1.17: Problems

Problem A Lakewood Personal Finance Company, which provides financial advisory services, engaged in the following transactions during May 2010:

May 1Received USD 300,000 cash for shares of capital stock issued when company was organized.

2 The company borrowed USD 40,000 from the bank on a note.

7 The company bought USD 182,400 of computer equipment for cash.

11 Cash received for services performed to date was USD 15,200.

14 Services performed for a customer who agreed to pay within a month were USD 10,000.

15 Employee wages were paid, USD 13,200.

19 The company paid USD 14,000 on the note to the bank.

31 Interest paid to the bank for May was USD 140. (Interest is an expense, which reduces retained earnings.)

31 The customer of May 14 paid USD 3,200 of the amount owed to the company.

31 An order was received from a customer for services to be rendered next week, which will be billed at USD 12,000.

Prepare a summary of transactions (see Part A of Exhibit 4). Use money columns headed Cash, Accounts Receivable, Equipment, Notes Payable, Capital Stock, and Retained Earnings. Determine balances after each transaction to show that the accounting equation balances.

Problem B Reliable Lawn Care Service, Inc., a company that takes care of lawns and shrubbery of personal residences, engaged in the following transactions in April 2010:

Apr.1 The company was organized and received USD 400,000 cash from the owners in exchange for capital stock issued.

4 The company bought equipment for cash, USD 101,760.

9 The company bought additional mowing equipment that cost USD 9,120 and agreed to pay for it in 30 days.

15 Cash received for services performed to date was USD 3,840.

16 Amount due from a customer for services performed totaled USD 5,280.

30 Of the receivable (see April 16), USD 3,072 was collected in cash.

30 Miscellaneous operating expenses of USD 6,240 were paid during the month.

30 An order was placed for miscellaneous equipment costing USD 28,800.

a. Prepare a summary of transactions (see Part A of Exhibit 4). Use money columns headed Cash, Accounts Receivable, Equipment, Accounts Payable, Capital Stock, and Retained Earnings. Determine balances after each transaction to show that the basic accounting equation balances.

b. Prepare a balance sheet as of April 30.

Problem C Analysis of the transactions of the Moonlight Drive-In Theater for June 2010 disclosed the following:

Balance sheet amounts at June 30 include the following:

a. Prepare an income statement for June 2010.

b. Prepare a statement of retained earnings for June 2010.

c. Prepare a balance sheet as of 2010 June 30.

d. How solvent does this company appear to be?

Problem D Little Folks Baseball, Inc., was formed by a group of parents to meet a need for a place for kids to play baseball. At the beginning of its second year of operations, its balance sheet appeared as follows:

The summarized transactions for May 2010 are as follows:

a. Issued additional capital stock for cash, USD 200,000.

b. Collected USD 80,000 on accounts receivable.

c. Paid USD 64,000 on accounts payable.

d. Received membership fees from parents (nonrefundable): in cash, USD 260,000; and on account, USD 120,000.

e. Incurred operating expenses: for cash, USD 60,000; and on account, USD 160,000.

f. Paid dividends of USD 16,000.

g. Purchased more land for cash, USD 96,000.

h. Placed an order for new equipment expected to cost USD 120,000.

a. Prepare a summary of transactions (see Part A of Exhibit 4) using column headings as given in the balance sheet. Determine balances after each transaction.

b. Prepare an income statement for May 2010.

c. Prepare a statement of retained earnings for May 2010.

d. Prepare a balance sheet as of 2010 May 31.

The balance sheets for 2010 May 31, and 2010 April 30, and the income statement for May of the Target-Line Golf Driving Range follow. (Common practice is to show the most recent period first.)

All revenues earned are on account.

State the probable cause(s) of the change in each of the balance sheet accounts from April 30 to 2010 May 31.

Alternate problems

Alternate problem A Preston Auto Paint Company had the temporary free use of an old building and completed the following transactions in September 2010:

Sept. 1 The company was organized and received USD 100,000 cash from the issuance of capital stock.

5 The company bought painting and sanding equipment for cash at a cost of USD 25,000.

7 The company painted the auto fleet of a customer who agreed to pay USD 8,000 in one week. The customer furnished the special paint.

14 The company received the USD 8,000 from the transaction of September 7.

20 Additional sanding equipment that cost USD 2,800 was acquired today; payment was postponed until September 28.

28 USD 2,400 was paid on the liability incurred on September 20.

30 Employee salaries for the month, USD 2,200, were paid.

30 Placed an order for additional painting equipment advertised at USD 20,000.

Prepare a summary of transactions (see Part A of Exhibit 4) for the company for these transactions. Use money columns headed Cash, Accounts Receivable, Equipment, Accounts Payable, Capital Stock, and Retained Earnings. Determine balances after each transaction to show that the basic accounting equation balances.

Alternate problem B Quick-Start Home Repair Company completed the following transactions in June 2010:

June 1 The company was organized and received USD 200,000 cash from the issuance of capital stock.

4 The company paid USD 48,000 cash for a truck.

7 The company borrowed USD 10,000 from its bank on a note.

9 Cash received for repair services performed was USD 4,500.

12 Expenses of operating the business so far this month were paid in cash, USD 3,400.

18 Repair services performed for a customer who agreed to pay within a month amounted to USD 5,400.

25 The company paid USD 4,065 on its loan from the bank, including USD 4,050 of principal and USD 15 of interest. (The principal is the amount of the loan. Interest is an expense, which reduces retained earnings.)

30 Miscellaneous expenses incurred in operating the business from June 13 to date were USD 3,825 and were paid in cash.

30 An order (contract) was received from a customer for repair services to be performed tomorrow, which will be billed at USD 3,000.

a. Prepare a summary of transactions (see Part A of Exhibit 4). Include money columns for Cash, Accounts Receivable, Trucks, Notes Payable, Capital Stock, and Retained Earnings. Determine balances after each transaction to show that the basic accounting equation balances.

b. Prepare a balance sheet as of 2010 June 30.

Alternate problem C Following are summarized transaction data for Luxury Apartments, Inc., for the year ending 2010 June 30. The company owns and operates an apartment building.

Of the USD 150,000 rent revenue, USD 5,000 was not collected in cash until 2010 July 5.

Prepare an income statement for the year ended 2010 June 30.

Alternate problem D The following data are for Central District Parking Corporation:

The summarized transactions for October 2010 are as follows:

Oct.1 The accounts payable owed as of September 30 (USD 94,000) were paid.

1 The company paid rent for the premises for October, USD 19,200.

7 The company received cash of USD 4,200 for parking by daily customers during the week.

10 The company collected USD 14,400 of the accounts receivable in the balance sheet at September 30.

14 Cash receipts for the week from daily customers were USD 6,600.

15 Parking revenue earned but not yet collected from fleet customers was USD 6,000.

16 The company paid salaries of USD 2,400 for the period October 1–15.

19 The company paid advertising expenses of USD 1,200 for October.

21 Cash receipts for the week from daily customers were USD 7,200.

24 The company incurred miscellaneous expenses of USD 840. Payment will be due November 10.

31 Cash receipts for the last 10 days of the month from daily customers were USD 8,400.

31 The company paid salaries of USD 3,000 for the period October 16–31.

31 Billings to monthly customers totaled USD 21,600 for October.

31 Paid cash dividends of USD 24,000.

a. Prepare a summary of transactions (see Part A of Exhibit 4) using column headings as given in the preceding balance sheet. Determine balances after each transaction.

b. Prepare an income statement for October 2010.

c. Prepare a statement of retained earnings for October 2010.

d. Prepare a balance sheet as of 2010 October 31.

Alternate problem E The following balance sheets for 2010 June 30, and 2010 May 31, and the income statement for June are for Beach Camping Trailer Storage, Inc. (Common practice is to show the most recent period first.)

A cash dividend of USD 6,000 was declared and paid in June.

State the probable causes of the changes in each of the balance sheet accounts from May 31 to 2010 June 30.

Beyond the numbers—critical thinking

Business decision case A Upon graduation from high school, Jim Crane went to work for a builder of houses and small apartment buildings. During the next six years, Crane earned a reputation as an excellent employee—hardworking, dedicated, and dependable—in the light construction industry. He could handle almost any job requiring carpentry, electrical, or plumbing skills.

Crane then decided to go into business for himself under the name Jim’s Fix-It Shop, Inc. He invested cash, some power tools, and a used truck in his business. He completed many repair and remodeling jobs for homeowners and apartment owners. The demand for his services was so large that he had more work than he could handle. He operated out of his garage, which he had converted into a shop, adding several new pieces of power woodworking equipment.

Now, two years after going into business for himself, Crane must decide whether to continue in his own business or to accept a position as construction supervisor for a home builder. He has been offered an annual salary of USD 50,000 and a package of fringe benefits (medical and hospitalization insurance, pension contribution, vacation and sick pay, and life insurance) worth approximately USD 8,000 per year. The offer is attractive to Crane. But he dislikes giving up his business since he has thoroughly enjoyed being his own boss, even though it has led to an average workweek well in excess of the standard 40 hours

Suppose Crane comes to you for assistance in gathering the information needed to help him make a decision. He brings along the accounting records that have been maintained for his business by an experienced accountant. Using logic and your own life experiences, indicate the nature of the information Jim needs if he is to make an informed decision. Pay particular attention to the information likely to be found in his business accounting records. Does the accounting information available enter directly into the decision? Write a memorandum to Jim describing the information he will need to make an informed decision. The memo’s headings should include Date, To, From, and Subject. (See the format in Group Project E below.)

Annual report analysis B Recall that in this chapter we showed that the equity ratio is calculated by dividing stockholders’ equity by total equities (or total assets). Another format for analyzing solvency is to divide total debt by total equities. This latter calculation tells the proportion of assets financed by debt rather than the proportion of assets financed by stockholders’ equity. These two ratios are complements and must add to 100 per cent. Thus, if 25 per cent of assets were financed by debt, 75 per cent were financed by stockholders’ equity.

Using the following historical data from Gateway, calculate the “total-debt-to total-capital” ratio for each year.

Study these amounts and comment on the solvency of the company. Is there a trend in the company’s solvency over time? Gateway has experienced tremendous growth in stockholders’ equity during the past six years, but has also increased liabilities significantly. Could Gateway have grown this much without increasing liabilities?

Annual report analysis C Look at The Limited, Inc., annual report in the Annual report appendix. In that report you will find a letter outlining Management’s responsibilities concerning the financial statements, as well as the report of the independent auditors.

Write answers to the following questions:

Who is responsible for preparing the financial statements?

Of what importance is the internal audit?

What is the role of the audit committee?

Why are no officers or employees on the audit committee?

What is the responsibility of the external independent auditor?

Does the independent auditor have absolute assurance that the financial statements are free of material misstatement?

To what extent does the independent auditor examine evidence?

Ethics case- writing experience D Refer to “An ethical perspective: State university”. Write a short essay discussing the alternatives James Stevens could pursue and the likely outcomes of those alternatives. Which of the alternatives you have discussed would you recommend?

Group project E In teams of two or three students, interview a businessperson in your community. Ask how that person uses accounting information in making business decisions and obtain specific examples. Each team should write a memorandum to the instructor summarizing the results of the interview. Information contained in the memo should include:

Date:

To:

From:

Subject:

Content of the memo must include the name and title of the person interviewed, name of the company, date of the interview, examples of the use of accounting information for decision making, and any other pertinent information.

Group project F With a team composed of one or two other students, conceive of a business that you would like to form after graduation. Then describe approximately 15–20 transactions that the business might undertake in its first month of operations. Prepare a summary of transactions showing how each transaction affects the accounting equation. Identify each asset, liability, and stockholders’ equity item in your summary of transactions. For instance, instead of grouping all assets in one number, show cash, accounts receivable, and so on in your accounting equation.

Group project G With a team of one or two other students and using library sources, write a paper on the American Institute of Certified Public Accountants, their services to members, and their activities. Be careful to cite sources for your information. Direct quotes should be labeled as such and should be single-spaced and indented if relatively long or in quote marks and not indented if relatively short. To quote without giving the source is plagiarism and should be avoided at all costs.

Using the Internet—A view of the real world

Visit the following website for Nokia:

http://www.nokia.com

Write a short paper describing company information, products and services, and support available for their products.

Visit the following website for Ford Motor Company:

http://www.ford.com

When the web page appears, search for Investor Information and then locate the Ford Motor Company Annual Report. Based on your investigation, write a short paper describing the general content of the annual report.

Answers to self-test

True-False

False. Corporation, not trust, is the third form.

True. The accounting for all three of these is covered in this text.

False. The income statement is dated using a period of time, such as “For the Year Ended 2010 December 31”.

True. In addition, the statement of retained earnings shows dividends declared.

True. Both show assets, liabilities, and stockholders’ equity.

Multiple-choice

d. The ending balance in retained earnings is shown in both the statement of retained earnings and in the balance sheet.

d. This form of the equation would not balance.

b. The inflation accounting concept was not one of the ones discussed. The other two were the money measurement concept and the periodicity concept.

c. When the stockholders invest cash, assets and stockholders’ equity increase.

c. The performance of services on account increases both accounts receivable and retained earnings.