Solution manual intermediate accounting 13e kieso ch03

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER The Accounting Information System ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Transaction identification 1, 2, 3, 5, 6, 7, Nominal accounts 4, Trial balance 6, 10 Adjusting entries 8, 11, 13, 14 Financial statements Closing 12 Inventory and cost of goods sold Comprehensive accounting cycle *9 Brief Exercises Exercises Problems 1, 1, 2, 3, 4, 17 2, 3, 1, 2, 5, 6, 7, 8, 9, 10, 20 1, 2, 3, 4, 5, 6, 7, 8, 9, 11 11, 12, 15, 22, 23 1, 2, 4, 13, 14, 16 1, 4, 8, 9, 11 3, 4, 5, 6, 7, 8, 9, 10 11 12, 14, 15 1, 2, 6, 11 Cash vs Accrual Basis 18, 19, 20 12 18, 19 *10 Reversing entries 21 13 20 *11 Worksheet 22 21, 22, 23 10 11 *These topics are dealt with in an Appendix to the Chapter Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 3-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Brief Exercises Learning Objectives Exercises Problems Understand basic accounting terminology Explain double-entry rules Identify steps in accounting cycle Record transactions in journals, post to ledger accounts, and prepare a trial balance 1, 2, 3, 4, 5, 6, 1, 2, 3, 4, 17 1, 4, 8, Explain the reasons for preparing adjusting entries 3, 4, 5, 6, 7, 8, 9, 10 5, 6, 7, 8, 9, 10, 20 2, 3, 4, 5, 6, 7, 8, 9, 11 Prepare financial statements from the adjusted trail balance 11, 12, 15 1, 2, 4, 6, 7, 8, 9, 11 Prepare closing entries 11 13, 14, 16 1, 4, 8, 9, 11 *8 Differentiate the cash basis of accounting from the accrual basis of accounting 12 18, 19 10 *9 Identify adjusting entries that may be reversed 13 20 *10 Prepare a 10-column worksheet 21, 22, 23 11 *These topics are dealt with in an Appendix to the Chapter 3-2 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ASSIGNMENT CHARACTERISTICS TABLE Level of Difficulty Time (minutes) Simple Simple Simple Simple Moderate Moderate Complex Moderate Moderate Complex Moderate Moderate Simple Moderate Simple Moderate Moderate 15–20 10–15 15–20 10–15 10–15 15–20 15–20 10–15 15–20 25–30 20–25 20–25 10–15 10–15 10–15 10–15 10–15 *E3-18 *E3-19 *E3-20 *E3-21 *E3-22 *E3-23 Transaction analysis–service company Corrected trial balance Corrected trial balance Corrected trial balance Adjusting entries Adjusting entries Analyze adjusted data Adjusting entries Adjusting entries Adjusting entries Prepare financial statements Prepare financial statements Closing entries Closing entries Missing amounts Closing entries for a corporation Transactions of a corporation, including investment and dividend Cash to accrual basis Cash to accrual basis Adjusting and reversing entries Worksheet Worksheet and balance sheet presentation Partial worksheet preparation Moderate Moderate Complex Simple Moderate Moderate 15–20 10–15 20–25 10–15 20–25 10–15 P3-1 P3-2 P3-3 P3-4 P3-5 P3-6 P3-7 P3-8 P3-9 *P3-10 *P3-11 Transactions, financial statements–service company Adjusting entries and financial statements Adjusting entries Financial statements, adjusting and closing entries Adjusting entries Adjusting entries and financial statements Adjusting entries and financial statements Adjusting and closing Adjusting and closing Cash and accrual basis Worksheet, balance sheet, adjusting and closing entries Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Complex 25–35 35–40 25–30 40–50 15–20 25–35 25–35 30–40 30–35 35–40 40–50 Item E3-1 E3-2 E3-3 E3-4 E3-5 E3-6 E3-7 E3-8 E3-9 E3-10 E3-11 E3-12 E3-13 E3-14 E3-15 E3-16 E3-17 Description Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 3-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO QUESTIONS Examples are: (a) Payment of an accounts payable (b) Collection of an accounts receivable from a customer (c) Transfer of an accounts payable to a note payable Transactions (a), (b), (d) are considered business transactions and are recorded in the accounting records because a change in assets, liabilities, or owners’/stockholders’ equity has been effected as a result of a transfer of values from one party to another Transactions (c) and (e) are not business transactions because a transfer of values has not resulted, nor can the event be considered financial in nature and capable of being expressed in terms of money Transaction (a): Transaction (b): Transaction (c): Transaction (d): Accounts Receivable (debit), Service Revenue (credit) Cash (debit), Accounts Receivable (credit) Office Supplies (debit), Accounts Payable (credit) Delivery Expense (debit), Cash (credit) Revenue and expense accounts are referred to as temporary or nominal accounts because each period they are closed out to Income Summary in the closing process Their balances are reduced to zero at the end of the accounting period; therefore, the term temporary or nominal is given to these accounts Andrea is not correct The double-entry system means that for every debit amount there must be a credit amount and vice-versa At least two accounts are affected It does not mean that each transaction must be recorded twice Although it is not absolutely necessary that a trial balance be taken periodically, it is customary and desirable The trial balance accomplishes two principal purposes: (1) It tests the accuracy of the entries in that it proves that debits and credits of an equal amount are in the ledger (2) It provides a list of ledger accounts and their balances which may be used in preparing the financial statements and in supplying financial data about the concern (a) Real account; balance sheet (b) Real account; balance sheet (c) Merchandise inventory is generally considered a real account appearing on the balance sheet It has the elements of a nominal account when the periodic inventory system is used It may appear on the income statement when the multiple-step format is used under a periodic inventory system (d) Real account; balance sheet (e) Real account; balance sheet (f) Nominal account; income statement (g) Nominal account; income statement (h) Real account; balance sheet At December 31, the three days’ wages due to the employees represent a current liability The related expense must be recorded in this period to properly reflect the expense incurred (a) In a service company, revenues are service revenues and expenses are operating expenses In a merchandising company, revenues are sales revenues and expenses consist of cost of goods sold plus operating expenses (b) The measurement process in a merchandising company consists of comparing the sales price of the merchandise inventory to the cost of goods sold and operating expenses 3-4 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Questions Chapter (Continued) 10 (a) (b) (c) (d) No change Before closing, balances exist in these accounts; after closing, no balances exist Before closing, balances exist in these accounts; after closing, no balances exist Before closing, a balance exists in this account exclusive of any dividends or the net income or net loss for the period; after closing, the balance is increased or decreased by the amount of net income or net loss, and decreased by dividends declared (e) No change 11 Adjusting entries are prepared prior to the preparation of financial statements in order to bring the accounts up to date and are necessary (1) to achieve a proper matching of revenues and expenses in measuring income and (2) to achieve an accurate presentation of assets, liabilities and stockholders’ equity 12 Closing entries are prepared to transfer the balances of nominal accounts to capital (retained earnings) after the adjusting entries have been recorded and the financial statements prepared Closing entries are necessary to reduce the balances in nominal accounts to zero in order to prepare the accounts for the next period’s transactions 13 Cost – Salvage Value = Depreciable Cost: $4,000 – $0 = $4,000 Depreciable Cost ÷ Useful Life = Depreciation Expense For One Year $4,000 ÷ years = $800 per year The asset was used for months (7/1 – 12/31), therefore 1/2-year of depreciation expense should be reported Annual depreciation X 6/12 = amount to be reported on 2010 income statement: $800 X 6/12 = $400 14 December 31 Interest Receivable 10,000 Interest Revenue (To record accrued interest revenue on loan) 10,000 Accrued expenses result from the same causes as accrued revenues In fact, an accrued expense on the books of one company is an accrued revenue to another company 15 No, all international companies are not subject to the same internal control standards All public companies that list their securities on U.S stock exchanges are subject to the internal control testing and assurance provisions of the Sarbanes-Oxley Act of 2002 International companies that list their securities on non-U.S exchanges are not subject to these rules and there is debate as to whether they should have to comply 16 There is concern that the cost of complying with the higher internal control provisions is making U.S markets less competitive as a place to list securities This in turn could give U.S investors less investment opportunities On the other hand, some argue that the enhanced internal control requirements in the U.S increase the perceived reliability of companies’ financial statements and helps reduce their cost of capital Furthermore, the decline in public listings in the U.S are more likely due to other factors, such as growth in non-U.S markets and general globalization Thus, the jury is still out on the net cost/benefit of Sarbanes-Oxley and its impact on international competitiveness 17 As with accounting standards, there are differences in auditing standards across international jurisdictions In the U.S., auditors of public companies are regulated by the Public Company Accounting Oversight Board (PCAOB) The PCAOB enforces the provisions of the Sarbanes-Oxley Act through its various auditing standards In the international domain, the auditing standards board is the International Auditing and Assurance Standards Board (IAASB) The IAASB is working on a broad set of international auditing standards but to date does not have a law like Sarbanes-Oxley to guide its work Note to instructors—Some instructors may wish to direct students to the IAASB web-site http://www.ifac.org/iaasb/-to learn more about its work and to compare to the work of the PCAOB— http://www.pcaobus.org/ Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 3-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Questions Chapter (Continued) *18 Under the cash basis of accounting, revenue is recorded only when cash is received and expenses are recorded only when paid Under the accrual basis of accounting, revenue is recognized when it is earned and expenses are recognized when incurred, without regard to the time of the receipt or payment of cash A cash-basis balance sheet and income statement are incomplete and inaccurate in comparison to accrual-basis financial statements The accrual basis matches effort (expenses) with accomplishment (revenues) in the income statement while the cash basis only presents cash receipts and cash disbursements The accrual basis balance sheet contains receivables, payables, accruals, prepayments, and deferrals while a cash basis balance sheet shows none of these *19 Wages paid during the year will include the payment of any wages attributable to the prior year but unpaid at the end of the prior year This amount is an expense of the prior year and not of the current year, and thus should be subtracted in determining wages expense Similarly, wages paid during the year will not include any wages attributable to hours worked during the current year but not actually paid until the following year This should be added in determining wages expense *20 Although similar to the strict cash basis, the modified cash basis of accounting requires that expenditures for capital items be charged against income over all the periods to be benefited This is done through conventional accounting methods, such as depreciation and amortization Under the strict cash basis, expenditures would be recognized as expenses in the period in which the corresponding cash disbursements are made *21 Reversing entries are made at the beginning of the period to reverse accruals and some deferrals Reversing entries are not required They are made to simplify the recording of certain transactions that will occur later in the period The same results will be attained whether or not reversing entries are recorded *22 Disagree A worksheet is not a permanent accounting record and its use is not required in the accounting cycle The worksheet is an informal device for accumulating and sorting information needed for the financial statements Its use is optional in helping to prepare financial statements 3-6 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3-1 May Cash Common Stock 4,000 Equipment 1,100 4,000 Accounts Payable 13 21 1,100 Rent Expense Cash 400 Accounts Receivable 500 400 Service Revenue 500 BRIEF EXERCISE 3-2 Aug Cash 12,000 Equipment Agazzi, Capital 2,500 Supplies 500 14,500 Accounts Payable 12 Cash Accounts Receivable 500 1,300 670 Service Revenue Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 1,970 3-7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com BRIEF EXERCISE 3-2 (Continued) 15 Rent Expense 600 Cash 19 600 Supplies Expense Supplies ($500 – $270) 230 230 BRIEF EXERCISE 3-3 July Dec 31 Prepaid Insurance Cash 15,000 Insurance Expense 2,500 15,000 Prepaid Insurance ($15,000 X 1/2 X 1/3) 2,500 BRIEF EXERCISE 3-4 July Dec 31 Cash Unearned Insurance Revenue 15,000 Unearned Insurance Revenue 2,500 15,000 Insurance Revenue ($15,000 X 1/2 X 1/3) 3-8 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual 2,500 (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com BRIEF EXERCISE 3-5 Feb Prepaid Insurance 720,000 Cash June 30 720,000 Insurance Expense 150,000 Prepaid Insurance ($720,000 X 5/24) 150,000 BRIEF EXERCISE 3-6 Nov Cash 2,400 Unearned Rent Revenue Dec 31 Unearned Rent Revenue Rent Revenue 2,400 1,600 ($2,400 X 2/3) 1,600 BRIEF EXERCISE 3-7 Dec 31 Salaries Expense Salaries Payable 4,800 ($8,000 X 3/5) Jan Salaries Payable Salaries Expense 4,800 4,800 3,200 Cash Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 8,000 3-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com BRIEF EXERCISE 3-8 Dec 31 Interest Receivable 300 Interest Revenue Feb Cash Notes Receivable 300 12,400 12,000 Interest Receivable Interest Revenue 300 100 BRIEF EXERCISE 3-9 Aug 31 31 Interest Expense Interest Payable 300 Accounts Receivable 1,400 300 Service Revenue 31 31 1,400 Salaries Expense Salaries Payable 700 Bad Debt Expense 900 700 Allowance for Doubtful Accounts 900 BRIEF EXERCISE 3-10 Depreciation Expense 2,000 Accumulated Depreciation—Equipment Equipment Less: Accumulated depreciation—equipment 3-10 Copyright © 2010 John Wiley & Sons, Inc 2,000 $30,000 2,000 Kieso, Intermediate Accounting, 13/e, Solutions Manual $28,000 (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com *PROBLEM 3-9 (Continued) (c) Dec 31 Sales Income Summary Dec 31 Income Summary Cost of Goods Sold Advertising Expense Administrative Salaries Expense Sales Salaries Expense Office Expense Insurance Expense Bad Debt Expense 600,000 600,000 554,210 408,000 6,000 65,000 52,400 3,500 2,550 1,400 Depreciation Expense—Furniture and Equipment Interest Expense Dec 31 Income Summary Retained Earnings 3-68 Copyright © 2010 John Wiley & Sons, Inc 12,000 3,360 45,790 Kieso, Intermediate Accounting, 13/e, Solutions Manual 45,790 (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com *PROBLEM 3-10 (a) ARKANSAS SALES AND SERVICE Income Statement For the Month Ended January 31, 2010 Revenues (1) (2) Cash Basis Accrual Basis $ 75,000 $98,400* Expenses Cost of computers & printers: Purchased and paid 82,500** Cost of goods sold Salaries 9,600 Rent Other operating expenses 6,000 8,400 10,400 Total expenses 106,500 84,500 $(31,500) $13,900 Net income (loss) 59,500*** 12,600 2,000 *($2,550 X 30) + ($3,600 X 4) + ($500 X 15) **($1,500 X 40) + ($2,500 X 6) + ($300 X 25) ***($1,500 X 30) + ($2,500 X 4) + ($300 X 15) Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 3-69 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com *PROBLEM 3-10 (Continued) (b) ARKANSAS SALES AND SERVICE Balance Sheet As of January 31, 2010 (1) Cash Basis Assets Cash Accounts Receivable Inventory Prepaid rent Total assets Liabilities and Owners’ Equity Salaries payable Accounts payable Owners’ equity Total liabilities and owners’ equity a Original investment Cash sales Cash purchases Rent paid Salaries paid Other operating expenses Cash balance Jan 31 $58,500a $58,500 (2) Accrual Basis $ 58,500a 23,400 23,000b 4,000 $108,900 $ $58,500c $58,500 3,000 2,000 103,900d $108,900 $ 90,000 75,000 (82,500) (6,000) (9,600) (8,400) $ 58,500 b (10 @ $1,500) + (2 @ $2,500) + (10 @ $300) c Initial investment minus net loss: $90,000 – $31,500 d Initial investment plus net income: $90,000 + $13,900 3-70 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com *PROBLEM 3-10 (Continued) (c) The $23,400 in receivables from customers is an asset and a future cash flow resulting from sales that is ignored The cash basis understates the amount of revenues and inflow of assets in January from the sale of computers and printers by $23,400 The cost of computers and printers sold in January is overstated by $23,000 The unsold computers and printers are an asset of $23,000 in the form of inventory The cash basis ignores $3,000 of the salaries that have been earned by the employees in January and will be paid in February Rent expense on the cash basis is overstated by $4,000 under the cash basis This prepayment is an asset in the form of two months’ future right to the use of office, showroom, and repair space and should appear on the balance sheet Other operating expenses on a cash basis are understated by $2,000 as is the liability for the unpaid portion of these expenses incurred in January Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 3-71 3-72 Account Titles Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual 5,800 (c) 259,500 Taxes; (f) Accrued Interest Payable Key: (a) Expired Insurance; (b) Supplies Used; (c) Depreciation Expensed; (d) Admission Revenue Earned; (e) Accrued Property 259,500 280,500 3,000 280,500 6,000 Totals 14,000 42,000 14,600 700 50,000 109,700 Cr 33,500 5,800 28,000 14,400 12,000 109,000 30,500 9,400 16,900 21,000 280,500 37,400 4,200 3,900 80,000 120,000 Dr 506,500 3,000 6,000 280,500 Cr 506,500 5,800 28,000 14,400 12,000 109,000 30,500 9,400 16,900 21,000 14,000 42,000 14,600 700 50,000 109,700 Dr 33,500 59,200 3,000 6,000 2,000 37,400 4,200 3,900 80,000 120,000 Cr Balance Sheet Net Income (e) (f) (d) 5,800 14,400 28,000 Dr Income Statement 226,000 59,200 _ 28,000 14,400 (a) (b) 6,000 3,000 2,000 (c) (b) (a) Cr Adjusted Trial Balance 259,500 491,700 491,700 (f) (e) (d) Dr Adjustments 280,500 278,500 36,200 14,600 2,700 50,000 109,700 Cr 6,000 109,000 30,500 9,400 16,900 18,000 14,000 37,400 18,600 31,900 80,000 120,000 Dr Trial Balance For the Year Ended September 30, 2010 Worksheet COOKE COMPANY 247,000 Totals Prop Taxes Payable Insurance Expense Supplies Expense Interest Payable Depreciation Expense Totals Interest Expense Cash Supplies Prepaid Insurance Land Equipment Accum Depreciation Accounts Payable Unearned Ad Rev Mortgage Payable Cooke, Capital Cooke, Drawing Admissions Revenue Salaries Expense Repair Expense Advertising Expense Utilities Expense Prop Taxes Expense (a) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com *PROBLEM 3-11 (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com *PROBLEM 3-11 (Continued) (b) COOKE COMPANY Balance Sheet September 30, 2010 Assets Current assets Cash $37,400 Supplies Prepaid insurance 4,200 3,900 Total current assets Property, plant, and equipment $ 45,500 Land 80,000 Equipment $120,000 Less: Accum depreciation 42,000 78,000 Total assets 158,000 $203,500 Liabilities and Owner’s Equity Current liabilities Accounts payable Current maturity of long-term debt $14,600 10,000 Interest payable Property taxes payable 6,000 3,000 Unearned admissions revenue 700 Total current liabilities $ 34,300 Long-term liabilities Mortgage payable 40,000 Total liabilities Owner’s equity 74,300 Cooke, Capital ($109,700 + $33,500 – $14,000) 129,200 Total liabilities and owner’s equity $203,500 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 3-73 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com *PROBLEM 3-11 (Continued) (c) Sep 30 Insurance Expense 28,000 Prepaid Insurance 28,000 30 Supplies Expense Supplies 14,400 30 Depreciation Expense 5,800 14,400 Accum Depreciation 30 Unearned Admissions Revenue 5,800 2,000 Admissions Revenue 30 Property Taxes Expense 2,000 3,000 Property Taxes Payable 30 Interest Expense 3,000 6,000 Interest Payable (d) Sep 30 Admissions Revenue 6,000 280,500 Income Summary 30 Income Summary 3-74 280,500 247,000 Salaries Expense 109,000 Repair Expense 30,500 Insurance Expense 28,000 Property Taxes Expense Supplies Expense 21,000 14,400 Utilities Expense Interest Expense 16,900 12,000 Advertising Expense Depreciation Expense 9,400 5,800 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com *PROBLEM 3-11 (Continued) 30 Income Summary 33,500 Cooke, Capital 33,500 30 Cooke, Capital Cooke, Drawing (e) 14,000 14,000 COOKE COMPANY Post-Closing Trial Balance September 30, 2010 Debit Cash Supplies $ 37,400 4,200 Prepaid Insurance Land 3,900 80,000 Equipment Accumulated Depreciation 120,000 Credit $ 42,000 Accounts Payable Unearned Admissions Revenue 14,600 700 Interest Payable Property Taxes Payable 6,000 3,000 Mortgage Payable Cooke, Capital 50,000 129,200 $245,500 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual $245,500 (For Instructor Use Only) 3-75 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com FINANCIAL REPORTING PROBLEM (a) June 30, 2007 total assets: $138,014 million June 30, 2006 total assets: $135,695 million (b) June 30, 2007 cash and cash equivalents: $5,354 million (c) 2005 research and development costs: $1,940 million 2007 research and development costs: $2,112 million (d) 2005 net sales: $56,741 million 2007 net sales: $76,476 million (e) An adjusting entry for deferrals is necessary when the receipt/disbursement precedes the recognition in the financial statements Accounts such as prepaid insurance and prepaid rent may be included in the Prepaid expenses and other current assets section ($3,300 million at June 30, 2007) Both of these accounts would require an adjusting entry to recognize the proper amount of expense incurred during the period In addition, depreciation expense is an adjusting entry related to a deferral An adjusting entry for an accrual is necessary when recognition in the financial statements precedes the cash receipt/disbursement, such as interest or taxes payable Other adjusting entries probably made by P&G include interest revenue and expense and interest receivable and interest payable P&G reports $9,586 million of Accrued and other liabilities at June 30, 2007 (f) 2005 Depreciation and amortization expense: $1,884 million 2006 Depreciation and amortization expense: $2,627 million 2007 Depreciation and amortization expense: $3,130 million (From the Statement of Cash Flows) 3-76 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com COMPARATIVE ANALYSIS CASE (a) The Coca-Cola Company percentage increase is computed as follows: Total assets (December 31, 2007) Total assets (December 31, 2006) Difference $43,269 $29,963 $13,306 $13,306 ÷ $29,963 = $44.4% PepsiCo, Inc.’s percentage increase is computed as follows: Total assets (December 29, 2007) Total assets (December 30, 2006) Difference $34,628 $29,930 $ 4,698 $4,698 ÷ $29,930 = $15.7% Coca-Cola Company had the larger increase (b) 5-Year Growth Rate Net sales Income from continuing operations (c) The Coca-Cola Company 7.7% 7.8% PepsiCo, Inc 9.3% 11.7% The Coca-Cola Company had depreciation and amortization expense of $1,163 million; PepsiCo, Inc had depreciation and amortization expense of $1,426 million PepsiCo has substantially more property, plant, and equipment and intangible assets than does Coca-Cola PepsiCo is engaged in three different types of businesses: soft drinks, snack-food, and juices As a result, it has more tangible fixed assets In addition, PepsiCo has substantial intangible assets Amortizable intangible assets for Coke and Pepsi increase the Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 3-77 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com COMPARATIVE ANALYSIS CASE (Continued) amount of amortization expense recorded in income The amount of property, plant, and equipment and amortizable intangible assets reported for these two companies is as follows: The Coca-Cola Company PepsiCo, Inc $ 8,493,000,000 $11,228,000,000 2,810,000,000 $11,303,000,000 796,000,000 $12,024,000,000 Property, plant, and equipment (net) Amortizable intangible assets (net) 3-78 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com FINANCIAL STATEMENT ANALYSIS (a) 2007 Sales $11,776.00 Gross Profit % (b) 43.98% 2006 $11,906.70 2005 $10,177.20 48.92% % % Change Change 2007 2006 –1.10% 16.99% 44.86% –10.10% 9.05% Operating Profit 1,544.10 1,508.10 1167.90 2.39% 29.13% Net Cash Flow less Capital Expenditures 1,031.00 957.40 769.10 7.69% 24.48% Net Earnings 1,103.00 1,004.10 980.40 9.85% 2.42% Kellogg experienced a slowing in sales (slight decline) and a reduced gross-profit percentage Its growth in operating profit and cash flows, compared to 2006, suggest it may be entering a challenging period This may bode well for the strength and flexibility of its business model Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 3-79 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com PROFESSIONAL RESEARCH (a) The three essential characteristics of assets Search String: asset and characteristics CON6, Par26 An asset has three essential characteristics: (a) it embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows, (b) a particular entity can obtain the benefit and control others’ access to it, and (c) the transaction or other event giving rise to the entity’s right to or control of the benefit has already occurred (b) Three essential characteristics of liabilities Search String: liability and characteristic CON6, Par36 A liability has three essential characteristics: (a) it embodies a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand, (b) the duty or responsibility obligates a particular entity, leaving it little or no discretion to avoid the future sacrifice, and (c) the transaction or other event obligating the entity has already happened (c) Uncertainty, and its effects on financial statements Search Strings: “uncertainty”, effect of uncertainty CON6, Par44 Uncertainty about economic and business activities and results is pervasive, and it often clouds whether a particular item qualifies as an asset or a liability of a particular entity at the time the definitions are applied The presence or absence of future economic benefit that can be obtained and controlled by the entity or of the entity’s legal, equitable, or constructive obligation to sacrifice assets in the future can often be discerned reliably only with hindsight As a result, some items that with hindsight actually qualified as assets or liabilities of the entity under the definitions may, as a practical matter, have been recognized as expenses, losses, revenues, or gains or remained unrecognized in its financial statements because of uncertainty about whether they qualified as assets or liabilities of the entity or because of recognition and measurement considerations stemming from uncertainty at the time of assessment Conversely, some items that with hindsight did not qualify under the definitions may have been included as assets or liabilities because of judgments made in the face of uncertainty at the time of assessment CON6, Par45 An effect of uncertainty is to increase the costs of financial reporting in general and the costs of recognition and measurement in particular Some items that qualify as assets or liabilities under the definitions may therefore be recognized as expenses, losses, revenues, or gains or remain unrecognized as a result of cost and benefit analyses indicating that their formal incorporation in financial statements is not useful enough to justify the time and effort needed to it It may be possible, for example, to make the information more reliable in the face of uncertainty by exerting greater effort or by spending more money, but it also may not be worth the added cost Note to instructors: The FASB codification does not contain the Concepts Statements However, the Concepts Statements can be accessed at another link on the FASB website 3-80 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com PROFESSIONAL RESEARCH (Continued) (d) The difference between realization and recognition Search String: realization, recognition CON6, Par143 Realization in the most precise sense means the process of converting noncash resources and rights into money and is most precisely used in accounting and financial reporting to refer to sales of assets for cash or claims to cash The related terms realized and unrealized therefore identify revenues or gains or losses on assets sold and unsold, respectively Those are the meanings of realization and related terms in the Board’s conceptual framework Recognition is the process of formally recording or incorporating an item in the financial statements of an entity Thus, an asset, liability, revenue, expense, gain, or loss may be recognized (recorded) or unrecognized (unrecorded) Realization and recognition are not used as synonyms, as they sometimes are in accounting and financial literature Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 3-81 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ... Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTIONS... 7,000 Kieso, Intermediate Accounting, 13/e, Solutions Manual 7,000 (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTIONS... Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com