# ACC 205 Principles of Accounting All Exercise Assignments New Course 2013

Question # 00003199 Posted By: maqj Updated on: 11/06/2013 02:27 AM Due on: 11/06/2013
Subject Accounting Topic Accounting Tutorials:
Question

## Week One Exercise Assignment

Basic Accounting Equations

1. 1. Basic concepts.Jean's Marine Supply specializes in the sale of boating equipment and acces­sories. Identify the items that follow as an asset (A), liability (L), revenue (R), or expense (E) from the firm's viewpoint.

1. a. The inventory of boating supplies owned by the company.
2. b. Monthly rental charges paid for store space.
3. c. A loan owed to Citizens Bank.
4. d. New computer equipment purchased to handle daily record keeping.
5. e. Daily sales made to customers.
6. f. Amounts due from customers.
7. g. Land owned by the company to be used as a future store site.
8. h. Weekly salaries paid to salespeople.

1. 2. Basic computations. The following selected balances were extracted from the accounting records of Rossi Enterprises on December 31, 20X3:

Accounts Payable \$3,200 Interest Expense \$2,500

Accounts Receivable 14,800 Land 18,000

Auto Expense 1,900 Loan Payable 40,000

Building 30,000 Tax Expense 3,300

Cash 7,400 Utilities Expense 4,100

Fee Revenue 56,900 Wage Expense 37,500

a. Determine Rossi’s total assets as of December 31.

b. Determine the company’s total liabilities as of December 31.

c. Compute 20X3 net income or loss.

3. Balance sheet preparation. The following data relate to Preston Company as of December 31, 19XX:

Building \$44,000 Accounts receivable \$24,000

Cash 17,000 Loan payable 30,000

J. Preston, Owners Equity 65,000 Land 21,000

Accounts payable ?

Prepare a balance sheet as of December 31, 19XX. (See Exhibit 1.1 and 1.4)

4. Basic transaction processing. On November 1 of the current year, Richard Parker established a sole proprietorship. The following transactions occurred during the month:

1: Parker invested \$19,000 into the business.

2: Paid \$9,000 to acquire a used minivan.

3: Purchased \$1,800 of office furniture on account.

4: Performed \$2,100 of consulting services on account.

5: Paid \$300 of repair expenses.

6: Received \$800 from clients who were previously billed in item 4.

7: Paid \$500 on account to the supplier of office furniture in item 3.

8: Received a \$150 electric bill, to be paid next month.

9: Parker withdrew \$600 from the business.

10: Received \$250 in cash from clients for consulting services rendered.

Instructions

a. Arrange the following asset, liability, and owner’s equity elements of the account­ing equation: Cash, Accounts Receivable, Office Furniture, Van, Accounts Payable, Investments/Withdrawals, and Revenues/Expenses. (See Exhibit 5)

b. Record each transaction on a separate line. After all transactions have been recorded, compute the balance in each of the preceding items.

c. Answer the following questions for Parker.

(1) How much does the company owe to its creditors at month-end? On which financial statement(s) would this information be found?

(2) Did the company have a “good” month from an accounting viewpoint? Briefly explain.

5. Transaction analysis and statement preparation. The transactions that follow

relate to Burton Enterprises for March 20X1, the company’s first month of activity.

3/1: Joanne Burton, the owner invested \$20,000 into the business.

3/4: Performed \$2,400 of services on account.

3/7: Acquired a small parcel of land by paying \$6,000 cash.

3/12: Received \$700 from a client, who was billed previously on March 4.

3/15: Paid \$800 to the Journal Herald for advertising expense.

3/18: Acquired \$9,000 of equipment from Park Central Outfitters by paying

\$7,000 down and agreeing to remit the balance owed within the next

2 weeks, (Accounts Payable).

3/22: Received \$300 cash from clients for services.

3/24: Paid \$1,500 on account to Park Central Outfitters in partial settlement

of the balance due from the transaction on March 18.

3/28: Rented a car from United Car Rental for use on March 28. Total charges

amounted to \$75, with United billing Burton for the amount due.

3/31: Paid \$900 for March wages.

3/31: Processed a \$600 cash withdrawal from the business for Joanne Burton.

Instructions

a. Determine the impact of each of the preceding transactions on Burton’s assets,

liabilities, and owner’s equity. See exhibit 1.5. Use the following format:

Assets = Liabilities + Owner’s Equity

Cash, Accounts Receivable, Land, Equipment Accounts Payable (+)Investments (+) Revenues

(-) Withdrawals (-) Expenses

a. Record each transaction on a separate line. Calculate balances only after the last transaction has been recorded.

b. Prepare an income statement, a statement of owner’s equity, and a balance sheet, (See Exhibit 1.1, 1.3 and 1.4)

6. Recognition of normal balances

The following items appeared in the accounting records of Triguero's, a retail music store that also sponsors concerts. Classify each of the items as an asset, liability; revenue; or expense from the company's viewpoint. Also indicate the normal account balance of each item.

1. a. The albums, tapes, and CDs held for sale to customers.
2. b. A long-term loan owed to Citizens Bank.
3. c. Promotional costs to publicize a concert.
4. d. Daily receipts for merchandise sold,
5. e. Amounts due from customers,
6. f. Land held as an investment,
7. g. A new fax machine purchased for office use.
8. h. Amounts to be paid in 10 days to suppliers,
9. i. Amounts paid to a mall for rent.

7.Basic journal entries

The following transactions pertain to the Jennifer Royall Company:

 Apr. 1 Jenni­fer Royall invested cash of \$15,000 and land valued at \$10,000 from into the business. 5 Provided \$1,200 of services to Jason Ratchford, a client, on account. 9 Paid \$250 of salaries to an employee. 14 Acquired a new computer for \$3,200, on account. 20 Collected \$800 from Jason Ratchford for services provided on April 5. 24 Borrowed \$7,500 from BestBanc by securing a six-month loan.

Prepare journal entries (and explanations) to record the preceding transactions and events.

8.Trial balance preparation. Brighton, a sole proprietorship began operation on March 1 of the current year. The following account balances were extracted from the general led­ger on March 31; all accounts have normal balances.

 Accounts Payable \$ 12,000 Interest Expense \$ 300 Accounts Receivable 8,800 Land ? Advertising Expense 5,700 Loan Payable 26,000 Bob Brighton, Owners Equity 30,000 Salaries Expense 11,100 Cash 22,500 Utilities Expense 700 Fees Earned 18,900

a. Determine the cost of the company’s land by preparing a trial balance. (Remember, the trial balance debits must equal the credits, see Exhibit 2.9)

b. Determine the firm’s net income for the period ending March 31.

9.Entry and trial balance preparation. Lee Adkins is a portrait artist. The following schedule represents Lee’s combined chart of accounts and trial balance as of May 31.

Account number Account name Debit Credit

 110 Cash \$ 2,700 120 Accounts Receivable 12,100 130 Equipment and Supplies 2,800 140 Studio 45,000 210 Accounts Payable \$2,600 310 Lee Adkins, Owners Equity 57,400 320 Lee Adkins, Drawing 30,000 410 Revenue 39,000 510 Advertising Expense 2,300 520 Salaries Expense 2,100 540 Utilities Expense 2,000 \$99,000 \$99,000

The general ledger also revealed account no. 530, Legal and Accounting Expense. The following transactions occurred during June:

 6/2: Collected \$7,500 on account from customers. 6/7: Sold 25% of the equipment and supplies to a young artist for \$700 for cash 6/10: Received a \$500 bill from the accountant for preparing last quarter’s financial statements. 6/15: Paid \$2,100 to creditors on account. 6/27: Adkins withdrew \$1,000 cash for personal use. 6/30: Billed a customer \$3,000 for a portrait painted this month.

a. Record the necessary journal entries for June on page 2 of the company’s general journal. (See Exhibit 2.6)

b. Open running balance ledger “T” accounts by entering account titles, account num­bers, and May 31 balances. (See exhibit 2.3 and 2.4)

c. Post the journal entries to the “T” accounts.

d. Prepare a trial balance as of June 30. (See exhibit 2.9)

10. Journal entry preparation.On January 1 of the current year, Peter Houston invested \$100,000 cash into his company MuniServ. Shortly thereafter, the company ac­quired selected assets of a bankrupt competitor. The acquisition included land (\$15,000), a building (\$40,000), and vehicles (\$10,000). MuniServ paid \$45,000 at the time of the transaction and agreed to remit the remaining balance due of \$20,000 (an account payable) by February 15.

During January, the company had additional cash outlays for the follow­ing items:

 Purchases of store equipment \$4,600 Loan payment 500 Salaries expense 2,300 Advertising expense 700

The January utilities bill of \$200 was received on January 31 and will be paid on February 10. MuniServ rendered services to clients on account amounting to \$9,400 and \$3,700 had been received in settlement.

Instructions

1. a. Present journal entries that reflect MuniServ's January transactions, starting with the \$100,000 investment. (See exhibit 2.6)
2. b. Compute the total debits, total credits, and ending balance that would be found in the company's Cash account. (Post to “T” Accounts, see exhibit 2.3 and 2.4)

Prepare a trail balance as of January 31. (See exhibit 2.9

5) Financial statements are a product of the accounting cycle. Think about two different companies: a manufacturing company, and a retail company. Why would different companies have different accounting cycles? Would you expect the steps of the accounting cycle to be the same for each company? Why or why not?

6) What is the purpose of a bank reconciliation? What are the reasons for differences between the cash reported in the accounting records and the cash balance in the bank statements?

7)The income statement measures the income and expenses of a company over a specific period of time. Reflecting on your personal financial statement for the past month, can you apply the principles of the income statement? What did you learn from this experience?

8) Week Two Exercise Assignment

Revenue and Expenses

1. Recognition of concepts. Ron Carroll operates a small company that books enter­tainers for theaters, parties, conventions, and so forth. The company’s fiscal year ends on June 30. Consider the following items and classify each as either (1) pre­paid expense, (2) unearned revenue, (3) accrued expense, (4) accrued revenue, or (5) none of the foregoing.

a. Amounts paid on June 30 for a 1-year insurance policy

b. Professional fees earned but not billed as of June 30

c. Repairs to the firm’s copy machine, incurred and paid in June

d. An advance payment from a client for a performance next month at a convention

e. The payment in part (d) from the client’s point of view

f. Interest owed on the company’s bank loan, to be paid in early July

g. The bank loan payable in part (f)

h. Office supplies on hand at year-end

2. Analysis of prepaid account balance. The following information relates to Action Sign Company for 20X2:

 Insurance expense \$4,350 Prepaid insurance, December 31, 20X2 1,900 Cash outlays for insurance during 20X2 6,200

Compute the balance in the Prepaid Insurance account on January 1, 20X2.

3. Understanding the closing process. Examine the following list of accounts:

 Interest Payable Accumulated Depreciation: Equipment Alex Kenzy, Drawing Accounts Payable Service Revenue Cash Accounts Receivable Supplies Expense Interest Expense

Which of the preceding accounts

a. appear on a post-closing trial balance?

b. are commonly known as temporary, or nominal, accounts?

c. generate a debit to Income Summary in the closing process?

d. are closed to the capital account in the closing process?

4. Adjusting entries and financial statements. The following information pertains to Fixation Enterprises:

• The company previously collected \$1,500 as an advance payment for services to be rendered in the future. By the end of December, one third of this amount had been earned.
• Fixation provided \$2,500 of services to Artech Corporation; no billing had been made by December 31.
• Salaries owed to employees at year-end amounted to \$1,650.
• The Supplies account revealed a balance of \$8,800, yet only \$3,300 of supplies were actually on hand at the end of the period.
• The company paid \$18,000 on October 1 of the current year to Vantage Property Management. The payment was for 6 months’ rent of Fixation’s headquarters, beginning on November 1.

Fixation’s accounting year ends on December 31.

Instructions

Analyze the five preceding cases individually and determine the following:

a. The typeof adjusting entry needed at year-end (Use the following codes: A, adjust­ment of a prepaid expense; B, adjustment of an unearned revenue; C, adjustment to record an accrued expense; or D, adjustment to record an accrued revenue.)

b. The year-end journal entry to adjust the accounts

c. The income statement impact of each adjustment (e.g., increases total revenues by \$500)

5. Adjusting entries. You have been retained to examine the records of Kathy’s Day Care Center as of December 31, 20X3, the close of the current reporting period. In the course of your examination, you discover the following:

• On January 1, 20X3, the Supplies account had a balance of \$2,350. During the year, \$5,520 worth of supplies was purchased, and a balance of \$1,620 remained unused on December 31.
• Unrecorded interest owed to the center totaled \$275 as of December 31.
• All clients pay tuition in advance, and their payments are credited to the Unearned Tuition Revenue account. The account was credited for \$75,500 on August 31. With the exception of \$15,500 all amounts were for the current semester ending on December 31.
• Depreciation on the school’s van was \$3,000 for the year.
• On August 1, the center began to pay rent in 6-month installments of \$21,000. Kathy wrote a check to the owner of the building and recorded the check in Pre­paid Rent, a new account.
• Two salaried employees earn \$400 each for a 5-day week. The employees are paid every Friday, and December 31 falls on a Thursday.
• Kathy’s Day Care paid insurance premiums as follows, each time debiting Pre­paid Insurance:

 Date Paid Policy No. Length of Policy Amount Feb. 1, 20X2 1033MCM19 1 year \$540 Jan. 1, 20X3 7952789HP 1 year 912 Aug. 1, 20X3 XQ943675ST 2 years 840

Instructions

The center’s accounts were last adjusted on December 31, 20X2. Prepare the adjusting entries necessary under the accrual basis of accounting.

6. Bank reconciliation and entries. The following information was taken from the accounting records of Palmetto Company for the month of January:

 Balance per bank \$6,150 Balance per company records 3,580 Bank service charge for January 20 Deposits in transit 940 Interest on note collected by bank 100 Note collected by bank 1,000 NSF check returned by the bank with the bank statement 650 Outstanding checks 3,080

Instructions:

a. Prepare Palmetto’s January bank reconciliation.

b. Prepare any necessary journal entries for Palmetto.

7. Direct write-off method. Harrisburg Company, which began business in early 20X7, reported \$40,000 of accounts receivable on the December 31, 20X7, balance sheet. Included in this amount was \$550 for a sale made to Tom Mattingly in July. On January 4, 20X8, the company learned that Mattingly had filed for personal bankruptcy. Harrisburg uses the direct write-off method to account for uncollectibles.

a. Prepare the journal entry needed to write off Mattingly’s account.

b. Comment on the ability of the direct write-off method to value receivables on the year-end balance sheet.

8.Allowance method: estimation and balance sheet disclosure. The following pre-­adjusted information for the Maverick Company is available on December 31:

• Accounts receivable \$107,000
• Allowance for uncollectible accounts 5,400 (credit balance)
• Credit sales 250,000

a. Prepare the journal entries necessary to record Maverick’s uncollectible accounts expense under each of the following assumptions:

(1) Uncollectible accounts are estimated to be 5% of Credit Sales.

(2) Uncollectible accounts are estimated to be 14% of Accounts Receivable.

b. How would Maverick’s Accounts Receivable appear on the December 31 balance sheet under assumption (1) of part (a)?

c. How would Maverick’s Accounts Receivable appear on the December 31 balance sheet under assumption (2) of part (a)?

9. Direct write-off and allowance methods: matching approach. The December 31, 20X2, year-end trial balance of Targa Company revealed the following account information:

 Debits Credits Accounts Receivable \$252,000 Allowance for Uncollectible Accounts \$ 3,000 Sales 855,000

Instructions

a. Determine the adjusting entry for bad debts under each of the following condi­tions:

(1) An aging schedule indicates that \$12,420 of accounts receivable will be uncollectible.

(2) Uncollectible accounts are estimated at 2% of net sales.

b. On January 19, 20X3, Targa learned that House Company, a customer, had declared bankruptcy. Present the proper entry to write off House’s \$950 balance using the allowance method.

c. Repeat the requirement in part (b), using the direct write-off method.

d. In light of the House bankruptcy, examine the allowance and direct write-off methods in terms of their ability to properly match revenues and expenses.

10. Allowance method: analysis of receivables. At a January 20X2 meeting, the presi­dent of Sonic Sound directed the sales staff “to move some product this year.” The president noted that the credit evaluation department was being disbanded be­cause it had restricted the company’s growth. Credit decisions would now be made by the sales staff.

By the end of the year, Sonic had generated significant gains in sales, and the president was very pleased. The following data were provided by the accounting department:

 20X2 20X1 Sales \$23,987,000 \$8,423,000 Accounts Receivable, 12/31 12,444,000 1,056,000 Allowance for Uncollectible Accounts, 12/31 ? 23,000 cr.

The \$12,444,000 receivables balance was aged as follows:

 Age of Receivable Amount Percentage of Accounts Expected to Be Collected Under 31 days \$5,321,000 99% 31260 days 3,890,000 90 61290 days 1,067,000 80 Over 90 days 2,166,000 60

Assume that no accounts were written off during 20X2.

Instructions

a. Estimate the amount of Uncollectible Accounts as of December 31, 20X2.

b. What is the company’s Uncollectible Accounts expense for 20X2?

c. Compute the net realizable value of Accounts Receivable at the end of 20X1 and 20X2.

d. Compute the net realizable value at the end of 20X1 and 20X2 as a percentage of respective year-end receivables balances. Analyze your findings and comment on the president’s decision to close the credit evaluation department.

(Week 3 DQs and Journal)

9) The controller of Sagehen Enterprises believes that the company should switch from the LIFO method to the FIFO method. The controller’s bonus is based on the next income. It is the controller’s belief that the switch in inventory methods would increase the net income of the company. What are the differences between the LIFO and FIFO methods?

10) A variety of depreciation methods are used to allocate the cost of an asset to all of the accounting periods benefited by the use of the asset. Your client has just purchased a piece of equipment for \$100,000. Explain the concept of depreciation. Which of the following depreciation methods would you recommend: straight-line depreciation, double declining balance method, or an alternative method?

11) Reflect for a moment on the LIFO (Last in First Out) and FIFO (First in First Out) inventory methods. If you were starting a small manufacturing company, what inventory method do you believe would provide the most accurate financial statements? Why do you believe this is the case?

12) Week Three Exercise Assignment

Inventory

1. Specific identification method. Boston Galleries uses the specific identification method for inventory valuation. Inventory information for several oil paintings follows.

 Painting Cost 1/2 Beginning inventory Woods \$11,000 4/19 Purchase Sunset 21,800 6/7 Purchase Earth 31,200 12/16 Purchase Moon 4,000

Woodsand Moonwere sold during the year for a total of \$35,000. Determine the firm’s

a. cost of goods sold.

b. gross profit.

c. ending inventory.

2. Inventory valuation methods: basic computations. The January beginning inven­tory of the White Company consisted of 300 units costing \$40 each. During the first quarter, purchases were:

Date Quantity Cost

1/15 700 \$45

1/31 1200 \$48

2/12 800 \$46

2/27 650 \$51

Sales during the first quarter were.

Date Sold

1/19 500

2/2 600

2/13 500

2/28 100

The White Company uses a perpetual inventory system.

Using the White Company data, fill in the following chart to compare the results obtained under the FIFO, LIFO, and weighted-average inventory methods.

 FIFO LIFO Weighted Average Goods available for sale \$ \$ \$ Ending inventory, March 31 Cost of goods sold

3.Perpetual inventory system: journal entries. At the beginning of 20X3, Beehler Company implemented a computerized perpetual inventory system. The following transactions occurred:

• Purchases on account: 500 units @\$4 = \$2,000
• Sales on account: 300 units @ \$5 = \$1,500
• Purchases on account: 600 units @\$5 = \$3,000
• Sales on account: 300 units @ \$5 = \$1,500

a. Prepare journal entries for the above purchases and sales.

b. Calculate the balance in the firm’s Inventory account.

4.Inventory valuation methods: computations and concepts. Wave Riders Surfboard Company began business on January 1 of the current year. Below are the transactions for the year

:

 1/3: Purchase 100 boards @\$125 3/17: Sold 50 boards @ \$250 4/3: Purchase 200 boards @\$135 5/17: Sold 75 boards @ \$250 6/3: Purchase 100 boards @\$145 1/3: Purchase 100 boards @\$155 3/17: Sold 300 boards @ \$250 1/3: Purchase 100 boards @\$140

Wave Riders uses a perpetual inventory system.

Instructions

a. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods:

• First-in, first-out
• Last-in, first-out
• Weighted average

b. Which of the three methods would be chosen if management’s goal is to

(1) produce an up-to-date inventory valuation on the balance sheet?

(2) approximate the physical flow of a sand and gravel dealer?

5. Depreciation methods.Betsy Ross Enterprises purchased a delivery van for \$30,000 in January 20X7. The van was estimated to have a service life of 5 years and a resid­ual value of \$6,000. The company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by using each of the following methods:

a. Units-of-output, assuming 17,000 miles were driven during 20X8

b. Straight-line

c. Double-declining-balance

6. Depreciation computations.Alpha Alpha Alpha, a college fraternity, purchased a new heavy-duty washing machine on January 1, 20X3. The machine, which cost \$1,000, had an estimated residual value of \$100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following:

a. The machine’s book value on December 31, 20X5, assuming use of the straight-line depreciation method

b. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500.

c. Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method.

7. Depreciation computations: change in estimate.Aussie Imports purchased a specialized piece of machinery for \$50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of \$5,000. During the 5 years of operations (20X3 - 20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.

Instructions

a. Compute depreciation for 20X3 - 20X7 by using the following methods: straight line, units of output, and double-declining-balance.

b. On January 1, 20X5, management shortened the remaining service life of the machine to 20 months. Assuming use of the straight-line method, compute the company’s depreciation expense for 20X5.

c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid \$47,800 for the machinery rather than \$50,000 In addition, assume that the company incurred \$800 of freight charges \$1,400 for machine setup and testing, and \$300 for insurance during the first year of use.

( Week 4 DQs and Journal)

13) What is a current liability? From the perspective of a user of financial statements, why do you believe current liabilities are separated from long-term liabilities? Based on your current experience as well as any additional research you may have done provide two examples of situations where businesses collect monies from customers and employees and reports these amounts as a current liability.

14) A client comes to you thinking about starting a consulting business. Your client is specifically interested in what type of entity should be created for this new business. Based on your readings or any additional research you may have done, discuss the advantages and disadvantages of the following: sole proprietorship, partnership, and corporation. Based on these advantages and disadvantages provide a clear recommendation to your client.

15) The current liability section of the balance sheet lists the liabilities that are due within the next 12 months. Reflecting on your current financial situation, apply the concept of current liabilities. What does this analysis tell you about your future obligations? What did you learn from this experience?

## 16) Week Four Exercise Assignment

Liability

1. 1. Partner investments; journal entries.The LP partnership was formed on January 1, 19X7, by investments from Bill Levy and Marv Parcells. Levy contributed \$30,000 cash and \$80,000 of land. Parcells contributed cash of \$50,000 and equipment with a value of \$20,000.

1. a. Prepare the journal entries needed to record the investments of Levy and Parcells.

2. Payroll accounting. Assume that the following tax rates and payroll information pertain to Brookhaven Publishing:

• Social Security taxes: 6% on the first \$55,000 earned
• Medicare taxes: 1.5% on the first \$130,000 earned
• Federal income taxes withheld from wages: \$7,500
• State income taxes: 5% of gross earnings
• Insurance withholdings: 1% of gross earnings
• State unemployment taxes: 5.4% on the first \$7,000 earned
• Federal unemployment taxes: 0.8% on the first \$7,000 earned

The company incurred a salary expense of \$50,000 during February. All employees had earned less than \$5,000 by month-end.

a. Prepare the necessary entry to record Brookhaven’s February payroll. The entry will include deductions for the following:

• Social Security taxes
• Medicare taxes
• Federal income taxes withheld
• State income taxes
• Insurance withholdings

b. Prepare the journal entry to record Brookhaven’s payroll tax expense. The entry will include the following:

• Matching Social Security taxes
• Matching Medicare taxes
• State unemployment taxes
• Federal unemployment taxes

3. Current liabilities: entries and disclosure.A review of selected financial activities of Visconti’s during 20XX disclosed the following:

 12/1 Borrowed \$20,000 from the First City Bank by signing a 3- month, 15% note payable. Interest and principal are due at maturity. 2/10 Established a warranty liability for the XY-80, a new product. Sales are expected to total 1,000 units during the month. Past experience with similar products indicates that 2% of the units will require repair, with warranty costs averaging \$27 per unit. 12/22 Purchased \$16,000 of merchandise on account from Oregon Company, terms 2/10, n/30. 12/26 Borrowed \$5,000 from First City Bank; signed a note payable due in 60 days. 12/31 Repaired six XY-80s during the month at a total cost of \$162. 12/31 Accrued 3 days of salaries at a total cost of \$1,400.

Instructions

a. Prepare journal entries to record the transactions.

b. Prepare adjusting entries on October 31 to record accrued interest.

c. Prepare the Current Liability section of Red Bank’s balance sheet as of October 31. Assume that the Accounts Payable account totals \$203,600 on this date.

4. Issuance of stock: organization costs.Snowbound Corporation was incorporated in July. The firm’s charter authorized the sale of 200,000 shares of \$10 par-value common stock. The following transactions occurred during the year:

 7/1: Sold 45,000 shares of common stock to investors for \$18 per share. Cash was collected and the shares were issued. 8/11 Sold 20,000 shares to investors for \$22 per share. Cash was collected and the shares were issued.

9/1 Declared a cash dividend on 9/1 for \$1.00 a share for shareholders on record 10/1 with payment being made on 11/1.

Instructions

1. a. Prepare journal entries for the two stock issues.
2. b. Prepare journal entries for the cash dividend declaration and payment.

5. Notes payable. Red Bank Enterprises was involved in the following transactions during the fiscal year ending October 31:

 8/2: Borrowed \$75,000 from the Bank of Kingsville by signing a 120-day note. 8/20: Issued a \$40,000 note to Harris Motors for the purchase of a \$40,000 de­livery truck. The note is due in 180 days and carries a 12% interest rate. 9/10: Purchased merchandise from Pans Enterprises in the amount of \$15,000. Issued a 30-day, 12% note in settlement of the balance owed. 9/11: Issued a \$60,000 note to Datatex Equipment in settlement of an overdue account payable of the same amount. The note is due in 30 days and car­ries a 14% interest rate. 10/10: The note to Pans Enterprises was paid in full.

(Week 5 DQs and Joural)

17) Ratios provide the users of financial statements with a great deal of information about the entity. Do ratios tell the whole story? How could liquidity ratios be used by investors to determine whether or not to invest in a company?

18)

 Profit Margin Year Ending December 2012 Year Ending December 2011 Year Ending December 2010 Revenues 40,000 35,000 33,000 Operating Expenses Salaries 15,000 10,000 9,000 Maintenance and Repairs 6,000 9,000 10,000 Rental Expense 2,500 2,500 2,500 Depreciation 2,000 2,000 2,000 Fuel 4,000 3,500 2,500 Total Operating Expenses 29,500 27,000 26,000 Operating Income 10,500 8,000 7,000 Sales and Administrative Expenses 6,000 4,000 3,000 Interest Expense 2,500 2,000 1,000 Net Income 2,000 2,000 3,000

Above is a comparative income statement for Cecil, Inc. for the years 2010, 2011, and 2012. Calculate the profit margin for each of these years. Comment on the profit margin trend.

10/31: The note to Datatex Equipment was paid in full.

11/30: Paid note to Bank of Kingville

Instructions

a. Prepare journal entries to record the transactions.

b. Prepare adjusting entries on October 31 to record accrued interest.

c. Prepare the Current Liability section of Red Bank’s balance sheet as of October 31. Assume that the Accounts Payable account totals \$203,600 on this date.

19) Reflect for a moment on the ratios (working capital, current ratio, quick ratio, debt to asset, debt to equity, times interest earned, gross margin and net margin) presented this week. If you were considering investing in a company what ratio would be the most important to you? Formulate and argument to defend your position.

## 20) Week Five Exercise Assignment

Financial Ratios

1. 1. Liquidity ratios.Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

 Edison Stagg Thornton Cash \$4,000 \$2,500 \$1,000 Short-term investments 3,000 2,500 2,000 Accounts receivable 2,000 2,500 3,000 Inventory 1,000 2,500 4,000 Prepaid expenses 800 800 800 Accounts payable 200 200 200 Notes payable: short-term 3,100 3,100 3,100 Accrued payables 300 300 300 Long-term liabilities 3,800 3,800 3,800

1. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?

1. 2. Computation and evaluation of activity ratios.The following data relate to Alaska Products, Inc:

 19X5 19X4 Net credit sales \$832,000 \$760,000 Cost of goods sold 440,000 350,000 Cash, Dec. 31 125,000 110,000 Average Accounts receivable 180,000 140,000 Average Inventory 70,000 50,000 Accounts payable, Dec. 31 115,000 108,000

1. Compute the accounts receivable and inventory turnover ratios for 19X5. Alaska rounds all calculations to two decimal places.

1. 3. Profitability ratios, trading on the equity.Digital Relay has both preferred and common stock outstanding. The com­pany reported the following information for 19X7:

 Net sales \$1,500,000 Interest expense 120,000 Income tax expense 80,000 Preferred dividends 25,000 Net income 130,000 Average assets 1,100,000 Average common stockholders' equity 400,000

1. Compute the gross profit margin ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
2. Does the firm have positive or negative financial leverage? Briefly ex­plain.

1. 4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

 20X2 20X1 Current Assets \$ 76,000 \$ 80,000 Property, Plant, and Equipment (net) 99,000 90,000 Intangibles 25,000 50,000 Current Liabilities 40,800 48,000 Long-Term Liabilities 143,000 160,000 Stockholders’ Equity 16,200 12,000 Net Sales 500,000 500,000 Cost of Goods Sold 332,500 350,000 Operating Expenses 93,500 85,000

Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.

1. 5. Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

 20X2 20X1 Current Assets \$ 76,000 \$ 80,000 Property, Plant, and Equipment (net) 99,000 90,000 Intangibles 25,000 50,000 Current Liabilities 40,800 48,000 Long-Term Liabilities 143,000 160,000 Stockholders’ Equity 16,200 12,000 Net Sales 500,000 500,000 Cost of Goods Sold 332,500 350,000 Operating Expenses 93,500 85,000

Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.

6. Ratio computation. The financial statements of the Lone Pine Company follow.

 LONE PINE COMPANYComparative Balance SheetsDecember 31, 20X2 and 20X1 (\$000 Omitted) 20X2 20X1 Assets Current Assets Cash and Short-Term Investments \$ 400 \$ 600 Accounts Receivable (net) 3,000 2,400 Inventories 2,000 2,200 Total Current Assets \$5,400 \$5,200 Property, Plant, and Equipment Land \$1,700 \$ 600 Buildings and Equipment (net) 1,500 1,000 Total Property, Plant, and Equipment \$3,200 \$1,600 Total Assets \$8,600 \$6,800 Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable \$1,800 \$1,700 Notes Payable 1,100 1,900 Total Current Liabilities \$2,900 \$3,600 Long-Term Liabilities Bonds Payable 4,100 2,100 Total Liabilities \$7,000 \$5,700 Stockholders’ Equity Common Stock \$ 200 \$ 200 Retained Earnings 1,400 900 Total Stockholders’ Equity \$1,600 \$1,100 Total Liabilities and Stockholders’ Equity \$8,600 \$6,800

 LONE PINE COMPANYStatement of Income and Retained EarningsFor the Year Ending December 31,20X2 (\$000 Omitted) Net Sales* \$36,000 Less: Cost of Goods Sold \$20,000 Selling Expense 6,000 Administrative Expense 4,000 Interest Expense 400 Income Tax Expense 2,000 32,400 Net Income \$ 3,600 Retained Earnings, Jan. 1 900 \$ 4,500 Cash Dividends Declared and Paid 3,100 Retained Earnings, Dec. 31 \$ 1,400 *All sales are on account.

Instructions

Compute the following items for Lone Pine Company for 20X2, rounding all calcu­lations to two decimal places when necessary:

a. Quick ratio

b. Current ratio

c. Inventory-turnover ratio

d. Accounts-receivable-turnover ratio

e. Return-on-assets ratio

f. Net-profit-margin ratio

g. Return-on-common-stockholders’ equity

h. Debt-to-total assets

i. Number of times that interest is earned

j. Dividend payout rate

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