Saturday, June 4, 2016

Chapter - 2 Financial accounting An introduction to concepts, methods and uses - Solutions for text book questions with case studies and answers to problems by stickney

Solutions to the textbooks problem continued

2.44         (Tertia Company; working backwards to income statements.)

A T-account method for deriving the solution appears below and on the following page.  Transactions (1)—(9) correspond to the numbered cash transactions information.  In Transactions (10)—(25), “p” indicates that the figure was derived by a “plug” and “c” indicates a closing entry.  The final check is that the debit to close Income Summary in Transaction (25) matches the plug in the Retained Earnings account.

                                                                                                Accounts and
                               Cash                                                    Notes Receivable             
Bal.               40,000                                          Bal.          36,000                               
(1)               144,000       114,000       (4)         (10p)      149,000       144,000      (1)
(2)                  63,000           5,000       (5)                                                                      
(3)                    1,000              500       (6)                                                                      
                                           57,500       (7)                                                                      
                                              1,200       (8)
                                              2,000       (9)                                                                      
Bal.               67,800                                          Bal.          41,000


               Merchandise Inventory                                 Interest Receivable           
Bal.               55,000                                          Bal.             1,000                               
(14)             121,000       126,500   (15p)         (11p)              700           1,000      (3)
Bal.               49,500                                          Bal.                700


                                                                                         Building, Machinery,
      Prepaid Miscellaneous Services                              and Equipment               
Bal.                 4,000                                          Bal.          47,000                               
(7)                  57,500         56,300   (12p)                                                                      
Bal.                 5,200                                          Bal.          47,000                               


                    Accounts Payable                                       Accounts Payable
              (Miscellaneous Services)                                     (Merchandise)                
                                              2,000     Bal.                                                34,000   Bal.
                                                 500   (13p)         (4)           114,000       121,000 (14p)
                                              2,500     Bal.                                                41,000   Bal.


                Property Tax Payable                           Accumulated Depreciation     
                                              1,000     Bal.                                                10,000   Bal.
(8)                    1,200           1,700   (16p)                                                  2,000 (17p)
                                              1,500     Bal.                                                12,000   Bal.


2.44 continued.

                   Mortgage Payable                                          Common Stock               
                                           35,000     Bal.                                                25,000   Bal.
(5)                    5,000                                                                                                       
                                           30,000     Bal.                                                25,000   Bal.


                   Retained Earnings                                                  Sales                        
                                           76,000     Bal.                                                63,000      (2)
(9)                    2,000         25,200   (18p)         (18c)       212,000       149,000    (10)
                                           99,200     Bal.                                                                      


                   Cost of Goods Sold                                        Interest Expense             
(15)             126,500       126,500   (18c)         (6)                   500              500  (18c)
                                                                                                                                          
                                                                                                                                         


                    Interest Revenue                                  Miscellaneous Expenses       
(18c)                   700              700     (11)         (12)           56,300                               
                                                                             (13)                500         56,800  (18c)
                                                                                                                                         


                Property Tax Expense                                Depreciation Expense         
(16)                  1,700           1,700   (18c)         (17)             2,000           2,000  (18c)
                                                                                                                                          
                                                                                                                                         









2.44 continued.

Transactions spreadsheet.
Balance Sheet Accounts

Transactions, By Number and Description


Balance:  Begin- ning of Period
Collect. From Credit Cust.
Recog. Sales Rev.
Collect. Of Interest
Recog. Int. Rev.
Pay. To Sup. Of Merchn.
Pur. Of Merchn.
Recog. COGS
Repay. Of Mort.
Pay. Of Int.
Pay. For Misc. Ser.
Acq. Of Misc. Ser.
Pay. For Prop. Taxes
Recog. Prop. Tax Exp.
Dec. and Pay. Div.
Recog. Depre. Exp.
Check on Ending Bal. Sheet Amts.
Balance:  End of 2008


1
2
3a
3b
4
5
6
7
8
9
10
11
12
13
14
15

ASSETS


















Current Assets:


















Cash
40,000
144,000
63,000
1,000

-114,000


-5,000
-500
-57,500

-1,200

-2,000

67,800
   67,800
Accounts & Notes Rec.
36,000
-144,000
149,000













41,000
   41,000
Merchandise Inventory
55,000





121,000
-126,500








49,500
   49,500
Interest Receivable
1,000


-1,000
700











700
        700
Prepaid Misc. Services
4,000









1,200





5,200
     5,200
  Total Current Assets
 136,000















  164,200
 164,200
Noncurrent Assets:


















Bldg., Mach., &
  Equipment

47,000
















47,000

   47,000
Accumulated
  Depreciation

-10,000















-2,000

-12,000

 (12,000)
  Total Noncurrent
    Assets

   37,000
















   35,000

  35,000
  Total Assets
 173,000















  199,200
 199,200



















LIABILITIES AND SHARE-
HOLDERS' EQUITY
















Current Liabilities:

















  
Accounts Pay.
  (miscellaneous ser.)

2,000










-56,300

56,800





2,500
 
   2,500
Accounts Pay.
  (mer. pur.)

34,000





-114,000

121,000










41,000
 
 41,000
Property Taxes Payable
1,000











-1,200
1,700


1,500
     1,500
  Total Current Liabilities
   37,000















    45,000
   45,000
Noncurrent Liabilities:

















  
Mortgage Payable
35,000







-5,000







30,000
   30,000
  Total Noncurrent
    Liabilities

   35,000
















   30,000

  30,000
  Total Liabilities
   72,000















    75,000
   75,000
Shareholders' Equity:


















Common Stock
25,000















25,000
   25,000
Retained Earnings
76,000

212,000

700


-126,500

-500

-56,800

-1,700
-2,000
-2,000
99,200
   99,200
  Total Shareholders'
    Equity

 101,000

















 124,200
  Total Liabilities and
    Shareholders' Equity

 173,000

















199,200



















Imbalance, if Any
           -  
             -  
            -  
            -  
            -  
            -  
            -  
            -  
            -  
            -  
            -  
            -  
            -  
            -  
            -  
            -  
            -  
           -  



















Income Statement Accounts


Sales Rev.

Int. Rev.


COGS

Int. Exp.

Mis. Ser. Exp.

Prop. Tax Exp.

Depre. Exp.







2.44 continued.

                                                 TERTIA COMPANY
           Statement of Income and Retained Earnings for 2008

Revenues:
        Sales......................................................................      $ 212,000
        Interest Revenue................................................                 700
            Total Revenues...............................................                                 $ 212,700
Expenses:
        Cost of Goods Sold...............................................      $ 126,500
        Property Tax Expense.......................................              1,700
        Depreciation Expense........................................              2,000
        Interest Expense.................................................                 500
        Miscellaneous Expenses....................................            56,800
            Total Expenses...............................................                                     187,500
Net Income..................................................................                                 $    25,200
Less Dividends............................................................                                        (2,000)
Increase in Retained Earnings...............................                                 $    23,200
Retained Earnings, Beginning of Year.................                                       76,000
Retained Earnings, End of Year.............................                                 $    99,200
2.45         (Preparing adjusting entries.)

a.    The Prepaid Rent account on the year-end balance sheet should represent eight months of prepayments.  The rent per month is $2,000 (= $24,000/12), so the balance required in the Prepaid Rent account is $16,000 (= 8 X $2,000).  Rent Expense for 2006 is $8,000 (= 4 X $2,000 = $24,000 – $16,000).

        Prepaid Rent....................................................................     16,000
            Rent Expense..............................................................                         16,000

Assets

=
Liabilities
+
Shareholders' Equity
(Class.)
+16,000



+16,000
IncSt à RE

To increase the balance in the Prepaid Rent account, reducing the amount in the Rent Expense account.

b.    The Prepaid Rent account on the balance sheet for the end of 2007 should represent eight months of prepayments.  The rent per month is $2,500 (= $30,000/12), so the required balance in the Prepaid Rent account is $20,000 (= 8 X $2,500).  The balance in that account is already $16,000, so the adjusting entry must increase it by $4,000 (= $20,000 – $16,000).


2.45 b. continued.

        Prepaid Rent....................................................................        4,000
            Rent Expense..............................................................                           4,000

Assets

=
Liabilities
+
Shareholders' Equity
(Class.)
+4,000



+4,000
IncSt à RE

To increase the balance in the Prepaid Rent account, reducing the amount in the Rent Expense account.

        The Rent Expense account will have a balance at the end of 2007 before closing entries of $26,000 (= $30,000 – $4,000).  This amount comprises $16,000 (= $2,000 X 8) for rent from January through August and $10,000 (= $2,500 X 4) for rent from September through December.

c.      The Prepaid Rent account on the balance sheet at the end of 2008 should represent two months of prepayments.  The rent per month is $3,000 (= $18,000/6), so the required balance in the Prepaid Rent account is $6,000 (= 2 X $3,000).  The balance in that account is $20,000, so the adjusting entry must reduce it by $14,000 (= $20,000 – $6,000).

        Rent Expense..................................................................     14,000
              Prepaid Rent..............................................................                         14,000

Assets

=
Liabilities
+
Shareholders' Equity
(Class.)
–14,000



–14,000
IncSt à RE

To decrease the balance in the Prepaid Rent account, increasing the amount in the Rent Expense account.

        The Rent Expense account will have a balance at the end of 2008 before closing entries of $32,000 (= $18,000 + $14,000).  This amount comprises $20,000 (= $2,500 X 8) for rent from January through August and $12,000 (= $3,000 X 4) for rent from September through December.

d.      The Wages Payable account should have a credit balance of $4,000 at the end of April, but it has a balance of $5,000 carried over from the end of March.  The adjusting entry must reduce the balance by $1,000, which requires a debit to the Wages Payable account.



2.45 d. continued.

        Wages Payable................................................................        1,000
            Wage Expense............................................................                           1,000

Assets

=
Liabilities
+
Shareholders' Equity
(Class.)


–1,000

+1,000
IncSt à RE

To reduce the balance in the Wages Payable account, reducing the amount in the Wage Expense account.

        Wage Expense is $29,000 (= $30,000 – $1,000).

e.      The Prepaid Insurance account balance of $3,000 represents four months of coverage.  Thus, the cost of insurance is $750 (= $3,000/4) per month.  The adjusting entry for a single month is as follows:

        Insurance Expense.........................................................           750
              Prepaid Insurance....................................................                              750

Assets

=
Liabilities
+
Shareholders' Equity
(Class.)
–750



–750
IncSt à RE

To recognize cost of one month’s insurance cost as expense of the month.

f.       The Advances from Tenants account has a balance of $25,000 carried over from the start of the year.  At the end of 2007, it should have a balance of $30,000.  Thus, the adjusting entry must increase the balance by $5,000, which requires a credit to the liability account.

        Rent Revenue..................................................................        5,000
              Advance from Tenants............................................                           5,000

Assets

=
Liabilities
+
Shareholders' Equity
(Class.)


+5,000

–5,000
IncSt à RE

To increase the balance in the Advances from Tenants account, reducing the amount in the Rent Revenue account.

        Rent Revenue for 2007 is $245,000 (= $250,000 – $5,000).



2.45 continued.

g.      The Depreciation Expense for the year should be $2,000 (= $10,000/5).  The balance in the Accumulated Depreciation account should also be $2,000; thus, the firm must credit Retained Earnings (Depreciation Expense) by $8,000 (= $10,000 – $2,000).  The adjusting entry not only reduces recorded depreciation for the period but also sets up the asset account and its accumulated depreciation contra account.

        Equipment.......................................................................     10,000
            Accumulated Depreciation.......................................                           2,000
            Depreciation Expense...............................................                           8,000

Assets

=
Liabilities
+
Shareholders' Equity
(Class.)
   +10,000



+8,000
IncSt à RE
      –2,000






To reduce the recorded amount in Depreciation Expense from $10,000 to $2,000, setting up the asset and its contra account.



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