Solutions to exercises chap 3

20,589 views
20,204 views

Published on

financial & managerial accounting 15th edition solutions manual

0 Comments
10 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
20,589
On SlideShare
0
From Embeds
0
Number of Embeds
8
Actions
Shares
0
Downloads
369
Comments
0
Likes
10
Embeds 0
No embeds

No notes for slide

Solutions to exercises chap 3

  1. 1. SOLUTIONS TO EXERCISES Ex. 3–1 a. Accounting period b. Accounting cycle c. None (This statement describes the accounting convention of conservatism.) d. Net income e. Realization principle f. Credit g. Matching principle h. Expenses Ex. 3–2 a. 1. Journalize transactions. 2. Post transaction data to the ledger. 3. Prepare a trial balance. 4. Make end-of-period adjustments. 5. Prepare an adjusted trial balance. 6. Prepare financial statements. 7. Journalize and post closing entries. 8. Prepare an after-closing trial balance. b. 1. Evaluate the efficiency of operations. 2. Establish accountability for assets and transactions. 3. Maintain a documentary record of business activities. 4. Help make business decisions.
  2. 2. Ex. 3–3 a. Costs of owning and operating an automobile (estimates will vary; the following list is only an example): Insurance................................................................................................................. Gasoline (15,000 miles at 20 mpg. × $1.20/gal.)..................................................... Registration and license.......................................................................................... Repairs and maintenance......................................................................................... Depreciation............................................................................................................ Interest on car loan*................................................................................................ Annual total............................................................................................................. Average cost per mile ($3,900 ÷ 15,000 miles)....................................................... $1,000 900 100 200 1,200 500 $ 3,900 $ 0.26 *Note to instructor: It is worth noting that including both depreciation and the “principal” portion of the car loan would be “double-counting” the purchase price of the car. Depreciation issues are introduced in Chapter 4. b. Although you spent no money during this trip, you incurred significant costs. For example, you have used much of the gasoline in your tank. Also, the more miles you drive, the higher your repair and maintenance costs, depreciation, and insurance. Assuming that it cost you about 26 cents per mile to own and operate your vehicle, about $26 would be a reasonable estimate of your “driving expenses.” Note to instructor: Most employers do base their reimbursement of driving expenses on an average cost per mile. In a sophisticated class, you may want to point out that the incremental costs of this trip are much less than the average cost. Thus, employees usually benefit somewhat in the short-term when they are reimbursed for using their own cars. Ex. 3–4 Oct.   1 Cash.......................................................................................... Capital Stock................................................................. Issued capital stock at $20 per share. 100,000   4 Computer Equipment................................................................ Cash.............................................................................. Notes Payable................................................................ Purchased computer equipment by paying $15,000 cash and issuing a note payable for the remaining balance. 45,000 12 Notes Payable........................................................................... Cash.............................................................................. Paid note payable to West Milton State Bank. 11,000 19 Office Supplies.......................................................................... Accounts Payable.......................................................... Purchased office supplies on account. 300 25 Cash.......................................................................................... Accounts Receivable..................................................... Collected amount owed from Lewisburg School District. 12,000 30 Dividends.................................................................................. Cash.............................................................................. Declared and paid cash dividend. 6,000 100,000 15,000 30,000 11,000 300 12,000 6,000
  3. 3. 120,000 70,000 58,600 15 Office Equipment...................................................................... Accounts Payable.......................................................... Purchased office equipment on account. 3,200 21 Accounts Payable...................................................................... Office Equipment.......................................................... Returned some of the office equipment purchased on November 15. 480 25 Notes Payable........................................................................... Cash.............................................................................. Paid note payable. 12,000 30 Vehicles.................................................................................... Cash.............................................................................. Notes Payable................................................................ Purchased vehicles by paying $1,400 cash and issuing a note payable for the remaining balance. Ex. 3–6 Nov.   1 Cash.......................................................................................... Capital Stock................................................................. Issued stock in exchange for cash.   8 Land.......................................................................................... Building.................................................................................... Cash.............................................................................. Notes Payable................................................................ Purchased land and building, by paying $33,600 cash and issuing a note payable for the remaining balance. Ex. 3–5 9,400 AVENSON INSURANCE COMPANY Trial Balance November 30, 20__ Cash........................................................................................................... Land........................................................................................................... Building..................................................................................................... Office equipment........................................................................................ Vehicles..................................................................................................... Notes payable............................................................................................. Accounts payable....................................................................................... Capital stock............................................................................................... 120,000 33,600 95,000 3,200 480 12,000 1,400 8,000 $ 73,000 70,000 58,600 2,720 9,400 $ 213,720 $ 91,000 2,720 120,000 $ 213,720
  4. 4. Ex. 3–7 Owners’ equity was $200,000 at the beginning of the year ($300,000 - $100,000), and $225,000 at the end of the year ($335,000 - $110,000). Thus, owners’ equity increased by $25,000 during the year. Net income (or loss) for the year can be computed as follows: Increase in = Capital Stock + Owners’ Equity Issued Net Income Dividends a. $25,000 $ 0 $25,000 $ 0 b. $25,000 $20,000 $ 5,000 $ 0 c. $25,000 $ 0 $35,000 $10,000 d. $25,000 $30,000 $10,000 $15,000 e. $25,000 $35,000 ( $10,000)* $ 0 *Brackets signify a net loss. Ex. 3–8 Income Statement Transaction 1. 2. 3. 4. 5. 6. Balance Sheet Net Revenue − Expenses = Income I NE NE NE NE NE Ex. 3–9 a. NE NE NE I NE NE I NE NE D NE NE Assets = Liabilities + I D NE NE I D Income Statement Transaction 1. 2. 3. 4. 5. 6. 7. 8. I NE NE NE I NE NE NE I NE NE D NE D Balance Sheet Net Revenue − Expenses = Income NE I NE NE NE NE NE NE NE D NE I I NE Owners’ Equity D I NE NE D NE NE NE Assets = Liabilities + NE I D I D NE I D I NE NE I NE NE I D Owners’ Equity D I D NE D NE NE NE
  5. 5. b. 1. 2. 3. 4. 5. 6. 7. Incurred wages expense to be paid at a later date. Earned revenue to be collected at a later date. Declared and paid a cash dividend. Purchased office supplies on account. Incurred and paid repairs expense. Collected cash from a customer for revenue earned previously on account. Purchased tools and equipment by paying part in cash and issuing a note payable for the remaining balance. 8. Paid an outstanding account payable. Ex. 3–10 a. An investment by stockholders does not constitute revenue. Although this investment causes an increase in owners’ equity, this increase was not earned. It did not result from the rendering of services or sale of merchandise to outsiders. b. The collection of an account receivable does not increase owners’ equity and does not represent revenue. c. The borrowing of money from a bank creates a liability; it does not increase the owners’ equity and does not represent revenue. d. The interest was earned in May and represents revenue of that month, despite the fact that no withdrawals were made from the bank. e. This fee was earned in May and represents revenue of that month, despite the fact that collection will not be made until June. Ex. 3–11 a. Purchase of a copying machine does not represent expense. The asset Cash is exchanged for the asset Office Equipment, without any change in owners’ equity. The purpose of the transaction was to obtain the use of the copier over a number of years, rather than to generate revenue only during the current period. (Evergreen will recognize depreciation expense on this asset throughout its useful life, but the purchase does not represent an expense in March. Depreciation issues are introduced in Chapter 4.) b. Gasoline purchased is an expense because it is ordinarily used up in the current period. These purchases decrease the owners’ equity and are for the purpose of generating revenue. c. Payment to an employee for services rendered in March is a March expense. Such a payment is made to generate revenue and decreases owners’ equity. d. The payment to the attorney for services rendered in a prior period reduced an existing liability but did not affect the owners’ equity. The payment was not an expense. e. The dividend does not constitute an expense. Unlike payments for advertising, rent, and supplies, dividends do not generate revenue. Dividends constitute a return to stockholders of a portion of their equity in the business.
  6. 6. Ex. 3–12 a. Apr.   5 Accounts Receivable.......................................................... Drafting Fees Earned.............................................. Prepared plans for Spangler Construction; payment due in 30 days. 900 May 17 Dividends........................................................................... Dividends Payable.................................................. Declared cash dividend; payment due June 25. 5,000 May 29 Professional Expenses........................................................ Accounts Payable.................................................... Received accounting bill from Bob Needham due on June 10. 2,000 June   4 Cash.................................................................................... Accounts Receivable............................................... Received full payment from Spangler Construction for bill sent April 5. 900 June 10 Accounts Payable............................................................... Cash........................................................................ Paid amount owed to Bob Needham, CPA. 2,000 June 25 Dividends Payable.............................................................. Cash........................................................................ Paid cash dividend declared May 17. 5,000 900 5,000 2,000 900 2,000 5,000 b. The following transactions will not cause a change in net income. May 17: June 4: June 10: June 25: Declaration of a cash dividend. Collection of an account receivable. Payment of an account payable. Payment of a dividend payable. Ex. 3–13 a. The company’s balance sheet is dated December 31. Thus, it is apparent that its financial year coincides with the calendar year. b. 1998: $487,423 = $90,966 + $396,457 1999: $529,416 = $98,770 + $430,646 c. The company’s cash (and cash equivalents) increased from $80,744 at the beginning of the year, to $88,504 at the end of the year. Thus, it had to have posted more debits than credits to cash (and cash equivalents). Note that these figures are stated in thousands of dollars.
  7. 7. SOLUTIONS TO PROBLEMS 30 Minutes, Medium PROBLEM 3–1 HEARTLAND CONSTRUCTION a. General Journal 20__ Feb. 1 Cash 500000 Capital Stock 10 Land Office Building Cash Notes Payable 16 Computer Systems Cash 18 Office Furnishings Cash Accounts Payable 22 Office Supplies Cash 23 Accounts Receivable Computer Systems 27 Accounts Payable Cash 28 Cash 500000 100000 200000 60000 240000 12000 12000 9000 1000 8000 300 300 36 36 4000 4000 36 Accounts Receivable 36 PROBLEM 3–1
  8. 8. HEARTLAND CONSTRUCTION (concluded) b. Transaction Feb. 1 Assets + $500,000 (Cash) = Liabilities $0 + Owners’ Equity + $500,000 (Capital Stock) Feb. 10 + $100,000 (Land) + $200,000 (Office Building) – $60,000 (Cash) + $240,000 (Notes Payable) $0 Feb. 16 + $12,000 (Computer Systems) – $12,000 (Cash) $0 $0 Feb. 18 + $9,000 (Office Furnishings) – $1,000 (Cash) + $8,000 (Accounts Payable) $0 Feb. 22 + $300 (Office Supplies) – $300 (Cash) $0 $0 Feb. 23 + $36 (Accounts Receivable) – $36 (Computer Systems) $0 $0 Feb. 27 – $4,000 (Cash) - $4,000 (Accounts Payable) $0 Feb. 28 + $36 (Cash) – $36 (Accounts Receivable) $0 $0 30 Minutes, Medium PROBLEM 3–2 ENVIRONMENTAL SERVICES, INC.
  9. 9. a. (1) (a) The asset Accounts Receivable was increased. Increases in assets are recorded by debits. Debit Accounts Receivable, $2,500. (b) Revenue has been earned. Revenue increases owners’ equity. Increases in owners’ equity are recorded by credits. Credit Testing Service Revenue, $2,500. (2) (a) The asset Testing Supplies was increased. Increases in assets are recorded by debits. Debit Testing Supplies, $3,800. (b) The asset Cash was decreased. Decreases in assets are recorded by credits. Credit Cash, $800. (c) The liability Accounts Payable was increased. Increases in liabilities are recorded by credits. Credit Accounts Payable, $3,000. (3) (a) The liability Accounts Payable was decreased. Decreases in liabilities are recorded by debits. Debit Accounts Payable, $100. (b) The asset Testing Supplies was decreased. Decreases in assets are recorded by credits. Credit Testing Supplies, $100. (4) (a) The asset Cash was increased. Increases in assets are recorded by debits. Debit Cash, $20,000. (b) The owners’ equity account Capital Stock was increased. Increases in owners’ equity are recorded by credits. Credit Capital Stock, $20,000. (5) (a) The asset Cash was increased. Increases in assets are recorded by debits. Debit Cash, $600. (b) The asset Accounts Receivable was decreased. Decreases in assets are recorded by credits. Credit Accounts Receivable, $600. (6) (a) The liability Accounts Payable was decreased. Decreases in liabilities are recorded by debits. Debit Accounts Payable, $2,900 ($3,800 - $800 - $100). (b) The asset Cash was decreased. Decreases in assets are recorded by credits. Credit Cash, $2,900. (7) (a) The Dividends account was increased. Dividends decrease the owners’ equity account Retained Earnings. Decreases in owners’ equity are recorded by debits. Debit Dividends, $6,800. (b) The asset Cash was decreased. Decreases in assets are recorded by credits. Credit Cash, $6,800. PROBLEM 3–2 ENVIRONMENTAL SERVICES, INC. (continued)
  10. 10. b. General Journal 20__ (1) Aug. 1 Accounts Receivable Testing Service Revenue Billed customers for services rendered. 2500 2500 (2) 3 Testing Supplies Cash Accounts Payable Purchased testing supplies. 3800 800 3000 (3) 5 Accounts Payable Testing Supplies Returned portion of testing supplies puchased on Aug. 3. 100 100 (4) 17 Cash 20000 Capital Stock Issued 2,500 shares of capital stock at $8 per share. 20000 (5) 22 Cash 600 Accounts Receivable Received partial payment for services billed on Aug. 1. (6) 29 Accounts Payable Cash Paid outstanding balance owed for testing supplies purchased on Aug. 3. (7) 30 Dividends Cash Declared and paid a cash dividend. 600 2900 2900 6800 6800 PROBLEM 3–2 ENVIRONMENTAL SERVICES, INC. (concluded)
  11. 11. c. The realization principle requires that revenue be recorded when it is earned, even if cash for the goods or services provided has not been received. d. The matching principle requires that revenue earned during an accounting period be matched (offset) with expenses incurred in generating this revenue. Testing supplies are recorded as an asset when they are first purchased. As these supplies are used in a particular accounting period, their cost will be matched against the revenue earned in that period. 35 Minutes, Medium a. PROBLEM 3–3 WEIDA SURVEYING, INC. Income Statement Transaction Sept. 1 Sept. 3 Sept. 9 Sept. 14 Sept. 25 Sept. 26 Sept. 29 Sept. 30 Balance Sheet Net Revenue − Expenses = Income NE I D I NE I I NE I NE I D NE NE NE I NE I NE NE NE NE NE NE Owners’ Assets = Liabilities + Equity D I I NE NE I D D NE NE NE I NE NE D NE D I I D NE I NE D PROBLEM 3–3 WEIDA SURVEYING, INC. (concluded)
  12. 12. b. General Journal Sept. 1 Rent Expense Cash Paid September rent. 4400 4400 3 Accounts Receivable Surveying Revenue Billed Fine Line Homes for surveying services. 5620 9 Cash 2830 5620 Surveying Revenue Collected cash from Sunset Ridge Development for services provided. 14 Advertising Expense Accounts Payable Placed ad in the newspaper to be published on Sept. 20. Total amount due in 30 days. 25 Cash 2830 165 165 5620 Accounts Receivable Received payment from Fine Line Homes for services billed on Sept. 3. 26 Cash Accounts Receivable Surveying Revenue Collected partial payment from Thompson and billed remainder. 29 Accounts Payable Cash Paid newspaper for advertisement published on Sept. 20. 30 Dividends Cash Declared and paid a cash dividend. c. 5620 400 1490 1890 165 165 7600 7600 Three situations in which a cash payment does not involve an expense include: (1) the payment of a cash dividend, (2) the payment of a liability for a previously recorded expense, and (3) the purchase of an asset, including expenses paid in advance such as insurance, rent, and advertising. 50 Minutes, Strong a. PROBLEM 3–4 AERIAL VIEWS Income Statement Transaction Net Revenue − Expenses = Income Balance Sheet Assets = Liabilities + Owners’ Equity
  13. 13. June 1 June 2 June 4 June 15 June 15 June 18 June 25 June 30 June 30 June 30 June 30 NE NE NE I NE NE NE I NE NE NE NE NE I NE I I NE NE I I NE NE NE D I D D NE I D D NE I I D I D D NE I D NE NE NE I NE NE NE NE NE NE NE I I I NE D I D D NE I D D D PROBLEM 3–4 AERIAL VIEWS (continued)
  14. 14. b. General Journal 2002 June 1 Cash 60000 Capital Stock Issued stock to Wendy Winger. 60000 2 Aircraft Cash Notes Payable Purchased plane from Utility Aircraft. 220000 4 Rent Expense Cash Paid office and hangar rent for June. 2500 40000 180000 2500 15 Accounts Receivable Aerial Photography Revenue Paid salaries for first half of June. 8320 15 Salaries Expense Cash Paid salaries for first half of June. 5880 18 Maintenance Expense Cash Paid Hannigan's Hangar for repair services. 1890 25 Cash 4910 8320 5880 1890 Accounts Receivable Collected portion of amount billed to customers. 4910 30 Accounts Receivable Aerial Photography Revenue Billed customers for services rendered through month-end. 16450 16450 30 Salaries Expense Cash Paid salaries through month-end. 6000 30 Fuel Expense Accounts Payable Received bill for fuel used during June. 2510 30 Dividends Dividends Payable Declared dividend payable July 15. 6000 2510 2000 2000 PROBLEM 3–4 AERIAL VIEWS (continued)
  15. 15. c. Date 2002 June 1 2 4 15 18 25 30 Explanation Date 2002 June 15 25 30 Explanation Date 2002 June 2 Explanation Date 2002 June 2 Explanation Date 2002 June 30 Explanation Cash Debit Credit Balance 60000 40 2 5 1 0 5 8 8 0 0 8 9 0 0 0 0 4910 6000 Accounts Receivable Debit Credit 8320 4910 16450 Aircraft Debit Credit 220000 Notes Payable Debit 6 2 1 1 0 0 7 1 9 14 8 0 0 5 6 7 6 6 0 0 0 2 3 4 4 0 0 0 0 0 0 0 Balance 8320 3410 19860 Balance 220000 Balance 180000 Accounts Payable Debit Credit 180000 Credit Balance 2510 2510 PROBLEM 3–4 AERIAL VIEWS (continued)
  16. 16. Date 2002 June 30 Explanation Date 2002 June 1 Explanation Date 2002 June 30 Explanation Date 2002 June 15 30 Explanation Date 2002 June 18 Explanation Dividends Payable Debit Credit 2000 Capital Stock Debit Credit 60000 Dividends Debit Credit 2000 Aerial Photography Revenue Debit 1890 2000 Balance 60000 Balance 2000 Credit 8320 16450 Maintenance Expense Debit Balance Credit Balance 8320 24770 Balance 1890 PROBLEM 3–4 AERIAL VIEWS (continued)
  17. 17. Date 2002 June 30 Explanation Date 2002 June 15 30 Explanation Date 2002 June 4 Explanation Fuel Expense Debit Credit 2510 Salaries Expense Debit 2510 Credit 5880 6000 Rent Expense Debit 2500 Balance Balance 5880 11880 Credit Balance 2500 PROBLEM 3–4 AERIAL VIEWS (continued)
  18. 18. d. Cash Accounts receivable Aircraft Notes payable Accounts payable Dividends payable Capital stock Retained earnings Dividends Aerial photography revenue Maintenance expense Fuel expense Salaries expense Rent expense AERIAL VIEWS Trial Balance June 30, 2002 $ 8640 19860 220000 $180 2 2 60 0 5 0 0 0 1 0 0 0 0 0 0 0 2000 24770 1 2 11 2 $269 8 5 8 5 2 9 1 8 0 8 0 0 0 0 0 $269280 PROBLEM 3–4 AERIAL VIEWS (concluded)
  19. 19. e. Total assets: Cash Accounts receivable Aircraft Total assets Total liabilities: Notes payable Accounts payable Dividends payable Total liabilities Total stockholders’ equity: Total assets - total liabilities ($248,500 - $184,510) $ 8640 19860 220000 $248500 $180000 2510 2000 $184510 $ 63990 (Alternate computation—net all owners’ equity accounts, permanent and temporary: $60,000 − $2,000 + $24,770 − $1,890 − $2,510 − $11,880 − $2,500) The above figures are most likely not the amounts to be reported in the balance sheet dated June 30. The accounting cycle includes adjustments that must be made to the trial balance figures before financial statements are prepared. The adjusting process is covered in Chapter 4. 60 Minutes, Strong PROBLEM 3–5 DR. SCHEKTER, DVM
  20. 20. a. Income Statement Transaction May 1 May 4 May 9 May 16 May 21 May 24 May 27 May 28 May 31 Net Revenue − Expenses = Income NE NE NE NE NE NE NE NE NE NE NE NE NE NE NE I NE I NE D D NE NE NE NE I D Balance Sheet Assets = Liabilities + I I NE I NE I NE NE D NE I NE I NE NE I NE NE Owners’ Equity I NE NE NE NE I D NE D PROBLEM 3–5 DR. SCHEKTER, DVM (continued)
  21. 21. b. General Journal 2002 May 1 Cash 400000 Capital Stock Issued 5,000 shares of capital stock. 400000 4 Land Building Cash Notes Payable Purchased land and building. 70000 180000 9 Medical Instruments Cash Purchased medical instruments. 130000 100000 150000 130000 16 Office Fixtures & Equipment Cash Accounts Payable Purchased fixtures and equipment. 50000 20000 30000 21 Office Supplies Cash Purchased office supplies. 5000 24 Cash Accounts Receivable Veterinary Service Revenue Recorded veterinary service revenue earned. 1900 300 5000 2200 27 Advertising Expense Accounts Payable Recorded advertising expense incurred in May. 400 28 Cash 100 400 Accounts Receivable Collected cash for May 24 services. 31 Salary Expense Cash Paid May salary expense. 100 2800 2800 PROBLEM 3–5 DR. SCHEKTER, DVM (continued) c.
  22. 22. May 1 Cash 400,000 May 4 May 24 1,900 May 9 May 28 100 May 24 May 31 Bal. May 21 May 31 Bal. May 9 May 31 Bal. 100,00 0 130,00 0 20,000 May 21 May 31 May31 Bal. May 16 Notes Payable May 4 5,000 2,800 May 31 Bal. Accounts Receivable 300 May 28 Accounts Payable May 16 May 27 May 31 Bal. 100 200 Office Supplies 5,000 30,000 400 30,400 Capital Stock May 1 5,000 May 31 Bal. Medical Instruments 130,000 Veterinary Service Revenue May 24 130,000 May 31 Bal. May 27 May 31 Bal. May 31 Bal. May 31 Bal. 150,00 0 144,200 Office Fixtures & Equipment May 16 50,000 May 4 150,00 0 50,000 Land 70,000 70,000 Building May 31 May 31 Bal. Advertising Expense 400 400 Salary Expense 2,800 2,800 400,00 0 400,00 0 2,200 2,200
  23. 23. May 4 180,000 May 31 Bal. 180,000 PROBLEM 3–5 DR. SCHEKTER, DVM (continued) d. Cash Accounts receivable Office supplies Medical instruments Office fixtures & equipment Land Building Notes payable Accounts payable Capital stock Retained earnings Veterinary service revenue Advertising expense Salary expense DR. SCHEKTER, DVM Trial Balance May 31, 2002 $14420 20 500 13000 5000 7000 18000 0 0 0 0 0 0 0 $150000 30400 400000 0 2200 400 2800 $582600 $582600 PROBLEM 3–5 DR. SCHEKTER, DMV (concluded)
  24. 24. e. Total assets: Cash Accounts receivable Office supplies Medical instruments Office fixtures & equipment Land Building Total assets $1442 2 50 1300 500 700 1800 Total liabilities: Notes payable Accounts payable Total liabilities $150000 30400 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $579400 $180400 Total owners' (stockholders’) equity: Total assets − total liabilities ($579,400 − $180,400) $399000 As shown below, the business was not profitable in its first month of operations: Veterinary service revenue Less: Advertising expense Salary expense $ $ Net loss Note to Instructor: It is not uncommon for new small businesses to initially report a net loss from operations. In this particular situation, there were so few revenue and expense transactions in May that it is difficult, if not impossible, to draw any conclusions about the expected performance of the veterinary clinic in the future. 2200 $ 3200 ( 1000) 400 2800

×