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Chapter 3

Accrual Accounting & Income

Short Exercises

(10 min.) S 3-1

Millions

Sales revenue…………………………………………….

960

Cost of goods sold………………………………………

(270 )

All other expenses………………………………………

(300 )

Net income………………………………………………..

$ 390

Beginning cash…………………………………………..

$ 105

Collections ($700 $30)−………………………………..

935

Payments for: inventory……………………………….

(370 )

everything else……………………….

(285 )

Ending cash………………………………………………

$ 385

Chapter 3 Accrual Accounting & Income 162

(10 min.) S 3-2

Statement Reports (Amounts in millions)Income statement Interest

expense……………….$1.8

Balance sheet Notes payable($3.9 + $2.3 $2.0)−

………….$4.2

Interest payable………………..

0.1

(10 min.) S 3-3

At the end of each accounting period, the business reports its performance through the preparation of financial statements. In order to be useful to the various users of financial statements they must be up-to-date. Accounts such as cash, Equipment, Accounts Payable, Common Stock and Dividends are up-to date and require no adjustment at the end of the accounting period. Accounts such as Accounts Receivable, Supplies, Salary Expense and Salaries Payable may not be up to date as of the last day of the accounting period. Why? Because certain transactions that took place in the month may not have been recorded.

The accrued salaries, which are owed to the employees yet have not been paid, are an expense related to the current period. The salaries that are owed to the employees but are unpaid also represent a liability or debt that is owed by the business. The business must make an adjusting entry to record the accrued salary owed as both an increase in Salary Expense and an increase in Salaries Payable. If the business does not make this adjustment the expenses will be understated and net income will be overstated. In addition, liabilities will be understated.


(10 min.) S 3-4

The large auto manufacturer should record sales

revenue when the revenue is earned by delivering

automobiles to Acme or Harris. The large auto

manufacturer should not record any revenue prior to

delivery of the vehicles because the large auto

manufacturer hasn’t earned the revenue yet. The revenue

principle governs this decision.

When the large auto manufacturer records the revenue

from the sale, at that time —not before or after — the

large auto manufacturer should also record cost of goods

sold, the expense. The matching principle tells when to

record expenses.


(10 min.) S 3-5

Depreciation is the periodic allocation of the cost of a

tangible long- lived asset, less its estimated residual

value, over its estimated useful life. All long- lived or

plant assets, except for land decline in usefulness during

their life and this decline is an expense. Accountants

must allocate the cost of each plant asset, except for

land, over the asset’s useful life. Depreciation is the

process of allocating the cost of a plant asset to expense.

Depreciation also decreases the book value of the asset

to reflect its usage.

(10 min.) S 3-6 a. The Matching Principle

b. The Time Period Concept

c. The Revenue Principle

d. The Revenue Principle

e. The Matching Principle


(10 min.) S 3-7

a.

Mar. 31 Rent Expense ($4,800 × 1/6)……..

800

Prepaid Rent……………………..

800

To record rent expense.

Prepaid Rent Rent ExpenseMar. 1

4,800 Mar. 31 800 Mar. 31

800

Bal. 4,000 Bal. 800

b.

Dec. 31 Supplies Expense ($900 −$700)….

200

Supplies…………………………….

200

To record supplies expense.

Supplies Supplies ExpenseDec. 1

900 Mar. 31

200 Marc. 31

200

Bal. 700 Bal. 200


(10 min.) S 3-8

Req. 1

(a)Jan.

1Computer Equipment…………….…..

80,000

Cash…………………………………..

80,000

Purchased computer equipment.

(b)

Dec. 31

Depreciation Expense −

Computer Equipment ($80,000 / 4)…

20,000

Accumulated Depreciation −Computer

Equipment……………...20,00

0

Req. 2

Computer Equipment

Accumulated Depreciatio

n − Computer Equipment

DepreciationExpense −Computer Equipment

Jan. 80,000

Dec. 31

20,000

Dec. 31

20,000

Bal. 80,000

Bal. 20,000

Bal. 20,000

Req. 3

Computer equipment………………………………….

$80,000

Less Accumulated depreciation…………………….

(20,000 )

Book $60,000


value………………………………………………


(10 min.) S 3-9

(Amounts in millions)

Income statement: 2010Salary expense ($38.3 + $2.8)

…..$41.1

Balance sheet: 2010Salary payable………………... $ 2.8


(10 min.) S 3-10

Req. 1

Oct. 31 Interest Expense……………………………….

500

Interest Payable……………………………..

500

To accrue interest expense for October.

Nov. 30 Interest Expense……………………………….

500


500

To accrue interest expense for November.

Dec. 31

Interest Expense……………………………….

500


500

To accrue interest expense for December.

Req. 2

Interest PayableOct.

31500

Nov. 30

500

Dec. 31

500

Bal. 1,500


Req. 3

Dec. 31

Interest Payable……………………………...

1,500

Cash…………………………………………

1,500

To pay interest.


(10 min.) S 3-11

Req. 1

Oct. 31 Interest Receivable…………………………..

500

Interest Revenue…………………………..

500

To accrue interest revenue for October.

Nov. 30 Interest Receivable…………………………..

500

Interest Revenue……...…………………..

500

To accrue interest revenue for November.

Dec. 31 Interest Receivable…………………………..

500

Interest Revenue……...……………….…..

500

To accrue interest revenue for December.

Req. 2

Interest ReceivableOct. 31

500

Nov. 30 500Dec. 31 500Bal. 1,500

Req. 3

Dec. Cash……………………………………… 1,50


31 …… 0Interest

Receivable………………………1,50

0To collect interest.


(5- 10 min.) S 3-12

Unearned revenues are liabilities because The Globe and

Trail has received cash from subscribers in advance of

providing them with newspapers. Receiving the cash in

advance creates an obligation (a liability) for The Globe

and Trail. As The Globe and Trail delivers newspapers to

subscribers, The Globe and Trail earns the revenue, and

the dollar amount of the unearned revenue then goes into

the revenue account.

a. Cash…………………………………………

50,000

Unearned Subscription Revenue…...

50,000

Received cash for revenue in advance.

b. Unearned Subscription Revenue.............. ..

50,000

Subscription Revenue…………………….

50,000

To record the earning of subscriptionrevenue that was collected in advance.


(5- 10 min.) S 3-13

Prepaid Rent at December 31:a. Unadjusted amount…………………………. $24,00

0b. Adjusted amount ($24,000 $8,000)−

……….16,000

Rent Expense at December 31:c. Unadjusted amount…………………………. $ 0d. Adjusted amount ($24,000 / 3)

……………….8,000

(10 min.) S 3-14

a. Accounts Receivable…………………….

60,000

Service Revenue……………………….

60,000

Cash…………………………………………

45,000

Accounts Receivable…………………

45,000

b. Cash…………………………………………

7,500

Unearned Service Revenue………….

7,500

Unearned Service Revenue…………….

3,500

Service Revenue……………………….

3,500


(15- 30 min.) S 3-15

Vulture Sporting Goods CompanyIncome Statement

Year Ended March 31, 2010Thousands

Net revenues…………………………….

$ 174,000

Cost of goods sold…………………….

136,800

All other expenses……………………..

26,000

Net income………………………………

$ 11,200

Vulture Sporting Goods CompanyStatement of Retained Earnings

Year Ended March 31, 2010Thousand

sRetained earnings, March 31, 2009…...

$2,000

Add: Net income………………………..

11,200

Retained earnings, March 31, 2010.…..

$13,200


(continued) S 3-15

Vulture Sporting Goods CompanyBalance SheetMarch 31, 2010

ThousandsASSETS

Current:

Cash………………………………………

$ 1,300

Accounts receivable…………………..

28,200

Inventories………………………………

37,000

Other current assets…………………..

5,200

Total current assets………………..

71,700

Property and equipment, net……………

6,000

Other assets……………………………….

28,0 00

Total assets…………………………………...

$105,700

LIABILITIESTotal current

liabilities…………………..$53,00

0Long-term liabilities………………….

….. 12,5

00Total liabilities………………………………..

65,500

STOCKHOLDERS’ EQUITYCommon

stock……………………………27,000

Retained earnings………………………..

13,2 00

Total stockholders’ equity………….….......

40,2 00

Total liabilities and stockholders’ equity..

$105,700



(5- 10 min.) S 3-16

CLOSING ENTRIESThousands

Mar. 31

Net Revenues…………………………

174,000

Retained Earnings………………...

174,000

31

Retained Earnings……………………

162,800

Cost of Goods Sold……………….

136,800

All Other Expenses………………..

26,000

Retained EarningsMar. 31, 2010 Expenses

162,800

Mar. 31, 2009 Bal. 2,000

Mar. 31, 2010 Revenues

174,000

Mar. 31, 2010 Bal. 13,200

Retained Earnings’ ending balance agrees with the

amount reported on the statement of retained earnings

and the balance sheet (in S 3-15).


(5 min.) S 3-17

Req. 1

(Dollars in thousands)

Current ratio =

Total current assets

=

$71,700 = 1.3

5Total current liabilities

$53,000

Req. 2

Debt ratio =

Total liabilities

=

$65,500 = 0.6

2Total assets $105,700

These ratio values are neither strong nor weak. They are

middle- of-the- road values.


(10 min.) S 3-18

1. Earned revenue of $8,000 on account:

a. Current ratio =

$71,700 + $8,000 = 1.50

$53,000

b. Debit ratio =

$65,500= 0.58$105,700 +

$8,000

2. Paid accounts payable of $8,000:

a. Current ratio =

$71,700 − $8,000 = 1.42$53,000 − $8,000

b. Debit ratio =

$65,500 − $8,000 = 0.59$105,700 − $8,000


Exercises

Group A

(5- 10 min.) E 3-19A

Statement Reports1. Income statement Sales

revenue…………$4,10

0Operating expenses…

1,400

Balance sheet Accounts receivable…

$ 700

Accounts payable……

1,300

2. Cash basis would report only the cash collections of $4,900 from customers and the payment of operating expenses ($1,400). Their balance sheet should have included neither accounts receivable nor accounts payable.

(5- 10 min.) E 3-20A

a. Cash Basis b. Accrual Basis

Revenues…………………...

$590,000 $580,000

Expenses…………………...

460,000 480,000

Net income…………………

$130,000 $ 100,000

The accrual basis measures net income better because

its information on revenues and expenses is more

complete than the information provided by the cash basis.



(5- 10 min.) E 3-21A

Million

a. Revenue……………………………………………….

$800

The revenue principle says to record revenue when it has been earned , regardless of when cash is collected. Therefore, report the amount of revenue earned, regardless of when the company collects cash.

b. Total expense…………………………………….…..

$590

The matching principle governs accounting for expenses.

c. The income statement reports revenues and expenses.The statement of cash flows reports cash receipts and cash payments.


(15- 20 min.) E 3-22A

Req. 1

Adjusting EntriesDATE ACCOUNT TITLES DEBIT CREDIT

a. Insurance Expense……………………………...

1,000

Prepaid Insurance ($500+$1,500−$1,000)..

1,000

b. Interest Receivable………………………...……

1,100

Interest Revenue…………………………......

1,100

c. Unearned Service Revenue ($1,200 −$400)..

800

Service Revenue……………………………

800

d. Depreciation Expense……………………..…..

4,900

Accumulated Depreciation………………...

4,900

e. Salary Expense ($14,000 × 3/5)………………

8,400

Salary Payable……………………….…..…..

8,400

f. Income Tax Expense ($22,000 × .25)……..…

5,500

Income Tax Payable…………………..…….

5,500


(continued) E 3-22A

Req. 2

Net income understated by omission of:

Interest revenue……………………………..

$ 1,100

Service revenue……………………………...

800

Total understatement……………………….

$ 1,900

Net income overstated by omission of:Insurance

expense………………………….$1,000

Depreciation expense………………………

4,900

Salary expense………………………………

8,400

Income tax expense…………………………

5,500

Total overstatement…………………………

19,800

Overall effect — net income overstated by..

$17,90 0


(10- 15 min.) E 3-23A

Missing amounts in italics .

1 2 3 4Beginning Supplies $ 100 $600 $

1,400$ 900

Add: Payments for supplies

during the year 1,300 600 800

700

Total amount to account for

1,400 1,200 2,200 1,600

Less: Ending Supplies (200 )

(200 )

(1,00 0 )

(300 )

Supplies Expense $ 1,200 $1,000 $ 1,200

$1,300

Journal entries:

Situation 1:

Supplies……………………………

1,300

Cash………………………….….

1,300

Situation 2:

Supplies Expense………………..

1,000

Supplies………………………...

1,000


(10- 20 min.) E 3-24A


a. Interest Expense………………………………

9,500

Interest Payable…………………………….

9,500

b. Interest Receivable……………………………

4,500

Interest Revenue…………………….……..

4,500

c. Unearned Rent Revenue ($13,600 / 2 × 6/12)

3,400

Rent Revenue……………………………….

3,400

d. Salary Expense ($1,800 × 3)………………....

5,400

Salary Payable………………………………

5,400

e. Supplies Expense……………………………..

2,100

Supplies ($3,300 1,200)−……………….….

2,100

f. Depreciation Expense ($100,000 / 5)………...

20,000

Accumulated Depreciation……………….

20,000

Book value = $80,000 ($100,000 $20,000)−


(10- 20 min.) E 3-25A

Accounts Receivable Supplies1,600 600 (a) 500

(c) 800 Bal. 100Bal. 2,400

Salary Payable Unearned Service Revenue

(b) 300 (d) 200 900Bal. 300 Bal. 700

Service Revenue Salary Expense4,800 2,500

(c) 800 (b) 300(d) 200 Bal. 2800Bal. 5,800

Supplies Expense(a) 500Bal. 500


(20- 30 min.) E 3-26A

Delicious Hams, Inc.Income Statement

Year Ended December 31, 2010Thousands

Revenues:Sales revenue………………...

$41,400

Expenses:Cost of goods

sold…………..$25,10

0Selling, administrative,

andgeneral

expense………….. 10,70

0Total

expenses……………. 35,80

0Income before tax………………

5,600

Income tax expense…………….

2,30 0

Net income……………………….

$ 3,300

Delicious Hams, Inc..Statement of Retained EarningsYear Ended December 31, 2010

ThousandsRetained earnings, December 31, 2009…

$4,700

Add: Net income ………………………….

3,300

8,000Less:

Dividends……………………………. (1,500 )

Retained earnings, December 31, 2010…

$6,500



(continued) E 3-26A

Delicious Hams, Inc.Balance Sheet

December 31, 2010Thousands

ASSETS LIABILITIESCash…………………………

….$

3,800 Accounts payable………

$ 7,600

Accounts receivable…………

1,500 Income tax payable……..

600

Inventories…………………….

1,100 Other liabilities…………..

2,20 0

Prepaid expenses…………….

1,700 Total liabilities…………...

10,400

Prop., plant, equip.

$ 6,500 STOCKHOLDERS’

Less: Accum. EQUITY deprec…… .

(2,300 )

4,200 Common stock…………..

4,700

Other assets…………………..

9,300 Retained earnings………

6,50 0

Total stockholders’ equity

11,20

Total liabilities and

Total assets……………………

$21,600

stockholders’ equity...

$21,600


(10- 20 min.) E 3-27A

One mechanism for solving this exercise is to prepare the

relevant T-accounts, insert the given information, and

solve for the unknown amounts, shown in italics .

Amounts in millions

ReceivablesBeg. bal. 270Sales revenue 20,200 Collections 20,08

0End. bal. 390

Prepaid InsuranceBeg. bal. 160

Payment 420Insurance expense 39

0End. bal. 190

Accrued Liabilities PayableBeg. bal. 610

Payments 4,100Other operating

expenses 4,220End. bal. 730


(10 min.) E 3-28A

Req. 1

Mother Meghan’s income statement:Service revenue ($6,000 × 1/2)

………………….....$3,000

Mother Meghan’s balance sheet:Unearned service revenue ($6,000 × 1/2)

………..$3,000

Req. 2

Boston’s income statement:Medical expense ($6,000 × 1/2)

……………………$3,000

Boston’s balance sheet:Prepaid medical expense ($6,000 × 1/2)

…………$3,000


(10- 15 min.) E 3-29A

Req. 1

Millions

Income statementService revenue (£460 £110)−

……………………£350

Balance sheetUnearned service

revenue………………………...£110

Req. 2

Income statementService revenue (£55 + £460 £110)−

…………….£405


revenue………………………...£110

Service revenue is greater in (2) because Nanofone

began the year owing more phone service to customers.

With collections for the year and the amount of the ending

liability unchanged, Nanofone must have earned more

revenue in situation 2 than in situation 1.

Not required but helpful:

Unearned Service RevenueBeg. bal. 55

Earned revenue

405

Collected cash

460

End. bal. 110


(10- 20 min.) E 3-30A

JournalDATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Closing EntriesDec.

31 Service Revenue…………………………

24,000

Other Revenue……………………………

300

Retained Earnings…………………….

24,300

31 Retained Earnings……………………….

23,600

Cost of Services Sold………………...

11,300

Selling, General, and Administrative

Expense……………………………...

6,700

Depreciation Expense………………..

4,800

Income Tax Expense………………….

800


600

Dividends…………………………….…

600

Net income for 2010 was $700 ($24,300 $23,600).−

Retained EarningsDec. 31, 2009

2,100

Dividends

600 Net income 700


Dec. 31, 2010

2,200


(15- 25 min.) E 3-31A

JournalDATE ACCOUNT TITLES AND EXPLANATION DEBIT

CREDIT

Adjusting EntriesDec. 31 Unearned Service

Revenue……………….6,500

Service Revenue ($20,100 −$13,600)...

6,500

31 Salary Expense ($5,100 $4,600)−………...

500

Salary Payable……………………….…...

500

31 Rent Expense ($1,300 $1,000)−…………..

300

Prepaid Rent………………………………

300

31 Depreciation Expense ($400 $0)−………..

400

Accumulated Depreciation……………..

400

31 Income Tax Expense ($1,000 $0)−……….

1,000

Income Tax Payable……………………..

1,000

Closing Entries31 Service

Revenue…………………………….20,10

0Retained

Earnings……………………….20,10

0

31 Retained Earnings…………………………..

7,800

Salary Expense…………………………...

5,100


Rent Expense……………………………..

1,300

Depreciation Expense…………………...

400

Income Tax Expense…………………….

1,000


1,300

Dividends…………………………….……

1,300


(20- 30 min.) E 3-32A

Req. 1

Draper Production CompanyBalance Sheet

December 31, 2009ASSETS

Current:Cash…………………………………..…….... $14,800

Prepaid rent ($1,000 $300)……..……….− 700Total current assets…………..…….….. 15,500

Plant:

Equipment…………………………………...

$44,000

Less accumulated depreciation($3,100 + $400)…………………….

…….. (3,500 )

40,50 0

Total assets……………………………………… $56,000

LIABILITIESCurrent:

Accounts payable………………………….. $ 5,100

Salary payable ($5,100 $4,600)………− 500Unearned service revenue ($9,300 $6,500)− 2,800Income tax payable……………………..…. 1,00

0Total current liabilities……………….... 9,400

Note payable, long-term…………………..… 13,000Total liabilities……………………………….… 22,400

STOCKHOLDERS’ EQUITYCommon stock………………………………… 8,500Retained earnings

($14,100+$20,100 $5,100 $1,300 $400− − − $1,000 $1,300)…….……………………− − 25,10

0Total stockholders’ equity………………… 33,600 Total liabilities and stockholders’ equity… $56,000


(continued) E 3-32A

Req. 2

CurrentYear

PriorYear

Current ratio

=


=

$15,500 = 1.65 1.70Total current

liabilities$9,400

The ability to pay current liabilities with current assets deteriorated.

Debt ratio =

Total liabilities

=

$22,400 = 0.40 0.30Total assets $56,000

The overall ability to pay total liabilities deteriorated a little.


(30 min.) E 3-33A

a. Current ratio =

$30= 1.6

7Debt ratio =

$30 + 8= 0.56$10 +

$8$60 + $8

The purchase of equipment on account hurts both ratios.

b. Current ratio =

$30 − $11 = .95 Debt

ratio =

$30 − $11 = 0.39$20 $60 − $11

The payment of long-term debit hurts the current ratio and improves the debt ratio.

c. Current ratio = $30 + $6 = 1.3

8Debt ratio = $30 + $6 = 0.55$20 + $6 $60 + $6

Collecting cash in advance hurts both ratios.

d. Current ratio = $30 = 1.3

0Debt ratio = $30 + $3 = 0.55$20 + $3 $60

Accruing an expense hurts both ratios.

e. Current ratio =

$30 + $11= 2.0

5 Debt ratio =$30

= .42$20 $60 + $11

A cash sale improves both ratios.


Exercises

Group B

(5- 10 min.) E 3-34B

Statement Reports1. Income statement Sales

revenue…………$4,80

0Operating expenses…

1,100

Balance sheet Accounts receivable…

$ 300

Accounts payable……

500

2. Cash basis would report only the cash collections of $4,900 from customers and the payment of operating expenses ($1,100).The balance sheet would include neither accounts receivable nor accounts payable.

(5- 10 min.) E 3-35B

a. Cash Basis b. Accrual Basis

Revenues…………………...

$580,000 $510,000

Expenses…………………...

440,000 470,000

Net income…………………

$140,000 $ 40,000

The accrual basis measures net income better because

its information on revenues and expenses is more

complete than the information provided by the cash basis.


(5- 10 min.) E 3-36B

Million

a. Revenue……………………………………………….

$740

The revenue principle says to record revenue when it has been earned , regardless of when cash is collected. Therefore, report the amount of revenue earned, regardless of when the company collects cash.

b. Total expense…………………………………….…..

$560

The matching principle governs accounting for expenses.

c. The income statement reports revenues and expenses.The statement of cash flows reports cash receipts and cash payments.


(15- 20 min.) E 3-37B

Req. 1


a. Insurance Expense……………………………...

1,600

Prepaid Insurance ($800+$2,400-$1,600)…

1,600

b. Interest Receivable…………………..…………

1,000

Interest Revenue……………………..……...

1,000

c. Unearned Service Revenue ($1,500 −$400)..

1,100

Service Revenue……………………..………

1,100

d. Depreciation Expense…………………..……..

4,600

Accumulated Depreciation…………..…….

4,600

e. Salary Expense ($16,000 × 3/5)………….……

9,600

Salary Payable……………………….…..…...

9,600

f. Income Tax Expense ($21,000 × .25)…………

5,250


Income Tax Payable………………………….

5,250


(continued) E 3-37B

Req. 2

Net income understated by omission of:

Interest revenue……………………………..

$ 1,000

Service revenue……………………………...

1,100

Total understatement……………………….

$ 2,100

Net income overstated by omission of:Insurance

expense………………………….$1,600

Depreciation expense………………………

4,600

Salary expense………………………………

9,600

Income tax expense…………………………

5,250

Total overstatement…………………………

21,050

Overall effect — net income overstated by..

$18,95 0


(10- 15 min.) E 3-38B

Missing amounts in italics .

1 2 3 4Beginning Supplies $ 100 $400 $

1,200$ 800

Add: Payments for supplies

during the year 1,400 1,000 800 800 Total amount to account for

1,500 1,400 2,000 1,600

Less: Ending Supplies (400 )

(500 )

(700 ) (500 )

Supplies Expense $ 1,100

$ 900 $ 1,300 $1,100

Journal entries:

Situation 1:

Supplies……………………………

1,400

Cash………………………….….

1,400

Situation 2:

Supplies Expense………………..

900

Supplies………………………...

900



(10- 20 min.) E 3-39B


a. Interest Expense………………………………

9,200

Interest Payable…………………………….

9,200

b. Interest Receivable……………………………

4,200

Interest Revenue…………………….……..

4,200

c. Unearned Rent Revenue ($12,600 / 2 × 6/12)

3,150

Rent Revenue……………………………….

3,150

d. Salary Expense ($1,900 × 3)………………....

5700

Salary Payable………………………………

5,700

e. Supplies Expense……………………………..

1,400

Supplies ($2,600 1,200)−……………….….

1,400

f. Depreciation Expense ($160,000 / 5)………...

32,000

Accumulated Depreciation……………….

32,000

Book value = $128,000 ($160,000 $32,000)−



(10- 20 min.) E 3-40B

Accounts Receivable Supplies1,200 300 (a) 100

(c) 800 Bal. 200Bal. 2,000

Salary Payable Unearned Service Revenue

(b) 600 (d) 100 800Bal. 600 Bal. 700

Service Revenue Salary Expense4,400 1,900

(c) 800 (b) 600(d) 100 Bal. 2,500Bal. 5,300

Supplies Expense(a) 100Bal. 100


(20- 30 min.) E 3-41B

Holiday Hams, Inc.Income Statement

Year Ended December 31, 2010Thousands

Revenues:Sales revenue………………...

$39,900

Expenses:Cost of goods

sold…………..$25,40

0Selling, administrative,

andgeneral

expense………….. 10,40

0Total

expenses……………. 35,80

0Income before tax………………

4,100

Income tax expense…………….

2,40 0

Net income……………………….

$ 1,700

Holiday Hams, Inc.Statement of Retained EarningsYear Ended December 31, 2010

ThousandsRetained earnings, December 31, 2009…

$4,700

Add: Net income ………………………….

1,700

6,400Less:

Dividends……………………………. (1,200 )

Retained earnings, December 31, 2010…

$5,200



(continued) E 3-41B

Holiday Hams, Inc.Balance Sheet

December 31, 2010Thousands

ASSETS LIABILITIESCash…………………………

….$

3,500 Accounts payable………

$ 7,900

Accounts receivable…………

1,700 Income tax payable……..

900

Inventories…………………….

1,200 Other liabilities…………..

2,70 0

Prepaid expenses…………….

1,600 Total liabilities…………...

11,500

Prop., plant, equip.

$ 6,700 STOCKHOLDERS’

Less: Accum. EQUITY deprec…… .

(2,700 )

4,000 Common stock…………..

4,800

Other assets…………………..

9,500 Retained earnings………

5,20 0


10,00


Total assets……………………

$21,500

stockholders’ equity...

$21,500


(10- 20 min.) E 3-42B

One mechanism for solving this exercise is to prepare the

relevant T-accounts, insert the given information, and

solve for the unknown amounts, shown in italics .

Amounts in millions

ReceivablesBeg. bal. 250Sales revenue 20,68

0Collections 20,60

0End. bal. 330

Prepaid InsuranceBeg. bal. 130

Payment 450Insurance expense 44

0End. bal. 140

Accrued Liabilities PayableBeg. bal. 600

Payments 4,100Other operating

expenses 4,260End. bal. 760


(10 min.) E 3-43B

Req. 1

Mother Elizabeth’s income statement:Service revenue ($9,600 × 1/2)

………………….....$4,800

Mother Elizabeth’s balance sheet:Unearned service revenue ($9,600 × 1/2)

………..$4,800

Req. 2

Portland’s income statement:Medical expense ($9,600 × 1/2)

……………………$4,800

Boston’s balance sheet:Prepaid medical expense ($9,600 × 1/2)

…………$4,800


(10 min.) E 3-44B

Req. 1

Millions

Income statementService revenue (£400 £105)−

……………………£295


revenue………………………...£105

Req. 2

Income statementService revenue (£95 + £400 £105)−

…………….£390


revenue………………………...£105

Service revenue is greater in (2) because Direct began

the year owing more phone service to customers. With

collections for the year and the amount of the ending

liability unchanged, Direct must have earned more

revenue in situation 2 than in situation 1.

Not required but helpful:

Unearned Service RevenueBeg. bal. 95

Earned revenue

390

Collected cash

400

End. bal. 105 Chapter 3 Accrual Accounting & Income 218

(10- 20 min.) E 3-45B


Closing EntriesDec.

31 Service Revenue…………………………

24,100

Other Revenue……………………………

500

Retained Earnings…………………….

24,600


22,500

Cost of Services Sold………………...

11,200

Selling, General, and Administrative

Expense……………………………...

6,100

Depreciation Expense………………..

4,800

Income Tax Expense………………….

400


900

Dividends…………………………….…

900

Net income for 2010 was $2,100 ($24,600 $22,500).−

Retained EarningsDec. 31, 2009 2,400

Dividends

900 Net income 2,100

Dec. 31, 2010 3,600



(15- 25 min.) E 3-46B


Adjusting EntriesDec. 31 Unearned Service

Revenue……………….6,500

Service Revenue ($19,900 −$13,400)...

6,500

31 Salary Expense ($4,900 $4,500)−………...

400

Salary Payable……………………….…...

400

31 Rent Expense ($1,400 $900)−…………..

500

Prepaid Rent………………………………

500

31 Depreciation Expense ($600 $0)−………..

600

Accumulated Depreciation……………..

600

31 Income Tax Expense ($1,700 $0)−……….

1,700

Income Tax Payable……………………..

1,700

Closing Entries31 Service

Revenue…………………………….19,90

0Retained

Earnings……………………….19,90

0


8,600

Salary Expense…………………………...

4,900

Rent 1,400


Expense……………………………..Depreciation

Expense…………………...600

Income Tax Expense…………………….

1,700


1,000

Dividends…………………………….……

1,000


(20- 30 min.) E 3-47B

Req. 1

Wallace Production CompanyBalance Sheet

December 31, 2009ASSETS

Current:Cash…………………………………………………..

….$13,600

Prepaid rent ($1,100 $500)−………………………....

600

Total current assets………………………………..

14,200

Plant:

Equipment…………………………………..

$48,000

Less accumulated depreciation($3,800 + $300)…………………….

….. (4,200 )

43,80 0

Total assets………………………………………………….

$58,000

LIABILITIESCurrent:

Accounts payable……………………………………….

$ 4,400

Salary payable ($4,900 $4,500)−…………………..…

400

Unearned service revenue($8,500 $6,500)−

……………………………………...2,000

Income tax payable…………………………………..…

1,70 0

Total current liabilities………………………………

8,500


Note payable, long-term…………………………………..

10,000

Total liabilities………………………………………………

18,500

STOCKHOLDERS’ EQUITYCommon stock……………………………………………...

8,400

Retained earnings($20,800 + $19,900 $4,900 $1,400 − − −$600

$1,700 $1,000)…….− −…………………………………

31,10 0

Total stockholders’ equity…………………………….….

39,50 0

Total liabilities and stockholders’ equity………………

$58,000


(continued) E 3-47B

Req. 2

CurrentYear

PriorYear

Current ratio

=


=

$14,200 = 1.67 1.45Total current

liabilities$8,500

The ability to pay current liabilities with current assets improved.

Debt ratio =

Total liabilities

=

$18,500 = 0.32 0.35Total assets $58,000

The overall ability to pay total liabilities improved a little.


(30 min.) E 3-48B

a. Current ratio = $40 = 1.11 Debt ratio = $30 + 6 = 0.55$30 + $6 $60 + $6

The purchase of equipment on account hurts both ratios.

b. Current ratio =

$40 − $11 = .97 Debt ratio =

$30 − $11 = 0.39$30 $60 − $11

The payment of long-term debit hurts the current ratio and improves the debt ratio.

c. Current ratio = $40 + $8 = 1.26 Debt ratio = $30 + $8 = 0.56$30 + $8 $60 + $8

Collecting cash in advance hurts both ratios.

d. Current ratio = $40 = 1.08 Debt ratio = $30 + $7 = 0.62$30 + $7 $60

Accruing an expense hurts both ratios.

e. Current ratio =

$40 + $11 = 1.7 Debt ratio =

$30

= 0.42$30 $60 + $11

A cash sale improves both ratios.


Serial Exercises

(3 hours) E 3-49

Reqs. 1, 3, 6, and 8

Cash Accounts ReceivableMar.

27,000 Mar.

2600 Mar.

182,100 Jan.

282,100

9 1,200 3 2,400 Bal. 021 1,800 12 300 Adj. 1,60028 2,100 26 500 Bal. 1,600

31 1,400Bal. 6,900

Supplies EquipmentMar. 5

500 Adj. 400 Mar. 3

2,400

Bal. 100

Accumulated Depreciation –

Equipment FurnitureAdj. 40 Mar.

47,500


Furniture Accounts PayableAdj. 125 Mar.

26500 Mar.

47,500

5

500

Bal. 7,500


(continued) E 3-49

Reqs. 1, 3, 6, and 8

Salary Payable Unearned Service RevenueAdj. 600 Adj. 600 Mar.

211,800

Bal. 1,200

Common Stock Retained EarningsMar. 2

7,000 Clo. 2,065 Clo. 5,500

Clo. 1,400Bal. 2,03

5

Dividends Service RevenueMar. 31

1,400 Clo. 1,400 Mar. 9

1,200

18

2,100

Bal. 3,300

Adj. 1,600

Adj. 600Clo. 3,800 Bal. 5,50

0

Rent Expense Utilities ExpenseMar. 2

600 Clo. 600 Mar. 12

300 Clo. 300

Salary ExpenseDepreciation Expense –

EquipmentAdj. 600 Clo. 600 Adj. 40 Clo. 40

Depreciation Expense –Furniture Supplies Expense

Adj. 125 Clo. 125 Adj. 400 Clo. 400



(continued) E 3-49

Req. 2

March 2 through 18 entries are repeated from Solution to Exercise 2-36.


Mar. 2

Cash……………………………………..

7,000

Common Stock……………………..

7,000

2

Rent Expense…………………………..

600

Cash…………………………………..

600

3

Equipment………………………………

2,400

Cash…………………………………..

2,400

4

Furniture………………………………..

7,500

Accounts Payable………………….

7,500

5

Supplies…………………………………

500

Accounts Payable………………….

500

9

Cash……………………………………..

1,200

Service Revenue……………………

1,200


12 Utilities Expense………………………

300

Cash…………………………………..

300

18 Accounts Receivable…………………

2,100

Service Revenue……………………

2,100


(continued) E 3-49

Req. 2


Mar.

21 Cash……………………………………..

1,800

Unearned Service Revenue………

1,800

21 No entry; no transaction yet

26 Accounts Payable…………………….

500

Cash………………………………….

500

28 Cash……………………………………..

2,100

Accounts Receivable……………

2,100

31 Dividends………………………………

1,400

Cash………………………………….

1,400


(continued) E 3-49Reqs. 4 and 5

Jerome Smith, Certified Public Accountant, P.C.Adjusted Trial Balance

March 31, 2009TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL

BALANCEACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

Cash 6,900 6,900Accounts receivable 0 (a) 1,600 1,600Supplies 500 (c) 400 100Equipment 2,400 2,400Accumulated depr. – equip. — (d1) 40 40Furniture 7,500 7,500Accumulated depr. – furn. — ( d2) 125 125Accounts payable 7,500 7,500Salary payable — (e) 600 600Unearned service revenue 1,800 (b) 600 1,200Common stock 7,000 7,000Retained earnings — —Dividends 1,400 1,400Service revenue 3,300 (a)1,600 5,500

(b) 600Rent expense 600 600Utilities expense 300 300Salary expense (e) 600 600Depreciation expense – equip.

(d1) 40 40

Depreciation expense – furn.

(d2) 125 125

Supplies expense (c) 400 400 19,600 19,600 3,365 3,365 21,965 21,965


(continued) E 3-49

Req. 6

Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT

CREDIT

Adjusting Entries(a) Mar.

31 Accounts Receivable…………………..

1,600

Service Revenue……………………..

1,600

(b) 31 Unearned Service Revenue…………

600

Service Revenue……………………..

600

(c) 31 Supplies Expense ($500 $100)−……..

400

Supplies………………………………..

400

(d1) 31 Depreciation Expense – Equipment…

40

Accumulated Depreciation – Equip

40

(d2) 31 Depreciation Expense – Furniture…

125

Accumulated Depreciation – Furn..

125

(e) 31 Salary Expense………………………….

600

Salary Payable………………………..

600


(continued) E 3-49

Req. 7

Jerome Smith, Certified Public Accountant, P.C.Income Statement

Month Ended March 31, 2009Revenues:

Service revenue $5,500

Expenses:Salary expense $600Supplies expense 400Rent expense 600Utilities expense 300Depreciation expense –

furniture40

Depreciation expense – equipment

12 5

Total expenses 2,06 5

Net income $3,435

Jerome Smith, Certified Public Accountant, P.C.Statement of Retained Earnings

Month Ended March 31, 2009Retained earnings, March 1, 2010 $ 0Add: Net income 3,435

3,435Less: Dividends (1,400 )Retained earnings, March 31, 2010 $ 2,035


(continued) E 3-49

Req. 7

Jerome Smith, Certified Public Accountant, P.C.Balance SheetMarch 31, 2009

ASSETS LIABILITIESCurrent assets: Current liabilities:

Cash $ 6,900

Accounts payable $ 7,500

Accounts receivable 1,600 Salary payable 600Supplies 10

0Unearned service


8,600 revenue 1,200

Plant assets: Total current liabilities 9,300Equipment $2,400

Less accum. STOCKHOLDERS’ EQUITYdepr.

(40 )2,360 Common stock 7,000

Furniture $7,500 Retained earnings 2,035Less accum. Total stockholders’

equity9,035

depr. (125)

7,37 5

Total liabilities and ______

Total assets $18,335

stockholders' equity $18,335


(continued) E 3-49

Req. 8


Closing EntriesMar.

31 Service Revenue…………………………..

5,500

Retained Earnings……………………..

5,500

31 Retained Earnings………………………..

2,065

Rent Expense…………………………..

600

Utilities Expense……………………….

300

Salary Expense…………………………

600

Depreciation Expense – Equipment..

40

Depreciation Expense – Furniture….

125

Supplies Expense……………………...

400

31 Retained Earnings………………………..

1,400

Dividends………………………………..

1,400


(continued) E 3-49

Req. 9

Current ratio =


=

$8,600 = 0.92Total current

liabilities$9,30

0

Debt ratio =

Total liabilities =

$9,300

= 0.51Total assets $18,33

5

These ratios indicate a weak financial position. The

business has only $0.92 in current assets for every $1.00

of current liabilities. It could face serious trouble in

paying current liabilities with current assets. The debt

ratio of 51% is not too high, which suggests that, overall,

the business should be able to pay its debts — if it can

generate enough cash to get its current ratio higher.


Challenge Exercises

(20- 25 min.) E 3-50

(Dollar amounts in thousands)

December 31, 2010

Current=

$1,800 + $5,300 + $2,300 + $1,100 =

$10,500= 1.78

ratio $2,800 + $1,100 + $2,000 $5,900

December 31, 2011

Current=

$400 1 + $6,500 2 + $2,300 3 + $700 4 =

$9,900= 2.11

ratio $1,300 5 + $1,100 6 + $2,300 7 $4,700_____Computations of December 31, 2010 balances:

1Cash = $1,800 $7,400 + $7,500 $1,500 = $400− −

2Receivables = $5,300 + $8,700 $7,500 = $6,500−

3No change in the Inventory balance.

4Prepaid expenses = $1,100 $400 = $700−

5Accounts payable = $2,800 $1,500 = $1,300−

6No change in the Unearned Revenues balance.

7Accrued expenses payable = $2,000 + $300 = $2,300

Conclusion: Worthy Hill’s current ratio improved during 2010. The company’s current ratio is very strong.


(60 min.) E 3-51

a. Net income: Service revenue:($160,000 + $1,620 +

$32,000).$193,620

Expenses:Salary ($34,000 + $3,200)

………$ 37,200

Depreciation – building………..

2,500

Supplies…………………………..3,600

Insurance…………………………1,200

Advertising……………………….7,600

Utilities…………………………… 2,100 54,20

0Net income…………………………..

$139,420

b. Total assets:

Cash…………………………………..

16,600

Accounts receivable($7,000 + $32,000)

………….....39,000

Supplies ($4,200 $3,600)−………..

600

Prepaid insurance($3,400 $1,200)−

………………...2,200

Building………………………………

$107,000

Less: Accum. Depr.($15,000 + $2,500)………….

…… (17,500

)89,500

Land…………………………………..

52,00 0

Total assets………………….…..

$199,900


(continued) E 3-51

c. Totalliabilities: Accounts

payable……………………. $ 6,500

Salary payable…………………………

3,200

Unearned service revenue($5,400 $1,620)−

…………………... 3,780

Total liabilities…………………………

$ 13,480

d. Total stock-holders’equity: Common

stock………………………... $ 14,000

Retained earnings, beginning….…...

45,000

Add: Net income….…………………...

139,420 198,420

Less:

Dividends......... .. .. ... .. .. .. .. . .. .. .

(12,00 0)

Total stockholders’ equity…………..

$186,420

e. Total assets

= Total liabilities + Total stockholders’ equity

$199,900 = $13,480 + $186,420


Quiz

Q3-52

b

Q3-53

b

Q3-54

d

Q3-55

b

Q3-56

b

Q3-57

a

Q3-58

b

Q3-59

b

Q3-60

b ($2,700 × 9/12 = $2,025)

Q3-61

a $2,000 + $26,000 $17,000−

= revenue of $11,000

Q3-62

c

Q3-63

d

Q3-64

b

Q3-65

d

Q3-66

c Current ratio

= $29,333 / $24,800

= 1.183 to 1

Debt ratio =

$24,800 + $112,738 = .635 to 1$29,333 + $187,430

Q3- $7,39 ($7,500 $660 $100 + $950 $300)− − −


67 0

Q3-68

b Salary Payable

Beg. bal. 28,000Payment 139,00

0Salary exp. 126,00

0End. bal. 15,000


Problems

Group A

(15- 20 min.) P 3-69A

(All amounts in millions)

1. $41 – x = $5 ; x = $36

2. Revenues……………..

$41

Expenses……………..

36

Net income…………...

$ 5

3. Beginning receivables………

$ 4

Add:Sales…………………..

41

Less:Collections…………...

(23 )

Ending receivables………….

$18

Balance sheetASSETS

Current assets:

Receivables………….$ 18

4. Beginning accounts payable……….

$ 8

Add:Expenses………………………

36

Less:Payments……………………...

(41 )

Ending accounts payable……………

$ 3


Balance sheetLIABILITIES

Current liabilities:Accounts

payable…………… $ 3


(20- 30 min.) P 3-70A

Req. 1

Elders ConsultingAmount of Revenue (Expense) for August

Date Cash Basis Accrual Basis

Aug. 1 Expense $(500 ) $ 0 4 Expense (800 ) 0 5 Revenue 700 700 8 Expense (500 ) (500 )11 Revenue 0 3,50019 0 024 Revenue 3,500 026 Expense (1,700 ) 029 Expense (800 ) (800 )31 Expense 0 $500 ÷ 5 = (100)31 Revenue

0 600

Req. 2Income (loss) before tax

$ (100 ) $3,400


(continued) P 3-70A

Req. 3

The accrual- basis measure of net income is preferable

because it accounts for revenues and expenses when

they occur, not when they are received or paid in cash.

For example, on August 11, the company earned $3,500

of revenue and increased its wealth as a result. The

accrual basis records this revenue, but the cash basis

ignores it. On August 24, the business collected the

receivable that was created by the revenue earned on

account at August 11. The accrual basis records no

revenue on August 24 because the company’s increase in

wealth occurred back on August 11. The cash basis waits

until cash is received, on August 24, to record the

revenue. This is too late.


(10- 20 min.) P 3-71A


Dec.

31 a. Insurance Expense…………………..

3,200 *

Prepaid Insurance……………......

3,200

To record insurance expense.

31 b. Salary Expense ($6,100 × 2/5)……..

2,440

Salary Payable…………………….

2,440

To accrue salary expense.

31 c. Interest Receivable………………….

400

Interest Revenue………………….

400

To accrue interest revenue.

31 d. Supplies Expense……………………

6,900 **

Supplies…………………………….

6,900


31 e. Unearned Service Revenue($12,000 × 7/12)

……………………...8,400

Service Revenue…………….……

8,400

To record revenue that was collected in advance.

31 f. Depreciation – Office Furniture……

3,000

Depreciation Expense – Equipment

5,400

Accumulated Depreciation –Office

Furniture………………...3,000



Equipment……………………….5,400

To record depreciation expense.

_____ * $ 900 + $3,600 $1,300= $3,200 − ** $2,700 + $6,400 $2,200 = $6,900−


(45- 60 min.) P 3-72AReq. 1

London, Inc.Adjusted Trial Balance

December 31, 2010TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL


Cash 8,900 8,900Accounts receivable 1,200 (a) 2,100 3,300Prepaid rent 2,400 (b) 800* 1,600Supplies 2,500 (c) 2,170 330Furniture 72,000 72,000Accumulated depreciation

3,900 (d) 2,000**

5,900

Accounts payable 3,300 3,300Salary payable (e)

2,880***2,880

Common stock 12,000 12,000Retained earnings 63,110 63,110Dividends 3,500 3,500Service revenue 11,000 (a) 2,100 13,100Salary expense 2,300 (e)

2,880***5,180

Rent expense (b) 800* 800Utilities expense 510 510Depreciation expense (d)

2,000**2,000

Supplies expense (c) 2,170 _____ 2,170 93,310 93,310 9,950 9,950 100,290 100,290

_____* $2,400 ÷ 3 = $800** $72,000 ÷ 3 = $24,000 ÷ 12 = $2,000


*** $4,800 × 3/5 = $2,880


(continued) P 3-72A

Req. 2

London, Inc.Income Statement

Month Ended December 31, 2010Revenues:


Expenses:Salary expense $5,180Supplies expense 2,170Rent expense 800Depreciation expense 2,000Utilities expense 510

Total expenses 10,660

Net income $ 2,440

London, Inc.Statement of Retained Earnings

Month Ended December 31, 2010Retained earnings, December 1, 2010

$63,110

Add: Net income 2,440 65,550

Less: Dividends (3,500 )

Retained earnings, December 31, 2010

$62,050


(continued) P 3-72A

Req. 2 (continued)

London, Inc.Balance Sheet

December 31, 2010ASSETS LIABILITIES

Current assets: Current liabilities:Cash $

8,900Accounts payable $3,300

Accounts receivable 3,300 Salary payable 2,88 0

Prepaid rent 1,600 Total current liabilities 6,180Supplies 330 Total current assets

14,130

Furniture $72,000

STOCKHOLDERS’ EQUITY

Less: Accum. Common stock 12,000deprec.

(5,900 )66,100 Retained earnings 62,05

0Total stockholders’ equity 74,050



stockholders’ equity $80,230


(10- 20 min.) P 3-73A

Req. 1


CREDIT

Apr. 30 Accounts Receivable ($6,810 −$5,900)...

910

Rental Revenue………………………….

910

To accrue rental revenue.

30 Interest Receivable ($200 $0)−…………..

200

Interest Revenue ($600 $400)−…….…

200


30 Supplies Expense ($1,200 $0)−…………

1,200

Supplies ($1,800 $600)−……………….

1,200


30 Insurance Expense ($1,700 $0)−………..

1,700

Prepaid Insurance ($2,300 −$600)…...

1,700


30 Depreciation Expense ($1,400 $0)−…….

1,400

Accumulated Depreciation($8,800 $7,400)−

……………………...1,40

0To record depreciation expense.

30 Wage Expense ($2,300 $1,300)−………...

1,000

Wages Payable ($1,000 $0)− 1,00


……….… 0To accrue wage expense.

30 Unearned Rental Revenue ($2,100 − 1,600)

500


500



(continued) P 3-73A

Req. 2

Total assets = $82,710 ($8,900 + $6,810 + $200 + $4,400 +

$600 + $600 + $70,000 −$8,800)

Total liabilities

= $ 9,300 ($6,700 + $1,000 + $1,600)

Total equity = $73,410 ($82,710 $9,300)−

Net income = $ 19,710 ($26,510 + $600 $1,400 − − $1,200 $400 $2,300 $400 − − − −$1,700)


(20- 30 min.) P 3-74A

Req. 1

Schneider CorporationIncome Statement

Year Ended July 31, 2010Revenues:


Expenses:Salary expense $39,80

0Rent expense 10,300Insurance expense 3,500Interest expense 3,300Supplies expense 2,800Depreciation expense 1,70

0 61,4

00Income before tax 40,700Income tax expense 6,5

00Net income $

34,200

Schneider CorporationStatement of Retained Earnings

Year Ended July 31, 2010Retained earnings, July 31, 2009 $ 5,000Add: Net income 34,200

39,200Less: Dividends

(21,000 )Retained earnings, July 31, 2010 $18,200


continued) P 3-74A

Req. 1 (continued)

Schneider CorporationBalance SheetJuly 31, 2010

ASSETS LIABILITIESCash $

2,000Accounts payable $ 3,400

Accounts receivable 9,400 Interest payable 200Supplies 2,400 Unearned service

revenue700

Prepaid rent 1,200 Income tax payable 2,000Note payable 18,900

Equipment $36,600 Total liabilities 25,200 Less: Accum.

deprec. (4,20 0 )

32,400 STOCKHOLDERS’ EQUITY

Common stock 4,000Retained earnings

18,200 Total stockholders’ equity

22,200


Total assets $47,40 0


Req. 2

Debt ratio:

$25,200 = 0.53$47,400

Snead is in compliance of its debt agreement, which

requires the company to maintain a debt ratio no higher

than 0.60.


(20 min.) P 3-75A

Req. 1


Closing EntriesMar. 31 Service

Revenue……………………..95,000

Retained Earnings………………...

95,000

31 Retained Earnings……………………

35,700

Advertising Expense……………..

10,900

Depreciation Expense……………

1,700

Interest Expense………..…………

900

Salary Expense……………………

17,800

Supplies Expense…………………

4,400

31 Retained Earnings……………………

31,200

Dividends…………………………...

31,200

Req. 2


35,700

Mar. 31, 2009 Bal. 22,000

Mar. 31, 2010 Dividends

31,200


95,000

Mar. 31, 2010 Bal. 50,100


Net income = $59,300 (revenues of $95,000 minus expenses of $35,700.

Req. 3

Retained Earnings increased during the year because net income of $59,300 exceeded dividends of $31,200.


(25- 40 min.) P 3-76A

Req. 1

Spa View Service, Inc.Balance SheetMarch 31, 2010

ASSETSCurrent assets:

Cash $ 7,900

Accounts receivable 16,100

Prepaid expenses 6,000

Supplies 3,6 00

Total current assets 33,600

Plant assets:Equipment $41,700

Less: Accumulated depreciation

(6,900 )

34,800

Other assets 14,400 Total assets

$82,800 LIABILITIES

Current liabilities:Current portion of note payable $

1,000Accounts payable 14,400Salary payable 2,900Unearned service revenue 2,700

Total current liabilities 21,000Note payable, long-term 6,100 Total liabilities 27,100

STOCKHOLDERS’ EQUITYCommon stock 5,600Retained earnings 50,100 *Total stockholders’ equity 55,700 Total liabilities and stockholders’ equity $82,800


_____*See next page.


(continued) P 3-76A

Req. 1 (continued)

*Retained earnings, March 31, 2009……………..

$22,000

Add: Net income ($95,000 $10,900 − −$1,700

$900 $17,800 $4,400)− − −………………...

59,300

81,300 Less:

Dividends………………………………........ (31,200 )

Retained earnings, March 31, 2010……………..

$50,100

Req. 2

2010

2009

Current ratio =

Total current assets =

$33,600 = 1.60 1.25Total current

liabilities$21,00

0

The ability to pay current liabilities with current assets

improved during 2010.

Debt ratio = Total liabilities = $27,100 = 0.33 0.20Total assets $82,800

The overall debt position deteriorated a little during 2010.

The improvement in the current ratio is greater than the

deterioration in the debt ratio. However, Spa Brook’s

overall debt position is strong because a debt ratio of .33

is not troublesome.


(45- 60 min.) P 3-77AReq. 1

(All amounts in millions )

Current ratio =


=

$15.6 = 1.63Total current

liabilities$

9.6

$15.1

Debt ratio =

Total liabilities =

$9.6 + $5.5= 0.4

9Total assets $31.7

Req. 2

Current Ratio Debt Ratio

a. $15.6 ($9.6 − × 1/2) = 2.25$15.1 ($9.6 × 1/2)−

= 0.38($9.6 × 1/2) $31.7 ($9.6 × 1/2)−

b. $15.6 + $6.0 = 2.25 $15,1+ $6.0 = 0.56$9.6 $31.7 + $6.0

c. $15.6 + $2.5 = 1.89 $15.1 = 0.44$9.6 $31.7 + $2.5

d. $15.6 $.6− = 1.56 $15.1 = 0.48$9.6 $31.7 $.6−

e. $15.6 = 1.51 $15.1 + $0.7 = 0.50$9.6 + $0.7 $31.7

f. $15.6 $1.5− = 1.47 $15.1 + $2.7 = 0.52$9.6 $31.7 + $4.2 $1.5−

g. $15.6 = 1.63 $15,1 = 0.49$9.6 $31.7 $0.8−

(continued) P 3-77A


Req. 3

a. Revenues usually increase the current ratio.

b. Revenues usually decrease the debt ratio.

c. Expenses usually decrease the current ratio.

Note : Depreciation is an exception to this rule.

d. Expenses usually increase the debt ratio.

e. If a company’s current ratio is greater than 1.0, as it is

for Hartford, paying off a current liability will always

increase the current ratio.

f. Borrowing money on long-term debt will always

increase the current ratio and increase the debt ratio.


Problems

Group B

(15- 20 min.) P 3-78B


1. $33 – x = $27; x = $6

2. Revenues……………..

$33

Expenses……………..

27

Net income…………...

$ 6

3. Beginning receivables……...

$ 9

Add:Revenues…………….

33

Less:Collections…………..

(24 )

Ending receivables………….

$ 18

Balance sheetASSETS

Current assets:

Receivables………….$ 18

4. Beginning accounts payable………..

$ 11

Add:Expenses……………………….

27

Less:Payments……………………....

(28 )

Ending accounts payable…………….

$ 10


Balance sheetLIABILITIES

Current liabilities:Accounts

payable…………….$ 10


(20- 30 min.) P 3-79B

Req. 1

Kings ConsultingAmount of Revenue (Expense) for May

Date Cash Basis Accrual BasisMay 1 Expense $ (500 ) Expense 0

4 Expense $(600 ) Expense 05 Revenue $1,000 Revenue

$1,0008 Expense $(400 ) Expense $(400 )11

Revenue Revenue $3,100

19

Expense 0 Expense 0

24

Revenue $3,100 Revenue 0

26

Expense $(2,000)

Expense 0

29

Expense $(1,500)

Expense $(1,500)

31

Expense 0 Expense $ (100)

31

Revenue 0 Revenue $500

Req. 2

Income (loss)before tax $(900 ) Income before

tax$2,60

0

Req. 3

The accrual basis better measures net income. For

example, the accrual basis accounts for the prepayment

of insurance on May 1 as an asset because prepaid

insurance gives the business insurance coverage of the Chapter 3 Accrual Accounting & Income 268

business’ assets for the next five months. The cash basis

ignores the future benefit (asset nature) of the

prepayment and accounts for the prepayment as an

expense.

(10- 20 min.) P 3-

80B


Mar 31 a. Insurance Expense 3,400 * Prepaid Insurance 3,400 To record insurance expense

31 b. Salary Expense ($5,800 × 3/5)……...

3,480

Salary Payable……………………..

3,480


31 c. Interest Receivable…………………..

700

Interest Revenue…………………..

700


31 d. Supplies Expense…………………….

6,600 **

Supplies……………………………..

6,600


31 e. Unearned Service Revenue($12,100 × 60%)

………………………7,260

Service Revenue…………………..

7,260



31 Depreciation Expense …………...….

8,900

Accumulated Depreciation –Office

Furniture……………3,500

Accumulated Depreciation –Equipment……………..

……5,400

To record depreciation expense._____ * $500 + 3,800 $900 = $3,400−** $2,700 + $6,100 $2,200 = $ 6,600 −


(45- 60 min.) P 3-81BReq. 1

Kings, Inc.Adjusted Trial Balance

August 31, 2010TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL


Cash 9,200 9,200Accounts receivable 1,500 (a) 2,000 3,500Prepaid rent 2,400 (b)

800*1,600

Supplies 2,200 (c) 1,820 380Furniture 81,000 81,000Accumulated depreciation

3,900 (d) 1,350**

5,250

Accounts payable 3,500 3,500Salary payable (e)

3,120***3,120

Common stock 15,000 15,000Retained earnings 71,020 71,020Dividends 3,600 3,600Advertising revenue 10,000 (a) 2,000 12,000Salary expense 3,000 (e)

3,120***6,120

Rent expense (b) 800 * 800Utilities expense 520 520Depreciation expense (d)

1,350**1,350

Supplies expense (c) 1,820 _____ 1,820 103,42

0 103,42

0 9,090 9,090 109,890 109,890

___


* $2,400 ÷ 3 = $800** $81,000 ÷ 5 = $16,200 ÷ 12 = $1,350*** $5,200 × 3/5 = $3,120


(continued) P 3-81B

Req. 2 (continued)

Kings, Inc.Income Statement

Month Ended August 31, 2010Revenues:

Advertising revenue $12,000

Expenses:Salary expense $6,120Rent expense 800Depreciation expense 1,350Utilities expense 520Supplies expense 1,82

0Total expenses 10,610

Net income $1,390

Kings, Inc.Statement of Retained EarningsMonth Ended August 31, 2010

Retained earnings, August 1, 2010 $71,020Add: Net income 1,390

72,410Less: Dividends (3,600 )Retained earnings, Aug 31, 2010 $68,810


(continued) P 3-81B

Req. 2 (continued)

Kings, Inc.Balance Sheet

August 31, 2010ASSETS LIABILITIES

Current assets: Current liabilities:Cash $9,200 Accounts payable $

3,500Accounts receivable 3,500 Salary payable 3,12

0Prepaid rent 1,600 Total current liabilities 6,620Supplies 3

80Total current assets 14,680 Furniture

$81,000STOCKHOLDERS’ EQUITY

Less: Accum. Common stock 15,000 deprec.

(5,250 )75,750 Retained earnings 68,810


83,810

______

Total liabilities and ______




(10- 20 min.) P 3-82BReq. 1


CREDIT

Dec. 31 Accounts Receivable ($6,880 −$6,000)

880

Rental Revenue…………………………….

880

To accrue rental revenue.

31 Supplies Expense ($900 $0)−……………...

900

Supplies ($1,500 $600)−………………….

900


31 Insurance Expense ($1,700 $0)−…………..

1,700

Prepaid Insurance ($2,500 $800)−……..

1,700


31 Depreciation Expense ($1,500 $0)−………

1,500

Accumulated Depreciation($10,300 $8,800)−

………………………….1,500

To record depreciation expense.

31 Wage Expense ($2,700 $1,900)−………….

800

Wages Payable ($800 $0)−…………..….

800


31 Interest Receivable ($500 0)……….−…….

500

Interest Income ($500 $0)− 500


……………..To accrue interest expense.

31 Unearned Rental Revenue($1,500 $1,200)−……………………………

300


300



(continued) P 3-82B

Req. 2

Total assets = $78,380 ($7,900 + $6,880 + $500 + $5,000 + $600 + $800 + $67,000 $10,300)−

Total liabilities

= $8,500 ($6,500 + $800 + $1,200)

Total equity = $69,880 ($78,380 $8,500)−

Net income = $12,780 ($19,480 + $700 $1,500 − −$900 $300 $2,700 $300 − − − −$1,700)


(20- 30 min.) P 3-83B

Req. 1

Sneed CorporationIncome Statement

Year Ended October 31, 2010 Revenues:


Expenses:Salary expense $40,50

0Rent expense 10,200Insurance expense 3,600

Interest expense 3,200 Supplies expense 2,900

Depreciation expense 1,20 0

61,600

Income before tax 40,100Income tax expense 7,50

0Net income $

32,600

Sneed CorporationStatement of Retained Earnings

Year Ended October 31, 2010Retained earnings, October 31, 2009

$ 4,000

Add: Net income 32,600 36,600


Retained earnings, October 31, 2010

$ 11,600


(continued) P 3-83B

Req. 1 (continued)

Sneed Corporation.Balance Sheet

October 31, 2010ASSETS LIABILITIES

Cash $ 1,600 Accounts payable $ 3,800

Accounts receivable 8,800 Unearned serviceSupplies 2,100 revenue

900Prepaid rent 1,000 Interest payable 4

00Income tax payable 2,500

Equipment $36,700 Note payable 18,60 0

Less: Accum.

Total liabilities 26,200

deprec.

(4,400 ) 32,300

STOCKHOLDERS’ EQUITYCommon stock 8,0

00Retained earnings 11,60

0 Total stockholders’

equity

19,600


Total assets $45,800 stockholders’ equity $45,800

Req. 2

Debt ratio: $26,200 = 0.57$45,800

Sneed Corporation’s debt ratio of 0.57 is in compliance with the lenders’ debt restriction.



(20 min.) P 3-84BReq. 1


Closing EntriesMar.

31 Service Revenue………………………

94,100

Retained Earnings…………………

94,100

31 Retained Earnings…………………….

36,300

Salary Expense……………………..

18,100

Supplies Expense………………….

4,300

Advertising Expense………………

11,100

Depreciation Expense…………….

2,000

Interest Expense…………………...

800

31 Retained Earnings…………………….

30,000

Dividends……………………………30,000

Req. 2


36,300

Mar. 31, 2009 Bal. 22,000

Mar. 31, 2010 Dividends

30,000


94,100

Mar. 31, 2010 Bal. 49,800


Net income = $57,800 (revenues of $94,100 minus expenses of $36,300)

Req. 3

Retained Earnings increased during the year because net income of $57,800 exceeded dividends of $30,000.


(30- 40 min.) P 3-85B

Req. 1

Sunny Stream Service, Inc.Balance SheetMarch 31, 2010

ASSETSCurrent assets:

Cash…………………………………………………….

$ 7,300

Accounts receivable…………………………………

16,400

Supplies………………………………………………..

3,300

Prepaid expenses 5,70 0

Total current assets……………………………...

$32,700

Plant assets:

Equipment…………………………………

$42,500

Less accumulated depreciation….

(7,300 )

35,200

Other assets…………………………………………… ..

14,500

Total assets………………………………………………

$82,400

LIABILITIESCurrent liabilities:

Accounts payable……………………………………

14,300

Current portion of note payable 500

Salary payable………………………………………..

2,600


Unearned service revenue………………………

2,600

Total current liabilities…………………………...

20,000

Note payable, long-term……………………………….

5,900

Total liabilities…………………………………………...

25,900

STOCKHOLDERS’ EQUITYCommon stock…………………………………………..

6,700

Retained earnings ……………………………………...

49,800 *

Total stockholders’ equity…………………………….

56,500

Total liabilities and stockholders’ equity…………...

$82,400

_____*See next page.


(continued) P 3-85B

Req. 1 (continued)_____*Computation:

Retained earnings, March 31, 2009………

$ 22,000

Add: Net income ($94,100 $18,100 − −$4,300

$11,100 $2,000 $800)− − −……………...

57,800

79,800Less: Dividends………………………………….

(30,000 )

Retained earnings, March 31, 2010………

$49,800

Req. 2

2010 2009

Current ratio =

Total current assets=

$32,700= 1.64 1.40Total current

liabilities$20,000

The ability to pay current liabilities with current assets

improved during 2010.

Debt ratio =

Total liabilities =

$25,900 = 0.3

10.2

5Total assets $82,400

Sunny Stream Services’ overall debt position deteriorated

a bit from 2009 to 2010. However, the company’s debit

position is still very strong.



(45- 60 min.) P 3-86BReq. 1


Current ratio =


=

$15.3 = 1.7


$8.6

$14.0

Debt ratio =Total liabilities

=$8.6 + $5.4 = 0.4

4Total assets $31.7Req. 2

Current Ratio Debt Ratio

a.

$15.3 ($8.6 × 1/2)−

= 2.56

$14.0 ($8.6 ×− 1/2)

= 0.35($8.6 × 1/2) $31.7 ($8.6 ×−

1/2)

b.

$15.3 + $7.0 = 2.59

$14.0 + $7.0 = 0.54$8.6 $31.7 + $7.0

c.

$15.3 + $2.5 = 2.07

$14.0 = 0.41$8.6 $31.7 + $2.5

d.

$15.3 $3.0− = 1.43

$14.0 = 0.49$8.6 $31.7 $3.0−

e.

$15.3 = 1.65

$14.0 + $0.7 = 0.46$8.6 + $0.7 $31.7

f.$15.3 $1.9−

= 1.56

$14.0 + $2.8 = 0.4

9$8.6 $31.7 + $4.7 −$1.9

g.

$15.3 = 1.78

$14.0 = 0.45$8.6 $31.7 $0.6−


(continued) P 3-86B

Req. 3

a. Revenues usually increase the current ratio.

b. Revenues usually decrease the debt ratio.

c. Expenses usually decrease the current ratio.

Note : Depreciation is an exception to this rule.

d. Expenses usually increase the debt ratio.

e. If a company’s current ratio is greater than 1.0, as for

Hillsboro, paying off a current liability will always

increase the current ratio.

f. Borrowing money on long-term debt will always

increase the current ratio and increase the debt ratio.


Decision Cases

(25 min.) Decision Case 1

Req. 1 Unadjusted trial balance:

Cash……………………………………..

$8,000

Accounts receivable………………….

4,200

Supplies………………………………...

800

Prepaid rent……………………………

1,200

Land……………………………………..

43,000

Accounts payable…………………….

$12,000

Salary payable…………………………

–0–

Unearned service revenue…………..

700

Note payable, due in 3 years………..

23,400

Common stock………………………...

5,000

Retained earnings…………………….

9,300

Service revenue……………………….

9,100

Salary expense………………………..

3,400

Rent expense…………………………..

–0–

Advertising expense………………….

900

Supplies expense……………………..

– 0 –

Totals……………………………………

$61,500 $59,500


Out of balance $2,000


(continued) Decision Case 1

Req. 2 Adjusted trial balance:

Cash……………………………………………...

$8,000

Accounts receivable…………………………..

4,200

Supplies ($800 -400)..………………………….

400

Prepaid rent ($1,200 x 11/12)…………………

1,100

Land ($41,000 + $2,000)……………………….

43,000

Accounts payable……………………………...

12,000

Salary payable………………………………….

1,000

Unearned service revenue ($700 - $500)….

200

Note payable, due in 3 years………………...

25,400

Common stock…………………………………

5,000

Retained earnings……………………………..

9,300

Service revenue ($9,100 + $500)…………….

9,600

Salary expense ($3,400 + $1,000)…………..

4,400

Rent expense ($1,200 x 1/12)………………..

100

Advertising expense…………………………..

900

Supplies expense……………………………...

40 0

Total………………………………………………

$62,500

$62,500

Req. 3


Current ratio =$8,000 + $4,200 + $400 +

$1,100$12,000 + $1,000 + $200

=

$13,700 = 1.04$13,200

We might have trouble sleeping at night with a current

ratio of 1.04. To be safe, the current ratio should be

around 1.40 or higher.


(20- 30 min.) Decision Case 2

Eagle Restaurant, Inc.Income Statement

Month Ended October 31, 2011Sales revenue $32,000Cost of goods sold $12,000Wages expense 5,000Rent expense 4,000Insurance expense 1,000Depreciation expense 1,00

0 23,00

0Net income $

9,000

Eagle Restaurant, Inc.Statement of Retained EarningsMonth Ended October 31, 2011

Retained earnings, beginning $ 0+ Net income 9,000- Dividends (3,000 )

Retained earnings, October 31, 2011 $6,000



Eagle Restaurant, Inc.Balance Sheet

October 31, 2011ASSETS LIABILITIES

Cash $ 8,000

Accounts payable $ 7,000

Food inventory 5,000 Unearned revenue 3,000 Prepaid insurance 1,000 10,000Dishes, silver 4,000Fixtures

$24,000OWNERS’ EQUITY

Less: Accum.

Common stock $25,000

deprec. (1,000 )

23,00 0

Retained earnings

6,00 0

31,00 0


Total liabilities and equity

$41,000

Recommendation : Do not expand the business. It is

not meeting Marks’ goals for net income

or for total assets.


(30- 40 min.) Decision Case 3

Req. 1 (your highest price)

Advertising revenue ($22,000 + $4,000)

$26,000

Expenses:Salary $4,000Utilities 900Other (unrecorded) 1,100Salary of your manager 5,000 11,00

0Your expected monthly net income $15,000Multiplier to compute price X 16Your highest price $240,00

0

Req. 2 (Williams’ asking price)

SW Advertising, Inc.Statement of Retained Earnings and Common Stock

June 30, 2010 Beginning retained earnings $

93,000Add: Net income

Revenue ($22,000 + $4,000) $26,000Less: Expenses ($4,000 +

$900 + $1,100) (6,000)

20,000

113,000


Ending retained earnings $104,000

Common stock 50,000

Stockholders’ equity, June 30, 2010 $154,000

Multiplier to compute price X


2__Williams’ asking price $308,00

0



Req. 3

You may start by offering Williams approximately

$225,000 for the business. His asking price is $308,000

so you are starting out quite far apart. If Williams

appears especially eager to sell out, you may be able to

buy the firm for closer to your highest price of $240,000.

However, if he is not so eager to sell and if you want the

business badly enough, you may have to pay somewhere

between $240,000 and $308,000. It might pay to hire an

expert to value the business’s assets. You may find that

Williams’ price is inflated based on the value of its

assets. You can always raise your offer, but you cannot

decrease it, so start the negotiating process with an offer

around $225,000.


Ethical Issues

Ethical Issue 1

1. The journal entry to record the revenue is:

Dec. Accounts Receivable………...

XXX

Sales Revenue……………..

XXX

The debit to Accounts Receivable will increase total current assets and, as a result, increase (improve) the current ratio.

The credit to Sales Revenue will increase total owner equity and, as a result, decrease (improve) the debt ratio.

2. a. – c. The issue is whether it is ethical to record the revenue in the current year. The contract has been signed, but the implication is that the company will not have done everything it needs to do in order to earn the revenue in the current year. The stakeholders are the company, the bank, the stockholders, and the company’s other creditors. From an economic standpoint, the entry would obviously improve the company’s short term financial position. However, the advantage would probably be short- lived. When the bank finds out about this entry, they will likely protest, and demand immediate payment, so the longer- term economic impact will likely be negative. From a “legal” standpoint, to record this transaction in December violates GAAP by violating the revenue principle . In this case Cross Timbers has not made the sale (has not delivered the merchandise) to the customer and, therefore, has not earned the revenue prior to December 31 of the current year. From an ethical standpoint, recording this revenue violates the bank’s rights for proper disclosure of the company’s income and assets. Revenue should be recorded no earlier than when it is earned. Cross Timbers expects to earn Chapter 3 Accrual Accounting & Income 298

the revenue in January of next year. Cross Timbers clearly cannot record this revenue until it is earned. To do so is not in their best economic, legal (GAAP) or ethical best interests.

3. The authors would suggest either of two actions. Cross Timbers can either:

a. Report the current ratio of 1.47 and the debt ratio of .51 because these are the true values. Then tell the bank of the signed contract for additional work and the hope for a better set of ratio values next year. In some cases, banks will agree to sign a waiver of the terms of loan covenants, meaning that, although the company is in violation, the bank will not move to enforce the covenant. They may give Cross Timbers a “grace period” to cure the violation in the covenant.

b. Pay off some current liabilities before year end. This will improve both the current ratio and the debt ratio. This may enable Cross Timbers to bring its ratio values into compliance with the bank’s requirements.


Ethical Issue 2

1. These transactions — recorded as directed by Almond

— overstate the reported income of the company by

$21,000 ($10,000 + $10,000 + $1,000).

2. It appears that Almond wants to improve the company’s

reported income in order to borrow on favorable terms.

Her action is unethical and probably illegal as well

because she is deliberately overstating the company’s

reported income.

Almond appears to be letting the potential short term

economic advantage of these deliberate misstatements

take precedence. She needs to remember that these

misstatements violate GAAP, and that, depending on

what use is made of the financial statements, could

subject the company to civil or criminal legal

proceedings. If this happens, the short term economic

gains ($21,000) would not even come close to the long-

term economic costs associated with the legal actions,

not to mention the negative publicity. The business

will need a bank loan, and perhaps the money would be

used to pay bills, expand the business, and so on.

However, based on Almond’s lack of integrity, the

money may be destined for her own use. Regardless of

its use, the money is obtained under false pretenses

and cannot be headed for a good outcome.

The bank is harmed by Almond’s and Lail’s actions.

Lending money to Almond under false pretenses may


lead the bank to charge an unrealistically low interest

rate that robs the bank’s owners of interest revenue. In

the extreme, the public is robbed if taxpayers wind up

financing the bailout of a failed institution.

3. Personal advice will vary from student to student. The

purpose of asking this question is to challenge students

to take the high road of ethical conduct by having

nothing to do with Almond’s scheme. The authors would

advise Lail, the accountant, to take these actions, in

order:

a. Refuse to take any part in Almond’s scheme,

explaining that the result is overstatement of reported

income. This is both illegal and unethical, and will

ultimately have a negative economic impact on the

company, as well. Accountants are bound to

standards of ethical conduct that these actions

violate. The can go to prison when caught falsifying

financial statements.

b. To remain ethical, the accountant must be willing to

lose his/her job. It is better to protect one’s

reputation even if that causes a short- term hardship.


Focus on Financials: Amazon.com, Inc.

(15- 20 min.)

Req. 1

Accrued expenses are expenses that have been incurred

but that have not yet been paid as of the balance sheet

date. The accrual and matching concepts require that all

expenses be recognized during the period in which they

are incurred in order to earn revenue, regardless of when

they are paid.

Req. 2 and Req. 4 (balances in millions at December 31, 2008)

Accrued expenses and other Cash

Beg. Bal. $902

(a) 902

(a) 902

(b) 1,093 (b) 2,335

End. Bal. $1,093

Operating expenses

(b) 3,428


(continued) Focus on Financials: Amazon.com, Inc.

Req. 3 (amounts in millions)


a. Accrued expenses and other…….…

902

Cash………………….. 902

b. Operating expenses….……………….

3,428

Cash……………………..………... 2,335 Accrued expenses and other…

1,093

The balance of accrued expenses and other agrees with

the financial statements at December 31, 2008.


(continued) Focus on Financials: Amazon.com, Inc.

Req. 5

Current ratio:2008 2007

(Dollar amounts in millions)

Total current assets=

$6,157= 1.3

0

$5,164= 1.3


$4,746 $3,714

Debt ratio:

Total liabilities =

$5,642*= 0.68

$5,288**= 0.82

Total assets $8,314 $6,485*4,746 + $409 + $487 **3,714 + $1,282 + $292

The current ratio deteriorated slightly, but the debt ratio

improved significantly during 2008. The company used

cash to pay down long-term liabilities. This reveals

strengthening leverage at the expense of only slightly

weaker (but still respectable) liquidity.


Focus on Analysis: Foot Locker, Inc.

(15- 20 min.)

Req. 1

In fiscal 2006, Foot Locker earned the $59 million.

In fiscal 2007, Foot Locker earned the $50 million, and

$50 million is included in net income for fiscal 2007.

Req. 2

$62 million impacted rent expense in 2007 net income

computation.

$65 million impacted rent expense in 2008 net income.

This amount was still prepaid as of December 31, 2007.

Req. 3

During 2008, Foot Locker, Inc. sold plant assets

(property, plant, and equipment). They must have

removed $67 million from accumulated depreciation for

the plant assets that it sold ($870 + $100 - $903).


Req. 4

Customer deposits represent unearned income. When

received, these amounts are credited to a current liability

account. When customers redeem the gift cards, these

amounts are debited to customer deposits and credited to

sales revenue.

The entry to record the increase in this account is (in millions):

Cash………………………………………………

1

Customer deposits………………………

1

During 2007, Foot Locker, Inc. collected $1 million from

customers who were buying gift certificates. This

transaction created a liability for Foot Locker, Inc.


Group Project

(45 min.)

Req. 1

Davis Lawn Service, Inc.Income Statement

Four Months Ended August 31, 2010 Service revenue ($5,600 + $600) $6,200Expenses: Wage expense ($1,900 + $200)

$2,100

Rent expense ($600 × 4/6) 400 Supplies expense ($400 −$50)

350

Repair expense 300 Depreciation expense ($300× 1/3)

10 0

Total expenses 3,250 Net income $2,950


(continued) Group Project

Req. 2

Davis Lawn Service, Inc.Balance Sheet

August 31, 2010ASSETS LIABILITIES

Current: Current: Cash $2,040 Wages payable $ 200 Accounts receivable 600 Total current liabilities

200 Receivable from Ludwig

(or Prepaid rent) 200 Supplies

50 STOCKHOLDERS’

Total current assets 2,890 EQUITYLong-term: Common stock 400 Trailer $300 Retained earnings Less accum. ($2,950 $460)− 2,490

deprec. (100 ) 200 Total stockholders’ equity

2,890


Total assets $3,090 stockholders’ equity $3,090


Business

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