Problem 3 - 1 a) Expense can't be incurred until goods were delivered.

Hence $25,000 will be expense for July, not for June. b) Expense was incurred in June as the payment was for the work performed in that month.

c) Expense for June. The money was spent for purchasing these goods and were no use now. Hence this amount has d) Expense for June as the sale of goods has taken place in June itself. e) It will be expense for June if the radio advertising has taken place in this accounting period (viz. June).

f) Not an expense for June. Only the assets were acquired. They are yet to go through the manufacturing process and

Problem 3 - 2 a) Sales Less: Cost of goods sold Gross profit Expenses: Rent expense 3,300 Salary expense 27,400 Other expenses 50,240 Operating profit (EBIT) Less: interest expense Profit before tax Less: corporate tax expense c) Net income (PAT) 275,000 <== revenues 164,000 111,000

80,940 <== operating expenses 30,060 0 <== not provided. Assumed to be zero. 30,060 1,375 28,685 82,315

b) expenses = operating expenses + interest expenses + taxes =

Problem 3 - 3 opening stock add: purchases Total stock less: closing stock Cost of goods sold 27,000 78,000 105,000 31,000 74,000

Problem 3 - 4 Sales Less: Cost of goods sold a1) Gross profit Less: Selling and admin expenses Operating profit (EBIT) Less: interest expense 85,000 45,000 40,000 <== answer for (a) 25,000 15,000 0

Profit before tax Less: corporate tax expense Net income (PAT)

15,000 6,000 9,000 47.06% 10.59%

a2) Gross margin (Gross profit margin) = Gross profit / Sales = a3) Profit margin (net profit margin) = net profit / sales = b) Some interpretations: marginal tax rate is 40% operating profits (the earnings potential) is 17.7% of its sales. Company's gross margin is 47% of its sales. It could contain its operating expenses at 29.3% of its sales.

Problem 3 - 5

a) It is an expenditure of $40,000. It will be expensed over next 5 years. The depreciation expense will be charged to in b) No change in income statement as land is not depreciated.

c) Inventory consumed upto December 31 only will be shown in this year's income statement. Hence, $3,500 will be ch d) The accounting year is same as calender year in this case. The $72 expenditure spans over two accounting years.

Problem 3 - 6 shown on the balance sheet dated october 31, 2011 (say) December 31, 2011 December 31, 2012 October 31, 2013

Prepaid insurance 30,000 27,500 12,500 0

Fire insurance expense 2,500 15,000 12,500

Problem 3 - 7 QED Electronics Company Transactional analysis Assets Provision Accounts for parts Receivables Bad debt Inventory

Tr. No. 1) 2) 3)

Date

Descrption Opening balances paid for repair truck paid for parts bought consumed the parts Revenue in cash Credit sales Provision for bad debt

Cash -19000 -1600 20500

1600 -1600 12900 -645

4) 5) 6) 7) 8) 9) 10) 11)

Interest expense wages paid in cash wages not paid depletion in parts inv utilities bills paid Depreciation expense selling expenses paid provision for income tax Tax paid in this month Admin & misc. exp

-8600 -2100 -1500 -1900 -2600 -14700 12900 -645 -2100

Problem 3 - 8 XYZ Company Balance sheet as on _______ Assets Current assets Non-current assets (Bal. Fig.) Liabilities and OE $80,000 Current liabilities $138,182 Long-term liabilities Owners' equity $218,182 $50,000 $40,000 $128,182 $218,182

XYZ Company

Income Statement for the period ending _______ Saeles revenue Less: Cost of goods sold Gross Profit Less: operating expenses interest expenses corporate tax expense Net income (profit after tax) $81,818 $45,000 $36,818 xxx xxx xxx $28,636 <== plug figure $8,182 10%

45%

Problem 3 - 9 Sales in LC = January cash in LC = December cash in LC = 26,666,667 [LC 20,000,000 x (200 / 150)] 1,000,000 [LC 500,000 x (200 / 100)] 600,000 [LC 500,000 x (200 / 200)]

At year-end the company was more liquid in terms of nominal currency (LC 600,000 versus LC 500,000) but in term

ense for July, not for June.

o use now. Hence this amount has to be expensed in the month it were found to be obsolete.

ng period (viz. June).

ugh the manufacturing process and to be sold in order to be recognized as expense.

iation expense will be charged to income.

statement. Hence, $3,500 will be charged to income as cost of goods sold for this year. The remaining $3500 will be charged to next year's in

spans over two accounting years. Hence the subscription expense for this will be $36 and the balance $36 will be shown as prepaid expense

Fire insurance expense

shown on the income statement for the calender year ending 2011 2012 2013

tronics Company

ssets Accumulated Depreciation on repair truck

Liabilities Admin & misc. utilities bill income tax expenses payable payable payable 700

Repair Truck 19000

Interest accrued

wages payable

880 1,400 -700 -2700 2800 -2600 19000 -2700 880 1400 0 200 4,700 4700

QED Electronics Company Income Statement for April, 20xx Revenues: Cash sales Credit sales Less: Cost of goods sold Gross profit Less: Expenses Selling expenses Admin & misc. expenses Wages expense Utilities expenses provided for bad debts Depreciation expense Operating expenses Operating profit Less: interest expense Profit before tax Less: corporate tax expense Net income (Profit after tax) 33400 20500 12900 -3700 29700 -1900 -4,700 -10,000 -800 -645 -2700 -20745 8955 -880 8075 -2800 5275

Current liabilities, EoY Owners' equity, BoY Long-term debt, EoY Inventory, BoY Purchases during the year Inventory, EoY ==> cost of goods sold = ==> sales = ==> Net profit =

$50,000 $120,000 $40,000 $35,000 $40,000 $30,000 $45,000 $81,818 $8,182

Current ratio =

Gross margin = Net profit margin =

000 versus LC 500,000) but in terms of the purchasing power of its cash it was worse off (LC 1,000,000 versus LC 600,000).

3500 will be charged to next year's income.

36 will be shown as prepaid expense on the ending balance sheet of this accounting year. It will be expensed next year.

Revenues, Expenses

-1600 20500 12900 -645

-880 -8600 -1,400 -2100 -800 -2700 -1900 -2800 -4,700 5275

1.6

45% 10%

versus LC 600,000).

ensed next year.