Solution manual financial accounting 9th harrison ch03

Find more at www.downloadslide.com Chapter Accrual Accounting & Income Short Exercises (10 min.) S 3-1 Sales revenue…………………………………………… Cost of goods sold……………………………………… All other expenses……………………………………… Net income……………………………………………… Millions 850 (290) (325) $ 235 Beginning cash………………………………………… Collections ($850 − $27)……………………………… Payments for: inventory……………………………… everything else……………………… Ending cash……………………………………………… $ 75 823 (380) (255) $ 263 (10 min.) S 3-2 Statement Income statement Reports (Amounts in millions) Interest expense……………………… $ Balance sheet Notes payable ($4.1 + $1.7 − $1.6)… $4.2 Interest payable……………………… 0.3 Chapter Accrual Accounting & Income 3- Find more at www.downloadslide.com (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 upto-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 during the month may not have been recorded The accrued salaries, which are owed to the employees but have not been paid, are an expense related to the current period but 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, net income will be overstated, and liabilities will be understated 3-2 Financial Accounting 9/e Solutions Find more at www.downloadslide.com (10 min.) S 3-4 The large auto manufacturer should record sales revenue when the revenue is earned by delivering automobiles to Budget or Hertz 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 expense recognition principle tells when to record expenses (10 min.) S 3-5 Depreciation is the periodic allocation of the cost of a tangible long-lived asset, less its estimated residual value, over its estimated useful life All long-lived or plant assets, except for land, decline in usefulness during their life and this decline is an expense Accountants must allocate the cost of each plant asset, except for land, over the asset’s useful life Depreciation is the process of allocating the cost of a plant asset to expense Depreciation also decreases the book value of the asset to reflect its usage Chapter Accrual Accounting & Income 3- Find more at www.downloadslide.com (10 min.) S 3-6 a The Expense Recognition Principle b The Time Period Concept c The Revenue Principle d The Revenue Principle e The Expense Recognition Principle (10 min.) S 3-7 a Oct 31 Rent Expense ($3,000 × 1/6)………… Prepaid Rent………………………… To record rent expense Prepaid Rent Oct 3,000 Oct 31 Bal 2,500 500 500 Rent Expense 500 Oct 31 500 Bal 500 b Oct 31 Supplies Expense ($950 − $400)……… Supplies……………………………… To record supplies expense Supplies Oct 950 Oct 31 Bal 400 3-4 Financial Accounting 9/e Solutions 550 550 Supplies Expense 550 Oct 31 550 Bal 550 Find more at www.downloadslide.com (10 min.) S 3-8 Req (a) Jan (b) Dec 31 Computer Equipment…………….……… Cash……………………………………… Purchased computer equipment Depreciation Expense − Computer Equipment ($50,000 / 5)…… Accumulated Depreciation − Computer Equipment…………… Record depreciation expense 50,000 50,000 10,000 10,000 Req Computer Equipment Jan 50,000 Bal 50,000 Accumulated Depreciation − Computer Equipment Depreciation Expense − Computer Equipment Dec 31 10,000 Dec 31 10,000 Bal Bal 10,000 10,000 Req Computer equipment………………………………… $50,000 Less: Accumulated depreciation…………………… (10,000) Book value……………………………………………… $40,000 Chapter Accrual Accounting & Income 3- Find more at www.downloadslide.com (10 min.) S 3-9 (Amounts in millions) Income statement: Salary expense ($42.4 + $2.2)… 2012 $44.6 Balance sheet: Salary payable……………… 2012 $ 2.2 (10 min.) S 3-10 Req Oct 31 Nov 30 Dec 31 Interest Expense………………………………… Interest Payable……………………………… To accrue interest expense for October 250 Interest Expense………………………………… Interest Payable……………………………… To accrue interest expense for November 250 Interest Expense………………………………… Interest Payable………………………………… To accrue interest expense for December 250 250 250 250 Req Interest Payable Oct 31 Nov 30 Dec 31 Bal 250 250 250 750 Req Dec 31 3-6 Interest Payable…………………………… Cash…………………………………………… To pay interest Financial Accounting 9/e Solutions 750 750 Find more at www.downloadslide.com (10 min.) S 3-11 Req Oct 31 Interest Receivable……………………………… Interest Revenue…………………………… To accrue interest revenue for October 250 Nov 30 Interest Receivable……………………………… Interest Revenue…… ……………………… To accrue interest revenue for November 250 Dec 31 Interest Receivable……………………………… Interest Revenue…… ……………….…… To accrue interest revenue for December 250 250 250 250 Req Interest Receivable Oct 31 250 Nov 30 250 Dec 31 250 Bal 750 Req Dec 31 Cash……………………………………………… Interest Receivable………………………… To collect interest Chapter 750 Accrual Accounting & Income 750 3- Find more at www.downloadslide.com (5-10 min.) S 3-12 Unearned revenues are liabilities because The World Star has received cash from subscribers in advance of providing them with newspapers Receiving the cash in advance creates an obligation (a liability) for The World Star As The World Star delivers newspapers to subscribers, The World Star earns the revenue, and the dollar amount of the unearned revenue then goes into the revenue account a Cash…………………………………………… Unearned Subscription Revenue… Received cash for revenue in advance b Unearned Subscription Revenue Subscription Revenue…………………… To record the earning of subscription revenue that was collected in advance 60,000 60,000 40,000 40,000 (5-10 min.) S 3-13 Prepaid Rent at December 31: a Unadjusted amount…………………………… $18,000 b Adjusted amount ($18,000 − $6,000)……… 12,000 Rent Expense at December 31: c Unadjusted amount…………………………… d Adjusted amount ($18,000 / 3)……………… 3-8 Financial Accounting 9/e Solutions $ -06,000 Find more at www.downloadslide.com (10 min.) S 3-14 a b Accounts Receivable……………………… Service Revenue………………………… 55,000 Cash…………………………………………… Accounts Receivable…………………… 35,000 Cash…………………………………………… Unearned Service Revenue…………… 9,000 Unearned Service Revenue………………… Service Revenue………………………… 7,000 55,000 35,000 9,000 7,000 (15-30 min.) S 3-15 Sparrow Sporting Goods Company Income Statement For the Year Ended March 31, 2012 Thousands Net revenues…………………………… $175,500 Cost of goods sold…………………… 136,000 All other expenses…………………… 29,000 Net income……………………………… $ 10,500 Sparrow Sporting Goods Company Statement of Retained Earnings For the Year Ended March 31, 2012 Thousands Retained earnings, March 31, 2011… $21,500 Add: Net income………………………… 10,500 Retained earnings, March 31, 2012.… $32,000 Chapter Accrual Accounting & Income 3- Find more at www.downloadslide.com (continued) S 3-15 Sparrow Sporting Goods Company Balance Sheet March 31, 2012 Thousands ASSETS Current: Cash $ 20,800 Ac counts receivable 28,000 Inventories 35,000 Other current assets 5,000 Total current assets 88,800 Property and equipment, net 6,300 Other assets 22,000 Total assets $117,100 LIABILITIES Total current liabilities $ 55,100 Long-term liabilities 7,500 Total liabilities 62,600 STOCKHOLDERS’ EQUITY 3-10 Common stock 22,500 Retained earnings 32,000 Total stockholders’ equity 54,500 Total liabilities and stockholders’ equity $117,100 Financial Accounting 9/e Solutions Find more at www.downloadslide.com (continued) Decision Case Eagle Restaurant, Inc Balance Sheet October 31, 2012 ASSETS LIABILITIES Cash $ 8,000 Accounts payable $ 7,000 Food inventory 5,000 Unearned revenue 3,000 Prepaid insurance 1,000 Dishes, silver 4,000 OWNERS’ EQUITY Fixtures $24,000 Less: Accum Common stock deprec (1,000) Total assets Recommendation: 10,000 23,000 Retained earnings $25,000 6,000 $41,000 Total liabilities and equity 31,000 $41,000 Do not expand the business It is not meeting Marks’ goals for net income or for total assets Chapter Accrual Accounting and Income 3-93 Find more at www.downloadslide.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, 2012 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 Ending retained earnings Common stock Stockholders’ equity, June 30, 2012 Multiplier to compute price Williams’ asking price 3-94 Financial Accounting 9/e Solutions Manual (9,000) $104,000 50,000 $154,000 X $308,000 Find more at www.downloadslide.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 and Income 3-95 Find more at www.downloadslide.com Ethical Issues Ethical Issue 1 The journal entry to record the revenue is: Dec Accounts Receivable……… Sales Revenue…………… XXX 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 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 3-96 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued) Ethical Issue 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 and Income 3-97 Find more at www.downloadslide.com Ethical Issue These transactions 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 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 3-98 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com 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 and Income 3-99 Find more at www.downloadslide.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 (recorded) 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 (a) 1,759 (b) End Bal 3-100 Financial Accounting 9/e Solutions Manual $1,759 2,321 $2,321 Find more at www.downloadslide.com (continued) Focus on Financials: Amazon.com, Inc Req (amounts in millions) Journal DATE ACCOUNT TITLES DEBIT a Accrued expenses and other…….… Cash………………… 1,759 b Operating expenses….……………… Cash…………………… ……… Accrued expenses and other… 6,237 CREDIT 1,759 3,916 2,321 The balance of Accrued Expenses and Other agrees with the financial statements at December 31, 2010 Chapter Accrual Accounting and Income 3-101 Find more at www.downloadslide.com (continued) Focus on Financials: Amazon.com, Inc Req Current ratio: 2010 2009 (Dollar amounts in millions) Total current assets = Total current liabilities $13,747 = 1.33 $10,372 $9,797 = 1.33 $7,364 Working Capital: Current Assets – Current liabilities 2010 2009 $13,747$9,797 = $3,375 $10,372 $7,364 = $2,433 = Debt ratio: 2010 Total liabilities = Total assets $11,933* $18,797 2009 = 0.64 $8,556** $13,813 *10,372 + 1,561 + 1,192 The current = 0.62 **7,364 ratio did not change, working capital increased substantially, and the debt ratio slightly worsened during 2010 This reveals slightly weakening leverage but with sustained liquidity Also, the size of the firm overall has increased (indicated by total assets) and its working capital has increased as well to support Amazon.com now that it is a larger firm 3-102 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Focus on Analysis: RadioShack, Corp (15-20 min.) Req The beginning balance of Accounts Receivable, $322.5 million represents revenue earned in fiscal 2009 but not received until fiscal 2010 The ending balance of Accounts Receivable, $377.5 million, represents revenue earned in fiscal 2010 but not received until fiscal 2011 According to footnote 3, the receivables are due from vendors, trade accounts receivables, and other receivables The amount due from vendors likely represents deposits made by RadioShack whereas the trade accounts receivables are likely due from customers Req Since Deferred Income Taxes is a current asset, it is most likely similar to a prepaid asset, meaning taxes have been paid but will be expensed sometime in the future When the taxes are expensed in the future, the asset, Deferred Income Taxes will decrease as in the following entry: Journal DATE ACCOUNT TITLES AND EXPLANATION Income Tax Expense………… …….… Deferred Income Taxes ………… DEBIT CREDIT Req Since depreciation expense increases Accumulated Depreciation $70 million, a decrease of $49 million ($799 + $70 - $820) must have occurred Chapter Accrual Accounting and Income 3-103 Find more at www.downloadslide.com (continued) Focus on Analysis as well The decrease is most likely from the sale of property, plant, and equipment Req Accrued Advertising Payable represents an accrued liability account When the company incurs advertising expense, this current liability account is credited When the company pays the advertising company, these amounts are debited to Accrued Advertising Payable The expense relating to this accrued advertising was recorded in the year the expense was incurred—when the advertising first takes place (Note 2) Accordingly, the $26.9 million accrued advertising represents advertising incurred in fiscal 2010 but not paid until fiscal 2011 From 2009 to 2010, RadioShack, Corp.’s advertising expense increased from $193 million to $206 million.(Note 2) By reconstructing the accrued liability account, the amount RadioShack paid for advertising during fiscal 2010 can be derived Accrued Advertising Expense (Payable) Adv Paid $211.6 Beg Bal $31.4 Adv Exp 206.1 End Bal 26.9 3-104 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Group Project (45 min.) Req Trozo Lawn Service, Inc Income Statement Four Months Ended August 31 Service revenue ($5,600 + $600) $6,200 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 3,250 Net income $2,950 Chapter Accrual Accounting and Income 3-105 Find more at www.downloadslide.com (continued) Group Project Req Trozo Lawn Service, Inc Balance Sheet August 31 ASSETS LIABILITIES Current: Current: Cash $2,640 Accounts receivable 600 Wages payable Total current liabilities $ 200 200 Receivable from Ludwig (or Prepaid rent) 200 Supplies 50 Total current assets 2,890 Long-term: Trailer EQUITY Common stock $300 (100) 1,060 Retained earnings ($2,950 − $460) 2,490 200 Total stockholders’ equity 2,890 Less accum deprec STOCKHOLDERS’ Total liabilities and Total assets $3,690 3-106 Financial Accounting 9/e Solutions Manual stockholders’ equity $3,690 Find more at www.downloadslide.com (continued) Group Project Req Trozo Lawn Service, Inc Statement of Cash Flows Four Months Ended August 31 Cash flows from operating activities: Collections from customers………………… Payments: For supplies To employees For rent For repairs Net cash provided by operating activities Cash flows from investing activities: Purchase of trailer Net cash used for investing activities Cash flows from financing activities: Issued note payable to father Repayment of loan to father Payment of dividends Issuance of common stock Net cash used for financing activities Net increase in cash………………………… Cash balance, beginning……………………… Cash balance, ending…………………………… $ 5,600 $ 400 1,900 600 300 3,200 2,400 $(300) (300) $ 1,500 (1,500) (460) 1,000 540 $ 2,640 -0$ 2,640 Req Matt was successful because his lawn service was profitable and had a positive cash flow from operating activities Matt was also able to pay off his loan and pay a dividend Chapter Accrual Accounting and Income 3-107 ... governs accounting for expenses c 3-30 The income statement reports revenues and expenses The statement of cash flows reports cash receipts and cash payments Financial Accounting 9/e Solutions... understated, net income will be overstated, and liabilities will be understated 3-2 Financial Accounting 9/e Solutions Find more at www.downloadslide.com (10 min.) S 3-4 The large auto manufacturer... Supplies……………………………… To record supplies expense Supplies Oct 950 Oct 31 Bal 400 3-4 Financial Accounting 9/e Solutions 550 550 Supplies Expense 550 Oct 31 550 Bal 550 Find more at www.downloadslide.com