AFM Text Problem Solutions For Class of 2012

CHAPTER 1
THE NATURE AND PURPOSE OF ACCOUNTING
Problems
Problem 1-1
CHARLES COMPANY
BALANCE SHEET AS OF DECEMBER 31, ----.
Assets
Liabilities and Owners Equity
Cash ............................................................................................................................................................................................
$ 12,000
Bank loan ..........................................................................................................
$ 40,000
Inventory ....................................................................................................................................................................................
95,000
Owners Equity
Other assets ...............................................................................................................................................................................

13,000
Owners equity ..............................................................................................
80,000
Total liabilities and owners

equity ................................................................................................................
Total assets ................................................................................................................................................................................
$120,000
$120,000
Problem 1-2
The missing numbers are:
Year 1
Noncurrent assets .......................................................................................................................................................................

$410,976
Noncurrent liabilities .................................................................................................................................................................
240,518
Year 2
Current assets .............................................................................................................................................................................

$ 90,442
Total assets .................................................................................................................................................................................
288,456
Noncurrent liabilities .................................................................................................................................................................
78,585
Year 3
Total assets .................................................................................................................................................................................

$247,135
Current liabilities .......................................................................................................................................................................
15,583
Total liabilities and owners equity............................................................................................................................................
247,135
Year 4
Current assets .............................................................................................................................................................................

$ 69,090
Current liabilities .......................................................................................................................................................................
17,539
The basic accounting equation is
Assets = Liabilities + Owners equity
Current assets + Noncurrent assets = Total assets
Current liabilities + Noncurrent liabilities = Total liabilities
1
Paid-in capital + Retained earnings = Owners equity.

Problem 1-3
The missing numbers are:
Year 1
Gross margin ..............................................................................................................................................................................

$9,000
Tax expense................................................................................................................................................................................
1,120
Year 2
Sales ...........................................................................................................................................................................................
$11,968
Profit before taxes .....................................................................................................................................................................

2,547
Year 3
Cost of goods sold ......................................................................................................................................................................

$2,886
Other expenses ..........................................................................................................................................................................

6,296
Other accounting equations such as the following are also illustrated by this problem:
Gross margin = Sales - Cost of goods sold
Profit before taxes = Gross margin - Other expenses
Net income = Profit before taxes - Tax expense
In order to estimate Year 4, the key ratios to compute are:
Year 1
Year 2
Year 3
Average
Sales ...........................................................................................................................................................................................
100.0%
100.0%
100.0%
100.0%
Gross margin ..............................................................................................................................................................................
75.0
75.0
75.0
75.0%
Profit before
taxes ...........................................................................................................................................................................................
23.3
21.3
20.5
21.7%
Net income .................................................................................................................................................................................
14.0
12.8
12.2
13.0%
Tax rate ......................................................................................................................................................................................
40.0
40.0
40.0
40.0
Year 4
Sales ...........................................................................................................................................................................................
$10,000
Cost of goods sold ......................................................................................................................................................................

2,500
Gross margin (75% of sales) .......................................................................................................................................................

$ 7,500
Other expenses ..........................................................................................................................................................................

5,330
Profit before taxes (21.7% of sales) ...........................................................................................................................................

$ 2,170
Tax expense................................................................................................................................................................................
870
Net income (13% of sales) .........................................................................................................................................................

$ 1,300
The basic accounting equation used is: 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
Cash ...........................................................................................................................................................................................
$12,750
Accounts payable....................................................................................
$ 700
Accounts receivable ...................................................................................................................................................................
4,000
Supplies inventory .....................................................................................................................................................................
800
______
Current assets ......................................................................................................................................................................
17,550
Current liabilities ....................................................................................
700
Equipment ..................................................................................................................................................................................
7,000
Owners equity .......................................................................................
23,850
Total liabilities
Total assets .................................................................................................................................................................................
$24,550
and owners equity .................................................................................
$24,550
ACME CONSULTING
INCOME STATEMENT JULY 1 - 31, ----.
Revenues..........................................................................................................................................................
$10,000
Expenses
Salaries ........................................................................................................................................................
4,500
3
Rent .............................................................................................................................................................
750
Utilities........................................................................................................................................................
500
Travel ..........................................................................................................................................................
200
Supplies .......................................................................................................................................................
200
6,150
Net income .............................................................................................................................................
$ 3,850
ACME CONSULTING
CASH RECEIPTS AND DISBURSEMENTS, JULY 1 - 31, ----.
Receipts
Owners investment ....................................................................................................................................
$20,000
Cash sales ....................................................................................................................................................
5,000
Collection of accounts receivable ...............................................................................................................
1,000
Total receipts ..........................................................................................................................................
$26,000
Disbursements
Equipment purchase ....................................................................................................................................
$5,000
Supplies purchase........................................................................................................................................
1,000
Salaries paid ................................................................................................................................................
4,500
Payments to vendors ...................................................................................................................................
1,500
Rent paid .....................................................................................................................................................
750
Utilities paid ................................................................................................................................................
500
Total disbursements ...............................................................................................................................
$13,250
Increase in cash ......................................................................................................................................
$12,750
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 cash or paid in
cash. The cash paid to purchase the equipment is not reflected in the income statement.
This problem illustrates several important points that managers should understand. These are:
a. Every transaction involves at least two accounts.
b. Net income is not equivalent to the net change in the cash account during an accounting period.
c. 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
1.
2.
3.
4.
5.
6.
7.
Cash
+ $25,000
500
Accounts
+ Receivable
Supplies
+ Inventory
+ Equipment
+
+
500
750
3,000
2,000
$8,000
$8,000
Accounts
Payable
Owners
Equity
+ $25,000
500
Investment
Rent
Advertising
Salaries
Commissions
$8,000
$500
750
3,000
10,000
8.
9.
10.
5,000
-
5,000
1,000
100
100
1,000
Expenses
BON VOYAGE TRAVEL

BALANCE SHEET AS OF JUNE 30, ----.
Assets
Cash ..............................................................................................................................................................................
$17,250
Accounts payable ..................................................................................
$ 4,000
Accounts receivable ......................................................................................................................................................
8,000
Current liabilities ..............................................................................
4,000
Supplies inventory ........................................................................................................................................................
400
Owners equity......................................................................................
29,650
Current assets ...........................................................................................................................................................
25,650
Equipment .....................................................................................................................................................................
$ 8,000
______
Total liabilities
Total Assets .........................................................................................................................................................
$33,650
and owners equity ......................................................................
$33,650
BON VOYAGE TRAVEL

INCOME STATEMENT JUNE 1-30, ----.
Commissions....................................................................................................................................................
$10,000
Expenses ..........................................................................................................................................................
Rent .............................................................................................................................................................
$500
Advertising..................................................................................................................................................
750
Salaries ........................................................................................................................................................
3,000
Supplies .......................................................................................................................................................
100
Misc. Expenses ...........................................................................................................................................
1,000
5,350
Net Income .............................................................................................................................................
$ 4,650
BON VOYAGE TRAVEL

CASH RECEIPTS AND DISBURSEMENTS JUNE 1-30, ----.
Receipts
Owners investment .......................................................................................................................................
$25,000
Collection of commissions .............................................................................................................................
2,000
Total receipts ...........................................................................................................................................
$27,000
Disbursements
Paid rent .........................................................................................................................................................
$ 500
Bought supplies..............................................................................................................................................
500
Bought advertising .........................................................................................................................................
750
Paid salaries ...................................................................................................................................................
3,000
Paid vendors ...................................................................................................................................................
5,000
Total disbursements .................................................................................................................................
$ 9,750
Increase in cash ...........................................................................................................................................
$17,250
See Problem 1-4 for why change in cash account and the months income are not the same.
CHAPTER 2
BASIC ACCOUNTING CONCEPTS: THE BALANCE SHEET
Problem Solutions
Problem 2-1
1. Owners equity equals $55,000.
2. Liabilities equal $25,000.
3. Noncurrent assets equal $70,000.
4. 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.
5. Current ratio is 1.4 ($35,000 / $25,000)
Current assets $35,000 = Total assets $95,000 - Noncurrent assets $60,000.
Current liabilities $25,000 = Total assets $95,000 - Owners equity $70,000.
Problem 2-2
J.L. GREGORY COMPANY

BALANCE SHEET, JUNE 30, ----.
Liabilities
Assets
Cash ............................................................................................................................................................................................
$ 89,000
Accounts payable ..........................................................................
$ 241,000
Marketable securities ................................................................................................................................................................

379,000
Taxes payable ...............................................................................
125,000

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 .....................................................................................................................................................................................
1,120,000
Total liabilities ...............................................................................
1,373,000
Accumulated depreciation .........................................................................................................................................................

(538,000)
Owners Equity
Equipment ..................................................................................................................................................................................
761,000
6

(386,000)
Capital stock..................................................................................
1,000,000
Investments................................................................................................................................................................................
320,000
Retained earnings .........................................................................
620,000
Total liabilities
and owners equity...................................................................
Total assets............................................................................................................................................................................
$2,993,000
$2,993,000
J.L. GREGORY COMPANY

BALANCE SHEET, JUNE 30, ----.
Liabilities
Assets
Cash ............................................................................................................................................................................................
$ 89,000
Accounts payable ..........................................................................
$ 241,000
Marketable securities ................................................................................................................................................................

379,000
Taxes payable ...............................................................................
125,000

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 .....................................................................................................................................................................................
1,120,000
Total liabilities ...............................................................................
1,373,000

(538,000)
Owners Equity
Equipment ..................................................................................................................................................................................
761,000

(386,000)
Capital stock..................................................................................
1,000,000
Investments................................................................................................................................................................................
320,000
Retained earnings .........................................................................
620,000
Total liabilities
and owners equity...................................................................
Total assets............................................................................................................................................................................
$2,993,000
$2,993,000
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 + $3,000; Retained earnings - $3,000.
Cash - $3,000; Dividends payable - $3,000.
No effect.
Problem 2-4
Assets
CARSON LEGATT PARTNERSHIP

Capital Accounts
Cash ...........................................................................................................................................................................................
$ 50,000
Carson ...........................................................................................
$ 50,000
Inventory ....................................................................................................................................................................................
50,000
Legatt ............................................................................................
50,000
Total assets ............................................................................................................................................................................
$100,000
Total capital..............................................................................
$100,000
Assets
CARSON LEGATT PARTNERSHIP

Liabilities
Cash ...........................................................................................................................................................................................
$ 22,100
Bank loan ......................................................................................
$ 50,000
Inventory ....................................................................................................................................................................................
58,500
Capital - Carson ............................................................................
51,550
Land ...........................................................................................................................................................................................
25,000
Capital - Legatt .............................................................................
54,050
Building .....................................................................................................................................................................................
50,000
________
$155,600
$155,600
CARSON LEGATT
PARTNERSHIP
ACCOUNTS, JUNE 30, ----.
Carson
Capital - June 1...................................................................................................................
$50,000
Additions ............................................................................................................................
7,750
Withdrawals .......................................................................................................................
( 6,200 )
Capital - June 30.................................................................................................................
$51,550
Legatt
Capital - June 1...................................................................................................................
$50,000
Additions ............................................................................................................................
7,750
Withdrawals .......................................................................................................................
( 3,700 )
Capital - June 30.................................................................................................................
$54,050
Problem 2-5
Jan. 4:
Jan. 6:
Jan. 8:
Jan. 11:
Retained earnings (Sales) + $12,000; Cash + $12,000 Inventory - $7,000 ;Retained earnings
(Cost of goods sold) - $7,000
No effect.
Inventory + $7,000; Accounts Payable + $7,000
Inventory - $1,500; Cash + $2,500; Retained earnings (Sales) + $2,500; Retained earnings
8
Jan. 16:
Jan. 26:
Jan. 29:
Jan. 31:
(Cost of goods sold) - $1,500

Inventory - $2,000; Retained earnings (Cost of goods sold) - $2,000; Accounts receivable +
$3,400; Retained earnings (Sales) + $3,400
Cash - $4,200; Retained earnings (Wages) - $4,200
Cash - $20,000; Land + $20,000
Cash - $2,800; Prepaid insurance + $2,800
Assets
MARVIN COMPANY
BALANCE SHEET AS OF JANUARY 31, ----.
Liabilities
Cash ...........................................................................................................................................................................................
$12,500
Accounts payable ...................................................................
$ 7,000
3,400
Total current liabilities ...........................................................
$7,000
Inventory ....................................................................................................................................................................................
46,500
Current assets .............................................................................................................................................................................
62,400
Notes payable .........................................................................
20,000
Land ...........................................................................................................................................................................................
20,000
Total liabilities .......................................................................
27,000
Prepaid insurance .......................................................................................................................................................................
2,800
Owners Equity
Capital ....................................................................................
55,000
_______
Retained earnings ...................................................................
3,200
Total assets ..........................................................................................................................................................................
$85,200
Total liabilities
and owners equity .........................................................
$85,200
Problem 2-6
BRIAN COMPANY
CURRENT ASSETS AND LIABILITIES AS OF DECEMBER 31, ----.
Current Assets
Current Liabilities
Cash ...........................................................................................................................................................................................
$ 2,000
Accounts payable ...................................................................
$5,000
Marketable securities .................................................................................................................................................................
3,500
Wages payable .......................................................................
1,500
7,000
Bonds due current portion ...................................................
2,000
Current assets .............................................................................................................................................................................
$12,500
Current liabilities....................................................................
$8,500
Current ratio = ............................................................................................................................................................................

$12,500 $8,500 = 1.47
The current ratio is an indication of an entitys ability to meet its current obligations.
CHAPTER 3
BASIC ACCOUNTING CONCEPTS:
THE INCOME STATEMENT
Problems
Problem 3-1
Not an expense for June - not incurred.
Expense for June
9
Expense for June

Expense for June
Expense for June
Not an expense for June - asset acquired.
Problem 3-2
Revenues$275,000
a. Expenses
Cost of goods sold...............................................................................................................................

$164,000
Rent .....................................................................................................................................................
3,300
Salaries ................................................................................................................................................
27,400
Taxes ...................................................................................................................................................
1,375
Other ...................................................................................................................................................
50,240
246,315
Net income $28,685

Problem 3-3
Beginning inventory...................................................................................................................................................................
$27,000
Purchases ...................................................................................................................................................................................
78,000
Available for sale .......................................................................................................................................................................
Ending inventory........................................................................................................................................................................
($31,000)
Cost of goods sold......................................................................................................................................................................
$74,000
Problem 3-4
a. (1)
Sales ..........................................................................................................................................................................
$85,000
Cost of goods sold .....................................................................................................................................................
45,000
Gross margin .............................................................................................................................................................
$40,000
(2) 47 percent gross margin ($40,000 / $85,000)

(3) 11 percent profit margin (9000/85000)
The Woden Corporation had a tax rate of 40 percent ($6,000 / $15,000) on its pretax profit that
represented 17.7 percent of its sales ($15,000 / $85,000). The companys operating expenses were 82.3
percent of sales ($70,000 / $85,000) and its cost of goods sold was 53 percent of sales. The companys
gross margin was 47 percent of sales ($40,000 / $85,000).
Problem 3-5
Depreciation. Each year for the next 5 years depreciation will be charged to income.
No income statement charge. Land is not depreciated.
Cost of goods sold. $3,500 charged to current years income. $3,500 charged to next years income.
Subscription expense. $36 charged to current year. $36 charged to next year. Alternatively, $72 charged
to current year on grounds $72 is immaterial.
10
Problem 3-6
Asset value:
October 1, 20X5
December 31, 20X5
December 31, 20X6
December 31, 20X7
$30,000
26,250
11,250
0
Expenses:
20X5 $3,750 ($1,250 x 3 months)
20X6 $15,000 ($1,250 x 12 months)
20X7 $11,250 ($1,250 x 9 months)
One months insurance charge is $1,250 ($30, 000 / 24 months)
Problem 3-7
QED ELECTRONICS COMPANY

Income Statement for the month of April, ----.
Sales ....................................................................................................................................................
$33,400
Expenses:
Bad debts........................................................................................................................................
$ 645
Parts ...............................................................................................................................................
3,700
Interest ...........................................................................................................................................
880
Wages.............................................................................................................................................
10,000
Utilities...........................................................................................................................................
800
Depreciation ...................................................................................................................................
2,700
Selling ............................................................................................................................................
1,900
Administrative ...............................................................................................................................
4,700
______
25,325
Profit before taxes ...............................................................................................................................
8,075
Provision for taxes ..............................................................................................................................
2,800.
Net income
$5,275
Truck purchase has no income statement effect. It is an asset.
Sales are recorded as earned, 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.
Marchs 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.
11
Problem 3-8
First calculate sales:

Sales ($45,000 / (1 - .45)) ..........................................................................................................................................................
$81,818+
Beginning inventory...................................................................................................................................................................
$35,000
Purchases ...................................................................................................................................................................................
$40,000
Total available............................................................................................................................................................................
75,000
Ending inventory........................................................................................................................................................................
30,000
$45,000
Gross margin ..............................................................................................................................................................................
$36,818
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
Next, prepare balance sheet:
Assets
Liabilities
Current assets
($50,000 x 1.6) ...........................................................................................................................................................................
$ 80,000
Current liabilities .......................................................................................
$ 50,000
Other assets
Long term debt
40,000
($218,182 - $50,000)..................................................................................................................................................................
138,182
Total liabilities ...........................................................................................
$ 90,000
Owners equity
Beginning balance .....................................................................................
$120,000
Plus net income ..........................................................................................
8,182
Ending balance...........................................................................................
$128,182
Total liabilities
Total assets ....................................................................................................................................................................
$218,182+
and owners equity.....................................................................................
$218,182
+
Total assets = Total liabilities and Owners equity.
Problem 3-9
Sales LC 26,666,667 [LC 20,000,000 x (200 / 150)]
January cash LC 1,000,000 [LC 500,000 x (200 / 100)]
December cash LC 600,000
At year-end the company was more liquid in terms of nominal currency (LC 600,000 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).
CHAPTER 4
ACCOUNTING RECORDS AND SYSTEMS
Problems
12
Problem 4-1
Cash
Beg. Bal.
(4)
Bal.
$900
5,350
$1,900
Accounts Payable
$3,400 (3)
950 (5)
(3)
Accounts Receivable
Beg. Bal.
(2)
Bal.
$3,000
6,350
$4,000
$5,350 (4)
$3,400
$3,600 Beg. Bal.

2,350 (1)
$2,550 Bal.
Notes Payable
(5)
$950
$950 Beg. Bal.
Inventory
Beg. Bal.
(1)
Bal.
$5,700
2,350
$3,900
$4,150 (2)
Problem 4-2
1) dr. Prepaid Rent .................................................................................................................................................................

$14,340
cr. Cash ........................................................................................................................................................................
$14,340
Prepaid rent is an asset.
2) dr. Sales Discounts and Allowances ..................................................................................................................................

$34,150
cr. Provision for Sales Discounts and Allowances ......................................................................................................
$34,150
Sales discounts and allowances is a deduction from gross sales to arrive at net sales. The provision is
a liability.
3) dr. Interest Receivable .......................................................................................................................................................

$35
cr. Interest Income .......................................................................................................................................................
$35
Interest receivable is an asset. Interest income would be listed as other income in this periods income
statement.
4) dr. Depreciation Expense...................................................................................................................................................

$13,660
cr. Accumulated Depreciation .....................................................................................................................................
$13,660
Depreciation expense is an income statement item. Accumulated depreciation is disclosed as a
deduction from the related depreciable asset.
5) dr. Cash..............................................................................................................................................................................
$2,730
cr. Deferred revenue ....................................................................................................................................................
$2,730
Deferred revenue is a liability.
6) dr. Stamp Expense .............................................................................................................................................................

$100
Stamp Inventory ................................................................................................................................................................
$72
cr. Cash ........................................................................................................................................................................
$172
Stamps expense is an income statement item. Stamp inventory is an asset.
7) Bad debt expense ...............................................................................................................................................................

$1,350
13
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 4-3
a.
1) dr. Inventory................................................................................................................................................................
$1,300
cr. Accounts payable ..............................................................................................................................................
$1,300
2) dr. Wages Expense ......................................................................................................................................................

$730
cr. Cash ...................................................................................................................................................................
$730
3) dr. Cash .......................................................................................................................................................................

$1,940
cr. Sales ..................................................................................................................................................................
$1,940
4) dr. Accounts Receivable .............................................................................................................................................

$1,810
cr. Sales ..................................................................................................................................................................
$1,810
5) dr. Overhead and Other Expenses ...............................................................................................................................

$900
cr. Cash ...................................................................................................................................................................
$900
6) dr. Cash .......................................................................................................................................................................

$1,510
cr. Accounts Receivable .........................................................................................................................................
$1,510
7) dr. Accounts Payable ..................................................................................................................................................

$1,720
cr. Cash ...................................................................................................................................................................
$1,720
8) dr. Cash .......................................................................................................................................................................

$650
cr. Deferred Revenue ..............................................................................................................................................
$650
9) dr. Cash .......................................................................................................................................................................

$200
cr. Note Payable .....................................................................................................................................................
$200
10) dr. Cost of Goods Sold ................................................................................................................................................

$1,280
cr. Inventory ...........................................................................................................................................................
$1,280
+ Beginning inventory ..............................................................................................................................................

$1,730
Additions ...............................................................................................................................................................
1,300
Total available .......................................................................................................................................................
$3,030
Ending inventory ...................................................................................................................................................
1,750
Cost of goods sold .................................................................................................................................................
$1,280
11) Dr. Depreciation Expense ...........................................................................................................................................

$300
Cr. Accumulated Depreciation.......................................................................................................................
$300
b.
Accounts Payable
(1)
$1,720
$3,070
1,300 (1)
Accounts Receivable
(4)
$2,160
1,810
1,510 (6)
14
Accumulated Depreciation
Allowance for Doubtful Accounts
$2,800
300 (11)
$70
Cash
(3)
(1)
(8)
(9)
$1,440
1,940
1,510
650
200
Fixed Assets (cost)

$ 730 (2)
900 (5)
1,720 (7)
$6,200
Inventories
(1)
$1,730
1,300
Notes Payable
$1,280 (10)
$600
200 (9)
Owners Equity
(2)
(5)
(10)
(11)
Wages
Overhead
COGS
Depreciation
$7308
900
1,280
300
Deferred Revenue
$4,990
1,940 Sales (3)
1,810 Sales (4)
$650 (8)
See above
d.
LUFT CORPORATION
Balance Sheet
Assets
Liabilities
Cash ......................................................................................................................................................................................
$2,390
Accounts payable .............................................................................
$2,650
Accounts receivable (net) .....................................................................................................................................................
2,390
Deferred revenue..............................................................................
650
Inventories ............................................................................................................................................................................
1,750
Current liabilities .........................................................................
3,300
Current assets ...................................................................................................................................................................
$6,530
Notes payable ..............................................................................
800
Total liabilities.............................................................................
4,100
Fixed assets ...........................................................................................................................................................................
$6,200
Owners equity
Accumulated depreciation ....................................................................................................................................................
(3,100)
Owners equity .................................................................................
5,530
Total liabilities
Total assets .......................................................................................................................................................................
$9,630
and owners equity ......................................................................
$9,630
e.
LUFT CORPORATION
Income Statement
Sales ....................................................................................................................................................
$3,750
Cost of goods sold...............................................................................................................................
1,280
Gross margin .......................................................................................................................................
2,470
Wages .................................................................................................................................................
730
Overhead .............................................................................................................................................
900
15
Depreciation ........................................................................................................................................
300
Net income ..........................................................................................................................................
$ 540
Problem 4-4
a.
Cash and Equivalents
Accounts Receivable
$119,115
$119,115
$162.500
$162,500
Store Equipment
Merchandise Inventory
$215,000
$215,000
$700,680
$397,690
Supplies Inventory
$15,475
$5,210
$10,265 (3)
$38,250
$33,590
(6)
(1)
$302,990
$302,990 (h)
$10,265
$10,265 (j)
Accrued Interest
$105,750
3,575
(2)
$12,750
(4)
$4,660
$3,575 (6)
$3,575
Interest Income
(l)
Miscellaneous General Expenses

$31,000
31,000 (c)
Interest Expense
(5)
$9,300
3,730
$4,660 (k)
Accrued Sales Salaries
Interest Receivable
390
390
$12,750 (i)
Insurance Expense
$3,730 (5)
$3,730
(7)
109,325 (b)
Depreciation Expense
Supplies Expense
(3)
$4,660 (4)
Sales Salaries
24,900 (a)
Cost of Goods Sold
(1)
Prepaid Insurance
Selling Expense
$24,900
$302,990
390
390 (7)
Sales Discounts
(d)
6,220
$6,220
Social Security Taxes

$9, 600
$9,600 (f)
$13,030 (e)
16
Accumulated Depreciation
Accounts Payable
$37,300
12,750 (2)
$50,050
$118,180
$118,180
Notes Payable
Common Stock
$143,000
$143,000
$300,000
$300,000
Retained Earnings
$122,375
192,585 (m)
$314,960
Sales
(g)
$716,935
$716,935
Profit and Loss

(a)
(b)
(c)
(d)
(e)
(f)
(h)
(i)
(j)
(k)
(m)
24,900
109,325
31,000
6,220
13,030
9,600
302,990
12,750
10,265
4,660
192,585
716, 935 (g)

390 (l)
Adjusting entries are:
(1) dr. Cost Of Goods Sold .............................................................................................................................................

$302,990
cr. Merchandise Inventory ....................................................................................................................................
$302,990
(2) dr. Depreciation Expense ..........................................................................................................................................

$12,750
cr. Accumulated Depreciation ..............................................................................................................................
$12,750
(3) dr. Supplies Expense .................................................................................................................................................

$10,265
cr. Supplies Inventory ...........................................................................................................................................
$10,265
(4) dr. Insurance Expense................................................................................................................................................

$4,660
cr. Prepaid Insurance.............................................................................................................................................
$4,660
(5) dr. Interest Expense ...................................................................................................................................................

$3,730
cr. Accrued Interest ...............................................................................................................................................
$3,730
(6) dr. Sales Salaries .......................................................................................................................................................

$3,575
cr. Accrued Sales Salaries .....................................................................................................................................
$3,575
17
(7) dr. Interest Receivable ...............................................................................................................................................

$390
cr. Interest Income ................................................................................................................................................
$390
Closing entries are:
(a) dr. Profit and Loss .....................................................................................................................................................

$24,900
cr. Selling Expense ...............................................................................................................................................
$24,900
(b) dr. Profit and Loss .....................................................................................................................................................

$109,325
cr. Sales Salaries ...................................................................................................................................................
$109,325
(c) dr. Profit and Loss .....................................................................................................................................................

$31,000
cr. Miscellaneous General Expenses ....................................................................................................................
$31,000
(d) dr. Profit and Loss .....................................................................................................................................................

$6,220
cr. Sales Discounts ................................................................................................................................................
$6,220
(e) dr. Profit and Loss .....................................................................................................................................................

$13,030
cr. Interest Expense ...............................................................................................................................................
$13,030
(f) dr. Profit and Loss .....................................................................................................................................................

$9,600
cr. Social Security Taxes ......................................................................................................................................
$9,600
(g) dr. Sales .....................................................................................................................................................................

$716,935
cr. Profit and Loss .................................................................................................................................................
$716,935
(h) dr. Profit and Loss .....................................................................................................................................................

$302,990
cr. Cost of Goods Sold ..........................................................................................................................................
$302,990
(i) dr. Profit and Loss .....................................................................................................................................................

$12,750
cr. Depreciation Expense ......................................................................................................................................
$12,750
(j) dr. Profit and Loss .....................................................................................................................................................

$10,265
cr. Supplies Expense .............................................................................................................................................
$10,265
(k) dr. Profit and Loss .....................................................................................................................................................

$4,660
cr. Insurance Expense ...........................................................................................................................................
$4,660
(l) dr. Interest Income .....................................................................................................................................................

$390
cr. Profit and Loss .................................................................................................................................................
$390
(m) dr. Profit and Loss .....................................................................................................................................................

$192,585
cr. Retained Earnings ............................................................................................................................................
$192,585
DINDORF COMPANY
Income Statement for the year ----.
Sales .................................................................................................................................................................
$716,935
Sales discounts .................................................................................................................................................
(6,220)
18
Net sales ...........................................................................................................................................................

710,715
Cost of goods sold............................................................................................................................................
302,990
Depreciation .....................................................................................................................................................
12,750
Sales salaries ....................................................................................................................................................
109,325
Selling expense ................................................................................................................................................
24,900
Supplies expense ..............................................................................................................................................
10,265
Insurance expense ............................................................................................................................................
4,660
Social Security taxes ........................................................................................................................................
9,600
Miscellaneous general expenses ......................................................................................................................
31,000
Interest expense................................................................................................................................................
13,030
Interest income .................................................................................................................................................
390
Net income ..........................................................................................................................................
$192,585
DINDORF COMPANY
Balance Sheet as of January 31, ----.
Assets
Liabilities
Cash and cash equivalent ...........................................................................................................................................................
$119,115
Accounts payable ...........................................................................
$118,180
162,500
Accrued interest..............................................................................
3,730
Merchandise inventory...............................................................................................................................................................
397,690
Accrued sales salaries.....................................................................
3,575
Supplies inventory .....................................................................................................................................................................
5,210
Current liabilities ............................................................................
125,485
Prepaid insurance .......................................................................................................................................................................
33,590
Interest receivable ......................................................................................................................................................................
390
Notes payable .................................................................................
143,000
Current assets .............................................................................................................................................................................
718,495
Total liabilities...................................................................
268,485
Owners Equity
Store equipment .........................................................................................................................................................................
215,000
Common stock ................................................................................
300,000
(50,050)
Retained earnings ...........................................................................
314,960
Total liabilities
Total assets ............................................................................................................................................................................
$883,445
and owners equity .....................................................................
$883,445
CHAPTER 6
COST OF SALES AND INVENTORIES
Problems
Problem 6-1
The completed table is shown below. Each deduction involves the basic inventory equation.
Ending inventory = Beginning Inventory + Purchase Shipments (COGS)
as well as the basic relationships inherent in any income statement, that is:,
Income = Revenues Expenses
Co. W
Co. X
Co. Y
Co. Z
Sales ..................................................................................................................................................................................
$2,250
$1,800
$1,350
$2,100
Cost of goods sold: ...........................................................................................................................................................
19
Beginning inventory .....................................................................................................................................................

300
225
500
300
Plus: Purchases.............................................................................................................................................................
975
975
850
1,200
Less: Ending inventory ................................................................................................................................................
225
300
300
150
Cost of good sold ....................................................................................................................................................
1,050
900
1,050
1,350
Gross margin.....................................................................................................................................................................
1,200
900
300
750
Period expenses ................................................................................................................................................................
300
400
150
800
Net income (Loss) ............................................................................................................................................................
$ 900
$ 500
$ 150
$ (50)
Problem 6-2
The required income statement is reproduced below.
The closing entries are:
a.
Beginning inventory balance is $50,000
b.
dr. Inventory .........................................................................................................................................................

167,000
cr. Purchases ....................................................................................................................................................
167,000
c.
dr. Inventory .........................................................................................................................................................

4,000
cr. Freight-in ....................................................................................................................................................
4,000
d.
dr. Returns (to Suppliers) .....................................................................................................................................

8,000
cr. Inventory.....................................................................................................................................................
8,000
e.
dr. Cost of Goods Sold .........................................................................................................................................

135,500
cr. Inventory ......................................................................................................................................................
135,500
f.
dr. Income Summary ............................................................................................................................................

135,500
cr. Cost of Goods Sold .....................................................................................................................................
135,500
g.

95,000
cr. Other Expenses ...........................................................................................................................................
95,000
h.
dr. Tax expense ....................................................................................................................................................

28,350
cr. Taxes Payable .............................................................................................................................................
28,350
i.
dr. Sales ................................................................................................................................................................

325,000
cr. Income Summary ........................................................................................................................................
325,000
j.

28,350
cr. Tax Expense ...............................................................................................................................................
28,350
GARDNER PHARMACY
Income Statement for the Year ----.
Sales .....................................................................................................................................................................
$325,000
Cost of goods sold: ...............................................................................................................................................
Beginning inventory.......................................................................................................................................
$ 50,000
Plus: Purchase, gross ..............................................................................................................................
$167,000
Freight-in ......................................................................................................................................
4,000
171,000
Less: Purchase returns ............................................................................................................................
8,000
Net purchases .................................................................................................................................................
163,000
Goods available for sale .................................................................................................................................
213,000
Less: Ending inventory...........................................................................................................................
77,500
20
Cost of goods sold ................................................................................................................................

135,500
Gross margin ........................................................................................................................................................
189,500
Other expenses .....................................................................................................................................................
95,000
Income before taxes .............................................................................................................................................
94,500
Income tax expense ..............................................................................................................................................
28,350
Net income ...........................................................................................................................................................
66,150
Problem 6-3
a.
dr. Inventory ...............................................................................................................................................

85,500
cr. Cash (or Payables) ............................................................................................................................
85,500
dr. Cash (or Receivables) ...........................................................................................................................

133,400
cr. Sales ..................................................................................................................................................
133,400
dr. Sales Returns .........................................................................................................................................

1,840
Inventory ................................................................................................................................................
1,200
cr. Cash (or Receivables) .......................................................................................................................
1,840
Cost of Goods Sold ...........................................................................................................................
1,200
b.
GOULDS COMPANY
Income Statement
Gross sales ...........................................................................................................

$133,400
Less: Sales returns ........................................................................................
1,840
Net sales .................................................................................................
$131,560
Cost of goods sold.........................................................................................
85,800
Gross margin .................................................................................................
$ 45,760
c. The perpetual inventory records indicate ending inventory should have been 673 + 5,700 5,800
+ 80 = 653 units. Inventory shrinkage has therefore been 653 610 = 43 units.
dr. Inventory Shrinkage ...................................................................................................................................................

645
cr. Inventory ................................................................................................................................................................
645
The inventory shrinkage entry reduces gross margin by $645 (or shrinkage could be shown below the
gross margin line as a general expense).
Problem 6-4
Purchases:
50 units @
$14 = $ 700
75 units @
$12 =
900
Avg: 125 units @ $12.80 = $1,600
Sales: 100 units
Ending inventory: 25 units
Avg. Cost
Fifo
Lifo
July 31 inventory........................................................................................................................................................................
$ 320
$ 300
$ 350
1,280
1,300
1,250
Available for sale .......................................................................................................................................................................
1,600
1,600
1,600
Problem 6-5
a.
Fifo
Av. Cost
Lifo
Sales .................................................................................................................................................................................
$52,125
$52,125
$52,125
21
Cost of goods sold............................................................................................................................................................

27,310
27,053
26,960
Gross margin ....................................................................................................................................................................
$24,815
$25,072
$25,165
Fifo
Av. Cost
Lifo
b.
Gross margin percentage..................................................................................................................................................
47.6%
48.1%
48.3%
c. Net cash flow = $21,465 ($52,125 - $30,660)
No change in pretax cash flow figure using different inventory methods.
d.
Fifo
Av. Cost
Lifo
Pretax cash flow ...............................................................................................................................................................
$21,465
$21,465
$21,465
Tax payment ....................................................................................................................................................................
7,445
7,522
7,550
After-tax cash flow ..........................................................................................................................................................
$14,020
$13,943
$13,915
The tax payment in 30 percent of the gross margin dollars. The cash flow using Fifo for tax purposes is
the lowest of the three after tax cash flow amounts because the unit cost of computers is falling,
producing the highest taxable gross margin of the three methods.
Problem 6-6
a. Ending inventory balances are:
Materials
Work in
Finished
Inventory
Process
Goods
Beginning balance ...................................................................................................................................................
$ 100,000
$ 370,000
$ 60,000
(1) Purchases .................................................................................................................................................................
872,000
Delivery charge ........................................................................................................................................................
22,000
(2) Direct labor ..............................................................................................................................................................
565,000
(3) Materials transfer .....................................................................................................................................................
(900,000)
900,000
(4) Indirect labor............................................................................................................................................................
27,000
Factory supplies .......................................................................................................................................................
46,000
Depreciationfactory ...............................................................................................................................................
54,000
Factory utilities ........................................................................................................................................................
147,000
DepreciationMfg ....................................................................................................................................................
46,000
Property taxes ..........................................................................................................................................................
14,000
(5) Finished goodstransfers .........................................................................................................................................
________
(2,035,000)
2,035,000
$ 94,000
134,000
2,095,000
Cost of goods sold ...................................................................................................................................................
--(2,002,000)
Ending balance ........................................................................................................................................................
$ 94,000
$ 134,000
$ 93,000
b. Gross margin was 23 percent.
Sales .........................................................................................................................................................................
$2,600,000
Cost of goods sold ...................................................................................................................................................
2,002,000
Gross margin............................................................................................................................................................
$ 598,000
Problem 6-7
Item
A
B
Units
30
40
Valuation
Historical
Basis/Unit
$145
173
Cost/Unit
$150
183
Total
Adjustment
$150
400
22
C
D
20
40
131
113
134
113
Total adjustment
60
0
$610
CHAPTER 9
SOURCES OF CAPITAL: OWNERS EQUITY
Problems
Problem 91
a.
Debt/Equity
Debt/Capitalization
Ratio
Ratio
(1) Including current liabilities ............................................................................................................................
Rarely calculated
$97,920
66.7%
this way.
$146,880
(2) Excluding current liabilities except

$79,560
$79,560
35.1%
54.2%
current portion of long-term debt ...................................................................................................................
$226,440
$146,880
(3) Excluding all current liabilities ......................................................................................................................

$73,440
$73,440
50.0%
33.3%
$146,880
$220,320
b. These two ratios measure the proportion of funds the company has raised from creditors as opposed
to owners. They indicate how much leverage the firm has in its capital structure. The basic trade-off
a company makes in determining the right ratio (i.e., capital structure) is between the risks inherent
in taking on fixed debt obligations versus the opportunity to increase the shareholders profitability by
having some debt in the capital structure. (A more detailed study of capital structure decisions is
covered in finance courses.)
Problem 92
a. Basic earnings per share =
($19,550,0 00 $3,900,000 )
$7.83
2,000,000 shares
b. Diluted earnings per share =
($19,550,000 $3,900,000)
$7.45
2,000,000 (200,000 100,000) *
*Assume 200,000 optional shares issued less assumed 100,000 shared repurchased with option payments
(200,000 shares x $10 per exercised option) at $20 per share.
Problem 93
Weighted average number of shares outstanding during the fiscal year is
(100,000 300,000 300,000 300,000)

250,000 shares
4
23
Problem 94
Total
Johns
Schwartz
Salaries .......................................................................................................................................................................................
$ 55,000
$15,000
$40,000
Interest on capital .......................................................................................................................................................................
12,000
5,000
7,000
Remainder ..................................................................................................................................................................................
54,000
27,000
27,000
Total ...........................................................................................................................................................................................
$121,000
$47,000
$74,000
Problem 95
December 31, 2006
(a)
No entry (except to show 10,000,000 shares issued and outstanding)
(b)
If retired:
dr. Preferred Stock .....................................................................................................................................................................
1,200,000
Retained Earnings or Paid-In Capital....................................................................................................................................
168,000
cr. Cash ...................................................................................................................................................................................
1,368,000
Or
If not retired:
dr. Treasury Stock ......................................................................................................................................................................
1,368,000
cr. Cash ...................................................................................................................................................................................
1,368,000
January 1, 2007
(a)
dr. Dividends on Preferred Stock ...............................................................................................................................................
224,000
cr. Dividends Payable .............................................................................................................................................................
224,000
(b)
dr. Dividends on Common Stock ...............................................................................................................................................
1,500,000
cr. Dividends Payable .............................................................................................................................................................
1,500,000
(c)
No entry. (When this stock dividend is effective, retained earnings is diluted for the fair
value of the additional shares issued, paid-in-capital is credited for a like amount, and
1,000,000 additional shares are listed as issued and outstanding.)
(d)
February 1, 2007
dr. Dividends Payable ................................................................................................................................................................
1,724,000
cr. Cash ...................................................................................................................................................................................
1,724,000
Problem 9-6
a. 15,000 ( 80,000 - 65,000) common shares issued in 2006.
b.
3,000 sh= 3, 000 shares =

Change in preferred stock
($300,000 $150,000)
$50 per
150,000
24
Change in paid in capital
25,000
$175,000
$58,33 / shares
3,000 shares
c.
Book value (2005) = $1,7 80,000

Book value (2006) = $2,354,000
d.
dr. Treasury stock..............................................................................................................................................................

150,000
cr. Cash ..........................................................................................................................................................................

150,000
$150,000
$15 / share
Average price = .................................................................................................................................................................
10,000 shares
e.
Book value (2005) = $1,7 80,000

Book value (2006) = $2,354,000
Problem 97
a. April 15, 2003

No entry
b. April 15, 2003
dr. Cash .................................................................................................................................................................................
1,500,000
cr. Common Stock .............................................................................................................................................................
1,500,000
c. December 21, 2003
dr. Retained Earnings............................................................................................................................................................
400,000
cr. Paid-In Capital ..............................................................................................................................................................
400,000
d. July 1, 2004
dr. Cash .................................................................................................................................................................................
900,000
cr. Common Stock .............................................................................................................................................................
900,000
e. November 15, 2004
dr. Treasury Stock.................................................................................................................................................................
420,000
cr. Cash ..............................................................................................................................................................................
420,000
f. December 15, 2004
dr. Cash .................................................................................................................................................................................
230,000
cr. Treasury Stock...............................................................................................................................................................
210,000
Paid-In Capital ................................................................................................................................................................

20,000
g. February 1, 2005
No entry
h. September 15, 2005
dr. Cash .................................................................................................................................................................................
175,000
Paid-In Capital .................................................................................................................................................................
35,000
cr. Treasury Stock ..............................................................................................................................................................
210,000
i. December 24, 2005
dr. Retained Earnings............................................................................................................................................................
150,000
cr. Dividends Payable ........................................................................................................................................................
150,000
25
j.
January 24, 2006

dr. Dividends Payable ...........................................................................................................................................................
150,000
cr. Cash ..............................................................................................................................................................................
150,000
CHAPTER 10
OTHER ITEMS THAT AFFECT
NET INCOME AND OWNERS EQUITY
Problems
Problem 10-1
Wages Payable
Cash
FICA Taxes Payable
Withholding Taxes Payable
And, to finish, payment to government:
FICA Taxes Payable
Unemployment Taxes Payable
Withholding Taxes Payable
Cash
1,025.00
776.35
74.65
174.00
149.30
40.05
174.00
363.35
Problem 10-2
dr. Pension Cost .........................................................................................................................................................................

85,000
cr. Cash ...................................................................................................................................................................................
40,100
Pension Liability ................................................................................................................................................................
44,900
Problem 10-3
Financial Statements (Accrual Basis)
1999
2000
2001
2002
Revenues ....................................................................................................................................................................................
$456,000
$696,000
$840,000
$780,000
Expenses ....................................................................................................................................................................................
270,000
672,000
798,000
618,000
Profit before taxes ......................................................................................................................................................................
186,000
24,000
42,000
162,000
Tax provision (30%) ..................................................................................................................................................................
55,800
7,200
12,600
48,600
Tax Return (Cash Basis)
1999
2000
2001
2002
Receipts ......................................................................................................................................................................................
$336,000
$636,000
$894,000
$690,000
Disbursements ............................................................................................................................................................................
288,000
528,000
750,000
606,000
Taxable income ..........................................................................................................................................................................
48,000
108,000
144,000
84,000
Tax payment (30%)....................................................................................................................................................................
14,400
32,400
43,200
25,200
1999
2000
2001
2002
Tax provision .............................................................................................................................................................................
$55,800
$ 7,200
$ 12,600
$48,600
26
Tax payment...............................................................................................................................................................................
14,400
32,400
43,200
25,200
Difference ..................................................................................................................................................................................
41,400
(25,200)
(30,600)
23,400
Cumulative difference ................................................................................................................................................................
$41,400
$16,200
$(14,400)
$ 9,000
Cash basis accounting for tax payment purposes was preferable for the 1999 - 02 period. It resulted in
lower cumulative tax payments.
The difference between the annual tax provision and tax payments would be handled through deferred tax
accounting.
Problem 10-4
Net book value of machinery for financial reporting purposes
Year
1997
1998
1999
2000
2001
2002
Cost
$2,750,000
2,750,000
2,750,000
2,750,000
2,750,000
2,750,000
Depreciation
Expense
$275,000
550,000
550,000
550,000
550,000
275,000
Cumulative
Depreciation
Allowance
$ 275,000
825,000
1,375,000
1,925,000
2,475,000
2,750,000
Net Book Value

$2,475,000
1,925,000
1,375,000
825,000
275,000
-0-
Depreciation
Deduction
$550,000
880,000
528,000
316,250
316,250
159,500
Cumulative
Depreciation
Deduction
$ 550,000
1,430,000
1,958,000
2,274,250
2,590,500
2,750,000
Net Tax Basis

$2,200,000
1,320,000
792,000
475,750
159,500
-0-
Net tax basis of machinery for tax purpose.
Year
1997
1998
1999
2000
2001
2002
Tax Basis
$2,750,000
2,750,000
2,750,000
2,750,000
2,750,000
2,750,000
Deferred Tax Liability Calculation

Year
1997
1998
1999
2000
2001
2002
Net Book Value

$2,475,000
1,925,000
1,375,000
825,000
275,000
-0-
Net Tax Basis

$2,200,000
1,320,000
792,000
475,750
159,500
-0-
Difference
$275,000
605,000
583,000
349,250
115,500
-0-
Deferred Tax
Liability
$110,000
242,000
233,200
139,700
46,200
-0-
Income Tax Payments

27
Year
1997
1998
1999
2000
2001
2002
Profit Before
Depreciation
$1,500,000
1,500,000
1,500,000
1,500,000
1,500,000
1,500,000
Depreciation
$550,000
880,000
528,000
316,250
316,250
159,500
Taxable Income
$ 950,000
620,000
972,000
1,183,750
1,183,750
1,340,500
Tax Payment
$380,000
248,000
388,800
473,500
473,500
536,200
Pretax Income
$1,225,000
950,000
950,000
950,000
950,000
1,225,000
Tax Provision
$490,000
380,000
380,000
380,000
380,000
490,000
Income Tax Provisions

Year
1997
1998
1999
2000
2001
2002
Profit before
Depreciation
$1,500,000
1,500,000
1,500,000
1,500,000
1,500,000
1,500,000
Depreciation
$275,000
550,000
550,000
550,000
550,000
275,000
Tax Provision Presentation
1997
1998
1999
2000
2001
2002
Current
Tax Expense
$380,000
248,000
388,800
473,500
473,500
536,200
Deferred
Tax Expense
$110,000
132,000
(8,800)
(93,500)
(93,500)
(46,200)
Total Tax
Provision
$490,000
380,000
380,000
380,000
380,000
490,000
In 1999 the deferred tax liability account reverses.

A T-account tracking of the 1997 - 2002 tax payments, tax provision and deferred tax liability balances
can be constructed from the above schedules. Tax payments reduce cash. The deferred tax portion of the
total tax provision is initially a credit to the deferred tax liability account (1997 - 98) and thereafter a debit
entry.
Problem 10-5
1. APB Opinion No. 30 requires that in order to qualify as an extraordinary item, an event must satisfy
two criteria:
1. The event must be unusual; it should be highly abnormal and unrelated to, or only incidentally
related to, the ordinary activities of the entity.
2. The event must occur infrequently; it should be of a type that would not reasonably be expected
to recur in the foreseeable future.
Item 5 (loss of $300,000 due to explosion caused by disgruntled ex-husband of an employee) meets
the two extraordinary-item criteria.
Item 1 is explicitly excluded by APB No. 30 as an extraordinary item.
28
Item 2 is not an extraordinary item. Hurricanes are not an infrequent event in Louisiana.
Item 3 may be considered an extraordinary item if floods in northern New Mexico occur
infrequently.
Item 4 is not an extraordinary item. Selling segments of a business is a frequent business activity.
2.
Income before
extraordinary item ...............................................................................................................
$XXX,XXX
Extraordinary item, net
of applicable income
taxes ($90,000) ....................................................................................................................
210,000
Net income
$XXX,XXX
Problem 10-6
a. and b.
c.
1.
dr. Inventory ..................................................................................................................................................

57,600
cr. Note Payable ..........................................................................................................................................
57,600
2.
dr. Note Receivable .......................................................................................................................................

2,700
cr. Sales .......................................................................................................................................................
2,700
3.
dr. Accounts Receivable ................................................................................................................................

720,000
cr. Sales .......................................................................................................................................................
720,000
4.
dr. Inventory ..................................................................................................................................................

119,600
cr. Account Payable ....................................................................................................................................
119,600
1.
Note Payable (year end) ................................................................................................................................

$ 60,000
Note Payable (transaction date) .....................................................................................................................
57,600
Exchange loss ............................................................................................................................................
$ 2,400
2.
Note receivable (year end).............................................................................................................................

$ 3,000
Note receivable (transaction date) .................................................................................................................
2,700
Exchange gain ...........................................................................................................................................
$ 300
3.
Account receivable (year end) .......................................................................................................................

$692,308
Account receivable (transaction date) ...........................................................................................................
720,000
Exchange loss ............................................................................................................................................
$ 27,692
4.
No exchange gain or loss. Exchange rate unchanged.
CHAPTER 11
THE STATEMENT OF CASH FLOWS
Problems
Problem 11-1
2003 sales ...................................................................................................................................................................................
$8,743,000
Less: Change in accounts receivable .........................................................................................................................................
(70,000)
29
Cash generated from sales during 2003 .....................................................................................................................................

$8,673,000
Problem 11-2
a. Issuance of a 12-month note in return for $2 million cash is a financing source of cash. Use of $2
million cash to purchase equipment is an investment use of cash.
b. Cash proceeds from the issuance of common stock is a financing source of cash. The use of cash to
retire mortgage bonds is a financing use of cash.
c. No cash effect.
d. No cash effect.
e. Cash proceeds from the sale of machinery is an investment source of cash.
The above responses assume the direct method is used to present its cash flow of statement.
Problem 11-3
Kidsn Caboodle
Statement of Cash Flows
Cash received from customers ....................................................................................................................

$155,000
Cash used in operations ..............................................................................................................................
(146,900)
Cash from operations ...............................................................................................................................
$8,100
Equipment ...................................................................................................................................................
(10,500)
Cash used for investments .......................................................................................................................
(10,500)
Loan ............................................................................................................................................................
21,000
Cash from financing ................................................................................................................................
21,000
Increase in cash........................................................................................................................................
$ 18,600
Problem 11-4
Net loss..........................................................................................................................................................
$(11,000)
Depreciation ..................................................................................................................................................
26,400
15,400
Accounts receivable (reduced) ......................................................................................................................
17,600
Accounts payable (increased) .......................................................................................................................
8,800
Accrued salaries (increased) .........................................................................................................................
3,300
Other accruals (increased) .............................................................................................................................
2,200
Cash flow from operations ............................................................................................................................

47,300
Investments ...................................................................................................................................................
0
Long-term debt (reduced) .............................................................................................................................

(29,700)
Change in cash ...........................................................................................................................................

17,600
Beginning cash...........................................................................................................................................
4,400
Ending cash................................................................................................................................................
$22,000
Problem 11-5
Operating Activities
Cash received from customers ...................................................................................................................
$62,100
Interest received .........................................................................................................................................
345
Operating cash payments ...........................................................................................................................
(54,165)
30
Interest payment .........................................................................................................................................

(1,035)
Net cash provided by operations ................................................................................................................
7,245
Investing Activities
Sale of old machine ...................................................................................................................................
3,105
Down payment on new truck .....................................................................................................................
(3,450)
Net cash used in investing activities ..........................................................................................................

(345)
Financing Activities
Payment of debt .........................................................................................................................................
(3,450)
Net cash used in financing activities..........................................................................................................
(3,450)
Increase in cash ..........................................................................................................................................

3,450
Beginning cash...........................................................................................................................................
3,450
Ending cash................................................................................................................................................
$ 6,900
CHAPTER 13
FINANCIAL STATEMENT ANALYSIS
Problems
Problem 13-1
a. Profit Margins
M Net income
54
.05 (5 percent)
M Sales
1,080
N Net income
122
.10 (10 percent)

N Sales
1,215
N has the higher profit margin.

b. Investment Turnover
M Sales
1,080
6x
M Investment 180
N Sales
1,215
3x
N Investment 405
M has the higher investment turnover.
c. Return on Investment
M Net income
M-Sales
.05 x 6 .30 (30 percent)

M Sales
M-Investment
N Net income
N Sales
N Sales
N Investment
.10 x 3 .30 (30 percent)
31
Both firms have similar returns on investments. Based on this investment criterion, the investments
are equally attractive.
Problem 13-2
Since the division has no control over the financing of its assets employed in its operation, the most
appropriate measure of return on investment to use to judge its performance is
Net income excluding interest expense

Average total assets
$54,000 ($4,200 x .7)

($400,000 $525,000)/ 2
$56,940
$462,500
= .123 (12.3 percent).
Problem 13-3
Current Year
Days' cash
$5,479,296
($83,138,408 / 365)
$5,479,296
$227,776
= 24 days
Preceeding Year
Days' cash
$6,123,704
($99,748,943 / 365)
$6,123,704
$273,285
= 22.4 days
The new controller holds more cash relative to the companys cash expenses than did the old
controller. The higher level may be safer (i.e. less chance of not meeting payments when due), but
what is its cost? If the cash balance is excessive, the excess is a low-return use of cash compared to
investing it in higher return assets.
Problem 13-4
Current Year
Accounts receivable days
$1,392,790
($13,035,085 / 365)
32
$1,392,790
$35,713
= 39 days
Previous Year
Accounts receivable days
$1,207,393
($11,597 ,327 / 365)
$1,207 ,3930
$31,774
= 38 days
The new policy has not changed the payment practices of customers in any material way.
Problem 13-5
($58,160 $62,880)
2
Average inventory
= $60,520
$60,520
($300,000 / 365)
Days' inventory
$60,520
$822
= 74 days
Inventory turnover
$300,000
$60,520
= 5 times
Ms. Whitneys utilization of her investment in inventory is lower than for similar companies.
Problem 13-6
Price/earn ings ratio
$82
($20,000,0 00/2,000,0 00 shares)
$82
$10
= 8.2 times
Dividend yield
$5.74
82
= .07 (7 percent)
33
Dividend payout
($5.74 x 2,000,000 shares)

$20,000,00 0
$11,480,000
$20,000,000
= 57.4 percent
Problem 13-7
Working capital turnover
$1,750,000,0 00
$250,000,0 00
= 7 times
Capital intensity
$1,750,000,000
$525,000,000
= 3.33 times
Equity turnover
$1,750,000 ,000
$1,500,000 ,000
= 1.17 times
34

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CHAPTER 1

THE NATURE AND PURPOSE OF ACCOUNTING

Other assets ...............................................................................................................................................................................

Total liabilities and owners

Noncurrent assets .......................................................................................................................................................................

Current assets .............................................................................................................................................................................

Total assets .................................................................................................................................................................................

Current assets .............................................................................................................................................................................

Paid-in capital + Retained earnings = Owners equity.

Gross margin ..............................................................................................................................................................................

Profit before taxes .....................................................................................................................................................................

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

Other expenses ..........................................................................................................................................................................

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

Gross margin (75% of sales) .......................................................................................................................................................

Other expenses ..........................................................................................................................................................................

Profit before taxes (21.7% of sales) ...........................................................................................................................................

Net income (13% of sales) .........................................................................................................................................................

BON VOYAGE TRAVEL

BON VOYAGE TRAVEL

BON VOYAGE TRAVEL

J.L. GREGORY COMPANY

Marketable securities ................................................................................................................................................................

Accounts receivable ...................................................................................................................................................................

Current liabilities ..........................................................................

Current assets .......................................................................................................................................................................

Accumulated depreciation .........................................................................................................................................................

Accumulated depreciation .........................................................................................................................................................

J.L. GREGORY COMPANY

Marketable securities ................................................................................................................................................................

Accounts receivable ...................................................................................................................................................................

Current liabilities ..........................................................................

Current assets .......................................................................................................................................................................

Accumulated depreciation .........................................................................................................................................................

Accumulated depreciation .........................................................................................................................................................

Cash + $3,500; Accounts receivable - $3,500.

CARSON LEGATT PARTNERSHIP

CARSON LEGATT PARTNERSHIP

(Cost of goods sold) - $1,500

Current ratio = ............................................................................................................................................................................

Expense for June

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

Net income $28,685

(2) 47 percent gross margin ($40,000 / $85,000)

QED ELECTRONICS COMPANY

First calculate sales:

Total assets = Total liabilities and Owners equity.

$3,600 Beg. Bal.

$950 Beg. Bal.

1) dr. Prepaid Rent .................................................................................................................................................................

2) dr. Sales Discounts and Allowances ..................................................................................................................................

3) dr. Interest Receivable .......................................................................................................................................................

4) dr. Depreciation Expense...................................................................................................................................................

6) dr. Stamp Expense .............................................................................................................................................................

7) Bad debt expense ...............................................................................................................................................................

Allowance for doubtful accounts..........................................................................................................................

2) dr. Wages Expense ......................................................................................................................................................

3) dr. Cash .......................................................................................................................................................................

4) dr. Accounts Receivable .............................................................................................................................................

5) dr. Overhead and Other Expenses ...............................................................................................................................

6) dr. Cash .......................................................................................................................................................................

7) dr. Accounts Payable ..................................................................................................................................................