Professional Documents
Culture Documents
Sales revenue.
Cost of goods sold
All other expenses
Net income..
Millions
850
(290)
(325)
$ 235
Beginning cash..
Collections ($850 $27)..
Payments for: inventory.
everything else.
Ending cash
$ 75
823
(380)
(255)
$ 263
$ .8
Balance sheet
$4.2
Interest payable.
0.3
Chapter 3
3- 1
Common Stock and Dividends are up-to date and require no adjustment
at the end of the accounting period.
3-2
When the large auto manufacturer records the revenue from the sale, at
that time not before or after the large auto manufacturer should also
record cost of goods sold, the expense. The expense recognition
principle tells when to record expenses.
(10 min.) S 3-5
Depreciation is the periodic allocation of the cost of a tangible long-lived
asset, less its estimated residual value, over its estimated useful life. All
long-lived or plant assets, except for land, decline in usefulness during
their life and this decline is an expense. Accountants must allocate the
cost of each plant asset, except for land, over the assets useful life.
Depreciation is the process of allocating the cost of a plant asset to
expense. Depreciation also decreases the book value of the asset to
reflect its usage.
Chapter 3
3- 3
Prepaid Rent
Oct. 1
3,000 Oct. 31
Bal.
2,500
500
500
Rent Expense
500
Oct. 31
500
Bal.
500
b.
Oct. 31
Supplies
Oct. 1
950 Oct. 31
Bal.
400
3-4
550
550
Supplies Expense
550
Oct. 31
550
Bal.
550
Jan. 1
(b) Dec. 31
Computer Equipment...
Cash.
Purchased computer equipment.
Depreciation Expense
Computer Equipment ($50,000 / 5).
Accumulated Depreciation
Computer Equipment.......
Record depreciation expense.
50,000
50,000
10,000
10,000
Req. 2
Computer Equipment
Jan. 50,000
Bal.
50,000
Accumulated
Depreciation
Computer
Equipment
Depreciation
Expense
Computer Equipment
Dec. 31 10,000
Dec. 31 10,000
Bal.
Bal.
10,000
10,000
Req. 3
Computer equipment.
$50,000
(10,000)
Book value
$40,000
Chapter 3
3- 5
Income statement:
Salary expense ($42.4 + $2.2)..
2012
$44.6
Balance sheet:
Salary payable.........
2012
$ 2.2
Nov. 30
Dec. 31
Interest Expense..
Interest Payable..
To accrue interest expense for October.
250
Interest Expense..
Interest Payable..
To accrue interest expense for November.
250
Interest Expense...
Interest Payable
To accrue interest expense for December.
250
250
250
250
Req. 2
Interest Payable
Oct. 31
Nov. 30
Dec. 31
Bal.
250
250
250
750
Req. 3
Dec. 31
3-6
Interest Payable..........
Cash..
To pay interest.
750
750
250
250
250
250
250
250
Req. 2
Interest Receivable
Oct. 31
250
Nov. 30
250
Dec. 31
250
Bal.
750
Req. 3
Dec. 31
Cash.
Interest Receivable.
To collect interest.
Chapter 3
750
750
3- 7
Cash.
Unearned Subscription Revenue.......
Received cash for revenue in advance.
60,000
60,000
40,000
40,000
Unadjusted amount.
$18,000
b.
12,000
Unadjusted amount
d.
3-8
-06,000
b.
Accounts Receivable...
Service Revenue..
55,000
Cash.
Accounts Receivable.
35,000
Cash.
Unearned Service Revenue..
9,000
7,000
55,000
35,000
9,000
7,000
$175,500
136,000
29,000
Net income
$ 10,500
$21,500
10,500
$32,000
Chapter 3
3- 9
(continued) S 3-15
Sparrow Sporting Goods Company
Balance Sheet
March 31, 2012
Thousands
ASSETS
Current:
Cash.........................................................
$ 20,800
Ac counts receivable..............................
28,000
Inventories...............................................
35,000
5,000
88,800
6,300
Other assets............................................
22,000
Total assets...................................................
$117,100
LIABILITIES
Total current liabilities...........................
$ 55,100
Long-term liabilities................................
7,500
Total liabilities..............................................
62,600
STOCKHOLDERS EQUITY
3-10
Common stock........................................
22,500
Retained earnings...................................
32,000
54,500
$117,100
Net Revenues .
Retained Earnings.......
31
Retained Earnings.
Cost of Goods Sold.
All Other Expenses..
Thousands
175,500
175,500
165,000
136,000
29,000
Retained Earnings
Mar. 31, 2012 Expenses
21,500
175,500
32,000
Chapter 3
3- 11
(5 min.) S 3-17
(Dollars in thousands)
Req. 1
Net working capital
$33,700
$55,100
Req. 2
Current ratio
$88,800
$55,100
1.61
Total liabilities
Total assets
$62,600
$117,100
0.53
Req. 3
Debt ratio
Req. 4
Net working capital of $33,700 means current assets exceed current
liabilitiesa positive sign. The current ratio and debt ratio values are
strong.
3-12
b. Current ratio
$98,800
$55,100
1.79
c.
$62,600
$127,100 ($117,100 +$10,000)
0.49
Debt ratio
$78,800
$45,100
1.74
c.
0.49
Debt ratio
Chapter 3
3- 13
Exercises
Income statement
Balance sheet
2.
$4,300
Operating expenses.
1,200
Accounts receivable
$ 900
Accounts payable.
1,000
Cash basis would report only the cash collections of $4,500 from
customers and the payment of operating expenses ($1,200).
Their balance sheet should have included neither accounts
receivable nor accounts payable.
b. Accrual Basis
Revenues...
$540,000
$530,000
Expenses...
420,000
440,000
Net income
$120,000
$ 90,000
The accrual basis measures net income better because its information
about revenues and expenses is more complete than the information
provided by the cash basis.
3-14
Revenue.
$840
Total expense...
$500
Chapter 3
3- 15
DATE
Adjusting Entries
ACCOUNT TITLES
DEBIT CREDIT
a. Insurance Expense.................................................
Prepaid Insurance ($400+$1,200$700)..........
900
b. Interest Receivable.................................................
Interest Revenue...............................................
1,600
600
d. Depreciation Expense............................................
Accumulated Depreciation...............................
4,800
10,800
5,250
900
1,600
600
4,800
10,800
5,250
Req. 2
Net income understated by omission of:
Interest revenue
Service revenue....
Total understatement..
$ 1,600
600
$ 900
4,800
10,800
5,250
3-16
$ (2,200)
21,750
$19,550
$ 500
$ 400
1,000
$1,000
1,700
800
1,000
400
2,200
1,200
2,000
1,400
(500)
$1,700
(500)
$ 700
(700)
$1,300
(500)
$ 900
Journal entries:
Situation 1:
Situation 2:
Supplies..........................................
Cash............................................
1,700
Supplies Expense..............................
Supplies......................................
700
Chapter 3
1,700
700
3- 17
Adjusting Entries
DATE
ACCOUNT TITLES
a. Interest Expense.....................................................
Interest Payable.............................................
9,600
b. Interest Receivable.............................................
Interest Revenue........................................
4,900
3,000
7,600
e. Supplies Expense...................................................
Supplies ($3,200 $1,400)............................
1,800
16,000
Req. 2
Book value = $64,000 ($80,000 $16,000)
3-18
DEBIT
CREDIT
9,600
4,900
3,000
7,600
1,800
16,000
Supplies
1,500
Bal.
500 (a)
900
Bal.
300
200
2,400
Salary Payable
(b)
400
Bal.
400
(d)
Service Revenue
Bal.
600
Bal.
100
Salary Expense
4,200
Bal.
(c)
900
(b)
(d)
500
Bal.
Bal.
500 Bal.
1,900
400
2,300
5,600
Supplies Expense
(a)
200
Bal.
200
Chapter 3
3- 19
$40,900
Expenses:
Cost of goods sold....................
$25,000
10,300
Total expenses......................
35,300
5,600
2,100
Net income.......................................
$ 3,500
$4,700
3,500
8,200
3-20
Less: Dividends..
(1,500)
$6,700
(continued) E 3-26A
Honeyglazed Hams, Inc.
Balance Sheet
December 31, 2012
Thousands
ASSETS
LIABILITIES
$ 7,900
Accounts receivable
500
Inventories.
2,400
Prepaid expenses.
10,800
STOCKHOLDERS
Less: Accum.
EQUITY
deprec.. (2,800)
4,600
Other assets..
6,700
Chapter 3
3- 21
Amounts in millions
Receivables
Beg. bal.
Sales revenue
220
20,550 Collections
End. bal.
20,400
370
Prepaid Insurance
Beg. bal.
150
Payment
End. bal.
170
420
Other operating
expenses
4,300
End. bal.
3-22
600
4,400
700
350
Balance sheet
Unearned service revenue...
80
Req. 2
Income statement
Service revenue (65 + 430 80)..
415
Balance sheet
Unearned service revenue...
80
Service revenue is greater in (2) because Bennett began the year owing
more phone service to customers. With collections for the year and the
amount of the ending liability unchanged, Bennett must have earned
more revenue in situation 2 than in situation 1.
Not required but helpful:
Unearned Service Revenue
Earned revenue
Beg. bal.
65
430
End. bal.
80
Chapter 3
3- 23
DATE
Closing Entries
Dec. 31 Service Revenue........................................
Other Revenue............................................
Retained Earnings................................
DEBIT CREDIT
23,900
400
24,300
31 Retained Earnings.....................................
Cost of Services Sold..........................
Selling, General, and Administrative
Expense............................................
Depreciation Expense..........................
Income Tax Expense............................
22,000
31 Retained Earnings.....................................
Dividends..............................................
300
11,000
6,400
4,100
500
300
Req. 2
Retained Earnings
Dec. 31, 2011
Expenses
22,000
Dividends
300 Revenues
Dec. 31, 2012
3-24
2,600
24,300
4,600
DATE
Journal
ACCOUNT TITLES
DEBIT CREDIT
Adjusting Entries
Dec.
6,300
300
300
700
1,500
6,600
300
300
700
1,500
Closing Entries
31 Service Revenue...............................................
Retained Earnings.......................................
19,500
31 Retained Earnings............................................
Salary Expense............................................
Rent Expense...............................................
Depreciation Expense.................................
Income Tax Expense...................................
8,400
31 Retained Earnings............................................
Dividends.....................................................
1,400
Chapter 3
19,500
4,600
1,600
700
1,500
1,400
3- 25
$14,100
500
14,600
Plant Assets:
Equipment......
$42,000
(4,100)
Total assets..........................................................................
37,900
$52,500
LIABILITIES
Current:
Accounts payable..........................................................
$ 5,100
300
2,800
1,500
9,700
16,000
Total liabilities......................................................................
25,700
STOCKHOLDERS EQUITY
Common stock.................................................................
8,600
18,200
26,800
$52,500
3-26
(continued) E 3-31A
Req. 2
Current
Year
Net working =
capital
1.51
Prior
Year
$5,000
1.55
Both net working capital and the current ratio have decreased indicating
that the ability to pay current liabilities with current assets has
deteriorated.
Debt ratio =
Total liabilities
Total assets
$25,700
=
$52,500
0.49
0.30
Chapter 3
3- 27
$50
= 1.11
$40 + $5
$40 + $5
$70 + $5
Debt ratio =
= 0.60
b. Current ratio =
$50 $6
$40
$40 $6
= 0.53
$70 $6
The payment of long-term debt hurts the current ratio and improves
the debt ratio.
c. Current ratio =
$50 + $5
$40 + $5
$40 + $5
= 0.60
$70 + $5
d. Current ratio =
$50
$40 + $2
= 1.19
Debt ratio =
$40 + $2
= 0.60
$70
e. Current ratio =
$50 + $6
$40
= 1.40
3-28
Debt ratio
$40
= .53
$70 + $6
Income statement
Balance sheet
2.
$4,400
Operating expenses...
1,300
Accounts receivable..
$ 700
Accounts payable..
1,200
Cash basis would report only the cash collections of $4,600 from
customers and the payment of operating expenses ($1,300).The
balance sheet would include neither accounts receivable nor
accounts payable.
b. Accrual Basis
Revenues...
$510,000
$500,000
Expenses...
410,000
450,000
Net income
$100,000
$ 50,000
The accrual basis measures net income better because its information
about revenues and expenses is more complete than the information
provided by the cash basis.
Chapter 3
3- 29
Revenue.
$780
Total expense...
$530
3-30
DATE
Adjusting Entries
ACCOUNT TITLES
DEBIT CREDIT
a. Insurance Expense....................................................
Prepaid Insurance ($300 + $900 $500).............
700
b. Interest Receivable................................................
Interest Revenue...................................................
1,300
900
d. Depreciation Expense...............................................
Accumulated Depreciation..................................
4,400
10,200
6,500
700
1,300
900
4,400
10,200
6,500
Req. 2
Net income understated by omission of:
Interest revenue..
Service revenue.............
Total understatement
Net income overstated by omission of:
Insurance expense
Depreciation expense..
Salary expense..
Income tax expense............
Total overstatement............
$ 1,300
900
$ (2,200)
700
4,400
10,200
6,500
Chapter 3
21,800
$19,600
3- 31
$ 400
$ 600
$1,100
$ 900
1,600
1,100
1,500
600
2,000
1,700
2,600
1,500
(200)
$1,800
(300)
$1,400
(1,000)
$1,600
(300)
$1,200
Journal entries:
Situation 1:
Situation 2:
3-32
Supplies.
Cash..
1,600
Supplies Expense
Supplies.......
1,400
1,600
1,400
ACCOUNT TITLES
DEBIT
a. Interest Expense........................................................
Interest Payable....................................................
9,000
b. Interest Receivable....................................................
Interest Revenue...................................................
4,300
3,475
3,900
e. Supplies Expense......................................................
Supplies ($2,900 $1,600)...................................
1,300
CREDIT
9,000
4,300
3,475
3,900
1,300
28,000
Req. 2
Book value = $112,000 ($140,000 $28,000)
Chapter 3
3- 33
Supplies
1,400
Bal.
300 (a)
500
Bal.
100
1,900
Salary Payable
(b)
700
Bal.
700
(d)
Bal.
4,600
200
Bal.
200
Bal.
500
(b)
(d)
200
Bal.
5,300
Supplies Expense
(a)
1,000
Salary Expense
(c)
Bal.
200
Bal.
Service Revenue
3-34
200
2,400
700
3,100
800
$42,200
Expenses:
Cost of goods sold..................
$25,500
10,000
Total expenses...................
35,500
6,700
2,500
Net income.........................................
$ 4,200
$4,600
4,200
8,800
Less: Dividends
(1,400)
$7,400
Chapter 3
3- 35
(continued) E 3-40B
Honeybee Hams, Inc.
Balance Sheet
December 31, 2012
Thousands
ASSETS
LIABILITIES
600
Inventories.
2,400
Prepaid expenses
10,700
STOCKHOLDERS
Less: Accum.
EQUITY
deprec. (2,500)
4,500
Other assets..
7,400
3-36
Amounts in millions
Receivables
Beg. bal.
Sales revenue
End. bal.
210
21,010 Collections
20,900
320
Prepaid Insurance
Beg. bal.
160
Payment
End. bal.
200
430
Other operating
4,200
expenses
End. bal.
Chapter 3
640
4,290
730
3- 37
285
Balance sheet
Unearned service revenue...
95
Req. 2
Income statement
Service revenue (75 + 380 95)
360
Balance sheet
Unearned service revenue...
95
Service revenue is greater in (2) because Terra began the year owing
more phone service to customers. With collections for the year and the
amount of the ending liability unchanged, Terra must have earned more
revenue in situation 2 than in situation 1.
Not required but helpful:
Unearned Service Revenue
Earned revenue
3-38
Beg. bal.
75
380
End. bal.
95
DATE
Closing Entries
Dec. 31 Service Revenue............................................
Other Revenue...........................................
Retained Earnings....................................
DEBIT CREDIT
24,300
200
24,500
31 Retained Earnings.........................................
Cost of Services Sold..............................
Selling, General, and Administrative
Expense............................................
Depreciation Expense..............................
Income Tax Expense................................
22,500
31 Retained Earnings.........................................
Dividends..................................................
400
11,400
6,000
4,500
600
400
Req. 2
Retained Earnings
Dec. 31, 2011
Expenses
Dividends
2,200
22,500
400 Revenues
Dec. 31, 2012
Chapter 3
24,500
3,800
3- 39
DATE
Dec.
Journal
ACCOUNT TITLES
Adjusting Entries
31 Unearned Service Revenue..........................
Service Revenue ($19,600 $13,300).....
6,300
6,300
900
800
600
1,200
Closing Entries
31 Service Revenue............................................
Retained Earnings....................................
3-40
DEBIT CREDIT
900
800
600
1,200
19,600
19,600
31 Retained Earnings.........................................
Salary Expense.........................................
Rent Expense........................................
Depreciation Expense..............................
Income Tax Expense................................
9,700
31 Retained Earnings.........................................
Dividends..................................................
1,100
5,600
2,300
600
1,200
1,100
$14,200
700
14,900
39,900
$54,800
LIABILITIES
Current:
Accounts payable...................................................................
Salary payable ($5,600 $4,700)...........................................
Unearned service revenue ($8,400 $6,300).......................
Income tax payable.................................................................
Total current liabilities......................................................
Note payable, long-term...........................................................
Total liabilities...........................................................................
STOCKHOLDERS EQUITY
Common stock..............................................................................
Retained earnings ($11,400 + $9,900* $1,100)........................
Total stockholders equity...........................................................
Total liabilities and stockholders equity...................................
$ 4,700
900
2,100
1,200
8,900
17,000
25,900
8,700
20,200
28,900
$54,800
Chapter 3
3- 41
(continued) E 3-45B
Req. 2
Current
Year
Net working =
capital
1.67
Prior
Year
$7,000
1.70
Both net working capital and the current ratio have decreased indicating
that the ability to pay current liabilities with current assets has
deteriorated.
Debt ratio =
Total liabilities
Total assets
$25,900
=
$54,800
0.47
3-42
0.40
$60
= 1.03
$50 + $8
Debt ratio
$70 + $8
= 0.80
$90 + $8
b. Current ratio
$60 $5
= 1.10
$50
Debt ratio
$70 $5
= 0.76
$90 $5
The payment of long-term debt hurts the current ratio and improves
the debt ratio.
c. Current ratio
$60 + $4
= 1.19
$50 +$4
Debt ratio
$70 + $4
= 0.79
$90 + $4
$70 + $4
= 0.82
$90
$70
= 0.71
$90 + $8
d. Current ratio
$60
= 1.11
$50 + $4
Debt ratio
e. Current ratio
$60 + $8
= 1.36
$50
Debt ratio
Chapter 3
3- 43
Serial Exercise
(3 hours) E 3-47
Reqs. 1, 2, 5, and 7
Cash
Jan.
Accounts Receivable
11,000
Jan. 2
700
1,000
3,900
Bal.
21
2,400
12
200
Adj.
2,000
28
1,500
26
400
Bal.
2,000
31
1,200
Bal.
Jan. 18
1,500 Jan. 28
9,500
Supplies
Jan. 5
400 Adj.
Bal.
200
Equipment
200
Jan. 3
3,900
Bal.
3,900
Accumulated Depreciation
Equipment
Furniture
Adj.
65
Jan. 4
4,700
Bal.
65
Bal.
4,700
Accumulated Depreciation
Furniture
Accounts Payable
Adj.
78
Bal.
78
Jan. 26
400 Jan. 4
4,700
400
Bal.
3-44
1,500
4,700
(continued) E 3-47
Reqs. 1, 2, 5, and 7
Salary Payable
Adj.
500
Bal.
500
Adj.
Common Stock
800 Jan. 21
2,400
Bal.
1,600
Retained Earnings
Jan. 2
11,000
Clo.
1,743 Clo.
Bal.
11,000
Clo.
1,200
5,300
Bal.
Dividends
Jan. 31
1,200 Clo.
Service Revenue
1,200
Clo.
Rent Expense
Jan. 2
700 Clo.
500 Clo.
700
Jan. 12
78 Clo.
1,000
18
1,500
Bal.
2,500
Adj.
2,000
Adj.
800
5,300 Bal.
5,300
200 Clo.
200
Depreciation Expense
Equipment
500
Adj.
Depreciation Expense
Furniture
Adj.
Jan. 9
Utilities Expense
Salary Expense
Adj.
2,357
65 Clo.
65
Supplies Expense
78
Adj.
Chapter 3
200 Clo.
200
3- 45
(continued) E 3-47
Req. 1
January 2 through 18 entries are repeated from Solution to E 2-36.
Journal
ACCOUNT TITLES
DATE
Jan.
DEBIT
Cash...........................................................
Common Stock......................................
11,000
Rent Expense............................................
Cash........................................................
700
Equipment..............................................
Cash........................................................
3,900
Furniture....................................................
Accounts Payable..................................
4,700
Supplies.....................................................
Accounts Payable..................................
400
Cash...........................................................
Service Revenue....................................
1,000
12 Utilities Expense.......................................
Cash........................................................
200
18 Accounts Receivable................................
Service Revenue....................................
1,500
21 Cash.............................................................
Unearned Service Revenue...................
2,400
2
3
4
5
9
CREDIT
11,000
700
3,900
4,700
400
1,000
200
1,500
2,400
3-46
26 Accounts Payable......................................
Cash.........................................................
400
28 Cash.............................................................
Accounts Receivable..............................
1,500
31
1,200
Dividends....................................................
Cash.......................................................
400
1,500
1,200
(continued) E 3-47
Reqs. 3 and 4
Steve Ruiz, Certified Public Accountant, P.C.
Adjusted Trial Balance
January 31, 2012
ACCOUNT TITLE
Cash
Accounts receivable
Supplies
Equipment
Accumulated depr. equip.
Furniture
Accumulated depr. furn.
Accounts payable
Salary payable
Unearned service revenue
Common stock
Retained earnings
Dividends
Service revenue
Rent expense
Utilities expense
Salary expense
Depreciation expense equip.
Depreciation expense furn.
Supplies expense
TRIAL BALANCE
DEBIT
CREDIT
9,500
400
3,900
ADJUSTMENTS
DEBIT
CREDIT
(a) 2,000
(c) 200
(d1) 65
4,700
2,400
11,000
(d2) 78
4,700
65
78
4,700
500
1,600
11,000
(e) 500
(b) 800
1,200
2,500
(a)2,000
(b) 800
700
200
Chapter 3
9,500
2,000
200
3,900
4,700
1,200
20,600
20,600
(e) 500
(d1) 65
(d2) 78
(c) 200
3,643
3,643
3- 47
5,300
700
200
500
65
78
200
23,243
23,243
(continued) E 3-47
Req. 5
DATE
(a) Jan.
(b)
(c)
(d1)
(d2)
(e)
3-48
Journal
ACCOUNT TITLES
Adjusting Entries
31 Accounts Receivable................................
Service Revenue....................................
DEBIT
2,000
2,000
800
200
65
78
31 Salary Expense.........................................
Salary Payable.......................................
500
CREDIT
800
200
65
78
500
(continued) E 3-47
Req. 6
Steve Ruiz, Certified Public Accountant, P.C.
Income Statement
Month Ended January 31, 2012
Revenues:
Service revenue
$5,300
Expenses:
Rent expense
$700
Salary expense
500
Supplies expense
200
Utilities expense
200
65
78
Total expenses
1,743
Net income
$3,557
0
3,557
3,557
Less:
Dividends
(1,200)
Chapter 3
$ 2,357
3- 49
(continued) E 3-47
Req. 6
Steve Ruiz, Certified Public Accountant, P.C.
Balance Sheet
January 31, 2012
ASSETS
LIABILITIES
Current assets:
Current liabilities:
Cash
$ 9,500
Accounts receivable
2,000
Supplies
200
11,700
Plant assets:
Equipment
Furniture
Total assets
3-50
$ 4,700
500
Unearned service
revenue
1,600
6,800
$3,900
STOCKHOLDERS EQUITY
(65)
11,000
Retained earnings
2,357
$4,700
Total stockholders
equity
13,357
(78)
______
Less: accum.
depr.
Salary payable
Less: accum.
depr.
Accounts payable
$20,157
stockholders' equity
$20,157
(continued) E 3-47
Req. 7
DATE
Journal
ACCOUNT TITLES
Closing Entries
Jan. 31 Service Revenue
Retained Earnings..
DEBIT CREDIT
5,300
5,300
31 Retained Earnings
Rent Expense
Utilities Expense..
Salary Expense
Depreciation Expense Equipment...
Depreciation Expense Furniture..
Supplies Expense.......
1,743
31 Retained Earnings
Dividends..
1,200
Chapter 3
700
200
500
65
78
200
1,200
3- 51
(continued) E 3-47
Req. 8
Net working
capital
Current ratio
Debt ratio
Total liabilities
Total assets
$11,700
$6,800
$6,800
$20,157
= 1.72
0.34
The company has an excess of current assets over its current liabilities.
The current and debt ratios indicate an excellent financial position. The
business has $1.72 in current assets for every $1.00 of current liabilities.
The debt ratio of 34% is not too high, which suggests that, overall, the
business should be able to pay its debts.
3-52
Quiz
Q3-48
Q3-49
Q3-50
Q3-51
Q3-52
Q3-53
Q3-54
Q3-55
Q3-56
Q3-57
Q3-58
Q3-59
Q3-60
Q3-61
Q3-62
b
b
c
d
a
b
b
a
b
d
b
a
b
d
d
Q3-63
$7,965
Q3-64
$25,100 + $113,000
$29,700 + $188,500
= .633
Payment
Salary Payable
Beg. bal.
136,000 Salary exp.
End. bal.
Chapter 3
20,000
122,000
6,000
3- 53
Problems
$40 x = $6 ; x = $34
2.
Revenues..
$40
Expenses..
(34)
Net income...
$ 6
3.
4.
3-54
Beginning receivables..
$ 10
Add: Revenues
40
Less: Collections...
(25)
Ending receivables
$25
Balance sheet
ASSETS
Current assets:
Receivables.
$ 25
$ 7
Add: Expenses..
34
Less: Payments....
(37)
$ 4
Balance sheet
LIABILITIES
Current liabilities:
Accounts payable
$ 4
Date
July 1
Masters Consulting
Amount of Revenue (Expense) for July
Cash Basis
Accrual Basis
Expense
$(2,000)
$
0
Expense
(1,000)
Revenue
800
800
Expense
(700)
(700)
11
Revenue
19
3,400
24
Revenue
3,400
26
Expense
(2,000)
29
Expense
(1,500)
31
Expense
31
Revenue
ReReq. 2
$ (3,000)
(1,500)
$2,000 5 =
(400)
1,000
$2,600
Req. 3
The accrual-basis measure of net income is preferable because it accounts
for revenues and expenses when they occur, not when they are received or
paid in cash. For example, on July 11, the company earned $3,400 of
revenue and increased its wealth as a result. The accrual basis records this
revenue, but the cash basis ignores it. On July 24, the business collected
the receivable that was created by the revenue earned on account at July
11. The accrual basis records no revenue on July 24 because the
companys increase in wealth occurred back on July 11. The cash basis
waits until cash is received, on July 24, to record the revenue. This is too
late.
Chapter 3
3- 55
DATE
Journal
ACCOUNT TITLES
4,650
2,320
31 c. Interest Receivable.
Interest Revenue
To accrue interest revenue.
600
31 d. Supplies Expense..
Supplies..
To record supplies expense.
6,300**
CREDIT
4,650*
3-56
DEBIT
2,320
600
6,300
7,260
7,260
3,000
6,300
3,000
6,300
Cash
Accounts receivable
Prepaid rent
Supplies
Furniture
Accumulated depreciation
Accounts payable
Salary payable
Common stock
Retained earnings
Dividends
Service revenue
Salary expense
Rent expense
Utilities expense
Depreciation expense
Supplies expense
TRIAL BALANCE
DEBIT
CREDIT
8,800
1,600
3,000
2,100
90,000
ADJUSTMENTS
DEBIT
CREDIT
(a) 1,700
(b 1,000*
(c) 1,630
3,000
3,200
8,800
3,300
2,000
470
90,000
(d) 1,500**
4,500
3,200
3,000
14,000
75,060
(e) 3,000***
14,000
75,060
3,900
3,900
17,000
2,400
(a) 1,700
(e) 3,000***
(b) 1,000*
460
112,260
112,260
(d) 1,500**
(c) 1,630
8,830
_____
8,830
_____
* $3,000 3 = $1,000
** $90,000 5 = $18,000 12 = $1,500
*** $5,000 3/5 = $3,000
Chapter 3
3- 57
18,700
5,400
1,000
460
1,500
1,630
118,460
118,460
(continued) P 3-68A
Req. 2
Lady, Inc.
Income Statement
Month Ended July 31, 2012
Revenues:
Service revenue
$18,700
Expenses:
Salary expense
$5,400
Supplies expense
1,630
Depreciation expense
1,500
Rent expense
1,000
Utilities expense
460
Total expenses
Net income
9,990
$ 8,710
Lady, Inc.
Statement of Retained Earnings
Month Ended July 31, 2012
Retained earnings, July 1, 2012
Add: Net income
$75,060
8,710
83,770
Less: Dividends
Retained earnings, July 31, 2012
3-58
(3,900)
$79,870
(continued) P 3-68A
Req. 2 (continued)
Lady, Inc.
Balance Sheet
July 31, 2012
ASSETS
Current assets:
Cash
LIABILITIES
Current liabilities:
$ 8,800
Accounts payable
$ 3,200
Accounts receivable
3,300
Salary payable
3,000
Prepaid rent
2,000
6,200
Supplies
470
14,570
$90,000
STOCKHOLDERS EQUITY
Less: Accum.
deprec.
Common stock
(4,500)
14,000
79,870
93,870
$100,070
stockholders equity
Chapter 3
$100,070
3- 59
Apr.
DEBIT CREDIT
530
500
400
1,400
1,900
700
530
500
400
1,400
1,900
3-60
700
400
(continued) P 3-69A
Req. 2
Total assets
Total liabilities
Net income
Total equity
Chapter 3
3- 61
$105,500
Expenses:
Salary expense
Rent expense
$39,800
10,100
Insurance expense
4,000
Interest expense
2,700
Supplies expense
2,400
Depreciation expense
1,300
60,300
45,200
7,000
$ 38,200
Simpson Corporation
Statement of Retained Earnings
Year Ended March 31, 2012
Retained earnings, March 31, 2011
Add: Net income
$ 2,000
38,200
40,200
3-62
Less: Dividends
(23,000)
$17,200
(continued) P 3-70A
Req. 1 (continued)
Simpson Corporation
Balance Sheet
March 31, 2012
ASSETS
Cash
LIABILITIES
$ 1,700 Accounts payable
$ 3,100
Accounts receivable
700
Supplies
800
Prepaid rent
2,400
Note payable
18,400
Total liabilities
25,400
Equipment
$36,000
Less: Accum.
deprec.
(4,600) 31,400
STOCKHOLDERS EQUITY
Common stock
3,000
Retained earnings
17,200
20,200
$45,600
stockholders equity
$45,600
Req. 2
Debt ratio:
$25,400
$45,600
0.56
Chapter 3
3- 63
DATE
Mar.
Journal
ACCOUNT TITLES
Closing Entries
31 Service Revenue..
Retained Earnings.........
DEBIT
CREDIT
94,100
94,100
31 Retained Earnings..
Advertising Expense
Depreciation Expense..
Interest Expense...
Salary Expense..
Supplies Expense.
35,200
31 Retained Earnings..
Dividends........
32,500
11,000
1,000
300
17,900
5,000
32,500
Req. 2
Retained Earnings
Mar. 31, 2012 Expenses
19,500
94,100
45,900
Req. 3
Retained Earnings increased during the year because net income of
$58,900 exceeded dividends of $32,500.
3-64
$ 7,500
Accounts receivable
16,600
Prepaid expenses
5,000
Supplies
3,700
32,800
Plant assets:
Equipment
$42,500
(6,700)
35,800
Other assets
13,700
Total assets
$82,300
LIABILITIES
Current liabilities:
Current portion of note payable
Accounts payable
400
14,100
Salary payable
2,500
3,700
20,700
5,700
Total liabilities
26,400
STOCKHOLDERS EQUITY
Common stock
10,000
Retained earnings
45,900*
55,900
Chapter 3
$82,300
3- 65
(continued) P 3-72A
Req. 1 (continued)
*Retained earnings, March 31, 2011.
$19,500
58,900
78,400
Less: Dividends...........
(32,500)
$45,900
Req. 2
2012
Net working = Total current assets - $32,800 capital
current liabilities
$20,700 =
Current ratio =
2011
$12,100 $11,800
1.20
The increase in both working capital and the current ratio indicate that
the ability to pay current liabilities with current assets improved during
2012.
Debt ratio
Total liabilities
Total assets
2012
2011
$26,400
= 0.32
$82,300
0.25
3-66
$15.8
$8.6
1.84
$13.9
Debt ratio
Total liabilities
Total assets
$8.6 + $5.3
$32.1
= 0.43
Req. 2
Current Ratio
Debt Ratio
a.
= 2.67
0.35
b.
$15.8 + $2.0
$8.6
= 2.07
$13.9 + $2.0
$32.1 + $2.0
0.47
c.
$15.8 + $2.4
$8.6
= 2.12
$13.9
$32.1 + $2.4
0.40
d.
$15.8 $.7
$8.6
= 1.75
$13.9
$32.1 $.7
0.44
e.
$15.8
$8.6 + $0.5
= 1.74
$13.9 + $0.5
$32.1
0.45
f.
$15.8 $1.5
$8.6
= 1.66
$13.9 + $2.5
$32.1 + $4.0 $1.5
0.47
g.
$15.8
$8.6
= 1.84
$13.9
$32.1 $0.4
0.44
Chapter 3
3- 67
(continued) P 3-73A
Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a companys current ratio is greater than 1.0, as it is for Harrington,
paying off a current liability will always increase the current ratio.
f. Borrowing money on long-term debt will always increase the current
ratio and increase the debt ratio.
3-68
1.
2.
Revenues..
$37
Expenses..
30
Net income...
$ 7
3.
Beginning receivables.........
$ 11
Add: Revenues
37
Less:
4.
Collections..
(20)
Ending receivables
$ 28
Balance sheet
ASSETS
Current assets:
Receivables
$ 28
$ 6
Add: Expenses
30
Less: Payments.....
(35)
$ 1
Balance sheet
LIABILITIES
Current liabilities:
Accounts payable
$1
Chapter 3
3- 69
Date
Dec.
$ (3,500)
Expense
4 Expense
$(900)
Expense
5 Revenue
$500
Revenue
$500
8 Expense
$(200)
Expense
$(200)
11 Revenue
Revenue
$3,100
19 Expense
Expense
24 Revenue
$3,100
Revenue
26 Expense
$(1,800)
Expense
29 Expense
$(800)
Expense
$(800)
Expense
$(700)
Revenue
$400
31 Expense
31 Revenue
Req. 2
Income (loss)
before tax
$(3,600)
$2,300
Req. 3
The accrual-basis measure of net income is preferable because it accounts
for revenues and expenses when they occur, not when they are received or
paid in cash. For example, on Dec. 11, the company earned $3,100 of
revenue and increased its wealth as a result. The accrual basis records this
revenue, but the cash basis ignores it. On Dec. 24, the business collected
the receivable that was created by the revenue earned on account at Dec.
11. The accrual basis records no revenue on Dec. 24 because the
companys increase in wealth occurred back on Dec. 11. The cash basis
waits until cash is received, on Dec. 24, to record the revenue. This is too
late.
DATE
Dec. 31 a.
31 b.
31 c.
31 d.
31 e.
31 f.
Journal
ACCOUNT TITLES AND EXPLANATION
DEBIT
Insurance Expense............................
Prepaid Insurance.........................
To record insurance expense
3,500*
1,240
Interest Receivable.............................
Interest Revenue...........................
To accrue interest revenue.
500
Supplies Expense................................
Supplies..........................................
To record supplies expense.
6,800**
CREDIT
3,500
1,240
500
6,800
8,330
8,330
3,500
5,800
3,500
5,800
_____
* $800 + $3,600 $900 = $3,500
** $2,700 + $6,400 $2,300 = $6,800
Chapter 3
3- 71
Cash
Accounts receivable
Prepaid rent
Supplies
Furniture
Accumulated depreciation
Accounts payable
Salary payable
Common stock
Retained earnings
Dividends
Service revenue
Salary expense
Rent expense
Utilities expense
Depreciation expense
Supplies expense
TRIAL BALANCE
DEBIT
CREDIT
8,300
1,900
2,100
2,400
63,000
(a) 2,100
(b)
(c)
3,700
4,000
700*
2,090
ADJUSTED
TRIAL BALANCE
DEBIT
CREDIT
8,300
4,000
1,400
310
63,000
(d) 1,750**
5,450
4,000
3,060
13,000
53,430
(e) 3,060***
13,000
53,430
4,300
4,300
11,000
2,600
(a) 2,100
(e) 3,060***
(b) 700*
530
85,130
* $2,100 3 = $700
** $63,000 3 = $21,000 12 = $1,750
*** $5,100 3/5 = $3,060
3-72
ADJUSTMENTS
DEBIT
CREDIT
85,130
(d) 1,750**
(c) 2,090
9,700
_____
9,700
13,100
5,660
700
530
1,750
2,090
92,040
92,040
(continued) P 3-77B
Req. 2 (continued)
Princess, Inc.
Income Statement
Month Ended August 31, 2012
Revenues:
Service revenue
$13,100
Expenses:
Salary expense
$5,660
Supplies expense
2,090
Depreciation expense
1,750
Rent expense
700
Utilities expense
530
Total expenses
10,730
Net income
$2,370
Princess, Inc.
Statement of Retained Earnings
Month Ended August 31, 2012
Retained earnings, August 1, 2012
Add: Net income
$53,430
2,370
55,800
Less: Dividends
(4,300)
Chapter 3
$51,500
3-73
(continued) P 3-77B
Req. 2 (continued)
Princess, Inc.
Balance Sheet
August 31, 2012
ASSETS
LIABILITIES
Current assets:
Current liabilities:
Cash
$8,300
Accounts payable
Accounts receivable
4,000
Prepaid rent
Supplies
$63,000
STOCKHOLDERS EQUITY
Common stock
(5,450)
Total assets
3-74
7,060
14,010
Less: Accum.
deprec.
3,060
310
Salary payable
$ 4,000
13,000
51,500
64,500
______
$71,560
$71,560
stockholders equity
DATE
Journal
ACCOUNT TITLES AND EXPLANATION
DEBIT CREDIT
500
400
700
1,500
1,400
1,200
200
500
400
700
1,500
1,400
1,200
200
_____
* ($15,700 - $15,000 - $500)
Chapter 3
3-75
(continued) P 3-78B
Req. 2
Total assets
Total liabilities
Net income
Total equity
3-76
$97,800
Expenses:
Salary expense
$40,200
Rent expense
10,300
Insurance expense
3,600
Interest expense
2,600
Supplies expense
2,500
Depreciation expense
1,200
60,400
37,400
7,100
Net income
$30,300
Nicholl Corporation
Statement of Retained Earnings
Year Ended May 31, 2012
Retained earnings, May 31, 2011
$ 4,000
30,300
34,300
Less: Dividends
(20,000)
$14,300
Chapter 3
3-77
(continued) P 3-79B
Req. 1 (continued)
Nicholl Corporation.
Balance Sheet
May 31, 2012
ASSETS
Cash
LIABILITIES
$ 1,500 Accounts payable
Accounts receivable
Supplies
2,200
Prepaid rent
revenue
900
$37,300
Less: Accum.
deprec.
(4,100)
$ 3,700
500
2,100
Note payable
18,800
Total liabilities
26,000
33,200
STOCKHOLDERS EQUITY
Common stock
7,000
Retained earnings
14,300
21,300
$47,300
stockholders equity
$47,300
Req. 2
Debt ratio:
$26,000
$47,300
0.55
3-78
ACCOUNT TITLES
DEBIT
Closing Entries
Mar. 31 Service Revenue
Retained Earnings
CREDIT
91,500
91,500
31 Retained Earnings.
Salary Expense..
Supplies Expense.
Advertising Expense
Depreciation Expense.
Interest Expense...
36,300
31 Retained Earnings.
Dividends
32,500
17,700
4,800
11,400
2,000
400
32,500
Req. 2
Retained Earnings
Mar. 31, 2012 Expenses
20,000
91,500
42,700
Chapter 3
3-79
3-80
$ 7,400
17,000
3,000
5,500
32,900
35,900
14,000
$82,800
$14,400
700
2,600
3,600
21,300
5,600
26,900
13,200
42,700*
55,900
$82,800
(continued) P 3-81B
Req. 1 (continued)
_____
*Computation:
Retained earnings, March 31, 2011..
Add: Net income ($91,500 $11,400 $2,000
$400 $17,700 $4,800)..........
$ 20,000
55,200
75,200
(32,500)
$42,700
Less: Dividends..
Retained earnings, March 31, 2012..
Req. 2
2012
Net working = Total current assets capital
current liabilities
$32,900 $21,300 =
Current ratio =
2011
$11,600 $11,000
$32,900
= 1.54
$21,300
1.30
The increase in both working capital and the current ratio indicate that
the ability to pay current liabilities with current assets improved during
2012.
Debt ratio
Total liabilities
Total assets
$26,900
$82,800
= 0.32
0.35
Cool River Services overall debt position improved a bit from 2011 to
2012.
Chapter 3
3-81
$15.4
= 1.64
$9.4
$14.9
Debt ratio
Total liabilities
Total assets
$9.4 + $5.5
$31.2
= 0.48
Req. 2
Current Ratio
a.
3-82
Debt Ratio
=
2.28
0.38
b.
$15.4 + $3.0
$9.4
1.96
$14.9 + $3.0
$31.2 + $3.0
0.52
c.
$15.4 + $2.4
$9.4
1.89
$14.9
$31.2 + $2.4
0.44
d.
$15.4 $.6
$9.4
1.57
$14.9
$31.2 $.6
0.49
e.
$15.4
$9.4 + $0.3
1.59
$14.9 + $0.3
$31.2
0.49
f.
$15.4 $2.0
$9.4
1.43
0.52
g.
$15.4
$9.4
1.64
0.49
$14.9 + $2.9
$31.2 + $4.9 $2.0
$14.9
$31.2 $0.9
(continued) P 3-82B
Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a companys current ratio is greater than 1.0, as for Hiaport, paying
off a current liability will always increase the current ratio.
f. Borrowing money on long-term debt will always increase the current
ratio and increase the debt ratio.
Chapter 3
3-83
$11,100
=
$6,100
1.82
Current
ratio
_____
$10,700
=
$5,200
2.06
Conclusion:
3-84
a. Net income:
Service revenue:
($161,000 + $1,650 + $32,200).
$194,850
Expenses:
Salary ($37,000 + $3,500).
$ 40,500
Depreciation building
2,600
Supplies...
Insurance.
3,100
Advertising..
7,300
Utilities.
2,000
1,500
57,000
Net income..
$137,850
b. Total assets:
Cash
$ 7,300
39,700
1,500
2,000
Building
$110,000
91,800
53,000
Land
$195,300
Total assets.
Chapter 3
3-85
(continued) E 3-84
c. Total liabilities:
Accounts payable..........................................
Salary payable................................................
Unearned service revenue
($5,500 $1,650)........................................
Total liabilities................................................
6,100
3,500
3,850
$ 13,450
d.
Total stockholders equity:
Common stock...............................................
Retained earnings, beginning......................
Add: Net income...........................................
Less: Dividends............................................
Total stockholders equity............................
$ 14,000
$ 46,000
137,850
197,850
(16,000
167,850
)
$181,850
3-86
LIABILITIES
Accounts payable (g)
Advertising payable(h)
Salary payable (i)
Unearned gift certificate
revenue (b)
Total liabilities
$ 3,000
500
500
1,200
5,200
23,000
STOCKHOLDERS EQUITY
Total assets
Chapter 3
18,000
17,500
35,500
$40,700
3-87
(continued) P 3-85
Supporting computations
(a)
Bal. 12/31/2011
Cash
1,300
8,000
Bal. 1/31/2012
(b)
15,300
600
(c)
Accounts Receivable
Bal. 12/31/2011
Revenue on account
Bal. 1/31/2012
2,000
29,400
1,400
* Excludes the $1,000 for gift certificates which was received in advance, not on
account
(d)
Supplies
Bal. 12/31/2011
1,500
Purchase of supplies
3,500
Bal. 1/31/2012
1,000
(e)
(f)
3-88
(continued) P 3- 85
(g)
Accounts payable
5,000 Bal. 12/31/2011
Payments on account
5,500
Salary Payable
1,000 Bal. 12/31/2011
Salaries paid
12,500
(j)
(k)
Retained Earnings
12,000 Bal. 12/31/2011
Dividends
500
Chapter 3
3-89
Decision Cases
(25 min.) Decision Case 1
Req. 1 Unadjusted trial balance:
Debit
Cash..
$ 8,000
Accounts receivable.
4,200
Supplies...
800
Prepaid rent
1,200
Land..
43,000
Accounts payable..
Credit
$12,000
Salary payable
700
23,400
Common stock..
5,000
Retained earnings.
9,300
Service revenue.
9,100
Salary expense...
Rent expense..
Advertising expense.
Supplies expense..
Totals
3,400
0
900
0
$61,500
$59,500
3-90
Credit
$8,000
Accounts receivable..
4,200
400
1,100
43,000
Accounts payable...
12,000
Salary payable.
1,000
200
25,400
Common stock
5,000
Retained earnings..
9,300
9,600
4,400
100
Advertising expense..
900
Supplies expense...
400
Total
$62,500
$62,500
Req. 3
Current ratio
1.04
3-91
$32,000
$12,000
Wages expense.........................................
5,000
Rent expense............................................
4,000
Insurance expense...................................
1,000
Depreciation expense..............................
1,000
23,000
Net income................................................
$ 9,000
3-92
9,000
Less: Dividends...................................................
(3,000)
$6,000
LIABILITIES
Cash
$ 7,000
Food inventory
3,000
Prepaid insurance
1,000
Dishes, silver
4,000
OWNERS EQUITY
Fixtures
$24,000
Less: Accum.
Common stock
deprec. (1,000)
Total assets
Recommendation:
10,000
$25,000
6,000
31,000
$41,000
Chapter 3
3-93
$26,000
$4,000
900
1,100
5,000
11,000
$15,000
X 16
$240,000
$26,000
(6,000)
20,000
113,000
Less: Dividends
Ending retained earnings
Common stock
Stockholders equity, June 30, 2012
Multiplier to compute price
Williams asking price
3-94
(9,000)
$104,000
50,000
$154,000
X 2__
$308,000
Chapter 3
3-95
Ethical Issues
Ethical Issue 1
1. The journal entry to record the revenue is:
Dec.
Accounts Receivable...
Sales Revenue..
XXX
XXX
3-96
3. The authors would suggest either of two actions. Cross Timbers can
either:
a. Report the current ratio of 1.47 and the debt ratio of .51 because
these are the true values. Then tell the bank of the signed contract
for additional work and the hope for a better set of ratio values next
year. In some cases, banks will agree to sign a waiver of the terms
of loan covenants, meaning that, although the company is in
violation, the bank will not move to enforce the covenant. They
may give Cross Timbers a grace period to cure the violation in
the covenant.
b. Pay off some current liabilities before year end. This will
improve both the current ratio and the debt ratio. This may enable
Cross Timbers to bring its ratio values into compliance with the
banks requirements.
Chapter 3
3-97
Ethical Issue 2
1. These transactions overstate the reported income of the company by
$21,000 ($10,000 + $10,000 + $1,000).
2. It appears that Almond wants to improve the companys reported
income in order to borrow on favorable terms. Her action is unethical
and probably illegal as well because she is deliberately overstating
the companys reported income.
Almond appears to be letting the potential short term economic
advantage of these deliberate misstatements take precedence. She
needs to remember that these misstatements violate GAAP, and that,
depending on what use is made of the financial statements, could
subject the company to civil or criminal legal proceedings. If this
happens, the short term economic gains ($21,000) would not even
come close to the long-term economic costs associated with the legal
actions, not to mention the negative publicity.
need a bank loan, and perhaps the money would be used to pay bills,
expand the business, and so on. However, based on Almonds lack of
integrity, the money may be destined for her own use. Regardless of
its use, the money is obtained under false pretenses and cannot be
headed for a good outcome.
The bank is harmed by Almonds and Lails actions. Lending
money to Almond under false pretenses may lead the bank to charge
an unrealistically low interest rate that robs the banks owners of
interest revenue. In the extreme, the public is robbed if taxpayers
wind up financing the bailout of a failed institution.
3. Personal advice will vary from student to student. The purpose of
asking this question is to challenge students to take the high road of
3-98
Chapter 3
3-99
1,759
(b)
End. Bal.
$1,759
2,321
$2,321
DEBIT
1,759
b. Operating expenses..
Cash.....
Accrued expenses and other
6,237
CREDIT
1,759
3,916
2,321
The balance of Accrued Expenses and Other agrees with the financial
statements at December 31, 2010.
Chapter 3
3-101
$13,747
$10,372
= 1.33
$9,797
= 1.33
$7,364
Working Capital:
Current Assets
Current liabilities
2010
2009
$13,747$9,797 =
$3,375
$10,372
$7,364 = $2,433
Debt ratio:
2010
Total liabilities
Total assets
$11,933*
$18,797
2009
= 0.64
$8,556**
$13,813
*10,372 + 1,561
+ 1,192
The
current
= 0.62
**7,364
ratio
did
not
change,
working
capital
increased
substantially, and the debt ratio slightly worsened during 2010. This
reveals slightly weakening leverage but with sustained liquidity. Also,
the size of the firm overall has increased (indicated by total assets) and
its working capital has increased as well to support Amazon.com now
that it is a larger firm.
beginning
balance
of
Accounts
Receivable,
$322.5
million
represents revenue earned in fiscal 2009 but not received until fiscal
2010
represents revenue earned in fiscal 2010 but not received until fiscal
2011.
DEBIT
8
CREDIT
8
Req. 3
Since depreciation expense increases Accumulated Depreciation $70
million, a decrease of $49 million ($799 + $70 - $820) must have occurred
Chapter 3
3-103
as well. The decrease is most likely from the sale of property, plant, and
equipment.
Req. 4
Accrued Advertising Payable represents an accrued liability account.
When the company incurs advertising expense, this current liability
account is credited. When the company pays the advertising company,
these amounts are debited to Accrued Advertising Payable.
$211.6
Beg. Bal.
$31.4
Adv. Exp.
206.1
End. Bal.
26.9
Group Project
(45 min.)
Req. 1
Trozo Lawn Service, Inc.
Income Statement
Four Months Ended August 31
Service revenue ($5,600 + $600)
$6,200
Expenses:
Wage expense ($1,900 + $200)
$2,100
400
350
Repair expense
300
100
Total expenses
3,250
Net income
$2,950
Chapter 3
3-105
LIABILITIES
Current:
Current:
Cash
$2,640
Accounts receivable
600
Wages payable
Total current liabilities
$ 200
200
200
Supplies
50
2,890
Long-term:
Trailer
EQUITY
Common stock
$300
(100)
1,060
Retained earnings
($2,950 $460)
2,490
2,890
Less accum.
deprec.
STOCKHOLDERS
$3,690
stockholders equity
$3,690
$ 5,600
$ 400
1,900
600
300
3,200
2,400
$(300)
(300)
$ 1,500
(1,500)
(460)
1,000
540
$ 2,640
-0$ 2,640
Req. 4
Matt was successful because his lawn service was profitable and had a
positive cash flow from operating activities. Matt was also able to pay
off his loan and pay a dividend.
Chapter 3
3-107