Chapter 05 - Accounting for Receivables and Inventory Cost Flow

MGT45 HW2 Fall 2013 11AM Section CHAPTER 5 - Accounting for Receivables and Inventory Cost Flow

ANSWERS TO QUESTIONS 1. Accounts receivable are the expected future receipts that arise when a company permits its customers to buy now and pay later. The amounts are usually small with a short term to maturity. Notes Receivable have longer terms to maturity and are usually for larger amounts. The note specifies the maturity date, interest rate, and other credit terms. Factors for use in estimating uncollectible accounts include: (1) the percentage of uncollectible accounts from years past. (2) adjustment for new circumstances that are anticipated to be experienced in the future. (3) industry averages or experiences of similar businesses. (4) examination of current accounts and company credit policies.

8.

15. An aging of accounts receivable schedule classifies all receivables by their due date. When using an aging schedule for estimating uncollectible accounts, accounts receivable is divided into categories based on due dates. Different percentages are then applied to each category. For instance a higher percentage would be applied to the group of accounts that is more than 90 days past due than to the group that is only 30 days past due. 20. The matching concept matches revenue and expenses to the period in which they are earned or incurred. By accruing interest, the interest is recognized in the period it is earned or incurred regardless of when the cash is collected or paid. The acceptance of major credit cards enables a business to avoid the cost of uncollectible accounts and the clerical costs of maintaining accounts receivable records. In addition, the business avoids the implicit cost of lost opportunities due to delayed cash flows.

26.

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Chapter 05 - Accounting for Receivables and Inventory Cost Flow

SOLUTIONS TO EXERCISES - CHAPTER 5 EXERCISE 5-1 a.

Ninas Accounting Service Horizontal Statements Model Balance Sheet Assets = Equity + Acct. Rec. Allow. Ret. Ear. 120,000 (90,000) NA NA 30,000 NA NA NA 1,200 1,200 120,000 NA (24,000) (1,200) = 94,800 Acct. Titles for R/E

Event Cash
2012

1. 2. 3. 4. Bal.

NA 90,000 (24,000) NA 66,000 +

Svc. Rev. Sal. Exp. Uncoll. Accts. Exp.

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Chapter 05 - Accounting for Receivables and Inventory Cost Flow

EXERCISE 5-1 (cont.) b. Ninas Accounting Service Income Statement For the Year Ended December 31, 2012 Service Revenue Operating Expenses Salaries Expense Uncollectible Accounts Expense Total Operating Expenses Net Income Ninas Accounting Service Balance Sheet As of December 31, 2012 Assets Cash Accounts Receivable Allowance for Doubtful Accounts Total Assets Liabilities Stockholders Equity Retained Earnings Total Stockholders Equity Total Liabilities and Stockholders Equity $94,800 94,800 $94,800 $66,000 $30,000 (1,200) 28,800 $94,800 $ -0$24,000 1,200 (25,200) $ 94,800 $120,000

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Chapter 05 - Accounting for Receivables and Inventory Cost Flow

EXERCISE 5-1 b (cont.) Ninas Accounting Service Statement of Cash Flows For the Year Ended December 31, 2012 Cash Flows From Operating Activities: Inflow from Customers Outflow for Expenses Net Cash Flow from Operating Activities Cash Flows From Investing Activities Cash Flows From Financing Activities Net Change in Cash Plus: Beginning Cash Balance Ending Cash Balance

$90,000 (24,000) $66,000 -0-066,000 -0$66,000

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Chapter 05 - Accounting for Receivables and Inventory Cost Flow

EXERCISE 5-8 a. Sales on Account Less: Ending Balance of Accounts Receivable Collections of Accounts Receivable

$400,000 (68,000) $332,000

b. c.

Sales on Account $400,000 x 1% = $4,000 of Uncollectible Accounts Expense Accounts Receivable Ending Balance Less: Allowance for Doubtful Accounts Net Realizable Value of Accounts Receivable $68,000 (4,000) $64,000

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Chapter 05 - Accounting for Receivables and Inventory Cost Flow

PROBLEM 5-8 (cont.) d.

Coggins Repair Co. Effect of Events on Financial Statements Event 1. 2. 3. Totals Cash NA 332,000 NA 332,000 + + + + + Assets Acct. Rec. 400,000 (332,000) NA 68,000 Allow. NA NA 4,000 4,000 = Liab. + S. Equity = NA + Ret. Earn. = NA + 400,000 = NA + NA = NA + (4,000) = -0- + 396,000 Rev. 400,000 NA NA 400,000 Exp. = NA NA 4,000 4,000 = = = = Net Inc. 400,000 NA (4,000) 396,000 Cash Flows

NA
332,000 OA

NA
332,000

EXERCISE 5-11

Babb Enterprises Date Cash 1. 9/1/12 2. 12/31/121 3. 9/1/132 9/1/13 (25,000) NA NA 26,500 Balance Sheet Assets = Equity + Note Rec. + Int. Rec. = Ret. Ear. 25,000 NA NA (25,000) NA 500 1,000 (1,500) NA 500 1,000 NA Income Statement Rev. Exp. = Net Inc. NA 500 1,000 NA NA NA NA NA NA 500 1,000 NA Statement of Cash Flows (25,000) IA NA NA 25,000 IA 1,500 OA

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Chapter 05 - Accounting for Receivables and Inventory Cost Flow

1 2

$25,000 x 6% x 4/12 = $500 $25,000 x 6% x 8/12 = $1,000

EXERCISE 5-14 a.
Royal Carpet Cleaning Horizontal Statements Model Balance Sheet Assets = Liab + Equity . Cash + Acc. Rec. = + Ret. Ear NA 87,300 + + 87,300 = NA (87,300) = NA + + 87,300 NA Income Statement Rev. Exp. = Net Inc. Statement of Cash Flows

Event 1. 2.

90,000 NA

2,700* = NA =

87,300 NA

NA 87,300 OA

*$90,000 x 3% = $2,700

b. (1) (2) (3) (4)

Total assets: Cash Revenue recognized: Cash Flow from Operating Activities:

$ 87,300 $ 90,000 $ 87,300

By accepting credit cards rather than allowing customers to purchase goods on account, Royal Carpet Cleaning avoids the risk of uncollectible accounts as well as the expense of maintaining and collecting accounts receivable.

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Chapter 05 - Accounting for Receivables and Inventory Cost Flow

EXERCISE 5-17

Mix Co. First Purchase Second Purchase Total

$1,200 1,500 $2,700 (a) FIFO (b) LIFO $1,500 1,200 (c) W. AVG. $1,350* 1,350*

Cost of Goods Sold Ending Inventory *Average Cost per Unit:

$1,200 1,500

$2,700 2 = $1,350

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Chapter 05 - Accounting for Receivables and Inventory Cost Flow

Chapter 6 Questions 2. Tangible assets are those assets that have a physical existence. Some examples include buildings and equipment. Intangible assets are those assets that represent some rights and privileges associated with owning the asset. Some examples include copyrights, leases, and trademarks. Depreciation is the systematic allocation of the cost of property, plant and equipment to the accounting periods over which they are to be used. Some examples of assets that are depreciated include buildings, machinery, and office equipment. Amortization is the systematic allocation of the cost of intangible assets over their estimated useful lives. Examples of intangible assets that are amortized include patents, franchises and copyrights. 13. Recognition of depreciation expense reduces total assets; while the asset account containing the asset that is being depreciated is not changed, the contra asset account, accumulated depreciation, is increased which, in turn, reduces total assets. Total equity is decreased when an expense is recognized. 16. When the total cost of an asset is expensed in the year acquired, total expense will be overstated and net income will be understated. Because all of a plant asset's cost is erroneously expensed, assets will be understated and retained earnings will be understated because net income was understated.

4.

7.

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Chapter 05 - Accounting for Receivables and Inventory Cost Flow

EXERCISE 6-2 Long-Term Operational Assets: a. No b. Yes c. Yes d. No e. No f. Yes g. No h. Yes i. Yes (If the company is in a business that uses or sells timber) j. Yes (As long as it is not held for investment purposes) k. Yes l. Yes EXERCISE 6-5

a.

Basket Purchase

b. Total Appraised Value Land $ 200,000 Building 800,000 Total $1,000,000

% of* App. Val. .20 x .80 x

Purchase Allocated Price Cost $900,000 = $180,000 900,000 = 720,000 $900,000

*Land: $200,000 $1,000,000 = .20; Building: $800,000 $1,000,000 = .80 c. No, the historical cost concept requires that assets be recorded at the amount paid for them.

d. Balance Sheet Assets = Lia + Equity

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Income Statement Re Exp. = Net

Statemt. of Cash

Chapter 05 - Accounting for Receivables and Inventory Cost Flow

b. Cash + Land + Bldg. = +

NA (900,000) + 180,000 + 720,000 = NA +

v.
NA NA =

Inc.
NA

Flows
(900,000) IA

EXERCISE 6-6 a. Asset Appraised Value Land $160,000 Building 400,000 Equipment 240,000 Total $800,000 Asset Land Building Equipment Total % of App. Value 20% 50% 30% Percent of Appraised Value 20% 50% 30% 100% Purchase Price Allocated Cost $700,000 = $140,000 700,000 = 350,000 700,000 = 210,000 $700,000

x x x

b. Assets
Cash + Land

= Equity

Rev. Exp = Net. . Inc.

NA NA = NA

Cash Flow
(700,000) IA

+ Buildin + Equip. = g (700,000) + 140,000 + 350,000 + 210,000 =

NA

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Chapter 05 - Accounting for Receivables and Inventory Cost Flow

PROBLEM 6-23 KC Company Financial Statements Income Statements 2011 Revenue Depr. Expense* Operating Income Loss Net Income $7,500 (6,250) 1,250 -0$1,250 2012 $8,000 (6,250) 1,750 -0$1,750 2013 $8,200 (6,250) 1,950 -0$1,950 $ 2014 $7,000 (6,250) 750 -0750 2015

$ -0-0-0(500)**

$ (500)

Statements of Changes in Stockholders Equity Beg. Com. Stock Plus: Stk. Issued End. Com. Stock Beg. Ret. Earn. Plus: Net Income End. Ret. Earn. Total Equity Stk. $ -030,000 30,000 -01,250 1,250 $31,250 $30,000 -030,000 1,250 1,750 3,000 $33,000 $30,000 -030,000 3,000 1,950 4,950 $34,950 $30,000 -030,000 4,950 750 5,700 $35,700 $30,000 -030,000 5,700 (500) 5,200 $35,200

*Depreciable Cost: $30,000 $5,000 (salvage value) = $25,000; Depreciation per year: $25,000 4 = $6,250 **Loss on Sale of Equipment: Sales price $4,500 less book value $5,000=$500 loss

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Chapter 05 - Accounting for Receivables and Inventory Cost Flow

PROBLEM 6-23 (cont.) KC Company Financial Statements Balance Sheets 2011 Assets Cash Equipment Less: Acc. Dep. Total Assets 2012 2013 2014 2015

$ 7,500 $15,500 30,000 30,000 (6,250) (12,500) $31,250 $33,000

$23,700
30,000 $34,950

$30,700 30,000
$35,700

$35,200
-0-0$35,200

(18,750) (25,000)

Stockholders Equity Common Stock $30,000 Retained Earnings 1,250 Total Stk. Equity $31,250

$30,000

3,000
$33,000

$30,000 4,950 $34,950

$30,000
5,700 $35,700

$30,000 5,200 $35,200

Statements of Cash Flows Operating Act.: Inflow from Cust. Net Cash Op. Act.

$ 7,500 $ 8,000
7,500 8,000 -0-0-0-0-0-

$ 8,200 8,200 -0-0-0-0-08,200 15,500 $23,700

$ 7,000 $ 7,000 -0-0-0-0-07,000 23,700 $30,700

0-04,500 -04,500 -0-04,500 30,700

Investing Act.: Inflow from Sale -0Outflow for (30,000) Equip. Net Cash Inv. Act. (30,000) Financing Act. Inflow from Stock Net Cash Fin. Act. 30,000 30,000

Net Change in Cash 7,500 8,000 Plus: Beg. Cash -07,500 Bal. Ending Cash Bal. $ 7,500 $15,500

$35,200

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Chapter 07 - Accounting for Liabilities

Chapter 7 Questions

1.

Cash payments to creditors is an asset use transaction. This type of transaction will reduce both assets and liabilities. The entry to record accrued interest consists of an increase to Interest Expense and an increase to Interest Payable. The transaction is a claims exchange transaction and reduces equity and increases liabilities. Collection of sales tax is not revenue. The retailer is merely acting as a collection agency for the state. The retailer collects the sales tax and periodically remits it to the state. The three categories of contingent liabilities are: 1. Probable and reasonably estimated 2. Possible but not reasonably estimated 3. Remote A line of credit is a preapproved amount of credit that is available to a business to use as needed. It eliminates the need to get loan approval each time the company needs some additional cash. When using a line of credit, money can be borrowed one day and paid back the next or used for some prespecified period. A line of credit is generally used for short-term financing where it is not practical to issue bonds. The issuance of bonds by a company is an asset source transaction. Assets increase and liabilities increase. A classified balance sheet is one that separates assets and liabilities into current and noncurrent items.

3.

8.

10.

19.

27.

33.

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Chapter 07 - Accounting for Liabilities

SOLUTIONS TO EXERCISES - CHAPTER 7

EXERCISE 7-1 a. $-0-. Interest will be paid at maturity of the note, April 30, 2013. b. $1,200 ($90,000 x 8% = $7,200; $7,200 x 2/12= $1,200) c. $91,200 ($90,000 Notes Payable +$1,200 Interest Payable) d. $93,600 [$90,000 principal + $3,600 interest ($90,000 x 8% x 6/12)] e. $2,400 ($90,000 x 8% = $7,200; $7,200 x 4/12)

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Chapter 07 - Accounting for Liabilities

EXERCISE 7-3 a. Book Sales Miscellaneous Items Sales Total Sales x Sales Tax Rate Sales Tax Collected $275,000 150,000 425,000 7% $29,750

b. Total Sales: Event 1. Event 2 Total $275,000 150,000 $425,000

Total Sales Less: Cost of Goods Sold Gross Margin Less: Operating Expenses Net Income

$425,000 (210,000) 215,000 (130,000) $ 85,000

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Chapter 07 - Accounting for Liabilities

EXERCISE 7-5 a. There are three categories of contingent liabilities: 1. Probable and can be reasonably estimated. This category of contingent liabilities is recognized in the financial statements. 2. Possible but cannot be reasonably estimated. This category of contingent liabilities is disclosed in the footnotes to the financial statements. 3. Remote. This category of contingent liabilities is not recognized in the financial statements or disclosed in the footnotes. b. 1. This is a contingent liability. The event occurred. The lawsuit has been filed, and the attorney knows that the company will have to pay. Therefore, the liability is probable. The reasonably certain amount of $500,000 is deemed reasonably estimable and therefore $500,000 should be accrued. 2. This is a contingent liability which can be reasonably estimated. GAAP requires that it be recorded on the books. This is not a contingent liability since the likelihood of damage is not certain. It is not recorded on the books or mentioned in the financial statements.

3.

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Chapter 07 - Accounting for Liabilities

EXERCISE 7-8 a.
Mabry Equipment Sales Corp. Statements Model
Assets No. 1. 2. 3a. 3b. 4. 5. 6. 7. 8. 9. 10.1 Bal.
1

Cash 50,000 NA 216,000 NA NA (12,000) 20,000 (5,600) (54,000) (125,000) NA 89,400

Inv. NA 175,000 NA (125,000) NA NA NA NA NA NA NA 50,000

Liabilities Accts. Pay. Sales Tax Warr. = Pay. Pay. NA NA NA 175,000 NA NA NA 16,000 NA NA NA NA NA NA 8,000 NA (12,000) NA NA NA NA NA NA (5,600) NA NA NA (125,000) NA NA NA NA NA = 50,000 4,000 2,400

+ Int. Pay Notes Pay. + NA NA NA NA NA NA NA NA NA NA 400 400 NA NA NA NA NA NA 20,000 NA NA NA NA 20,000

Equity Comm. Ret. Earn. Stock 50,000 NA NA NA NA 200,000 NA (125,000) NA (8,000) NA NA NA NA NA NA NA (54,000) NA NA NA (400) 50,000 12,600

$20,000 x 6% x 4/12 = $400.

Event 1. 2. 3a. 3b. 4. 5. 6. 7. 8. 9. 10 Bal.

Rev. NA NA 200,000 NA NA NA NA NA NA NA NA 200,000

Income Statement Exp. = NA NA NA 125,000 8,000 NA NA NA 54,000 NA 400 187,400 =

Net Inc. NA NA 200,000 (125,000) (8,000) NA NA NA (54,000) NA (400) 12,600

Statement of Cash Flows 50,000 FA NA 216,000 OA NA NA (12,000) OA 20,000 FA (5,600) OA (54,000) OA (125,000) OA NA 89,400

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Chapter 07 - Accounting for Liabilities

EXERCISE 7-8 (cont.) b. Mabry Equipment Sales Corp. Income Statement For the Year Ended December 31, 2012 Sales Revenue Cost of Goods Sold Gross Margin Expenses Operating Expenses Warranty Expense Total Operating Expenses Operating Income Interest Expense Net Income $54,000 8,000 (62,000) 13,000 (400) $12,600 $200,000 (125,000) 75,000

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Chapter 07 - Accounting for Liabilities

EXERCISE 7-8 b. (cont.) Mabry Equipment Sales Corp. Balance Sheet As of December 31, 2012 Assets Cash Merchandise Inventory Total Assets Liabilities Accounts Payable Sales Tax Payable Warranties Payable Interest Payable Notes Payable Total Liabilities Stockholders Equity Common Stock Retained Earnings Total Stockholders Equity Total Liabilities and Stockholders Equity $50,000 12,600 62,600 $139,400 $ 89,400 50,000 $139,400 $ 50,000 4,000 2,400 400 20,000 76,800

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Chapter 07 - Accounting for Liabilities

EXERCISE 7-8 b. (cont.) Mabry Equipment Sales Corp. Statement of Cash Flows For the Year Ended December 31, 2012 Cash Flows From Operating Activities: Inflow from Customers Inflow from Sales Tax Outflow for Inventory Outflow for Expenses1 Outflow for Sales Tax Net Cash Flow from Operating Activities Cash Flows From Investing Activities Cash Flows From Financing Activities: Inflow from Stock Issue Inflow from Loan Net Cash Flow from Financing Activities Net Change in Cash Plus: Beginning Cash Balance Ending Cash Balance
1.

$200,000 16,000 (125,000) (59,600) (12,000) $19,400 -050,000 20,000 70,000 89,400 -0$89,400

$54,000 + $5,600 = $59,600

c.

Current Liabilities: Accounts Payable Sales Tax Payable Warranties Payable Interest Payable Notes Payable Total Current Liabilities

$50,000 4,000 2,400 400 20,000 $76,800

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Chapter 07 - Accounting for Liabilities

EXERCISE 7-22

Steller Co. Classified Balance Sheet As of December 31, 2012 Assets Current Assets Cash Accounts Receivable Merchandise Inventory Prepaid Insurance Total Current Assets Property, Plant and Equipment Office Equipment Total Property, Plant and Equipment Total Assets Liabilities and Stockholders Equity Current Liabilities Accounts Payable Long-Term Liabilities Long-Term Notes Payable Total Liabilities Stockholders Equity Common Stock Retained Earnings Total Stockholders Equity Total Liabilities and Stockholders Equity $42,000 45,460 87,460 $118,460 $ 8,000 23,000 31,000 $15,260 42,500 29,000 3,200 $ 28,500 28,500 $ 118,460 89,960

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Chapter 07 - Accounting for Liabilities

CHAPTER 8 - Proprietorships, Partnerships, and Corporations ANSWERS TO QUESTIONS 1. The three major forms of business organizations are the sole proprietorship, the partnership, and the corporation. The sole proprietorship is a business owned by one individual. The partnership is a business that is owned by two or more persons with the intent to make a profit. The corporation is a legal entity that is organized according to the laws of the state in which it is formed. The business organization is separate from its owners. 8. The corporate form of business has both advantages and disadvantages. Advantages: (1) Limited liability. Owners are not held personally responsible for the actions of the corporation. Generally, the maximum amount an owner can lose is limited to his/her amount of the investment. (2) Continuity of existence. Corporations do not cease to exist when an owner dies, disposes of his interest, retires, etc. (3) Free transferability of ownership interest. An owner can readily sell or transfer an interest to another party without interfering in the corporation's business. (4) Ease of raising capital. It is generally easier to attract many small investors rather than one or two investors willing to invest large sums of money or assets in a business. Disadvantages: (1) Regulation. Corporations are subject to considerably more regulation, both state and federal, than are sole proprietorships and partnerships. Corporations are required to file separate income tax returns and public corporations are required to comply with SEC regulations. (2) Double taxation. The most important disadvantage of the corporation is double taxation. Since a corporation is a separate legal entity, it must file and pay tax on corporate profits. When these
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Chapter 07 - Accounting for Liabilities

profits are distributed to the owners (shareholders), these distributions are not deductible for the corporation and are taxable income to the shareholders. 11. Contributed capital is the capital that is acquired by the corporation from owners of the corporation. For example, the sale of stock to an investor is a type of contributed capital. Retained earnings is the capital of a corporation that has been generated through the earnings process of a corporation and kept in the corporation (i.e., not distributed to owners). Because corporations can be owned by millions of individuals, they are able to pool the resources of many individuals which permits access to billions of dollars of capital. Proprietorships and partnerships are bound by the financial condition of a few, private investors. The primary reason for declaring a stock split is to reduce the market value of stock by increasing the number of shares outstanding on the market. This makes the stock more affordable and may, therefore, increase demand for the stock. Equity financing refers to capital acquired from owners; usually the term refers to issuance of stock. Debt financing refers to borrowing in the form of notes and bonds payable.

13.

26.

30.

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Chapter 07 - Accounting for Liabilities

EXERCISE 8-10

Date
10/1 11/20 12/30

Assets NA NA (60,000)

= = = =

Balance Sheet Com. Liab. + Stk. 60,000 + NA NA + NA (60,000) + NA

Income Statement + Ret. Ear. + (60,000) + NA + NA Rev NA NA NA Exp. NA NA NA = Net Inc. = NA = NA = NA

Statement of Cash Flows NA NA (60,000) FA

EXERCISE 8-15 a. The accounting records are not affected by a stock split. A memo would indicate the number of shares had doubled and the par value had been reduced by one-half. 300,000 shares x 2 = 600,000 new shares outstanding $10 par value 2 = $5 new par value c. Theoretically, the market value per share would be reduced to $90 ($180 2) after the split. However, if this is perceived as a good move by the company, the price per share may not fall that far, ending at something over $90.

b.

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