Solution manual financial accounting 8th by harrison CH03

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Accrual Accounting & Income Short Exercises (10 min.) S 3-1 Sales revenue…………………………………………… Cost of goods sold……………………………………… All other expenses……………………………………… Net income……………………………………………… Millions 960 (270) (300) $ 390 Beginning cash………………………………………… Collections ($700 − $30)……………………………… Payments for: inventory……………………………… everything else……………………… Ending cash……………………………………………… $ 105 935 (370) (285) $ 385 Chapter Accrual Accounting & Income 162 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 3-2 Statement Income statement Reports (Amounts in millions) Interest expense……………… $1.8 Balance sheet Notes payable ($3.9 + $2.3 − $2.0)………… $4.2 Interest payable……………… 0.1 (10 min.) S 3-3 At the end of each accounting period, the business reports its performance through the preparation of financial statements In order to be useful to the various users of financial statements they must be up-to-date Accounts such as cash, Equipment, Accounts Payable, Common Stock and Dividends are up-to date and require no adjustment at the end of the accounting period Accounts such as Accounts Receivable, Supplies, Salary Expense and Salaries Payable may not be up to date as of the last day of the accounting period Why? Because certain transactions that took place in the month may not have been recorded The accrued salaries, which are owed to the employees yet have not been paid, are an expense related to the current period The salaries that are owed to the employees but are unpaid also represent a liability or debt that is owed by the business The business must make an adjusting entry to record the accrued salary owed as both an increase in Salary Expense and an increase in Salaries Payable If the business does not make this adjustment the expenses will be understated and net income will be overstated In addition, liabilities will be understated Chapter Accrual Accounting & Income 163 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 3-4 The large auto manufacturer should record sales revenue when the revenue is earned by delivering automobiles to Acme or Harris The large auto manufacturer should not record any revenue prior to delivery of the vehicles because the large auto manufacturer hasn’t earned the revenue yet The revenue principle governs this decision When the large auto manufacturer records the revenue from the sale, at that time —not before or after — the large auto manufacturer should also record cost of goods sold, the expense The matching principle tells when to record expenses Chapter Accrual Accounting & Income 164 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 3-5 Depreciation is the periodic allocation of the cost of a tangible long-lived asset, less its estimated residual value, over its estimated useful life All long-lived or plant assets, except for land decline in usefulness during their life and this decline is an expense Accountants must allocate the cost of each plant asset, except for land, over the asset’s useful life Depreciation is the process of allocating the cost of a plant asset to expense Depreciation also decreases the book value of the asset to reflect its usage (10 min.) S 3-6 a The Matching Principle b The Time Period Concept c The Revenue Principle d The Revenue Principle e The Matching Principle Chapter Accrual Accounting & Income 165 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 3-7 a Mar 31 Mar Bal Rent Expense ($4,800 × 1/6)…… 800 Prepaid Rent…………………… To record rent expense Prepaid Rent 4,800 Mar 31 4,000 800 800 Rent Expense Mar 31 800 Bal 800 b Dec 31 Supplies Expense ($900 − $700)… 200 Supplies…………………………… To record supplies expense Dec Supplies 900 Mar 31 Bal 700 200 200 Supplies Expense Marc 200 31 Bal 200 Chapter Accrual Accounting & Income 166 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 3-8 Req (a) Jan Computer Equipment…………….… 80,000 Cash………………………………… 80,000 Purchased computer equipment (b) Dec 31 Depreciation Expense − Computer Equipment ($80,000 / 4)… 20,000 Accumulated Depreciation − Computer Equipment…………… 20,000 Req Computer Equipment Jan 80,000 Bal 80,000 Accumulated Depreciation − Computer Equipment Depreciation Expense − Computer Equipment Dec 31 20,000 Bal 20,000 Dec 31 20,000 Bal 20,000 Req Computer equipment………………………………… Less Accumulated depreciation…………………… Book value……………………………………………… Chapter $80,000 (20,000) $60,000 Accrual Accounting & Income 167 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 3-9 (Amounts in millions) Income statement: Salary expense ($38.3 + $2.8)… 2010 $41.1 Balance sheet: Salary payable……………… 2010 $ 2.8 Chapter Accrual Accounting & Income 168 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 3-10 Req Oct 31 Interest Expense……………………………… Interest Payable…………………………… To accrue interest expense for October 500 Interest Expense……………………………… Interest Payable…………………………… To accrue interest expense for November 500 Dec 31 Interest Expense……………………………… Interest Payable…………………………… To accrue interest expense for December 500 Nov 30 500 500 500 Req Interest Payable Oct 31 Nov 30 Dec 31 Bal 500 500 500 1,500 Req Dec 31 Interest Payable…………………………… 1,500 Cash………………………………………… 1,500 To pay interest Chapter Accrual Accounting & Income 169 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 3-11 Req Oct 31 Nov 30 Dec 31 Interest Receivable………………………… Interest Revenue………………………… To accrue interest revenue for October 500 Interest Receivable………………………… Interest Revenue…… ………………… To accrue interest revenue for November 500 Interest Receivable………………………… Interest Revenue…… ……………….… To accrue interest revenue for December 500 500 500 500 Req Interest Receivable Oct 31 500 Nov 30 500 Dec 31 500 Bal 1,500 Req Dec 31 Cash…………………………………………… 1,500 Interest Receivable……………………… 1,500 To collect interest Chapter Accrual Accounting & Income 170 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5-10 min.) S 3-12 Unearned revenues are liabilities because The Globe and Trail has received cash from subscribers in advance of providing them with newspapers Receiving the cash in advance creates an obligation (a liability) for The Globe and Trail As The Globe and Trail delivers newspapers to subscribers, The Globe and Trail earns the revenue, and the dollar amount of the unearned revenue then goes into the revenue account Cash………………………………………… Unearned Subscription Revenue… Received cash for revenue in advance 50,000 b Unearned Subscription Revenue Subscription Revenue…………………… To record the earning of subscription revenue that was collected in advance 50,000 a Chapter 50,000 50,000 Accrual Accounting & Income 171 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (20-30 min.) Decision Case Eagle Restaurant, Inc Income Statement Month Ended October 31, 2011 Sales revenue Cost of goods sold $12,000 Wages expense 5,000 Rent expense 4,000 Insurance expense 1,000 Depreciation expense 1,000 Net income Eagle Restaurant, Inc Statement of Retained Earnings Month Ended October 31, 2011 Retained earnings, beginning + Net income - Dividends Retained earnings, October 31, 2011 Chapter $32,000 23,000 $ 9,000 $ 9,000 (3,000) $6,000 Accrual Accounting & Income 266 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Decision Case Eagle Restaurant, Inc Balance Sheet October 31, 2011 ASSETS LIABILITIES Cash $ 8,000 Accounts payable $ 7,000 Food inventory 5,000 Unearned revenue 3,000 Prepaid insurance 1,000 10,000 Dishes, silver 4,000 Fixtures $24,000 OWNERS’ EQUITY Less: Accum Common stock $25,000 deprec (1,000) 23,000 Retained earnings 6,000 31,000 Total assets $41,000 Total liabilities and equity $41,000 Recommendation: Do not expand the business It is not meeting Marks’ goals for net income or for total assets Chapter Accrual Accounting & Income 267 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (30-40 min.) Decision Case Req (your highest price) Advertising revenue ($22,000 + $4,000) Expenses: Salary Utilities Other (unrecorded) Salary of your manager Your expected monthly net income Multiplier to compute price Your highest price $26,000 $4,000 900 1,100 5,000 11,000 $15,000 X 16 $240,000 Req (Williams’ asking price) SW Advertising, Inc Statement of Retained Earnings and Common Stock June 30, 2010 Beginning retained earnings $ 93,000 Add: Net income Revenue ($22,000 + $4,000) $26,000 Less: Expenses ($4,000 + $900 + $1,100) (6,000) 20,000 113,000 Less: Dividends (9,000) Ending retained earnings $104,000 Common stock 50,000 Stockholders’ equity, June 30, 2010 $154,000 Multiplier to compute price X Williams’ asking price $308,000 Chapter Accrual Accounting & Income 268 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Decision Case Req You may start by offering Williams approximately $225,000 for the business His asking price is $308,000 so you are starting out quite far apart If Williams appears especially eager to sell out, you may be able to buy the firm for closer to your highest price of $240,000 However, if he is not so eager to sell and if you want the business badly enough, you may have to pay somewhere between $240,000 and $308,000 It might pay to hire an expert to value the business’s assets You may find that Williams’ price is inflated based on the value of its assets You can always raise your offer, but you cannot decrease it, so start the negotiating process with an offer around $225,000 Chapter Accrual Accounting & Income 269 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethical Issues Ethical Issue 1 The journal entry to record the revenue is: Dec Accounts Receivable……… XXX Sales Revenue…………… XXX The debit to Accounts Receivable will increase total current assets and, as a result, increase (improve) the current ratio The credit to Sales Revenue will increase total owner equity and, as a result, decrease (improve) the debt ratio a – c The issue is whether it is ethical to record the revenue in the current year The contract has been signed, but the implication is that the company will not have done everything it needs to in order to earn the revenue in the current year The stakeholders are the company, the bank, the stockholders, and the company’s other creditors From an economic standpoint, the entry would obviously improve the company’s short term financial position However, the advantage would probably be short-lived When the bank finds out about this entry, they will likely protest, and demand immediate payment, so the longer-term economic impact will likely be negative From a ―legal‖ standpoint, to record this transaction in December violates GAAP by violating the revenue principle In this case Cross Timbers has not made the sale (has not delivered the merchandise) to the customer and, therefore, has not earned the revenue prior to December 31 of the current year From an ethical standpoint, recording this revenue violates the bank’s rights for proper disclosure of the company’s income and assets Revenue should be recorded no earlier than when it is earned Cross Timbers expects to earn the revenue in Chapter Accrual Accounting & Income 270 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com January of next year Cross Timbers clearly cannot record this revenue until it is earned To so is not in their best economic, legal (GAAP) or ethical best interests The authors would suggest either of two actions Cross Timbers can either: a Report the current ratio of 1.47 and the debt ratio of 51 because these are the true values Then tell the bank of the signed contract for additional work and the hope for a better set of ratio values next year In some cases, banks will agree to sign a waiver of the terms of loan covenants, meaning that, although the company is in violation, the bank will not move to enforce the covenant They may give Cross Timbers a ―grace period‖ to cure the violation in the covenant b Pay off some current liabilities before year end This will improve both the current ratio and the debt ratio This may enable Cross Timbers to bring its ratio values into compliance with the bank’s requirements Chapter Accrual Accounting & Income 271 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethical Issue These transactions — recorded as directed by Almond — overstate the reported income of the company by $21,000 ($10,000 + $10,000 + $1,000) It appears that Almond wants to improve the company’s reported income in order to borrow on favorable terms Her action is unethical and probably illegal as well because she is deliberately overstating the company’s reported income Almond appears to be letting the potential short term economic advantage of these deliberate misstatements take precedence She needs to remember that these misstatements violate GAAP, and that, depending on what use is made of the financial statements, could subject the company to civil or criminal legal proceedings If this happens, the short term economic gains ($21,000) would not even come close to the long-term economic costs associated with the legal actions, not to mention the negative publicity The business will need a bank loan, and perhaps the money would be used to pay bills, expand the business, and so on However, based on Almond’s lack of integrity, the money may be destined for her own use Regardless of its use, the money is obtained under false pretenses and cannot be headed for a good outcome Chapter Accrual Accounting & Income 272 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The bank is harmed by Almond’s and Lail’s actions Lending money to Almond under false pretenses may lead the bank to charge an unrealistically low interest rate that robs the bank’s owners of interest revenue In the extreme, the public is robbed if taxpayers wind up financing the bailout of a failed institution Personal advice will vary from student to student The purpose of asking this question is to challenge students to take the high road of ethical conduct by having nothing to with Almond’s scheme The authors would advise Lail, the accountant, to take these actions, in order: a Refuse to take any part in Almond’s scheme, explaining that the result is overstatement of reported income This is both illegal and unethical, and will ultimately have a negative economic impact on the company, as well Accountants are bound to standards of ethical conduct that these actions violate The can go to prison when caught falsifying financial statements b To remain ethical, the accountant must be willing to lose his/her job It is better to protect one’s reputation even if that causes a short-term hardship Chapter Accrual Accounting & Income 273 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Focus on Financials: Amazon.com, Inc (15-20 min.) Req Accrued expenses are expenses that have been incurred but that have not yet been paid as of the balance sheet date The accrual and matching concepts require that all expenses be recognized during the period in which they are incurred in order to earn revenue, regardless of when they are paid Req and Req (balances in millions at December 31, 2008) Accrued expenses and other Beg Bal $902 (a) 902 (b) 1,093 End Bal $1,093 Cash (a) 902 (b) 2,335 Operating expenses (b) 3,428 Chapter Accrual Accounting & Income 274 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Focus on Financials: Amazon.com, Inc Req (amounts in millions) Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT a Accrued expenses and other…….… Cash………………… 902 b Operating expenses….……………… Cash…………………… ……… Accrued expenses and other… 3,428 CREDIT 902 2,335 1,093 The balance of accrued expenses and other agrees with the financial statements at December 31, 2008 Chapter Accrual Accounting & Income 275 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Focus on Financials: Amazon.com, Inc Req Current ratio: 2008 2007 (Dollar amounts in millions) Total current assets = Total current liabilities $6,157 $4,746 = 1.30 $5,164 $3,714 = 1.39 Debt ratio: Total liabilities $5,642* $5,288** = = 0.68 = Total assets $8,314 $6,485 *4,746 + $409 + $487 **3,714 + $1,282 + $292 0.82 The current ratio deteriorated slightly, but the debt ratio improved significantly during 2008 The company used cash to pay down long-term liabilities This reveals strengthening leverage at the expense of only slightly weaker (but still respectable) liquidity Chapter Accrual Accounting & Income 276 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Focus on Analysis: Foot Locker, Inc (15-20 min.) Req In fiscal 2006, Foot Locker earned the $59 million In fiscal 2007, Foot Locker earned the $50 million, and $50 million is included in net income for fiscal 2007 Req $62 million impacted rent expense in 2007 net income computation $65 million impacted rent expense in 2008 net income This amount was still prepaid as of December 31, 2007 Req During 2008, Foot Locker, Inc sold plant assets (property, plant, and equipment) They must have removed $67 million from accumulated depreciation for the plant assets that it sold ($870 + $100 - $903) Chapter Accrual Accounting & Income 277 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Req Customer deposits represent unearned income When received, these amounts are credited to a current liability account When customers redeem the gift cards, these amounts are debited to customer deposits and credited to sales revenue The entry to record the increase in this account is (in millions): Cash……………………………………………… Customer deposits……………………… During 2007, Foot Locker, Inc collected $1 million from customers who were buying gift certificates This transaction created a liability for Foot Locker, Inc Chapter Accrual Accounting & Income 278 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Group Project (45 min.) Req Davis Lawn Service, Inc Income Statement Four Months Ended August 31, 2010 Service revenue ($5,600 + $600) Expenses: Wage expense ($1,900 + $200) $2,100 Rent expense ($600 × 4/6) 400 Supplies expense ($400 − $50) 350 Repair expense 300 Depreciation expense ($300× 1/3) 100 Total expenses Net income Chapter $6,200 3,250 $2,950 Accrual Accounting & Income 279 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Group Project Req Davis Lawn Service, Inc Balance Sheet August 31, 2010 ASSETS Current: Cash Accounts receivable Receivable from Ludwig (or Prepaid rent) Supplies Total current assets Long-term: Trailer $300 Less accum deprec (100) Total assets LIABILITIES Current: $2,040 Wages payable $ 200 600 Total current liabilities 200 200 50 2,890 STOCKHOLDERS’ EQUITY Common stock 400 Retained earnings ($2,950 − $460) 2,490 200 Total stockholders’ 2,890 equity Total liabilities and $3,090 stockholders’ equity $3,090 Chapter Accrual Accounting & Income 280 ... information provided by the cash basis Chapter Accrual Accounting & Income 178 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Accrual Accounting. .. 3-3 At the end of each accounting period, the business reports its performance through the preparation of financial statements In order to be useful to the various users of financial statements... Accrual Accounting & Income 5,500 181 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) E 3-22A Req Net income understated by omission