Bus 272 An. Nea Problemy Jes‘oblem 1-3 The missing numbers are: Year | Gross margin Tax expense Year 2 Sales Profit before taxes Year 3 Cost of goods sold Other expenses .. Other accounting equations such as the following are also illustrated by this problei Gross margin = Sales - Cost of goods sold Profit before taxes = Gross margin - Other expenses $9,000 1,120 $11,968 2547 $2,886 6,296 Net income = Profit before taxes - Tax expense ‘The instructor may want to point out to the students that ratios are often used by managers to construct projected financial statements. Year 4 is an example of this application, In order to estimate Year 4, the key ratios to compute are: Year SAIS veecrcnnne — 100.0% Gross margin .. 75.0 Profit before taxes, 233 Net income 40 Tax rate... 40.0 Year 4 Sales Cost of goods sold. Gross margin (75% of sal Other expenses Profit before taxes (21.7% of sales) .. Tax expense. Net income (13% of sales) ‘The basic accounting equation used is: les) . 75.0 213 128 40.0 Year 2 100.0% $10,000 2.500 $ 7,500 — 5.330 $ 2,170 870 $1,300 Year 3 100.0% 75.0 20.5 12.2 40.0 Average 100.0% 75.0% 21.7% 13.0% 40.0 Net income = Revenues - ExpensesProblem 1-4 The explanation of these 11 transactions is: 1, Owners invest $20,000 of equity capital in Acme Consulting, 2. Equipment costing $7,000 is purchased for $5,000 cash and an account payable of $2,000. 3. Supplies inventory costing $1,000 is bought for cash. 4, Salaries of $4,500 are paid in cash. 5, Revenues of $10,000 are earned, of which $5,000 has been recovered in cash. The remaining $5,000 is owed to the company by its customers 6. Accounts payable of $1,500 are paid in cash. 7. Customers pay $1,000 of the $5,000 they owe the company. 8, Rent Expense of $750 is paid in cash. 9. Utilities of $500 are paid in cash. 10. A $200 travel expense has been incurred but not yet paid, 11. Supplies inventory costing $200 are consumed. ACME CONSULTING BALANCE SHEET AS OF JULY 31, —. Assets Liabilities and Owners’ Equity Cash... é $12,750 Accounts payable. $700 Accounts receivable. 4,000 Supplies inventory 800 Current assets... 17,550 Current liabilities . Equipment 7,000 Owners’ equity. Total liabilities Total assets... $24,550 and owners’ equity ACME CONSULTING INCOME STATEMENT JULY 1-31, Revenues, $10,000 Expenses Salaries 4,500 Rent... 750 Utilities 500 Travel... 200 SUPPTIES eerrnrsne 200 6150 Net income. S38ACME CONSULTING CASH RECEIPTS AND DISBURSEMENTS, JULY 1-31, Receipts ‘Owners? investment... eee $20,000 Cash sales, 5,000 Collection of accounts receivable. : 1.000 Total receipts cnn $26,000 Disbursements Equipment purchase cee $85,000 Supplies purchase : 1,000 Salaries paid cnn oe 4,500 Payments to vendors... 1,500 Rent paid... 750 Utilities paid 500 Total disbursements... $13,250 Increase in cash. 812.750 ‘The change in this cash account includes the owners’ investment, which is not an income statement item. ‘The income statement includes revenues and expenses that have not yet been received in eash or paid in cash. The cash paid to purchase the equipment is not reflected in the income statement. (It is probably best if the instructor does not discuss depreciation at this point in the course.) This problem illustrates several important points that managers should understand. These are: a, Every transaction involves at least two accounts. b, Net ineome is not equivalent to the net change in the cash account during an accounting period. ©. Cash is influenced by both balance sheet and income statement events. d. The basic accounting equation (Assets = Liabilities + Owners’ equity) can be used to capture, illustrate, and explain the accounting consequences of many (but not all) transactions and events that involve a company. The cash receipts - disbursements display is used since it would be premature to introduce the cash flow statement display at this point in the course. Problem 1-5 ‘Accounts Supplies Accounts Owners? Cash__ +_Receivable_ + _Inventory + Equipment. = Payable +__ Equity oe 1. $25,000 $25,000 Investment 2 = "300 + ‘500. Rent 3 + $8,000 + $8,000 4-500 + $300 a0 + 750. Advertsing 6 + 3,000 = 3,000 Salaries 7 + 2000 + $8,000 + 10,000 Commissions & = 5.000 = $000 8 00 - 100 10. + 1,000 > 1,000 ExpensesBON VOYAG! BALANCE SHI As Cash... ee G17,250 Accounts receivable vovwnnen 8,000 Supplies inventory : 400, Current assets a 251650 Equipment... = $ 8,000 Total Assets $33,650 TRAVEL OF JUNE 30. Liabit Accounts payable Current liabilities Owners’ equity Total liabilities and owners’ equity. BON VOYAGE TRAVEL, INCOME STATEMENT JUNE 1-30, Commissions. Expenses Rent Advertising. Salaries Supplies. Misc. Expenses ‘Net Income $10,000 $500 750 3,000 100 1,000 350 $4,650 BON VOYAGE TRAVEL CASH RECEIPTS AND DISBURSEMENTS JUNE 1-30, —-. Receipts ‘Owners’ investment. Collection of commis Total receipts Disbursements aid rent... Bought supp! Bought advertising Paid salaries... Paid vendors ‘Total disbursements... Increase in cash .. $25,000 and Owners’ Equity $ 4,000, 4,000 29,650 See Problem 1-4 for why change in cash account and the month’s income are not the same. The problem’s purpose and lessons for managers are similar to those in Problem 1-4,development programs have said that one of the chief values of our approach is that it does show the limitations as well as the usefulness of accounting, They say that one of their principal practical problems is that some uninformed people expect too much of accounting and are disappointed or disgruntled when the accountant cannot furnish them with precise or complete information. It is possible that misconceptions of these people are generated from exposure {0 a course in which the value of accoun ‘was overemphasized and its limitations omitted. The foregoing does not mean that one should ever apologize for the limitations of accounting, Fram time to time it should be pointed out that these limitations are inherent in the job of attempting to reduce the complexities of an actual business situation to a few monetary figures. Incidentally, we understand that physies teachers got themselves into considerable trouble Some years ago by overemphasizing the aceuracy and completeness of our knowledge about physical phenomena. Their current practice, we understand, is to explain what is not known. Cases Cases 2-1 and 2-2 provide practice work for beginning students. These two are mechanical problems to be worked as the text material is studied. Lone Pine Cafe (A) requires the student to think about the application of basic concepts. Additional Cases, Some instructors like to use one of the Chapter | cases with this chapter. Any of the concepts described can be dealt with in the context of those cases. Problem Solu Problem 2-1 Owners’ equity equals $55,000. Liabilities equal $25,000, Noncurrent assets equal $70,000. Owners? equity is $73,000. Current assets $33,000 + Noncurrent assets $55,000 = Total assets $88,000. Current liabilities are $15,000 ($33,000 / 2.2) Total liabilities and Owners’ Equity = $88,000. Owners” equity $73,000 = Total liabilities and Owners’ equity $88,000 - Current liabilities $15,000. Current ratio is 1.4 (835,000 / $25,000) Current assets $35,000 = Total assets $95,000 - Noncurrent assets $60,000, Current liabilities $25,000 = Total assets $95,000 - Owner’s equity $70,000. This problem tests students’ understanding of balance sheet relationships using the basic accounting equation and financial ratio. 7Problem 2-2 JL. GREGORY COMPANY BALANCE SHEET, JUNE 30, -—. Assets Liabili Cash... $ 89,000 Accounts payable... S$ 241,000 Marketable securities 379,000 Taxes payable... 125,000 Accounts receivable. = 505,000 Accrued expenses. - 107,000 Inventories 513.000 Current liabilities... 473,000 Current assets 1,486,000 Notes payable 200,000 Land 230,000 Bonds payable 700,000 Buildings : smvmnnee 1,120,000 Total liabilities 1,373,000 Accumulated depreciation (538,000) Equipment a 761,000 Owners’ Equity Accumulated depreciation. - (386,000) Capital stock. 1,000,000 Investments... : 320,000 Retained earn 620,000 ‘Total liabilities, Total assets... $2,993,000 and owners’ equity... $2,993,000 Some students may want to test the notes payable as a current liability, Notes payable are usually debt instruments longer than one year, but in the absence of any details listing them as a current liability is acceptable, Problem 2-3 Cash + $100,000; Capital stock -+ $100,000, Bonds payable - $25,000; Capital stock + $25,000. Retained earnings (Depreciation expense) - $8,500. Accumulated depreciation on plant and equipment + $8,500. Cash - $15,900; Inventory + $15,900, Inventory + $9,400; Accounts payable + $9,400. Inventory - $4,500; Accounts receivable + $7,200; Retained earnings + $2,700 Cash # $3,500; Accounts receivable - $3,500. Dividends payable + $3,00 tained earnings - $3,000, Cash - $3,000; Dividends payable - $3,000. No effect. Some students may simply show the net effect on assets, liabilities, and owners? equity without reference to the specific accounts. While this is acceptable, students should be pushed to identify both the net effect and the particular accounts involved. This will help students to became familiar with the balance sheet account names.Problem 2-4 Assets Cash Inventory crore Total assets Assets. Building... Problem 2-5 CARSON LEGATT PARTNERSHIP BALANCE SHEET AS OF JUNE 1, ----. Capital Accounts $ 50,000 — 50.000 $100,000 Carson .. Legatt ‘Total capital CARSON LEGATT PARTNERSHIP BALANCE SHEET AS OF JUNE 30, $ 22,100 58,500 25,000 50,000 5155,600 Bank loan Capital - Carson. Capital - Legatt CARSON LEGATT PARTNERSHIP ACCOUNTS, JUNE 30,—. Carson Capital - June 1. Additions .. Withdrawals... Capital - June 30. Legatt Capital - June 1. Additions... Withdrawals, Capital - June 30. $50,000 7,750 6.200) $51,550 $50,000 7,750 $54,050 (3,700) Liabilities $ 50,000 5 100, $ 50,000 51,550 54,050 155.600 Jan. 4: Retained earnings (Sales) + $12,000; Cash + $12,000 Inventory - $7,000 ;Retained earnings (Cost of goods sold) - $7,000 Jan.6: No effect. Jan, 8: Inventory + $7,000; Accounts Payable + $7,000 Jan, II: Inventory - $1,500; Cash + $2,500; Retained earnings (Sales) + $2,500; Retained earings (Cost of goods sold) - $1,500 Jan. 1 $3,400; Retained earnings (Sales) + $3,400 Jan, 26: Cash - $4,200; Retained earnings (Wages) - $4,200 Jan, 29: Cash - $20,000; Land + $20,000 Jan. 31: Cash - $2,800; Prepaid insurance + $2,800 Inventory - $2,000; Retained earnings (Cost of goods sold) - $2,000; Accounts receivable +Problem 3-7 QED ELECTRONICS COMPANY Income Statement for the month of Ap: Sales Expenses: Bad debts aoe $645 ae 3,700 Interest : 880 Wages eee 10,000 Utilities 800 Depreciation ... 2,700 Selling... 1,900 Administrative. 4,700 23,325 Profit before taxes... 8.075 Provision for taxes: 2,800. Net income 35.205 Truck purchase has no income statement effect. It is an asset. Sales are recorded as eared, not when cash is received. Bad debt provision of 5 percent related to sales on credit ($33,400 - $20,500) must be recognized. Wages expense is recognized as incurred, not when paid. March’s utility bill is an expense of March when the obligation was incurred. Income tax provision relates to pretax income, Must be matched with related income. Problem 3-8 First calculate sales: Sales ($45,000 / (I ~ 45). S81,818+ Beginning inventory $35,000 Purchases. ‘$40,000 Total available 75,000 Ending inventory... 30,000 Cost of goods sold Gross margin If the gross margin percentage is 45 percent, the cost of goods sold percentage must be 55 percent. Once sales are determined, calculate net income: Net income ($81,818 x .1) $8,182 316) dr. Stamp Expense : a $100 Stamp Inventory. See : $72 cecah ee ee siz Stamps expense is an income statement item. Stamp inventory is an asset, 7) Bad debt expense... oS $1,350 Allowance for doubtful accounts $1,350 Bad debt expense account is an expense account. Allowance for doubtful accounts is a contra asset displayed as a deduction from the asset accounts receivable. Problem 43 a 1) dr, Inventory... 81,300 er. Accounts payable... $1,300 2) dr. Wages Expense $730 er. Cash $730 3) de. Cash... $1,940 cr. Sales $1,940 4) dr. Accounts Receivable. $1,810 EF, SALES ne $1,810 5) dt. Overhead and Other Expenses $900 er. Cash $900 6) dr. Cash, — $1,510 er. Accounts Receivable. $1,510 7) dr. Accounts Payable. $1,720 er. Cash $1,720 8) dr. CASH encoun $650 cr. Deferred Revenue $650 9) dr. Cash... “ $200 ct. Note Payable.. $200 10) dr. Cost of Goods Sold... $1,280 cr. Inventory. $1,280 + Beginning inventory Additions... Total available Ending inventory.. Cost of goods sald 49b, 11). Dr. Depreciation Expense.. cee Cr. Accumulated Depreciation Accounts Payable $300 $300 Accounts Receivable () $1,720] $3,070 $2,160 1510 (6) 1,300. (1) @) 1,810 | Depreciation Allowance for Doubtful Accounts $2,800 = ‘$70 300 (11) Cash Fixed Assets (cost) S10 $730 $6,200 @) 1,940 900 (5) a) 110] 1,720 (8) 650 0°) 200 Inventories Notes Payable $1,730] $1280 (10) - | S600 2 @ 1300 1} 200 (9) Owners’ Equity Deferred Revenue 3650 (8) LUFT CORPORATION Balance Sheet (2) Wages 87308 | $4,990 (5) Overhead 900} 1,940 Sales (3) (io) CoGs 1,280 | 1,810 Sales (4) (11) Depreciation "300 See above 4 Assets Cash, $2,390 Accounts receivable (net).. 2,390 Inventori oe 1,750 Current assets... $6,530 Fixed assets $6,200 Accumulated depreciation, (3.100 Total assets $9,630 50 Liabilities Accounts payable. $2,650 Deferred revenue 650 Current abilities nui 3,300 Notes payable... Total liabilities Owner's equity Owner's equity... sid) ‘Total liabilities, and owners* equity...LUFT CORPORATION Income Statement Sales Cost of goods sold. Gross margin .. Wages... Overhead Depreciation Net income Problem 4-4 a Cash and Equivalents Accounts Receivable _ $119,115 z a $162,500 $119,115 $162,500 Store Equipment Merchandise Inventory = $215,000 zi ___ $700,680 [$302,990 (1) $215,000 $397,690 Supplies Inventory Prepaid Insurance “$15,475 [$10,265 _G) $38,250 | $4,660 (4) $5,210 $33,590 Selling Expense Sales Sal $24,900 | 24,900 (a) $105,750, © 3,575 | 109,325 (b) Cost of Goods Sold Depreciation Expense (@_—_3362,590 [$302,990 th) _@) $12,750 |_$12,750_@ Supplies Expense Insurance Expense G) $10,265 | $10,265 @ 60084660) I Accrued Interest Acerued Sales Sal: ite 370 $3,575 _(6) $3,730 $3,575 Interest Receivable Interest Income @) 390 | = : ae 390_(7) 390 | |Miscellaneous General Expenses Sales Discounts $31,000 | 31,000 (©) “@)___ 6220] $6,230 Interest Expense Social Security Taxes Es $9,300 | _ $9,600] 99,600 () | __ ©) 3,730 |_$13,030_(@) | Accumulated Depreciation Accounts Payable | om “T $37,300 [ $118,180 12,750_@) $118,180 $50,050 | Notes Payable Common Stock i $143,000 — oo $300,000 | $143,000 $300,000 | Retained Earnings I : $122,375 | 192,585 _(m) | $314,960 | Profit and Loss | 2 @ 24,900 716,935 (g) (&) 109,325 390) | ©) 31,000 @ 6.220 (e) 13,030 | 0) 9,600 | (hy 302,990 i @ 12,750 { @ 10,265 { ) 4.660 | im) __ 192,585 Adjusting entries are: | $302,990 (1) dr. Cost OF Goods Sold er. Merchandise Inventory... $302,990 (2). dr. Depreciation Expense. $12,750 er. Accumulated Depreciation... $12,750 (3) dr. Supplies Expense... ee $10,265 er. Supplies Inventary : $10,265 52dr. Insurance Expense. ce — $4,660 er. Prepaid Insurance... Closing entries are dr, Interest Expense, ee 53,730 er. Accrued Interest nn dr. Sales Salaries... $3,575 cr, Accrued Sales Salaries dr, Interest Receivable «esse eee $390 er, Interest Income..... (a) dr. Profit and Loss. $24,900 er. Selling Expense. dr. Profit and Loss... $109,325 cr. Sales Salaries, dr, Profit and Loss... $31,000 $6,220 de. Profit and Loss. $13,030 er. Interest Expense . dr. Profit and Loss. 59,600 er, Social Security Taxes. dr. Sales. . $716,935 cr. Profit and Loss dr. Profit and L088... $302,990 er. Cost af Goods Sold... dr, Profit and Loss, $12,750 cr. Depreciation Expense... dr, Profit and Loss, $10,265 cr. Supplies Expense .. de. Profit and Loss.. $4,660 cr. Insurance Expense... dr, Interest Income $390 cr, Profit and Loss 33 $4,660 $3,730 $3,575 3390 $24,900 $109,325 $31,000 $6,220 $13,030 $9,600 $716,935 $302,990 $12,750 $10,265 $4,660 $390(m) de. Profit and Loss. . a $192,585 or. Retained Earnings — sone $192, DINDORF COMPANY Income Statement for the year Sales : semen $716,93: Sales discounts ... Net sales... oe 710,715 Cost of g00ds S014... 3 302,990 Depreciation - 12,750 Sales salaries 109,325 Selling expense... 24,900 Supplies expense... 10,265 Instirance expense... 4,660 Social Security taxes . 9,600 Miscellaneous general expenses. 31,000 Interest expense. 13,030 Interest income 390 ‘Net income DINDORF COMPANY Balance Sheet as of January 31,~ Assets Liabilities Cash and cash equivalent $119,115 Accounts payable. Accounts receivable, 162,500 Accrued interest... Merchandise inventory. 397,690 Acerued sales salaries Supplies inventory 5,210 Current liabiliti $118,180 Prepaid insurance 33,590 Interest receivable... 390 Notes payable., Current ass 718,495, Total liabilities... 268,485 Owners? Equity Store equipment..esnnsse 215,000 Common stock .... : 300,000 Accumulated depreciation sone (50,050) Retained earnings... 314,960 Total liabilities, Total assets 883.445 and OWNEES” CQUILY einen — $BRRAIS Cases Approach This is @ way of easing gently into the debit-credit mechanism and the complete accounting cycle Students usually need such a simple problem to build up their confidence in journalizing and posting transactions. 54