4.12: Solutions

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.
8. 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.
9. 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.
10. Big Dog Carworks Corp. makes it easier to compare financial information from period to period by presenting comparative annual financial data for two years.
11. 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.
12. The auditor's report indicates that GAAP have been consistently applied in BDCC's financial statements (see last sentence of the report).
13. 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. 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.

2. 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

3. 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. 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

2. 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

3. 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

2. 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

3. 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