SOLUTIONS TO EXERCISES - CHAPTER 7 [PDF]

Assets. = Liabilities. +. Equity. Cash. Retained Earnings. 20X4. 20X4. 2. 8,000. cl. 9,900. Bal. 8,000. Bal. 9,900. 20X5

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SOLUTIONS TO EXERCISES - CHAPTER 7 EXERCISE 7-1 a. Scott Cleaning Service T-Accounts



Assets







=

Cash

Liabilities





20X4 2. 8,000 Bal. 8,000 20X5 3. 9,000









Bal. 17,000







Accounts Receivable





+



Equity











Retained Earnings 20X4 cl 9,900 Bal. 9,900





















cl



















Bal. -0-



20X5 2. 12,000 Bal. 12,000



Revenue 20X4 1. 10,000

10,000

20X4 1. 10,000 Bal. 2,000 20X5 2. 12,000

2. 1.

8,000 80















Bal. 4,920

3.

9,000













20X4 3. 100 Bal. -020X5

cl

100













4. Bal.





Allow. for Bad Debts 1.

20X4 3. 100 Bal. 100 20X5 4. 226 Bal. 246

80

Bad Debts Expense

226 226

EXERCISE 7-1 (cont.) b. Scott Cleaning Service Financial Statements For the Period Ended December 31, 20X4

Income Statement



















Bad Debt Expense



(100)









$ 9,900













$ -0-





-0-







$ -0-







Beginning Retained Earnings Plus: Net Income Ending Retained Earnings

-09,900











9,900





















Revenue Expenses Net Income



$10,000

Statement of Changes in Equity



Beginning Contributed Capital Plus: Capital Acquisitions Ending Contributed Capital



Total Equity

$9,900



EXERCISE 7-1 b. (cont.) Scott Cleaning Service Financial Statements















Balance Sheet As December 31, 20X4





Cash



$8,000





Accounts Receivable







Less: Allow. for Doubtful Acct.

$2,000 (100)

1,900





Total Assets





$9,900























Contributed Capital Retained Earnings

$ -0-







Total Equity



9,900





















Assets

Liabilities Equity

$ - 0-

9,900

Total Liabilities and Equity

$9,900



Statement of Cash Flows For the Period Ending December 31, 20X4





Inflow from Customers









Cash Flows From Operating Activities: Cash Flows From Investing Activities Cash Flows From Financing Activities Net Change in Cash Plus: Beginning Cash Balance Ending Cash Balance









$8,000 -0-



-0-



8,000



-0-



$8,000







EXERCISE 7-1 (cont.) c. For accounting equation T-accounts, see a. above. Scott Cleaning Service Financial Statements



For the Period Ended December 31, 20X5

Income Statement



















Bad Debt Expense



(226)





















Revenue Expenses Net Income



$12,000

$11,774



Statement of Changes in Equity





$ -0-







Plus: Capital Acquisition

-0-









Ending Contributed Capital



$ -0-











$9,900 11,774





Beginning Retained Earnings Plus: Net Income Ending Retained Earnings









21,674





























Beginning Contributed Capital



Total Equity

$21,674







EXERCISE 7-1 c. (cont.) Scott Cleaning Service Financial Statements

Balance Sheet As of December 31, 20X5











Cash



$17,000





Accounts Receivable







Less: Allow. for Doubtful Accts.

$ 4,920 (246)



Total Assets























Contributed Capital Retained Earnings

$ -0-







Total Equity



21,674



























$ 9,000 -0-



-0-



9,000



8,000



$17,000







Assets

Liabilities Equity

4,674 $21,674

$ -0-

21,674

Total Liabilities and Equity



$21,674

Statement of Cash Flows





Inflow from Customers









Cash Flows From Operating Activities: Cash Flows From Investing Activities Cash Flows From Financing Activities Net Change in Cash Plus: Beginning Cash Balance Ending Cash Balance





EXERCISE 7-2 Event



Assets = Liab. + Equity Rev. – Exp. = Net Inc.

1. 2. 3. 4.



+ + – – + –











n/a n/a n/a n/a





+ n/a – n/a









+ n/a n/a n/a









n/a n/a + n/a



















n/a

+ n/a – n/a



Cash Flow



+ OA n/a n/a











EXERCISE 7-3 a. Analyze the Accounts Receivable account: Accounts Receivable



Beginning Balance Plus: Revenue on Account Less: Write-off Less: Ending Balance Collections of Accounts Rec.

$ 1,000 5,000 ( 60) (1,200) $ 4,740





b. Analyze the Allowance for Doubtful Accounts account: Allowance for Doubtful Accounts



Beginning Balance Less: Write-off Less: Ending Balance Bad Debt Expense

$ 50 ( 60) ( 75) $ 85





Note to Instructor: This information can also be shown in T-Account format.

EXERCISE 7-4 Selected T-Accounts: Cash



20X7







2. 876 4. 188,000



















Accounts Receivable



Allowance for Doubt Acct. 12/31/X6

Bad Debt Expense



20X7



Bal. 2,784



5. 3,668



20X7







1. 3,240 2. 876 Bal. 420 5. 3,668 Bal. 4,088

















12/31/X6





Bal. 77,000





20X7















2. 876 1. 3,240 3. 196,000 2. 876 4. 188,000 Bal. 81,760

































































20X7 transactions: 1. Bad accounts written off: $3,240 2. Collected previously written off accounts: 876 3. Sales on account: 196,000 4. Collections of accounts receivable: 188,000 5. Uncollectible accounts; 5% of Acct. Rec. a. 1. Allowance for Doubtful Accounts, 12/31/X7: $ 4,088 2. Accounts Receivable, 12/31/X7 81,760 3. Net Realizable Value: $81,760 – $4,088 = 77,672 b. Bad Debt Expense 20X7 ($81,760 x 5%) = $4,088 - $420 = $3,668 c. The recovery of the previously written off account will cause two asset exchange transactions. First, reinstate the accounts receivable; + Accounts Receivable, +Allowance for Doubtful Accounts. Second, record the collection of the accounts receivable; +Cash, – Accounts Receivable.

EXERCISE 7-5 Accounts Receivable Allowance for Doubt. Accts. Cr. Sales 310,000 coll. 285,000 chg. Off 275est. 1,017 chg. Off 275 Bal. 742 Bal. 24,725









a. 1. $24,725 (see above) 2. $742 ($24,725 x 3%) 3. $1,017 (estimate of bad debts, see above) 4. $23,983 ($24,725 - $742) b. 1. $24,725 (same as above) 2. $275 (the amount charged off) 3. $24,725 (the balance of accounts receivable)

EXERCISE 7-9 Note: T-Accounts are provided for the use of the instructor. Assets

=





Cash Sales

Liabilities

+



Warranties Payable Pd. 150 Est. 6,300

Equity









Revenue Sales 105,000

Pur. 90,000





Pd. 150





Bal. 6,150





Bal. 14,850























Cost of Goods Sold Sold 90,000

Inventory Pur. 90,000 Sold 90,000 Bal. -0-



























Warranty Expense Est. 6,300











105,000











Wendy’s Computers Financial Statements

Income Statement Revenue







Cost of Goods Sold





Gross Margin





Warranty Expense





Net Income



















$105,000 (90,000) (150)















$14,850



Cash Flows From Investing Activities







Cash Flows From Financing Activities





Net Change in Cash





$105,000



(90,000)



15,000



(6,300)



$ 8,700

Statement of Cash Flows Cash Flows From Operating Activities:

Inflow from Customers Outflow for Inventory Outflow for Warranty Expense Net Cash Flow from Operating Expenses



Plus: Beginning Cash Balance Ending Cash Balance



-0-0-



14,850 -0$14,850















EXERCISE 7-9 (cont.) The difference between net income and cash flows from operating activities is the difference in the amount of warranty expense accrued and the amount actually paid. The estimated warranty expense based on a percent of sales amounted to $6,300, but only $150 of that amount was actually paid.

EXERCISE 7-10 a. Event



Assets = Liab. + Equity Rev. - Exp. = Net Inc.

Est.



n/a -

Pd.









+ -



b. Est.

c. Payment





n/a





Event











n/a n/a



+ n/a











n/a







Account Titles



Cash Flow





n/a - OA











Debit

Credit







Warranty Expense Warranty Payable

700





700







Warranty Payable Cash

298





298







d. Warranty obligations may be uncertain, but they usually represent legal liabilities that must be recognized in the accounts.

EXERCISE 7-11 Note: T-Accounts are provided for the use of the instructor. Cash 1. 90 ,000 2. 27,500 Bal. 117,500





Notes Payable 1. 100,000 Bal. 100,000





























Disc. on Notes Pay. 1. 10,000 3. 8,333 Bal. 1,667



Revenue 2. 27,500 Bal. 27,500















Interest Expense 3. 8,333* Bal. 8,333





* $10,000 x 10/12 = $8,333 a. Total Liabilities: Notes Payable Less: Discount on Notes Payable Total Liabilities

$100,000 (1,667) $ 98,333





b. Income Reported on the Income Statement: Revenue Less: Interest Expense Net Income

$27,500 (8,333) $19,167

c. Cash Flows From Operating Activities: Inflow from Customer $27,500

EXERCISE 7-11 (cont.) d. Tebett’s General Journal





Date

Account Titles



Debit

Credit







3/1/X6

Cash Discount on Notes Payable Notes Payable

90,000 10,000

100,000







12/31/X6

Interest Expenses Discount on Notes Payable

8,333





8,333







2/28/X7

Interest Expense Discount on Notes Payable

1,667





1,667







2/28/X7

Notes Payable Cash

100,000





100,000

















EXERCISE 7-12 a.

Balance Sheet Liabilities



Event

Assets

=





Cash

= Notes Pay.

1.

13,500

















Event



= 15,000

Cash



2.

15,000









Equity







+

= 15,000



+

Int. Pay.



Equity













n/a









= n/a

13,500 FA

















+ n/a



- n/a



Income Statement Rev. - Exp. = Net Inc.

+ Ret. Ear.

Statement of Cash Flows





+ n/a



+ n/a

Balance Sheet Liabilities

= Notes Pay.





- 1,500



Assets =



+

- Disc. on NP + Ret. Ear.



Income Statement Rev. - Exp. = Net Inc.



Statement of Cash Flows



















n/a









15,000 FA











- n/a

= n/a



b. Discount Note: 15,000 x 10% = $1,500 Short-Term Note: 15,000 x 10% = $1,500 c. Discount Note: Principal $13,500. Short-Term Note: Principal $15,000. d. Effective Interest Rate = Interest Paid ¸ Principal Amount Discount Note: $1,500 ¸ $13,500 = 11.11% Short-Term Note: $1,500 ¸ $15,000 = 10% The effective interest rate is higher for the discount note. Both notes paid the same amount of interest, but only $13,500 of cash was received from the loan for the discount note.

EXERCISE 7-13 Marque Dollar General Journal



Date



Account Titles



Debit

Credit







Cash Discount on Notes Payable Notes Payable

17,600 2,400





20,000







Interest Expense* Discount on Notes Payable

1,400





1,400







Interest Expense** Discount on Notes Payable

1,000





1,000







5/31/X7

Notes Payable Cash

20,000





20,000







a. 6/1/X6

b. 12/31/X6

c. 5/31/X7



*$2,400 x 7/12 = $1,400 **$2,400 x 5/12 = $1,000

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