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ACC205: Principles of Accounting
Week 1
Discussions
To participate in the following discussions, go to this week’s Discussion link in the left navigation.
- Accounting Equation As you have learned in this week’s readings the Accounting Equation is Assets = Liabilities + Owners’ Equity. Is the accounting equation true in all instances? Provide sample transactions from your own experiences to demonstrate the validity of the Accounting Equation. Guided Response: Review several of your peers’ posts and identify some core components that you feel should be included in every transaction. Respond to at least two of your peers and provide recommendations to extend their thinking. Challenge your peers by asking a question that may cause them to reevaluate or add components to their transactions.
- Accounts What does the term account mean? What are the different classifications of accounts? How do the rules for debits and credits impact accounts? Please provide an example of how debits and credits impact accounts. Guided Response: Analyze several of your peers’ posts. Let at least two of your peers know if this knowledge could be used in their everyday lives. Is so, how? If not, why not?
Exercise Assignment To complete the following assignment, go to this week’s Assignment link in the left navigation.
Basic Accounting Equations Please complete each of the exercises below in a word document. Save the document, and submit to in week using the
Assignment Submission button.
Discussions To participate in the following discussions, go to this week’s Discussion link in the left navigation.
- Accounting Cycle Financial statements are a product of the accounting cycle. Think about two different companies: a manufacturing company, and a retail company. Why would different companies have different accounting cycles? Would you expect the steps of the accounting cycle to be the same for each company? Why or why not? Guided Response: Review several of your peers’ posts and identify what steps of the accounting cycle that you feel are the most critical. Respond to at least two of your peers and provide recommendations to extend their thinking. Challenge your peers by asking a question that may cause them to reevaluate their position on the accounting cycle.
- Bank Reconciliation What is the purpose of a bank reconciliation? What are the reasons for differences between the cash reported in the accounting records and the cash balance in the bank statements? Analyze several of your peers’ posts. Let at least two of your peers know what happens to the discrepancies between the book balance and the bank balance. Could these differences just be written off? Guided Response: A bank reconciliation reconciles the bank account balance per the books to the actual bank balance. Outstanding checks, deposits in transit, and bank errors are reasons there are differences between the cash reported in the accounting records and the cash balance in the bank statements.
Exercise Assignment To complete the following assignment, go to this week’s Assignment link in the left navigation.
Revenue and Expenses Please complete each of the exercises below in a word document. Save the document, and submit to in week using the Assignment Submission button.
Week 3
Discussions To participate in the following discussions, go to this week’s Discussion link in the left navigation.
- LIFO vs. FIFO The controller of Sagehen Enterprises believes that the company should switch from the LIFO method to the FIFO method. The controller’s bonus is based on the next income. It is the controller’s belief that the switch in inventory methods would increase the net income of the company. What are the differences between the LIFO and FIFO methods? Guided Response: Analyze several of your peers’ posts. Let at least two of your peers know if a company is better off it switches from a LIFO method to a FIFO method? Explain your reasoning.
-
Depreciation
A variety of depreciation methods are used to allocate the cost of an asset to all of the accounting periods benefited by the use of the asset. Your client has just purchased a piece of equipment for $100,000. Explain the concept of depreciation. Which of the following depreciation methods would you recommend: straight-line depreciation, double declining balance method, or an alternative method? Guided Response: Let at least two of your peers know if a company would use an accelerated depreciation method for their financial statements or their tax returns. Why do you believe this would be the case?
Exercise Assignment To complete the following assignment, go to this week’s Assignment link in the left navigation.
Inventory Please complete each of the exercises below in a word document. Save the document, and submit to in week using the Assignment Submission button.
Ashford 5: – Week 4
Discussions To participate in the following discussions, go to this week’s Discussion link in the left navigation.Current Liability What is a current liability? From the perspective of a user of financial statements, why do you believe current liabilities are separated from long-term liabilities? Based on your current experience as well as and any additional research you may have done provide two examples of situations where businesses collect monies from customers and employees and report these amounts as a current liability. Guided Response: Review several of your peers’ posts and identify the core components of a current liability. Respond to at least two of your peers and provide recommendations to extend their thinking. Challenge your peers by asking a question that may cause them to reevaluate if their example is a current liability.Client Recommendations A client comes to you thinking about starting a consulting business. Your client is specifically interested in what type of entity should be created for this new business. Based on your readings or any additional research you may have done, discuss the advantages and disadvantages of the following: sole proprietorship, partnership, and corporation. Based on these advantages and disadvantages provide a clear recommendation to your client. Let at least two of your peers posts know if an alternative choice of entity would be possible. What would be the benefits of this new entity choice? Would there be any disadvantages associated with this new entity selection. Guided Response: Let at least two of your peers know if an alternative choice of entity would be possible? What would be the benefits of this new entity choice? Would there be any disadvantages associated with this new entity selection? Exercise Assignment To complete the following assignment, go to this week’s Assignment link in the left navigation.
Liability Please complete each of the exercises below in a word document. Save the document, and submit to in week using the Assignment Submission button.
Ashford 6: – Week 5
Discussions To participate in the following discussions, go to this week’s Discussion link in the left navigation.
- Ratios Ratios provide the users of financial statements with a great deal of information about the entity. Do ratios tell the whole story? How could liquidity ratios be used by investors to determine whether or not to invest in a company? Guided Response: Let at least two of your peers know how debt service ratios can be used by a lender in determining whether or not to lend money to a company.
- Profit Margin
|
Year Ending December 2012 |
Year Ending December 2011 |
Year Ending December 2010 |
|||
|
Revenues |
40,000 |
35,000 |
3 |
3,000 |
|
|
Operating Expenses |
|||||
|
Salaries |
15,000 |
10,000 |
9,000 |
||
|
Maintenance and Repairs |
6,000 |
||||
|
Rental Expense |
2,500 |
||||
|
2,000 |
|||||
|
Fuel |
4,000 |
3,500 |
|||
|
Total Operating Expenses |
29,500 |
2 |
7,000 |
26,000 |
|
|
Operating Income |
10,500 |
8,000 |
|||
|
Sales and Administrative Expenses |
|||||
|
Interest Expense |
1,000 |
||||
|
Net Income |
Above is a comparative income statement for Cecil, Inc. for the years 2010, 2011, and 2012. Calculate the profit margin for each of these years. Comment on the profit margin trend. Guided Response: Let at least two of your peers posts know what you changes you would recommend to improve the net margin of the company.
Exercise Assignment To complete the following assignment, go to this week’s Assignment link in the left navigation.
Financial Ratios Please complete each of the exercises below in a word document. Save the document, and submit to in week using the Assignment Submission button. Week Five Exercise Assignment
Carefully review the Grading Rubric for the criteria that will be used to evaluate your assignment.
Final Paper
To complete the following final paper, go to this week’s Final Paper link in the left navigation.
Final Paper Focus of the Final Paper Write a five-to seven-page financial statement analysis of a public company, and formatted according to APA style as outlined in the Ashford Writing Center. In this analysis you will discuss the financial health of this company with the ultimate goal of making a recommendation to other investors. Your paper should consist of the following sections: introduction, company overview, horizontal analysis, ratio analysis, final recommendation, and conclusions. Your paper needs to include a minimum of two scholarly resources in addition to the textbook as references. Here is a breakdown of the sections within the body of the assignment:
Company Overview Provide a brief overview of your company (one to two paragraphs at most). What industry is it in? What are its main products or services? Who are its competitors?
Horizontal Analysis of Income Statement and Balance Sheet Prepare a three-year horizontal analysis of the income statement and balance sheet of your selected company. Discuss the importance and meaning of horizontal analysis. Discuss both the positive and negative trends presented in your company.
Ratio Analysis Calculate the current ratio, quick ratio, cash to current liabilities ratio, over a two-year period. Discuss and interpret the ratios that you calculated. Discuss potential liquidity issues based on your calculations of the current and quick ratios. Are there any factors that could be erroneously influencing the results of the ratios? Discuss liquidity issues of competitive companies within the same industry.
Recommendation Based on your analysis would you recommend an individual invest in this company? What strengths do you see? What risks do you see? It is perfectly acceptable to state that you would recommend avoiding this company as long as you provide support for your position.
Writing the Final Paper 1. Must be five to seven double-spaced pages in length, and formatted according to APA style as outlined in the Ashford Writing Center. 2. Must include a title page with the following:
a. Title of paper b. Student’s name c. Course name and number d. Instructor’s name e. Date submitted
3. Must begin with an introductory paragraph that has a succinct thesis statement. 4. Must address the topic of the paper with critical thought. 5. Must end with a conclusion that reaffirms your thesis. 6. Must document all sources in APA style, as outlined in the Ashford Writing Center. 7. Must include a separate reference page, formatted according to APA style as outlined in the Ashford Writing Center.
A
Week One Exercise Assignment
Basic Accounting Equations
1.Recognition of normal balances
The following items appeared in the accounting records of Triguero’s, a retail music store that also sponsors concerts. Classify each of the items as an asset, liability, revenue, or expense from the company’s viewpoint. Also indicate the normal account balance of each item.
a. The albums, tapes, and CDs held for sale to customers.
b. A long-term loan owed to Citizens Bank.
c. Promotional costs to publicize a concert.
d. Daily sales of merchandise sold,
e. Amounts due from customers,
f. Land held as an investment,
g. A new fax machine purchased for office use.
h. Amounts to be paid in 10 days to suppliers,
i. Amounts paid to a mall for rent.
2.Basic journal entries
The following April transactions pertain to the Jennifer Royall Company:
Apr. 1
Jennifer Royall invested cash of $15,000 and land valued at $10,000into the business.
Apr.5
Provided $1,200 of services to Jason Ratchford, a client, on account.
Apr.9
Paid $250 of salaries to an employee.
Apr.14
Acquired a new computer for $3,200, on account.
Apr.20
Collected $800 from Jason Ratchford for services provided on April 5.
Apr.24
Borrowed $7,500 from BestBanc by securing a six-month loan.
Prepare journal entries (and explanations) to record the preceding transactions and events.
3. Balance sheet preparation. The following data relate to Preston Company as of December 31, 20XX:
Building $44,000 Accounts receivable $24,000
Cash 17,000 Loan payable 30,000
J. Preston, Capital 65,000 Land 21,000
Accounts payable ?
Prepare a balance sheetas of December 31, 20XX. (See Exhibit 1.1 and 1.4)
4. Basic transaction processing. On November 1 of the current year, Richard Parker established a sole proprietorship. The following transactions occurred during the month:
1: Parker invested $19,000 into the business for $19,000 in common stock.
2: Paid $9,000 to acquire a used minivan.
3: Purchased $1,800 of office furniture on account.
4: Performed $2,100 of consulting services on account.
5: Paid $300 of repair expenses.
6: Received $800 from clients who were previously billed in item 4.
7: Paid $500 on account to the supplier of office furniture in item 3.
8: Received a $150 electric bill, to be paid next month.
9: Parker withdrew $600 from the business.
10: Received $250 in cash from clients for consulting services rendered.
Instructions
a. Arrange the following asset, liability, and owner’s equity elements of the accounting equation: Cash, Accounts Receivable, Office Furniture, Van, Accounts Payable, Common Stock/Dividends, and Revenues/Expenses. (See Exhibit 1.5)
b. Record each transaction on a separate line. After all transactions have been recorded, compute the balance in each of the preceding items.
c. Answer the following questions for Parker.
(1) How much does the company owe to its creditors at month-end? On which financial statement(s) would this information be found?
(2) Did the company have a “good” month from an accounting viewpoint? Briefly explain.
5. Transaction analysis and statement preparation. The transactions that follow
relate to Burton Enterprises for March 20X1, the company’s first month of activity.
3/1: Joanne Burton, the owner invested $20,000 into the business for $20,000 of Common Stock.
3/4: Performed $2,400 of services on account.
3/7: Acquired a small parcel of land by paying $6,000 cash.
3/12: Received $700 from a client, who was billed previously on March 4.
3/15: Paid $800 to the Journal Herald for advertising expense.
3/18: Acquired $9,000 of equipment from Park Central Outfitters by paying
$7,000 down and agreeing to remit the balance owed within the next
2 weeks, (Accounts Payable).
3/22: Received $300 cash from clients for services.
3/24: Paid $1,500 on account to Park Central Outfitters in partial settlement
of the balance due from the transaction on March 18.
3/28: Rented a car from United Car Rental for use on March 28. Total charges
amounted to $75, with United billing Burton for the amount due.
3/31: Paid $900 for March wages.
3/31: Processed a $600 cash withdrawal (dividend) from the business for Joanne Burton.
Instructions
a. Determine the impact of each of the preceding transactions on Burton’s assets,
liabilities, and owner’s equity. See exhibit 1.5. Use the following format:
Assets = Liabilities + Owner’s Equity
Cash, Accounts Receivable, Land, Equipment Accounts Payable (+)Common Stock(+) Revenues
(-) Dividends (-) Expenses
a. Record each transaction on a separate line. Calculate balances only after the lasttransaction has been recorded.
b. Prepare an income statement, a statement of retained earnings, and a balance sheet (See Exhibit 1.2, 1.3 and 1.4).
6. Entry and trial balance preparation. Lee Adkins is a portrait artist. The following schedule represents Lee’s combined chart of accounts and trial balance as of May 31.
Account number Account name Debit Credit
110
Cash
$ 2,700
120
Accounts Receivable
12,100
130
Equipment and Supplies
2,800
140
Studio
45,000
210
Accounts Payable
$2,600
310
Lee Adkins, Capital
57,400
320
Lee Adkins, Drawing
30,000
410
Professional Fee Revenue
39,000
510
Advertising Expense
2,300
520
Salaries Expense
2,100
540
Utilities Expense
2,000
$99,000
$99,000
The general ledger also revealed account no. 530, Legal and Accounting Expense. The following transactions occurred during June:
6/2:
Collected $7,500 on account from customers.
6/7:
Sold 25% of the equipment and supplies to a young artist for $700 for cash.
6/10:
Received a $500 invoice from the accountant for preparing last quarter’s financial statements.
6/15:
Paid $2,100 to creditors on account.
6/27:
Adkins withdrew $1,000 cash for personal use.
6/30:
Billed a customer $3,000 for a portrait painted this month.
a. Record the necessary journal entries for June on page 2 of the company’s general journal (See Exhibit 2.6).
b. Open running balance ledger “T” accounts by entering account titles, account numbers, and May 31 balances (See exhibit 2.3 and 2.4).
c. Post the journal entries to the “T” accounts.
d. Prepare a trial balance as of June 30 (See exhibit 2.9).
7. Journal entry preparation.On January 1 of the current year, Peter Houston invested $100,000 cash into his companyMuniServ.The cash was obtained from an owner investment by Peter Houston of $70,000 and a $30,000 notes payable. Shortly thereafter, the company acquired selected assets of a bankrupt competitor. The acquisition included land ($15,000), a building ($40,000), and vehicles ($10,000). MuniServ paid $45,000 at the time of the transaction and agreed to remit the remaining balance due of $20,000 (an account payable) by February 15.
During January, the company had additional cash outlays for the following items:
Purchases of store equipment
$4,600
Note payment
500
Salaries expense
2,300
Advertising expense
700
The January utility bill of $200 was received on January 31 and will be paid next month. MuniServ rendered services to clients on account amounting to $9,400. All customers have been billed; by month end, $3,700 had been received in settlement of account balances.
Instructions
a. Present journal entries that reflect MuniServ’s January transactions, including the $100,000raised from the owner investment and loan (See exhibit 2.6).
b. Compute the total debits, total credits, and ending balance that would befound in the company’s Cash account (Post to “T” Accounts, see exhibit 2.3 and 2.4).
c. Prepare a trail balance as of January 31 (See exhibit 2.9).
Week Four Exercise
A
ssignment
Liability
1. Payroll accounting. Assume that the following tax rates and payroll information pertain to Brookhaven Publishing:
· Social Security taxes
: 6% on the first $55,000 earned per employee
· Medicare taxes
: 1.5% on the first $130,000 earned per employee
· Federal income taxes withheld
from wages: $7,500
· State income taxes
: 5% of gross earnings
· Insurance withholdings
: 1% of gross earnings
· State unemployment taxes
: 5.4% on the first $7,000 earned per employee
· Federal unemployment taxes
: 0.8% on the first $7,000 earned per employee
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. The entry will include deductions for the following:
· Social Security taxes
· Medicare taxes
· Federal income taxes withheld
· State income taxes
· Insurance withholdings
b. Prepare the journal entry to record Brookhaven’s payroll tax expense. The entry will include the following:
· Matching Social Security taxes
· Matching Medicare taxes
· State unemployment taxes
· Federal unemployment taxes
2. Current liabilities: entries and disclosure. A review of selected financial activities of Visconti’s during 20XX disclosed the following:
12/1
Borrowed $20,000 from the First City Bank by signing a 3- month, 15% note payable. Interest and principal are due at maturity.
12/10
Established a warranty liability for the XY-80, a new product. Sales are expected to total 1,000 units during the month. Past experience with similar products indicates that 2% of the units will require repair, with warranty costs averaging $27 per unit (parts only).
12/22
Purchased $16,000 of merchandise on account from Oregon Company, terms 2/10, n/30.
12/26
Borrowed $5,000 from First City Bank; signed a 15% note payable due in 60 days. (Assume 360 days for daily interest calculation)
12/31
Repaired six XY-80s during the month at a total cost of $162.
12/31
Accrued 3 days of salaries at a total cost of $1,400.
Instructions
a. Prepare journal entries to record the transactions.
b. Prepare adjusting entries on December 31 to record accrued interest for each of the notes payable.
3. Notes payable. Red Bank Enterprises was involved in the following transactions during the fiscal year ending October 31:
8/2:
Borrowed $75,000 from the Bank of Kingsville by signing a 120-day, 12% note.
8/20:
Issued a $40,000 note to Harris Motors for the purchase of a $40,000 delivery truck. The note is due in 180 days and carries a 12% interest rate.
9/10:
Purchased inventory from Pans Enterprises in the amount of $15,000. Issued a 30-day, 12% note in settlement of the balance owed.
9/11:
Issued a $60,000 note to Datatex Equipment in settlement of an overdue account payable of the same amount. The note is due in 30 days and carries a 14% interest rate.
10/10:
The note to Pans Enterprises was paid in full.
A
10/11: The note to Datatex Equipment was paid in full.
11/30: Paid note to Bank of Kingsville
Instructions
a. Prepare journal entries to record the transactions.
b. Prepare adjusting entries on December 31 to record accrued interest(daily interest is calculated utilizing the 360 day method).
c. Prepare the Current Liability section of Red Bank’s balance sheet as of December 31. Assume that the Accounts Payable account totals $203,600 on this date.
A
Week Three Exercise Assignment
Inventory
1. Specific identification method. Boston Galleries uses the specific identification method for inventory valuation. Inventory information for several oil paintings follows.
Painting
Cost
1/2 Beginning inventory
Woods
$11,000
4/19 Purchase
Sunset
21,800
6/7 Purchase
Earth
31,200
12/16 Purchase
Moon
4,000
Woods and Moon were sold during the year for a total of $35,000. Determine the firm’s
a. cost of goods sold.
b. gross profit.
c. ending inventory.
2. Inventory valuation methods: basic computations. The January beginning inventory of the White Company consisted of 300 units costing $40 each. During the first quarter, the company purchased two batches of goods: 700 Units at $44 on February 21 and 800 units at $50 on March 28. Sales during the first quarter were 1,400 units at $75 per unit. The White Company uses a periodic inventory system. Using the White Company data, fill in the following chart to compare the results obtained under the FIFO, LIFO, and weighted-average inventory methods.
FIFO
LIFO
Weighted Average
Goods available for sale
$
$
$
Ending inventory, March 31
Cost of goods sold
3. Perpetual inventory system: journal entries. At the beginning of 20X3, Beehler Company implemented a computerized perpetual inventory system. The first transactions that occurred during 20X3 follow:
· 1/2/20X3 Purchases on account: 500 units @$4 = $2,000
· 1/15/20X3 Sales on account: 300 units @ $8.50 = $2,550
· 1/20/20X3 Purchases on Account: 200 units @ $5 = $1,000
· 1/25/20X3 Sales on Account: 300 units @ $8.50 = $2,550
The company president examined the computer-generated journal entries for these transactions and was confused by the absence of a Purchases account.
a. Duplicate the journal entries that would have appearedon the computer printout under FIFO & LIFO.
b. Calculate the balance in the firm’s Inventory account under each method.
c. Briefly explain the absence of the Purchases account to the company president.
4. 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) show the lowest net income for tax purposes?
5. 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 residual 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
6. Depreciation computations. Alpha Alpha Alpha, 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.
7. 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 (20X3 – 20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.
Instructions
a. Compute depreciation for 20X3 – 20X7 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.
A
Week Two Exercise Assignment
Revenue and Expenses
1. Recognition of concepts. Ron Carroll operates a small company that books entertainers for theaters, parties, conventions, and so forth. The company’s fiscal year ends on June 30. Consider the following items and classify each as either (1) prepaid expense, (2) unearned revenue, (3) accrued expense, (4) accrued revenue, or (5) none of the foregoing.
a. Amounts paid on June 30 for a 1-year insurance policy.
b. Professional fees earned but not billed as of June 30.
c. Repairs to the firm’s copy machine, incurred and paid in June.
d. An advance payment from a client for a performance next month at a convention.
e. The payment in part (d) from the client’s point of view.
f. Interest owed on the company’s bank loan, to be paid in early July.
g. The bank loan payable in part (f).
h. Office supplies on hand at year-end.
2. Understanding the closing process. Examine the following list of accounts:
Interest Payable
Accumulated Depreciation: Equipment
Alex Kenzy, Drawing
Accounts Payable
Service Revenue
Cash
Accounts Receivable
Supplies Expense
Interest Expense
Which of the preceding accounts
a. appear on a post-closing trial balance?
b. are commonly known as temporary, or nominal, accounts?
c. generate a debit to Income Summary in the closing process?
d. are closed to the capital account in the closing process?
3. Adjusting entries and financial statements. The following information pertains to Fixation Enterprises:
· The company previously collected $1,500 as an advance payment for services to be rendered in the future. By the end of December, one third of this amount had been earned.
· Fixation provided $2,500 of services to Artech Corporation; no billing had been made by December 31.
· Salaries owed to employees at year-end amounted to $1,650.
· The Supplies account revealed a balance of $8,800, yet only $3,300 of supplies were actually on hand at the end of the period.
· The company paid $18,000 on October 1 of the current year to Vantage Property Management. The payment was for 6 months’ rent of Fixation’s headquarters, beginning on November 1.
Fixation’s accounting year ends on December 31.
Instructions
Analyze the five preceding cases individually and determine the following:
a. The type of adjusting entry needed at year-end (Use the following codes: A, adjustment of a prepaid expense; B, adjustment of an unearned revenue; C, adjustment to record an accrued expense; or D, adjustment to record an accrued revenue).
b. The year-end journal entry to adjust the accounts.
c. The income statement impact of each adjustment (e.g., increases total revenues by $500).
4. 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:
· 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.
· Unrecorded interest owed to the center totaled $275 as of December 31.
· 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 $15,500all amounts were for the current semester ending on December 31.
· Depreciation on the school’s van was $3,000 for the year.
· 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.
· Two salaried employees earn $400 each for a 5-day week. The employees are paid every Friday, and December 31 falls on a Thursday.
· 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.
5. Bank reconciliation and entries. The following information was taken from the accounting records of Palmetto Company for the month of January:
Balance per bank
$6,150
Balance per company records
$3,580
Bank service charge for January
$20
Deposits in transit
$940
Interest on note collected by bank
$100
Note collected by bank
$1,000
NSF check returned by the bank with the bank statement
$650
Outstanding checks
$3,080
Instructions:
a. Prepare Palmetto’s January bank reconciliation.
b. Prepare any necessary journal entries for Palmetto.
6. Direct write-off method. Harrisburg Company, which began business in early 20X7, reported $40,000 of accounts receivable on the December 31, 20X7, balance sheet. Included in this amount was $550 for a sale made to Tom Mattingly in July. On January 4, 20X8, the company learned that Mattingly had filed for personal bankruptcy. Harrisburg uses the direct write-off method to account for uncollectibles.
a. Prepare the journal entry needed to write off Mattingly’s account.
b. Comment on the ability of the direct write-off method to value receivables on the year-end balance sheet.
7. 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:
20X2
20X1
Sales
$23,987,000
$8,423,000
Accounts Receivable, 12/31
12,444,000
1,056,000
Allowance for Uncollectible Accounts, 12/31
?
23,000 cr.
The $12,444,000 receivables balance was aged as follows:
Age of Receivable
Amount
Percentage of Accounts Expected to Be Collected
Under 31 days
$5,321,000
99%
31260 days
3,890,000
90
61290 days
1,067,000
80
Over 90 days
2,166,000
60
Assume that no accounts were written off during 20X2.
Instructions
a. Estimate the amount of Uncollectible Accounts as of December 31, 20X2.
b. What is the company’s Uncollectible Accounts expense for 20X2?
c. Compute the net realizable value of Accounts Receivable at the end of 20X1 and 20X2.
d. 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.
A
Week Five Exercise Assignment
Financial Ratios
1. Liquidity ratios.
Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:
Edison
Stagg
Thornton
Cash
$4,000
$2,500
$1,000
Short-term investments
3,000
2,500
2,000
Accounts receivable
2,000
2,500
3,000
Inventory
1,000
2,500
4,000
Prepaid expenses
800
800
800
Accounts payable
200
200
200
Notes payable: short-term
3,100
3,100
3,100
Accrued payables
300
300
300
Long-term liabilities
3,800
3,800
3,800
a. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?
2. Computation and evaluation of activity ratios.
The following data relate to Alaska Products, Inc:
20X5
20X4
Net credit sales
$832,000
$760,000
Cost of goods sold
440,000
350,000
Cash, Dec. 31
125,000
110,000
Average Accounts receivable
180,000
140,000
Average Inventory
70,000
50,000
Accounts payable, Dec. 31
115,000
108,000
a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.
3. Profitability ratios, trading on the equity.
Digital Relay has both preferred and common stock outstanding. The company reported the following information for 20X7:
Net sales
$1,500,000
Interest expense
$120,000
Income tax expense
$80,000
Preferred dividends
$25,000
Net income
$130,000
Average assets
$1,100,000
Average common stockholders’ equity
$400,000
a. Compute the profit margin ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
b. Does the firm have positive or negative financial leverage? Briefly explain.
4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.
20X2
20X1
Current Assets
$76,000
$80,000
Property, Plant, and Equipment (net)
99,000
90,000
Intangibles
25,000
50,000
Current Liabilities
40,800
48,000
Long-Term Liabilities
143,000
160,000
Stockholders’ Equity
16,200
12,000
Net Sales
500,000
500,000
Cost of Goods Sold
332,500
350,000
Operating Expenses
93,500
85,000
Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.
5. Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.
20X2
20X1
Current Assets
$ 76,000
$ 80,000
Property, Plant, and Equipment (net)
99,000
90,000
Intangibles
25,000
50,000
Current Liabilities
40,800
48,000
Long-Term Liabilities
143,000
160,000
Stockholders’ Equity
16,200
12,000
Net Sales
500,000
500,000
Cost of Goods Sold
332,500
350,000
Operating Expenses
93,500
85,000
Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.
6. Ratio computation. The financial statements of the Lone Pine Company follow.
LONE PINE COMPANY
Comparative Balance Sheets
December 31, 20X2 and 20X1 ($000 Omitted)
20X2
20X1
Assets
Current Assets
Cash and Short-Term Investments
$ 400
$ 600
Accounts Receivable (net)
3,000
2,400
Inventories
2,000
2,200
Total Current Assets
$5,400
$5,200
Property, Plant, and Equipment
Land
$1,700
$ 600
Buildings and Equipment (net)
1,500
1,000
Total Property, Plant, and Equipment
$3,200
$1,600
Total Assets
$8,600
$6,800
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable
$1,800
$1,700
Notes Payable
1,100
1,900
Total Current Liabilities
$2,900
$3,600
Long-Term Liabilities
Bonds Payable
4,100
2,100
Total Liabilities
$7,000
$5,700
Stockholders’ Equity
Common Stock
$ 200
$ 200
Retained Earnings
1,400
900
Total Stockholders’ Equity
$1,600
$1,100
Total Liabilities and Stockholders’ Equity
$8,600
$6,800
LONE PINE COMPANY
Statement of Income and Retained Earnings
For the Year Ending December 31,20X2 ($000 Omitted)
Net Sales*
$36,000
Less: Cost of Goods Sold
$20,000
Selling Expense
6,000
Administrative Expense
4,000
Interest Expense
400
Income Tax Expense
2,000
32,400
Net Income
$ 3,600
Retained Earnings, Jan. 1
900
$ 4,500
Cash Dividends Declared and Paid
3,100
Retained Earnings, Dec. 31
$ 1,400
*All sales are on account.
Instructions
Compute the following items for Lone Pine Company for 20X2, rounding all calculations to two decimal places when necessary:
a. Quick ratio
b. Current ratio
c. Inventory-turnover ratio
d. Accounts-receivable-turnover ratio
e. Return-on-assets ratio
f. Net-profit-margin ratio
g. Return-on-common-stockholders’ equity
h. Debt-to-total assets
i. Number of times that interest is earned
