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4.12: Solutions

  • Page ID
    30653
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    • Contributed by Henry Dauderis and David Annand
    • Athabasca University
    • Sourced from Lyryx Learning

    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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