# 4.12: Solutions

• Henry Dauderis and David Annand
• Athabasca University via Lyryx Learning
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## Discussion Questions

1. The economic resources of Big Dog Carworks Corp. are its assets: cash, accounts receivable, inventories, prepaid expenses and property, plant and equipment.
2. The financial statements are the balance sheet, the income statement, the statement of changes in equity, and the statement of cash flows. Notes to the financial statements are also included. The statements report the financial position of the company at year-end, the results of operations for the year, changes in share capital and retained earnings, sources and uses of cash during the year, and information in the notes that is not quantifiable or that provides additional supporting information to the financial statements.
3. Fundamentally, accounting measures the financial progress of an entity. The purpose of financial statements is to communicate information about this progress to external users, chiefly investors and creditors.
4. ASSETS = LIABILITIES + EQUITY

$284,645 = 241,145 + 43,500. 5. Net assets equal$43,500 ($284,645 − 241,145). Net assets are synonymous with equity. They represent the amount of total assets attributable to the shareholders after taking into account the claims of creditors. 6. The individual assets of Big Dog Carworks Corp. as shown on the balance sheet are cash, accounts receivable, inventories, prepaid expenses, and property, plant, and equipment. Its liabilities are borrowings, accounts payable, and income taxes payable. 7. Per Note 3(d), property, plant, and equipment are depreciated on a straight-line basis over their estimated useful lives. Land is not depreciated. 1. Current asset accounts: Per Note 3(a) and (b), revenue and expenses are accrued. This will give rise to current assets and current liabilities like accounts receivable, inventory, prepaid expenses, accounts payable, income taxes payable, and accrued liabilities. In addition, accounts receivable are carried at net realizable value. Inventory is carried at lower of cost and net realizable value. These amounts must be adjusted to the correct balance. Prepaid expenses would be adjusted to reflect the unused portion at the end of the period. 2. Non-current asset accounts: Per Note 3(d), buildings are depreciated at 4% per year using the straight-line method. Equipment is depreciated at 10% per year on a straight-line basis; motor vehicles are depreciated on a straight-line basis over five years. 3. Current liability accounts: income taxes payable are adjusted at the end of the period to reflect the estimated amount of taxes incurred for the period. All expenses that are incurred but not yet paid are added to the unrecorded accrual accounts. Examples are salaries payable for partial periods and interest owed but not yet paid. 4. Non-current liability accounts: borrowings must be analysed to determine current and non-current amounts, as shown in Note 5. 8. The balance sheet is classified in order to facilitate the analysis of its information. For instance, comparing amounts that will be needed to be satisfied within the upcoming year (current liabilities) with resources available to satisfy these claims (current assets) allows readers to assess the relative ability of the corporation to meets its short-term obligations as they become due. 9. Big Dog Carworks Corp. makes it easier to compare financial information from period to period by presenting comparative annual financial data for two years. 10. The auditor is H. K. Walker, Chartered Professional Accountant. The audit report states that the financial statements of BDCC have been examined in accordance with generally accepted auditing standards. It also states that, in the auditor's opinion, the statements present fairly the financial position of BDCC and the results of its operations and changes in financial position for the year just ended. There are no concerns raised in the report. 11. The auditor's report indicates that GAAP have been consistently applied in BDCC's financial statements (see last sentence of the report). 12. Management's responsibilities for financial statements are to ensure that they are prepared in accordance with GAAP, in this case International Financial Reporting Standards. Though the financial statements are produced under the direction of management, they belong to the shareholders. Shareholders are the owners of the company. ## Exercises ### EXERCISE 4–1 1. The balance sheet is as follows:  Joyes Enterprises Ltd. Balance Sheet At December 31, 2016 Assets Current Cash$2,000 Accounts Receivable 8,000 Merchandise Inventory 19,000 Prepaid Insurance 1,000 Total Current Assets $30,000 Property, Plant, and Equipment Land 5,000 Buildings$25,000 Less: Accum. Dep'n. 1,000 24,000 Equipment 20,000 Less: Accum. Dep'n. 4,000 16,000 Net Property, Plant, and Equipment 45,000 Total Assets $75,000 Liabilities Current Liabilities Bank Loan$5,000 Accounts Payable 7,000 Income Taxes Payable 3,000 Total Current Liabilities $15,000 Non-current Liabilities Mortgage Payable 5,000 Total Liabilities 20,000 Equity Share Capital 48,000 Retained Earnings 7,000 Total Equity 55,000 Total Liabilities and Equity$75,000
2. Current assets total $30,000. Current liabilities total$15,000. The company appears to have sufficient resources to meet its obligations in the next year.
3. Total equity is $55,000. Total liabilities equal$20,000. The ratio is $55,000/20,000 = 2.75 to 1. ### EXERCISE 4–2 1. The building should likely be a non-current asset, as its useful life is generally greater than one fiscal year. Short-term investments are current assets because they are readily marketable, by definition. Unused office supplies are likely current assets, as they will usually be used in the next fiscal period. The bank loan payable is due in 2022 and therefore a non-current liability, as it will not be paid within the next fiscal year. Salaries payable is likely a current liability, as it will be paid in the next fiscal year in all likelihood. The last line on the balance sheet should read "Total Liabilities and Equity". The balance sheet lists a building account but not a land account. Sometimes a company owns a building without owning land, but it is more likely that these two assets should have been separated when they were acquired. Retained earnings should be shown in the equity section. There is no accumulated depreciation recorded for the long-lived assets and there are no income taxes payable recorded. The reasons for these omissions should be investigated. 2. The balance sheet is as follows:  Abbey Limited Balance Sheet At November 30, 2015 Assets Current Cash$1,000 Short-term Investments 3,000 Accounts Receivable 6,000 Merchandise Inventory 3,000 Unused Supplies 100 Total Current Assets $13,100 Property, Plant, and Equipment Building$$^{*}$$ 12,000 Equipment 1,500 Truck 1,350 Net Property, Plant, and Equipment 14,850 Total Assets$27,950 Liabilities Current Accounts Payable $5,600 Notes Payable 2,000 Salaries Payable 250 Total Current Liabilities$7,850 Non-current Bank Loan 1,000 Mortgage Payable 7,000 Total Non-current Liabilities 8,000 Total Liabilities 15,850 Equity Share Capital 11,100 Retained Earnings 1,000 Total Equity 12,100 Total Liabilities and Equity $27,950 $$^{*}$$ Land may need to be separated out. 3. Additional disclosure should be considered for: • depreciation rates for plant and equipment. • details about cost and accumulated depreciation amounts for property, plant, and equipment. • details about debt, including interest rates, due dates, any assets securing the debt, repayment amounts and intervals, and when terms will be re-negotiated. • details about share capital. ### EXERCISE 4–3  3 Land used in the normal course of business operations 5 Accrued salaries payable 5 Notes payable, due in four months 1 Prepaid advertising 3 Truck 8 Advertising expense 2 Land held for investment 5 Unearned revenue 4 Copyright 8 Service revenue 5 Accounts payable 1 Cash 8 Cash dividends 6 Mortgage payable, due in fifteen years 3 Building 5 Mortgage payable, due in six months 3 Furniture 7 Share capital 1 Accounts receivable, from customer sales 1 Shop supplies 4 Franchise 3 Accumulated depreciation, building 8 Utilities expense 8 Depreciation expense 5 Utilities payable 1 Office supplies ### EXERCISE 4–4 1. Close revenue accounts to income summary account.  General Journal Date Account/Explanation F Debit Credit Dec 31 Revenue 35,000 Income summary 35,000 2. Close expense accounts to income summary account.  General Journal Date Account/Explanation F Debit Credit Dec 31 Income summary 16,600 Salaries expense 8,000 Insurance expense 600 Supplies and postage expense 3,000 Rent expense 3,000 Travel expense 1,500 Utilities expense 500 3. Close the income summary account to retained earnings.  General Journal Date Account/Explanation F Debit Credit Dec 31 Income summary 18,400 Retained earnings 18,400 4. Close dividends to retained earnings: No entry required. 1.  Abled Appliance Repair Ltd. Balance Sheet At December 31, 2016 Assets Liabilities Cash$80,000 Accounts payable $35,000 Accounts receivable 66,000 Unearned consulting fees 10,000 Office supplies 2,000 Total current liabilities$45,000 Prepaid insurance expense 5,000 Total current assets 153,000 Equity Property, Plant and Equipment Share capital $1,000 Land$20,000 Retained earnings 135,000$$^{*}$$ Office equipment 10,000 Total equity Total liabilities and equity 136,000 Accumulated depreciation, office equipment (2,000) 28,000 Total assets $181,000$181,000

$$^{*}$$ Net income (35,000−3,000−8,000−500−1,500−600−3,000)=$18,400 Retained earnings ($116,600+18,400)=135,000

2.  Abled Appliance Repair Ltd. Post-closing Trial Balance At December 31, 2016 Debit Credit Cash $80,000 Accounts receivable 66,000 Office supplies 2,000 Prepaid insurance expense 5,000 Land 20,000 Office equipment 10,000 Accumulated depreciation, office equipment$2,000 Accounts payable 35,000 Unearned consulting fees 10,000 Share capital 1,000 Retained earnings 135,000 $183,000$183,000

### EXERCISE 4–5

 Mystery Company Ltd. Balance Sheet At November 30, 2016 Assets Liabilities Cash $150,650 Accounts payable$95,960 Accounts receivable 99,520 Accrued salaries payable 58,580 Office supplies 1,300 Prepaid insurance expense 10,000 Current portion of long-term, note payable 72,000 Prepaid rent expense 12,000 Income taxes payable 32,500 Total current assets 273,470 Interest payable 12,000 Unearned revenue 150,000 Property, Plant and Equipment Total current liabilities 421,040 Building $270,000 Accumulated depreciation, building (43,530) 226,470 Long-term Liabilities Vehicle 108,000 Note payable, due 2025 145,000 Accumulated depreciation, vehicle (8,650) 99,350 Total liabilities 566,040 Total property, plant and equipment 325,820 Equity Share capital$10,000$$^{*}$$ Intangible Assets Retained earnings 74,850 84,850 Copyright 51,600 Total liabilities and equity $650,890 Total assets$650,890
 $$^{*}$$ Share capital: Assets = Liabilities + Equity Total assets $650,890 Less total liabilities (566,040) Less retained earnings (74,850) Share capital$10,000

### EXERCISE 4–6

 Hitalle Heights Corp. Statement of Changes in Equity For the Period Ended May 31, 2016 Share Capital Retained Earnings Total Equity Opening balance $640$192,355 $192,995 Shares issuance 200 200 Dividends declared (2,800) (2,800) Net income 47,759 47,759 Ending balance$840 $237,314$238,154

Net income ($94,000−1,333−2,520−2,072−84−12,600−840−23,352−420−3,020)=$47,759

 Hitalle Heights Corp. Balance Sheet At May 31, 2016 Assets Liabilities Cash $8,888 Accounts payable$13,020 Accounts receivable 59,808 Accrued salaries payable 4,872 Shop supplies 1,008 Current portion of long-term 5,200 Prepaid rent expense 7,162 note payable* 5,200 Total current assets 76,866 Income taxes payable 3,320 Interest payable 224 Unearned revenue 21,000 Property, Plant and Equipment Total current liabilities 47,636 Land 58,048 Furniture $8,400 Long-term Liabilities Accumulated depreciation, furniture (1,792) 6,608 Note payable, due 2025* 11,600 Total property, plant and equipment 64,656 Total liabilities 59,236 Equity Intangible Assets Share capital$840 Franchise 155,868 Retained earnings 237,314 238,154 Total assets $297,390 Total liabilities and equity$297,390

## Problems

### PROBLEM 4–1

 Norman Company Ltd. Balance Sheet At December 31, 2015 Assets Current Cash $250 Accounts Receivable 138 Notes Receivable 18 Prepaid Insurance 12 Unused Office Supplies 70 Total Current Assets$488 Property, Plant, and Equipment Land 115 Building 400 Equipment 140 Net Property, Plant, and Equipment 655 Total Assets $1,143 Liabilities Current Accounts Payable$125 Bank Loan 110 Salaries Payable 14 Total Current Liabilities $249 Non-current Mortgage Payable 280 Total Liabilities 529 Equity Share Capital 400 Retained Earnings 214 Total Equity 614 Total Liabilities and Equity$1,143

### PROBLEM 4–2

1. Calculation of net income:
 Revenue $80,000 Salaries Expense (39,000) Depreciation (1,100) Interest (1,300) Income Taxes (2,300) Advertising (7,200) Insurance (1,200) Utilities (3,600) Telephone (1,100) Rent (17,950) Net Income$5,250
2. The statement of changes in equity is as follows:
 Dark Edge Sports Inc. Statement of Changes in Equity For the Year Ended December 31, 2015 Share Capital Retained Earnings Total Equity Opening Balance $3,000$2,000 $5,000 Net Income 5,250 5,250 Dividends (600) (600) Ending Balance$3,000 $6,650$9,650
3. The balance sheet is as follows:
 Dark Edge Sports Inc. Balance Sheet At December 31, 2015 Assets Current Cash $1,500 Accounts Receivable 18,700 Prepaid Expenses (1,300 + 600) 1,900 Total Current Assets 22,100 Property, Plant, and Equipment Equipment$12,500 Less: Accumulated Depreciation 2,000 Net Property, Plant, and Equipment 10,500 Total Assets $32,600 Liabilities Current Bank Loan$$^{*}$$$10,000 Accounts Payable 8,350 Income Taxes Payable 4 ,600 Total Current Liabilities $22,950 Equity Share Capital 3,000 Retained Earnings 6,650 Total Equity 9,650 Total Liabilities and Equity$32,600

$$^{*}$$ Alternately, with appropriate disclosure, "Borrowings"

4. Amount by which total current liabilities exceed total current assets:
 Current Assets $22,100 Current Liabilities 22,950 Difference$850
5. After the $5,000 bank loan is received, both current assets and current liabilities will increase by the same amount (Debit to Cash; credit to Bank Loan). The difference will remain$850.
6. The company appears to have negative working capital (current assets less current liabilities) with or without the loan. More information should be requested, such as why the loan is needed. If it will be used to purchase a non-current asset like more equipment, perhaps the loan repayment terms should be extended by several years in which case the loan would be classified as a long-term liability causing working capital to be positive instead of negative as a result of the loan.

### PROBLEM 4–3

1. Close revenue accounts to income summary account.
 General Journal Date Account/Explanation F Debit Credit Jun 30 Revenue 135,000 Income summary 135,000
2. Close expense accounts to income summary account.
 General Journal Date Account/Explanation F Debit Credit Jun 30 Income summary 155,092 Advertising expense 5,670 Depreciation expense 3,332 Income tax expense 6,300 Insurance expense 5,180 Interest expense 210 Rent expense 31,500 Salaries expense 58,380 Shop supplies expense 1,050 Utilities expense 32,550 Repairs expense 10,920
3. Close the income summary account to retained earnings.
 General Journal Date Account/Explanation F Debit Credit Jun 30 Retained earnings 20,092 Income summary 20,092
4. Close dividends to retained earnings.
 General Journal Date Account/Explanation F Debit Credit Jun 30 Retained earnings 7,000 Cash dividends 7,000
1.  MayBee Services Ltd. Balance Sheet At June 30, 2016 Assets Liabilities Cash $122,220 Accounts payable$32,550 Accounts receivable 149,520 Accrued salaries payable 12,180 Office supplies 2,520 Income taxes payable 6,300 Prepaid insurance expense 17,906 Interest payable 210 Total current assets 292,166 Current portion of long-term debt 14,000 Unearned revenue 52,500 Property, Plant and Equipment Total current liabilities 117,740 Building $145,400 Accumulated depreciation, building (280)$145,120 Long-term Liabilities Equipment 21,000 Notes payable 28,000 Accumulated depreciation, equipment (4,480) 16,520 161,640 Total liabilities 145,740 Intangible assets Equity Trademark 10,000 Share capital $2,100 Retained earnings 315,966$$^{*}$$ Total equity 318,066 Total assets$463,806 Total liabilities and equity $463,806 $$^{*}$$ Retained earnings ($343,058−7,000−20,092)=$315,966 2.  MayBee Services Ltd. Post-closing Trial Balance At June 30, 2016 Debit Credit Cash$122,220 Accounts receivable 149,520 Office supplies 2,520 Prepaid insurance expense 17,906 Building 145,400 Accumulated depreciation, building $280 Equipment 21,000 Accumulated depreciation, equipment 4,480 Trademark 10,000 Accounts payable 32,550 Accrued salaries payable 12,180 Income taxes payable 6,300 Interest payable 210 Unearned revenue 52,500 Notes payable$$^{*}$$ 42,000 Share capital 2,100 Retained earnings 315,966$468,566 $468,566 $$^{*}$$ The notes payable account is not separated into two accounts for current and long-term portions. The disclosure of the current and long-term portions is for reporting purposes only. ### PROBLEM 4–4 1.  Jennette Ltd. Adjusted Trial Balance At September 30, 2016 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Debit Credit Debit Credit Debit Credit Accounts payable$39,983 $39,983 Accounts receivable$321,468 $20,000$341,468 Accrued salaries payable 21,909 $2,500 24,409 Accumulated depreciation, building 9,632 8,504 18,136 Accumulated depreciation, vehicle 602 3,000 3,602 Advertising expense 12,191 12,191 Building 312,610 312,610 Cash 262,773 262,773 Cash dividends 15,050 15,050 Copyright 21,500 21,500 Depreciation expense 7,164 8,504 18,668 3,000 Income tax expense 13,545 13,545 Income taxes payable 13,545 13,545 Insurance expense 11,137 4,249 15,386 Interest expense 452 452 Interest payable 4,730 4,730 Mortgage payable, due 2019 90,300 90,300 Office supplies 5,418 5,418 Prepaid insurance expense 8,498 4,249 4,249 Prepaid rent expense 5,150 5,150 Rent expense 67,725 5,150 62,575 Repairs expense 23,478 23,478 Retained earnings 737,575 737,575 Revenue 290,250 20,000 360,250 50,000 Salaries expense 155,517 2,500 158,017 Share capital 4,515 4,515 Shop supplies expense 2,259 2,259 Unearned revenue 112,875 50,000 62,875 Utilities expense 39,981 39,981 Vehicle 45,150 45,150$1,325,916 $1,325,916$93,403 $93,403$1,359,920 $1,359,920 2.  Jennette Ltd. Balance Sheet At September 30, 2016 Assets Liabilities Cash$262,773 Accounts payable $39,983 Accounts receivable 341,468 Accrued salaries payable 24,409 Office supplies 5,418 Income taxes payable 13,545 Prepaid insurance expense 4,249 Interest payable 4,730 Prepaid rent expense 5,150 Current portion of long-term debt 30,000 Total current assets 619,058 Unearned revenue 62,875 Total current liabilities 175,542 Property, Plant and Equipment Building$312,610 Long-term Liabilities Accumulated depreciation, building (18,136) $294,474 Notes payable 60,300 Vehicle 45,150 Total liabilities 235,842 Accumulated depreciation, vehicle (3,602) 41,548 336,022 Equity Intangible assets Share capital$4,515 Copyright 21,500 Retained earnings 736,223* Total equity 740,738 Total assets $976,580 Total liabilities and equity$976,580
Net income (360,250−12,191−18,668−13,545−15,386−452−62,575−23,478−158,017−2,259−39,981)=13,698 * Retained earnings (\$737,575+13,698−15,050)=736,223

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