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Solution manual for intermediate accounting-14e-kieso-warfield-weygandt
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TABLE OF CONTENTS
CHAPTER 1 ............................................................................................................ 1
Concepts for Analysis 1-5 .................................................................................. 1 Concepts for Analysis 1-6 .................................................................................. 2 Concepts for Analysis 1-10 ................................................................................ 3 Concepts for Analysis 1-11 ................................................................................ 3
CHAPTER 2 ............................................................................................................ 4
Brief Exercise 2-3 .............................................................................................. 4 Brief Exercise 2-4 .............................................................................................. 4 Brief Exercise 2-5 .............................................................................................. 4 Exercise 2-3 ....................................................................................................... 5
CHAPTER 3 ............................................................................................................ 6
Exercise 3-6 ....................................................................................................... 6 Exercise 3-9 ....................................................................................................... 6 Exercise 3-11 ..................................................................................................... 8 Exercise 3-14 ................................................................................................... 10 Exercise 3-15 ................................................................................................... 10 Exercise 3-16 ................................................................................................... 10
CHAPTER 4 .......................................................................................................... 12
Exercise 4-2 ..................................................................................................... 12 Exercise 4-4 ..................................................................................................... 13 Exercise 4-5 ..................................................................................................... 16 Exercise 4-12 ................................................................................................... 17 Exercise 4-13 ................................................................................................... 18 Exercise 4-15 ................................................................................................... 19 Problem 4-1 ..................................................................................................... 19 Problem 4-7 ..................................................................................................... 21
CHAPTER 5 .......................................................................................................... 23
Exercise 5-2 ..................................................................................................... 23 Exercise 5-4 ..................................................................................................... 23 Exercise 5-13 ................................................................................................... 25 Exercise 5-15 ................................................................................................... 25 Problem 5-2 ..................................................................................................... 27
CHAPTER 7 .......................................................................................................... 29
Exercise 7-5 ..................................................................................................... 29 Exercise 7-7 ..................................................................................................... 30 Exercise 7-13 ................................................................................................... 30 Exercise 7-15 ................................................................................................... 31
Exercise 7-16 ................................................................................................... 31 Exercise 7-24 ................................................................................................... 32 Problem 7-8 ..................................................................................................... 34 Problem 7-11................................................................................................... 35 Problem 7-15................................................................................................... 36
CHAPTER 8 .......................................................................................................... 38
Exercise 8-1 ..................................................................................................... 38 Exercise 8-15 ................................................................................................... 38 Exercise 8-25 ................................................................................................... 39 Exercise 8-26 ................................................................................................... 40
CHAPTER 9 .......................................................................................................... 42
Brief Exercise 9-2 ............................................................................................ 42 Brief Exercise 9-4 ............................................................................................ 42 Brief Exercise 9-7 ............................................................................................ 42 Brief Exercise 9-8 ............................................................................................ 43 Exercise 9-2 ..................................................................................................... 43 Exercise 9-7 ..................................................................................................... 44 Exercise 9-12 ................................................................................................... 45 Exercise 9-14 ................................................................................................... 46 Exercise 9-19 ................................................................................................... 47 Problem 9-4 ..................................................................................................... 47
CHAPTER 18 ........................................................................................................ 49
Exercise 18-2 ................................................................................................... 49 Exercise 18-4 ................................................................................................... 50 Exercise 18-7 ................................................................................................... 51 Exercise 18-11 ................................................................................................. 52 Exercise 18-15 ................................................................................................. 53 Exercise 18-19 ................................................................................................. 54 Problem 18-7................................................................................................... 55 Problem 18-8................................................................................................... 57
CHAPTER 23 ........................................................................................................ 59
Exercise 23-1 ................................................................................................... 59 Exercise 23-5 ................................................................................................... 59 Exercise 23-6 ................................................................................................... 60 Exercise 23-11 ................................................................................................. 60
1
CHAPTER 1
CA 1-5 (a) One of the committees that the AICPA established prior to the establishment of the FASB was the
Committee on Accounting Procedures (CAP). The CAP, during its existence from 1939 to 1959, issued 51 Accounting Research Bulletins (ARB). In 1959, the AICPA created the Accounting Prin-ciples Board (APB) to replace the CAP. Before being replaced by the FASB, the APB released 31 official pronouncements, called APB Opinions.
(b) Although the ARBs issued by the CAP helped to narrow the range of alternative practices to some
extent, the CAP’s problem-by-problem approach failed to provide the well-defined, structured body of accounting principles that was both needed and desired. As a result, the CAP was replaced by the APB.
The APB had more authority and responsibility than did the CAP. Unfortunately, the APB was beleaguered throughout its 14-year existence. It came under fire early, charged with lack of produc-tivity and failing to act promptly to correct alleged accounting abuses. The APB also met a lot of industry and CPA firm opposition and occasional governmental interference when tackling numerous thorny accounting issues. In fear of governmental rule making, the accounting profession investigated the ineffectiveness of the APB and replaced it with the FASB.
Learning from prior experiences, the FASB has several significant differences from the APB. The FASB has: (1) smaller membership, (2) full-time, compensated membership, (3) greater autonomy, (4) increased independence, and (5) broader representation. In addition, the FASB has its own research staff and relies on the expertise of various task force groups formed for various projects. These features form the bases for the expectations of success and support from the public. In addition, the due process taken by the FASB in establishing financial accounting standards gives interested persons ample opportunity to make their views known. Thus, the FASB is responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession.
(c) The AICPA has supplemented the FASB’s efforts in the present standard-setting environment. The issue papers, which are prepared by the Accounting Standards Executive Committee (AcSEC), identify current financial reporting problems for specific industries and present alternative treat-ments of the issue. These papers provide the FASB with an early warning device to insure timely issuance of FASB standards, Interpretations, and Staff Positions. In situations where the FASB avoids the subject of an issue paper, AcSEC may issue a Statement of Position to provide guidance for the reporting issue. AcSEC also issues Practice Bulletins which indicate how the AICPA believes a given transaction should be reported.
Recently, the role of the AICPA in standard-setting has diminished. The FASB and the AICPA agreed, that after a transition period, the AICPA and AcSEC no longer will issue authoritative accounting guidance for public companies.
CA 1-6
2
(a) The Financial Accounting Foundation (FAF) is the sponsoring organization of the FASB. The FAF selects the members of the FASB and its Advisory Council, funds their activities, and generally oversees the FASB’s activities.
The FASB follows a due process in establishing a typical FASB Statement of Financial Accounting Standards. The following steps are usually taken: (1) A topic or project is identified and placed on the Board’s agenda. (2) A task force of experts from various sectors is assembled to define problems, issues, and alternatives related to the topic. (3) Research and analysis are conducted by the FASB technical staff. (4) A preliminary views document is drafted and released. (5) A public hearing is often held, usually 60 days after the release of the preliminary views. (6) The Board analyzes and evaluates the public response. (7) The Board deliberates on the issues and prepares an exposure draft for release. (8) After a 30-day (minimum) exposure period for public comment, the Board evaluates all of the responses received. (9) A committee studies the exposure draft in relation to the public responses, reevaluates its position, and revises the draft if necessary. (10) The full Board gives the revised draft final consideration and votes on issuance of a Standards Statement. The passage of a new accounting standard in the form of an FASB Statement requires the support of five of the seven Board members.
(b) The FASB issues three major types of pronouncements: Standards and Interpretations, Financial
Accounting Concepts, and Technical Bulletins. Financial accounting standards issued by the FASB are considered GAAP. In addition, the FASB also issues interpretations that represent modifications or extensions of existing standards and APB Opinions. These interpretations have the same authority as standards and APB Opinions in guiding current accounting practices.
The Statements of Financial Accounting Concepts (SFAC) help the FASB to avoid the “problem-by-problem approach.” These statements set forth fundamental objectives and concepts that the Board will use in developing future standards of financial accounting and reporting. They are intended to form a cohesive set of interrelated concepts, a body of theory or a conceptual framework, that will serve as tools for solving existing and emerging problems in a consistent, sound manner.
The FASB may issue a technical bulletin when there is a need for guidelines on implementing or applying FASB Standards or Interpretations, APB Opinions, Accounting Research Bulletins, or emerging issues. A technical bulletin is issued only when (1) it is not expected to cause a major change in accounting practice for a number of enterprises, (2) its cost of implementation is low, and (3) the guidance provided by the bulletin does not conflict with any broad fundamental accounting principle. In addition, the FASB’s Emerging Issues Task Force (EITF) issues statements to provide guidance on how to account for new and unusual financial transactions that have the potential for creating diversity in reporting practices. The EITF identifies controversial accounting problems as they arise and determines whether they can be quickly resolved or whether the FASB should become involved in solving them. In essence, it becomes a “problem filter” for the FASB. Thus, it is hoped that the FASB will be able to work on more pervasive long-term problems, while the EITF deals with short-term emerging issues.
CA 1-10 1. (b), (e) 2. (a) 3. (c)
3
4. (d)
CA 1-11 1. (d) 2. (f) 3. (c) 4. (e) 5. (a) 6. (b)
CHAPTER 2
BRIEF EXERCISE 2-3
(a) Equity
(b) Revenues
(c) Equity
(d) Assets
(e) Expenses
(f) Losses
(g) Liabilities
(h) Distributions to owners
(i) Gains
(j) Investments by owners
BRIEF EXERCISE 2-4
(a) Periodicity
(b) Monetary unit
(c) Going concern
(d) Economic entity
BRIEF EXERCISE 2-5
(a) Revenue recognition
4
(b) Expense recognition
(c) Full disclosure
(d) Historical cost
EXERCISE 2-3 (15–20 minutes)
(a) Gains, losses.
(b) Liabilities.
(c) Investments by owners, comprehensive income.
(also possible would be revenues and gains).
(d) Distributions to owners.
(Note to instructor: net effect is to reduce equity and assets).
(e) Comprehensive income.
(also possible would be revenues and gains).
(f) Assets.
(g) Comprehensive income.
(h) Revenues, expenses.
(i) Equity.
(j) Revenues.
(k) Distributions to owners.
(l) Comprehensive income.
5
CHAPTER 3
EXERCISE 3-6 (10–15 minutes)
1. Accounts Receivable .............................................................................................................. 750
Service Revenue ........................................................................................................... 750
2. Utilities Expense ..................................................................................................................... 520
Utilities Payable ............................................................................................................ 520
3. Depreciation Expense ............................................................................................................ 400
Accumulated Depreciation—Dental Equipment .......................................................... 400
Interest Expense .................................................................................................................... 500
Interest Payable ............................................................................................................ 500
4. Insurance Expense ($15,000 X 1/12) ..................................................................................... 1,250
Prepaid Insurance ......................................................................................................... 1,250
5. Supplies Expense ($1,600 – $400) ......................................................................................... 1,200
Supplies ........................................................................................................................ 1,200
EXERCISE 3-9 (15–20 minutes)
(a) 10/15 Salaries Expense .................................................................................................................... 800
Cash ............................................................................................................................. 800
6
(To record payment of October 15
payroll)
10/17 Accounts Receivable ............................................................................................................. 2,100
Service Revenue .......................................................................................................... 2,100
(To record revenue for services
performed for which payment has
not yet been received)
10/20 Cash 650
Unearned Service Revenue ......................................................................................... 650
(To record receipt of cash for
services not yet performed)
(b) 10/31 Supplies Expense ................................................................................................................... 470
Supplies ........................................................................................................................ 470
(To record the use of supplies during
October)
10/31 Accounts Receivable ............................................................................................................. 1,650
Service Revenue .......................................................................................................... 1,650
(To record revenue for services
performed for which payment
has not yet been received)
10/31 Salaries Expense .................................................................................................................... 600
Salaries Payable ........................................................................................................... 600
(To record liability for accrued payroll)
10/31 Unearned Service Revenue ................................................................................................... 400
Service Revenue .......................................................................................................... 400
(To reduce the Unearned Service
Revenue account for service that
7
has been performed)
EXERCISE 3-11 (20–25 Minutes)
(a) CAVAMANLIS CO.
Income Statement
For the Year Ended December 31, 2010
Revenues
Service revenue ....................................................................... $12,590
Expenses
Salaries expense ...................................................................... $6,840
Rent expense ........................................................................... 2,760
Depreciation expense .............................................................. 145
Interest expense ...................................................................... 83 9,828
Net Income ........................................................................................... $ 2,762
(b) CAVAMANLIS CO.
Statement of Retained Earnings
For the Year Ended December 31, 2010
Retained earnings, January 1 ........................................................................................ $11,310
Add: Net income .................................................................................................... 2,762
Less: Dividends ............................................................................................................. 3,000
Retained earnings, December 31 ................................................................................. $11,072
(c) CAVAMANLIS CO.
Balance Sheet
8
December 31, 2010
Assets
Current Assets
Cash $18,972
Accounts receivable ............................................................. 6,920
Prepaid rent ......................................................................... 2,280
Total current assets ..................................................... $28,172
Property, plant, and equipment
Equipment ............................................................................ 18,050
Less: Accumulated depreciation ......................................... (4,895) 13,155
Total assets $41,327
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable ...................................................................... $ 5,700
Accounts payable ................................................................. 4,472
Interest payable ................................................................... 83
Total current liabilities ................................................. 10,255
Stockholders’ equity
Common Stock ..................................................................... $20,000
Retained Earnings ................................................................ 11,072* 31,072
Total liabilities and stockholders’ equity .............................................. $41,327
*Beg. Balance + Net Income – Dividends = Ending Balance
$11,310 + $2,762 – $3,000 = $11,072
EXERCISE 3-14 (10–15 minutes)
Sales 340,000
Sales Returns and Allowances ..................................................................................... 13,000
9
Sales Discounts ............................................................................................................ 8,000
Income Summary ......................................................................................................... 319,000
Income Summary ................................................................................................................... 302,000
Cost of Goods Sold ....................................................................................................... 202,000
Freight-out ................................................................................................................... 7,000
Insurance Expense ....................................................................................................... 12,000
Rent Expense ............................................................................................................... 20,000
Salary Expense ............................................................................................................. 61,000
Income Summary ................................................................................................................... 17,000
Retained Earnings ........................................................................................................ 17,000
EXERCISE 3-15 (10–15 minutes)
(a) $5,000 ($90,000 – $85,000) (d) $95,000 ($5,000 + $90,000)
(b) $29,000 ($85,000 – $56,000) (e) $52,000 ($90,000 – $38,000)
(c) $14,000 ($29,000 – $15,000)
EXERCISE 3-16 (10–15 minutes)
Sales 390,000
Cost of Goods Sold ....................................................................................................... 235,700
Sales Returns and Allowances ..................................................................................... 12,000
Sales Discounts ............................................................................................................ 15,000
Selling Expenses ........................................................................................................... 16,000
Administrative Expenses .............................................................................................. 38,000
Income Tax Expense .................................................................................................... 30,000
Income Summary ......................................................................................................... 43,300
(or)
10
Sales 390,000
Income Summary ......................................................................................................... 390,000
Income Summary ................................................................................................................... 346,700
Cost of Goods Sold ....................................................................................................... 235,700
Sales Returns and Allowances ..................................................................................... 12,000
Sales Discounts ............................................................................................................ 15,000
Selling Expenses ........................................................................................................... 16,000
Administrative Expenses .............................................................................................. 38,000
Income Tax Expense .................................................................................................... 30,000
Income Summary ................................................................................................................... 43,300
Retained Earnings ........................................................................................................ 43,300
Retained Earnings .................................................................................................................. 18,000
Dividends ..................................................................................................................... 18,000
CHAPTER 4
EXERCISE 4-2 (25–35 minutes)
(a) Total net revenue:
11
Sales ............................................................... $400,000
Less: Sales discounts ..................................... $ 7,800
Sales returns .................................... 12,400 20,200
Net sales ......................................................... 379,800
Dividend revenue ........................................... 71,000
Rental revenue ............................................... 6,500
Total net revenue ............................... $457,300
(b) Net income:
Total net revenue (from a)............................. $457,300
Expenses:
Cost of goods sold .................................... $184,400
Selling expenses........................................ 99,400
Administrative expenses .......................... 82,500
Interest expense ....................................... 12,700
Total expenses .................................... 379,000
Income before income tax ............................. 78,300
Income tax ..................................................... 26,600
Net income ............................................... $ 51,700
(c) Dividends declared:
Ending retained earnings ............................... $134,000
Beginning retained earnings .......................... 114,400
Net increase ............................................................... 19,600
Less: Net income (from (b)) ...................................... 51,700
Dividends declared .................................................... $ 32,100
ALTERNATE SOLUTION (for (c))
12
Beginning retained earnings .......................................................... $114,400
Add: Net income ...................................................................... 51,700
166,100
Less: Dividends declared ............................................................... ?
Ending retained earnings ............................................................... $134,000
Dividends declared must be $32,100
($166,100 – $134,000)
EXERCISE 4-4 (30–35 minutes)
(a) Multiple-Step Form
WEBSTER COMPANY
Income Statement
For the Year Ended December 31, 2010
(In thousands, except earnings per share)
Sales $96,500
Cost of goods sold ....................................................................... 63,570
Gross profit .................................................................................. 32,930
Operating Expenses
Selling expenses
Sales commissions ............................................................ $7,980
Depr. of sales equipment ................................................. 6,480
Transportation-out ........................................................... 2,690 $17,150
Administrative expenses
Officers’ salaries ............................................................... 4,900
Depr. of office furn. and equip. ........................................ 3,960 8,860 26,010
Income from operations ............................................. 6,920
13
Other Revenues and Gains
Rental revenue ....................................................................... 17,230
24,150
Other Expenses and Losses
Interest expense .................................................................... 1,860
Income before income tax .......................................................... 22,290
Income tax .............................................................................. 7,580
Net income .................................................................................. $14,710
Earnings per share ($14,710 ÷ 40,550) ....................................... $.36
(b) Single-Step Form
WEBSTER COMPANY
Income Statement
For the Year Ended December 31, 2010
(In thousands, except earnings per share)
Revenues
Sales $ 96,500
Rental revenue .................................................................................................. 17,230
Total revenues ............................................................................................. 113,730
Expenses
Cost of goods sold ............................................................................................. 63,570
Selling expenses ................................................................................................ 17,150
Administrative expenses ................................................................................... 8,860
Interest expense ............................................................................................... 1,860
Total expenses ............................................................................................. 91,440
Income before income tax ..................................................................................... 22,290
Income tax .............................................................................................................. 7,580
14
Net income........................................................................................................ $ 14,710
Earnings per share .................................................................................................. $0.36
Note: An alternative income statement format for the single-step form is to show income tax as
part of expenses, and not as a separate item.
(c) Single-step:
1. Simplicity and conciseness.
2. Probably better understood by users.
3. Emphasis on total costs and expenses and net income.
4. Does not imply priority of one revenue or expense over another.
Multiple-step:
1. Provides more information through segregation of operating and nonoperating items.
2. Expenses are matched with related revenue.
Note to instructor: Students’ answers will vary due to the nature of the question; i.e., it asks for an
opinion. However, the discussion supporting the answer should include the above points.
EXERCISE 4-5 (30–35 minutes)
PARNEVIK CORP.
Income Statement
For the Year Ended December 31, 2010
Sales Revenue
15
Sales $1,280,000
Less: Sales returns and allowances ........................................................ $150,000
Sales discounts ....................................................................... 45,000 195,000
Net sales revenue .................................................................................... 1,085,000
Cost of goods sold ................................................................................... 621,000
Gross profit ................................................................................................... 464,000
Operating Expenses
Selling expenses................................................................................ 194,000
Admin. and general expenses .......................................................... 97,000 291,000
Income from operations ............................................................................... 173,000
Other Revenues and Gains
Interest revenue .................................................................................. 86,000
259,000
Other Expenses and Losses
Interest expense .................................................................................. 60,000
Income before tax and extraordinary item ................................................... 199,000
Income tax ($199,000 X .34) ............................................................... 67,660
Income before extraordinary item ................................................................ 131,340
Extraordinary item—loss from earthquake damage ........................................ 120,000
Less: Applicable tax reduction ($120,000 X .34) .................................... 40,800 79,200
Net income .................................................................................................... $ 52,140
Per share of common stock:
Income before extraordinary item
($131,340 ÷ 100,000) ..........................................................................
$1.31*
Extraordinary item (net of tax) .............................................................. (0.79)
Net income ($52,140 ÷ 100,000)............................................................ $0.52
16
*Rounded
EXERCISE 4-12 (15–20 minutes)
Net income:
Income from continuing operations
before income tax ........................................................................................................
$21,650,000
Income tax (35% X $21,650,000) ..................................................................................... 7,577,500
Income from continuing operations ................................................................................ 14,072,500
Discontinued operations
Loss before income tax ............................................................................................... $3,225,000
Less: Applicable income tax (35%) ............................................................................ 1,128,750 2,096,250
Net income ....................................................................................................................... $11,976,250
Preferred dividends declared: ............................................................................................... $ 860,000
Weighted average common shares outstanding ................................................................................. 4,000,000
Earnings per share
Income from continuing operations ................................................................................ $3.30*
Discontinued operations, net of tax ................................................................................ (0.52)**
Net income ....................................................................................................................... $2.78***
*($14,072,500 – $860,000) ÷ 4,000,000. (Rounded)
**$2,096,250 ÷ 4,000,000. (Rounded)
***($11,976,250 – $860,000) ÷ 4,000,000.
EXERCISE 4-13 (15–20 minutes)
(a) 2010
17
Income before income tax ........................................................ $460,000
Income tax (35%) ....................................................................... 161,000
Net Income ................................................................................ $299,000
(b) Cumulative effect for years prior to 2010:
Year
Weighted
Average FIFO Difference
Tax Rate
(35%) Net Effect
2008 $370,000 $395,000 $25,000
2009 390,000 420,000 30,000
Total $55,000 $19,250 $35,750
(c) 2010 2009 2008
Income before income tax $460,000 $420,000 $395,000
Income tax (35%) 161,000 147,000 138,250
Net income $299,000 $273,000 $256,750
EXERCISE 4-15 (15–20 minutes)
BRYANT CO.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2010
Compre-
hensive
Retained
Accumulated
Other
Comprehensive
Common
18
Total Income Earnings Income Stock
Beginning balance $520,000 $ 90,000 $80,000 $350,000
Comprehensive income
Net income* 170,000 $170,000 170,000
Other comprehensive income
Unrealized holding loss (50,000) (50,000) (50,000)
Comprehensive income $120,000
Dividends (10,000) (10,000)
Ending balance $630,000 $250,000 $30,000 $350,000
*($750,000 – $500,000 – $80,000).
SOLUTIONS TO PROBLEMS
PROBLEM 4-1
DICKINSON COMPANY
Income Statement
For the Year Ended December 31, 2010
Sales ............................................................................................................... $25,000,000
Cost of goods sold ......................................................................................... 16,000,000
Gross profit .................................................................................................... 9,000,000
Selling and administrative expenses ............................................................. 4,700,000
Income from operations ................................................................................ 4,300,000
Other revenues and gains
Interest revenue .............................................................................. $ 70,000
Gain on the sale of investments ...................................................... 110,000 180,000
Other expenses and losses
Write-off of goodwill ....................................................................... 820,000
Income from continuing operations before income tax ......................................... 3,660,000
Income tax ..................................................................................................... 1,244,000
Income from continuing operations ............................................................. 2,416,000
19
Discontinued operations
Loss on operations, net of tax ......................................................... 90,000
Loss on disposal, net of tax .............................................................. 440,000 530,000
Income before extraordinary item ................................................................ 1,886,000
Extraordinary item—loss from flood
damage, net of tax .....................................................................................
390,000
Net income .................................................................................................... $ 1,496,000
Earnings per share:
Income from continuing operations ................................................ $ 4.67a
Discontinued operations
Loss on operations, net of tax .............................................. $(0.18)
Loss on disposal, net of tax .................................................. (0.88) (1.06)
Income before extraordinary item ................................................... 3.61b
Extraordinary loss, net of tax ........................................................... (0.78)
Net income ....................................................................................... $ 2.83c
DICKINSON COMPANY
Retained Earnings Statement
For the Year Ended December 31, 2010
Retained earnings, January 1 ............................................................ $ 980,000
Add: Net income ......................................................................... 1,496,000
2,476,000
Less: Dividends
Preferred stock .................................................................... $ 80,000
Common stock ..................................................................... 250,000 330,000
Retained earnings, December 31 ...................................................... $ 2,146,000
a$2,416,000 – $80,000 = $4.67
20
500,000 shares
b$1,886,000 – $80,000 = $3.61
500,000 shares
c$1,496,000 – $80,000 = $2.83
500,000 shares
PROBLEM 4-7
WADE CORP.
Income Statement (Partial)
For the Year Ended December 31, 2010
Income from continuing operations
before income tax ...........................................................
$1,200,000*
Income tax .............................................................. 456,000**
Income from continuing operations .................................. 744,000
Discontinued operations
Loss from operations of
discontinued subsidiary ......................................
$ 90,000
Less: Applicable income tax
reduction .......................................
34,200
$ 55,800
Loss from disposal of subsidiary ..................................... 100,000
Less: Applicable income tax
reduction ........................................
38,000
62,000
117,800
Income before extraordinary item ..................................... 626,200
Extraordinary item:
Gain on condemnation ........................................... 125,000
Less: Applicable income tax ................................... 50,000 75,000
21
Net income ......................................................................... $ 701,200
Per share of common stock:
Income from continuing operations .................................................................. $4.96
Discontinued operations, net of tax ................................................................... (0.79)
Income before extraordinary item ..................................................................... 4.17
Extraordinary item, net of tax ............................................................................ 0.50
Net income ($701,200 ÷ 150,000) ...................................................................... $4.67
*Computation of income from continuing operations
before income tax:
As previously stated $1,210,000
Loss on sale of equipment [$40,000 – ($80,000 – $30,000)] (10,000)
Restated $1,200,000
**Computation of income tax expense:
$1,200,000 X .38 = $456,000
Note: The error related to the intangible asset was correctly charged to retained earnings.
22
CHAPTER 5
EXERCISE 5-2 (15–20 minutes)
1. h. 11. b.
2. d. 12. f.
3. f. 13. a.
4. f. 14. h.
5 c. 15. c.
6. a. 16. b.
7. f. 17. a.
8. g. 18. a.
9. a. 19. g.
10. a. 20. f.
EXERCISE 5-4 (30–35 minutes)
GULISTAN INC.
Balance Sheet
December 31, 2010
Assets
Current assets
Cash $XXX
Less: Cash restricted for plant
expansion .....................................................
XXX
$XXX
Accounts receivable .............................................................. XXX
Less: Allowance for doubtful
accounts .......................................................
XXX
XXX
Notes receivable ................................................................... XXX
Receivables—officers ............................................................ XXX
Inventories
Finished goods ................................................................. XXX
Work in process ............................................................... XXX
23
Raw materials .................................................................. XXX XXX
Total current assets .................................................... $XXX
Long-term investments
Preferred stock investments ................................................. XXX
Land held for future plant site .............................................. XXX
Cash restricted for plant expansion ...................................... XXX
Total long-term investments ...................................... XXX
Property, plant, and equipment
Buildings ................................................................................ XXX
Less: Accum. depreciation—
buildings .......................................................
XXX
XXX
Intangible assets
Copyrights ............................................................................. XXX
Total assets ..................................................................... $XXX
Liabilities and Stockholders’ Equity
Current liabilities
Accrued salaries payable ................................................................ $XXX
Notes payable, short-term ............................................................. XXX
Unearned subscriptions revenue ................................................... XXX
Unearned rent revenue ................................................................. XXX
Total current liabilities .............................................................. $XXX
Long-term debt
Bonds payable, due in four years ................................................... $XXX
Less: Discount on bonds payable ................................................... (XXX) XXX
Total liabilities ........................................................................... XXX
Stockholders’ equity
Capital stock:
Common stock .......................................................................... XXX
24
Additional paid-in capital:
Paid in capital in excess of
par—common stock ...............................................................
XXX
Total paid-in capital ............................................................. XXX
Retained earnings .......................................................................... XXX
Total paid-in capital and
retained earnings..............................................................
XXX
Less: Treasury stock, at cost .................................................... (XXX)
Total stockholders’ equity ................................................... XXX
Total liabilities and stock-
holders’ equity ..................................................................
$XXX
Note to instructor: An assumption made here is that cash included the cash restricted for plant
expansion. If it did not, then a subtraction from cash would not be necessary or the cash balance would
be “grossed up” and then the cash restricted for plant expansion deducted.
EXERCISE 5-13 (15–20 minutes)
(a) 4. (f) 1. (k) 1.
(b) 3. (g) 5. (l) 2.
(c) 4. (h) 4. (m) 2.
(d) 3. (i) 5.
(e) 1. (j) 4.
EXERCISE 5-15 (25–35 minutes)
(a) SONDERGAARD CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2010
Cash flows from operating activities
Net income ........................................................................................... $160,000
Adjustments to reconcile net income
to net cash provided by operating
25
activities:
Depreciation expense ..................................................................... $17,000
Loss on sale of investments ............................................................ 7,000
Decrease in accounts receivable .................................................... 5,000
Decrease in current liabilities ......................................................... (17,000) 12,000
Net cash provided by operating activities ........................................... 172,000
Cash flows from investing activities
Sale of investments
[($74,000 – $52,000) – $7,000] ......................................................... 15,000
Purchase of equipment ........................................................................ (58,000)
Net cash used by investing activities ................................................... (43,000)
Cash flows from financing activities
Payment of cash dividends .................................................................. (50,000)
Net increase in cash ................................................................................... 79,000
Cash at beginning of year .......................................................................... 78,000
Cash at end of year .................................................................................... $157,000
(b) Free Cash Flow Analysis
Net cash provided by operating activities ................................................. $172,000
Less: Purchase of equipment.................................................................... (58,000)
Dividends .................................................................................... (50,000)
Free cash flow .......................................................................................... $ 64,000
PROBLEM 5-2
26
MONTOYA, INC.
Balance Sheet
December 31, 2010
Assets
Current assets
Cash $ 360,000
Trading securities ....................................................... 121,000
Notes receivable ........................................................ 445,700
Income taxes receivable ............................................ 97,630
Inventories ................................................................. 239,800
Prepaid expenses ....................................................... 87,920
Total current assets .............................................. $1,352,050
Property, plant, and equipment
Land $ 480,000
Building ...................................................................... $1,640,000
Less: Accum. depreciation—
building ..............................................
270,200
1,369,800
Equipment .................................................................. 1,470,000
Less: Accum. depreciation—
equipment .........................................
292,000
1,178,000
3,027,800
Intangible assets
Goodwill ..................................................................... 125,000
Total assets ........................................................... $4,504,850
Liabilities and Stockholders’ Equity
27
Current liabilities
Accounts payable ......................................................... $ 490,000
Notes payable to banks ................................................ 265,000
Payroll taxes payable ................................................... 177,591
Taxes payable ............................................................... 98,362
Rent payable ................................................................ 45,000
Total current liabilities ............................................ $1,075,953
Long-term liabilities
Unsecured notes payable
(long-term) ............................................................... $1,600,000
Bonds payable .............................................................. $300,000
Less: Discount on bonds
payable .................................................
15,000
285,000
Long-term rental obligations ...................................... 480,000 2,365,000
Total liabilities ......................................................... 3,440,953
Stockholders’ equity
Capital stock
Preferred stock, $10 par; 20,000
shares authorized, 15,000
shares issued ........................................................
$150,000
Common stock, $1 par;
400,000 shares authorized,
200,000 issued .....................................................
200,000
$350,000
Retained earnings
($1,063,897 – $350,000) ...........................................
713,897
Total stockholders’ equity
($4,504,850 – $3,440,953) ...................................
1,063,897
Total liabilities and
stockholders’ equity .............................................
$4,504,850
CHAPTER 7
28
EXERCISE 7-5 (15–20 minutes)
(a) 1. June 3 Accounts Receivable—Arquette ................................................................... 2,000
Sales ................................................................................................... 2,000
June 12 Cash ............................................................................................................... 1,960
Sales Discounts ($2,000 X 2%) ....................................................................... 40
Accounts Receivable—Arquette ....................................................... 2,000
2. June 3 Accounts Receivable—Arquette ................................................................... 1,960
Sales ($2,000 X 98%).......................................................................... 1,960
June 12 Cash ............................................................................................................... 1,960
Accounts Receivable—Arquette ....................................................... 1,960
(b) July 29 Cash .............................................................................................................. 2,000
Accounts Receivable—Arquette ........................................................... 1,960
Sales Discounts Forfeited ...................................................................... 40
(Note to instructor: Sales discounts forfeited could have been recog-nized at the time the
discount period lapsed. The company, however, would probably not record this forfeiture
until final cash settlement.)
EXERCISE 7-7 (10–15 minutes)
29
(a) Bad Debt Expense .......................................................................................... 7,500
Allowance for Doubtful Accounts ...................................................... 7,500*
*.01 X ($800,000 – $50,000) = $7,500
(b) Bad Debt Expense .......................................................................................... 6,000
Allowance for Doubtful Accounts ...................................................... 6,000*
*Step 1: .05 X $160,000 = $8,000 (desired credit balance in Allowance account)
Step 2: $8,000 – $2,000 = $6,000 (required credit entry to bring allowance account to
$8,000 credit balance)
EXERCISE 7-13 (10–15 minutes)
(a) Cash................................................................................................................ 290,000
Finance Charge .............................................................................................. 10,000*
Notes Payable .................................................................................... 300,000
*2% X $500,000 = $10,000
(b) Cash................................................................................................................ 350,000
Accounts Receivable .......................................................................... 350,000
EXERCISE 7-13 (Continued)
(c) Notes Payable ................................................................................................ 300,000
Interest Expense ............................................................................................ 7,500*
Cash.................................................................................................... 307,500
*10% X $300,000 X 3/12 = $7,500
EXERCISE 7-15 (10–15 minutes)
30
Computation of net proceeds:
Cash received ................................................................................................ $190,000
Less: Recourse liability ................................................................................. 2,000
Net proceeds ................................................................................................ $188,000
Computation of gain or loss:
Carrying value ............................................................................. $200,000
Net proceeds .............................................................................. 188,000
Loss on sale of receivables ......................................................... $ 12,000
The following journal entry would be made:
Cash ................................................................................................... $190,000
Loss on Sale of Receivables ............................................................... 12,000
Recourse Liability ....................................................................... 2,000
Accounts Receivable .................................................................. 200,000
EXERCISE 7-16 (15–20 minutes)
(a) To be recorded as a sale, all of the following conditions would be met:
1. The transferred asset has been isolated from the transferor (put beyond reach of the
transferor and its creditors).
2. The transferees have obtained the right to pledge or to exchange either the transferred
assets or beneficial interests in the trans-ferred assets.
3. The transferor does not maintain effective control over the trans-ferred assets through an
agreement to repurchase or redeem them before their maturity.
31
(b) Computation of net proceeds:
Cash received ($250,000 X 94%) .......................................... $235,000
Due from factor ($250,000 X 4%) ......................................... 10,000 $245,000
Less: Recourse obligation .................................................... 3,000
Net proceeds ........................................................................ $242,000
Computation of gain or loss:
Carrying value .................................................................... $250,000
Net proceeds ..................................................................... 242,000
Loss on sale of receivables ................................................ $ 8,000
The following journal entry would be made:
Cash ................................................................................................... $235,000
Due from Factor ................................................................................ 10,000
Loss on Sale of Receivables ............................................................... 8,000
Recourse Liability ....................................................................... 3,000
Accounts Receivable .................................................................. 250,000
*EXERCISE 7-24 (15–20 minutes)
(a) KIPLING COMPANY
Bank Reconciliation
July 31
Balance per bank statement, July 31 ............................................................ $ 8,650
Add: Deposits in transit ................................................................................ 2,850a
Deduct: Outstanding checks ......................................................................... (1,100)b
Correct cash balance, July 31 ........................................................................ $10,400
Balance per books, July 31 ............................................................................ $ 9,250
Add: Collection of note ................................................................................ 1,500
32
Less: Bank service charge ............................................................................. $ 15
NSF check ............................................................................................ 335 (350)
Corrected cash balance, July 31 .................................................................... $10,400
aComputation of deposits in transit
Deposits per books $5,810
Deposits per bank in July $ 4,500
Less deposits in transit (June) (1,540)
Deposits mailed and received
in July
(2,960)
Deposits in transit, July 31 $2,850
bComputation of outstanding checks
Checks written per books $3,100
Checks cleared by bank in July $ 4,000
Less outstanding checks
(June)*
(2,000)
Checks written and cleared
in July
(2,000)
Outstanding checks, July 31 $1,100
*Assumed to clear bank in July
(b) Cash ............................................................................................................... 1,150
Office Expenses—Bank Charges .................................................................... 15
Accounts Receivable ...................................................................................... 335
Notes Receivable ............................................................................... 1,500
PROBLEM 7-8
33
10/1/10 Notes Receivable ........................................................................................... 120,000
Sales ................................................................................................... 120,000
12/31/10 Interest Receivable ........................................................................................ 2,400*
Interest Revenue ............................................................................... 2,400
*$120,000 X .08 X 3/12 = $2,400
10/1/11 Cash ............................................................................................................... 9,600*
Interest Receivable ............................................................................ 2,400
Interest Revenue ...................................................... 7,200**
*$120,000 X .08 = $9,600
**$120,000 X .08 X 9/12 = $7,200
12/31/11 Interest Receivable ........................................................................................ 2,400
Interest Revenue ................................................... 2,400
10/1/12 Cash ............................................................................................................... 9,600
Interest Receivable ............................................................................ 2,400
Interest Revenue ................................................. 7,200
Cash ............................................................................................................... 120,000
Notes Receivable ............................................................................... 120,000
Note: Entries at 10/1/11 and 10/1/12 assumes reversing entries were not made on January 1, 2011 and
January 1, 2012.
PROBLEM 7-11
34
SANDBURG COMPANY
Income Statement Effects
For the Year Ended December 31, 2010
Expenses resulting from accounts receivable
assigned (Schedule 1) ................................................................................... $22,320
Loss resulting from accounts receivable
sold ($300,000 – $270,000).......................................................................... 30,000
Total expenses ........................................................................................... $52,320
Schedule 1
Computation of Expense
for Accounts Receivable Assigned
Assignment expense:
Accounts receivable assigned .................................................................... $400,000
X 80%
Advance by Keller Finance Company......................................................... 320,000
X 3% $ 9,600
Interest expense ............................................................................................. 12,720
Total expenses ........................................................................................... $22,320
35
*PROBLEM 7-15
(a) The entries for the issuance of the note on January 1, 2010:
The present value of the note is: $1,200,000 X .68058 = $816,700 (Rounded by $4).
Botosan Company (Debtor):
Cash .................................................................................................... 816,700
Discount on Notes Payable ................................................................ 383,300
Note Payable............................................................................... 1,200,000
National Organization Bank (Creditor):
Notes Receivable................................................................................ 1,200,000
Discount on Notes Receivable .................................................... 383,300
Cash ............................................................................................ 816,700
(b) The amortization schedule for this note is:
SCHEDULE FOR INTEREST AND DISCOUNT AMORTIZATION—
EFFECTIVE-INTEREST METHOD
$1,200,000 Note Issued to Yield 8%
Date
Cash
Paid
Interest
Expense
Discount
Amortized
Carrying Amount
of Note
1/1/10 $ 816,700
12/31/10 $0 $ 65,336* $ 65,336 882,036**
12/31/11 0 70,563 70,563 952,599
12/31/12 0 76,208 76,208 1,028,807
12/31/13 0 82,305 82,305 1,111,112
12/31/14 0 88,888 88,888 1,200,000
Total $0 $383,300 $383,300
*$816,700 X 8% = $65,336.
**$816,700 + $65,336 = $882,036.
36
(c) The note can be considered to be impaired only when it is probable that, based on current
information and events, National Organization Bank will be unable to collect all amounts due
(both principal and interest) according to the contractual terms of the loan.
(d) The loss is computed as follows:
Carrying amount of loan (12/31/11) ............................................................. $952,599a
Less: Present value of $800,000 due
in 3 years at 8% ...............................................................................
(635,064)b
Loss due to impairment ................................................................................. $317,535
aSee amortization schedule from answer (b) on page 7-66.
b$800,000 X .79383 = $635,064.
December 31, 2011
National Organization Bank (Creditor):
Bad Debt Expense ...................................................................... 317,535
Allowance for Doubtful Accounts ...................................... 317,535
Note: Botosan Company (Debtor) has no entry.
CHAPTER 8
EXERCISE 8-1 (15–20 minutes)
Items 2, 3, 5, 8, 10, 13, 14, 16, and 17 would be reported as inventory in the financial statements.
The following items would not be reported as inventory:
1. Cost of goods sold in the income statement.
4. Not reported in the financial statements.
37
6. Cost of goods sold in the income statement.
7. Cost of goods sold in the income statement.
9. Interest expense in the income statement.
11. Advertising expense in the income statement.
12. Office supplies in the current assets section of the balance sheet.
15. Not reported in the financial statements.
18. Short-term investments in the current asset section of the balance sheet.
EXERCISE 8-15 (15–20 minutes)
(a) ESPLANADE COMPANY
Computation of Inventory for Product
BAP Under FIFO Inventory Method
March 31, 2010
Units Unit Cost Total Cost
March 26, 2010 ................................................. 600 $12.00 $ 7,200
February 16, 2010............................................. 800 11.00 8,800
January 25, 2010 (portion) ............................... 100 10.00 1,000
March 31, 2010, inventory ............................... 1,500 $17,000
(b) ESPLANADE COMPANY
Computation of Inventory for Product
BAP Under LIFO Inventory Method
March 31, 2010
Units Unit Cost Total Cost
Beginning inventory ......................................... 600 $8.00 $ 4,800
January 5, 2010 (portion) ................................. 900 9.00 8,100
March 31, 2010, inventory ............................... 1,500 $12,900
(c) ESPLANADE COMPANY
Computation of Inventory for Product
BAP Under Weighted Average Inventory Method
March 31, 2010
Units Unit Cost Total Cost
Beginning inventory ......................................... 600 $ 8.00 $ 4,800
January 5, 2010 ................................................. 1,100 9.00 9,900
38
January 25, 2010 ............................................... 1,300 10.00 13,000
February 16, 2010............................................. 800 11.00 8,800
March 26, 2010 ................................................. 600 12.00 7,200
4,400 $43,700
Weighted average cost
($43,700 ÷ 4,400) ........................................... $ 9.93*
March 31, 2010, inventory ............................... 1,500 $ 9.93 $14,895
*Rounded off.
EXERCISE 8-25 (20–25 minutes)
Current $
Price Index
Base Year $
Change from Prior
Year
2007 $ 80,000 1.00 $ 80,000 —
2008 111,300 1.05 106,000 +$26,000
2009 108,000 1.20 90,000 (16,000)
2010 122,200 1.30 94,000 +4,000
2011 147,000 1.40 105,000 +11,000
2012 176,900 1.45 122,000 +17,000
39
Ending Inventory—Dollar-value LIFO:
2007 $80,000 2011 $80,000 @ 1.00 = $ 80,000
10,000 @ 1.05 = 10,500
2008 $80,000 @ 1.00 = $ 80,000 4,000 @ 1.30 = 5,200
26,000 @ 1.05 = 27,300 11,000 @ 1.40 = 15,400
$107,300 $111,100
2009 $80,000 @ 1.00 = $ 80,000 2012 $80,000 @ 1.00 = $ 80,000
10,000 @ 1.05 = 10,500 10,000 @ 1.05 = 10,500
$ 90,500 4,000 @ 1.30 = 5,200
11,000 @ 1.40 = 15,400
2010 $80,000 @ 1.00 = $ 80,000 17,000 @ 1.45 = 24,650
10,000 @ 1.05 = 10,500 $135,750
4,000 @ 1.30 = 5,200
$ 95,700
EXERCISE 8-26 (15–20 minutes)
Date
Current $
Price Index
Base-Year $
Change from
Prior Year
Dec. 31, 2007 $ 70,000 1.00 $70,000 —
Dec. 31, 2008 88,200 1.05 84,000 +$14,000
Dec. 31, 2009 95,120 1.16 82,000 (2,000)
Dec. 31, 2010 108,000 1.20 90,000 +8,000
Dec. 31, 2011 100,000 1.25 80,000 (10,000)
40
Ending Inventory—Dollar-value LIFO:
Dec. 31, 2007 $70,000
Dec. 31, 2008 $70,000 @ 1.00 = $70,000
14,000 @ 1.05 = 14,700
$84,700
Dec. 31, 2009 $70,000 @ 1.00 = $70,000
12,000 @ 1.05 = 12,600
$82,600
Dec. 31, 2010 $70,000 @ 1.00 = $70,000
12,000 @ 1.05 = 12,600
8,000 @ 1.20 = 9,600
$92,200
Dec. 31, 2011 $70,000 @ 1.00 = $70,000
10,000 @ 1.05 = 10,500
$80,500
41
CHAPTER 9
BRIEF EXERCISE 9-2
Item
Cost
Designated
Market
LCM
Jokers $2,000 $2,050 $2,000
Penguins 5,000 4,950 4,950
Riddlers 4,400 4,550 4,400
Scarecrows 3,200 3,070 3,070
BRIEF EXERCISE 9-4
Group
Number
of CDs
Sales
Price
per CD
Total
Sales
Price
Relative
Sales
Price
Total
Cost
Cost
Allocated to
CDs
Cost per
CD
1 100 $ 5 $ 500 5/100* X $8,000 = $ 400 $ 4**
2 800 $10 8,000 80/100 X $8,000 = 6,400 $ 8
3 100 $15 1,500 15/100 X $8,000 = 1,200 $12
$10,000 $8,000
*$500/$10,000 = 5/100 **$400/100 = $4
BRIEF EXERCISE 9-7
Beginning inventory ................................................................................ $150,000
Purchases ................................................................................................. 500,000
Cost of goods available ............................................................................ 650,000
Sales $700,000
Less gross profit (35% X 700,000)............................................................ 245,000
Estimated cost of goods sold ................................................................... 455,000
Estimated ending inventory destroyed in fire ......................................... $195,000
42
BRIEF EXERCISE 9-8
Cost Retail
Beginning inventory ....................................................................... $ 12,000 $ 20,000
Net purchases ................................................................................. 120,000 170,000
Net markups ................................................................................... 10,000
Totals $132,000 200,000
Deduct:
Net markdowns .............................................................................. 7,000
Sales 147,000
Ending inventory at retail ............................................................... $ 46,000
Cost-to-retail ratio: $132,000 ÷ $200,000 = 66%
Ending inventory at lower-of cost-or-market (66% X $46,000) = $30,360
EXERCISE 9-2 (10–15 minutes)
Item
Net Realizable
Value (Ceiling)
Net Realizable
Value Less
Normal Profit
(Floor)
Replacement Cost
Designated
Market
Cost
LCM
D $90* $70** $120 $90 $75 $75
E 80 60 72 72 80 72
F 60 40 70 60 80 60
G 55 35 30 35 80 35
H 80 60 70 70 50 50
I 60 40 30 40 36 36
*Estimated selling price – Estimated selling expense = $120 – $30 = $90. **Net realizable value – Normal profit margin = $90 – $20 = $70.
43
EXERCISE 9-7 (15–20 minutes)
Co
st
Pe
r Lo
t
(Co
st
Allo
cate
d/
No
. of
Lots
)
$2
,04
0
2,7
20
1,3
60
Co
st
Allo
cate
d
to L
ots
$1
8,3
60
40
,80
0
25
,84
0
$8
5,0
00
Tota
l C
ost
$8
5,0
00
85
,00
0
85
,00
0
X
X
X
Rel
ativ
e Sa
les
Pri
ce
$2
7,0
00
/$1
25,0
00
$6
0,0
00
/$1
25,0
00
$3
8,0
00
/$1
25,0
00
$7
8,0
00
53
,04
0
24
,96
0
18
,20
0
$ 6
,76
0
G
ross
P
rofi
t
$ 3
,84
0
10
,24
0
10
,88
0
$2
4,9
60
Tota
l Sa
les
Pri
ce
$
27
,00
0
6
0,0
00
3
8,0
00
$1
25
,00
0
Sa
les
(see
sch
edu
le)
Co
st o
f go
od
s so
ld (
see
sch
edu
le)
Gro
ss p
rofi
t
Op
erat
ing
exp
ense
s
Net
inco
me
Sale
s
$1
2,0
00
32
,00
0
34
,00
0
$7
8,0
00
Sale
s P
rice
Per
Lo
t
$3
,00
0
4,0
00
2,0
00
Co
st
C
ost
of
Pe
r
Lo
ts
Lo
t
So
ld
$2
,04
0
$
8,1
60
2,7
20
21
,76
0
1,3
60
23
,12
0
$
53
,04
0
No
. o
f Lo
ts
9
15
19
N
um
ber
o
f Lo
ts S
old
*
4
8
17
29 * 9
– 5
= 4
1
5 –
7 =
8
19
– 2
=
17
44
Gro
up
1
Gro
up
2
Gro
up
3
Gro
up
1
Gro
up
2
Gro
up
3
To
tal
EXERCISE 9-12 (10–15 minutes)
(a) Inventory, May 1 (at cost) ................................................................ $160,000
Purchases (at cost) ........................................................................... 640,000
Purchase discounts .......................................................................... (12,000)
Freight-in .......................................................................................... 30,000
Goods available (at cost) ...................................................... 818,000
Sales (at selling price) ....................................................................... $1,000,000
Sales returns (at selling price) .......................................................... (70,000)
Net sales (at selling price) ................................................................ 930,000
Less: Gross profit (25% of $930,000) .............................................. 232,500
Sales (at cost) ....................................................................... 697,500
Approximate inventory,
May 31 (at cost) ...............................................................
$120,500
(b) Gross profit as a percent of sales must be computed:
25% = 20% of sales.
100% + 25%
Inventory, May 1 (at cost) .......................................................... $160,000
Purchases (at cost) ..................................................................... 640,000
Purchase discounts .................................................................... (12,000)
Freight-in .................................................................................... 30,000
Goods available (at cost) ................................................ 818,000
Sales (at selling price) ................................................................. $1,000,000
Sales returns (at selling price) .................................................... (70,000)
Net sales (at selling price) .......................................................... 930,000
Less: Gross profit (20% of $930,000) ........................................ 186,000
45
Sales (at cost) ................................................................. 744,000
Approximate inventory,
May 31 (at cost) .........................................................
$ 74,000
EXERCISE 9-14
Beginning inventory ............................................................................... $170,000
Purchases ................................................................................................ 450,000
620,000
Purchase returns .................................................................................... (30,000)
Goods available (at cost) ........................................................................ 590,000
Sales $650,000
Sales returns ........................................................................................... (24,000)
Net sales ................................................................................................. 626,000
Less: Gross profit (30% X $626,000) ...................................................... (187,800) 438,200
Estimated ending inventory (unadjusted for
damage) ...............................................................................................
151,800
Less: Goods on hand—undamaged (at cost)
$21,000 X (1 – 30%) .................................................................
(14,700)
Less: Goods on hand—damaged (at net
realizable value) .......................................................................
(5,300)
Fire loss on inventory ............................................................................. $131,800
EXERCISE 9-19 (12–17 minutes)
Cost Retail
Beginning inventory .............................................. $ 200,000 $ 280,000
46
Purchases ............................................................... 1,425,000 2,140,000
Totals ......................................................... 1,625,000 2,420,000
Add: Net markups
Markups .................................................... $95,000
Markup cancellations ............................... _________ (15,000) 80,000
Totals $1,625,000 2,500,000
Deduct: Net markdowns
Markdowns ................................................ 35,000
Markdown cancellations ........................... (5,000) 30,000
Sales price of goods available ................................ 2,470,000
Deduct: Sales ........................................................ 2,250,000
Ending inventory at retail ...................................... $ 220,000
Cost-to-retail ratio = $1,625,000
= 65% $2,500,000
Ending inventory at cost = 65% X $220,000 = $143,000
PROBLEM 9-4
Beginning inventory .................................................................................. $ 80,000
Purchases ................................................................................................... 290,000
370,000
Purchase returns ....................................................................................... (28,000)
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Total goods available ................................................................................. 342,000
Sales $415,000
Sales returns .............................................................................................. (21,000)
394,000
Less: Gross profit (35% of $394,000) ........................................................ 137,900 (256,100)
Ending inventory (unadjusted for damage) .............................................. 85,900
Less: Goods on hand—undamaged
($30,000 X [1 – 35%]) ................................................................. 19,500
Inventory damaged ................................................................................... 66,400
Less: Salvage value of damaged inventory ............................................... 8,150
Fire loss on inventory ................................................................................ $ 58,250
CHAPTER 18
EXERCISE 18-2 (15–20 minutes)
(a) 1. 6/3 Accounts Receivable—Ann Mount .......................... 8,000
Sales ............................................................. 8,000
6/5 Sales Returns and Allowances ............................................ 600
Accounts Receivable—Ann Mount ........................... 600
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6/7 Transportation-Out ............................................................. 24
Cash ........................................................................... 24
6/12 Cash ......................................................................... 7,252
Sales Discounts (2% X $7,400) ............................................ 148
Accounts Receivable—Ann Mount ........................... 7,400
2. 6/3 Accounts Receivable—Ann Mount ..................................... 7,840
Sales [$8,000 – (2% X $8,000)] ................................. 7,840
6/5 Sales Returns and Allowances ............................................ 588
Accounts Receivable—Ann Mount
[$600 – (2% x $600)] ........................................... 588
6/7 Transportation-Out ............................................................. 24
Cash ........................................................................... 24
6/12 Cash ......................................................................... 7,252
Accounts Receivable—Ann Mount ........................... 7,252
(b) 8/5 Cash ......................................................................... 7,400
Accounts Receivable—Ann Mount ........................... 7,252
Sales Discounts Forfeited
(2% X $7,400) ......................................................... 148
49
EXERCISE 18-4 (20–25 minutes)
(a) Gross profit recognized in:
2010 2011 2012
Contract price $1,600,000 $1,600,000 $1,600,000
Costs: Costs to date $400,000 $825,000 $1,070,000 Estimated costs to complete
600,000
1,000,000
275,000
1,100,000
0
1,070,000
Total estimated profit
600,000
500,000
530,000
Percentage completed to date
40%*
75%**
100%
Total gross profit recognized
240,000
375,000
530,000
Less: Gross profit recognized in previous years
0
240,000
375,000
Gross profit recognized in current year
$ 240,000
$ 135,000
$ 155,000
**$400,000 ÷ $1,000,000**$825,000 ÷ $1,100,000
(b) Construction in Process ($825,000 – $400,000) ................................ 425,000
Materials, Cash, Payables, etc. ........................................................... 425,000
Accounts Receivable ($900,000 – $300,000) ..................................... 600,000
Billings on Construction in Process .......................................... 600,000
Cash ($810,000 – $270,000) ............................................................... 540,000
Accounts Receivable ................................................................. 540,000
Construction Expenses ....................................................................... 425,000
Construction in Process ...................................................................... 135,000
Revenue from Long-Term Contracts ........................................ 560,000*
*$1,600,000 X (75% – 40%)
50
(c) Gross profit recognized in:
2010 2011 2012
Gross profit $–0– $–0– $530,000*
*$1,600,000 – $1,070,000
EXERCISE 18-7 (25–30 minutes)
(a) 1. Gross profit recognized in 2010:
Contract price ....................................................................... $1,200,000
Costs:
Costs to date ............................................................... $280,000
Estimated additional costs ......................................... 520,000 800,000
Total estimated profit........................................................... 400,000
Percentage completion to date
($280,000/$800,000) ........................................................ 35%
Gross profit recognized in 2010 ........................................... $ 140,000
Gross profit recognized in 2011:
Contract price ....................................................................... $1,200,000
Costs:
Costs to date ............................................................... $600,000
Estimated additional costs ......................................... 200,000 800,000
Total estimated profit........................................................... 400,000
Percentage completion to date
($600,000/$800,000) ........................................................ 75%
Total gross profit recognized ................................................ 300,000
Less: Gross profit recognized in 2010 .................................. 140,000
Gross profit recognized in 2011 ........................................... $ 160,000
2. Construction in Process ($600,000 – $280,000) ................................ 320,000
Materials, Cash, Payables, etc. ............................................... 320,000
Accounts Receivable ($500,000 – $150,000) ................................... 350,000
Billings on Construction in Process ........................................ 350,000
Cash ($320,000 – $120,000) ............................................................. 200,000
Accounts Receivable ............................................................... 200,000
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Construction in Process .................................................................... 160,000
Construction Expenses ..................................................................... 320,000
Revenues from Long-Term Contracts..................................... 480,000*
*$1,200,000 X [($600,000 – $280,000) ÷ $800,000]
(b) Income Statement (2011)—
Gross profit on long-term construction contract ......................................... $160,000
Balance Sheet (12/31/11)—
Current assets:
Receivables—construction in process ................................................ $180,000*
Inventories—construction in process totaling
$900,000** less billings of $500,000 .............................................. $400,000
**$180,000 = $500,000 – $320,000
**Total cost to date $600,000
2010 Gross profit 140,000
2011 Gross profit 160,000
$900,000
EXERCISE 18-11 (15–20 minutes)
(a) Computation of gross profit recognized:
2010 2011
$370,000 X 34%* $125,800
$350,000 X 34%* $119,000
$450,000 X 32%** 144,000
$125,800 $263,000
*($900,000 – $594,000) ÷ $900,000
**($1,000,000 – $680,000) ÷ $1,000,000(b)Installment Accounts Receivable—2011
1,000,000
Installment Sales ................................................................. 1,000,000
Cost of Installment Sales ............................................................... 680,000
Inventory ............................................................................. 680,000
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Cash 800,000
Installment Accounts Receivable, 2010 ....................................... 350,000
Installment Accounts Receivable, 2011 ....................................... 450,000 Installment Sales ................................................................................ 1,000,000
Cost of Installment Sales .......................................................... 680,000
Deferred Gross Profit on Installment
Sales, 2011 ............................................................................ 320,000 Deferred Gross Profit on Installment Sales, 2010 ................................... 119,000
Deferred Gross Profit on Installment Sales, 2011 ................................... 144,000
Realized Gross Profit on Installment Sales ................................ 263,000 Realized Gross Profit on Installment
Sales ................................................................................................ 263,000
Income Summary ...................................................................... 263,000
EXERCISE 18-15 (10–15 minutes)
(a) Realized gross profit recognized in 2011 under the installment-sales method of accounting is
$83,000. When gross profit is expressed as a percentage of cost, it must be converted to percentage of
sales to compute the realized gross profit under the installment-sales method of accounting. Thus, 2010
and 2011 gross profits as a percentage of sales are 20% and 21.875% respectively.
Sale Year
Gross Profit Percentage
2011
Collections
2011
Realized Profit
2010 .25/(1.00 + .25) = 20% $240,000 $48,000
2011 .28/(1.00 + .28) = 21.875% 160,000 35,000
TOTAL $83,000
(Note to instructor: The problem provides gross profit as a percent of cost.)
(b) The balance of “Deferred Gross Profit” could be reported on the balance sheet for 2011:
1. As a current liability on the theory that it is related to Installment Accounts Receivables that
are normally treated as current assets;
53
2. As a deferred credit between liabilities and stockholders’ equity. This treatment is criticized
because there is no obligation to outsiders; or
3. As an adjustment or offset to the related Installment Accounts Receivable. This is because the
deferred gross profit is a part of revenue from installment sales not yet realized. The related
receivable will be overstated unless the deferred gross profit is deducted.
On the other hand, the amount of deferred gross profit has no direct relationship with the
estimated collectability of the accounts receivable.
It is not a settled matter as to the proper classification of “deferred gross profit” on the balance
sheet when the installment-sales method of accounting is used to measure income. As indicated
in the text, the FASB in Statement of Financial Accounting Concepts No. 6 indicates that it
conceptually is an asset valuation. We support the FASB position.
(c) Gross profit as a percent of sales in 2010 is 20% (as computed in (a) above); gross profit therefore
is $96,000 ($480,000 X .20) and the cost of 2010 sales is $384,000 ($480,000 – $96,000). Because
the amounts collected in 2010 ($130,000) and 2011 ($240,000) do not exceed the total cost of
$384,000, no profit is recognized in 2010 or 2011 on 2010 sales. Also, no profit is recognized on
2011 sales since the collections of $160,000 do not exceed the total cost of $484,375 [$620,000 X (1 –
.21875)].
*EXERCISE 18-19 (14–18 minutes)
(a) Cash ........................................................................................... 28,000
Notes Receivable .................................................................................... 42,000
Discount on Notes Receivable
[$42,000 – (2.48685 X $14,000)] .............................................. 7,184
Revenue from Franchise Fees ...................................................... 62,816
(b) Cash ........................................................................................... 28,000
Unearned Franchise Fees ............................................................. 28,000
(c) Cash ........................................................................................... 28,000
Notes Receivable .................................................................................... 42,000
Discount on Notes Receivable ...................................................... 7,184
Revenue from Franchise Fees ...................................................... 28,000
Unearned Franchise Fees
($14,000 X 2.48685) .................................................................. 34,816
(Calculations rounded)
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PROBLEM 18-7
(a) Computation of Recognizable Profit/Loss
Percentage-of-Completion Method
2010
Costs to date (12/31/10) ............................................................................ $ 300,000
Estimated costs to complete ...................................................................... 1,200,000
Estimated total costs ........................................................................ $1,500,000
Percent complete ($300,000 ÷ $1,500,000) ............................................... 20%
Revenue recognized ($1,900,000 X 20%) ................................................... $ 380,000
Costs incurred ............................................................................................. 300,000
Profit recognized in 2010 ........................................................................... $ 80,000
2011
Costs to date (12/31/11) ............................................................................ $1,200,000
Estimated costs to complete ...................................................................... 800,000
Estimated total costs ........................................................................ 2,000,000
Contract price ............................................................................................. 1,900,000
Total loss ..................................................................................................... $ 100,000
Total loss ..................................................................................................... $ 100,000
Plus gross profit recognized in 2010 .......................................................... 80,000
Loss recognized in 2011 ............................................................................. $ 180,000
OR
Percent complete ($1,200,000 ÷ $2,000,000) ............................................ 60%
Revenue recognized in 2011
[($1,900,000 X 60%) – $380,000] ........................................................... $ 760,000
Costs incurred in 2011
($1,200,000 – $300,000) ........................................................................ 900,000
Loss to date ................................................................................................ 140,000
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Loss attributable to 2012* ......................................................................... 40,000
Loss recognized in 2011 ............................................................................. $ 180,000
*2012 revenue
($1,900,000 – $380,000 – $760,000) ....................... $760,000
2012 estimated costs ........................................ 800,000
2012 loss ............................................................ $ (40,000)
2012
Costs to date (12/31/12) ................................................................. $2,100,000
Estimated costs to complete ........................................................... 0
2,100,000
Contract price .................................................................................. 1,900,000
Total loss .......................................................................................... $ (200,000)
Total loss .......................................................................................... $ (200,000)
Less: Loss recognized in 2011 ......................................................... $180,000
Gross profit recognized in 2010 ...................................................... (80,000) (100,000)
Loss recognized in 2012 .................................................................. $ (100,000)
(b) Computation of Recognizable Profit/Loss
Completed-Contract Method
2010—NONE
2011
Costs to date (12/31/11) .................................................................... $1,200,000
Estimated costs to complete ............................................................. 800,000
Estimated total costs ............................................................... 2,000,000
Deduct contract price ........................................................................ 1,900,000
Loss recognized in 2011 ..................................................................... $ (100,000)
2012
Total costs incurred ........................................................................... $2,100,000
Total revenue recognized .................................................................. 1,900,000
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Total loss on contract .............................................................. (200,000)
Deduct loss recognized in 2011 ......................................................... (100,000)
Loss recognized in 2012 ..................................................................... $ (100,000)
PROBLEM 18-8
(a)
Rate of gross profit ( Gross profit
Sales )
2010 2011 2012
38% 37% 35%
Gross profit realized:
38% of $ 75,000 $28,500
38% of $100,000 $38,000
37% of $100,000 37,000
38% of $ 50,000 $19,000
37% of $120,000 44,400
35% of $100,000 35,000
$28,500 $75,000 $98,400
(b) Installment Accounts Receivable—2012 ................................................ 280,000
Installment Sales .......................................................................... 280,000
Cash ......................................................................................... 270,000
Installment Accounts Receivable—2010 ...................................... 50,000
Installment Accounts Receivable—2011 ...................................... 120,000
Installment Accounts Receivable—2012 ...................................... 100,000
Cost of Installment Sales ........................................................................ 182,000
Inventory ...................................................................................... 182,000
Installment Sales .................................................................................... 280,000
Cost of Installment Sales .............................................................. 182,000
Deferred Gross Profit on Installment
Sales—2012 .............................................................................. 98,000
Deferred Gross Profit on Installment Sales—2010 ................................... 19,000
Deferred Gross Profit on Installment Sales—2011 ................................... 44,400
Deferred Gross Profit on Installment Sales—2012 ................................... 35,000
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Realized Gross Profit on Installment
Sales ......................................................................................... 98,400
Realized Gross Profit on Installment Sales ............................................ 98,400
Income Summary ......................................................................... 98,400
CHAPTER 23
EXERCISE 23-1 (10–15 minutes)
(a) Operating—add to net income.
(b) Financing activity.
(c) Investing activity.
(d) Operating—add to net income.
(e) Significant noncash investing and financing activity.
(f) Financing activity.
(g) Operating—add to net income.
(h) Financing activity.
(i) Significant noncash investing and financing activity.
(j) Financing activity.
(k) Operating—deduct from net income.
(l) Investing activity.
EXERCISE 23-5 (20–30 minutes)
NORMAN COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2010
Cash flows from operating activities
Cash receipts from customers .............................. $862,000 (a)
Cash payments ......................................................
For operating expenses ............................... $609,000 (b)
For income taxes.......................................... 44,500 (c) 653,500
Net cash provided by operating
activities ............................................................. $208,500
58
(a) Computation of cash receipts from customers:
Revenue from fees .................................................................... $840,000
Add: Decrease in accounts receivable
Ad ($59,000 – $37,000) ..................................................... 22,000
Cash receipts from customers ................................................... $862,000
(b) Computation of cash payments:
Operating expenses per income statement .............................. $624,000
Deduct: Increase in accounts payable
Deduct ($46,000 – $31,000) .............................................. 15,000
Cash payments for operating expenses .................................... $609,000
(c) Income tax expense per income statement .............................. $ 40,000
Add: Decrease in income taxes payable
Add ($8,500 – $4,000) ......................................................... 4,500
Cash payments for income taxes .............................................. $ 44,500
EXERCISE 23-6 (15–20 minutes)
NORMAN COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2010
Cash flows from operating activities
Net income ....................................................................................... $90,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation expense ................................................................. $60,000
Loss on sale of equipment .......................................................... 26,000
Decrease in accounts receivable ................................................. 22,000
Increase in accounts payable ...................................................... 15,000
Decrease in income taxes payable .............................................. (4,500) 118,500
Net cash provided by operating activities ........................................ $208,500
EXERCISE 23-11 (30–35 minutes)
FAIRCHILD COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2010
59
(Indirect Method)
Cash flows from operating activities
Net income .................................................................................................. $ 810
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense ($1,200 – $1,170) ............................................. $ 30
Gain on sale of investments ................................................................. (80)
Decrease in inventory ........................................................................... 300
Increase in accounts payable ............................................................... 400
Increase in receivables ......................................................................... (450)
Decrease in accrued liabilities .............................................................. (50) 150
Net cash provided by operating activities ................................................... 960
Cash flows from investing activities
Sale of held-to-maturity investments
[($1,470 – $1,300) + $80] .........................................................................
250
Purchase of plant assets [($1,900 – $1,700) – $70] .................................... (130)
Net cash provided by investing activities .................................................... 120
Cash flows from financing activities
Issuance of capital stock [($1,900 – $1,700) – $70] ...................................... 130
Retirement of bonds payable ........................................................................ (250)
Payment of cash dividends ............................................................................ (260)
Net cash used by financing activities ............................................................ (380)
Net increase in cash................................................................................................... 700
Cash, January 1, 2010 ................................................................................................ 1,100
Cash, December 31, 2010 .......................................................................................... $1,800
Noncash investing and financing activities
Issuance of common stock for plant assets .................................................. $ 70