Solution manual financial accounting 9th harrison ch03

S 3-15 Sparrow Sporting Goods Company Income Statement For the Year Ended March 31, 2012 Thousands All other expenses……….... continued S 3-15 Sparrow Sporting Goods Company Balance

Chapter 3

Accrual Accounting & Income

Short Exercises

(10 min.) S 3-1

Millions

Sales revenue……… 850

Cost of goods sold……… (290)

All other expenses……… (325)

Net income……… $ 235

Beginning cash……… $ 75

Collections ($850 − $27)……… 823

Payments for: inventory……… (380)

everything else……… (255)

Ending cash……… $ 263

(10 min.) S 3-2 Statement Reports (Amounts in millions) Income statement Interest expense……… $ 8

Balance sheet Notes payable ($4.1 + $1.7 − $1.6)… $4.2

up-at the end of the accounting period Accounts such as Accounts Receivable, Supplies, Salary Expense and Salaries Payable may not be

up to date as of the last day of the accounting period Why? Because certain transactions that took place during the month may not have been recorded

The accrued salaries, which are owed to the employees but have not been paid, are an expense related to the current period but also represent a liability or debt that is owed by the business The business must make an adjusting entry to record the accrued salary owed as both

an increase in Salary Expense and an increase in Salaries Payable If the business does not make this adjustment, the expenses will be understated, net income will be overstated, and liabilities will be understated

(10 min.) S 3-4

The large auto manufacturer should record sales revenue when the

revenue is earned by delivering automobiles to Budget or Hertz The

large auto manufacturer should not record any revenue prior to delivery

of the vehicles, because the large auto manufacturer hasn’t earned the

revenue yet The revenue principle governs this decision

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

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 asset’s 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

(10 min.) S 3-6

a The Expense Recognition Principle

b The Time Period Concept

c The Revenue Principle

d The Revenue Principle

e The Expense Recognition Principle

(10 min.) S 3-7

a

Oct 31 Rent Expense ($3,000 × 1/6)………… 500

To record rent expense

Oct 1 3,000 Oct 31 500 Oct 31 500

b

Oct 31 Supplies Expense ($950 − $400)……… 550

To record supplies expense

Oct 1 950 Oct 31 550 Oct 31 550

(10 min.) S 3-8

Req 1

(a) Jan 1 Computer Equipment……….……… 50,000

Purchased computer equipment

(b) Dec 31 Depreciation Expense −

Computer Equipment ($50,000 / 5)…… 10,000 Accumulated Depreciation −

Depreciation Expense − Computer Equipment

To accrue interest expense for October

Nov 30 Interest Expense……… 250

To accrue interest expense for November

Dec 31 Interest Expense……… 250

(10 min.) S 3-11

Req 1

Oct 31 Interest Receivable……… 250

To accrue interest revenue for October

Nov 30 Interest Receivable……… 250

To accrue interest revenue for November

Dec 31 Interest Receivable……… 250

To accrue interest revenue for December

Req 2

Interest Receivable Oct 31 250

(5-10 min.) S 3-12

Unearned revenues are liabilities because The World Star has received

cash from subscribers in advance of providing them with newspapers

Receiving the cash in advance creates an obligation (a liability) for The World Star As The World Star delivers newspapers to subscribers, The World Star earns the revenue, and the dollar amount of the unearned

revenue then goes into the revenue account

To record the earning of subscription

revenue that was collected in advance

Unearned Service Revenue……… 7,000

(15-30 min.) S 3-15

Sparrow Sporting Goods Company

Income Statement For the Year Ended March 31, 2012

Thousands

All other expenses……… 29,000

Sparrow Sporting Goods Company Statement of Retained Earnings For the Year Ended March 31, 2012

Thousands

Retained earnings, March 31, 2011… $21,500

Retained earnings, March 31, 2012.… $32,000

(continued) S 3-15

Sparrow Sporting Goods Company

Balance Sheet March 31, 2012

LIABILITIES

Total current liabilities $ 55,100 Long-term liabilities 7,500 Total liabilities 62,600

STOCKHOLDERS’ EQUITY

Common stock 22,500 Retained earnings 32,000 Total stockholders’ equity 54,500

Total liabilities and stockholders’ equity $117,100

Retained Earnings Mar 31, 2012 Expenses 165,000 Mar 31, 2011 Bal 21,500

Mar 31, 2012 Revenues 175,500 Mar 31, 2012 Bal 32,000

Retained Earnings’ ending balance agrees with the amount reported on

the statement of retained earnings and the balance sheet (in S 3-15)

Current ratio = Total current assets = $88,800 = 1.61

Total current liabilities $55,100

(10 min.) S 3-18

1 Earned revenue of $10,000 on account:

a Net working capital = $43,700 [($88,800 + $10,000)- $55,100]

2 Paid accounts payable of $10,000:

a Net working capital = $33,700 [($88,800 - $10,000) - ($55,100- $10,000)]

Exercises

(5-10 min.) E 3-19A

1 Income statement Sales revenue………… $4,300

Their balance sheet should have included neither accounts

receivable nor accounts payable

(5-10 min.) E 3-21A

Millions

The revenue principle says to record revenue when it has been

earned, regardless of when cash is collected Therefore, report

the amount of revenue earned, regardless of when the company

collects cash

The expense recognition principle governs accounting for

expenses

c The income statement reports revenues and expenses

The statement of cash flows reports cash receipts and cash

payments

f Income Tax Expense ($21,000 × 25) 5,250

Income Tax Payable… 5,250

(10-15 min.) E 3-23A

Missing amounts in italics

Beginning Supplies $ 500 $ 400 1,000 $1,000

Add: Payments for supplies

during the year 1,700 800 1,000 400

Total amount to account for 2,200 1,200 2,000 1,400

Less: Ending Supplies (500) (500) (700) (500)

(10-20 min.) E 3-25A

(20-30 min.) E 3-26A

Honeyglazed Hams, Inc

Income Statement Year Ended December 31, 2012

Thousands

Revenues:

Sales revenue $40,900 Expenses:

Cost of goods sold $25,000 Selling, administrative, and

general expense 10,300 Total expenses 35,300 Income before tax 5,600

Income tax expense… 2,100

Net income $ 3,500

Honeyglazed Hams, Inc

Statement of Retained Earnings Year Ended December 31, 2012

Thousands

Retained earnings, December 31, 2011……… $4,700

8,200 Less: Dividends……… (1,500)

Retained earnings, December 31, 2012……… $6,700

(continued) E 3-26A

Honeyglazed Hams, Inc

Balance Sheet December 31, 2012

Thousands

Cash……… $ 3,700 Accounts payable……… $ 7,900

Accounts receivable………… 1,700 Income tax payable…… 500

Inventories……… 1,600 Other liabilities………… 2,400

Prepaid expenses……… 1,600 Total liabilities………… 10,800

Prop., plant, equip $ 6,800 STOCKHOLDERS’

deprec.…… (2,800) 4,000 Common stock………… 4,600

Other assets……… 9,500 Retained earnings……… 6,700

Total stockholders’ equity 11,300 Total liabilities and Total assets……… $22,100 stockholders’ equity $22,100

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 415 Collected cash 430

Other Revenue 400 Retained Earnings 24,300

31 Retained Earnings 22,000

Cost of Services Sold 11,000 Selling, General, and Administrative

Expense 6,400 Depreciation Expense 4,100 Income Tax Expense 500

(15-25 min.) E 3-30A

Journal

Adjusting Entries Dec 31 Unearned Service Revenue 6,300

31 Income Tax Expense ($1,500 − $0) 1,500

Income Tax Payable 1,500

31 Retained Earnings 1,400

Dividends 1,400

(20-30 min.) E 3-31A

Req 1

Anderson Production Company

Balance Sheet December 31, 2012 ASSETS

Current Assets:

Cash $14,100 Prepaid rent ($800 − $300) 500 Total current assets 14,600 Plant Assets:

Less accumulated depreciation

($3,400 + $700)……….……… (4,100) 37,900 Total assets $52,500

LIABILITIES Current:

Accounts payable $ 5,100 Salary payable ($4,600 − $4,300)… 300 Unearned service revenue ($9,100 − $6,300) 2,800 Income tax payable… 1,500 Total current liabilities 9,700 Note payable, long-term 16,000 Total liabilities 25,700

STOCKHOLDERS’ EQUITY Common stock… 8,600 Retained earnings ($8,500 + $19,500 − $4,600 − $1,600 −

$700 − $1,500 − $1,400)…… 18,200 Total stockholders’ equity… 26,800 Total liabilities and stockholders’ equity $52,500

(continued) E 3-31A

Req 2

Current Year

Prior Year Net working

capital

= Total current assets -

current liabilities

$14,600 - $9,700

Both net working capital and the current ratio have decreased indicating

that the ability to pay current liabilities with current assets has

The payment of long-term debt hurts the current ratio and improves

the debt ratio

c Current ratio = $50 + $5 = 1.22 Debt ratio = $40 + $5 = 0.60

Collecting cash in advance hurts both ratios

d Current ratio = $50 = 1.19 Debt ratio = $40 + $2 = 0.60

Accruing an expense hurts both ratios

e Current ratio = $50 + $6 = 1.40 Debt ratio = $40 = 53

A cash sale improves both ratios

(5-10 min.) E 3-33B

1 Income statement Sales revenue……… $4,400

Operating expenses…… 1,300

Balance sheet Accounts receivable…… $ 700

Accounts payable……… 1,200

2 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

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

c The income statement reports revenues and expenses

The statement of cash flows reports cash receipts and cash

payments

f Income Tax Expense ($26,000 × 25) 6,500

Income Tax Payable 6,500

(10-15 min.) E 3-37B

Missing amounts in italics

Beginning Supplies $ 400 $ 600 $1,100 $ 900 Add: Payments for supplies

during the year 1,600 1,100 1,500 600 Total amount to account for 2,000 1,700 2,600 1,500 Less: Ending Supplies (200) (300) (1,000) (300)

(10-20 min.) E 3-39B

(20-30 min.) E 3-40B

Honeybee Hams, Inc

Income Statement Year Ended December 31, 2012

Income tax expense 2,500

Net income $ 4,200

Honeybee Hams, Inc

Statement of Retained Earnings Year Ended December 31, 2012

Thousands

Retained earnings, December 31, 2011… $4,600

8,800

Retained earnings, December 31, 2012… $7,400

(continued) E 3-40B

Honeybee Hams, Inc

Balance Sheet December 31, 2012

Thousands

Cash……… $ 3,400 Accounts payable……… $ 7,700 Accounts receivable………… 1,900 Income tax payable…… 600 Inventories……… 1,700 Other liabilities………… 2,400 Prepaid expenses……… 1,700 Total liabilities………… 10,700 Prop., plant, equip $ 6,700 STOCKHOLDERS’

deprec…… (2,500) 4,200 Common stock………… 4,500 Other assets……… 9,700 Retained earnings……… 7,400

Total stockholders’ equity 11,900 Total liabilities and Total assets……… $22,600 stockholders’ equity $22,600

(10-20 min.) E 3-41B

One mechanism for solving this exercise is to prepare the relevant

T-accounts, insert the given information, and solve for the unknown

amounts, shown in italics

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 360 Collected cash 380

Other Revenue… 200 Retained Earnings 24,500

31 Retained Earnings 22,500

Cost of Services Sold 11,400 Selling, General, and Administrative

Expense… 6,000 Depreciation Expense 4,500 Income Tax Expense 600

(15-25 min.) E 3-44B

Journal

Adjusting Entries Dec 31 Unearned Service Revenue 6,300

31 Income Tax Expense ($1,200 − $0) 1,200

Income Tax Payable 1,200

31 Retained Earnings 1,100

Dividends 1,100

(20-30 min.) E 3-45B

Req 1

Durkin Production Company

Balance Sheet December 31, 2011 ASSETS

Accounts payable $ 4,700

Salary payable ($5,600 − $4,700) 900

Unearned service revenue ($8,400 − $6,300) 2,100

Income tax payable 1,200

Total current liabilities 8,900

Note payable, long-term… 17,000

Total liabilities… 25,900

STOCKHOLDERS’ EQUITY

Common stock 8,700

Retained earnings ($11,400 + $9,900* − $1,100) 20,200

Total stockholders’ equity 28,900

Total liabilities and stockholders’ equity $54,800

* Net income = $9,900 ($19,600 − $5,600 − $2,300 − $600 - $1,200)

(continued) E 3-45B

Req 2

Current Year

Prior Year Net working

capital

= Total current assets -

current liabilities =

$14,900 - $8,900

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 = $25,900 = 0.47 0.40

Total assets $54,800

The overall ability to pay total liabilities deteriorated a little

The payment of long-term debt hurts the current ratio and improves

the debt ratio

c Current ratio = $60 + $4 = 1.19 Debt ratio = $70 + $4 = 0.79

Collecting cash in advance hurts both ratios

d Current ratio = $60 = 1.11 Debt ratio = $70 + $4 = 0.82

Accruing an expense hurts both ratios

e Current ratio = $60 + $8 = 1.36 Debt ratio = $70 = 0.71

A cash sale improves both ratios