Solution manual intermediate accounting 9e by nicolai appendix c

Prepare income statement, retained earnings statement, balance sheet, closing entries.. Journal entries, posting, trial balance, financial statements, adjusting and closing entries.. A

APPENDIX C

REVIEW OF THE ACCOUNTING PROCESS

CONTENT ANALYSIS OF EXERCISES AND PROBLEMS

EC-1 Financial Statement Interrelationship Diagram 5-10 EC-2 Journal Entries Sales, purchases, accounts payable 5-10 EC-3 Journal Entries Sales, purchases, accounts payable, accounts

EC-4 Income Statement Partial through gross profit on sales 5-10 EC-5 Income Statement Calculations, fill in the blanks 5-10 EC-6 Financial Statements Prepare income statement, retained

earnings statement, balance sheet, closing entries 10-20 EC-7 Adjusting Entries Bad debts, accruals, deferrals 5-15 EC-8 Adjusting Entries Recognizing necessary adjustments, journal

EC-9 Adjusting Entries Record changes in trial balance accounts 5-10 EC-10 Closing Entries Prepare from ending account balances 5-15 EC-11 Reversing Entries Recognizing and preparing appropriate

EC-12 Special Journals Indicate appropriate journal and account for

EC-13 Worksheet Adjustments, income statement, retained earnings

statement, balance sheet Prepare financial statements from worksheet

10-20

EC-14 Worksheet Adjustments, income statement, retained earnings

statement, balance sheet Financial statement preparation

Closing entries

15-20

EC-15 Cash-Basis Accounting Prepare accrual-based income 15-20

Number Content Time Range (minutes) PC-1 Trial Balance Journal entries, posting to general ledger,

PC-2 Financial Statements Periodic inventory system Preparation of

income statement, retained earnings statement, balance

sheet from trial balance Closing entries

30-45

PC-3 Financial Statements Perpetual inventory system Preparation

of income statement, retained earnings statement, balance

sheet from trial balance Closing entries

30-45

PC-4 Adjusting Entries Recognize, calculate, journalize adjustments

PC-5 Adjusting Entries Calculate and journalize accruals, deferrals,

PC-6 Adjusting Entries Determine by comparing trial balance and

adjusted trial balance Prepare necessary reversing entries 20-40 PC-7 Adjusting Entries Year-end adjustments to update trial

PC-8 Reversing Entries Note payable, note receivable Recording

collection, payment with and without reversing entries 15-30 PC-9 Errors Effect on net income, total assets, total liabilities, total

PC-10 Errors in Financial Statements Indicate effect on net income,

assets, liabilities, and stockholders' equity of various errors 15-20 PC-11 Reversing Entries Prepare appropriate reversals and explain

PC-12 Special Journals Various transactions, record in appropriate

PC-13 Worksheet Prepare and complete worksheet Financial

PC-14 Worksheet Complete worksheet Prepare financial

PC-15 Special Journals Journalize and post various transactions in

PC-16 Comprehensive Journal entries, posting, trial balance,

financial statements, adjusting and closing entries 90-120 PC-17 Comprehensive: Statements From Incomplete Records

Prepare worksheet and financial statements from checkbook

and other information

45-90

Number Content (minutes) PC-18 (AICPA adapted) Comprehensive Accrual adjustments to

cash-basis records, worksheet, statement of changes in capital 45-90

ANSWERS TO QUESTIONS

QC-1 A primary objective of financial reporting is to provide information that is useful to

present and potential investors and creditors and other users in making rational investment, credit, and similar decisions

QC-2 An accounting system is the means by which a company records and stores the

financial and managerial information from its transactions so that it can retrieve and report the information in an accounting statement All companies have accounting systems, ranging in degree of sophistication from the simple to the complex

QC-3 Assets = Liabilities + Stockholders' Equity

Net Income = Revenues - Expenses

QC-4 A double-entry system standardizes the method that a company uses to record

changes in its accounts resulting from various business transactions or events For each transaction or event that a company records, the dollar amount of the debits entered in all the related accounts must be equal to the total dollar amount of the credits These debit or credit entries affect two or more accounts in the assets,

liabilities, and stockholders' equity (including the temporary accounts) All normal accounts on the left side of the accounting equation (assets) are increased by debits and decreased by credits whereas accounts on the right side of the equation

(liabilities and stockholders' equity) are increased by credits and decreased by debits

QC-5 A permanent account is an account whose balance at the end of the accounting

period is carried forward into the next accounting period Examples: Cash,

QC-6 The major financial statements of a company include:

a The income statement, which summarizes the results of the company's producing activities for the accounting period

income-b The balance sheet, which summarizes the amounts of the assets, liabilities, and stockholders' equity of the company on a particular date

c The statement of cash flows, which summarizes the cash receipts and cash payments of the company for the accounting period

Some companies also have a fourth financial statement for reporting their

comprehensive income

QC-7 a An account is used by a company to store the recorded monetary information

from its transactions and events An account can be in several physical forms such as a location on a computer disk or a standardized business paper

b A contra account is an account established to emphasize a reduction from a related account

c A ledger is the group of accounts for a company

d A journal (or document of original entry) is used by a company to initially record the debit and credit entries to all accounts affected by its transactions

e Posting involves transferring the date and debit and credit amounts from the journal entries to the appropriate debit and credit sides of the applicable accounts in the general or subsidiary ledger

QC-8 The advantages to a company of initially recording each transaction in a journal

include the following

a Use of a journal helps to prevent errors because all account titles and debit and credit entries are initially recorded in one place

b All the transactional information is recorded in one place, thereby providing a complete picture of the transaction

c Since the transactions are recorded as they occur, the journal also provides a chronological record of the company's financial transactions

QC-9 a Purchase of land on account

b Sale of capital stock for cash

c Collection of accounts receivable

d Payment of accounts payable

e Retirement of capital stock for cash (note: many examples may show a

decrease in an asset and an increase in a contra-stockholders' equity account) QC-10 a Purchase of merchandise on account

b Return of defective merchandise for credit

c Purchase of merchandise for cash

d Return of defective merchandise for cash refund

a Recording daily transactions or events in a journal The daily transactions or events are recorded in the general journal or the special journal

b Posting journal entries to the accounts in the general ledger The dates and debit and credit amounts from the journal entries in the general journal and the special journals are transferred to the appropriate debit and credit sides of the

applicable accounts in the ledger

c Preparing and posting adjusting entries At the end of the accounting period, certain accounts are updated through the use of an adjusting entry so that financial statements include the correct amounts for the current period Those entries are transferred (by posting) to the appropriate accounts in the ledger just

as the other journal entries are

d Preparing the financial statements After all the adjusting entries have been posted to the general ledger, an adjusted trial balance is prepared From the adjusted trial balance, the income statement, the retained earnings statement, and the balance sheet are prepared

e Preparing and posting closing entries All the temporary accounts are closed (their balances are reduced to zero) and the inventory and retained earnings accounts are updated by closing entries which are posted to the general ledger QC-12 For most companies, not all of their accounts are up to date at the end of the

accounting period Some of these accounts need to be adjusted so that all

revenues and expenses are recorded and the balance sheet accounts have a correct ending balance This is accomplished through the use of adjusting entries QC-13 A prepaid expense is a good or service purchased by the company for use in its

operations, but which has not been fully consumed by the end of the accounting period

Example: Assume the company paid for a two year insurance policy on July 1, in the amount of $400 and recorded this as Prepaid Insurance At the end of the year, the following adjusting entry is necessary:

Insurance Expense [($400 2) x 1/2] 100

A deferred revenue is a payment received by the company in advance for the future delivery of inventory or performance of services

Example: Assume the company received 6 months rent, totaling $1,200 in advance

on November 1 and recorded the receipt as Unearned Rent On December 31, the following adjusting entry is necessary:

QC-14 An accrued expense is an expense incurred during the accounting period that has

been neither paid nor recorded

Example: Assume a company pays employees' salaries once a month on the 15th of the month The monthly salaries payment is $5,000 On December 31, the following adjusting entry is necessary:

Salaries Expense ($5,000 x 1/2) 2,500

An accrued revenue is a revenue earned during the accounting period that has neither been received nor recorded

Example: Assume a company received a 90-day note receivable dated December

1 The note has a face value of $10,000 and bears an annual interest rate of 12% The adjusting entry on December 31 is:

Interest Receivable

QC-15 Examples of adjusting entries used to record estimated items include:

a Estimation of bad debts: Assume a company adopts a policy of providing

allowance for bad debt losses that is equal to ½% of net sales In the current year, the company has net sales of $1,500,000 The adjusting entry on December

31 is:

Bad Debt Expense

b Estimation of depreciation expense: The cost of a depreciable asset is

systematically allocated as an expense to each accounting period in which the asset is used This allocation process is called depreciation Assume that on July 1

of the current year, a company purchased certain office equipment for $20,000, which is estimated to have a useful life of 10 years and a residual value of $500 Depreciation expense is calculated using the following formula (assuming the straight-line method is used):

lifeserviceEstimated

valueresidual

EstimatedCost

ondepreciatiAnnual

On December 31 of the current year, the company records the following adjusting entry relating to its depreciation expense:

Accumulated Depreciation

the effect of adjusting entries on the accounts An adjusted trial balance lists all of the account balances of a company after the adjusting entries have been posted to the accounts and before closing entries have been made

Items on an adjusted trial balance can be readily classified as belonging on either the income statement, retained earnings statement, or balance sheet, and,

therefore, a company's financial statements can be easily prepared by using the information on the adjusted trial balance

QC-17 A periodic inventory system requires counting, measuring, or weighing goods at the

end of the accounting period to determine the quantities on hand Values are then assigned to these quantities to determine the portion of the recorded costs to be included in the ending inventory No record is kept for the cost of inventory which is sold during the period nor the cost of inventory on hand during the period

A perpetual inventory system requires the maintenance of records that provide a continuous summary of inventory items on hand Inventory increases and decreases are recorded in the individual inventory accounts, the resulting balances

representing the current amounts on hand

Under a periodic inventory system, the balance of the beginning inventory account remains the same throughout the entire period, until it is closed at the end of the period When inventories are purchased, the Purchases account is debited and when inventories are sold, the Inventory account is not adjusted The cost of goods sold for the period is calculated by adding the beginning inventory balance to purchases (net) and subtracting the ending inventory balance All inventory losses and errors are buried in the cost of goods sold calculation

Under a perpetual inventory system, the purchase of goods increases (debits) the Inventory account In addition, the Cost of Goods Sold account is increased

(debited) and the Inventory account is decreased (credited) when the goods are sold A physical count of the units on hand is made at least once a year to confirm the inventory balance listed on the books Variations between the recorded amount and the amount actually on hand resulting from errors in recording, shrinkage, and theft may be recognized The book inventory is adjusted into agreement with the physical count and the discrepancy is recorded as an adjustment to cost of goods sold or an operating expense

QC-18 When a company uses a periodic inventory system, cost of goods sold is computed

as follows:

Add: Net purchases (including returns, allowances, and freight-in; less discounts taken) XX

QC-19 Closing entries are made by a company at the end of its accounting period to

reduce the balance in each temporary account to zero and to update the retained earnings and inventory accounts After the company posts its closing entries, each temporary account begins the next accounting period with a zero balance, which makes it easier to summarize the company's net income and dividend information for the next accounting period The retained earnings and inventories balances are also updated and become the next period's beginning balances

QC-20 Dec 31 Sales Revenue

Interest Revenue Purchases Returns and Allowances Purchases Discounts Taken

Inventory (December 31) Income Summary

To close the temporary accounts with credit balances and to record the ending inventory

Dec 31 Income Summary

Sales Returns and Allowances Sales Discounts Taken

Purchases Freight-In Depreciation Expense Salaries Expense Rent Expense Interest Expense Bad Debt Expense Utilities Expense Income Tax Expense Inventory (January 1)

To close the temporary accounts with debit balances and to eliminate the beginning inventory

Dec 31 Income Summary

QC-21 Reversing entries are the exact reverse (accounts and amounts) of adjusting entries

They are usually made at the same time as closing entries but are dated the first day

of the next accounting period The use of reversing entries is optional; reversing entries are used to simplify the recording of a later transaction related to the

adjusting entry The later transaction can be recorded routinely, without the need to consider the possible impact of the prior adjusting entry

Assume the ABC Company pays employees' salaries every Friday (5-day work week), the weekly payroll amounts to $6,000, and December 31 falls on Tuesday The

adjusting, reversing, and payment entries are as follows:

QC-22 A worksheet is a large sheet of multicolumn accounting paper prepared by a

company the end of an accounting period to minimize errors, simplify recording in the general journal of the adjusting and closing entries, and facilitate the preparation

of the financial statements It consists of a column for listing all the ledger accounts, and debit and credit columns for the trial balance, adjustments, income statement, retained earnings statement, and balance sheet The trial balance is listed with the current accounts and balances Year-end adjustments are then initially entered on the worksheet The trial balance amount of each account is combined with the adjustments to that account and carried over to the proper column of the financial statement in which the account is located After each column is properly totaled and checked, financial statements, adjusting entries, and closing entries can be prepared from the information contained in the worksheet

QC-23 A subsidiary ledger is a group of accounts, all of which pertain to one specific

company activity, such as the sale or purchase on account It is common to have

an Accounts Receivable subsidiary ledger and an Accounts Payable subsidiary ledger When a subsidiary ledger is used, a control account is maintained in the general ledger On any balance sheet date, the balance of a control account must always be equal to that of the subsidiary ledger Subsidiary ledgers and control accounts are used by large companies selling on credit to many customers and purchasing on credit from many suppliers If all the customer and supplier accounts were included in the general ledger, this ledger would substantially increase in size

In order to reduce the size of the general ledger, minimize errors, divide the

accounting task, and keep up-to-date records of the company's dealings with charge customers and suppliers, a subsidiary ledger is usually established.

QC-23 (continued)

Example: Assume a company sells goods on account to three customers, A, B, and

C During the year, the following transactions occurred and were recorded in a general journal

The Accounts Receivable control account in the general ledger and the Accounts Receivable subsidiary ledger accounts will appear as follows:

General Ledger Accounts Receivable Subsidiary Ledger

QC-24 Special journals are journals used by a company to record transactions with a similar

characteristic, such as credit sales and cash payments Advantages of using special journals are that (1) they allow the accounting task to be divided, (2) they reduce the time necessary to complete the various accounting activities, and (3) they provide for a chronological listing of similar transactions Subsidiary ledgers and control accounts are often used with special journals When this occurs, the postings

to the Accounts Receivable control account are made less frequently from the sales journal and cash receipts journal.

each of them are as follows:

(1) Sales journal-sales of merchandise on account

(2) Purchases journal-purchases of merchandise on account

(3) Cash receipts journal-receipts of cash

(4) Cash payments journal-payments of cash

(5) General journal-adjusting, closing, and reversing entries and other transactions not recorded in the special journals Note: The general journal is not a special journal but is used with special journals as indicated

QC-26 A voucher system is designed to provide safeguards over the disbursement of cash

The use of a voucher system requires that a company: (1) establish a liability

(Vouchers Payable, which replaces Accounts Payable) for each anticipated cash payment; (2) support each cash payment by a voucher and substantiating

documents to prove the validity of the payment; and (3) make all payments by check

In a voucher system, a company uses a voucher register Each expenditure is initially recorded in the voucher register as a liability by a credit to Vouchers Payable and a debit to the associated asset or expense account Each expenditure is assigned a voucher number in sequential order and each voucher contains a file of supporting evidence

When the company makes payment, an authorization signature is required and a check is issued The check number is entered in the voucher register beside the number of the paid voucher In this manner, all unpaid vouchers at the end of the period can be identified as those without an associated check number Posting from the voucher register must be made daily and at the end of the period

QC-27 The common software packages for the financial accounting functions include

programs for accounts receivable, accounts payable, inventory, payroll, the general ledger, and spreadsheets

QC-28 Under cash-basis accounting, a company records revenues when it collects cash

from sales and records expenses when it pays cash for its operations To convert its cash-basis accounting records to an accrual-based income statement, the

company must adjust its cash receipts to convert them to sales revenues and must adjust its cash payments to convert them to cost of goods sold and operating

expenses.

EC-1

Beginning balance sheet: AS = LB + CC + RE

Income statement: Rev - Exp = NI

Retained earnings statement: End RE = Beg RE + NI - Div

Ending balance sheet: AS = LB + CC + RE

Made credit sales

Paid salaries

EC-2 (continued)

Paid for May 5 purchases less 2% discount

Sold land at a gain

Returned defective merchandise for credit

Paid for June 20 purchases less return and discount

Paid the monthly utility bill

RULE COMPANY Partial Income Statement For Year Ended December 31, 2004

Cost of goods sold

EC-5 (continued)

Operating expenses

2 TURTLE COMPANY

Statement of Retained Earnings For Year Ended December 31, 2004

$3,340

Balance Sheet December 31, 2004

Assets Current Assets

Property and Equipment

Liabilities Current Liabilities

Stockholders' Equity Contributed Capital

To provide for possible bad debt losses ($25,000 x 2%)

Dec 31 Unearned Rent 1,000

To record income tax expense for the year ($6,800 - 500 - 1,400 - 3,500 - 800 +

EC-8 (continued)

To record portion of advances to sales personnel that has been used

to pay travel expenses

To record income tax expense for the year ($8,655 - 1,725 - 810 - 890 - 280 -

To provide for possible bad debt losses $(650 - 380)

To record income tax expense for the year $(2,250 - 0)

Dec 31 Interest Expense 320

2 S; Accounts Receivable (Dr.), Sales (Cr.)

3 CP; Sales Salaries Expense (Dr.), Cash (Cr.)

4 P; Purchases (Dr.), Accounts Payable (Cr.)

5 CR; Cash (Dr.), Sales Revenue (Cr.)

6 G; Land (Dr.), Notes Payable (Cr.)

7 CR; Cash (Dr.), Notes Receivable (Cr.), Interest Revenue (Cr.)

8 G; Accounts Payable (Dr.), Purchases Returns and Allowances (Cr.)

9 G; Various Revenue, Expense, Asset, and Liability Accounts (Dr or Cr.)

10 CP; Equipment (Dr.), Cash (Cr.)

EC-13

1 (Worksheet on Following Page)

Income Statement For Year Ended December 31, 2004

Other item

Earnings per share (200 shares) $ 2.63

Prepaid rent

Office equipment

Accumulated depreciation

Note payable (due 7/1/05)

Capital stock (250 shares)

Income tax expense

Income taxes payable

Net income

Retained earnings (12/31/04)

3,800 2,400 7,000

200 2,500

800 16,700

1,400 2,000 4,000 3,200 6,100 16,700

(a)1,200 (b) 700 (c) 150 2,050 (d) 225

2,275

(a)1,200 (b) 700

(c) 150 2,050 (d) 225 2,275

225 5,575

525 6,100

6,100

6,100 6,100 6,100

200

200 3,525 3,725

3,200

525 3,725 3,725

3,800 1,200 7,000

12,000 12,000

2,100 2,000 4,000

150

225 8,475 3,525 12,000

EC-13 (continued)

2 (continued)

GRANT CONSULTING COMPANY Statement of Retained Earnings For Year Ended December 31, 2004

$3,725

GRANT CONSULTING COMPANY

Balance Sheet December 31, 2004

Assets Current Assets

Property and Equipment

Liabilities Current Liabilities

MURPHY COMPANY Worksheet For Year Ended December 31, 2004

Note payable (due 7/1/05)

Capital stock (1,000 shares)

Income tax expense

Income taxes payable

Net income

2,500 4,000 6,800 3,600 30,000 1,000 22,400 7,100 3,300 4,400 85,100

300

12,000 3,700 5,000 8,900 10,200 45,000

85,100

(b) 500

(a)3,000 (c)1,200 (d) 450 (e) 400 5,550 (f) 1,460

7,010

(d) 450 (c)1,200 (a)3,000

(b) 500

(e) 400 5,550 (f)1,460 7,010

6,800

22,400 7,600 3,300 4,400 3,000 1,200

450

400 49,550 1,460 51,010 2,190 53,200

45,000

8,200 53,200 53,200 53,200

1,000

1,000

10,200

2,190 12,390

2,500 4,000 2,400 30,000

8,200

750

15,000 3,700 5,000 8,900

500

400

1,460

EC-14 (continued)

Income Statement For Year Ended December 31, 2004

Other item

MURPHY COMPANY Statement of Retained Earnings For Year Ended December 31, 2004

$12,390

EC-14 (continued)

2 (continued)

MURPHY COMPANY Balance Sheet December 31, 2004

Assets Current Assets

Property and Equipment

Liabilities Current Liabilities

3 2004

receivable - $4,200 beginning accounts receivable

$6,300 ending inventory + $7,000 ending accounts payable -

$6,100 beginning accounts payable

rent ($7,200 2) + $900 salaries payable

EC-15 (continued)

Balance Sheet December 31, 2004

Assets Current Assets

Property and Equipment

Liabilities Current Liabilities

Returned defective merchandise

Leased portion of building and received

6 months' rent at $220 per month

Paid for merchandise purchased

on Nov 17 less 1% discount

Paid advertising expense

Paid sales salaries and office salaries

PC-2

Income Statement For Year Ended December 31, 2004

Operating expenses

Other items

$12,895

PC-2 (continued)

Balance Sheet December 31, 2004

Assets Current Assets

Property and Equipment

Liabilities Current Liabilities

Long-Term Liabilities

Stockholders' Equity Contributed Capital