(10-20 min.) P 3-67A Journal
DATE ACCOUNT TITLES DEBIT CREDIT
Dec. 31 a. Insurance Expense………. 4,650*
Prepaid Insurance……….. 4,650
To record insurance expense.
31 b. Salary Expense ($5,800 × 2/5)…….. 2,320
Salary Payable……… 2,320
To accrue salary expense.
31 c. Interest Receivable………. 600
Interest Revenue……… 600
To accrue interest revenue.
31 d. Supplies Expense……….. 6,300**
Supplies……….. 6,300
To record supplies expense.
31 e. Unearned Service Revenue
($12,100 × 60%)………... 7,260
Service Revenue……… 7,260
To record revenue collected in advance.
31 f. Depreciation Expense – Office
Furniture………
3,000 Depreciation Expense – Equipment.. 6,300
Accumulated Depreciation –
Office Furniture……….. 3,000
Accumulated Depreciation –
Equipment……… 6,300
To record depreciation expense.
_____
* $1,050 + $4,800 − $1,200 = $4,650
** $2,300 + $6,100 − $2,100 = $6,300
(45-60 min.) P 3-68A Req. 1
Lady, Inc.
Adjusted Trial Balance July 31, 2012
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash 8,800 8,800
Accounts receivable 1,600 (a) 1,700 3,300
Prepaid rent 3,000 (b 1,000* 2,000
Supplies 2,100 (c) 1,630 470
Furniture 90,000 90,000
Accumulated depreciation 3,000 (d) 1,500** 4,500
Accounts payable 3,200 3,200
Salary payable (e) 3,000*** 3,000
Common stock 14,000 14,000
Retained earnings 75,060 75,060
Dividends 3,900 3,900
Service revenue 17,000 (a) 1,700 18,700
Salary expense 2,400 (e) 3,000*** 5,400
Rent expense (b) 1,000* 1,000
Utilities expense 460 460
Depreciation expense (d) 1,500** 1,500
Supplies expense (c) 1,630 _____ 1,630 112,260 112,260 8,830 8,830 118,460 118,460
_____
* $3,000 ÷ 3 = $1,000
** $90,000 ÷ 5 = $18,000 ÷ 12 = $1,500
*** $5,000 × 3/5 = $3,000
(continued) P 3-68A Req. 2
Lady, Inc.
Income Statement Month Ended July 31, 2012 Revenues:
Service revenue $18,700
Expenses:
Salary expense $5,400
Supplies expense 1,630
Depreciation expense 1,500
Rent expense 1,000
Utilities expense 460
Total expenses 9,990
Net income $ 8,710
Lady, Inc.
Statement of Retained Earnings Month Ended July 31, 2012
Retained earnings, July 1, 2012 $75,060
Add: Net income 8,710
83,770
Less: Dividends (3,900)
Retained earnings, July 31, 2012 $79,870
Req. 2 (continued)
Lady, Inc.
Balance Sheet July 31, 2012
ASSETS LIABILITIES
Current assets: Current liabilities:
Cash $ 8,800 Accounts payable $ 3,200
Accounts receivable 3,300 Salary payable 3,000 Prepaid rent 2,000 Total current liabilities 6,200
Supplies 470
Total current assets 14,570
Furniture $90,000 STOCKHOLDERS’ EQUITY
Less: Accum. Common stock 14,000
deprec. (4,500) 85,500 Retained earnings 79,870 Total stockholders’ equity 93,870 Total liabilities and Total assets $100,070 stockholders’ equity $100,070
(10-20 min.) P 3-69A Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Apr. 30 Accounts Receivable ($6,830 − $6,300)... 530
Rental Revenue………. 530
To accrue rental revenue.
30 Interest Receivable ($500 − $0)……….. 500
Interest Revenue ($1,300 − $800)…….…… 500 To accrue interest revenue.
30 Supplies Expense ($400 − $0)……… 400
Supplies ($1,200 − $400)……… 400
To record supplies expense.
30 Insurance Expense ($1,400 − $0)……….. 1,400
Prepaid Insurance ($2,400 − $1,000)…….. 1,400 To record insurance expense.
30 Depreciation Expense ($1,900 − $0)…………. 1,900 Accumulated Depreciation
($11,000 − $9,100)……….. 1,900 To record depreciation expense.
30 Wage Expense ($2,300 − $1,600)………... 700
Wages Payable ($700 − $0)……….……….. 700
To accrue wage expense.
30 Unearned Rental Revenue ($1,700 − $1,300).. 400
Rental Revenue*……….. 400
To record revenue that was collected in advance.
_____
* ($20,630 - $19,700 - $530)
Req. 2
Total assets = $80,230 ($8,200 + $6,830 + $500 + $4,900 + $800 + $1,000 + $69,000 − $11,000)
Total liabilities = $8,800 ($6,800 + $700 + $1,300)
Net income = $15,230 ($20,630 + $1,300 − $1,900 − $400 − $100 − $2,300 − $600 − $1,400)
Total equity =
$71,430 ($80,230 − $8,800) or ($19,000 + $41,000 + $15,230 - $3,800)
(20-30 min.) P 3-70A Req. 1
Simpson Corporation Income Statement Year Ended March 31, 2012 Revenues:
Service revenue $105,500
Expenses:
Salary expense $39,800
Rent expense 10,100
Insurance expense 4,000
Interest expense 2,700
Supplies expense 2,400
Depreciation expense 1,300 60,300
Income before tax 45,200
Income tax expense 7,000
Net income $ 38,200
Simpson Corporation
Statement of Retained Earnings Year Ended March 31, 2012
Retained earnings, March 31, 2011 $ 2,000
Add: Net income 38,200
40,200
Less: Dividends (23,000)
Retained earnings, March 31, 2012 $17,200
Req. 1 (continued)
Simpson Corporation Balance Sheet March 31, 2012
ASSETS LIABILITIES
Cash $ 1,700 Accounts payable $ 3,100
Accounts receivable 8,800 Interest payable 700
Supplies 2,000 Unearned service revenue 800
Prepaid rent 1,700 Income tax payable 2,400
Note payable 18,400
Equipment $36,000 Total liabilities 25,400
Less: Accum.
deprec. (4,600) 31,400 STOCKHOLDERS’ EQUITY
Common stock 3,000
Retained earnings 17,200 Total stockholders’ equity 20,200 Total liabilities and Total assets $45,600 stockholders’ equity $45,600
Req. 2
Debt ratio: $25,400
= 0.56
$45,600
Simpson is in compliance with its debt agreement, which requires the company to maintain a debt ratio no higher than 0.60.
(20 min.) P 3-71A Req. 1
Journal
DATE ACCOUNT TITLES DEBIT CREDIT
Closing Entries
Mar. 31 Service Revenue……….. 94,100
Retained Earnings………... 94,100 31 Retained Earnings……….. 35,200
Advertising Expense……… 11,000
Depreciation Expense……….. 1,000
Interest Expense………..………. 300
Salary Expense……….. 17,900
Supplies Expense………. 5,000
31 Retained Earnings……….. 32,500
Dividends………... 32,500
Req. 2
Retained Earnings
Mar. 31, 2012 Expenses 35,200 Mar. 31, 2011 Bal. 19,500 Mar. 31, 2012 Dividends 32,500 Mar. 31, 2012 Revenues 94,100 Mar. 31, 2012 Bal. 45,900 Net income = $58,900 ($94,100 - $35,200)
Req. 3
Retained Earnings increased during the year because net income of
$58,900 exceeded dividends of $32,500.
Req. 1
Mountain Lodge Service, Inc.
Balance Sheet March 31, 2012
ASSETS Current assets:
Cash $ 7,500
Accounts receivable 16,600
Prepaid expenses 5,000
Supplies 3,700
Total current assets 32,800
Plant assets:
Equipment $42,500
Less: Accumulated depreciation (6,700) 35,800
Other assets 13,700
Total assets $82,300
LIABILITIES Current liabilities:
Current portion of note payable $ 400
Accounts payable 14,100
Salary payable 2,500
Unearned service revenue 3,700
Total current liabilities 20,700
Note payable, long-term 5,700
Total liabilities 26,400
STOCKHOLDERS’ EQUITY
Common stock 10,000
Retained earnings 45,900*
Total stockholders’ equity 55,900
Total liabilities and stockholders’ equity $82,300
(continued) P 3-72A Req. 1 (continued)
*Retained earnings, March 31, 2011………. $19,500 Add: Net income ($94,100 − $11,000 − $1,000 −
$300 − $17,900 − $5,000)………. 58,900 78,400 Less: Dividends………... (32,500) Retained earnings, March 31, 2012……… $45,900
Req. 2
2012 2011 Net working
capital
= Total current assets - current liabilities
$32,800 - $20,700
= $12,100 $11,800 Current ratio = Total current assets
= $32,800
= 1.58 1.20 Total current liabilities $20,700
The increase in both working capital and the current ratio indicate that the ability to pay current liabilities with current assets improved during 2012.
2012 2011 Debt ratio = Total liabilities
= $26,400
= 0.32 0.25 Total assets $82,300
The overall debt position deteriorated a little during 2012. The improvement in the current ratio is greater than the deterioration in the debt ratio. However, Mountain Lodge’s overall debt position is strong because a debt ratio of .32 is not troublesome.
Req. 1
(All amounts in millions)
Current ratio = Total current assets
= $15.8
= 1.84 Total current liabilities $8.6
$13.9
Debt ratio = Total liabilities
= $8.6 + $5.3
= 0.43
Total assets $32.1
Req. 2
Current Ratio Debt Ratio
a. $15.8 − ($8.6 × 1/2)
= 2.67 $13.9 − ($8.6 × 1/2)
= 0.35 ($8.6 × 1/2) $32.1 − ($8.6 × 1/2)
b. $15.8 + $2.0
= 2.07 $13.9 + $2.0
= 0.47
$8.6 $32.1 + $2.0
c. $15.8 + $2.4
= 2.12 $13.9
= 0.40
$8.6 $32.1 + $2.4
d. $15.8 − $.7
= 1.75 $13.9
= 0.44
$8.6 $32.1 − $.7
e. $15.8
= 1.74 $13.9 + $0.5
= 0.45
$8.6 + $0.5 $32.1
f. $15.8 − $1.5
= 1.66 $13.9 + $2.5
= 0.47
$8.6 $32.1 + $4.0 − $1.5
g. $15.8
= 1.84 $13.9
= 0.44
$8.6 $32.1− $0.4
(continued) P 3-73A Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a company’s current ratio is greater than 1.0, as it is for Harrington, paying off a current liability will always increase the current ratio.
f. Borrowing money on long-term debt will always increase the current ratio and increase the debt ratio.
(All amounts in millions)
1. $37 – x = $7; x = $30
2. Revenues……….. $37
Expenses……….. 30 Net income…………... $ 7
3. Beginning receivables……... $ 11
Add: Revenues……… 37
Less: Collections………….. (20) Ending receivables……… $ 28 Balance sheet
ASSETS
Current assets:
Receivables…… $ 28
4. Beginning accounts payable……….. $ 6
Add: Expenses……… 30
Less: Payments………... (35) Ending accounts payable………. $ 1 Balance sheet
LIABILITIES
Current liabilities:
Accounts payable……… $ 1
(20-30 min.) P 3-75B Req. 1
Healthy Hearts Consulting
Amount of Revenue (Expense) for December
Date Cash Basis Accrual Basis
Dec. 1 Expense $ (3,500) Expense 0
4 Expense $(900) Expense 0
5 Revenue $500 Revenue $500
8 Expense $(200) Expense $(200)
11 Revenue 0 Revenue $3,100
19 Expense 0 Expense 0
24 Revenue $3,100 Revenue 0
26 Expense $(1,800) Expense 0
29 Expense $(800) Expense $(800)
31 Expense 0 Expense $(700)
31 Revenue 0 Revenue $400
Req. 2 Income (loss)
before tax $(3,600) Income before tax $2,300 Req. 3
The accrual-basis measure of net income is preferable because it accounts for revenues and expenses when they occur, not when they are received or paid in cash. For example, on Dec. 11, the company earned $3,100 of revenue and increased its wealth as a result. The accrual basis records this revenue, but the cash basis ignores it. On Dec. 24, the business collected the receivable that was created by the revenue earned on account at Dec.
11. The accrual basis records no revenue on Dec. 24 because the company’s increase in wealth occurred back on Dec. 11. The cash basis waits until cash is received, on Dec. 24, to record the revenue. This is too late.
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Dec. 31 a. Insurance Expense ... 3,500*
Prepaid Insurance ... 3,500 To record insurance expense
31 b. Salary Expense ($6,200 × 1/5) ... 1,240
Salary Payable… ... 1,240 To accrue salary expense.
31 c. Interest Receivable ... 500
Interest Revenue ... 500 To accrue interest revenue.
31 d. Supplies Expense ... 6,800**
Supplies ... 6,800 To record supplies expense.
31 e. Unearned Service Revenue
($11,900 × 70%) ... 8,330
Service Revenue ... 8,330 To record revenue that was collected
in advance.
31 f. Depreciation Expense – Office ...
Furniture ...
Depreciation Expense – Equipment..
3,500 5,800
Accumulated Depreciation –
Office Furniture ... 3,500 Accumulated Depreciation –
Equipment... . 5,800 To record depreciation expense.
_____
* $800 + $3,600 − $900 = $3,500
** $2,700 + $6,400 − $2,300 = $6,800
(45-60 min.) P 3-77B Req. 1
Princess, Inc.
Adjusted Trial Balance August 31, 2012
TRIAL BALANCE ADJUSTMENTS
ADJUSTED TRIAL BALANCE
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash 8,300 8,300
Accounts receivable 1,900 (a) 2,100 4,000
Prepaid rent 2,100 (b) 700* 1,400
Supplies 2,400 (c) 2,090 310
Furniture 63,000 63,000
Accumulated depreciation 3,700 (d) 1,750** 5,450
Accounts payable 4,000 4,000
Salary payable (e) 3,060*** 3,060
Common stock 13,000 13,000
Retained earnings 53,430 53,430
Dividends 4,300 4,300
Service revenue 11,000 (a) 2,100 13,100
Salary expense 2,600 (e) 3,060*** 5,660
Rent expense (b) 700* 700
Utilities expense 530 530
Depreciation expense (d) 1,750** 1,750
Supplies expense (c) 2,090 _____ 2,090 85,130 85,130 9,700 9,700 92,040 92,040
* $2,100 ÷ 3 = $700
** $63,000 ÷ 3 = $21,000 ÷ 12 = $1,750
*** $5,100 × 3/5 = $3,060
Req. 2 (continued)
Princess, Inc.
Income Statement
Month Ended August 31, 2012 Revenues:
Service revenue $13,100
Expenses:
Salary expense $5,660
Supplies expense 2,090
Depreciation expense 1,750
Rent expense 700
Utilities expense 530
Total expenses 10,730
Net income $2,370
Princess, Inc.
Statement of Retained Earnings Month Ended August 31, 2012
Retained earnings, August 1, 2012 $53,430
Add: Net income 2,370
55,800
Less: Dividends (4,300)
Retained earnings, August 31, 2012 $51,500
(continued) P 3-77B Req. 2 (continued)
Princess, Inc.
Balance Sheet August 31, 2012
ASSETS LIABILITIES
Current assets: Current liabilities:
Cash $8,300 Accounts payable $ 4,000
Accounts receivable 4,000 Salary payable 3,060 Prepaid rent 1,400 Total current liabilities 7,060 Supplies 310
Total current assets 14,010
Furniture $63,000 STOCKHOLDERS’ EQUITY
Less: Accum. Common stock 13,000
deprec. (5,450) 57,550 Retained earnings 51,500 Total stockholders’ equity 64,500 ______ Total liabilities and ______
Total assets $71,560 stockholders’ equity $71,560
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Apr. 30 Accounts Receivable ($6,800 − $6,300)………. 500
Rental Revenue………. 500
To accrue rental revenue.
30 Interest Receivable ($400 − $0)……….………… 400
Interest Income ($400 − $0)………... 400 30 Supplies Expense ($700 − $0)………... 700
Supplies ($1,300 − $600)………... 700 To record supplies expense.
30 Insurance Expense ($1,500 − $0)……….. 1,500
Prepaid Insurance ($2,400 − $900)………….. 1,500 To record insurance expense.
30 Depreciation Expense ($1,400 − $0)………….... 1,400 Accumulated Depreciation
($10,200 − $8,800)……… 1,400
To record depreciation expense.
30 Wage Expense ($2,500 − $1,300)………. 1,200
Wages Payable ($1,200 − $0)…………..……. 1,200 To accrue salary expense.
30 Unearned Rental Revenue ($2,000 − $1,800)…. 200
Rental Revenue*……….. 200
To record revenue that was collected in advance.
_____
* ($15,700 - $15,000 - $500)
(continued) P 3-78B Req. 2
Total assets = $75,200 ($8,400 + $6,800 + $400 + $5,300 + $600 + $900 + $63,000 − $10,200)
Total liabilities = $9,300 ($6,300 + $1,200 + $1,800)
Net income = $9,200 ($15,700 + $700 − $1,400 − $700 − $400 – $2,500 − $700 − $1,500)
Total equity = $65,900 ($75,200 − $9,300) or ($9,300 + $46,200 + $9,200 - $3,500)
Req. 1
Nicholl Corporation Income Statement Year Ended May 31, 2012 Revenues:
Service revenue $97,800
Expenses:
Salary expense $40,200
Rent expense 10,300
Insurance expense 3,600
Interest expense 2,600
Supplies expense 2,500
Depreciation expense 1,200 60,400
Income before tax 37,400
Income tax expense 7,100
Net income $30,300
Nicholl Corporation
Statement of Retained Earnings Year Ended May 31, 2012
Retained earnings, May 31, 2011 $ 4,000
Add: Net income 30,300
34,300
Less: Dividends (20,000)
Retained earnings, May 31, 2012 $14,300
(continued) P 3-79B Req. 1 (continued)
Nicholl Corporation.
Balance Sheet May 31, 2012
ASSETS LIABILITIES
Cash $ 1,500 Accounts payable $ 3,700
Accounts receivable 8,600 Unearned service
Supplies 2,200 revenue 900
Prepaid rent 1,800 Interest payable 500 Income tax payable 2,100
Equipment $37,300 Note payable 18,800
Less: Accum. Total liabilities 26,000
deprec. (4,100) 33,200
STOCKHOLDERS’ EQUITY
Common stock 7,000 Retained earnings 14,300 Total stockholders’ equity 21,300 Total liabilities and Total assets $47,300 stockholders’ equity $47,300
Req. 2
Debt ratio: $26,000
= 0.55
$47,300
Nicholl Corporation’s debt ratio of 0.55 is in compliance with the lenders’
debt restriction.
(20 min.) P 3-80B Req. 1
Journal
DATE ACCOUNT TITLES DEBIT CREDIT
Closing Entries
Mar. 31 Service Revenue……… 91,500
Retained Earnings……… 91,500
31 Retained Earnings………. 36,300
Salary Expense……….. 17,700
Supplies Expense………. 4,800
Advertising Expense……… 11,400
Depreciation Expense………. 2,000
Interest Expense………... 400
31 Retained Earnings………. 32,500
Dividends……… 32,500
Req. 2
Retained Earnings
Mar. 31, 2012 Expenses 36,300 Mar. 31, 2011 Bal. 20,000 Mar. 31, 2012 Dividends 32,500 Mar. 31, 2012 Revenues 91,500 Mar. 31, 2012 Bal. 42,700 Net income = $55,200 ($91,500 - $36,300)
Req. 3
Retained Earnings increased during the year because net income of
$55,200 exceeded dividends of $32,500.
(30-40 min.) P 3-81B Req. 1
Cool River Service, Inc.
Balance Sheet March 31, 2012 ASSETS Current assets:
Cash ... $ 7,400 Accounts receivable ... 17,000 Prepaid expenses ... 3,000 Supplies ... 5,500 Total current assets ... 32,900 Plant assets:
Equipment ... $42,800
Less: accumulated depreciation ... (6,900) 35,900 Other assets ... 14,000 Total assets ... $82,800
LIABILITIES Current liabilities:
Accounts payable ... $14,400 Current portion of note payable ... 700 Salary payable ... 2,600 Unearned service revenue ... 3,600 Total current liabilities ... 21,300 Note payable, long-term ... 5,600 Total liabilities ... 26,900
STOCKHOLDERS’ EQUITY
Common stock ... 13,200 Retained earnings … ... 42,700*
Total stockholders’ equity… ... 55,900 Total liabilities and stockholders’ equity ... $82,800
Req. 1 (continued) _____
*Computation:
Retained earnings, March 31, 2011……….. $ 20,000 Add: Net income ($91,500 − $11,400 − $2,000
− $400 − $17,700 − $4,800)………... 55,200 75,200
Less: Dividends……….. (32,500)
Retained earnings, March 31, 2012……….. $42,700
Req. 2
2012 2011 Net working
capital
= Total current assets - current liabilities
$32,900 - $21,300
= $11,600 $11,000 Current ratio = Total current assets
= $32,900
= 1.54 1.30 Total current liabilities $21,300
The increase in both working capital and the current ratio indicate that the ability to pay current liabilities with current assets improved during 2012.
Debt ratio = Total liabilities
= $26,900
= 0.32 0.35 Total assets $82,800
Cool River Services’ overall debt position improved a bit from 2011 to 2012.
(45-60 min.) P 3-82B Req. 1
(All amounts in millions)
Current ratio = Total current assets
= $15.4
= 1.64 Total current liabilities $9.4
$14.9 Debt ratio = Total liabilities
= $9.4 + $5.5
= 0.48
Total assets $31.2
Req. 2
Current Ratio Debt Ratio
a. $15.4 − ($9.4 × 1/2)
= 2.28 $14.9 − ($9.4 × 1/2)
= 0.38 ($9.4 × 1/2) $31.2 − ($9.4 × 1/2)
b. $15.4 + $3.0
= 1.96 $14.9 + $3.0
= 0.52
$9.4 $31.2 + $3.0
c. $15.4 + $2.4
= 1.89 $14.9
= 0.44
$9.4 $31.2 + $2.4
d. $15.4 − $.6
= 1.57 $14.9
= 0.49
$9.4 $31.2 − $.6
e. $15.4
= 1.59 $14.9 + $0.3
= 0.49
$9.4 + $0.3 $31.2
f. $15.4 − $2.0
= 1.43 $14.9 + $2.9
= 0.52
$9.4 $31.2 + $4.9 − $2.0
g. $15.4
= 1.64 $14.9
= 0.49
$9.4 $31.2 − $0.9
Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a company’s current ratio is greater than 1.0, as for Hiaport, paying off a current liability will always increase the current ratio.
f. Borrowing money on long-term debt will always increase the current ratio and increase the debt ratio.
Challenge Exercises and Problem
(20-25 min.) E 3-83 (Dollar amounts in thousands)
December 31, 2011
Current assets = $11,100 ($1,500 + $5,900 + $2,700 + $1,000) Current liabilities = $6,100 ($2,600 + $1,600 + $1,900)
Net working capital = $5,000 ($11,100 - $6,100) Current
= $11,100
= 1.82
ratio $6,100
December 31, 2012
Current assets = $10,700 ($9001 + $6,8002 + $2,7003 + $3004) Current liabilities = $5,200 ($1,2005 + $1,6006 + $2,4007)
Net working capital = $5,500 ($10,700 - $5,200) Current
= $10,700
= 2.06
ratio $5,200
_____
Computations of December 31, 2012 balances:
1Cash = $1,500 − $7,300 + $8,100 − $1,400 = $900
2Receivables = $5,900 + $9,000 − $8,100 = $6,800
3No change in the Inventory balance.
4Prepaid expenses = $1,000 − $700 = $300
5Accounts payable = $2,600 − $1,400 = $1,200
6Nochange in the Unearned Revenues balance.
7Accrued expenses payable = $1,900 + $500 = $2,400
Conclusion: Valley Forge’s net working capital and current ratio improved during 2012. The company’s current ratio is very strong.
a. Net income:
Service revenue:
($161,000 + $1,650 + $32,200)……….
Expenses:
Salary ($37,000 + $3,500)……….
Depreciation – building………
Supplies...………
Insurance……….………
Advertising………..
Utilities……….
Net income………..
$194,850
$ 40,500 2,600 3,100 1,500 7,300 2,000
57,000
$137,850 b. Total assets:
Cash………
Accounts receivable ($7,500 + $32,200)………
Supplies ($4,600 − $3,100)………
Prepaid insurance ($3,500 − $1,500)………….
Building………
Less: Accum. Depr.
($15,600 + $2,600)………….……….
Land………
Total assets……….………
$ 7,300 39,700 1,500 2,000 $110,000
(18,200) 91,800 53,000
$195,300
(continued) E 3-84 c. Total liabilities:
Accounts payable ...
Salary payable...
Unearned service revenue
($5,500 − $1,650) ...
Total liabilities ...
Total stockholders’ equity:
Common stock ...
Retained earnings, beginning ...
Add: Net income ...
Less: Dividends. ...
Total stockholders’ equity ...
$ 6,100 3,500 3,850 $ 13,450 d.
$ 14,000 $ 46,000
137,850 197,850
(16,000)
167,850
$181,850
e. Total assets = Total liabilities + Total stockholders’ equity $195,300 = $13,450 + $181,850
(20 min.) P 3-85 Express Detail Inc.
Balance Sheet December 31, 2012
ASSETS LIABILITIES
Cash (a) $ 15,300 Accounts payable (g) $ 3,000 Accounts receivable (c) 1,400 Advertising payable(h) 500 Supplies (d) 1,000 Salary payable (i) 500
Total current assets Equipment (e) $35,000 Less: Accum.
deprec.(f) (12,000)
17,700
23,000
Unearned gift certificate revenue (b)
Total liabilities
1,200 5,200
STOCKHOLDERS’ EQUITY
Total assets $40,700
Common stock (j) Retained earnings (k) Total stockholders’
equity
Total liabilities and stockholders’ equity
18,000 17,500 35,500
$40,700
(continued) P 3-85
Supporting computations
(a) Cash
Bal. 12/31/2011 1,300
Cash collections from customers
Issuance of common stock
31,000 8,000
12,500 500 5,000
Salaries paid Dividends paid
Purchase of equipment 5,500 Payments of accounts
payable 1,500 Advertising paid
1,500
Bal. 1/31/2012 15,300
(b) Unearned Gift Certificate Revenue
800 Bal. 12/31/2011
Gift certificate revenue earned 600 1,000 Sale of gift certificates 1,200 Bal. 1/31/2012 (given)
(c) Accounts Receivable
Bal. 12/31/2011 2,000
Revenue on account 29,400 30,000 Collections from customers*
Bal. 1/31/2012 1,400
* Excludes the $1,000 for gift certificates which was received in advance, not on account
(d) Supplies
Bal. 12/31/2011 1,500
Purchase of supplies 3,500 4,000 Supplies expense
Bal. 1/31/2012 1,000
(e) Equipment -- $35,000 ($30,000 + $5,000)
(f) Accumulated depreciation -- $12,000 ($6,000 + $6,000)
(continued) P 3- 85
(g) Accounts payable
5,000 Bal. 12/31/2011
Payments on account 5,500 3,500 Purchase of supplies 3,000 Bal. 1/31/2012
(h) $2,000 Advertising expense - $1,500 advertising paid
(i) Salary Payable
1,000 Bal. 12/31/2011 Salaries paid 12,500 12,000 Salary expense
500 Bal. 1/31/2012
(j) Common Stock--$18,000 ($10,000 + $8,000)
(k) Retained Earnings
12,000 Bal. 12/31/2011
Dividends 500 6,000 Net income
17,500 Bal. 1/31/2012
Decision Cases
(25 min.) Decision Case 1 Req. 1 Unadjusted trial balance:
Debit Credit
Cash……….. $ 8,000
Accounts receivable………. 4,200
Supplies………... 800
Prepaid rent……… 1,200 Land……….. 43,000
Accounts payable……….. $12,000
Salary payable……… –0–
Unearned service revenue………….. 700
Note payable, due in 3 years……….. 23,400
Common stock……….. 5,000
Retained earnings………. 9,300
Service revenue………. 9,100
Salary expense………... 3,400
Rent expense……….. –0–
Advertising expense………. 900
Supplies expense……….. –0–
Totals……… $61,500 $59,500
Out of balance $2,000
Req. 2 Adjusted trial balance:
Debit Credit
Cash………... $8,000
Accounts receivable……….. 4,200
Supplies ($800 - $400)..………. 400
Prepaid rent ($1,200 x 11/12)……… 1,100
Land ($41,000 + $2,000)………. 43,000
Accounts payable………... 12,000
Salary payable………. 1,000
Unearned service revenue ($700 - $500)….. 200
Note payable, due in 3 years………... 25,400
Common stock……… 5,000
Retained earnings……….. 9,300
Service revenue ($9,100 + $500)………. 9,600
Salary expense ($3,400 + $1,000)……… 4,400
Rent expense ($1,200 x 1/12)……….. 100
Advertising expense……….. 900
Supplies expense………... 400
Total……… $62,500 $62,500
Req. 3
Current ratio = $8,000 + $4,200 + $400 + $1,100
$12,000 + $1,000 + $200
= $13,700
= 1.04
$13,200
We might have trouble sleeping at night with a current ratio of 1.04. To be safe, the current ratio should be around 1.50 or higher.
(20-30 min.) Decision Case 2 Eagle Restaurant, Inc.
Income Statement
Month Ended October 31, 2012
Sales revenue ... $32,000 Cost of goods sold ... $12,000
Wages expense ... 5,000 Rent expense ... 4,000 Insurance expense ... 1,000
Depreciation expense ... 1,000 23,000 Net income ... $ 9,000
Eagle Restaurant, Inc.
Statement of Retained Earnings Month Ended October 31, 2012
Retained earnings, October 1, 2012 ... $ 0 Add: Net income ... 9,000 Less: Dividends ... (3,000) Retained earnings, October 31, 2012 ... $6,000
Eagle Restaurant, Inc.
Balance Sheet October 31, 2012
ASSETS LIABILITIES
Cash $ 8,000 Accounts payable $ 7,000
Food inventory 5,000 Unearned revenue 3,000
Prepaid insurance 1,000 10,000
Dishes, silver 4,000
Fixtures
$24,000
OWNERS’ EQUITY Less: Accum. Common stock $25,000
deprec. (1,000) 23,000 Retained earnings 6,000 31,000 Total assets $41,000 Total liabilities and equity $41,000 Recommendation: Do not expand the business. It is not meeting
Marks’ goals for net income or for total assets.
(30-40 min.) Decision Case 3 Req. 1 (your highest price)
Advertising revenue ($22,000 + $4,000) $26,000 Expenses:
Salary $4,000
Utilities 900
Other (unrecorded) 1,100
Salary of your manager 5,000 11,000
Your expected monthly net income $15,000
Multiplier to compute price X 16
Your highest price $240,000
Req. 2 (Williams’ asking price)
SW Advertising, Inc.
Statement of Retained Earnings and Common Stock June 30, 2012
Beginning retained earnings $ 93,000
Add: Net income
Revenue ($22,000 + $4,000) $26,000 Less: Expenses ($4,000 +
$900 + $1,100) (6,000) 20,000 113,000
Less: Dividends (9,000)
Ending retained earnings $104,000
Common stock 50,000
Stockholders’ equity, June 30, 2012 $154,000
Multiplier to compute price X 2__
Williams’ asking price $308,000
Req. 3
You may start by offering Williams approximately $225,000 for the business. His asking price is $308,000 so you are starting out quite far apart. If Williams appears especially eager to sell out, you may be able to buy the firm for closer to your highest price of $240,000. However, if he is not so eager to sell and if you want the business badly enough, you may have to pay somewhere between $240,000 and $308,000. It might pay to hire an expert to value the business’s assets. You may find that Williams’ price is inflated based on the value of its assets. You can always raise your offer, but you cannot decrease it, so start the negotiating process with an offer around $225,000.
Ethical Issues