Problems: Set C. Problems: Set C 1

Problems: Set C

1

Problems: Set C

P1-1C Presented below are five independent situations.

(a) Christy Petersen and Joel Dunn each owned separate plastic molding businesses. They have decided to combine their businesses. They expect that within the coming year they will need significant funds to expand their operations.

(b) Three licensed physical therapists have been working in rehabilitation hospitals for several years. They have decided to form a business that will provide therapy in clients’ homes. Each has contributed an equal amount of cash and knowledge to the ven-ture. Although there appears to be a great need for their services, they are concerned about the legal liabilities that their business might confront.

(c) Erik, Geoff, and Janna recently graduated with education degrees. They have been friends since childhood. They have decided to start a consulting business focused on assisting “home-schooled” students over the Internet.

(d) Ben Fullerton has been providing routine automotive maintenance and repair serv-ices for several years. He performs his work in customers’ garages out of a cargo van that contains tools, diagnostic equipment, and parts. Customers can continue to work or relax at home while he services their vehicles. His business has been so successful that several regular customers have suggested he expand its operations. Ben is confident that he could find other mechanics to help provide the service but knows the business would require a large investment of capital to outfit the vans. He is also aware that working in customers’ homes could expose him to consider-able liability. Ben has no savings or personal assets. He wants to maintain control over the business.

(e) Chad Browne, a college student looking for summer employment, opened a flower stand at a local farmers’ market.

Instructions

In each case explain what form of organization the business is likely to take—sole pro-prietorship, partnership, or corporation. Give reasons for your choice.

P1-2C Financial decisions often place heavier emphasis on one type of financial statement over the others. Consider each of the following hypothetical situations independently.

(a) Nordstromsis considering extending credit to a new customer. The terms of the credit would require the customer to pay within 30 days of receipt of goods.

(b) An investor is considering purchasing common stock of Home Depot Company. The investor plans to hold the investment for at least 5 years.

(c) Wells Fargois considering extending a loan to a small company. The company would be required to make interest payments at the end of each year for 5 years, and to re-pay the loan at the end of the fifth year.

(d) The president of American Greetingsis trying to determine whether the company is generating enough cash to increase the amount of dividends paid to investors in this and future years, and still have enough cash to buy equipment as it is needed.

Instructions

In each situation, state whether the decision maker would be most likely to place primary emphasis on information provided by the income statement, balance sheet, or statement of cash flows. In each case provide a brief justification for your choice. Choose only one financial statement in each case.

P1-3C On August 1 Copicat Inc. was started with an initial investment in the company of $10,000 cash. Here are the assets and liabilities of the company at August 31, and the revenues and expenses for the month of August, its first month of operations:

Cash $ 3,800 Notes payable $6,000

Accounts receivable 1,000 Accounts payable 900

Revenue 11,000 Supplies expense 3,000

Supplies 1,800 Rent expense 1,600

Advertising expense 500 Utilities expense 200

Equipment 12,000 Wage expense 3,400

Determine forms of business organization.

(SO 1)

Identify users and uses of financial statements.

(SO 2, 4, 5)

Prepare an income

statement, retained earnings statement, and balance sheet, and discuss results.

(SO 4, 5)

In August, the company issued no additional stock, but paid dividends of $600. Instructions

(a) Prepare an income statement and a retained earnings statement for the month of August and a balance sheet at August 31, 2007.

(b) Briefly discuss whether the company’s first month of operations was a success. (c) Discuss the company’s decision to distribute a dividend.

P1-4C Presented below is selected financial information for Showalter Corporation for December 31, 2007.

Inventory $ 19,000 Cash paid to purchase equipment $ 8,000

Cash paid to suppliers 76,000 Equipment 40,000

Building 200,000 Revenues 87,000

Common stock 40,000 Cash received from customers 93,000 Cash dividends paid 4,000 Cash received from issuing

common stock 18,000

Instructions

(a) Determine which items should be included in a statement of cash flows and then pre-pare the statement for Showalter Corporation.

(b) Comment on the adequacy of net cash provided by operating activities to fund the company’s investing activities and dividend payments.

P1-5C Julius Corporation was formed on January 1, 2007. At December 31, 2007, Dan Jasper, the president and sole stockholder, decided to prepare a balance sheet, which ap-peared as follows.

JULIUS CORPORATION Balance Sheet December 31, 2007

Assets Liabilities and Stockholders’ Equity

Cash $20,000 Accounts payable $40,000

Accounts receivable 39,000 Notes payable 15,000

Motorcycle 17,000 Motorcycle loan 14,000

Truck 20,000 Stockholders’ equity 27,000

Dan willingly admits that he is not an accountant by training. He is concerned that his balance sheet might not be correct. He has provided you with the following additional information.

1. The motorcycle actually belongs to Jasper, not to Julius Corporation. However, because he thinks he might use it to visit customers occasionally, he decided to list it as an as-set of the company. To be consistent he also listed as a liability of the corporation his personal loan that he took out at the bank to buy the motorcycle.

2. The truck was purchased for only $18,000, even though Dan knows its “sticker price” was $20,000. He thought it would be best to record it at $20,000.

3. Included in the accounts receivable balance is $8,000 that Dan expects to collect from a customer for a sale that he anticipates will occur in January. Dan included this in the receivables of Julius Corporation because he has already discussed the potential sale with the customer.

Instructions

(a) Comment on the proper accounting treatment of the three items above.

(b) Provide a corrected balance sheet for Julius Corporation. (Hint: To get the balance sheet to balance, adjust stockholders’ equity.)

2

Determine items included in a statement of cash flows, prepare the statement, and comment.

(SO 4, 5)

(a) Net income $2,300 Ret. earnings $1,700 Tot. assets $18,600

Comment on proper accounting treatment and prepare a corrected balance sheet.

(SO 4, 5)

(a) Net increase $23,000

Tot. assets $69,000

Marginal check figures (in blue) provide a key number to let you know you’re on the right track.

Problems: Set C

3

Problems: Set C

P2-1C The following items are taken from the 2004 balance sheet of Starbucks Corpo-ration. (All dollars are in thousands.)

Intangible assets $ 95,750

Common stock 996,078

Property and equipment, net 1,551,416

Accounts payable 199,346

Other assets 85,561

Long-term investments 306,926

Accounts receivable 140,226

Prepaid expenses and other current assets 134,997

Short-term investments 353,881

Retained earnings 1,478,140

Cash and cash equivalents 299,128

Long-term debt 3,618

Accrued expenses and other current liabilities 425,536

Unearned revenue—current 121,377

Other long-term liabilities 166,453

Inventories 422,663

Instructions

Prepare a classified balance sheet for Starbucks Corporation as of October 3, 2004. P2-2C These items are taken from the financial statements of Graham Corporation for 2007.

Retained earnings (beginning of year) $26,000

Utilities expense 3,000 Equipment 38,000 Accounts payable 2,400 Cash 20,700 Salaries payable 1,700 Common stock 15,000 Dividends 7,000 Service revenue 77,000 Prepaid insurance 1,950 Repair expense 1,800 Depreciation expense 5,300 Accounts receivable 8,850 Insurance expense 3,900 Salaries expense 44,000 Accumulated depreciation 12,400 Instructions

Prepare an income statement, a retained earnings statement, and a classified balance sheet as of December 31, 2007.

P2-3C You are provided with the following information for Barnette Enterprises, effec-tive as of its September 30, 2007, year-end.

Accounts payable $ 6,300

Accounts receivable 2,500

Building, net of accumulated depreciation 37,000

Cash 2,600

Common stock 10,000

Cost of goods sold 22,000

Current portion of long-term debt 5,000

Depreciation expense 2,900

Dividends paid during the year 1,800

Prepare a classified balance sheet.

(SO 1)

Prepare financial statements.

(SO 1, 3)

Tot. current assets $1,350,895 Tot. assets $3,390,548

Net income $19,000 Tot. assets $57,100

Prepare financial statements.

(SO 1, 3)

4

Equipment, net of accumulated depreciation 14,000

Income tax expense 2,550

Income taxes payable 700

Interest expense 3,400

Inventories 4,800

Land 16,000

Long-term debt 31,000

Prepaid expenses 1,350

Retained earnings, beginning 21,300

Revenues 56,800 Selling expenses 2,700 Short-term investments 3,000 Wages expense 15,600 Wages payable 1,100 Instructions

(a) Prepare an income statement and a retained earnings statement for Barnette Enterprises for the year ended September 30, 2007.

(b) Prepare a classified balance sheet for Barnette Enterprises as of September 30, 2007. P2-4C Comparative financial statement data for Batman Corporation and Spiderman Cor-poration, two competitors, appear below. All balance sheet data are as of December 31, 2007. Net income $7,650

Tot. current assets $14,250 Tot. assets $81,250

Compute ratios; comment on relative profitability, liquidity, and solvency.

(SO 2, 4, 5) Batman Corporation Spiderman Corporation

2007 2007

Net sales $269,000 $504,000

Cost of goods sold 130,000 248,000

Operating expenses 80,000 132,000

Interest expense 12,000 6,000

Income tax expense 18,000 44,000

Current assets 146,000 182,000

Plant assets (net) 105,000 86,000

Current liabilities 44,000 106,000

Long-term liabilities 87,000 41,000

Additional information:

Cash from operating activities $36,000 $43,000

Capital expenditures $15,000 $28,000

Dividends paid $8,000 $10,000

Average number of shares

outstanding 30,000 40,000

Instructions

(a) Comment on the relative profitability of the companies by computing the net income and earnings per share for each company for 2007.

(b) Comment on the relative liquidity of the companies by computing working capital and the current ratios for each company for 2007.

(c) Comment on the relative solvency of the companies by computing the debt to total assets ratio and the free cash flow for each company for 2007.

P2-5C Here and on the next page are financial statements of Howard Company. HOWARD COMPANY

Income Statement For the Year Ended December 31

2007

Net sales $558,200

Cost of goods sold 254,500

Selling and administrative expenses 178,000

Interest expense 24,000

Income tax expense 34,700

Net income $ 67,000

Compute liquidity, solvency, and profitability ratios.

(SO 2, 4, 5)

Problems: Set C

5

Additional information: The cash provided by operating activities for 2007 was $105,000. The cash used for capital expenditures was $64,000. The cash used for dividends was $18,000. The average number of shares outstanding during the year was 20,000. Instructions

Compute the following values and ratios for 2007. (a) Working capital.

(b) Current ratio. (c) Free cash flow.

(d) Debt to total assets ratio. (e) Earnings per share.

P2-6C Condensed balance sheet and income statement data for Janzan Corporation are presented here. HOWARD COMPANY Balance Sheet December 31 Assets 2007 Current assets Cash $ 15,000 Short-term investments 33,500

Accounts receivable (net) 66,400

Inventory 21,200

Total current assets 136,100

Plant assets (net) 294,600

Total assets $430,700

Liabilities and Stockholders’ Equity Current liabilities

Accounts payable $ 26,800

Income taxes payable 18,300

Total current liabilities 45,100

Bonds payable 220,000

Total liabilities 265,100

Stockholders’ equity

Common stock 80,000

Retained earnings 85,600

Total stockholders’ equity 165,600 Total liabilities and stockholders’ equity $430,700

JANZAN CORPORATION Balance Sheets December 31 Assets 2007 2006 Cash $ 10,500 $ 9,000 Receivables (net) 18,000 14,000

Other current assets 5,700 4,000

Long-term investments 21,800 20,000

Plant and equipment (net) 46,000 38,000

Total assets $102,000 $85,000

Compute and interpret liquidity, solvency, and profitability ratios.

(SO 2, 4, 5)

Liabilities and Stockholders’ Equity 2007 2006

Current liabilities $ 25,000 $23,000

Long-term debt 36,000 36,000

Common stock 22,000 20,000

Retained earnings 19,000 6,000

Total liabilities and stockholders’ equity $102,000 $85,000

6

Additional information:

Cash from operating activities $20,000 $13,000 Cash used for capital expenditures $11,000 $8,000

Dividends paid $5,000 $3,000

Average number of shares outstanding 22,000 20,000 Instructions

Compute these values and ratios for 2006 and 2007. (a) Earnings per share.

(b) Working capital. (c) Current ratio.

(d) Debt to total assets ratio. (e) Free cash flow.

(f) Based on the ratios calculated, discuss briefly the improvement or lack thereof in financial position and operating results from 2006 to 2007 of Janzan Corporation. P2-7C Selected financial data of two competitors, Home Depot and Lowes, are pre-sented here. (All dollars are in millions.)

JANZAN CORPORATION Income Statements For the Years Ended December 31

2007 2006

Sales $175,000 $160,000

Cost of goods sold 100,000 92,000

Operating expenses (including income taxes) 57,000 53,000

Net income $ 18,000 $ 15,000

Home Depot Lowes (1/30/05) (1/28/05) Income Statement Data for Year

Net sales $73,094 $36,464

Cost of goods sold 48,664 24,165

Selling and administrative expenses 16,504 7,562

Interest expense 70 192

Other income (loss) 56 (1,001)

Income taxes 2,911 1,368

Net income $ 5,001 $ 2,176

Home Depot Lowes Balance Sheet Data (End of Year)

Current assets $14,190 $ 6,974

Noncurrent assets 24,717 14,235

Total assets $38,907 $21,209

Current liabilities $10,529 $ 5,719

Long-term debt 4,220 3,955

Total stockholders’ equity 24,158 11,535

Total liabilities and stockholders’ equity $38,907 $21,209

Cash from operating activities $6,904 $3,033

Cash paid for capital expenditures $3,948 $2,927

Dividends paid $719 $116

Average shares outstanding 2,207 777

Compute ratios and compare liquidity, solvency, and profitability for two companies.

(SO 2, 4, 5)

Instructions

For each company, compute these values and ratios. (a) Working capital.

(b) Current ratio.

(c) Debt to total assets ratio. (d) Free cash flow.

(e) Earnings per share.

(f) Compare the liquidity, solvency, and profitability of the two companies.

P2-8C Meredith Norby recently completed an undergraduate degree in accounting. She has been approached by her older brother and five of his friends to assist them in creating an investment club. None have taken any business courses, but all have been working for at least five years and feel they are ready to make their money work for them. Some of the prospective members want to use the fund as part of their retire-ment assets. Others hope to use their portion of the annual earnings to suppleretire-ment their current income.

The group has discussed various types of companies to invest in. Some members pre-fer to choose well-established companies that are traded on national stock exchanges. Others want to “get in on the ground floor” by investing in new businesses that may have only a few stockholders. One member has suggested buying into a company started by his best friend from high school who claims that his business has tripled its earnings dur-ing its first two years of operations.

It has become clear to Meredith that this group of prospective investors has little or no understanding of financial reporting or generally accepted accounting principles (GAAP).

Instructions

(a) Explain what is meant by financial reporting and GAAP.

(b) Considering the variety of members’ goals and suggestions, indicate the type of fi-nancial information that should be most useful in addressing investment choices.

Problems: Set C

7

Comment on the objectives and qualitative characteris-tics of financial reporting.

(SO 6, 7)

8

Analyze transactions and compute net income.

(SO 1)

(a) Cash $6,600 Ret. earnings $600

Problems: Set C

P3-1C On April 1 Test Prep Inc. was established. These transactions were completed during the month.

1. Stockholders invested $12,000 cash in the company in exchange for common stock. 2. Paid $1,400 cash for April office rent.

3. Purchased office equipment for $4,300 cash.

4. Purchased $500 of advertising in School News, on account. 5. Paid $700 cash for office supplies.

6. Earned $6,000 for services provided: Cash of $1,000 is received from customers, and the balance of $5,000 is billed to customers on account.

7. Paid $100 cash dividends.

8. Paid School News amount due in transaction (4). 9. Paid employees’ salaries $3,400.

10. Received $4,000 in cash from customers who have previously been billed in trans-action (6).

Instructions

(a) Prepare a tabular analysis of the transactions using these column headings: Cash, Accounts Receivable, Supplies, Office Equipment, Accounts Payable, Common Stock, and Retained Earnings. Include margin explanations for any changes in Retained Earnings. (b) From an analysis of the column Retained Earnings, compute the net income or net

loss for April.

P3-2C Judy Takahashi started her own consulting firm, Takahashi Consulting Inc., on November 1, 2007. The following transactions occurred during the month of November.

Nov. 1 Stockholders invested $15,000 cash in the business in exchange for common stock.

2 Paid $1,000 for office rent for the month. 3 Purchased $750 of supplies on account.

5 Paid $400 to advertise in the Small Business Times. 9 Received $800 cash for services provided.

12 Paid $100 cash dividend.

15 Performed $4,400 of services on account. 17 Paid $2,100 for employee salaries.

20 Paid for the supplies purchased on account on November 3.

23 Received a cash payment of $1,800 for services provided on account on November 15.

26 Borrowed $8,000 from the bank on a note payable.

29 Purchased office equipment for $3,500 paying $200 in cash and the balance on account.

30 Paid $220 for utilities. Instructions

(a) Show the effects of the previous transactions on the accounting equation using the following format. Assume the note payable is to be repaid within the year.

Analyze transactions and prepare financial statements.

(SO 1) GLS

Stockholders’

Assets  Liabilities  Equity

Accounts Office Notes Accounts Common Retained

Date Cash  _{Receivable } Supplies  _{Equipment  Payable  Payable  Stock}  _Earnings (a) Cash $20,830

Ret. earnings $1,380

Include margin explanations for any changes in Retained Earnings. (b) Prepare an income statement for the month of November.

(c) Prepare a classified balance sheet at November 30, 2007.

P3-3C Din Liu created a corporation providing legal services, Din Liu Inc., on March 1, 2007. On March 31 the balance sheet showed: Cash $6,500; Accounts Receivable $2,000; (b) Net income $1,480

GLS

Problems: Set C

9

and Retained Earnings $3,600. During April the following transactions occurred. 1. Collected $1,300 of accounts receivable due from customers.

2. Paid $3,200 cash for accounts payable due.

3. Earned revenue of $7,100 of which $4,000 is collected in cash and the balance is due in May.

4. Purchased additional office equipment for $1,000, paying $200 in cash and the bal-ance on account.

5. Paid salaries $2,700, rent for April $800, and advertising expenses $280. 6. Declared and paid a cash dividend of $400.

7. Received $3,500 from Metro Bank; the money was borrowed on a 4-month note payable. 8. Incurred utility expenses for the month on account $320.

Instructions

(a) Prepare a tabular analysis of the April transactions beginning with March 31 balances. The column heading should be: Cash  Accounts Receivable  Supplies  Office Equipment  Notes Payable  Accounts Payable  Common Stock  Retained Earn-ings. Include margin explanations for any changes in Retained EarnEarn-ings.

(b) Prepare an income statement for April, a retained earnings statement for April, and a classified balance sheet at April 30.

P3-4C Skating By, Inc. was opened on May 1 by James Bea. These selected events and transactions occurred during May.

May 1 Stockholders invested $80,000 cash in the business in exchange for com-mon stock of the corporation.

3 Purchased BoardWorld for $60,000 cash. The price consists of land $20,000, building $30,000, and equipment $10,000. (Record this in a sin-gle entry.)

5 Advertised the opening of the skate board park, paying advertising expenses of $500 cash.

6 Paid cash $6,000 for a 1-year insurance policy.

10 Purchased equipment for $4,600 from T. Hawks Company, payable in 30 days.

18 Received $1,500 in cash from customers for fees earned.

19 Sold 150 coupon books for $40 each in cash. Each book contains five coupons that enable the holder to use the park. (Hint: The revenue is not earned until the customers use the coupons.)

25 Declared and paid a $300 cash dividend. 30 Paid salaries of $1,280.

30 Paid T. Hawks in full for equipment purchased on May 10. 31 Received $1,100 of fees in cash from customers for fees earned.

The company uses these accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Unearned Revenue, Common Stock, Retained Earnings, Dividends, Revenue, Advertising Expense, and Salaries Expense.

Instructions

Journalize the May transactions, including explanations.

P3-5C Castle Architects incorporated as licensed architects on September 1, 2007. During the first month of the operation of the business, these events and transactions occurred: Sept. 1 Stockholders invested $22,000 cash in exchange for common stock of the

corporation.

1 Hired a secretary-receptionist at a salary of $410 per week, payable monthly. 2 Paid office rent for the month $1,500.

3 Purchased architectural supplies on account from Taliesin Company $1,150. 10 Completed blueprints on a carport and billed client $1,700 for services. 11 Received $800 cash advance from M. Stewart to design a new home. 20 Received $4,900 cash for services completed and delivered to R. Husch. 30 Paid secretary-receptionist for the month $1,640.

30 Paid $600 to Taliesin Company for accounts payable due.

Analyze transactions and prepare an income statement, retained earnings statement, and balance sheet.

(SO 1) (a) Cash $7,720 Ret. earnings $6,200 (b) Net income $3,000 Journalize a series of transactions. (SO 3, 5) GLS GLS

Journalize transactions, post, and prepare a trial balance.

(SO 3, 5, 6, 7, 8) GLS

10

The company uses these accounts: Cash, Accounts Receivable, Supplies, Accounts Payable, Unearned Revenue, Common Stock, Service Revenue, Salaries Expense, and Rent Expense.

Instructions

(a) Journalize the transactions, including explanations. (b) Post to the ledger T accounts.

(c) Prepare a trial balance on September 30, 2007.

P3-6C This is the trial balance of Dominic Company on April 30. (c) Cash $23,960

Tot. trial

balance $29,950

Journalize transactions, post, and prepare a trial balance.

(SO 3, 5, 6, 7, 8) _{DOMINIC COMPANY}

Trial Balance April 30, 2007 Debit Credit Cash $ 3,700 Accounts Receivable 3,200 Supplies 900 Equipment 9,300 Accounts Payable $ 3,400 Unearned Revenue 1,700 Common Stock 12,000 $17,100 $17,100 GLS

The May transactions were as follows.

May 5 Received $1,600 in cash from customers for accounts receivable due. 10 Billed customers for services performed $4,900.

15 Paid employee salaries $1,600.

17 Performed $400 of services for customers who paid in advance in April. 20 Paid $1,500 to creditors for accounts payable due.

29 Paid a $200 cash dividend. 31 Paid utilities $360.

Instructions

(a) Prepare a general ledger using T accounts. Enter the opening balances in the ledger accounts as of May 1. Provision should be made for these additional accounts: Div-idends, Service Revenue, Salaries Expense, and Utilities Expense.

(b) Journalize the transactions, including explanations. (c) Post to the ledger accounts.

(d) Prepare a trial balance on May 31, 2007.

P3-7C This trial balance of Arias Co. does not balance. ARIAS CO. Trial Balance March 31, 2007 Debit Credit Cash $ 3,240 Accounts Receivable $ 3,656 Supplies 800 Equipment 4,360 Accounts Payable 2,720 Unearned Revenue 1,200 Common Stock 7,100 Dividends 800 Service Revenue 5,420 Salaries Expense 3,100 Office Expense 660 $13,360 $19,696 (d) Cash $1,640 Tot. trial balance $20,500

Prepare a correct trial balance.

(SO 8)

Problems: Set C

11

Tot. trial balance $16,660

Journalize transactions, post, and prepare a trial balance.

(SO 3, 5, 6, 7, 8) Each of the listed accounts has a normal balance per the general ledger. An examination

of the ledger and journal reveals the following errors:

1. Cash received from a customer on account was debited for $340, and Accounts Re-ceivable was credited for $34. The actual collection was for $340.

2. The purchase of copy machine paper on account for $160 was recorded as a debit to Equipment for $160 and a credit to Accounts Payable for $160.

3. A client paid $900 for services to be performed during April and May. Cash was debited for $900 and Service Revenue was credited for $900.

4. A debit posting to Office Expense of $130 was omitted.

5. A payment on account was credited to Cash for $240 and debited to Accounts Payable for $240. The actual payment was $420.

6. Payment of a $400 cash dividend to Arias’s stockholders was debited to Common Stock for $400 and credited to Cash for $400.

Instructions

Prepare the correct trial balance. (Hint: All accounts have normal balances.)

P3-8C Big Sky Drive-In Theater Inc. was recently formed. It began operations in April 2007. On April 1, the ledger of Big Sky showed: Cash $31,000; Land $52,000; Buildings (concession stand, projection room, ticket booth, and screen) $64,000; Equipment $35,000; Accounts Payable $22,000; and Common Stock $160,000. During the month of April the following events and transactions occurred.

Apr. 1 Rented movies to be shown for the first two weeks of April. The film rental was $15,000; $3,000 was paid in cash and $12,000 will be paid on April 13.

2 Ordered movies to be shown the last two weeks of April at a cost of $7,000 per week.

8 Received $11,400 cash from admissions.

10 Hired R. Daggett to operate the concession stand. Daggett agrees to pay Big Sky 20% of gross receipts, payable monthly.

13 Paid balance due on movie rentals and $7,400 on April 1 accounts payable.

14 Received the movies ordered April 2 and paid rental fee of $14,000. 15 Paid advertising expenses $600.

18 Received $9,800 cash from customers for admissions. 30 Paid salaries of $5,200.

30 Received statement from R. Daggett showing gross receipts from con-cessions of $10,400 and the balance due to Big Sky of $2,080 for April. Daggett paid half the balance due and will remit the remainder on May 8. 30 Received $23,000 cash from customers for admissions.

In addition to the accounts identified above, the chart of accounts includes: Accounts Receivable, Admission Revenue, Concession Revenue, Advertising Expense, Film Rental Expense, and Salaries Expense.

Instructions

(a) Using T accounts, enter the beginning balances to the ledger. (b) Journalize the April transactions, including explanations. (c) Post the April journal entries to the ledger.

(d) Prepare a trial balance on April 30, 2007.

P3-9C The bookkeeper for Tim Taylor’s repair shop made the following errors in jour-nalizing and posting.

1. A credit to Accounts Payable of $900 was posted twice.

2. A credit posting of $800 to Unearned Revenue was inadvertently credited to Accounts Receivable.

3. A purchase of equipment on account of $960 was debited to Equipment for $960 and credited to Accounts Payable for $690.

4. A debit posting of $250 to Wages Expense was omitted.

5. A debit posting to Wages Payable for $250 was inadvertently posted as a credit to Wages Payable.

GLS

(d) Cash $34,040 Tot. trial

balance $220,880

Analyze errors and their effects on the trial balance.

(SO 8)

12

6. A debit posting for $800 of Dividends was inadvertently posted to Wage Expense instead.

7. A debit posting to Cash and a credit posting to Service Revenue for $600 were inad-vertently posted twice.

8. A debit to Accounts Receivable of $400 was debited to Accounts Payable. Instructions

For each error, indicate (a) whether the trial balance will balance; (b) the amount of the difference if the trial balance will not balance; and (c) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error 1 is given as an example.

(a) (b) (c)

Error In Balance Difference Larger Column

1. No $900 Credit

Problems: Set C

13

Unearned Service Revenue 3,100

Common Stock 25,000 Service Revenue 9,000 Salaries Expense 3,800 Insurance Expense 400 $42,200 $42,200

Problems: Set C

P4-1C The following selected data are taken from the comparative financial statements of Lake View Bocce Club. The Club prepares its financial statements using the accrual basis of accounting.

October 31 2007 2006

Accounts receivable for member dues $ 15,000 $ 19,000

Unearned rent revenue 30,000 38,000

Dues revenue 162,000 140,000

Dues are billed to members based upon their use of the Club’s facilities. Unearned revenues arise from deposits required to reserve club facilities for weddings and parties.

Instructions

(Hint: You will find it helpful to use T accounts to analyze the following data. You must analyze these data sequentially, as missing information must first be deduced before moving on. Post your journal entries as you progress, rather than waiting un-til the end.)

(a) Prepare journal entries for each of the following events that took place during 2007. 1. Dues receivable from members from 2006 were all collected during 2007. 2. Unearned rent revenue at the end of 2006 was all earned during 2007.

3. Additional rent revenue of $89,000 cash was received during 2007; a portion of these were for events held during the year. The entire balance remaining relates to upcoming events in 2007 and 2008.

4. Dues for the 2006–2007 fiscal year were billed to members.

5. Dues receivable for 2007 (i.e., those billed in item (4) above) were partially collected. (b) Determine the amount of cash received by the Club from the above transactions

dur-ing the year ended October 31, 2007.

P4-2C Troy Verley started his own consulting firm, Do It Now Consulting, on April 1, 2007. The trial balance at April 30 is as follows.

Record transactions on accrual basis; convert revenue to cash receipts.

(SO 2, 4)

Prepare adjusting entries, post to ledger accounts, and prepare adjusted trial balance.

(SO 4, 5, 6)

(b) Cash received $255,000

GLS

In addition to those accounts listed on the trial balance, the chart of accounts for Do It Now also contains the following accounts: Accumulated Depreciation—Office Equipment, Phone Payable, Salaries Payable, Depreciation Expense, Rent Expense, Phone Expense, and Supplies Expense.

Other data:

1. Supplies on hand at April 30 total $320.

2. A phone bill for $120 has not been recorded and will not be paid until next month. 3. The prepaid rent covers April, May, and June.

14

4. $2,200 of unearned service revenue has been earned at the end of the month. 5. Salaries of $1,460 are accrued at April 30.

6. The office equipment has a 5-year life with salvage value of $2,000 and is being depreciated at $300 per month for 60 months.

7. Invoices representing $2,800 of services performed during the month have not been recorded as of April 30.

Instructions

(a) Prepare the adjusting entries for the month of April.

(b) Post the adjusting entries to the ledger accounts. Enter the totals from the trial bal-ance as beginning account balbal-ances. Use T accounts.

(c) Prepare an adjusted trial balance at April 30, 2007.

P4-3C The Welcome Inn opened for business on March 1, 2007. Here is its trial bal-ance before adjustment on March 31.

(c) Rent revenue $12,300 Tot. trial

balance $147,005

Prepare adjusting entries, adjusted trial balance, and financial statements.

(SO 4, 5, 6, 7)

(b) Service rev. $14,000 (c) Tot. trial balance $46,880

GLS

(d) Net income $4,295

Prepare adjusting entries and financial statements; identify accounts to be closed. (SO 4, 5, 6, 7) GLS WELCOME INN Trial Balance March 31, 2007 Debit Credit Cash $ 2,700 Prepaid Insurance 2,400 Supplies 3,300 Land 25,000 Lodge 85,000 Furniture 22,400 Accounts Payable $ 9,200

Unearned Rent Revenue 2,800

Mortgage Payable 50,000 Common Stock 72,000 Rent Revenue 11,000 Salaries Expense 3,000 Utilities Expense 800 Advertising Expense 400 $145,000 $145,000 Other data:

1. Insurance expires at the rate of $400 per month.

2. An inventory of supplies shows $1,900 of unused supplies on March 31. 3. Annual depreciation is $4,440 on the lodge and $3,600 on furniture.

4. The mortgage interest rate is 9%. (The mortgage was taken out on March 1.) 5. Unearned rent of $1,300 has been earned.

6. Salaries of $960 are accrued and unpaid at March 31. Instructions

(a) Journalize the adjusting entries on March 31.

(b) Prepare a ledger using T accounts. Enter the trial balance amounts and post the adjusting entries.

(c) Prepare an adjusted trial balance on March 31.

(d) Prepare an income statement and a retained earnings statement for the month of March and a classified balance sheet at March 31.

(e) Identify which accounts should be closed on March 31.

P4-4C Green Acres Golf Inc. was organized on April 1, 2007. Quarterly financial state-ments are prepared. The trial balance and adjusted trial balance on June 30 are shown on the next page.

Problems: Set C

15

Trial Balance June 30, 2007 Unadjusted Adjusted Dr. Cr. Dr. Cr. Cash $ 7,890 $ 7,890 Accounts Receivable 1,500 1,900 Prepaid Insurance 2,400 1,800 Supplies 2,100 1,410 Equipment 18,000 18,000 Accumulated Depreciation—Equipment $ 750 Notes Payable $ 7,500 7,500 Accounts Payable 2,200 2,200 Salaries Payable 900 Interest Payable 100

Unearned Rent Revenue 1,300 800

Common Stock 18,000 18,000 Retained Earnings 0 0 Dividends 450 450 Dues Revenue 14,600 15,000 Rent Revenue 700 1,200 Salaries Expense 10,100 11,000 Insurance Expense 1,200 1,800 Depreciation Expense 750 Supplies Expense 690 Utilities Expense 660 660 Interest Expense 100 $44,300 $44,300 $46,450 $46,450 Instructions

(a) Journalize the adjusting entries that were made.

(b) Prepare an income statement and a retained earnings statement for the 3 months ending June 30 and a classified balance sheet at June 30.

(c) Identify which accounts should be closed on June 30.

(d) If the note bears interest at 8%, how many months has it been outstanding? P4-5C A review of the ledger of Phelps Company at December 31, 2007, produces these data pertaining to the preparation of annual adjusting entries.

1. Prepaid Insurance $16,400. The company has separate insurance policies on its buildings and its motor vehicles. Policy B4564 on the building was purchased on January 1, 2006, for $11,400. The policy has a term of 3 years. Policy A2958 on the vehicles was purchased on July 1, 2007, for $8,800. This policy has a term of 2 years.

2. Unearned Subscription Revenue $29,040. The company began selling magazine sub-scriptions on September 1, 2007 on an annual basis. The selling price of a subscrip-tion is $24. A review of subscripsubscrip-tion contracts reveals the following.

Subscription Number of Start Date Subscriptions

September 1 240

October 1 260

November 1 330

December 1 380

1,210

3. Notes Payable, $16,000: This balance consists of a note for 8 months at an annual interest rate of 9%, dated August 1.

4. Salaries Payable $0: There are six salaried employees. Salaries are paid every Friday for the current week. Four employees receive a salary of $480 each per week, and two employees earn $600 each per week. December 31 is a Thursday.

(b) Net income $1,200 Tot. assets $30,250

Prepare adjusting entries.

(SO 4, 5)

16

A-PLUS TEST PREP Income Statement

For the Quarter ended April 30, 2007 Revenues Tuition revenues $240,000 Operating expenses Advertising $ 6,400 Wages 92,000 Utilities 1,300 Depreciation 2,400 Repairs 1,700

Total operating expenses 103,800

Net income $136,200

Denise suspected that something was wrong with the statement because net income had never exceeded $40,000 in any one quarter. Knowing that you are an experienced ac-countant, she asks you to review the income statement and other data.

You first look at the trial balance. In addition to the account balances reported above in the income statement, the ledger contains the following additional selected balances at April 30, 2007.

Books and Supplies $ 9,800 Prepaid Insurance 12,000

Note Payable 15,000

You then make inquiries and discover the following.

1. Tuition revenues include advanced tuition payments received for summer classes, in the amount of $70,000.

2. There were $2,600 of books and supplies on hand at April 30.

3. Prepaid insurance resulted from the payment of a one-year policy on February 1, 2007.

4. The mail in May 2007 brought the following bills: advertising for the week of April 24, $80; repairs made April 18, $2,560; and utilities for the month of April, $530. 5. There are six employees who receive wages that total $1,380 per day. At April 30,

three days’ wages have been incurred but not paid.

6. The note payable is a 8% note dated February 1, 2007, and due on May 31, 2007. 7. Income tax of $15,200 for the quarter is due in May but has not yet been recorded. Instructions

(a) Prepare any adjusting journal entries required as at April 30, 2007. (b) Prepare a correct income statement for the quarter ended April 30, 2007.

(c) Explain to Denise the generally accepted accounting principles that she did not rec-ognize in preparing her income statement and their effect on her results.

Employees do not work weekends. All employees worked the last 4 days of December.

Instructions

Prepare the adjusting entries at December 31, 2007.

P4-6C A-Plus Test Prep was organized on May 1, 2006, by Denise Fenley. Denise is a good manager but a poor accountant. From the trial balance prepared by a part-time bookkeeper, Denise prepared the following income statement for her fourth quarter, which ended April 30, 2007.

Prepare adjusting entries and a corrected income statement.

(SO 4, 5)

(b) Net income $33,190

Problems: Set C

17

Repair Services.

Debits Credits

Cash $ 6,040 Accumulated Depreciation $ 600

Accounts Receivable 2,910 Accounts Payable 2,300

Supplies 1,030 Unearned Service Revenue 1,260

Store Equipment 10,000 Salaries Payable 1,420

Common Stock 10,000

Retained Earnings 4,400

$19,980 $19,980

During August the following summary transactions were completed. Aug. 5 Received $1,200 cash from customers in payment of account.

10 Paid $3,120 for salaries due employees, of which $1,700 is for August and $1,420 is for July salaries payable.

12 Received $2,800 cash for services performed in August. 15 Purchased store equipment on account $2,000.

17 Purchased supplies on account $860.

20 Paid creditors $2,500 of accounts payable due. 22 Paid August rent $380.

25 Paid salaries $2,900.

27 Performed services on account and billed customers for services provided $3,130.

29 Received $780 from customers for services to be provided in the future. Adjustment data:

1. Supplies on hand are valued at $960. 2. Accrued salaries payable are $1,540. 3. Depreciation for the month is $320.

4. Unearned service revenue of $800 is earned. Instructions

(a) Enter the August 1 balances in the ledger accounts. (Use T accounts.) (b) Journalize the August transactions.

(c) Post to the ledger accounts. Use Service Revenue, Depreciation Expense, Supplies Expense, Salaries Expense, and Rent Expense.

(d) Prepare a trial balance at August 31. (e) Journalize and post adjusting entries. (f) Prepare an adjusted trial balance.

(g) Prepare an income statement and a retained earnings statement for August and a classified balance sheet at August 31.

P4-8C Laura Young opened Magic Carpet Cleaners Inc. on January 1, 2007. During January the following transactions were completed.

Jan. 1 Issued 12,000 shares of common stock for $18,000 cash.

1 Purchased used truck for $12,000, paying $4,000 cash and the balance on account.

3 Purchased cleaning supplies for $940 on account.

5 Paid $7,200 cash on 1-year insurance policy effective January 1. 12 Billed customers $4,100 for cleaning services.

18 Paid $600 cash on amount owed on truck and $300 on amount owed on cleaning supplies.

20 Paid $2,600 cash for employee salaries.

21 Collected $2,300 cash from customers billed on January 12. 25 Billed customers $2,850 for cleaning services.

31 Paid $450 for gas and oil used in the truck during month. 31 Declared and paid $600 cash dividend.

The chart of accounts for Magic Carpet Cleaners contains the following accounts: Cash, Accounts Receivable, Cleaning Supplies, Prepaid Insurance, Equipment, Accumulated

GLS

Journalize transactions and follow through accounting cycle to preparation of financial statements.

(SO 4, 5, 6)

Complete all steps in accounting cycle.

(SO 4, 5, 6, 7, 8)

(f) Cash $1,920 Tot. trial balance $27,490 (g) Net loss $1,040

GLS

18

Depreciation—Equipment, Accounts Payable, Salaries Payable, Common Stock, Retained Earnings, Dividends, Income Summary, Service Revenue, Gas & Oil Expense, Cleaning Supplies Expense, Depreciation Expense, Insurance Expense, Salaries Expense.

Instructions

(a) Journalize the January transactions.

(b) Post to the ledger accounts. (Use T accounts.) (c) Prepare a trial balance at January 31.

(d) Journalize the following adjustments.

(1) Services provided but unbilled and uncollected at January 31 were $2,340. (2) Depreciation on the truck for the month was $320.

(3) One-twelfth of the insurance expired.

(4) An inventory count shows $210 of cleaning supplies on hand at January 31. (5) Accrued but unpaid employee salaries were $760.

(e) Post adjusting entries to the T accounts. (f ) Prepare an adjusted trial balance.

(g) Prepare the income statement and a retained earnings statement for January and a classified balance sheet at January 31.

(h) Journalize and post closing entries and complete the closing process. (i) Prepare a post-closing trial balance at January 31.

(f) Cash $4,550 (g) Tot. assets $30,030

Problems: Set C

19

Problems: Set C

P5-1C Franklin Craft Store completed the following merchandising transactions in the month of October. At the beginning of October, Franklin’s ledger showed Cash of $8,000 and Common Stock of $8,000.

Oct. 1 Purchased merchandise on account from Michael’s Wholesale Supply for $4,800, terms 1/10, n/30.

2 Sold merchandise on account for $3,900, terms 2/10, n/30. The cost of the merchandise sold was $2,400.

5 Received credit from Michael’s Wholesale Supply for merchandise returned $600.

9 Received collections in full, less discounts, from customers billed on sales of $3,900 on October 2.

10 Paid Michael’s Wholesale Supply in full, less discount. 11 Purchased supplies on account for $750.

12 Purchased merchandise for cash $2,100.

15 Received $200 refund for return of poor-quality merchandise from supplier on cash purchase.

17 Purchased merchandise on account from Handiwork Distributors for $2,500, terms 2/10, n/30.

19 Paid freight on October 17 purchase $310.

24 Sold merchandise for cash $6,900. The cost of the merchandise sold was $4,510.

25 Purchased merchandise on account from Hobbytown Inc. for $1,000, terms 3/10, n/30.

27 Paid Handiwork Distributors in full, less discount.

29 Made refunds to cash customers for returned merchandise $190. The returned merchandise had cost $134.

31 Sold merchandise on account for $1,460, terms 1/10, n/30. The cost of the merchandise sold was $950.

Franklin Craft’s chart of accounts includes Cash, Accounts Receivable, Merchandise Inventory, Supplies, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.

Instructions

(a) Journalize the transactions using a perpetual inventory system.

(b) Post the transactions to T accounts. Be sure to enter the beginning cash and com-mon stock balances.

(c) Prepare an income statement through gross profit for the month of October 2007. (d) Calculate the profit margin ratio and the gross profit rate. (Assume operating expenses

were $2,100.)

P5-2C Crowning Glory Warehouse distributes commercial hair care products in one-gallon bottles to hair salons and extends credit terms of 3/10, n/30 to all of its customers. During the month of April the following merchandising transactions occurred.

Apr. 1 Purchased 190 bottles on account for $6 each (including freight) from Healthy Hair, terms 2/10, n/30.

3 Sold 40 bottles on account to the Curl Up and Dye salon for $10 each. 6 Received $90 credit for 15 bottles returned to Healthy Hair.

9 Paid Healthy Hair in full.

12 Received payment in full from the Curl Up and Dye salon. 13 Sold 25 bottles on account to Hairport Salon for $10 each.

20 Purchased 200 bottles on account for $6 each from Golden Tresses, terms 1/15, n/30.

24 Received payment in full from Hairport Salon. 26 Paid Golden Tresses in full.

28 Sold 160 bottles on account to Cheaper/Cuts salons for $10 each. 30 Granted Cheaper/Cuts $120 credit for 12 bottles returned costing $72.

(c) Gross profit $4,266

Journalize purchase and sale transactions under a perpetual inventory system.

(SO 2, 3)

Journalize, post, prepare partial income statement, and calculate ratios.

(SO 2, 3, 4, 6)

GLS

20

Journalize the transactions for the month of April for Crowning Glory Warehouse, using a perpetual inventory system. Assume the cost of each bottle sold was $6.

P5-3C At the beginning of the current season on November 1, the ledger of Lakeside Ice House showed Cash $3,300; Merchandise Inventory $4,700; and Common Stock $8,000. The following transactions were completed during November 2007.

Nov. 5 Purchased hockey sticks and pucks on account from Gillmore Co. $1,600, terms 2/10, n/60.

7 Paid freight on Gillmore purchase $90.

9 Received credit from Gillmore Co. for merchandise returned $350. 10 Sold merchandise on account for $1,100, terms n/30. The merchandise

sold had a cost of $760.

12 Purchased gloves, socks, and other accessories on account from Orr Sportswear $945, terms 1/10, n/30.

14 Paid Gillmore Co. in full.

17 Received credit from Orr Sportswear for merchandise returned $45. 20 Made sales on account for $1,330, terms n/30. The cost of the

merchan-dise sold was $950.

21 Paid Orr Sportswear in full.

27 Granted an allowance to customers for clothing that did not fit properly $110.

30 Received payments on account for $1,900.

The chart of accounts for the ice house includes Cash, Accounts Receivable, Merchan-dise Inventory, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances, and Cost of Goods Sold.

Instructions

(a) Journalize the November transactions using a perpetual inventory system.

(b) Using T accounts, enter the beginning balances in the ledger accounts and post the November transactions.

(c) Prepare a trial balance on November 30, 2007. (d) Prepare an income statement through gross profit.

P5-4C Tobin’s China and Collectibles is located in midtown Centralia. During the past several years, net income has been declining because suburban shopping centers have been attracting business away from city areas. At the end of the company’s fiscal year on September 30, 2007, these accounts appeared in its adjusted trial balance.

Accounts Payable $ 22,800

Accounts Receivable 19,530

Accumulated Depreciation—Building 120,000 Accumulated Depreciation—Store Equipment 21,000

Advertising Expense 6,000

Building 200,000

Cash 7,800

Common Stock 28,000

Cost of Goods Sold 520,000

Delivery Expense 5,800

Depreciation Expense—Building 8,000

Depreciation Expense—Store Equipment 4,200

Dividends 15,000

Gain on Sale of Investment 2,300

Insurance Expense 10,300

Interest Expense 5,600

Merchandise Inventory 31,400

Notes Payable 52,000

Prepaid Insurance 2,570

Property Tax Expense 7,600

Property Taxes Payable 7,600

Retained Earnings 18,100

Salaries Expense 194,700

(c) Tot. trial

balance $10,430 (d) Gross profit $610

Prepare financial statements and calculate profitability ratios.

(SO 4, 6)

Journalize, post, and prepare trial balance and partial income statement.

(SO 2, 3, 4) GLS

Problems: Set C

21

Sales 886,000

Sales Commissions Expense 18,000

Sales Commissions Payable 2,200

Sales Returns and Allowances 26,000

Store Equipment 64,000

Utilities Expense 13,500

Additional data: Notes payable are due in 2013. Instructions

(a) Prepare a multiple-step income statement; a retained earnings statement, and a clas-sified balance sheet.

(b) Calculate the profit margin ratio and the gross profit rate.

(c) The vice-president of marketing and the director of human resources have devel-oped a proposal whereby the company would compensate the sales force on a strictly commission basis using 30% of net sales. Given the increased incentive, they expect net sales to increase by 25%. As a result, they estimate that gross profit will increase by $85,000 and operating expenses by $109,800. Compute the ex-pected new net income. (Hint: You do not need to prepare an income statement). Then compute the revised profit margin ratio and gross profit rate. Comment on the effect that this plan would have on net income and on the ratios, and evaluate the merit of this proposal.

P5-5C An inexperienced accountant prepared this condensed income statement for Xiong Company, a retail firm that has been in business for a number of years.

Prepare a correct multiple-step income statement.

(SO 4)

Net income $145,000

Journalize, post, and prepare adjusted trial balance and financial statements.

(SO 4) XIONG COMPANY

Income Statement

For the Year Ended December 31, 2007 Revenues

Net sales $952,000

Other revenues 17,000

969,000 Cost of goods sold 548,000

Gross profit 421,000 Operating expenses Selling expenses 161,000 Administrative expenses 104,000 265,000 Net earnings $156,000

As an experienced, knowledgeable accountant, you review the statement and determine the following facts.

1. Net sales consist of sales $972,000, less delivery expense on merchandise sold $20,000. 2. Other revenues consist of sales discounts $12,000 and interest revenue $5,000. 3. Selling expenses consist of salespersons’ salaries $88,000; depreciation on store

equip-ment $4,000; sales returns and allowances $46,000; advertising $12,000; and sales com-missions $11,000.

4. Administrative expenses consist of office salaries $54,000; dividends $14,000; utilities $13,000; interest expense $3,000; and rent expense $20,000, which includes prepay-ments totaling $2,000 for the first month of 2008. The utilities represent utilities paid. At December 31, utility expense of $3,000 has been incurred but not paid.

Instructions

Prepare a correct detailed multiple-step income statement.

P5-6C The trial balance of Wheels and Deals Inc. contained the accounts shown on the following page as of December 31, the end of the company’s fiscal year.

(a) Net income $68,600 Tot. assets $184,300

22

Adjustment data:

1. Depreciation is $18,000 on buildings and $8,000 on equipment. (Both are operating expenses.)

2. Insurance expires at a rate of $500 per month.

Other data: $12,500 of the notes payable are payable next year. Instructions

(a) Journalize the adjusting entries.

(b) Create T accounts for all accounts used in part (a). Enter the trial balance amounts into the T accounts and post the adjusting entries.

(c) Prepare an adjusted trial balance.

(d) Prepare a multiple-step income statement and a retained earnings statement for the year, and a classified balance sheet at December 31, 2007.

P5-7C At the end of Bill’s Dollar Store’s fiscal year on January 31, 2007, these accounts appeared in its adjusted trial balance.

Freight-in $ 6,900

Merchandise Inventory (beginning) 47,500

Purchases 674,200

Purchase Discounts 5,800

Purchase Returns and Allowances 8,900

Sales 792,000

Sales Returns and Allowances 12,000 Additional facts:

1. Merchandise inventory on January 31, 2007, is $52,300. 2. Note that Bill’s Dollar Store uses a periodic system. Instructions

Prepare an income statement through gross profit for the year ended January 31, 2007. P5-8C All Decked Out Inc. operates a retail operation that purchases and sells lawn and patio products. The company purchases all merchandise inventory on credit and uses a

WHEELS AND DEALS INC. Trial Balance December 31, 2007 Debit Credit Cash $ 45,200 Accounts Receivable 31,100 Merchandise Inventory 41,200 Prepaid Insurance 8,000 Land 44,000 Buildings 360,000 Accumulated Depreciation—Buildings $ 90,000 Equipment 56,000 Accumulated Depreciation—Equipment 40,000 Notes Payable 62,500 Accounts Payable 38,300 Common Stock 180,000 Retained Earnings 87,200 Dividends 14,000 Sales 768,000 Sales Discounts 3,500

Cost of Goods Sold 496,800

Salaries Expense 136,400

Utilities Expense 9,600

Repair Expense 7,800

Gas and Oil Expense 7,600

Interest Expense 4,800

$1,266,000 $1,266,000

(c) Tot. trial balance

$1,292,000 (d) Net income $69,500 Tot. assets $423,500

Determine cost of goods sold and gross profit under periodic approach.

(SO 4, 5)

Gross profit $118,400

Calculate missing amounts and assess profitability.

(SO 4, 5, 6)

Problems: Set C

23

inven-tory purchases only; all other current liabilities are accrued in separate accounts. You are provided with the following selected information for the fiscal years 2005 through 2008, inclusive.

Instructions

(a) Calculate cost of goods sold for each of the 2006, 2007, and 2008 fiscal years. (b) Calculate the gross profit for each of the 2006, 2007, and 2008 fiscal years.

(c) Calculate the ending balance of accounts payable for each of the 2006, 2007, and 2008 fiscal years. The ending balance of accounts payable for 2005 was $19,000. (d) The vice-presidents of sales, marketing, production, and finance are discussing the

company’s results with the CEO. They note that sales declined over the 3-year fiscal period, 2006-2008. Does that mean that profitability necessarily also declined? Explain, computing the gross profit rate for each fiscal year to help support your answer.

*P5-9C At the beginning of the current season on November 1, the ledger of Lakeside Ice House showed Cash $3,300, Merchandise Inventory $4,700, and Common Stock $8,000. These transactions occured during November 2007.

Nov. 5 Purchased hockey sticks and pucks on account from Gillmore Co. $1,600, terms 2/10, n/60.

7 Paid freight on Gillmore Co. purchases $90.

9 Received credit from Gillmore Co. for merchandise returned $350. 10 Sold merchandise on account for $1,100, terms n/30.

12 Purchased gloves, socks, and other accessories on account from Orr Sportswear $945, terms 1/10, n/30.

14 Paid Gillmore Co. in full.

17 Received credit from Orr Sportswear for merchandise returned $45. 20 Made sales on account for $1,330, terms n/30.

21 Paid Orr Sportswear in full.

27 Granted credit to customers for clothing that did not fit properly $110. 30 Received payments on account for $1,900.

The chart of accounts for the ice house includes Cash, Accounts Receivable, Merchan-dise Inventory, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances, Purchases, Purchase Returns and Allowances, Purchase Discounts, and Freight-in. Instructions

(a) Journalize the November transactions using a periodic inventory system.

(b) Using T accounts, enter the beginning balances in the ledger accounts and post the November transactions.

(c) Prepare a trial balance on November 30, 2007.

(d) Prepare an income statement through Gross Profit, assuming merchandise inventory on hand at November 30 is $5,196.

Journalize, post, and prepare trial balance and partial income statement using periodic approach. (SO 5, 7) (c) Tot. trial balance $10,859 Gross profit $610 GLS 2005 2006 2007 2008 Inventory (ending) $18,420 $ 14,300 $ 15,400 $ 12,680 Sales 292,000 295,000 284,000 Purchases of merchandise inventory on account 174,000 178,100 162,000

Cash payments to suppliers 171,000 183,000 167,000

(a) 2007 cost of goods sold $177,000 2007 Ending acct. payable $17,100

24

Problems: Set C

P6-1C Farrell Company is trying to determine the value of its ending inventory as of March 31, 2007, the company’s year-end. The following transactions occurred, and the ac-countant asked your help in determining whether they should be recorded or not.

(a) On March 30, Farrell shipped to a customer goods costing $800. The goods were shipped FOB destination, and the receiving report indicates that the customer re-ceived the goods on April 1.

(b) On March 28, Supplier Inc. shipped goods to Farrell FOB shipping point. The invoice price was $400 plus $20 for freight. The receiving report indicates that the goods were received by Farrell on April 2.

(c) Farrell had $750 of consigned goods from Joyce Inc.

(d) Farrell had $380 of inventory at Zwingle Variety, on consignment from Farrell.

(e) On March 29, Farrell ordered goods costing $640. The goods were shipped FOB des-tination on March 31. Farrell received the goods on April 3.

(f ) A customer returned goods to Farrell on March 31. Upon inspection, the goods were found to be undamaged and were accepted as returned goods. These goods originally cost $400 and Farrell sold them for $640.

Instructions

For each of the above transactions, specify whether the item in question should be included in ending inventory, and if so, at what amount. For each item that is not included in ending inventory, indicate who owns it and what account, if any, it should have been recorded in. P6-2C Timeless Distribution markets classic children’s books. At the beginning of June, Timeless had in beginning inventory 1,200 books with a unit cost of $3. During June, Timeless made the following purchases of books.

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average cost, with analysis.

(SO 2, 3)

Determine items and amounts to be recorded in inventory.

(SO 1)

Cost of goods sold: FIFO $47,100 LIFO $56,500 Average $51,578

June 3 3,000 @ $4 June 29 4,000 @ $6

June 18 7,800 @ $5

During June, 10,500 books were sold. Timeless uses a periodic inventory system. Instructions

(a) Determine the cost of goods available for sale.

(b) Determine (1) the ending inventory and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods. (Note: For average cost, round cost per unit to three decimal places.)

(c) Which cost flow method results in (1) the highest inventory amount for the balance sheet and (2) the highest cost of goods sold for the income statement?

P6-3C Byron Company Inc. had a beginning inventory of 200 units of Product ERV at a cost of $6 per unit. During the year, purchases were:

Jan. 24 800 units at $7 Aug. 19 600 units at $ 9 Apr. 12 400 units at $8 Nov. 30 300 units at $10

Byron Company uses a periodic inventory system. Sales totalled 1,900 units. Instructions

(a) Determine the cost of goods available for sale.

(b) Determine the ending inventory and the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods.

(c) Which cost flow method results in the lowest inventory amount for the balance sheet? The lowest cost of goods sold for the income statement?

Cost of goods sold: FIFO $14,500 LIFO $15,800 Average $15,200

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average cost in a periodic inventory system, and assess financial statement effect.

(SO 2, 3)

Problems: Set C

25

Inventory, January 1 (4,000 units) $ 16,000 Cost of 105,000 units purchased 470,500 Selling price of 100,000 units sold 870,000

Operating expenses 185,000

Units purchased consisted of 35,000 units at $4.20 on March 20; 65,000 units at $4.60 on July 24, and 5,000 units at $4.90 on December 12. Income taxes are 30%.

Instructions

(a) Prepare comparative condensed income statements for 2007 under FIFO and LIFO. (Show computations of ending inventory.)

(b) Answer the following questions for management in the form of a business letter. (1) Which inventory cost flow method produces the most meaningful inventory

amount for the balance sheet? Why?

(2) Which inventory cost flow method produces the most meaningful net income? Why? (3) Which inventory cost flow method is most likely to approximate the actual

phys-ical flow of the goods? Why?

(4) How much more cash will be available under LIFO than under FIFO? Why? (5) How much of the gross profit under FIFO is illusionary in comparison with the

gross profit under LIFO?

P6-5C You have the following information for Alsteen Inc. for the month ended May 31, 2007. Alsteen uses a periodic method for inventory.

Unit Cost or

Date Description Units Selling Price

May 1 Beginning inventory 40 $20

May 6 Purchase 110 23 May 7 Sale 90 32 May 15 Purchase 70 24 May 18 Sale 40 37 May 24 Purchase 60 26 May 30 Sale 80 38 Instructions

(a) Calculate (i) ending inventory, (ii) cost of goods sold, (iii) gross profit, and (iv) gross profit rate under each of the following methods.

(1) LIFO. (2) FIFO.

(3) Average cost. (Round cost per unit to three decimal places.) (b) Compare results for the three cost flow assumptions.

P6-6C You have the following information for Tempus Watches. Tempus uses the periodic method of accounting for its inventory transactions. Tempus carries only one brand of hand-crafted jeweled watches—all are identical. Each batch of watches pur-chased is carefully coded and marked with its purchase cost.

July 1 Beginning inventory 220 watches at a cost of $400 per watch. July 2 Purchased 200 watches at a cost of $450 each.

July 5 Sold 180 watches for $680 each.

July 14 Purchased 350 watches at a cost of $480 each. July 28 Sold 480 watches for $720 each.

Instructions

(a) Assume that Tempus uses the specific identification cost flow method.

(1) Demonstrate how Tempus could maximize its gross profit for the month by specif-ically selecting which watches to sell on July 5 and July 28.

(2) Demonstrate how Tempus could minimize its gross profit for the month by selecting which watches to sell on July 5 and July 28.

Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO.

(SO 2, 3)

Gross profit: FIFO $426,400 LIFO $420,500

Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results. (SO 2, 3) Gross profit: LIFO $2,320 FIFO $2,630 Average $2,472 P6-4C The management of Jorgensen Inc. asks your help in determining the

compar-ative effects of the FIFO and LIFO inventory cost flow methods. For 2007 the account-ing records show these data.

Compare specific identification, FIFO, and LIFO under periodic method; use cost flow assumption to influence earnings.

(SO 2, 3)

Gross profit:

Maximum $174,800 Minimum $166,000

26

(b) Assume that Tempus uses the FIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would Tempus report under this cost flow assumption? (c) Assume that Tempus uses the LIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would the company report under this cost flow assumption?

(d) Which cost flow method should Tempus Watches select? Explain.

P6-7C This information is available for the Automotive Sector of Ford Motor Company for 2004. Ford uses the LIFO inventory method.

(in millions) 2004 Beginning inventory $ 9,151 Ending inventory 10,766 LIFO reserve 1,001 Current assets 44,703 Current liabilities 55,027 Cost of goods sold 135,856

Sales 147,134

Instructions

(a) Calculate the inventory turnover ratio and days in inventory.

(b) Calculate the current ratio based on inventory as reported using LIFO. (c) Calculate the current ratio after adjusting for the LIFO reserve. (d) Comment on any difference between parts (b) and (c).

*P6-8C Brong Inc. is a retailer operating in Centralia. Brong uses the perpetual inven-tory method. All sales returns from customers result in the goods being returned to in-ventory. (Assume that the inventory is not damaged.) Assume that there are no credit transactions; all amounts are settled in cash. You are provided with the following infor-mation for Brong Inc. for the month of January 2007.

Unit Cost or Date Description Quantity Selling Price

Dec. 31 Ending inventory 140 $14

Jan. 2 Purchase 120 15

Jan. 6 Sale 150 30

Jan. 9 Sale return 20 30

Jan. 9 Purchase 85 17

Jan. 10 Purchase return 15 17

Jan. 10 Sale 70 35

Jan. 23 Purchase 100 19

Jan. 30 Sale 110 40

Compute inventory turnover ratio and days in inventory; compute current ratio based on LIFO and after adjusting for LIFO reserve.

(SO 5, 6)

Instructions

(a) For each of the following cost flow assumptions, calculate (i) cost of goods sold, (ii) ending inventory, and (iii) gross profit.

(1) LIFO. (Assume sales returns had a cost of $14 and purchase returns had a cost of $17.)

(2) FIFO. (Assume sales returns had costs of $14 for 10 units and $15 for 10 units, and purchase returns had a cost of $17.)

(3) Moving-average. (Round cost per unit to three decimal places.) (b) Compare results for the three cost flow assumptions.

*P6-9C Just Rugs began operations on February 1. It uses a perpetual inventory system. During February the company had the following purchases and sales.

Calculate cost of goods sold, ending inventory, and gross profit for LIFO, FIFO, and average cost under the perpetual system; compare results.

(SO 3, 7)

Determine ending inventory under a perpetual inventory system. (SO 3, 7) Gross profit: LIFO $5,580 FIFO $6,140 Average $5,932