Problemset c questions

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Problems: Set C 1

Problems: Set C
P1-1C Presented below are five independent situations. Determine forms of business
(a) Christy Petersen and Joel Dunn each owned separate plastic molding businesses. They organization.
have decided to combine their businesses. They expect that within the coming year (SO 1)
they will need significant funds to expand their operations.
(b) Three licensed physical therapists have been working in rehabilitation hospitals for
several years. They have decided to form a business that will provide therapy in clients’
homes. Each has contributed an equal amount of cash and knowledge to the ven-
ture. Although there appears to be a great need for their services, they are concerned
about the legal liabilities that their business might confront.
(c) Erik, Geoff, and Janna recently graduated with education degrees. They have been
friends since childhood. They have decided to start a consulting business focused on
assisting “home-schooled” students over the Internet.
(d) Ben Fullerton has been providing routine automotive maintenance and repair serv-
ices for several years. He performs his work in customers’ garages out of a cargo
van that contains tools, diagnostic equipment, and parts. Customers can continue
to work or relax at home while he services their vehicles. His business has been so
successful that several regular customers have suggested he expand its operations.
Ben is confident that he could find other mechanics to help provide the service but
knows the business would require a large investment of capital to outfit the vans.
He is also aware that working in customers’ homes could expose him to consider-
able liability. Ben has no savings or personal assets. He wants to maintain control
over the business.
(e) Chad Browne, a college student looking for summer employment, opened a flower
stand at a local farmers’ market.
Instructions
In each case explain what form of organization the business is likely to take—sole pro-
prietorship, partnership, or corporation. Give reasons for your choice.
P1-2C Financial decisions often place heavier emphasis on one type of financial Identify users and uses of
statement over the others. Consider each of the following hypothetical situations financial statements.
(SO 2, 4, 5)
independently.
(a) Nordstroms is considering extending credit to a new customer. The terms of the credit
would require the customer to pay within 30 days of receipt of goods.
(b) An investor is considering purchasing common stock of Home Depot Company. The
investor plans to hold the investment for at least 5 years.
(c) Wells Fargo is considering extending a loan to a small company. The company would
be required to make interest payments at the end of each year for 5 years, and to re-
pay the loan at the end of the fifth year.
(d) The president of American Greetings is trying to determine whether the company
is generating enough cash to increase the amount of dividends paid to investors
in this and future years, and still have enough cash to buy equipment as it is
needed.

Instructions
In each situation, state whether the decision maker would be most likely to place primary
emphasis on information provided by the income statement, balance sheet, or statement
of cash flows. In each case provide a brief justification for your choice. Choose only one
financial statement in each case.
P1-3C On August 1 Copicat Inc. was started with an initial investment in Prepare an income
the company of $10,000 cash. Here are the assets and liabilities of the company at statement, retained earnings
statement, and balance sheet,
August 31, and the revenues and expenses for the month of August, its first month of
and discuss results.
operations: (SO 4, 5)
Cash $ 3,800 Notes payable $6,000
Accounts receivable 1,000 Accounts payable 900
Revenue 11,000 Supplies expense 3,000
Supplies 1,800 Rent expense 1,600
Advertising expense 500 Utilities expense 200
Equipment 12,000 Wage expense 3,400

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2 CHAPTER 1 Introduction to Financial Statements

Marginal check figures In August, the company issued no additional stock, but paid dividends of $600.
(in blue) provide a key
number to let you know Instructions
you’re on the right track. (a) Prepare an income statement and a retained earnings statement for the month of
(a) Net income $2,300 August and a balance sheet at August 31, 2007.
Ret. earnings $1,700 (b) Briefly discuss whether the company’s first month of operations was a success.
Tot. assets $18,600 (c) Discuss the company’s decision to distribute a dividend.
Determine items included in P1-4C Presented below is selected financial information for Showalter Corporation for
a statement of cash flows, December 31, 2007.
prepare the statement, and
comment. Inventory $ 19,000 Cash paid to purchase equipment $ 8,000
(SO 4, 5) Cash paid to suppliers 76,000 Equipment 40,000
Building 200,000 Revenues 87,000
Common stock 40,000 Cash received from customers 93,000
Cash dividends paid 4,000 Cash received from issuing
common stock 18,000

Instructions
(a) Net increase $23,000 (a) Determine which items should be included in a statement of cash flows and then pre-
pare the statement for Showalter Corporation.
(b) Comment on the adequacy of net cash provided by operating activities to fund the
company’s investing activities and dividend payments.
Comment on proper P1-5C Julius Corporation was formed on January 1, 2007. At December 31, 2007, Dan
accounting treatment and Jasper, the president and sole stockholder, decided to prepare a balance sheet, which ap-
prepare a corrected balance peared as follows.
sheet.
(SO 4, 5)
JULIUS CORPORATION
Balance Sheet
December 31, 2007

Assets Liabilities and Stockholders’ Equity
Cash $20,000 Accounts payable $40,000
Accounts receivable 39,000 Notes payable 15,000
Motorcycle 17,000 Motorcycle loan 14,000
Truck 20,000 Stockholders’ equity 27,000
Dan willingly admits that he is not an accountant by training. He is concerned that his
balance sheet might not be correct. He has provided you with the following additional
information.
1. The motorcycle actually belongs to Jasper, not to Julius Corporation. However, because
he thinks he might use it to visit customers occasionally, he decided to list it as an as-
set of the company. To be consistent he also listed as a liability of the corporation his
personal loan that he took out at the bank to buy the motorcycle.
2. The truck was purchased for only $18,000, even though Dan knows its “sticker price”
was $20,000. He thought it would be best to record it at $20,000.
3. Included in the accounts receivable balance is $8,000 that Dan expects to collect from
a customer for a sale that he anticipates will occur in January. Dan included this in
the receivables of Julius Corporation because he has already discussed the potential
sale with the customer.

Instructions
(a) Comment on the proper accounting treatment of the three items above.
Tot. assets $69,000 (b) Provide a corrected balance sheet for Julius Corporation. (Hint: To get the balance
sheet to balance, adjust stockholders’ equity.)

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Problems: Set C 3

Problems: Set C
P2-1C The following items are taken from the 2004 balance sheet of Starbucks Corpo- Prepare a classified balance
ration. (All dollars are in thousands.) sheet.
(SO 1)
Intangible assets $ 95,750
Common stock 996,078
Property and equipment, net 1,551,416
Accounts payable 199,346
Other assets 85,561
Long-term investments 306,926
Accounts receivable 140,226
Prepaid expenses and other current assets 134,997
Short-term investments 353,881
Retained earnings 1,478,140
Cash and cash equivalents 299,128
Long-term debt 3,618
Accrued expenses and other current liabilities 425,536
Unearned revenue—current 121,377
Other long-term liabilities 166,453
Inventories 422,663

Instructions
Prepare a classified balance sheet for Starbucks Corporation as of October 3, 2004. Tot. current assets $1,350,895
Tot. assets $3,390,548
P2-2C These items are taken from the financial statements of Graham Corporation for 2007. Prepare financial statements.
(SO 1, 3)
Retained earnings (beginning of year) $26,000
Utilities expense 3,000
Equipment 38,000
Accounts payable 2,400
Cash 20,700
Salaries payable 1,700
Common stock 15,000
Dividends 7,000
Service revenue 77,000
Prepaid insurance 1,950
Repair expense 1,800
Depreciation expense 5,300
Insurance expense 3,900
Salaries expense 44,000
Accumulated depreciation 12,400

Instructions
Prepare an income statement, a retained earnings statement, and a classified balance Net income $19,000
sheet as of December 31, 2007. Tot. assets $57,100

P2-3C You are provided with the following information for Barnette Enterprises, effec- Prepare financial statements.
tive as of its September 30, 2007, year-end. (SO 1, 3)

Accounts payable $ 6,300
Building, net of accumulated depreciation 37,000
Cash 2,600
Common stock 10,000
Cost of goods sold 22,000
Current portion of long-term debt 5,000
Depreciation expense 2,900
Dividends paid during the year 1,800

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4 CHAPTER 2 A Further Look at Financial Statements

Equipment, net of accumulated depreciation 14,000
Income tax expense 2,550
Income taxes payable 700
Interest expense 3,400
Inventories 4,800
Land 16,000
Long-term debt 31,000
Prepaid expenses 1,350
Retained earnings, beginning 21,300
Revenues 56,800
Selling expenses 2,700
Wages expense 15,600
Wages payable 1,100
Instructions
Net income $7,650 (a) Prepare an income statement and a retained earnings statement for Barnette
Tot. current assets $14,250 Enterprises for the year ended September 30, 2007.
Tot. assets $81,250 (b) Prepare a classified balance sheet for Barnette Enterprises as of September 30, 2007.
Compute ratios; comment on P2-4C Comparative financial statement data for Batman Corporation and Spiderman Cor-
relative profitability, liquidity, poration, two competitors, appear below. All balance sheet data are as of December 31, 2007.
and solvency.
(SO 2, 4, 5) Batman Corporation Spiderman Corporation
2007 2007
Net sales $269,000 $504,000
Cost of goods sold 130,000 248,000
Operating expenses 80,000 132,000
Interest expense 12,000 6,000
Income tax expense 18,000 44,000
Current assets 146,000 182,000
Plant assets (net) 105,000 86,000
Current liabilities 44,000 106,000
Long-term liabilities 87,000 41,000
Additional information:
Cash from operating activities $36,000 $43,000
Capital expenditures $15,000 $28,000
Dividends paid $8,000 $10,000
Average number of shares
outstanding 30,000 40,000
Instructions
(a) Comment on the relative profitability of the companies by computing the net income
and earnings per share for each company for 2007.
(b) Comment on the relative liquidity of the companies by computing working capital
and the current ratios for each company for 2007.
(c) Comment on the relative solvency of the companies by computing the debt to total
assets ratio and the free cash flow for each company for 2007.
Compute liquidity, solvency, P2-5C Here and on the next page are financial statements of Howard Company.
and profitability ratios.
HOWARD COMPANY
(SO 2, 4, 5)
Income Statement
For the Year Ended December 31

2007
Net sales $558,200
Cost of goods sold 254,500
Selling and administrative expenses 178,000
Interest expense 24,000
Income tax expense 34,700
Net income $ 67,000

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Problems: Set C 5
HOWARD COMPANY
Balance Sheet
December 31

Assets 2007
Current assets
Cash $ 15,000
Accounts receivable (net) 66,400
Inventory 21,200
Total current assets 136,100
Plant assets (net) 294,600
Total assets $430,700

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $ 26,800
Income taxes payable 18,300
Total current liabilities 45,100
Bonds payable 220,000
Total liabilities 265,100
Stockholders’ equity
Common stock 80,000
Retained earnings 85,600
Total stockholders’ equity 165,600
Total liabilities and stockholders’ equity $430,700

Additional information: The cash provided by operating activities for 2007 was $105,000.
The cash used for capital expenditures was $64,000. The cash used for dividends was
$18,000. The average number of shares outstanding during the year was 20,000.

Instructions
Compute the following values and ratios for 2007.
(a) Working capital.
(b) Current ratio.
(c) Free cash flow.
(d) Debt to total assets ratio.
(e) Earnings per share.

P2-6C Condensed balance sheet and income statement data for Janzan Corporation are Compute and interpret
presented here. liquidity, solvency, and
profitability ratios.
JANZAN CORPORATION (SO 2, 4, 5)
Balance Sheets
December 31

Assets 2007 2006
Cash $ 10,500 $ 9,000
Receivables (net) 18,000 14,000
Other current assets 5,700 4,000
Long-term investments 21,800 20,000
Plant and equipment (net) 46,000 38,000
Total assets $102,000 $85,000
Liabilities and Stockholders’ Equity 2007 2006
Current liabilities $ 25,000 $23,000
Long-term debt 36,000 36,000
Common stock 22,000 20,000
Retained earnings 19,000 6,000
Total liabilities and stockholders’ equity $102,000 $85,000

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6 CHAPTER 2 A Further Look at Financial Statements

JANZAN CORPORATION
Income Statements
For the Years Ended December 31

2007 2006
Sales $175,000 $160,000
Operating expenses (including income taxes) 57,000 53,000
Net income $ 18,000 $ 15,000

Additional information:

Cash used for capital expenditures $11,000 $8,000
Dividends paid $5,000 $3,000
Average number of shares outstanding 22,000 20,000

Instructions
Compute these values and ratios for 2006 and 2007.
(a) Earnings per share.
(b) Working capital.
(c) Current ratio.
(d) Debt to total assets ratio.
(e) Free cash flow.
(f) Based on the ratios calculated, discuss briefly the improvement or lack thereof in
financial position and operating results from 2006 to 2007 of Janzan Corporation.

Compute ratios and compare P2-7C Selected financial data of two competitors, Home Depot and Lowes, are pre-
liquidity, solvency, and sented here. (All dollars are in millions.)
profitability for two
companies.
(SO 2, 4, 5) Home Depot Lowes
(1/30/05) (1/28/05)
Income Statement Data for Year
Net sales $73,094 $36,464
Selling and administrative expenses 16,504 7,562
Interest expense 70 192
Other income (loss) 56 (1,001)
Income taxes 2,911 1,368
Net income $ 5,001 $ 2,176

Home Depot Lowes
Balance Sheet Data (End of Year)
Current assets $14,190 $ 6,974
Noncurrent assets 24,717 14,235
Total assets $38,907 $21,209
Current liabilities $10,529 $ 5,719
Long-term debt 4,220 3,955
Total stockholders’ equity 24,158 11,535
Total liabilities and stockholders’ equity $38,907 $21,209

Cash paid for capital expenditures $3,948 $2,927
Dividends paid $719 $116
Average shares outstanding 2,207 777

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Problems: Set C 7
Instructions
For each company, compute these values and ratios.
(a) Working capital.
(b) Current ratio.
(c) Debt to total assets ratio.
(d) Free cash flow.
(e) Earnings per share.
(f) Compare the liquidity, solvency, and profitability of the two companies.

P2-8C Meredith Norby recently completed an undergraduate degree in accounting. Comment on the objectives
She has been approached by her older brother and five of his friends to assist them in and qualitative characteris-
creating an investment club. None have taken any business courses, but all have been tics of financial reporting.
(SO 6, 7)
working for at least five years and feel they are ready to make their money work for
them. Some of the prospective members want to use the fund as part of their retire-
ment assets. Others hope to use their portion of the annual earnings to supplement
their current income.
The group has discussed various types of companies to invest in. Some members pre-
fer to choose well-established companies that are traded on national stock exchanges.
Others want to “get in on the ground floor” by investing in new businesses that may have
only a few stockholders. One member has suggested buying into a company started by
his best friend from high school who claims that his business has tripled its earnings dur-
ing its first two years of operations.
It has become clear to Meredith that this group of prospective investors has little or
no understanding of financial reporting or generally accepted accounting principles
(GAAP).

Instructions
(a) Explain what is meant by financial reporting and GAAP.
(b) Considering the variety of members’ goals and suggestions, indicate the type of fi-
nancial information that should be most useful in addressing investment choices.

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8 CHAPTER 3 The Accounting Information System

Problems: Set C
Analyze transactions and P3-1C On April 1 Test Prep Inc. was established. These transactions were completed
compute net income. during the month.
(SO 1)
1. Stockholders invested $12,000 cash in the company in exchange for common stock.
GL S
2. Paid $1,400 cash for April office rent.
3. Purchased office equipment for $4,300 cash.
4. Purchased $500 of advertising in School News, on account.
5. Paid $700 cash for office supplies.
6. Earned $6,000 for services provided: Cash of $1,000 is received from customers, and
the balance of $5,000 is billed to customers on account.
7. Paid $100 cash dividends.
8. Paid School News amount due in transaction (4).
9. Paid employees’ salaries $3,400.
10. Received $4,000 in cash from customers who have previously been billed in trans-
action (6).
Instructions
(a) Cash $6,600 (a) Prepare a tabular analysis of the transactions using these column headings: Cash,
Ret. earnings $600 Accounts Receivable, Supplies, Office Equipment, Accounts Payable, Common Stock, and
Retained Earnings. Include margin explanations for any changes in Retained Earnings.
(b) From an analysis of the column Retained Earnings, compute the net income or net
loss for April.
Analyze transactions and P3-2C Judy Takahashi started her own consulting firm, Takahashi Consulting Inc., on
prepare financial statements. November 1, 2007. The following transactions occurred during the month of November.
(SO 1)
Nov. 1 Stockholders invested $15,000 cash in the business in exchange for
GL S common stock.
2 Paid $1,000 for office rent for the month.
3 Purchased $750 of supplies on account.
5 Paid $400 to advertise in the Small Business Times.
9 Received $800 cash for services provided.
12 Paid $100 cash dividend.
15 Performed $4,400 of services on account.
17 Paid $2,100 for employee salaries.
20 Paid for the supplies purchased on account on November 3.
23 Received a cash payment of $1,800 for services provided on account on
November 15.
26 Borrowed $8,000 from the bank on a note payable.
29 Purchased office equipment for $3,500 paying $200 in cash and the
balance on account.
30 Paid $220 for utilities.
Instructions
(a) Cash $20,830 (a) Show the effects of the previous transactions on the accounting equation using the
Ret. earnings $1,380 following format. Assume the note payable is to be repaid within the year.

Stockholders’
Assets Liabilities Equity
Accounts Office Notes Accounts Common Retained
Date Cash Supplies
Receivable Equipment Payable Payable Stock Earnings

Include margin explanations for any changes in Retained Earnings.
(b) Net income $1,480 (b) Prepare an income statement for the month of November.
(c) Prepare a classified balance sheet at November 30, 2007.

P3-3C Din Liu created a corporation providing legal services, Din Liu Inc., on March 1,
2007. On March 31 the balance sheet showed: Cash $6,500; Accounts Receivable $2,000;

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Problems: Set C 9
Supplies $800; Office Equipment $7,000; Accounts Payable $4,700; Common Stock $8,000; Analyze transactions and
and Retained Earnings $3,600. During April the following transactions occurred. prepare an income statement,
retained earnings statement,
1. Collected $1,300 of accounts receivable due from customers. and balance sheet.
2. Paid $3,200 cash for accounts payable due. (SO 1)
3. Earned revenue of $7,100 of which $4,000 is collected in cash and the balance is due GL S
in May.
4. Purchased additional office equipment for $1,000, paying $200 in cash and the bal-
ance on account.
5. Paid salaries $2,700, rent for April $800, and advertising expenses $280.
6. Declared and paid a cash dividend of $400.
7. Received $3,500 from Metro Bank; the money was borrowed on a 4-month note payable.
8. Incurred utility expenses for the month on account $320.
Instructions
(a) Prepare a tabular analysis of the April transactions beginning with March 31 balances. (a) Cash $7,720
The column heading should be: Cash Accounts Receivable Supplies Office Ret. earnings $6,200
Equipment Notes Payable Accounts Payable Common Stock Retained Earn-
ings. Include margin explanations for any changes in Retained Earnings.
(b) Prepare an income statement for April, a retained earnings statement for April, and (b) Net income $3,000
a classified balance sheet at April 30.

P3-4C Skating By, Inc. was opened on May 1 by James Bea. These selected events and Journalize a series of
transactions occurred during May. transactions.
(SO 3, 5)
May 1 Stockholders invested $80,000 cash in the business in exchange for com-
mon stock of the corporation. GL S
3 Purchased BoardWorld for $60,000 cash. The price consists of land
$20,000, building $30,000, and equipment $10,000. (Record this in a sin-
gle entry.)
5 Advertised the opening of the skate board park, paying advertising
expenses of $500 cash.
6 Paid cash $6,000 for a 1-year insurance policy.
10 Purchased equipment for $4,600 from T. Hawks Company, payable in
30 days.
18 Received $1,500 in cash from customers for fees earned.
19 Sold 150 coupon books for $40 each in cash. Each book contains five
coupons that enable the holder to use the park. (Hint: The revenue is not
earned until the customers use the coupons.)
25 Declared and paid a $300 cash dividend.
30 Paid salaries of $1,280.
30 Paid T. Hawks in full for equipment purchased on May 10.
31 Received $1,100 of fees in cash from customers for fees earned.
The company uses these accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment,
Accounts Payable, Unearned Revenue, Common Stock, Retained Earnings, Dividends,
Revenue, Advertising Expense, and Salaries Expense.
Instructions
Journalize the May transactions, including explanations.

P3-5C Castle Architects incorporated as licensed architects on September 1, 2007. During Journalize transactions, post,
the first month of the operation of the business, these events and transactions occurred: and prepare a trial balance.
(SO 3, 5, 6, 7, 8)
Sept. 1 Stockholders invested $22,000 cash in exchange for common stock of the
corporation. GL S
1 Hired a secretary-receptionist at a salary of $410 per week, payable monthly.
2 Paid office rent for the month $1,500.
3 Purchased architectural supplies on account from Taliesin Company $1,150.
10 Completed blueprints on a carport and billed client $1,700 for services.
11 Received $800 cash advance from M. Stewart to design a new home.
20 Received $4,900 cash for services completed and delivered to R. Husch.
30 Paid secretary-receptionist for the month $1,640.
30 Paid $600 to Taliesin Company for accounts payable due.

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The company uses these accounts: Cash, Accounts Receivable, Supplies, Accounts
Payable, Unearned Revenue, Common Stock, Service Revenue, Salaries Expense, and
Rent Expense.
Instructions
(c) Cash $23,960 (a) Journalize the transactions, including explanations.
Tot. trial (b) Post to the ledger T accounts.
balance $29,950 (c) Prepare a trial balance on September 30, 2007.
Journalize transactions, post, P3-6C This is the trial balance of Dominic Company on April 30.
and prepare a trial balance.
(SO 3, 5, 6, 7, 8) DOMINIC COMPANY
GL S Trial Balance
April 30, 2007

Debit Credit
Cash $ 3,700
Accounts Receivable 3,200
Supplies 900
Equipment 9,300
Accounts Payable $ 3,400
Unearned Revenue 1,700
Common Stock 12,000
$17,100 $17,100

The May transactions were as follows.
May 5 Received $1,600 in cash from customers for accounts receivable due.
10 Billed customers for services performed $4,900.
15 Paid employee salaries $1,600.
17 Performed $400 of services for customers who paid in advance in April.
20 Paid $1,500 to creditors for accounts payable due.
29 Paid a $200 cash dividend.
31 Paid utilities $360.
Instructions
(a) Prepare a general ledger using T accounts. Enter the opening balances in the ledger
accounts as of May 1. Provision should be made for these additional accounts: Div-
idends, Service Revenue, Salaries Expense, and Utilities Expense.
(d) Cash $1,640 (b) Journalize the transactions, including explanations.
Tot. trial (c) Post to the ledger accounts.
balance $20,500 (d) Prepare a trial balance on May 31, 2007.

Prepare a correct trial P3-7C This trial balance of Arias Co. does not balance.
balance.
(SO 8) ARIAS CO.
Trial Balance
March 31, 2007

Debit Credit
Cash $ 3,240
Accounts Receivable $ 3,656
Supplies 800
Equipment 4,360
Accounts Payable 2,720
Unearned Revenue 1,200
Common Stock 7,100
Dividends 800
Service Revenue 5,420
Salaries Expense 3,100
Office Expense 660
$13,360 $19,696

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Problems: Set C 11
Each of the listed accounts has a normal balance per the general ledger. An examination
of the ledger and journal reveals the following errors:

1. Cash received from a customer on account was debited for $340, and Accounts Re-
ceivable was credited for $34. The actual collection was for $340.
2. The purchase of copy machine paper on account for $160 was recorded as a debit to
Equipment for $160 and a credit to Accounts Payable for $160.
3. A client paid $900 for services to be performed during April and May. Cash was debited
for $900 and Service Revenue was credited for $900.
4. A debit posting to Office Expense of $130 was omitted.
5. A payment on account was credited to Cash for $240 and debited to Accounts Payable
for $240. The actual payment was $420.
6. Payment of a $400 cash dividend to Arias’s stockholders was debited to Common Stock
for $400 and credited to Cash for $400.
Instructions
Prepare the correct trial balance. (Hint: All accounts have normal balances.) Tot. trial balance $16,660

P3-8C Big Sky Drive-In Theater Inc. was recently formed. It began operations in April Journalize transactions, post,
2007. On April 1, the ledger of Big Sky showed: Cash $31,000; Land $52,000; Buildings and prepare a trial balance.
(concession stand, projection room, ticket booth, and screen) $64,000; Equipment (SO 3, 5, 6, 7, 8)
$35,000; Accounts Payable $22,000; and Common Stock $160,000. During the month of GL S
April the following events and transactions occurred.
Apr. 1 Rented movies to be shown for the first two weeks of April. The film
rental was $15,000; $3,000 was paid in cash and $12,000 will be paid on
April 13.
2 Ordered movies to be shown the last two weeks of April at a cost of
$7,000 per week.
8 Received $11,400 cash from admissions.
10 Hired R. Daggett to operate the concession stand. Daggett agrees to pay
Big Sky 20% of gross receipts, payable monthly.
13 Paid balance due on movie rentals and $7,400 on April 1 accounts
payable.
14 Received the movies ordered April 2 and paid rental fee of $14,000.
15 Paid advertising expenses $600.
18 Received $9,800 cash from customers for admissions.
30 Paid salaries of $5,200.
30 Received statement from R. Daggett showing gross receipts from con-
cessions of $10,400 and the balance due to Big Sky of $2,080 for April.
Daggett paid half the balance due and will remit the remainder on May 8.
30 Received $23,000 cash from customers for admissions.
In addition to the accounts identified above, the chart of accounts includes: Accounts
Receivable, Admission Revenue, Concession Revenue, Advertising Expense, Film Rental
Expense, and Salaries Expense.
Instructions
(a) Using T accounts, enter the beginning balances to the ledger.
(b) Journalize the April transactions, including explanations. (d) Cash $34,040
(c) Post the April journal entries to the ledger. Tot. trial
(d) Prepare a trial balance on April 30, 2007. balance $220,880

P3-9C The bookkeeper for Tim Taylor’s repair shop made the following errors in jour- Analyze errors and their
nalizing and posting. effects on the trial balance.
(SO 8)
1. A credit to Accounts Payable of $900 was posted twice.
2. A credit posting of $800 to Unearned Revenue was inadvertently credited to Accounts
Receivable.
3. A purchase of equipment on account of $960 was debited to Equipment for $960 and
credited to Accounts Payable for $690.
4. A debit posting of $250 to Wages Expense was omitted.
5. A debit posting to Wages Payable for $250 was inadvertently posted as a credit to
Wages Payable.

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6. A debit posting for $800 of Dividends was inadvertently posted to Wage Expense
instead.
7. A debit posting to Cash and a credit posting to Service Revenue for $600 were inad-
vertently posted twice.
8. A debit to Accounts Receivable of $400 was debited to Accounts Payable.
Instructions
For each error, indicate (a) whether the trial balance will balance; (b) the amount of the
difference if the trial balance will not balance; and (c) the trial balance column that will
have the larger total. Consider each error separately. Use the following form, in which
error 1 is given as an example.

(a) (b) (c)
Error In Balance Difference Larger Column
1. No $900 Credit

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Problems: Set C 13

Problems: Set C
P4-1C The following selected data are taken from the comparative financial statements Record transactions on
of Lake View Bocce Club. The Club prepares its financial statements using the accrual accrual basis; convert
basis of accounting. revenue to cash receipts.
(SO 2, 4)
October 31 2007 2006
Accounts receivable for member dues $ 15,000 $ 19,000
Unearned rent revenue 30,000 38,000
Dues revenue 162,000 140,000

Dues are billed to members based upon their use of the Club’s facilities. Unearned revenues
arise from deposits required to reserve club facilities for weddings and parties.
Instructions
(Hint: You will find it helpful to use T accounts to analyze the following data. You
must analyze these data sequentially, as missing information must first be deduced
before moving on. Post your journal entries as you progress, rather than waiting un-
til the end.)
(a) Prepare journal entries for each of the following events that took place during 2007.
1. Dues receivable from members from 2006 were all collected during 2007.
2. Unearned rent revenue at the end of 2006 was all earned during 2007.
3. Additional rent revenue of $89,000 cash was received during 2007; a portion of
these were for events held during the year. The entire balance remaining relates
to upcoming events in 2007 and 2008.
4. Dues for the 2006–2007 fiscal year were billed to members.
5. Dues receivable for 2007 (i.e., those billed in item (4) above) were partially collected.
(b) Determine the amount of cash received by the Club from the above transactions dur- (b) Cash received $255,000
ing the year ended October 31, 2007.

P4-2C Troy Verley started his own consulting firm, Do It Now Consulting, on April 1, Prepare adjusting entries,
2007. The trial balance at April 30 is as follows. post to ledger accounts,
and prepare adjusted trial
balance.
DO IT NOW CONSULTING (SO 4, 5, 6)
Trial Balance
April 30, 2007 GL S

Debit Credit
Cash $ 9,300
Prepaid Rent 2,700
Supplies 1,000
Office Equipment 20,000
Unearned Service Revenue 3,100
Common Stock 25,000
Service Revenue 9,000
Insurance Expense 400
$42,200 $42,200

In addition to those accounts listed on the trial balance, the chart of accounts for Do It Now
also contains the following accounts: Accumulated Depreciation—Office Equipment,
Phone Payable, Salaries Payable, Depreciation Expense, Rent Expense, Phone Expense,
and Supplies Expense.
Other data:

1. Supplies on hand at April 30 total $320.
2. A phone bill for $120 has not been recorded and will not be paid until next month.
3. The prepaid rent covers April, May, and June.

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14 CHAPTER 4 Accrual Accounting Concepts

4. $2,200 of unearned service revenue has been earned at the end of the month.
5. Salaries of $1,460 are accrued at April 30.
6. The office equipment has a 5-year life with salvage value of $2,000 and is being
depreciated at $300 per month for 60 months.
7. Invoices representing $2,800 of services performed during the month have not been
recorded as of April 30.

Instructions
(a) Prepare the adjusting entries for the month of April.
(b) Service rev. $14,000 (b) Post the adjusting entries to the ledger accounts. Enter the totals from the trial bal-
(c) Tot. trial balance $46,880 ance as beginning account balances. Use T accounts.
(c) Prepare an adjusted trial balance at April 30, 2007.
Prepare adjusting entries, P4-3C The Welcome Inn opened for business on March 1, 2007. Here is its trial bal-
adjusted trial balance, and ance before adjustment on March 31.
financial statements.
(SO 4, 5, 6, 7)

GL S
WELCOME INN
Trial Balance
March 31, 2007

Debit Credit
Cash $ 2,700
Prepaid Insurance 2,400
Supplies 3,300
Land 25,000
Lodge 85,000
Furniture 22,400
Unearned Rent Revenue 2,800
Mortgage Payable 50,000
Common Stock 72,000
Rent Revenue 11,000
Utilities Expense 800
Advertising Expense 400
$145,000 $145,000

Other data:

1. Insurance expires at the rate of $400 per month.
2. An inventory of supplies shows $1,900 of unused supplies on March 31.
3. Annual depreciation is $4,440 on the lodge and $3,600 on furniture.
4. The mortgage interest rate is 9%. (The mortgage was taken out on March 1.)
5. Unearned rent of $1,300 has been earned.
6. Salaries of $960 are accrued and unpaid at March 31.

Instructions
(c) Rent revenue $12,300 (a) Journalize the adjusting entries on March 31.
Tot. trial
(b) Prepare a ledger using T accounts. Enter the trial balance amounts and post the
balance $147,005
adjusting entries.
(d) Net income $4,295 (c) Prepare an adjusted trial balance on March 31.
(d) Prepare an income statement and a retained earnings statement for the month of
Prepare adjusting entries and March and a classified balance sheet at March 31.
financial statements; identify (e) Identify which accounts should be closed on March 31.
accounts to be closed.
(SO 4, 5, 6, 7) P4-4C Green Acres Golf Inc. was organized on April 1, 2007. Quarterly financial state-
ments are prepared. The trial balance and adjusted trial balance on June 30 are shown
GL S on the next page.

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Problems: Set C 15
GREEN ACRES GOLF INC.
Trial Balance
June 30, 2007

Unadjusted Adjusted
Dr. Cr. Dr. Cr.
Cash $ 7,890 $ 7,890
Accounts Receivable 1,500 1,900
Prepaid Insurance 2,400 1,800
Supplies 2,100 1,410
Equipment 18,000 18,000
Accumulated Depreciation—Equipment $ 750
Notes Payable $ 7,500 7,500
Accounts Payable 2,200 2,200
Salaries Payable 900
Interest Payable 100
Unearned Rent Revenue 1,300 800
Common Stock 18,000 18,000
Retained Earnings 0 0
Dividends 450 450
Dues Revenue 14,600 15,000
Rent Revenue 700 1,200
Salaries Expense 10,100 11,000
Insurance Expense 1,200 1,800
Depreciation Expense 750
Supplies Expense 690
Utilities Expense 660 660
Interest Expense 100
$44,300 $44,300 $46,450 $46,450

Instructions
(a) Journalize the adjusting entries that were made.
(b) Prepare an income statement and a retained earnings statement for the 3 months (b) Net income $1,200
ending June 30 and a classified balance sheet at June 30. Tot. assets $30,250
(c) Identify which accounts should be closed on June 30.
(d) If the note bears interest at 8%, how many months has it been outstanding?

P4-5C A review of the ledger of Phelps Company at December 31, 2007, produces these Prepare adjusting entries.
data pertaining to the preparation of annual adjusting entries. (SO 4, 5)

1. Prepaid Insurance $16,400. The company has separate insurance policies on its
buildings and its motor vehicles. Policy B4564 on the building was purchased on
January 1, 2006, for $11,400. The policy has a term of 3 years. Policy A2958 on
the vehicles was purchased on July 1, 2007, for $8,800. This policy has a term of
2 years.
2. Unearned Subscription Revenue $29,040. The company began selling magazine sub-
scriptions on September 1, 2007 on an annual basis. The selling price of a subscrip-
tion is $24. A review of subscription contracts reveals the following.

Subscription Number of
Start Date Subscriptions
September 1 240
October 1 260
November 1 330
December 1 380
1,210
3. Notes Payable, $16,000: This balance consists of a note for 8 months at an annual
interest rate of 9%, dated August 1.
4. Salaries Payable $0: There are six salaried employees. Salaries are paid every
Friday for the current week. Four employees receive a salary of $480 each per
week, and two employees earn $600 each per week. December 31 is a Thursday.

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Employees do not work weekends. All employees worked the last 4 days of
December.

Instructions
Prepare the adjusting entries at December 31, 2007.

Prepare adjusting entries P4-6C A-Plus Test Prep was organized on May 1, 2006, by Denise Fenley. Denise is a
and a corrected income good manager but a poor accountant. From the trial balance prepared by a part-time
statement. bookkeeper, Denise prepared the following income statement for her fourth quarter, which
(SO 4, 5)
ended April 30, 2007.

A-PLUS TEST PREP
Income Statement
For the Quarter ended April 30, 2007

Revenues
Tuition revenues $240,000
Operating expenses
Advertising $ 6,400
Wages 92,000
Utilities 1,300
Depreciation 2,400
Repairs 1,700
Total operating expenses 103,800
Net income $136,200

Denise suspected that something was wrong with the statement because net income
had never exceeded $40,000 in any one quarter. Knowing that you are an experienced ac-
countant, she asks you to review the income statement and other data.
You first look at the trial balance. In addition to the account balances reported above
in the income statement, the ledger contains the following additional selected balances
at April 30, 2007.

Books and Supplies $ 9,800
Note Payable 15,000

You then make inquiries and discover the following.

1. Tuition revenues include advanced tuition payments received for summer classes, in
the amount of $70,000.
2. There were $2,600 of books and supplies on hand at April 30.
3. Prepaid insurance resulted from the payment of a one-year policy on February 1,
2007.
4. The mail in May 2007 brought the following bills: advertising for the week of April
24, $80; repairs made April 18, $2,560; and utilities for the month of April, $530.
5. There are six employees who receive wages that total $1,380 per day. At April 30,
three days’ wages have been incurred but not paid.
6. The note payable is a 8% note dated February 1, 2007, and due on May 31, 2007.
7. Income tax of $15,200 for the quarter is due in May but has not yet been recorded.

Instructions
(a) Prepare any adjusting journal entries required as at April 30, 2007.
(b) Net income $33,190 (b) Prepare a correct income statement for the quarter ended April 30, 2007.
(c) Explain to Denise the generally accepted accounting principles that she did not rec-
ognize in preparing her income statement and their effect on her results.

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Problems: Set C 17
P4-7C On August 1, 2007, the following were the account balances of Bob and Norm Journalize transactions and
Repair Services. follow through accounting
cycle to preparation of
financial statements.
Debits Credits (SO 4, 5, 6)
Cash $ 6,040 Accumulated Depreciation $ 600
GL S
Accounts Receivable 2,910 Accounts Payable 2,300
Supplies 1,030 Unearned Service Revenue 1,260
Store Equipment 10,000 Salaries Payable 1,420
Common Stock 10,000
Retained Earnings 4,400
$19,980 $19,980

During August the following summary transactions were completed.
Aug. 5 Received $1,200 cash from customers in payment of account.
10 Paid $3,120 for salaries due employees, of which $1,700 is for August and
$1,420 is for July salaries payable.
12 Received $2,800 cash for services performed in August.
15 Purchased store equipment on account $2,000.
17 Purchased supplies on account $860.
20 Paid creditors $2,500 of accounts payable due.
22 Paid August rent $380.
25 Paid salaries $2,900.
27 Performed services on account and billed customers for services provided
$3,130.
29 Received $780 from customers for services to be provided in the future.
Adjustment data:

1. Supplies on hand are valued at $960.
2. Accrued salaries payable are $1,540.
3. Depreciation for the month is $320.
4. Unearned service revenue of $800 is earned.
Instructions
(a) Enter the August 1 balances in the ledger accounts. (Use T accounts.)
(b) Journalize the August transactions.
(c) Post to the ledger accounts. Use Service Revenue, Depreciation Expense, Supplies
Expense, Salaries Expense, and Rent Expense.
(d) Prepare a trial balance at August 31.
(e) Journalize and post adjusting entries.
(f) Prepare an adjusted trial balance. (f) Cash $1,920
(g) Prepare an income statement and a retained earnings statement for August and a Tot. trial balance $27,490
classified balance sheet at August 31. (g) Net loss $1,040

P4-8C Laura Young opened Magic Carpet Cleaners Inc. on January 1, 2007. During Complete all steps in
January the following transactions were completed. accounting cycle.
(SO 4, 5, 6, 7, 8)
Jan. 1 Issued 12,000 shares of common stock for $18,000 cash.
1 Purchased used truck for $12,000, paying $4,000 cash and the balance on GL S
account.
3 Purchased cleaning supplies for $940 on account.
5 Paid $7,200 cash on 1-year insurance policy effective January 1.
12 Billed customers $4,100 for cleaning services.
18 Paid $600 cash on amount owed on truck and $300 on amount owed on
cleaning supplies.
20 Paid $2,600 cash for employee salaries.
21 Collected $2,300 cash from customers billed on January 12.
25 Billed customers $2,850 for cleaning services.
31 Paid $450 for gas and oil used in the truck during month.
31 Declared and paid $600 cash dividend.
The chart of accounts for Magic Carpet Cleaners contains the following accounts: Cash,
Accounts Receivable, Cleaning Supplies, Prepaid Insurance, Equipment, Accumulated

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Depreciation—Equipment, Accounts Payable, Salaries Payable, Common Stock, Retained
Earnings, Dividends, Income Summary, Service Revenue, Gas & Oil Expense, Cleaning
Supplies Expense, Depreciation Expense, Insurance Expense, Salaries Expense.

Instructions
(a) Journalize the January transactions.
(b) Post to the ledger accounts. (Use T accounts.)
(c) Prepare a trial balance at January 31.
(d) Journalize the following adjustments.
(1) Services provided but unbilled and uncollected at January 31 were $2,340.
(2) Depreciation on the truck for the month was $320.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $210 of cleaning supplies on hand at January 31.
(5) Accrued but unpaid employee salaries were $760.
(e) Post adjusting entries to the T accounts.
(f) Cash $4,550 (f ) Prepare an adjusted trial balance.
(g) Tot. assets $30,030 (g) Prepare the income statement and a retained earnings statement for January and a
classified balance sheet at January 31.
(h) Journalize and post closing entries and complete the closing process.
(i) Prepare a post-closing trial balance at January 31.

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Problems: Set C 19

Problems: Set C
P5-1C Franklin Craft Store completed the following merchandising transactions in the Journalize, post, prepare
month of October. At the beginning of October, Franklin’s ledger showed Cash of $8,000 partial income statement,
and Common Stock of $8,000. and calculate ratios.
(SO 2, 3, 4, 6)
Oct. 1 Purchased merchandise on account from Michael’s Wholesale Supply for
$4,800, terms 1/10, n/30.
2 Sold merchandise on account for $3,900, terms 2/10, n/30. The cost of GL S
the merchandise sold was $2,400.
5 Received credit from Michael’s Wholesale Supply for merchandise
returned $600.
9 Received collections in full, less discounts, from customers billed on
sales of $3,900 on October 2.
10 Paid Michael’s Wholesale Supply in full, less discount.
11 Purchased supplies on account for $750.
12 Purchased merchandise for cash $2,100.
15 Received $200 refund for return of poor-quality merchandise from
supplier on cash purchase.
17 Purchased merchandise on account from Handiwork Distributors for
$2,500, terms 2/10, n/30.
19 Paid freight on October 17 purchase $310.
24 Sold merchandise for cash $6,900. The cost of the merchandise sold
was $4,510.
25 Purchased merchandise on account from Hobbytown Inc. for $1,000,
terms 3/10, n/30.
27 Paid Handiwork Distributors in full, less discount.
29 Made refunds to cash customers for returned merchandise $190. The
returned merchandise had cost $134.
31 Sold merchandise on account for $1,460, terms 1/10, n/30. The cost of
the merchandise sold was $950.

Franklin Craft’s chart of accounts includes Cash, Accounts Receivable, Merchandise
Inventory, Supplies, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances,
Sales Discounts, and Cost of Goods Sold.

Instructions
(a) Journalize the transactions using a perpetual inventory system.
(b) Post the transactions to T accounts. Be sure to enter the beginning cash and com-
mon stock balances.
(c) Prepare an income statement through gross profit for the month of October 2007. (c) Gross profit $4,266
(d) Calculate the profit margin ratio and the gross profit rate. (Assume operating expenses
were $2,100.)

P5-2C Crowning Glory Warehouse distributes commercial hair care products in one- Journalize purchase and
gallon bottles to hair salons and extends credit terms of 3/10, n/30 to all of its customers. sale transactions under a
During the month of April the following merchandising transactions occurred. perpetual inventory system.
(SO 2, 3)
Apr. 1 Purchased 190 bottles on account for $6 each (including freight) from
Healthy Hair, terms 2/10, n/30.
3 Sold 40 bottles on account to the Curl Up and Dye salon for $10 each.
6 Received $90 credit for 15 bottles returned to Healthy Hair.
9 Paid Healthy Hair in full.
12 Received payment in full from the Curl Up and Dye salon.
13 Sold 25 bottles on account to Hairport Salon for $10 each.
20 Purchased 200 bottles on account for $6 each from Golden Tresses,
terms 1/15, n/30.
24 Received payment in full from Hairport Salon.
26 Paid Golden Tresses in full.
28 Sold 160 bottles on account to Cheaper Cuts salons for $10 each.
30 Granted Cheaper Cuts $120 credit for 12 bottles returned costing $72.

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20 CHAPTER 5 Merchandising Operations and the Multiple-Step Income Statement

Instructions
Journalize the transactions for the month of April for Crowning Glory Warehouse, using
a perpetual inventory system. Assume the cost of each bottle sold was $6.
Journalize, post, and prepare P5-3C At the beginning of the current season on November 1, the ledger of Lakeside
trial balance and partial Ice House showed Cash $3,300; Merchandise Inventory $4,700; and Common Stock
income statement. $8,000. The following transactions were completed during November 2007.
(SO 2, 3, 4)
Nov. 5 Purchased hockey sticks and pucks on account from Gillmore Co. $1,600,
GL S terms 2/10, n/60.
7 Paid freight on Gillmore purchase $90.
9 Received credit from Gillmore Co. for merchandise returned $350.
10 Sold merchandise on account for $1,100, terms n/30. The merchandise
sold had a cost of $760.
12 Purchased gloves, socks, and other accessories on account from Orr
Sportswear $945, terms 1/10, n/30.
14 Paid Gillmore Co. in full.
17 Received credit from Orr Sportswear for merchandise returned $45.
20 Made sales on account for $1,330, terms n/30. The cost of the merchan-
dise sold was $950.
21 Paid Orr Sportswear in full.
27 Granted an allowance to customers for clothing that did not fit properly
$110.
30 Received payments on account for $1,900.
The chart of accounts for the ice house includes Cash, Accounts Receivable, Merchan-
dise Inventory, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances,
and Cost of Goods Sold.

Instructions
(a) Journalize the November transactions using a perpetual inventory system.
(b) Using T accounts, enter the beginning balances in the ledger accounts and post the
(c) Tot. trial November transactions.
balance $10,430 (c) Prepare a trial balance on November 30, 2007.
(d) Gross profit $610 (d) Prepare an income statement through gross profit.

Prepare financial statements P5-4C Tobin’s China and Collectibles is located in midtown Centralia. During the past
and calculate profitability several years, net income has been declining because suburban shopping centers have
ratios. been attracting business away from city areas. At the end of the company’s fiscal year on
(SO 4, 6) September 30, 2007, these accounts appeared in its adjusted trial balance.
Accumulated Depreciation—Building 120,000
Accumulated Depreciation—Store Equipment 21,000
Advertising Expense 6,000
Building 200,000
Cash 7,800
Common Stock 28,000
Cost of Goods Sold 520,000
Delivery Expense 5,800
Depreciation Expense—Building 8,000
Depreciation Expense—Store Equipment 4,200
Dividends 15,000
Gain on Sale of Investment 2,300
Insurance Expense 10,300
Interest Expense 5,600
Merchandise Inventory 31,400
Notes Payable 52,000
Property Tax Expense 7,600
Property Taxes Payable 7,600
Retained Earnings 18,100

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