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Exercises 2.

Basic computations. The following selected balances were extracted from the accounting records of Rossi Enterprises on December 31, 20X3:

a. Determine Rossi’s total assets as of December 31.

b. Determine the company’s total liabilities as of December 31.

c. Compute 20X3 net income or loss.

5. Accounting equation; analysis of owner’s equity. Sportscar Repair revealed the following financial data on January 1 and December 31 of the current year.

Assets Liabilities

January 1 $45,000 $20,000

December 31 49,000 31,000

a. Compute the change in owner’s equity during the year by using the accounting equation.

b. Assume that there were no owner investments or withdrawals during the year. What is the probable cause of the change in owner’s equity from part (a)?

c. Assume that there were no owner investments during the year. If the owner withdrew $17,000, determine and compute the company’s net income or net loss. Be sure to label your answer.

d. If owner investments and withdrawals amounted to $13,000 and $2,000, respectively, determine whether the company operated profitably during the year. Show appropriate calculations.

 

8. Financial statement relationships. The following information appeared on the financial statements of the Altoona Repair Company:

1. By picturing the content of and the interrelationships among the financial statements, determine the following:

a. Total revenues for the year

b. Total owner investments

c. Total assets

 

Problems 3.

Statement preparation. The following information is taken from the accounting records of Grimball Cardiology at the close of business on December 31, 20X1.

Accounts Payable $14,700 Surgery Revenue $175,000

Surgical Expenses 80,000 Cash 60,000

Surgical Equipment 37,000 Office Equipment 118,000

 

2. All equipment was acquired just prior to year-end. Conversations with the practice’s bookkeeper revealed the following data:

Rose Grimball, capital (January 1, 20X1) $300,000

19X1 owner investments 2,000

19X1 owner withdrawals 22,000

3. Instructions

a. Prepare the income statement for Grimball Cardiology in good form.

b. Prepare a statement of owner’s equity in good form.

c. Prepare Grimball’s balance sheet in good form.

 

5.Financial statement preparation. On October 1, 20X6, Susan Thompson opened Thompson Decorating Services, a sole proprietorship. Susan began operations with $50,000 cash, 60% of which was acquired via an owner investment. The remaining amount was obtained from a bank loan. A review of the accounting records for October revealed the following:

 

• Asset purchases: Van, $16,000; office equipment, $4,000; and decorator (household) furnishings, $17,000. These amounts were paid in cash except for $2,100 that is still owed for the furnishings acquisition.

 

Instructions

d. Prepare an income statement for the month ending October 31, 20X6.

e. Prepare a statement of owner’s equity for the month ending October 31, 20X6.

f. Prepare a balance sheet as of October 31, 20X6.

 

Chapter 2 Exercise 3

3. Basic journal entries. The following April transactions pertain to the Jennifer Royall Company:

4/1: Received cash of $15,000 and land valued at $10,000 from Jennifer Royall as an investment in the business.

4/5: Provided $1,200 of services to Jason Ratchford, a client.

4/5: Ratchford agreed to pay $800 in 15 days and the remaining amount in May.

4/9: Paid $250 in salaries to an employee.

4/24: Borrowed $7,500 from Best Bank by securing a 6-month loan.

Prepare journal entries (and explanations) to record the preceding transactions and events.

 

Chapter 2 Exercise 4

 

4. Trial balance preparation. Brighton Company began operation on March 1 of the current year. The following account balances were extracted from the general ledger on March 31; all accounts have normal balances.

Accounts Payable $ 12,000 Interest Expense   $ 300

 

Fees Earned   18,900

a. Determine the cost of the company’s land by preparing a trial balance.

b. Determine the firm’s net income for the period ending March 31.

 

 

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Exercise 4

4. Accounting for prepaid expenses and unearned revenues. Hawaii-Blue began business on January 1 of the current year and offers deep-sea fishing trips to tourists. Tourists pay $125 in advance for an all-day outing off the coast of Maui. The company collected monies during January for 210 outings, with 30 of the tourists not planning to take their trips until early February.

Hawaii-Blue rents its fishing boat from Pacific Yacht Supply. An agreement was signed at the beginning of the year, and $72,000 was paid for the rights to use the boat for 2 full years.

 

1. Prepare journal entries to record (1) the collection of monies from tourists and (2) the revenue generated during January.

2. Calculate Hawaii-Blue’s total obligation to tourists at the end of January. On what financial statement and in which section would this amount appear?

3. Prepare journal entries to record (1) the payment to Pacific Yacht Supply and (2) the subsequent adjustment on January 31.

4. On what financial statement would Hawaii-Blue’s January boat rental cost appear?

 

Exercise 8

8. Closing entries. Gomez Company had the following adjusted trial balance on December Prepare the closing entries that Gomez would record on December 31.

Problem 3

Adjusting entries. You have been retained to examine the records of Kathy’s Day Care Center as of December 31, 20X3, the close of the current reporting period. In the course of your examination, you discover the following:

1. On January 1, 20X3, the Supplies account had a balance of $2,350. During the year, $5,520 worth of supplies was purchased, and a balance of $1,620 remained unused on December 31.

2. Unrecorded interest owed to the centertotaled $275 as of December 31.

3. All clients pay tuition in advance, and their payments are credited to the Unearned Tuition Revenue account. The account was credited for $75,500 on August 31. With the exception of $15,500, which represented prepayments for 10 months’ tuition from several well-to-do families, all amounts were for the current semester ending on December 31.

4. Depreciation on the school’s van was $3,000 for the year.

5. On August 1, the center began to pay rent in 6-month installments of $21,000. Kathy wrote a check to the owner of the building and recorded the check in Prepaid Rent, a new account.

6. Two salaried employees earn $400 each for a 5-day week. The employees are paid every Friday, and December 31 falls on a Thursday.

7. Kathy’s Day Care paid insurance premiums as follows, each time debiting Prepaid Insurance:

Date Paid Policy No. Length of Policy Amount

Feb. 1, 20X2 1033MCM19 1 year $540

Jan. 1, 20X3 7952789HP 1 year 912

Aug. 1, 20X3 XQ943675ST 2 years 840

Instructions

The center’s accounts were last adjusted on December 31, 20X2. Prepare the adjusting entries necessary under the accrual basis of accounting.

Chapter 4 Exercises

3. Bank reconciliation and entries. The following information was taken from the accounting records of Palmetto Company for the month of January:

1. January bank reconciliation.

2. Prepare any necessary journal entries for Palmetto.

 

Exercise 6

6. Allowance method: estimation and balance sheet disclosure. The following preadjusted information for the Maverick Company is available on December 31:

Accounts receivable $107,000

Allowance for uncollectible accounts       5,400 (credit balance)

Credit sales   250,000

1. Prepare the journal entries necessary to record Maverick’s uncollectible accounts expense under each of the following assumptions:

(1) Uncollectible accounts are estimated to be 5% of Credit Sales.

(2) Uncollectible accounts are estimated to be 14% of Accounts Receivable.

2. How would Maverick’s Accounts Receivable appear on the December 31 balance sheet under assumption (1) of part (a)?

3. How would Maverick’s Accounts Receivable appear on the December 31 balance sheet under assumption (2) of part (a)?

Problem 4

3. Allowance method: analysis of receivables. At a January 20X2 meeting, the president of Sonic Sound directed the sales staff “to move some product this year.” The president noted that the credit evaluation department was being disbanded because it had restricted the company’s growth. Credit decisions would now be made by the sales staff.

By the end of the year, Sonic had generated significant gains in sales, and the president was very pleased. The following data were provided by the accounting department:

The $12,444,000 receivables balance was aged as follows:

Assume that no accounts were written off during 20X2.

Instructions

1. Estimate the amount of Uncollectible Accounts as of December 31, 20X2.

2. What is the company’s Uncollectible Accounts expense for 20X2?

3. Compute the net realizable value of Accounts Receivable at the end of 20X1 and 20X2.

4. Compute the net realizable value at the end of 20X1 and 20X2 as a percentage of respective year-end receivables balances. Analyze your findings and comment on the president’s decision to close the credit evaluation department.

 

 

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Chapter 5, Exercise 1

Inventory errors and income measurement. The income statements of Keagle Company for 20X3 and 20X4 follow.

20X3 20X4

Sales $100,000 $109,000

Cost of goods sold 62,000 74,000

Gross profit 38,000 35,000

Expenses 26,000 22,000

 

Net income $12,000 $ 13,000

 

A recent review of the accounting records discovered that the 20X3 ending inventory had been understated by $4,000.

 

a. Prepare corrected 20X3 and 20X4 income statements.

b. What is the effect of the error on ending owner’s equity for 20X3 and 20X4?

 

 

Chapter 5, Problem 2

 

Inventory valuation methods: computations and concepts. Wave Riders Surfboard

Company began business on January 1 of the current year. Purchases of surfboards were as follows:

 

1/3: 100 boards , $125

3/17: 50 boards , $130

5/9: 246 boards , $140

7/3: 400 boards , $150

10/23: 74 boards , $160

 

Wave Riders sold 710 boards at an average price of $250 per board. The company uses a periodic inventory system.

 

Instructions

 

a. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods:

• First-in, first-out

• Last-in, first-out

• Weighted average

b. Which of the three methods would be chosen if management’s goal is to

(1) produce an up-to-date inventory valuation on the balance sheet?

(2) approximate the physical flow of a sand and gravel dealer?

(3) report low earnings (for tax purposes) for a separate electronics company that

has been experiencing declining purchase prices?

 

 

 

Chapter 6, Exercise 2

 

Depreciation methods. Betsy Ross Enterprises purchased a delivery van for $30,000 in January 20X7. The van was estimated to have a service life of 5 years and a resid¬ual value of $6,000. The company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by using each of the following methods:

a. Units-of-output, assuming 17,000 miles were driven during 20X8

b. Straight-line

c. Double-declining-balance

 

 

Chapter 6, Exercise 3

 

Depreciation computations. Alpha AlphaAlpha, a college fraternity, purchased a new heavy-duty washing machine on January 1, 20X3. The machine, which cost $1,000, had an estimated residual value of $100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following:

a. The machine’s book value on December 31, 20X5, assuming use of the straight-line depreciation method

b. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500.

c. Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method.

 

 

Chapter 6, Problem 2

 

Depreciation computations: change in estimate. Aussie Imports purchased a specialized piece of machinery for $50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of $5,000. During the 5 years of operations (20X3220X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.

Instructions

a. Compute depreciation for 20X3220X7 by using the following methods: straight line, units of output, and double-declining-balance.

b. On January 1, 20X5, management shortened the remaining service life of the machine to 20 months. Assuming use of the straight-line method, compute the company’s depreciation expense for 20X5.

c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800 for the machinery rather than $50,000 In addition, assume that the company incurred $800 of freight charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use.

 

 

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Chapter 7 Exercise 2 and 4

2. Accrued liability: current portion of long-term debt. On July 1, 20X1, Hall Company borrowed $225,000 via a long-term loan. Terms of the loan require that Hall pay interest and $75,000 of principal on July 1, 20X2, 20X3, and 20X4. The unpaid balance of the loan accrues interest at the rate of 10% per year. Hall has a December 31 year-end.

a. Compute Hall’s accrued interest as of December 31, 20X1.

b. Present the appropriate balance sheet disclosure for the accrued interest and the current and long-term portion of the outstanding debt as of December 31, 20X1.

c. Repeat parts (a) and (b) using a date of December 31, 20X2, rather than December 31, 20X1. Assume that Hall is in compliance with the terms of the loan agreement.

 

4. Payroll accounting. Assume that the following tax rates and payroll information pertain to Brookhaven Publishing:

5. Social Security taxes: 6% on the first $55,000 earned

6. Medicare taxes: 1.5% on the first $130,000 earned

7. Federal income taxes withheld from wages: $7,500

8. State income taxes: 5% of gross earnings

9. Insurance withholdings: 1% of gross earnings

10. State unemployment taxes: 5.4% on the first $7,000 earned

11. Federal unemployment taxes: 0.8% on the first $7,000 earned

The company incurred a salary expense of $50,000 during February. All employees had earned less than $5,000 by month-end.

a. Prepare the necessary entry to record Brookhaven’s February payroll that will be paid on March 1.

b. Prepare the journal entry to record Brookhaven’s payroll tax expense.