Chapter 3 Set B Exercises Libby 7e

E3-1B (similar to E3-2) Reporting Cash Basis versus Accrual Basis Income Breeze, Inc., sells hiking equipment to customers. Its fiscal year ends on December 31. The follo ing transactions occurred in !"1!# a. $urchased %1&',""" of ne sports equipment in(entory) paid %&",""" in cash and o ed the rest on account. b. $aid employees %1*!,3"" in ages for ork during the year) an additional %&,3!" for !"1! ages ill be paid in +anuary !"13. c. ,old sports equipment to customers for %-'&,""") recei(ed %.3&,""" in cash and the rest on account. The cost of the equipment as %/1!,""". d. $aid %!",.-" cash for utilities for the year. e. 0ecei(ed %3&,""" from customers as deposits on orders of ne inter hiking equipment to be sold to the customers in +anuary !"13. f. 0ecei(ed a %1,-*" bill for December !"1! utilities that ill be paid in +anuary !"13. Required: 1. 1omplete the follo ing statements# Cash Basis Income Statement 0e(enues 1ash sales 1ustomer deposits 23penses In(entory purchases 4ages paid 5tilities paid 6et income Accrual Basis Income Statement 0e(enues ,ales to customers 23penses 1ost of sales 4ages e3pense 5tilities e3pense 6et income

!. 4hich basis of accounting 7cash or accrual8 pro(ides more useful information to in(estors, creditors, and other users9 4hy9 E3-2B (similar to E3-3) Identi !ing Revenues 0e(enues are normally recognized hen the deli(ery of goods or ser(ices has occurred, there is persuasi(e e(idence of an arrangement for customer payment, the price is fi3ed or determinable, and collection is reasonably assured. The amount recorded is the cash:equi(alent sales price. The follo ing transactions occur in "une !"13# a. ; popular food magazine company recei(es a total of %1/,*-" from subscribers. The subscriptions begin in the ne3t fiscal year. ;ns er from the magazine company<s standpoint. b. =n +une 1, !"13, a bank lends %!,/"" to a company) the note principal and %3-/ 7%!,/"" 3 1. percent8 annual interest are due in one year. ;ns er from the bank<s standpoint. c. >onda, Inc., sells a truck ith a list, or ?sticker,@ price of %!',"-* for %!1,&&* cash. d. Taryt department store orders 1,""" boy<s shirts for %1! each for future deli(ery from T:shirt 4orld 1orporation. The terms require payment in full ithin 3" days of deli(ery. ;ns er from T:shirt 4orld<s standpoint. e. T:shirt 4orld 1orporation completes production of the shirts described in 7d8 and deli(ers the order. ;ns er from T:shirt 4orld<s standpoint. f. T:shirt 4orld 1orporation recei(es payment from Taryt<s for the order described in 7 d8. ;ns er from T:shirt 4orld<s standpoint. g. ; customer purchases a ticket from 5nited ;irlines for %3!! cash to tra(el the follo ing +anuary. ;ns er from 5nited ;irlines< standpoint. h. BA4 issues %!" million in ne common stock. i. 5ni(ersity of Aiami recei(es %1-,3"",""" cash for .",""" t el(e:game season football tickets. j. 5ni(ersity of Aiami plays the first football game referred to in 7 i8. k. $recision Builders signs a contract ith a customer for the construction of a ne %&"",""" arehouse. ;t the signing, $recision recei(es a check for %1&",""" as a deposit on the future construction. ;ns er from $recision<s standpoint.
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l. ; customer orders and recei(es '! A$3 players from Best Buy) the customer promises to pay %*,""" ithin three months. ;ns er from Best Buy<s standpoint. m. Delights, a retail store, sells a %/& lamp to a customer ho charges the sale on his store credit card. ;ns er from Delights< standpoint. Required: Bor each of the transactions, if re(enue is to be recognized in +une, indicate the re(enue account title and amount. If re(enue is not to be recognized in +une, e3plain hy. E3-3B (similar to E3-&) Identi !ing E'penses 0e(enues are normally recognized hen goods or ser(ices ha(e been pro(ided and payment or promise of payment has been recei(ed. 23pense recognition is guided by an attempt to match the costs associated ith the generation of those re(enues to the same time period. The follo ing transactions occur in "anuar! !"1!# a. Ce4orld 1ompany uses %/,3!" orth of electricity and natural gas in its headquarters building for hich it has not yet been billed. b. ;t the beginning of +anuary, Darcia 1onstruction 1ompany pays %/!. for magazine ad(ertising to run in monthly publications each of the first three months of the year. c. >elpDesk pays its computer ser(ice technicians %!33,/"" in salaries for the t o eeks ended +anuary '. ;ns er from >elpDesk<s standpoint. d. ; uni(ersity orders 11",""" season baseball tickets from its printer and pays %.,'"" in ad(ance for the custom printing. The first game ill be played in ,eptember. ;ns er from the uni(ersity<s standpoint. e. ; bookstore recei(es 3!" accounting te3ts at a cost of %11" each. The terms indicate that payment is due ithin 3& days of deli(ery. f. During the last eek of +anuary, the bookstore sells !&" of the accounting te3ts recei(ed in 7 e8 at a sales price of %1&" each. g. >onda, Inc., pays its salespersons %11,!"" in commissions related to December automobile sales. ;ns er from >onda<s standpoint. h. =n +anuary 31, >onda, Inc., determines that it ill pay its salespersons %13,'!" in commissions related to +anuary sales. The payment ill be made in early Bebruary. ;ns er from >onda<s standpoint. i. ; ne grill is purchased and installed at a restaurant at the end of the day on +anuary 31) a %1",'&" cash payment is made on that day. j. Dade Aall had Eanitorial supplies costing %!,""" in storage on +anuary 1. ;n additional %1,'"" orth of supplies as purchased during +anuary. ;t the end of +anuary %*." orth of Eanitorial supplies remained in storage. k. ; 4endy<s employee orks eight hours, at %1! per hour, on +anuary 31) ho e(er, payday is not until Bebruary 3. ;ns er from 4endy<s point of (ie . l. Boot<s 1ompany pays %/,-"" for a fire insurance policy on +anuary 1. The policy co(ers 1! months beginning on +anuary 1. ;ns er from Boot<s point of (ie . m. 0edtree Incorporated has its deli(ery (an repaired in +anuary for %'&" and charges the amount on account. n. ,aas 1ompany, a fitness equipment company, recei(es its phone bill at the end of +anuary for %1'* for +anuary calls. The bill has not been paid to date. o. +ill 1ompany recei(es and pays in +anuary a %!,3-" in(oice 7bill8 from a consulting firm for ser(ices recei(ed in +anuary. p. Aonk<s Ta3i 1ompany pays a %'*& in(oice from a consulting firm for ser(ices recei(ed and recorded in December. q. T:shirt 4orld completes production of &"" men<s shirts ordered by ,hine<s department stores at a cost of %1! each and deli(ers the order. ;ns er from T:shirt 4orld<s standpoint. Required: Bor each of the transactions, if an e3pense is to be recognized in +anuary, indicate the e3pense account title and the amount. If an e3pense is not to be recognized in +anuary, indicate hy.
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E3-&B (similar to E3-() )etermining *inancial Statement E ects o +arious ,ransactions The follo ing transactions occurred for 6orman 1ompany during a recent year. Dollars are in thousands. a. b. c. d. e. f. g. h. i. Issued common stock to in(estors for %',"/' cash. $urchased %.&/,'!1 of additional in(entory on account. Borro ed %/",""". ,old %&&.,3'/ of products to customers on account) cost of the products sold as %3/&,/'' $aid cash di(idends of %1&,/&". $urchased for cash %//,1!& in additional property, plant, and equipment. Incurred %!-&,""" in selling e3penses, paying three:fourths in cash and o ing the rest on account. 2arned %!,3/" interest on in(estments, recei(ing *" percent in cash. Incurred %1,*3& in interest e3pense to be paid at the beginning of ne3t year.

Required: Bor each of the transactions, complete the tabulation, indicating the effect 7F for increase and : for decrease8 of each transaction. 70emember that ; G C F ,2, 0 : 2 G 6I, and 6I affects ,2 through 0etained 2arnings.8 4rite 62 if there is no effect. The first transaction is pro(ided as an e3ample. Balance Sheet Income Statement Stoc.holders/ ,ransaction Assets #ia-ilities E0uit! Revenues E'penses 1et Income
7a8 7e3ample8 F',"/' 62 F',"/' 62 62 62 #$& E3-2B (similar to E3-3) Recording "ournal Entries The follo ing summarized transactions are typical of those that occurred in a recent year at Aarkham Industries 7dollars are in thousands8. a. $urchased equipment for %1,!-& in cash. b. Borro ed %1!,""" from a bank, signing a short:term note. c. $ro(ided %&!,3"" in ser(ice to customers during the year, ith %1',!&" on account and the rest recei(ed in cash. d. $aid %',&-" cash on accounts payable. e. $urchased %/!,**" in(entory on account. f. $aid payroll of %1&,'!" during the year. g. 0ecei(ed %!*,/-" from customers as payments on their account. h. $urchased and used %1,*-. of fuel in deli(ery (ehicles during the year 7paid for in cash8. i. Declared and paid %**' in di(idends for the year. j. Incurred %-. in utility usage during the year) paid %3. in cash and o ed the rest on account.

Required: Bor each of the transactions, prepare Eournal entries. Determine hether the accounting equation remains in balance and debits equal credits after each entry. E3-(B (similar to E3-4) Recording "ournal Entries Haye 0esorts, Inc., o ns and operates fi(e premier ski resort properties here they sell lift tickets, ski lessons, and ski equipment. The follo ing hypothetical transactions are typical of those that occur at the resorts. a. Borro ed %3,&"",""" from the bank on +une 1, signing a note payable due in si3 months. b. $urchased a ne sno plo for %'&,""" cash on December 31. c. $urchased -" sno boards for %!*,""" on account to sell in the ski shops. d. Incurred %/!,""" in routine maintenance e3penses for the chairlifts) paid cash. e. ,old %1'&,""" of season passes 7(alid Bebruary through Aarch8 and recei(ed cash. f. ,old a sno board to a customer for %."" on account. 7The cost of the sno board as %3'&.8 g. ,old ski lessons in December for a total of %1'",""" in cash. h. 0ecei(ed a %/,!"" deposit on a lodge to be rented for fi(e days in Aarch. i. $aid half the charges incurred on account in 7c8. j. 0ecei(ed %!&" on account from the customer in 7f8. k. $aid %!"&,""" in ages to employees for the month of +anuary.

Required: 1. $repare Eournal entries for each transaction. 70emember to check that debits equal credits and that the accounting equation is in balance after each transaction.8 !. ;ssume that Haye 0esorts had a %1,/"" balance in ;ccounts 0ecei(able at the beginning of +anuary. Determine the ending balance in the ;ccounts 0ecei(able account at the end of December based on transactions (a) through (k). ,ho your ork in T:account format. E3-3B (similar to E3-15) Anal!6ing the E ects o ,ransactions in ,-Accounts and Computing Cash Basis versus Accrual Basis 1et Income Deorge<s $iano 0ebuilding 1ompany has been operating for one year 7!"1"8. ;t the start of !"11, its income statement accounts had zero balances and its balance sheet account balances ere as follo s# 1ash ;ccounts recei(able ,upplies 2quipment Cand Building % ',/"" 1&,""" **" 1/,""" 1",""" 3!,&"" ;ccounts payable 5nearned fee re(enue 7deposits8 6ote payable 7long:term8 1ontributed capital 0etained earnings % .,'"" /,/"" &.,""" 1",!"" !,&*"

Required: 1. 1reate T:accounts for the balance sheet accounts and for these additional accounts# 0ebuilding Bee 0e(enue, 0ent 0e(enue, 4ages 23pense, and 5tilities 23pense. 2nter the beginning balances. !. 2nter the follo ing +anuary !"11 transactions in the T:accounts, using the letter of each transaction as the reference# a. 0ebuilt and deli(ered se(en pianos in +anuary to customers ho paid %1/,'&" in cash. b. 0ecei(ed a %/"" deposit from a customer ho anted his piano rebuilt. c. 0ented a part of the building to a bicycle repair shop) recei(ed %3!" for rent in +anuary. d. 0ecei(ed %-,/"" from customers as payment on their accounts. e. 0ecei(ed an electric and gas utility bill for %/'& to be paid in Bebruary. f. =rdered %.-" in supplies. g. $aid %1,//" on account in +anuary. h. 0ecei(ed from the home of +im ,mith, the maEor shareholder, a %1!"" tool 7equipment8 to use in the business. i. $aid %1!,""" in ages to employees ho orked in +anuary. j. Declared and paid a %1,3"" di(idend. k. 0ecei(ed and paid cash for the supplies in 7f8. 3. 5sing the data from the T:accounts, amounts for the follo ing on +anuary 31, !"11, ere 0e(enues % IIII: 23penses % IIII G 6et Income % IIII ;ssets % IIII G Ciabilities %III F ,tockholders< 2quity % IIII /.4hat is net income if ,tacey<s used the cash basis of accounting9 4hy does this differ from accrual basis net income 7in requirement 389 E3-4B (similar to E3-11) 7reparing an Income Statement% Statement o Stoc.holders/ E0uit!% and Classi ied Balance #$2 Sheet 0efer to 23J'B. Required: 5se the ending balances in the T:accounts in 23:'B to prepare the follo ing# 1. ;n income statement for +anuary !"11 in good form 7ignore income ta3es8. !. ; statement of stockholders< equity for +anuary !"11. 3. ; classified balance sheet as of +anuary 31, !"11, in good form. E3-8B (similar to E3-13) Anal!6ing the E ects o ,ransactions in ,-Accounts 1hristy Banks and Haren +ones had been operating a decorating business for se(eral years. In +une !"11, the partners ere planning to e3pand by opening a retail sales shop and decided to form the business as a corporation called Dress it up, Inc. The follo ing transactions occurred in +une !"11# a. 0ecei(ed %.",""" cash from each of the t o shareholders to form the corporation. The partners also contributed %/,""" in accounts recei(able, %*,""" in equipment, a (an 7equipment8 appraised at a fair market (alue of %11,""", and %."" in supplies.

b. $urchased a (acant store for %!/",""", making a %'&,""" cash do n payment and signing a 1":year mortgage from a local bank for the rest 7ignore interest8. c. Borro ed %1"",""" from the local bank on a 1" percent, one:year note 7ignore interest8. d. $urchased and used paper supplies costing %',-&") paid cash. e. Binished three homes in +une for %.,'"") %3,""" as billed, and the rest as recei(ed in cash. f. Aade and sold items at the retail store for %/,'"" cash. g. 0ecei(ed a %!"" telephone bill for +une to be paid in +uly. h. $aid %!-* in gas for the (an in +une. i. $aid %&,3*" in ages to employees ho orked in +une. j. $aid a %1&" di(idend from the corporation to each o ner. k. $urchased %1&,""" of equipment and reno(ated and decorated the ne store for %3&,""" 7added to the cost of the building8) paid cash.
Required:

1. ,et up appropriate T:accounts for 1ash, ;ccounts 0ecei(able, ,upplies, 2quipment, Building, ;ccounts $ayable, 6ote $ayable, Aortgage $ayable, 1ontributed 1apital, 0etained 2arnings, 0etail ,tore 0e(enue, Decorating 0e(enue, ,upplies 23pense, 5tilities 23pense, 4ages 23pense, and Buel 23pense. 2nter the beginning balances in the T:accounts. !. 0ecord in the T:accounts the effects of each transaction for Dress it up, Inc., in +une. Identify the amounts ith the letters starting ith 7a8. 1ompute ending balances. E3-15B (similar to E3-1() In erring $perating ,ransactions and 7reparing an Income Statement and Balance Sheet Kicky<s Hite 1ompany 7a corporation8 sells and repairs kites from manufacturers around the orld. Its stores are located in rented space in malls and shopping centers. During its first month of operations ended ;pril 3", !"11, Kicky<s Hite 1ompany completed eight transactions ith the dollar effects indicated in the follo ing schedule# )ollar E ect o Each o the Eight ,ransactions
Accounts 1ash ;ccounts 0ecei(able In(entory $repaid 23penses ,tore Bi3tures ;ccounts $ayable 5nearned 0e(enue 1ontributed 1apital ,ales 0e(enue 1ost of ,ales 4ages 23pense 0ent 23pense 5tilities 23pense 1,"-" -3,3"" !1,!"" 11,."" 1,'." 1,&.! &." !/,!"" 11,."" %1,"-" '." 1/,-"" (a) %-3,3"" (-) %7!/,!""8 (c) %73,!""8 (d) % /,.-" 1.,&!" 711,.""8 1,&.3 (e) () %71,'."8 (g) %73,1!&8 (h) %1,3!" Ending Balance

Required: 1. 4rite a brief e3planation of transactions 7a8 through 7h8. Include any assumptions that you made. !. 1ompute the ending balance in each account and prepare an income statement and a classified balance sheet for Kicky<s Hite 1ompany on ;pril 3", !"11.

E3-11B (similar to E3-14) In erring ,ransactions and Computing E ects 9sing ,-Accounts Tundra, Inc<s recent accounting records included the follo ing accounts. Dollars are in millions# 1L1 Accounts Receiva-le -// 1'!* 9 &3" 1L1 7repaid E'penses 1!& 1*3 9 119nearned Su-scriptions .* 1L1 9 ** *. 1!L31

1!L31

1!L31

Required: 1. Bor each T:account, describe the typical transactions that affect each account 7that is, the economic e(ents that occur to make these accounts increase and decrease8. !. Bor each T:account, compute the missing amounts.