Chapter 3 Review Problems

Problem #1

The following data were taken from the records of Village Corporation at December 31, 2014:

Required:

Prepare a complete statement of earnings for the company (showing both gross profit and earnings from operations). Show all
computations. (Hint: Set up the side captions starting with sales revenue and ending with earnings per share; use the amounts and
percentages given to infer missing values.)

Solution to Problem #1
Problem #2
Mostert Music Company had the following transactions in March:

1. Sold instruments to customers for $15,000; received $10,000 in cash and the rest on account.
2. Determined that the cost of the instruments sold was $9,000.
3. Purchased $3,000 of new instruments inventory; paid $1,000 in cash and the rest on account.
4. Paid $750 in wages for the month.
5. Received a $200 bill for utilities that will be paid in April.
6. Received $3,000 from customers as deposits on orders of new instruments to be sold to customers in April.

Complete the following statements:

Does the cash basis or the accrual basis of accounting provide a better indication of the operating performance of Mostert Music
Company in March? Explain.

Solution to Problem #2
Problem #3

Revenues are normally recognized when the entity has transferred to the buyer the significant risks and rewards of ownership of the
goods, it retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control
over the goods, it is probable that future economic benefits will flow to the company, and the benefits from and costs associated
with the transaction can be measured reliably. The amount recorded is the cash-equivalent sales price. Assume that the following
events and transactions occurred in September 2014:

1. A customer purchases a ticket from WestJet for $435 cash to travel the following January. Answer from WestJet’s
standpoint.
2. General Motors issues $26 million in new shares.
3. Hall Construction Company signs a contract with a customer for the construction of a new $500,000 warehouse. At the
signing, Hall receives a cheque for $50,000 as a deposit on the future construction. Answer from Hall’s standpoint.
4. On September 1, 2014, a bank lends $10,000 to a company. The loan carries a 6 percent annual interest rate, and the
principal and interest are due in a lump sum on August 31, 2015. Answer from the bank’s standpoint.
5. A popular ski magazine company receives a total of $1,800 from subscribers on September 30, the last day of its fiscal year.
The subscriptions begin in the next fiscal year. Answer from the magazine company’s standpoint.
6. Sears Canada sells a $100 lamp to a customer who charges the sale on his store credit card. Answer from the standpoint of
Sears.
7. A customer orders and receives 10 personal computers from Dell Inc.; the customer promises to pay $20,000 within three
months. Answer from Dell’s standpoint.
8. Sam Shell Dodge sells a truck with a list, or sticker, price of $24,000 for $21,000 cash.
9. The Hudson’s Bay Company orders 1,000 men’s shirts from Gildan Activewear Inc. at $18 each for future delivery. The
terms require payment in full within 30 days of delivery. Answer from Gildan’s standpoint.
10. Gildan Activewear completes production of the shirts described in (i) and delivers the order. Answer from Gildan’s
standpoint.
11. Gildan receives payment from the Hudson’s Bay Company for the order described in (i). Answer from Gildan’s standpoint.

Required:

For each of the September transactions,

1. Indicate the account titles that are affected and the type of each account (A for asset, L for liability, SE for shareholders’ equity,
and R for revenue).

2. If revenue is to be recognized in September, indicate the amount. If revenue is not to be recognized in September, indicate which
of the revenue recognition criteria are not met.

Use the following headings in structuring your solution:

Solution to Problem #3
Problem #4

Internet Marketing Inc. (IMI), which has been operating for three years, provides marketing consulting services worldwide for online
companies. You are a financial analyst assigned to report on the effectiveness of IMI’s management team at managing its assets. At
the start of 2014 (its fourth year), IMI’s T-account balances were as follows. Amounts are in thousands of dollars.

Required:

1. Using the data from these T-accounts, complete the accounting equation on January 1, 2014.

Assets, $__________ = Liabilities, $__________ + Shareholders’ Equity, $__________

2. Enter the following 2014 transactions in the T-accounts:

1. Provided $58,000 in services to clients; received $48,000 in cash and the rest on account.
2. Received $5,600 cash from clients on account.
3. Received $400 in cash as income on investments.
4. Paid $36,000 for wages, $12,000 for travel, $7,600 in rent, and $1,600 on trade payables.
5. Received $1,600 in cash from clients in advance of services that IMI will provide next year.
6. Received a utility bill for $800 for services used in 2014.
7. Paid $480 in dividends to shareholders.
3. Compute ending balances in the T-accounts to determine the missing amounts on December 31, 2014:

Revenues, $ _____ − Expenses, $_____ = Net earnings, $_____

Assets, $_____ = Liabilities, $_____ + Shareholders’ Equity, $_____

Calculate the total asset turnover ratio for 2014. If the company had a total asset turnover ratio of 2.00 in 2013 and of 1.80 in 2012,
what does your computation suggest to you about IMI? What would you state in your report?
Solution to Problem #4
Problem #5

Part A. Perform transaction analysis for Blake Company regarding the following transactions for the
month of March. Indicate the account affected by the transaction as well as the increase (+) or decrease
(-) to the components of the accounting equation and the amount.

Assets Liabilities Stockholders’ Equity

Transaction
Account Amount Account Amount Account Amount

Paid wages for two

weeks in March. Wage
Ex. Cash -$500 -$500
The total cash paid expense
was $500.

Collected $2,000
A. on accounts
receivable.

Services were
completed for
customers. A total
B. of $1,500 was
billed but none of it
was received in
March.

Paid the February

utilities bill for
$100. It was
C.
recorded as an
expense in
February.

Received and paid

D. the March utilities
bill for $150.

Sold land for

E. $50,000 that had
cost $35,000.

Paid $3,000 for

F. rent for April, May,
and June.
Part B. Determine whether the transactions A-F above affected cash flows during March. If so, determine the type of
activity as an operating activity, an investing activity, or a financing activity. If cash is not affected use "no effect." Place an
X under the appropriate column for each transaction.

Type of Activity

Transaction Operating Investing Financing No effect

A.

B.

C.

D.

E.

F.
Solution to Problem #5

A.

Stockholders’
Assets Liabilities
Transaction Equity
Analysis
Account Amount Account Amount Account Amount

Cash
+$2,000
A. Accts
-$2,000
Rec.

Accts Service
B. +$1,500 +$1,500
Rec. Revenue

Utilities
C. Cash -$100 -$100
Payable

Utilities
D. Cash -$150 -$150
Expense

+$50,000 Gain on
Cash
E. - Sale of +$15,000
Land
$35,000 Land

Cash
-$3,000
F. Prepaid
+$3,000
Expenses
B.

Type of Activity

Transaction Operating Investing Financing No effect

A. X

B. X

C. X

D. X

E. X

F. X
Problem #6

World Coffee, Inc. has provided the following information pertaining to the store's month ended October 31, 2016:

Sales revenue $100,000 Supplies expense $1,500

Interest expense 6,900 Rent expense 4,000

Cost of goods
60,000 Wages expense 9,500
sold

Dividends paid 5,000 Utilities expense 1,100

Advertising Loss on sale of coffee

4,500 3,200
expense equipment

Dividends
7,100 Income tax expense 3,800
declared

Unearned
6,100
revenues

Prepare an income statement through operating income for the month ended October 31, 2016.
Solution to Problem #6

World Coffee, Inc.

Income Statement
For the Month Ended October 31, 2016

Revenues:

Sales Revenues $100,000

Store operating expenses:

Cost of goods sold $60,000

Supplies expense 1,500

Rent expense 4,000

Wages expense 9,500

Utilities expense 1,100

Total store expenses $76,100

General and administrative expense:

4,500
Advertising

Loss on sale of coffee equipment 3,200

Total expenses 83,800

Operating income $16,200