysis

The asset account Cash is decreased by $600; the liability account Accounts Payable is decreased by $600.

(2) Equation Analysis

Assets

Cash -$600 (3) Debit−Credit Analysis

Solutions Manual .

=

Liabilities

+

Shareholders’ Equity

Accounts Payable -$600

Debits decrease liabilities: debit Accounts Payable $600. Credits decrease assets: credit Cash $600.

3-55

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4A (Continued) (a) (Continued) Transaction 7

Feb. 23: Collected $20,000 of the amount owing from the Feb. 6 transaction.

(1) Basic Analysis

The asset account Cash is increased by $20,000; the Asset account Accounts Receivable is decreased by $20,000.

(2) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Cash +$20,000 Accounts Receivable -$20,000

(3) Debit−Credit Analysis

Debits increase assets: debit Cash $20,000. Credits decrease assets: credit Accounts Receivable $20,000.

Transaction 8

Feb. 24: Paid office expenses for the month $22,000.

(1) Basic Analysis

The expense account Office Expense is increased by $22,000; the asset account Cash is decreased by $22,000.

(2) Equation Analysis

Assets

=

Liabilities

Cash -$22,000

(3) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Office Expense -$22,000

Debits increase expenses: debit Office Expense $22,000. Credits decrease assets: credit Cash $22,000.

3-56

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4A (Continued) (a) (Continued) Transaction 9

Feb.27: Recorded salaries due to employees for work performed during the month, $14,000.

(1) Basic Analysis

The expense account Salaries Expense is increased by $14,000; the liability account Salaries Payable is increased by $14,000.

(2) Equation Analysis

Assets

=

Liabilities

+

Salaries Payable +$14,000

Shareholders’ Equity Salaries Expense -$14,000

(3) Debit−Credit Analysis

Debits increase expenses: debit Salaries Expense $14,000. Credits increase liabilities: credit Salaries Payable $14,000.

Transaction 10

Feb. 28: Paid interest of $50 on the bank loan signed Feb. 3.

(1) Basic Analysis

The expense account Interest Expense is increased by $50; the asset account Cash is decreased by $50.

(2) Equation Analysis

Assets

=

Liabilities

Cash -$50 (3) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Interest Expense -$50

Debits increase expenses: debit Interest Expense $50. Credits decrease assets: credit Cash $50.

3-57

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4A (Continued) (b) Feb. 2 Supplies ........................................................... Accounts Payable .....................................

600

3 Equipment ....................................................... Bank Loan Payable .................................

10,000

6 Cash ................................................................ Accounts Receivable ...................................... Service Revenue ......................................

30,000 20,000

13 Dividends ......................................................... Cash .........................................................

500

18 Cash ................................................................ Unearned Revenue ..................................

2,000

20 Accounts Payable ............................................ Cash .........................................................

600

23 Cash ................................................................ Accounts Receivable ................................

20,000

24 Office Expense ................................................ Cash .........................................................

22,000

27 Salaries Expense ............................................. Salaries Payable .......................................

14,000

28 Interest Expense .............................................. Cash .........................................................

50

Solutions Manual .

3-58

600

10,000

0 50,000

500

2,000

600

20,000

22,000

14,000

50

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-5A May 1 Cash ................................................................ Common Shares ......................................

120,000

4 Land ................................................................ Buildings .......................................................... Equipment ....................................................... Cash ......................................................... Mortgage Payable ....................................

125,000 100,000 45,000

4 Prepaid Insurance ........................................... Cash .........................................................

1,500

5 Advertising Expense ........................................ Cash .........................................................

800

6 Equipment ....................................................... Accounts Payable ....................................

9,000

18 Cash ................................................................ Fees Earned.............................................

8,800

20 Dividends......................................................... Cash .........................................................

1,000

22 Cash ................................................................ Unearned Revenue ..................................

1,200

29 Accounts Payable............................................ Cash .........................................................

9,000

30 Interest Expense ............................................. Cash .........................................................

800

30 Salaries Expense ............................................ Cash .........................................................

3,400

Solutions Manual .

3-59

120,000

100,000 170,000

1,500

800

9,000

8,800

1,000

1,200

9,000

800

3,400

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-6A (a) Apr. 1 Cash ................................................................ Equipment ....................................................... Common Shares ......................................

10,000 6,000 16,000

1 No entry. Not a transaction 2 Rent Expense .................................................. Cash .........................................................

950

3 Supplies .......................................................... Accounts Payable ....................................

1,900

10 Accounts Receivable ....................................... Service Revenue ......................................

900

13 Cash ................................................................ Unearned Revenue ..................................

800

20 Cash ................................................................ Service Revenue ......................................

1,500

21 Cash ................................................................ Accounts Receivable ................................

500

23 Office Expense ................................................ Accounts Payable ....................................

135

30

30

30

Solutions Manual .

950

1,900

900

800

1,500

500

135

Salaries Expense ............................................ Cash .........................................................

1,900

Accounts Payable............................................ Cash .........................................................

950

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

500

3-60

1,900

950

500

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-6A (Continued) (b) Cash Apr. 1 Apr. 13 Apr. 20 Apr. 21

10,000 800 1,500 500

Bal.

8,500

Apr. 2 Apr. 30 Apr. 30 Apr. 30

Common Shares 950 1,900 950 500

Apr. 1

16,000

Bal. 16,000 Dividends Apr. 30

500

Bal.

500

Accounts Receivable Apr. 10

900

Bal.

400

Apr. 21

500 Service Revenue

Supplies Apr. 3

1,900

Bal.

1,900

Apr. 10 Apr. 20

900 1,500

Bal.

2,400

Salaries Expense Equipment Apr. 1

6,000

Bal.

6,000

Apr. 30

1,900

Bal.

1,900

Rent Expense

Accounts Payable Apr. 30

950

Apr. 3 Apr. 23

1,900 135

Bal.

1,085

Solutions Manual .

800

Bal.

800

950

Bal.

950 Office Expense

Unearned Revenue Apr. 13

Apr. 2

3-61

Apr.23

135

Bal.

135

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-6A (Continued) (c)

This suggestion is not a good idea. Journals are used to record transactions. Ledgers are not intended to be used to capture the recording of transactions, but to tabulate the effects of transactions in separate accounts. The balances arrived at in the ledger are then used to communicate information to the users of the financial statements. If one attempted to omit the use of journal entries, one could not retrace the transactions as they originated in the journal. One would only see one side of a transaction at a time by looking at an account in the ledger. It would become very confusing and unruly to try to keep track of transactions.

Solutions Manual .

3-62

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-7A (a) and (c) Cash Feb. 28 Bal. 15,000 Mar. 9 16,300 Mar. 20 16,600 Mar. 25 18,400 Mar. 30 1,245

Bal.

Mar. 2 Mar. 12 Mar. 13 Mar. 19 Mar. 23 Mar. 27 Mar. 30 Mar. 30

Accounts Payable

10,000 17,000 12,000 950 3,000 4,200 2,000 3,000

Mar. 12 Mar. 13

17,000 Feb. 28 Bal. 12,000 Mar. 2 Bal.

12,000 17,000 0

Mortgage Payable

15,395

Mar. 30 1,250

Feb. 28Bal. Bal.

118,000 116,750

Accounts Receivable Mar. 30 Bal.

1,245 1,245

Common Shares Feb. 28 Bal. Bal.

Land Feb. 28 Bal. 85,000 Bal. 85,000

40,000 40,000

Retained Earnings Feb. 28 Bal. Bal.

27,000 27,000

Buildings Fees Earned

Feb. 28 Bal. 77,000 Bal. 77,000

Equipment

Mar. 9 Mar. 20 Mar. 25

16,300 16,600 18,400

Bal.

51,300

Feb. 28 Bal. 20,000 Bal. 20,000

Solutions Manual .

3-63

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-7A (Continued) (a) and (c) (Continued) Concession Revenue Mar. 30 Bal.

2,490 2,490

Rent Expense Mar. 2 Mar. 23 Bal.

27,000 3,000 30,000

Salaries Expense Mar. 27 Bal.

4,200 4,200

Advertising Expense Mar. 19 Bal.

950 950

Interest Expense Mar. 30 Bal.

750 750

Income Tax Expense Mar. 30 Bal.

Solutions Manual .

3,000 3,000

3-64

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-7A (Continued) (b) Mar. 2

27,000 17,000 10,000

2

No entry.

5

No entry.

9

Cash ................................................................ Fees Earned .............................................

16,300

Accounts Payable ........................................... Cash .........................................................

17,000

Accounts Payable ........................................... Cash .........................................................

12,000

Advertising Expense ........................................ Cash .........................................................

950

20

Cash ................................................................ Fees Earned .............................................

16,600

0 16,600

23

Rent Expense .................................................. Cash .........................................................

3,000

0 3,000

25

Cash ................................................................ Fees Earned .............................................

18,400

0 18,400

27

Salaries Expense ............................................. Cash .........................................................

4,200

Cash ................................................................ Accounts Receivable (2,490 × 50%) ................ Concession Revenue ................................

1,245 1,245

Mortgage Payable ............................................ Interest Expense .............................................. Cash .........................................................

1,250 750

Income Tax Expense ....................................... Cash .........................................................

3,000

12

13

19

30

30

30

Solutions Manual .

Rent Expense .................................................. Accounts Payable ..................................... Cash .........................................................

3-65

16,300

17,000

12,000

950

4,200

2,490

2,000

3,000

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-7A (Continued) (d) THE STAR THEATRE, INC. Trial Balance March 31, 2015 Debit Cash Accounts receivable Land Buildings Equipment Mortgage payable Common shares Retained earnings Fees earned Concession revenue Rent expense Salaries expense Advertising expense Interest expense Income tax expense Totals

Solutions Manual .

Credit

$ 15,395 1,245 85,000 77,000 20,000 $116,750 40,000 27,000 51,300 2,490 30,000 4,200 950 750 3,000 $237,540

3-66

00 $237,540

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-8A (a) and (c)

Apr. 30 May 7 8 15 22 29

Bal.

Cash 5,000 1,500 May 1 1,200 4 800 14 1,000 21 1,700 25 31 31 31 5,100

Apr. 30 Bal.

Supplies 500 500

Apr. 30

Equipment 24,000

Bal.

24,000

May 4 21

Accounts Payable Apr. 30 1,100 May 22 1,000 25 Bal. Bank Loan Payable Apr 30 Bal.

May 15 29

Solutions Manual .

Unearned Revenue Apr. 30 700 May 7 600 Bal.

Common Shares Apr. 30

1,000 1,100 1,200 1,000 400 50 1,200 150

Bal. Retained Earnings Apr. 30 Bal. Service Revenue May 8 15 15 22 29 29 Bal.

5,000 5,000

11,400 11,400

1,200 800 700 1,000 1,700 600 6,000

Salaries Expense May 14 1,200 31 1,200 Bal. 2,400

2,100 700 500 1,200

10,000

May 1 Bal.

Rent Expense 1,000 1,000

May 22 Bal.

Supplies Expense 700 700

May 25 Bal.

Advertising Expense 500 500

10,000

1,000 1,500 1,200

3-67

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Bal.

50

PROBLEM 3-8A (Continued) (a) (Continued)

May 25 Bal.

Utilities Expense 400 400

May 31

Interest Expense 50

May 31 Bal.

Income Tax Expense 150 150

(b) May 1

Rent Expense .................................................. Cash .........................................................

1,000

Accounts Payable ............................................ Cash .........................................................

1,100

Cash ................................................................ Unearned Revenue ..................................

1,500

Cash ................................................................ Service Revenue ......................................

1,200

Salaries Expense ............................................. Cash .........................................................

1,200

Cash ................................................................ Service Revenue ......................................

800

Unearned Revenue ......................................... Service Revenue ......................................

700

21

Accounts Payable ............................................ Cash .........................................................

1,000

22

Cash ................................................................ Service Revenue ......................................

1,000

Supplies Expense ............................................ Accounts Payable .....................................

700

4

7

8

14

15

15

22

Solutions Manual .

3-68

1,000

1,100

1,500

1,200

1,200

800

700 0 1,000

1,000

700

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-8A (Continued) (b) (Continued) May 25

25

29

29

31

31

31

Solutions Manual .

Advertising Expense ........................................ Accounts Payable .......................................

500

Utilities Expense .............................................. Cash ...........................................................

400

Cash ................................................................ Service Revenue ......................................

1,700

Unearned Revenue .......................................... Service Revenue ......................................

600

Interest Expense .............................................. Cash .........................................................

50

Salaries Expense ............................................. Cash .........................................................

1,200

Income Tax Expense ....................................... Cash .........................................................

150

3-69

500

400

1,700

600

50

1,200

150

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-8A (Continued) (d) PAMPER ME SALON INC. Trial Balance May 31, 2015 Debit Cash Supplies Equipment Accounts payable Bank loan payable Unearned revenue Common shares Retained earnings Service revenue Salaries expense Rent expense Supplies expense Advertising expense Utilities expense Interest expense Income tax expense Totals

Solutions Manual .

Credit

$ 5,100 500 24,000 $ 1,200 10,000 1,200 5,000 11,400 6,000 2,400 1,000 700 500 400 50 150 $34,800

3-70

$34,800

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-9A (a) TAGGAR ENTERPRISES INC. Trial Balance June 30, 2015 Debit $ 1,800 3,000 5,100 900 7,400 15,000

Cash Accounts receivable Merchandise inventory Prepaid insurance Land Buildings Accumulated depreciation—buildings Equipment Accumulated depreciation—equipment Long-term investments Accounts payable Income tax payable Mortgage payable, due 2021 Common shares Retained earnings, July 1, 2014 Sales Cost of goods sold Office expense Interest expense Income tax expense Totals (b)

Credit

$ 4,000 3,000 1,000 3,550 1,500 100 15,000 5,000 6,250 25,000 13,700 3,300 100 1,000 $57,850

$57,850

When debits equal credits in a trial balance, there is some assurance that certain types of errors may have been caught. However, there is no guarantee that errors do not exist because entries may have been omitted completely, duplicated or recorded to incorrect accounts.

Solutions Manual .

3-71

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-10A

TAGGAR ENTERPRISES INC. Income Statement Year Ended June 30, 2015 Sales Expenses Cost of goods sold Office expense Interest expense Total expenses Profit before income tax Income tax expense Profit

$25,000 $13,700 3,300 100 17,100 7,900 1,000 $ 6,900

TAGGAR ENTERPRISES INC. Statement of Changes in Equity Year Ended June 30, 2015 Common Shares

Retained Earnings

$3,000 2,000 00 000 $5,000

$ 6,250

Balance, July 1, 2014 Issued common shares Profit Balance, June 30, 2015

Solutions Manual .

3-72

6,900 $13,150

Total Equity $ 9,250 2,000 6,900 $18,150

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-10A (Continued) TAGGAR ENTERPRISES INC. Statement of Financial Position June 30, 2015 Assets Current assets Cash Accounts receivable Merchandise inventory Prepaid insurance Total current assets Long-term investments Property, plant, and equipment Land Buildings $15,000 Less: Accumulated depreciation 4,000 Equipment $3,000 Less: Accumulated depreciation 1,000 Total property, plant, and equipment Total assets

$1,800 3,000 5,100 900 $10,800 3,550 $ 7,400 11,000 2,000 20,400 $34,750

Liabilities and Shareholders’ Equity Current liabilities Accounts payable Income tax payable Current portion of mortgage payable Total current liabilities Non-current liabilities Mortgage payable Total liabilities Shareholders’ equity Common shares Retained earnings Total shareholders' equity Total liabilities and shareholders' equity

Solutions Manual .

$1,500 100 1,250 $ 2,850 13,750 16,600 $ 5,000 13,150 18,150 $34,750

3-73

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-11A CANTPOST LTD. Trial Balance June 30, 2015 Debit Cash ($1,241 + $750 – $570 − $1,000) Accounts receivable ($2,630 – $750 + $570) Supplies ($860 – $360) Equipment ($3,000 + $360) Accumulated depreciation—equipment Accounts payable Unearned revenue Common shares Dividends Service revenue ($8,440 – $89 + $890) Salaries expense (given) Rent expense Office expense Depreciation expense Income tax expense Totals

$

Credit

421 2,450 500 3,360 $

600 2,665 1,200 1,000

800 9,241 4,300 1,000 910 600 365 $14,706

0 $14,706

Note that the opening retained earnings balance is zero, as this is the company’s first year of operations. The retained earnings balance given in the problem is the ending retained earnings balance, which was included in the trial balance in error.

Solutions Manual .

3-74

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-1B (a) Assets

=

Liabilities

Accounts Accounts Supplies Equipment = Receivable Payable

Bank Loan Payable

+

Trans.

Cash

Unearned + Revenue

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Total

+$28,000 –1,280 –4,000

(b)

TOTAL ASSETS = $43,840 TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY = $12,700 + $31,140 = $43,840

Common Shares +$28,000

–$1,280 +$16,000 +$700

+$12,000 +$700

+4,200 –700 –200

+$4,200 –700 –200 +$3,600

–2,000 +700 +1,600 –500 –80 –600 $25,140

Shareholders’ Equity Retained Earnings + – – Revenues Expenses Dividends

+3,600 –2,000

, –1,600

+$700 –$500

+ $2,000

+ $700

+ $16,000 =

$0

+ $12,000

+ $700 +

$28,000

PROFIT = $7,800 – $4,160 = $3,640

Solutions Manual

3-75 .

Chapter 3

+ $7,800

–80 –600 –$4,160

–$500

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-2B (a) Assets

Liabilities

Bank Accounts Accounts Common Cash + +Supplies+Equipment= Loan + + + Receivable Payable Shares Payable Aug. 31 Sept. 1 1 3 5 8 14 15 25 28 29 30 30 30

$4,500 –3,200 –1,200 +1,450 +2,300 –700

$1,800

$350

$6,500

$3,200 –3,200

Shareholders’ Equity Retained Earnings Opening Retained +Revenues–Expenses– Dividends Earnings

$2,500

$7,450 –$1,200

–1,450 +2,300 +2,050

+1,350

+500 –300 +2,500 +3,000 –750

+$500 –300 +$2,500

+1,500

+4,500 –750 –175

+175 –500 –350 $6,750+

0 $2,350 +

0 $350+

0 $8,550=

0 $2,500+

0 $1,525+

0 $4,800+

0 $7,450+

0 $5,000–

–350 $2,775–

–$500 0 $500

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY = $18,000

TOTAL ASSETS = $18,000

Note: The transactions on September 4th (hired a part-time office assistant) and 25th (sent a statement) do not affect the accounting equation and are therefore not recorded in the accounting records .

Solutions Manual

3-76 .

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-2B (Continued) (b) CORSO CARE CORP. Income Statement Month Ended September 30, 2015 Revenues Service revenue Expenses Rent expense Salaries expense Advertising expense Utilities expense Total expenses Profit before income tax Income tax expense Profit

$5,000 $1,200 750 300 175 0

2,425 2,575 350 $2,225

CORSO CARE CORP. Statement of Changes in Equity Month Ended September 30, 2015

Balance, September 1 Issued common shares Profit Dividends Balance, September 30

Solutions Manual .

Common Shares

Retained Earnings

$2,500 2,300

$7,450

0 $4,800

3-77

2,225 (500) $9,175

Total Equity $ 9,950 2,300 2,225 (500) $13,975

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-2B (Continued) (b) (Continued) CORSO CARE CORP. Statement of Financial Position September 30, 2015 Assets Current assets Cash Accounts receivable Supplies Total current assets Property, plant, and equipment Equipment Total assets

$6,750 2,350 350 $ 9,450 8,550 $18,000

Liabilities and Shareholders' Equity Current liabilities Accounts payable Bank loan payable Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity

Solutions Manual .

3-78

$1,525 2,500 $ 4,025 $4,800 9,175 13,975 $18,000

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-3B (a)

Account Administrative expenses Buildings Cost of goods sold Dividends Finance income Fixtures and equipment Goodwill Income tax expense Income tax payable Inventories Mortgage payable Prepaid expenses Retained earnings, beginning of year Sales Trade and other receivables Trade payables

Solutions Manual .

3-79

(1) Increases with

(2) Normal Balance

Debit Debit Debit Debit Credit Debit Debit Debit Credit Debit Credit Debit Credit Credit Debit Credit

Debit Debit Debit Debit Credit Debit Debit Debit Credit Debit Credit Debit Credit Credit Debit Credit

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-3B (Continued) (b) (1) Classification

Account Administrative expenses Buildings Cost of goods sold Dividends Finance income Furniture and equipment Goodwill Income tax expense Income tax payable Inventories Mortgage payable Prepaid expenses Retained earnings, beginning of year Sales Trade and other receivables Trade payables

Solutions Manual .

(2) Financial Statement

Expenses

Income Statement

Non-current assets (property, plant, and equipment) Expenses Dividends Revenues Non-current assets (property, plant, and equipment) Non-current assets Expenses Current liabilities Current assets Non-current liability Current assets N/A

Statement of Financial Position

Revenues Current assets

Income Statement Statement of Financial Position

Current liabilities

Statement of Financial Position

3-80

Income Statement Statement of Changes in Equity Income Statement Statement of Financial Position Statement of Financial Position Income Statement Statement of Financial Position Statement of Financial Position Statement of Financial Position Statement of Financial Position Statement of Changes in Equity

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4B (a) Transaction 1

Jan. 2: Issued $10,000 of common shares for cash.

(1) Basic Analysis

The asset account Cash is increased by $10,000; the shareholders’ equity account Common Shares account is increased by $10,000.

(2) Equation Analysis

Assets

=

Liabilities

+

Cash +$10,000

Shareholders’ Equity Common Shares +$10,000

(3) Debit−Credit Analysis

Debits increase assets: debit Cash $10,000. Credits increase share capital: credit Common Shares $10,000.

Transaction 2

Jan. 5: Provided services on account $2,500.

(1) Basic Analysis

The asset account Accounts Receivable is increased by $2,500; the revenue account Service Revenue is increased by $2,500.

(2) Equation Analysis

Assets

=

Liabilities

Accounts Receivable +$2,500 (3) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Service Revenue +$2,500

Debits increase assets: debit Accounts Receivable $2,500. Credits increase revenues: credit Service Revenue $2,500.

3-81

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4B (Continued) (a) (Continued) Transaction 3

Jan. 6: Obtained a bank loan for $30,000

(1) Basic Analysis

The asset account Cash is increased by $30,000; the liability account Bank Loan Payable is increased by $30,000.

(2) Equation Analysis

Assets

=

Liabilities

Shareholders’ Equity

+

Bank Loan Payable +$30,000

Cash +$30,000 (3) Debit−Credit Analysis

Debits increase assets: debit Cash $30,000. Credits increase liabilities: credit Bank Loan Payable $30,000.

Transaction 4

Jan. 7: Paid $40,000 to purchase a car.

(1) Basic Analysis

The asset account Vehicles is increased by $40,000; the Asset account Cash is decreased by $40,000.

(2) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Cash -$40,000 Vehicles +$40,000

(3) Debit−Credit Analysis

Solutions Manual .

Debits increase assets: debit Vehicles $40,000. Credits decrease assets: credit Cash $40,000.

3-82

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4B (Continued) (a) (Continued) Transaction 5

Jan. 9: Received cash of $5,000 from a customer as a deposit for services to be performed in the future.

(1) Basic Analysis

The asset account Cash is increased by $5,000; the liability account Unearned Revenue is increased by $5,000.

(2) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Unearned Revenue +$5,000

Cash +$5,000

(3) Debit−Credit Analysis

Debits increase assets: debit Cash $5,000. Credits increase liabilities: credit Unearned Revenue $5,000.

Transaction 6

Jan. 12: Billed customers $20,000 for services performed during the month.

(1) Basic Analysis

The asset account Accounts Receivable is increased by $20,000; the revenue account Service Revenue is increased by $20,000.

(2) Equation Analysis

Assets

=

Liabilities

Accounts Receivable +$20,000

(3) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Service Revenue +$20,000

Debits increase assets: debit Accounts Receivable $20,000. Credits increase revenues: credit Service Revenue $20,000.

3-83

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4B (Continued) (a) (Continued) Transaction 7

Jan. 19: Paid $500 to purchase supplies.

(1) Basic Analysis

The asset account Supplies is increased by $500; the Asset account Cash is decreased by $500.

(2) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Cash -$500 Supplies +$500 (3) Debit−Credit Analysis

Debits increase assets: debit Supplies $500. Credits decrease assets: credit Cash $500.

Transaction 8

Jan 20: Provided $1,500 of services to the customer who paid in advance on January 9.

(1) Basic Analysis

The liability account Unearned Revenue decreased by $1,500; the revenue account Service Revenue is increased by $1,500.

(2) Equation Analysis

Assets

=

Liabilities Unearned Revenue -$1,500

(3) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Service Revenue +$1,500

Debits decrease liabilities: debit Unearned Revenue $1,500. Credits increase revenues: credit Service Revenue $1,500.

3-84

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4B (Continued) (a) (Continued) Transaction 9

Jan. 23: Collected $5,000 owing from customers from the January 12 transaction.

(1) Basic Analysis

The asset account Cash is increased by $5,000; the Asset account Accounts Receivable is decreased by $5,000.

(2) Equation Analysis

Assets

=

Liabilities

+

Shareholders’ Equity

Cash +$5,000 Accounts Receivable -$5,000 (3) Debit−Credit Analysis

Debits increase assets: debit Cash $5,000. Credits decrease assets: credit Accounts Receivable $5,000.

Transaction 10

Jan 26: Received a bill for utilities of $125, due Feb. 26.

(1) Basic Analysis

The expense account Utilities Expense is increased by $125; the liability account Accounts Payable increased by $125.

(2) Equation Analysis

Assets

=

Liabilities Accounts Payable +$125

(3) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Utilities Expense -$125

Debits increase expenses: debit Utilities Expense $125. Credits increase liabilities: credit Accounts Payable $125.

3-85

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4B (Continued) (a) (Continued) Transaction 11

Jan. 29: Paid rent for the month $1,500.

(1) Basic Analysis

The expense account Rent Expense is increased by $1,500; the asset account Cash is decreased by $1,500.

(2) Equation Analysis

Assets

=

Liabilities

+

Cash -$1,500

Shareholders’ Equity Rent Expense -$1,500

(3) Debit−Credit Analysis

Debits increase expenses: debit Rent Expense $1,500. Credits decrease assets: credit Cash $1,500.

Transaction 12

Jan. 31: Paid $4,000 of salaries to employees.

(1) Basic Analysis

The expense account Salaries Expense is increased by $4,000; the asset account Cash is decreased by $4,000.

(2) Equation Analysis

Assets

=

Liabilities

Cash -$4,000 (3) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Salaries Expense -$4,000

Debits increase expenses: debit Salaries Expense $4,000. Credits decrease assets: credit Cash $4,000.

3-86

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4B (Continued) (a) (Continued) Transaction 13

Jan 31: Paid interest of $300 on the bank loan from the Jan. 6 transaction.

(1) Basic Analysis

The expense account Interest Expense is increased by $300; the asset account Cash is decreased by $300.

(2) Equation Analysis

Assets

=

Liabilities

+

Cash -$300

Shareholders’ Equity Interest Expense -$300

(3) Debit−Credit Analysis

Debits increase expenses: debit Interest Expense $300. Credits decrease assets: credit Cash $300.

Transaction14

Jan. 31: Paid income tax for the month $3,600.

(1) Basic Analysis

The expense account Income Tax Expense is increased by $3,600; the asset account Cash is decreased by $3,600.

(2) Equation Analysis

Assets

=

Liabilities

Cash -$3,600 (3) Debit−Credit Analysis

Solutions Manual .

+

Shareholders’ Equity Income Tax Expense -$3,600

Debits increase expenses: debit Income Tax Expense $3,600. Credits decrease assets: credit Cash $3,600.

3-87

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-4B (Continued) (b) Jan. 2 Cash ................................................................ Common Shares ......................................

10,000

5 Accounts Receivable ....................................... Service Revenue ......................................

2,500

6 Cash ................................................................ Bank Loan Payable ..................................

30,000

7 Vehicles ........................................................... Cash .........................................................

40,000

9 Cash ................................................................ Unearned Revenue ..................................

5,000

12 Accounts Receivable ....................................... Service Revenue ......................................

20,000

19 Supplies........................................................... Cash .........................................................

500

20 Unearned Revenue ......................................... Service Revenue ......................................

1,500

23 Cash ................................................................ Accounts Receivable ................................

5,000

26 Utilities Expense .............................................. Accounts Payable ....................................

125

29 Rent Expense .................................................. Cash .........................................................

1,500

31 Salaries Expense ............................................ Cash .........................................................

4,000

31 Interest Expense ............................................. Cash .........................................................

300

31 Income Tax Expense ....................................... Cash .........................................................

03,600

Solutions Manual .

3-88

10,000

2,500

30,000

40,000

5,000

20,000

500

1,500

5,000

125

1,500

4,000

300

3,600

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-5B Apr. 1 Cash ...................................................................... Common Shares ............................................

Common 100,000 Shares 100,000 100,000

3 Land ...................................................................... Buildings ................................................................ Equipment ............................................................. Cash ............................................................... Bank Loan Payable ........................................

204,000 121,000 45,000

8 Advertising Expense .............................................. Accounts Payable ..........................................

1,800

10 Salaries Expense .................................................. Cash ...............................................................

2,800

60,000 310,000

1,800 2,800

13 No entry as the accounting equation is not affected. 14 Prepaid Insurance ................................................ Cash ..............................................................

5,500

17 Dividends.............................................................. Cash ..............................................................

600

20 Cash ..................................................................... Fees Earned..................................................

10,600

30 Accounts Payable................................................. Cash ..............................................................

1,800

30 Interest Expense .................................................. Cash ..............................................................

2,000

30 Income Tax Expense ............................................ Cash ..............................................................

800

Solutions Manual .

3-89

5,500

600

10,600

1,800

2,000

800

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-6B (a)

May 1 Cash ........................................................................... 20,000 Common Shares ..................................................

20,000

1 Rent Expense ............................................................. Cash ....................................................................

950

950

4 No entry. Not an accounting transaction.

Solutions Manual .

4 Supplies .............................................................. Accounts Payable ........................................

750

11 Accounts Receivable .......................................... Service Revenue .........................................

2,725

12 Cash ................................................................... Unearned Revenue......................................

3,500

15 Cash ................................................................... Service Revenue .........................................

2,350

20 Cash ................................................................... Accounts Receivable ...................................

1,725

22 Accounts Payable ($750 × 1/3) ........................... Cash ............................................................

250

25 Office Expense ................................................... Accounts Payable ........................................

275

29 Salaries Expense ................................................ Cash ............................................................

2,000

29 Income Tax Expense .......................................... Cash ............................................................

300

29 Dividends ............................................................ Cash ............................................................

250

3-90

750

2,725

3,500

2,350

1,725 , 250

275

2,000

300

250

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-6B (Continued) (b) Cash May 1 12 15 20

20,000 May 1 3,500 22 2,350 29 1,725 29 29 23,825

Bal.

950 250 2,000 300 250

Accounts Receivable May 11 Bal.

2,725 May 20 1,000

1,725

Supplies May 4 Bal.

750 750

Accounts Payable May 22

250 May

4 25

Bal.

750 275 775

Unearned Revenue May 12 Bal.

3,500 3,500

Common Shares May 1 Bal.

Solutions Manual .

20,000 20,000

3-91

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-6B (Continued) Dividends May 29 Bal.

250 250 Service Revenue May 11 15 Bal.

2,725 2,350 5,075

Salaries Expense May 29 Bal.

2,000 2,000 Rent Expense

May 1 Bal.

950 950 Office Expense

May 25 Bal.

275 275 Income Tax Expense

May 29 Bal.

Solutions Manual .

300 300

3-92

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-6B (Continued) (c)

This suggestion is not a good idea. Journals are used to record transactions. Ledgers are not intended to be used to capture the recording of transactions, but to tabulate the effects of transactions in separate accounts. The balances arrived at in the ledger are then used to communicate information to the users of the financial statements. If one attempted to omit the use of journal entries, one could not retrace the transactions as they originated in the journal. One would only see one side of a transaction at a time by looking at an account in the ledger. It would become very confusing and unruly to try to keep track of transactions.

Solutions Manual .

3-93

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-7B (a) and (c) Cash Mar. 31 Bal. 6,000 Apr. 11 1,950 Apr. 2 Apr. 25 7,300 Apr. 3 Apr. 30 560 Apr. 16 Apr. 17 Apr. 26 Apr. 27 Apr. 30 Bal. 5,140

Apr. 30 Bal.

Accounts Receivable 560 560

Apr. 27 Bal.

Prepaid Rent 700 700

Bal. 123,000 Common Shares Mar. 31 Bal. 50,000 Bal. 50,000

800 620 2,850 2,800 1,900 700 1,000

1,950 7,300 9,250

Concession Revenue Apr. 30 Bal.

1,120 1,120

Apr. 2 Apr. 20 Bal.

Rent Expense 800 750 1,550

Apr. 3 Bal.

Advertising Expense 620 620

5,000 750 2,950

Apr. 16 Bal.

Interest Expense 850 850

Mortgage Payable Mar. 31 Bal. 125,000 2,000

Apr. 30 Bal.

Income Tax Expense 1,000 1,000

Equipment Mar. 31 Bal. 25,000 Bal. 25,000

Solutions Manual .

Fees Earned Apr. 11 Apr. 25 Bal.

Apr. 26 Bal.

Buildings Mar. 31 Bal. 80,000 Bal. 80,000

Apr. 16

31,000 31,000

Salaries Expense 1,900 1,900

Land Mar. 31 Bal. 100,000 Bal. 100,000

Apr. 17

Retained Earnings Mar. 31 Bal. Bal.

Accounts Payable Mar. 31 Bal. 2,800 Apr. 20 Bal.

3-94

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-7B (Continued) (b) Apr. 2 Rent Expense.............................................................. Cash ....................................................................

800

3 Advertising Expense ................................................... Cash ....................................................................

620

800

620

3 No entry, not a transaction. 6 No entry, not a transaction. 11 Cash............................................................................ Fees Earned ........................................................

1,950

16 Mortgage Payable ....................................................... Interest Expense ......................................................... Cash ....................................................................

2,000 850

17 Accounts Payable ....................................................... Cash ....................................................................

2,800

20 Rent Expense.............................................................. Accounts Payable ................................................

750

25 Cash............................................................................ Fees Earned ........................................................

7,300

26 Salaries Expense ........................................................ Cash ....................................................................

1,900

27 Prepaid Rent ............................................................... Cash ....................................................................

700

30 Cash............................................................................ Accounts Receivable................................................... Concession Revenue (20% × $5,600) .................

560 560

30 Income Tax Expense .................................................. Cash ....................................................................

1,000

Solutions Manual .

3-95

1,950

2,850

2,800

750

7,300

1,900

700

1,120

1,000

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-7B (Continued) (d)

LAKE THEATRE, INC. Trial Balance April 30, 2015 Debit Cash Accounts receivable Prepaid rent Land Buildings Equipment Accounts payable Mortgage payable Common shares Retained earnings Fees earned Concession revenue Salaries expense Rent expense Advertising expense Interest expense Income tax expense Totals

Solutions Manual .

Credit

$

5,140 560 700 100,000 80,000 25,000 $ 2,950 123,000 50,000 31,000 9,250 1,120

1,900 1,550 620 850 1,000 $217,320

3-96

0000 000 $217,320

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-8B (a) and (c)

Cash Apr. 30 Bal. 23,000 May 29 2,200 May 4 May 9 May 11 May 15 May 18 May 29 May 29 May 29 May 31 Bal. 6,200

Apr. 30 Bal. Bal.

Equipment 2,000 2,000

6,000 6,000

Fees Earned May 29 Bal.

17,500 17,500

May 4 May 18 Bal.

Rent Expense 7,200 7,200 14,400

May 15 May 29 Bal.

Salaries Expense 1,000 1,000 2,000

May 11 29 Bal.

Advertising Expense 500 300 800

Accounts Payable Apr 30 Bal. 500 May 21 Bal.

500 100 100

Unearned Revenue Apr 30 Bal. 17,500 May 29 Bal.

17,500 2,200 2,200

May 29 Bal.

Supplies Expense 200 200

Common Shares Apr. 30 Bal. Bal.

1,000 1,000

May 21 Bal.

Office Expense 100 100

May 31 Bal.

Income Tax Expense 1,100 1,100

May 9

May 29

7,200 500 500 1,000 7,200 200 300 1,000 1,100

Retained Earnings Apr. 30 Bal. Bal.

Solutions Manual .

3-97

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-8B (Continued) (b) May

4 Rent Expense .............................................................. 7,200 Cash ..................................................................... 9 Accounts Payable ........................................................ Cash .....................................................................

7,200

500 500

11 No entry. Not a transaction. 11 Advertising Expense .................................................... Cash .....................................................................

500 500

15 Salaries Expense......................................................... 1,000 Cash .....................................................................

1,000

18 Rent Expense .............................................................. 7,200 Cash .....................................................................

7,200

21 Office Expense ............................................................ Accounts Payable.................................................

100 100

29 Unearned Revenue ..................................................... 17,500 Fees Earned ......................................................... 29 Supplies Expense ........................................................ Cash .....................................................................

200 200

29 Cash ............................................................................ 2,200 Unearned Revenue .............................................. 29 Advertising Expense .................................................... Cash .....................................................................

Solutions Manual .

17,500

2,200

300 300

29 Salaries Expense......................................................... 1,000 Cash .....................................................................

1,000

31 Income Tax Expense ................................................... 1,100 Cash .....................................................................

1,100

3-98

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-8B (Continued) (d)

KG SPRING SKATING SCHOOL INC. Trial Balance May 31, 2015 Debit Cash Equipment Accounts payable Unearned revenue Common shares Retained earnings Fees earned Rent expense Salaries expense Advertising expense Supplies expense Office expense Income tax expense Totals

Solutions Manual .

Credit

$ 6,200 2,000 $

100 2,200 1,000 6,000 17,500

14,400 2,000 800 200 100 1,100 $26,800

3-99

_ $26,800

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-9B (a) ASIAN IMPORTERS LIMITED Trial Balance January 31, 2015 (thousands) Debit Cash Accounts receivable Merchandise inventory Prepaid insurance Land Buildings Accumulated depreciation—buildings Equipment Accumulated depreciation—equipment Goodwill Accounts payable Other current liabilities Bank loan payable (due 2018) Mortgage payable Common shares Retained earnings, February 1, 2014 Dividends Sales Cost of goods sold Office expense Interest expense Income tax expense Totals

(b)

Credit

$ 6,000 30,200 74,250 3,950 42,500 39,500 $ 13,000 10,900 3,600 7,600 46,300 12,200 10,050 19,750 32,900 37,050 1,850 370,000 244,200 67,750 2,150 14,000 $544,850

00000 0 $544,850

When debits equal credits in a trial balance, there is some assurance that certain types of errors may have been caught. However, there is no guarantee that errors do not exist because entries may have been omitted completely, duplicated or recorded to incorrect accounts.

Solutions Manual .

3-100

Chapter 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

PROBLEM 3-10B

ASIAN IMPORTERS LIMITED Income Statement Year Ended January 31, 2015 (thousands) Revenues Sales Expenses Cost of goods sold Office expense Interest expense Total expenses Profit before income tax Income tax expense Profit

$370,000 $244,200 67,750 2,150 314,100 55,900 14,000 $ 41,900

ASIAN IMPORTERS LIMITED Statement of Changes in Equity Year Ended January 31, 2015 Common Shares Balance, February 1, 2014 Issued common shares Profit

$20,000 12,900

Dividends Balance, January 31, 2015

000 000 $32,900

Solutions Manual .

3-101

Retained Earnings $37,050

Total Equity

41,900

$ 57,050 12,900 41,900

(1,850) $77,100

(1,850) $110,000

Chapter 3