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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