Solution manual accounting principles 9e by kieso kimmel continuing cookies

CCC1 (a) CONTINUING COOKIE CHRONICLE Natalie has a choice between a sole proprietorship and a corporation A partnership is not an option since she is the sole owner of the business A proprietorship is the easiest to create and operate because there are no formal procedures involved in creating the proprietorship However, if she operates the business as a proprietorship she will personally have unlimited liability for the debts of the business Operating the business as a corporation would limit her liability to her investment in the business Natalie will in all likelihood require the services of a lawyer to incorporate Costs to incorporate as well as additional ongoing costs to administrate and operate the business as a corporation may be costly My recommendation is that Natalie choose the proprietorship form of business organization This is a very small business where the cost of incorporating outweighs the benefits of incorporating at this point in time Furthermore, it will be easier to stop operating the business if Natalie decides not to continue with it once she has finished college Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 1-1 CCC1 (Continued) (b) Yes, Natalie will need accounting information to help her operate her business She will need information on her cash balance on a daily or weekly basis to help her determine if she can pay her bills She will need to know the cost of her services so she can establish her prices She will need to know revenue and expenses so she can report her net income for personal income tax purposes, on an annual basis If she borrows money, she will need financial statements so lenders can assess the liquidity, solvency, and profitability of the business Natalie would also find financial statements useful to better understand her business and identify any financial issues as early as possible Monthly financial statements would be best because they are more timely, but they are also more work to prepare (c) Assets: Cash, Accounts Receivable, Supplies, Equipment, Prepaid Insurance Liabilities: Accounts Payable, Unearned Revenue, Notes Payable Owner’s Equity: N Koebel, Capital, N Koebel, Drawings Revenue: Teaching Revenue Expenses: Advertising Expense, Supplies Expense, Travel Expense, Telephone Expense, Insurance Expense (d) Natalie should have a separate bank account This will make it easier to prepare financial statements for her business The business is a separate entity from Natalie and must be accounted for separately Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 1-2 CCC2 (a) Nov CONTINUING COOKIE CHRONICLE GENERAL JOURNAL Account Titles and Explanation Debit J1 Credit No entry required for cashing U.S Savings Bonds—this is a personal transaction Cash N Koebel, Capital 500 11 Advertising Supplies Cash 165 13 Baking Supplies Cash 125 14 Baking Equipment N Koebel, Capital 300 16 Cash Notes Payable 2,000 17 Baking Equipment Cash 900 20 Cash Teaching Revenue 125 25 Cash Unearned Revenue 30 30 Prepaid Insurance Cash 1,320 Copyright © 2009 John Wiley & Sons, Inc 500 165 125 300 2,000 900 125 30 Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles 1,320 (For Instructor Use Only) 2-1 CCC2 (Continued) (b) Cash Date Nov Explanation 11 13 16 17 20 25 30 Date J1 J1 J1 J1 J1 J1 J1 J1 Explanation Nov 11 Date Explanation Nov 30 Date Nov 14 17 Copyright © 2009 John Wiley & Sons, Inc 1,320 Credits Balance 165 125 2,000 900 125 30 165 165 Credits 125 J1 J1 Balance 125 1,320 Baking Equipment Ref Debits Balance 500 335 210 2,210 1,310 1,435 1,465 145 Prepaid Insurance Ref Debits Credits J1 Explanation Credits 500 Baking Supplies Ref Debits J1 Explanation Debits Advertising Supplies Ref Debits J1 Nov 13 Date Ref Balance 1,320 Credits 300 900 Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles Balance 300 1,200 (For Instructor Use Only) 2-2 CCC2 (Continued) (b) (Continued) Date Explanation Nov 25 Date Nov 16 Nov Notes Payable Ref Debits J1 Explanation 14 Date Credits Balance 30 30 Credits Balance 2,000 2,000 Credits Balance 500 300 500 800 Credits Balance 125 125 J1 Explanation Date Unearned Revenue Ref Debits N Koebel, Capital Ref Debits J1 J1 Explanation Nov 20 Copyright © 2009 John Wiley & Sons, Inc Teaching Revenue Ref Debits J1 Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 2-3 CCC2 (Continued) (c) COOKIE CREATIONS Trial Balance November 30, 2009 Cash Advertising Supplies Baking Supplies Prepaid Insurance Baking Equipment Unearned Revenue Notes Payable N Koebel, Capital Teaching Revenue Debit $ 145 165 125 1,320 1,200 Credit $ $2,955 30 2,000 800 125 $2,955 Note to instructors: Because the notes payable is not due for 24 months, it follows Unearned Revenue in the accounts and the trial balance Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 2-4 CCC3 CONTINUING COOKIE CHRONICLE (a) Date GENERAL JOURNAL Account Titles and Explanation Debit Nov 30 Advertising Supplies Expense Advertising Supplies ($165 – $60) 105 30 Baking Supplies Expense Baking Supplies 35 30 Depreciation Expense Accumulated Depreciation—Baking Equipment [($300 + $900) ÷ 60 months] 20 30 Interest Expense Interest Payable ($2,000 X 06 X 1/12 X 5) 30 Accounts Receivable Teaching Revenue 300 30 Telephone Expense Accounts Payable 45 Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles J2 Credit 105 35 20 300 45 (For Instructor Use Only) 3-1 CCC3 (Continued) (a) (Continued) Date Explanation Cash Ref Debit Credit Nov 30 Balance Date Explanation Nov 30 Date Nov 30 Balance 30 Date Explanation Nov 30 Balance 30 Date 145 Accounts Receivable Ref Debit J2 Explanation Explanation Credit 300 Advertising Supplies Ref Debit J2 Baking Supplies Ref Debit Credit Balance 105 165 60 Credit Balance 35 125 90 Credit Balance J2 Prepaid Insurance Ref Debit Balance 300 Nov 30 Balance Copyright © 2009 John Wiley & Sons, Inc Balance 1,320 Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 3-2 CCC3 (Continued) (a) (Continued) Date Explanation Baking Equipment Ref Debit Credit Nov 30 Balance Date Date J2 Explanation Nov 30 Date 1,200 Accumulated Depreciation—Baking Equipment Explanation Ref Debit Credit Nov 30 Accounts Payable Ref Debit Nov 30 Copyright © 2009 John Wiley & Sons, Inc Interest Payable Ref Debit Balance 20 20 Credit Balance 45 45 Credit Balance J2 Explanation Balance J2 Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 3-3 CCC3 (Continued) (a) (Continued) Date Explanation Unearned Revenue Ref Debit Credit Nov 30 Balance Date Explanation 30 Notes Payable Ref Debit Credit Nov 30 Balance Date Explanation Explanation Nov 30 Balance 30 Date Explanation Nov 30 Copyright © 2009 John Wiley & Sons, Inc Balance 2,000 N Koebel, Capital Ref Debit Credit Nov 30 Balance Date Balance Balance 800 Teaching Revenue Ref Debit J2 Telephone Expense Ref Debit J2 Credit Balance 300 125 425 Credit Balance 45 Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles 45 (For Instructor Use Only) 3-4 CCC13 (Continued) (d) COOKIE & COFFEE CREATIONS INC Balance Sheet November 1, 2010 Assets Current assets Cash Accounts receivable Merchandise inventory Total current assets Plant and equipment Equipment Total assets $29,130 900 1,650 31,680 3,500 $35,180 Stockholders’ Equity Paid-in capital $0.50 preferred stock, no par value, noncumulative, 10,000 authorized, 2,000 shares issued Common stock, no par value, 100,000 shares authorized, 25,930 shares issued Total paid-in capital Retained earnings (deficit) Total stockholders’ equity Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles $10,000 25,930 35,930 (750) $35,180 (For Instructor Use Only) 13-3 CCC14 Date (a) Dec Apr June Oct CONTINUING COOKIE CHRONICLE GENERAL JOURNAL Account Titles and Explanation Cash Preferred Stock J1 Debit 4,000 4,000 30 Retained Earnings (2,800 X $0.50 X 1/2) Dividends Payable 700 700 Dividends Payable Cash 700 30 Treasury Stock Cash 500 31 Income Tax Expense Income Tax Payable ($462,500 – $370,000) X 20% 18,500 700 500 31 Retained Earnings (2,800 X $0.50 X 1/2) Dividends Payable Copyright © 2009 John Wiley & Sons, Inc Credit Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles 18,500 700 700 (For Instructor Use Only) 14-1 CCC14 (Continued) (b) COOKIE & COFFEE CREATIONS INC Statement of Retained Earnings Year Ended October 31, 2011 Balance, November 1, 2010 Add: Net income $ 74,000 74,000 1,400 $72,600 Less: Cash dividends—preferred Balance, October 31, 2011 (c) COOKIE & COFFEE CREATIONS INC Partial Balance Sheet October 31, 2011 Stockholders’ equity Paid-in capital $0.50-noncumulative preferred stock, no par value, 10,000 authorized, 2,800 stock issued Common stock, no par value, 100,000 shares authorized, 25,930 issued 25,180 shares outstanding Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock—common (750 shares)(at cost) Total stockholders’ equity Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles $ 14,000 25,930 39,930 72,600 112,530 (500) $112,030 (For Instructor Use Only) 14-2 CCC14 (Continued) (d) Oct 31 Revenues Income Summary 462,500 31 Income Summary Expenses Income Tax Expense 388,500 31 Income Summary Retained Earnings 74,000 (e) 462,500 370,000 18,500 74,000 Earnings per Share = Income available to common shareholders ÷ Weighted average number of common shares = ($74,000 $1,400) ữ 25,680 = $2.83 Copyright â 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 14-3 CCC15 (a) CONTINUING COOKIE CHRONICLE Alternative Interest Period Nov 2010 May 2011 Nov 2011 May 2012 Nov 2012 May 2013 Nov 2013 Totals (A) Cash Payment (B) + (C) $ 2,300 2,250 2,200 2,150 2,100 2,050 $13,050 Copyright © 2009 John Wiley & Sons, Inc (B) (C) Interest Reduction of Expense Principal (D) X 5% X 6/12 ($2,000 every mo.) $ 300 250 200 150 100 50 $1,050 $ 2,000 2,000 2,000 2,000 2,000 2,000 $12,000 Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (D) Principal Balance (D) – (C) $12,000 $10,000 $ 8,000 $ 6,000 $ 4,000 $ 2,000 $ (For Instructor Use Only) 15-1 CCC15 (Continued) (b) Nov Equipment Cash Notes Payable 17,000 5,000 12,000 (c) 2011 May Notes Payable Interest Expense Cash Nov Notes Payable Interest Expense Cash 2,000 300* 2,300 2,000 250 2,250 *See schedule in part (a) (d) Current portion* Long-term portion $ 4,000 6,000 $10,000 *$2,000 + $2,000 = $4,000 Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 15-2 CCC16 (a) CONTINUING COOKIE CHRONICLE The amount of influence you would have in The Beanery would determine how you would account for the investment Given that you would own 30% of the common shares of the Beanery, it would be assumed (unless there was evidence to the contrary) that you could exert significant influence over the day-to-day operations of the business This is especially so given the small number of stockholders Significant influence over an investee may also result from representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency Assuming significant influence existed, the investment would be accounted for using the equity method of accounting However, in this case, the Thornton sisters will still exercise majority control and may not be willing to let an investor participate in the decisionmaking process If this did occur, significant influence may not exist and the investment would be accounted for using the cost method One of the major advantages of going ahead with this investment would be the strategic advantage of the horizontal and vertical integration that would occur Not only would you eliminate a competitor but you both could learn the business of roasting beans while taking advantage of the expertise the Thornton sisters have developed with respect to the operation of their coffee shop Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 16-1 CCC16 (Continued) (a) (Continued) There would be disadvantages associated with this investment as well For example, there may be a significant time investment required by both of you especially since both of the Thornton sisters are very busy and would like the investor to take over some of the responsibilities of running the business Also, the Thornton sisters will still exercise majority control and may not be willing to let an investor participate in the decision-making process Finally, if the investment did not work out, it may be difficult to find another investor to purchase the shares held by Cookie & Coffee Creations (b) Stock Investments Cash 15,000 15,000 (c) Cost Method Cash Dividend Revenue ($25,000 X 30%) 7,500 7,500 Equity Method Stock Investments Revenue from Investment in The Beanery ($50,000 X 30%) 15,000 Cash ($25,000 X 30%) Stock Investments 7,500 Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles 15,000 7,500 (For Instructor Use Only) 16-2 CCC16 (Continued) (d) Because the investment in The Beanery is a strategic investment, it would be classified as a long-term investment in the noncurrent assets section of Cookie & Coffee Creations’ balance sheet If the investment were accounted for using the cost method, it would be recorded at its original cost of $15,000 If the investment were accounted for using the equity method, it would be accounted for at its original cost plus a proportionate share of The Beanery’s income, less a proportionate share of any dividends paid by The Beanery For the current year the investment would be at $22,500 ($15,000 + $15,000 – $7,500) Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 16-3 CCC17 (a) CONTINUING COOKIE CHRONICLE Indirect method COOKIE & COFFEE CREATIONS INC Cash Flow Statement Year Ended October 31, 2011 Operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 9,850 Increase in accounts receivable (3,250) Increase in merchandise inventory (17,897) Increase in prepaid expenses (6,300) Increase in accounts payable 5,848 Increase in income tax payable 18,500 Increase in salaries payable 2,250 Increase in interest payable 188 Net cash provided by operating activities Investing activities Purchase of furniture $(12,500) Purchase of computer equipment (4,200) Purchase of kitchen equipment (Note X) (71,000) Net cash used by investing activities Financing activities Issue of preferred stock $ 14,000 Issue of common stock 25,930 Principal repayment of note payable (2,000) Repurchase of stock (500) Payment of dividends (700) Net cash provided by financing activities Net increase in cash Cash, November 1, 2010 Cash, October 31, 2011 Noncash investing and financing activities Issuance of notes payable to purchase kitchen equipment Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles $74,000 9,189 83,189 (87,700) 36,730 32,219 $32,219 $12,000 (For Instructor Use Only) 17-1 CCC17 (Continued) (b) Direct method COOKIE & COFFEE CREATIONS INC Cash Flow Statement Year Ended October 31, 2011 Operating activities Cash receipts from customers (1) $459,250 Cash payments To suppliers (2) $(243,299) For operating expenses (3) (42,287) For salaries and wages (4) (90,250) For interest (5) (225) For income tax (6) (376,061) Net cash provided by operating activities 83,189 Investing activities Purchase of computer equipment $ (4,200) Purchase of furniture (12,500) Purchase of kitchen equipment (Note X) (71,000) Net cash used by investing activities (87,700) Financing activities Issue of common stock $ 25,930 Issue of preferred stock 14,000 Principal repayment of note payable (2,000) Repurchase of stock (500) Payment of dividends (7) (700) Net cash provided by financing activities 36,730 Net increase in cash 32,219 Cash, November Cash, October 31 $ 32,219 Noncash investing and financing activities Issuance of notes payable to purchase kitchen equipment Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles $ 12,000 (For Instructor Use Only) 17-2 CCC17 (Continued) (b) (Continued) Note X: During the year, the company acquired kitchen equipment with a cost of $14,000 by paying $5,000 cash and incurring a $9,000 note payable Calculations: (1) Cash receipts from customers Sales Less: Increase in accounts receivable Cash receipts from customers (2) Cash payments to suppliers Cost of goods sold Add: Increase in inventory Cost of goods purchased Less: Increase in accounts payable Cash payments to suppliers (3) $231,250 17,897 249,147 (5,848) $243,299 Cash payments for operating expenses Operating expenses Add: Increase in prepaid expenses Cash payments for operating expenses (4) $462,500 (3,250) $459,250 $ 35,987 6,300 $ 42,287 Cash payments to employees Salaries and wages expense Less: Increase in salaries payable Cash payments to employees Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles $ 92,500 (2,250) $ 90,250 (For Instructor Use Only) 17-3 CCC17 (Continued) (b) (Continued) (5) Cash payments for interest Interest expense Less: Increase in interest payable Cash payments for interest (6) $ 413 (188) 225 Cash payments for income tax Income tax expense Less: Increase in income tax payable Cash payments for income tax (7) $ $18,500 (18,500) $ Cash payments for dividends Dividends ($700 + $700) Less: Increase in dividends payable Cash payments for dividends Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles $ 1,400 (700) $ 700 (For Instructor Use Only) 17-4 CCC18 (a) CONTINUING COOKIE CHRONICLE Current ratio $59,666 = 1.9:1 $31,486 Receivables turnover $462,500 = 142.3 times $3,250 Inventory turnover $231,250 = 12.9 times $17,897 Debt to total assets $37,486 = 25.1% $149,516 Interest coverage $92,913 = 225 times $413 Gross profit margin $231,250 = 50.0% $462,500 Profit margin $74,000 = 16.0% $462,500 Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 18-1 CCC18 (Continued) (a) (Continued) Asset turnover $462,500 = 3.1 times $149,516 Return on assets $74,000 = 49.5% $149,516 10 Return on equity $74,000 = 66.1% $112,030 (b) The company had a very good year It was very profitable and has a healthy balance sheet The company is carrying very little debt and can cover the interest charges easily There are no liquidity or solvency problems (c) The bank should have no qualms about lending money to the company The new debt ratio would still be reasonably low [($37,486 + $20,000) ÷ ($149,516 + $20,000) = 33.9%] Even if there were no increases in revenue, operating income would still be more than adequate to cover the additional interest expense The company is very profitable and is an acceptable credit risk for the bank (d) Instead of bank financing, Cookies & Coffee Creations could lease the equipment The company could also consider equity financing Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 18-2 ... Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 1-2 CCC2 (a) Nov CONTINUING COOKIE CHRONICLE GENERAL JOURNAL Account... Copyright © 2009 John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles (For Instructor Use Only) 2-4 CCC3 CONTINUING COOKIE CHRONICLE (a) Date GENERAL JOURNAL... John Wiley & Sons, Inc Weygandt, Accounting Principles, 9/e, Continuing Cookie Chronicles $2,000 45 30 2,075 1,015 $3,095 (For Instructor Use Only) 3-8 CCC4 CONTINUING COOKIE CHRONICLE (a) COOKIE