LIBBY/LIBBY/SHORT Financial Accounting 6e LIST OF CHECK FIGURES AND SOLUTION HINTS ______________________________________________________________________________ CHAPTER 1 Mini-Exercises 1-1
(3) A.
1-2
(6) A.
1-3
(5) Securities and Exchange Commission.
Exercises 1-1
(2) G.
1-2
(4) L.
1-3
(9) E.
1-4
Total Assets = 12,037 (in billions of yen).
1-5
Req. 1: Total Assets = $184,350.
1-6
Net Income is $35,100.
1-7
Net Income is $561 (in millions).
1-8
Net Income is $55,180.
1-9
(A) Stockholders’ Equity is $74,200.
1-10
(B) Total Liabilities = $241,600.
1-11
Net Income is $80,500.
1-12
Ending Retained Earnings = $43,100.
1-13
(7) Investing Activity
1-14
Cash flow from operating activities $105,000.
1-3
(1) American Eagle Outfitters is the larger of the two companies in terms of total assets at the end of the most recent year. American Eagle Outfitters’ total assets = $1,987,484,000. Urban Outfitters’ total assets = $899,251,000.
1-4
Req. 2: Total Assets = $142,000.
1-5
Req. 1: Assert the need for an independent audit of the financial statements each year, because this is the best way to assure credibility – conformance with GAAP, completeness, and absence of bias.
1-6
(4) There is an ethics violation in this case because she would audit statements that covered a period of time where she was responsible for the accounting operations of the company. This is a problem in appearance and in fact.
CHAPTER 2 Mini-Exercises 2-1
(1) C.
2-2
(3) A.
2-3
(2) N.
2-4
(10) NCL.
2-5
(b) Cash -$7,000. Notes Receivable +$7,000.
Problems
2-6.1
Assets: debit increases; credit decreases.
1-1
Req. 1: Net Income is $32,060.
2-7.2
1-2
Req. 1: Net Income is $6,125.
Liabilities: an increase is recorded as a credit; a decrease is recorded as a debit.
1-3
Req. 1: (e) Income -$2,900, Cash -$3,800.
2-8
(d) Equipment, debit $15,000. Cash, credit $6,000. Notes Payable, credit $9,000.
1-4
Req. 4: Stockholders’ Equity (net resources) is $35,000.
2-9
Cash has a $6,800 debit balance.
2-10
Total Stockholders’ Equity is $13,000.
2-11
Financial Leverage Ratio is 1.73.
2-12
(e) F.
Alternate Problems 1-1
Req. 1: Net Income is $20,650.
1-2
Req. 1: Net Income is $8,120.
1-3
(d) Income -$36,000, Cash -$30,000
Exercises
Cases 1-1
(7) Total Liabilities = $570,172,000.
1-2
(2) Net Sales = $1,224,717,000.
McGraw-Hill/Irwin Financial Accounting, 6e
2-1
(6) H
2-2
Req. 1: (h) Investments received; Cash given
2-3
(3) CL, credit balance.
© Copyright 2009 by the McGraw-Hill Companies, Inc.
1
2-4
(d) Cash +$7,000. Notes Payable +7,000.
2-4
2-5
Req. 1: (c) Dividends Payable +179.2. Retained Earnings -179.2
2-6
(e) Mortgage Notes Payable, credit $11,000.
Cases
2-7
Req. 1: (b) Contributed Capital, credit $253.6
2-1
(4) Financial Leverage is 1.40.
2-2
(4) Financial Leverage is= 1.35.
2-8
Req. 1: Cash has a debit balance of $60,800.
2-3
2-9
Req. 2: Total Current Assets = $72,000.
2-10
Req. 2: Total Current Assets = $56,000.
2-11
(a) Cash (+A), debit $60,000. Contributed Capital (-SE), credit $60,000.
(3) American Eagle Outfitters paid $61,521,000 in dividends. Urban Outfitters did not pay any dividends during the year. Refer to the financing activities section of the statement of cash flows.
2-4
2-12
(e) Cash (+A), debit $2,677. Equipment (-A), credit $2,677.
Req. 2: (b) Total Cash Flows provided by Financing Activities was $6,596,000.
2-5
2-13
Req. 2: Cash has a debit balance of $6,950.
2-14
Total Assets = $9,200.
2-15
Req. 2: Total Assets = $68,000.
Req. 2: Investing in stocks is riskier than investing in bonds because debt holders have preference over stockholders upon liquidation of assets.
2-16
(b) Purchased a building for $50,000; paid $10,000 in cash and gave a $40,000 Note Payable for the balance.
2-6
The major deficiency in the balance sheet is the inclusion of the owner’s personal residence as a business asset.
2-17
Req. 2: Equipment, credit $700.
2-7
2-18
(d) Capital Expenditures, Investing Activity, Negative Effect on Cash.
2-19
Cash flow from investing activities $(154).
2-20
(5) Dividends paid go in financing activities section of the statement of cash flows.
(5) The negative retained earnings balance at the end of 2005 indicates Gateway has not been profitable over its years in business. Gateway also reported an accumulated deficit for 2006, but the balance was less negative than in 2005. This decrease in the negative balance in Retained Earnings indicates that Gateway was profitable in its business during 2006. Assuming no dividends were paid during 2006, net profit in 2006 was $14.
2-8
Req 1: Total Assets in 2011 = $19,784.4 (in millions of dollars). Total Assets in 2010 = $18,231.6 (in millions of dollars).
Problems 2-1
(10) Current Asset, debit balance.
2-2
Req. 4: (a) Total Assets = $870,000
2-3
Req. 2: (h) Cash, debit $1,000. Equipment, credit $1,000.
2-4
(h) Investing Activity, + Effect on Cash.
2-5
Req. 2: Long-term Liabilities has a credit balance of $4,493.
2-6
CHAPTER 3 Mini-Exercises
Cash flow from Investing Activities $(4,125)
3-1
(1) F.
3-2
Cash basis Net Income is $8,500.
3-3
(d) None. No revenue was earned in July, since the earnings process was not yet complete. Unearned Revenue is recorded upon receipt of cash.
3-4
(h) Insurance Expense of $600 was incurred and expensed in July. $1,200 has not been incurred and will not be expensed until future
Alternate Problems 2-1
(5) Current Asset, debit balance.
2-2
Req. 4: (a) Total Assets = $749,000
2-3
Req. 4: Total Assets = $812,718 (in thousands).
(e), Investing Activity, Negative Effect on Cash.
McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 2
months.
$10,560.
3-5
(d) Cash (+A) $1,600 Unearned Revenue (+L) $1,600
3-13
Req. 1: Cash has a $38,027 debit balance.
3-14
Req. 1: Net Loss is $(193).
3-6
(f) Accounts Payable (-L) $1,800 Cash (-A) $1,800
3-15
Total cash from financing activities is $114,400.
3-7
(d) Assets + $1,600. Liabilities + $1,600. Stockholders’ Equity NE. Revenues NE. Expenses NE. Net Income NE.
3-16
Req. 2: Net Income is $6,580.
3-17
Req. 3: Net Income is $14,000.
3-8
(i) Assets -$1,200. Liabilities NE. Stockholders’ Equity -$1,200, Revenues NE. Expenses +$1,200. Net Income -$1,200.
3-18
Req. 2: Accounts Receivable is missing a credit of $3,180.
3-19
3-9
Net Income is $6,910.
(6) Cost of Goods Sold item, located on the Income Statement.
3-10
Total cash from operating activities is $9,500
3-11
Total Asset Turnover Ratio is 3.1 for 2011. Total Asset Turnover Ratio is 2.8 for 2012.
Problems 3-1
(k) Debit 1. Credit 13.
3-2
(g) Advertising Expense (+E, -SE), debit $450. Cash (-A), credit $450.
3-3
Req. 1: (d) Assets +. Liabilities NE. Stockholders’ Equity +. Revenues +. Expenses NE. Net Income +.
3-4
Req. 3: Net Income is $810.
3-5
Cash flow from operating activities is $(670).
3-6
Req. 3: Total Assets = $9,825 (in millions)
3-7
Req. 1: (a) Journal Entry needed is: Cash (+A), debit $459,475. Admissions Revenue (+R, +SE), credit $459,475.
Exercises 3-1
(2) E.
3-2
Req. 1: Cash Basis Net Income is $209,600. Accrual Basis Net Income is $56,120.
3-3
(k) Interest Revenue is $12.
3-4
(h) Commission expense is $4,470.
3-5
(l) Assets -. Liabilities NE. Revenues NE. Expense +. Stockholders’ Equity -. Net Income -.
3-6
(e) Assets -$16,079. Liabilities NE. Stockholders’ Equity -$16,079. Revenues NE. Expenses NE. Net Income NE.
3-7
3-8
Alternate Problems
(f) Cash (+A), debit $21,120. Accounts Receivable (-A), credit $21,120. Debits = Credits. Assets increase and decrease by the same amount.
3-1
(p) Debit 8, 14.
3-2
(i) Accounts Receivable (+A), debit $14,500. Service Revenue (+R, +SE), credit $14,500.
Req. 1: (e) Debits = Credits. Since season passes are sold before Vail Resorts provides service, revenue is deferred until it is earned. Assets and Liabilities increase by the same amount. Cash (+A), debit $372,000. Unearned Pass Revenue (+L), credit $372,000.
3-3
Req. 1: (c) Assets (net) +. Liabilities NE. Stockholders’ Equity +. Revenues +. Expenses NE. Net Income +.
3-4
Req. 3: Net Income is $39,420.
3-5
Cash flow from operating activities $12,060.
3-6
Req. 3: Total Assets = $86,904 (in millions)
3-9
(2/10) Wages Payable (-L), debit $1,300. Cash (-A), credit $1,300.
3-10
Req. 3: Net Income is $5,340.
3-11
Req. 3: Total Assets = $83,280.
3-12
Total cash from operating activities is
Credit 1.
Cases 3-1
McGraw-Hill/Irwin Financial Accounting, 6e
(2) Assuming all net sales are on credit, American Eagles Outfitters collected $2,797,510,000 from customers.
© Copyright 2009 by the McGraw-Hill Companies, Inc. 3
Stockholders’ Equity +$233. Revenues +$233. Expenses NE. Net Income +$233.
3-2
(4) Urban Outfitters’ Total Asset Turnover is 1.47. Thus, Urban Outfitters generated $1.47 of sales per $1 of assets.
4-8
Net Income is $4,780.
3-3
(2) For the 2006 fiscal year, American Eagle Outfitters had higher net income of $387,359,000 compared to Urban Outfitters’ net income of $116,206,000 (all in thousands).
4-9
Stockholders’ Equity on Dec. 31, 2011 is $10,480.
4-10
Total Assets = $20,000.
4-11
Net Income is $4,780.
3-4
Req. 1: Total Asset Turnover in 2004 = 1.63.
4-12
3-5
Req. 3: Congress and the SEC have adopted reforms to attempt to address the rising concerns about financial reporting. The article suggests that, instead of helping to make financial statements clearer and more consistent, many of the reforms are aimed at policing managers and auditors and not at clarifying estimates that managers make.
In the closing entry: Retained Earnings is credited $4,780.
3-6
Req. 2: Net Income is $10,000.
3-7
Req. 3: Net Income is $23,000.
3-8
Req. 1: This type of ethical dilemma frequently occurs. It is difficult personally because of the possible repercussions to you, if you do not meet the request of your boss, Mr. Lynch. The ethical and professional response is to follow the revenue recognition rule and record the cash collected as deferred revenue. To record the collection as revenue would overstate income in the current period.
Exercises
CHAPTER 4 Mini-Exercises 4-1
Total for the adjusted trial balance is $5,220.
4-2
(1) A.
4-3
(3) B.
4-4
(a) Type: Unearned Revenue. The amount earned is $250. The Adjusting Entry is: Unearned Rent Revenue (-L), debit $250. Rent Revenue (+R, +SE), credit $250.
4-5
(c) Assets -$3,000. Liabilities NE. Stockholders’ Equity -$3,000. Revenues NE. Expenses +$3,000. Net Income -$3,000.
4-6
(b) Type: Accrued Expense. The amount incurred is $6,000. The adjusting entry is: Wages Expense (+E, -SE), debit $6,000. Wages Payable (+L), credit $6,000.
4-7
(c) Assets +$233. Liabilities NE.
McGraw-Hill/Irwin Financial Accounting, 6e
4-1
The Unadjusted Trial Balance total is $3,273,990.
4-2
Req. 2: Temporary Accounts that accumulate during the period (Revenues, Expenses, Gains, and Losses) are closed at the end of the year to the permanent account Retained Earnings.
4-3
Req. 2: (b) Type: Accrued Revenue. This transaction is accrued revenue, because revenue has been earned but no cash has been received. The adjusting entry needed on December 31, 2010 to conform to accrual accounting and the revenue principle is: Interest Receivable (+A), debit $3,000. Interest Revenue (+R, +SE), credit $3,000.
4-4
Req. 4: The account balances on the 2011 Balance Sheet would be: Prepaid Insurance $3,000. Shipping Supplies $20,000.
4-5
E4-4 (b) Assets -$49,000. Liabilities NE. Stockholders’ Equity -$49,000. Revenues NE. Expenses +$49,000. Net Income -$49,000.
4-6
Req. 2: (e) The adjusting entry would be: Depreciation Expense, debit $6,100. Accumulated Depreciation, credit $6,100.
4-7
Req. 2: (g) Interest Expense, debit $3,000. Interest Payable, credit $3,000.
4-8
(c) Assets NE. Liabilities -$3,200. Stockholders’ Equity +$3,200. Revenues +$3,200. Expenses NE. Net Income +$3,200.
4-9
(b) Assets NE. Liabilities -$500. Stockholders’ Equity +$500. Revenues +$500. Expenses NE. Net Income +$500.
4-10
(h) L, debit $62,000. K, credit $62,000.
4-11
(c) Balance Sheet: Prepaid Insurance $300.
© Copyright 2009 by the McGraw-Hill Companies, Inc. 4
Income Statement: Insurance Expense $100. 4-12
Jan 31, 2012, Payment of Note 2: Assets -$21,200. Liabilities -$21,200. Stockholders’ Equity -$200. Revenues NE. Expenses +$200. Net Income -$200.
4-13
Req. 2: (a) Cash paid is $323.
4-14
Req. 1: (a) The adjusting entry that should have been made on December 31 is: Depreciation Expense, debit $15,000. Accumulated Depreciation, credit $15,000.
4-15
Correct balance for Total Assets is $164,000.
4-16
Req. 2: Correct amount for Total Assets is $79,000.
4-17
Req. 2: Net Income is $21,200.
4-18
Req. 2: On the Adjusted Trial Balance, total debits are $190 (in thousands).
4-19
Net Income is $26 (in thousands).
4-20
Req. 2: (a) In the closing entry, Retained Earnings is credited for $26.
4-4
Req. 2: (e) Assets NE. Liabilities -$700. Stockholders’ Equity +$700. Revenues +$700. Expenses NE. Net Income +$700.
4-5
Req. 2: (h) Assets NE. Liabilities +$7,719. Stockholders’ Equity -$7,719. Revenues NE. Expenses +$7,719. Net Income -$7,719.
4-6
Req. 2: After posting the adjusting entries, Net Income is $14,100.
4-7
Req. 2: Total Assets = $44,750.
4-8
Req. 4: Total Assets = $69,000.
Cases 4-1
(5) Net Profit Margin for 2006 is 0.139.
4-2
(4) Accrued Liabilities consist of costs that have been incurred by the end of the accounting period, but have not been paid.
4-3
(4) Both accounting policies are similar, indicating that advertising costs are expensed when the marketing campaigns become publicly available. American Eagle allocates advertising costs for television campaigns over the life of the campaign. Urban Outfitters capitalizes expenses associated with direct-to-customer advertising (catalogs) and amortizes these expenses over the expected period of future benefits. (The policies are disclosed in both annual reports.)
4-4
Req. 1: The author suggests that obsession with earnings drives companies to push accounting standards to the limit and, at times, to engage in outright fraud. This causes managers to make decisions to meet short-term earnings expectations, often at the expense of long-term shareholder value.
4-5
Req. 4: Average income tax rate for 2010 is 30%.
4-6
Transaction A: (3) The carrying value of the Office Equipment is $9,800 on the Balance Sheet at December 31, 2011.
4-7
Req. 3: (j) Net Profit Margin is 14.6%
4-8
Req. 2: (1) Memo to Crystal Mullinex should include the following: Net Income was overstated by $112,525 because of the inappropriate recognition of revenue (overstated by $103,000) and expenses (understated by $9,525).
Problems 4-1
Adjusted Trial Balance total is $24,832.
4-2
Req. 1: (b) Accrued Expense.
4-3
Req. 1: (f) Prepaid Expense.
4-4
Req. 1: (h) Accrued Expense.
4-5
Req. 1: (e) Accrued Revenue.
4-6
The balance in Rent Revenue is $528,000. Effect on Cash Flows is +$524,000.
4-7
Req. 2: Net Income (Loss) after adjusting entries is $(12,180).
4-8
Req. 2: Net Income is $17,640
4-9
Req. 4: Net Income is $41,000.
Alternate Problems 4-1
Req. 1: The Adjusted Trial Balance total is $3,160 (in millions).
4-2
Req. 2: (e) Unearned Service Revenue (-L), debit $700. Service Revenue (+R, +SE), credit $700.
4-3
Req. 2: (d) Insurance Expense (+E,-SE), debit $200. Prepaid Insurance (-A), credit $200.
McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 5
4-9
Req. 4: (a) Unadjusted Earnings per share is $3.80 per share. Adjusted Earnings per share is $1.095 per share.
5-14
(a) Current Assets NE. Gross Profit NE. Current Liabilities NE, Cash Flow from Operating Activities +32.2.
4-10
Req. 3: Unearned Subscriptions Revenue is $14,500 on March 31, 2011.
5-15
Cash flows from operating Activities $9,000
5-16
Req. 1: Prior year ROE is 0.131. Current year ROE is 0.140.
5-17
Req. 2: The decrease in ROE is caused by the decrease in profit margin (from 0.49 in the prior year to 0.037 in the current year).
Chapter 5 Mini-Exercises 5-1
(4) A.
5-2
(1) Earnings Press Release. (2) Annual Report. (3) Form 10-K.
Problems
5-3
(3) A.
5-1
(20) S.
5-4
(b) Current Assets NE. Gross Profit NE. Current Liabilities +. Advertising Expense is not included in Cost of Goods Sold, so it has no effect on Gross Profit.
5-2
(16) K.
5-3
Total Assets = $383,000.
5-4
Req. 1: Total Stockholders’ Equity $203,000
5-5
Net Income is $138,208 (in thousands).
5-6
(a) Earnings Per Share is $0.86
5-5 5-6
5-7
(b) Under Stockholders’ Equity: Common Stock +$5,000. Additional paid-in capital +$75,000.
5-7
(a) The journal entries to record the sale are: Accounts Receivable (+A) 500 Sales Revenue (+R, +SE) 500
Req. 1: (d) Gross Profit NE. Operating Income (Loss) NE. Return on Equity +.
5-8
Net Income is $385.0
Cost of Goods Sold (+E, -SE) Inventory (-A)
Alternate Problems
200 200
Return on Equity (ROE) is 0.11
Exercises
5-1
Req. 1: Total Assets = $385,700.
5-2
Req. 1: Total Stockholders’ Equity $237,000
5-3
(a) Net Income is $21,420.
5-4
Req. 1: (a) Operating Income (Loss) NE. Net Income +. Return on Equity +.
5-1
(7) E.
5-2
(6) A.
5-3
(3) B and C.
Cases
5-4
Current Liabilities is number 6.
5-1
5-5
Total Assets = $6,445 (in millions).
5-6
Total current Assets = $82,328 (in millions).
(4) Website sales are recorded “upon the estimated customer receipt date of merchandise” (See Note 2).
5-7
Common Stock, credit $102.
5-2
5-8
Req. 1: Oakley did not pay any dividends during the year.
(5) Buildings are depreciated over useful lives of 39 years. This is disclosed in Note 2.
5-3
5-9
(10) B.
Req. 2: American Eagle Outfitters’ Return on Equity is 0.30.
5-10
Case C: Cost of Goods Sold is $190.
5-4
5-11
Earnings Per Share is $2.60.
5-12
Net Income is $19,500.
5-13
(a) Current Assets +$126.8. Gross Profit + $126.8. Current Liabilities NE.
Typical accounting fraud techniques include the overstatement of revenues (through early recording of legitimate revenues or the recording of fictitious revenues) and the overstatement of assets (by overstating the assets’ value or recording fictitious assets).
McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 6
5-5
(1) Gross Margin on Sales is $105,000.
6-1
Sales Discount is $19.
5-6
(a) Current Period ROE +. Future Periods’ ROE -. The decrease in R&D investments would lead to lower expense in the current year, which increases the current period’s income and ROE. However, when fewer products are brought to market in future periods, income and ROE will decrease.
6-2
Credit Card Discounts = $40.
6-3
Net Sales = $12,700.
6-4
Transaction on July 21: Net Sales -$1,000. Cost of Goods Sold -$600. Gross Profit -$400.
6-5
Req. 1: Annual Interest Rate is 30.44%
6-6
Pretax income is $122,292.
6-7
Req. 1: Income from Operations is $45,600.
6-8
(b) Allowance for Doubtful Accounts, debit $240.
6-9
(a) Bad Debt Expense, debit $23,700.
6-10
(a) Under Assets: Allowance for doubtful accounts -$23,700. Under Stockholders’ Equity: Bad debt expense -$23,700.
6-11
Req. 2: (b) No effect on Sales. No effect on Gross Profit. No effect on Income from Operations.
6-12
Bad Debt Expense for the year is $770.
6-13
(a) Bad Debt Expense for the year is $4,800.
6-14
Req. 1: The journal entry includes a $22,350 credit to Allowance for Doubtful Accounts.
6-15
(2) It would have no effect.
6-16
Req. 2: Cash collections = $49,036.
6-17
Req. 1: The amount of bad debt expense is $532,000 (in thousands).
6-18
Req. 1: The adjusting entry to record the estimated loss on uncollectible accounts includes a $1,125 debit to Bad Debt Expense.
6-19
Req. 1: Receivables Turnover is 8.74 times.
6-20
Req. 1: Average days sales in receivables are 27.7 days.
6-21
Req. 1: The change in the accounts receivable balance would increase cash flow from operations by $15,337 thousand.
6-22
Req. 1: The change in the accounts receivable balance would decrease cash flow from operations by $173,000 thousand.
6-23
Req. 1: Correct cash balance is $7,960.
6-24
Req. 4: Cash reported on the balance sheet dated September 30, 2011 is $5,470.
6-25
The journal entry to record the credit card sale on November 20, 2010 includes a debit of $9
5-7
5-8
(7) This transaction should have been recorded in 2010 as a debit to Land (an asset) and a credit to a Liability for $8,000. Therefore, at the end of 2010 both assets and liabilities were understated by $8,000. The entry in 2011 corrected the accounts. (3) Bonuses tied to performance measures such as accounting earnings tend to align the managers’ interests with those of the stockholders. However, when companies face a significant downturn, and bonuses will not be awarded, some dishonest managers falsify accounting numbers in an attempt to meet performance goals.
Chapter 6 Mini-Exercises 6-1
(a) On completion of flight
6-2
If the buyer pays within the discount period, the income statement will report $9,405 as net sales.
6-3
Net Sales (reported on the income statement) = $18,098
6-4
Gross Profit Percentage is 0.429
6-5
(b) Bad Debt Expense, debit $13,000.
6-6
(a) Under Assets: Allowance for Doubtful Accounts -$17,000. Under Stockholders’ Equity: Bad Debt Expense -$17.000.
6-7
(b) + Increased effectiveness of collection methods.
6-8
(c) Deposit in transit is added to the Bank Statement balance.
6-9
When the sale is recorded at the gross amount, if the customer pays within the discount period, the entry to record the payment includes a debit to Sales Discounts of $80.
Exercises McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 7
to the account titled Credit Card Discount.
Problems 6-1
Case A: The correct point for revenue recognition in this case is when the customer uses the coupon or when the coupon expires and McDonald’s has no further obligation.
7-1
Finished Goods Inventory, Manufacturing Business.
7-2
Debit Inventory for $2,500
7-3
The wages of factory workers is included as part of inventory cost.
7-4
Purchases = $11,062 million
7-5
(b) When costs are declining, the amount reported for Net Income and Ending Inventory are higher under LIFO.
7-6
LIFO is often selected when costs are rising because it reduces the company’s tax liability.
6-2
Req. 1: Bad Debt Expense is $1,140.
6-3
Case A: Net Income is $16,000.
6-4
(2) The write-offs for Year 2 = $41.
6-5
Req. 2: Bad Debt Expense for the year is $2,895.
7-7
The total Inventory amount reported on the balance sheet is $6,450.
6-6
Req. 1: Net Income is $17,920.
7-8
6-7
Req. 1: Correct Cash Balance is $24,850.
(b) +. Shorten the production process from 10 days to 8 days.
6-8
Req. 3: Correct Cash Balance is $22,400.
7-9
6-9
Req. 2: Net Sales Revenue is $307,320.
Understatement of the 2009 ending inventory by $100,000 caused the 2009 pretax income to be understated and the 2010 pretax income to be overstated by the same amount.
Alternate Problems 6-1
Req. 2: Net Sales Revenue is $300,760.
Exercises
6-2
(2) Bad Debt Expense for Year 2 is $5,475.
7-1
6-3
Req. 3: Bad Debt Expense, debit $2,725.
(b) Samples out on trial to a customer should be included in the vendor’s ending inventory.
6-4
Req. 1: Net Income is $22,400
7-2
Case C: Ending Inventory is $9,000.
6-5
Req. 3: Correct Cash Balance is $66,060.
7-3
Case D: Cost of Goods Sold is $400.
7-4
Purchases = $1,174,063,000.
7-5
Cost of Goods Sold under LIFO is $45,000
7-6
Cost of Goods Sold under FIFO is $30,000
7-7
(2) Goods available for sale (for both cases) is $246,000.
7-8
Case B (LIFO): Ending Inventory is $80,000.
7-9
Req. 1: Using FIFO, Net Income is $45,150.
7-10
Req. 2: Using Weighted Average, Pretax Income is $2,695.
7-11
Inventory valuation (LCM) should be $5,950.
7-12
Inventory valuation (LCM) should be $5,095.
7-13
Req. 1: Inventory Turnover is 77.51.
7-14
Case A (FIFO): Cost of Goods Sold is $1,110.
7-15
Increases in inventory cause cash flow from operations to decrease by $1,975,679.
7-16
Req. 1: If FIFO were used exclusively, the ending inventory would be $10,177 million,
Cases 6-1
(3) Receivables Turnover is 101.3 times.
6-2
(3) Gross Profit Percentage for 2007 is 0.369
6-3
(3) The current year’s Gross Profit Percentage for Urban Outfitters is 36.9%.
6-4
(1) No
6-5
(2) It should establish a sales returns and allowances account (a contra revenue account) for potential cancellations. An estimate of future cancellations should be deducted from sales in the same period in which the revenue is recognized.
6-6
Req. 1: The total approximate amount stolen is $4,820.
Chapter 7 Mini-Exercises McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 8
which is $996 million higher than reported.
7-3
Req. 1: Cost of Goods Sold for 2011 $46,000
7-17
Req. 1: Net Income for 2010 is Overstated.
7-4
Req. 1: Ending Inventory is $137,500.
7-18
Corrected Income is $20,506,758.
7-5
7-19
The $400 understatement of ending inventory resulted in first quarter pretax income being understated by $400 and the second quarter pretax income being overstated by $400.
Req. 1: (a) When prices are rising, Ending Inventory under FIFO costing is $2,400.
7-20
Cases
Req. 1: A decline in LIFO inventory quantity often will produce a dramatic increase in net income for the company.
7-21
Req. 2: The journal entry includes a debit to Sales Discounts of 22.5.
7-22
Cost of Goods Sold reported on the income statement will be $1,300.
7-1
Req. 2: The company purchased $1,506,885 thousand during the current year.
7-2
Req. 3: If the company had overstated its ending inventory by $10 million, its income before tax would be overstated by $10 million
7-3
Req. 1: Inventory Turnover is 5.24
7-4
Req. 1: Production costs included in inventory become cost of goods sold expense on the income statement in the period the goods are sold.
7-5
Req. 1: In 1995, Cost of Goods Sold under FIFO would be $11,932.
7-6
It is reasonable to assume that the company also adopted LIFO for tax purposes. This would result in a decrease in income tax expense of approximately $8 million.
7-7
The company understated purchases by $47.3 million, which caused cost of goods sold to be understated and pretax income to be overstated by $47.3 million. This results in a $28.2 million overstatement of Net Income.
Problems 7-1
(e) Goods purchased and in transit, F.O.B. shipping point, are owned by the purchaser and should be added to the purchaser’s ending inventory.
7-2
(a) Total cost of Goods Available for Sale is $4,730 under all methods.
7-3
Req. 1: Cost of Goods Sold using LIFO is $4,040.
7-4
Req. 1: Ending Inventory is $172,500.
7-5
Req. 1: (a) When prices are rising, ending inventory using FIFO is $2,400.
7-6
Req. 1: Net Income is $28,595.
7-7
Req. 1: Inventory Turnover is 14.1
Chapter 8d Mini-Exercises
7-8
Req. 1: Use of FIFO would result in an increase in net income of $204.8 million.
8-1
(4) NR, DP.
7-9
Req. 3: Income Tax Expense was overstated by $6,600 in 2010 and understated by $6,600 in 2011.
8-2
Fixed Asset Turnover Ratio is 1.74
8-3
(8) R.
8-4
7-10
Req. 2: Since prices are rising, LIFO liquidations increase net income before taxes.
Accumulated Depreciation at the end of the third year is $15,000.
8-5
(i) The journal entry includes a credit to Inventory for $3,825.
Net Book Value at the end of the third year is $5,400.
8-6
Accumulated Depreciation at the end of the third year is $17,750.
8-7
(c) Impairment, Yes. Loss of factory building, $32,000.
8-8
Gain on sale of store fixtures, credit $1,000.
8-9
Elizabeth Pie Company’s management may choose to accept the offer of $5,000,000 as
7-11
Alternate Problems 7-1
(a) Ending Inventory has 680 units.
7-2
Req. 1: (a) Using the weighted average method, Cost of Goods Sold is $2,256.
McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 9
this amount is more than the $4,700,000 market value of separately identifiable assets and liabilities. If so, goodwill of $300,000 would be recorded on the purchase date. 8-10
asset’s life. The accelerated methods would report more depreciation expense in the early years, which results in lower income and less cash outflow for income tax. In any case, the tax code specifies that MACRS, an accelerated method, must be used for most tangible depreciable property placed in service after Dec 31, 1986. It is important to note, that, over the entire useful life of an asset, total depreciation expense is the same regardless of the depreciation method used.
Cash provided by operating activities, $13,500.
Exercises 8-1
Total Assets, $3,164 (in millions).
8-2
Req. 1: Fixed Asset Turnover Ratio for 2006 is 18.41.
8-11
8-3
Req. 2: Straight-line depreciation for one year, $8,000.
Req. 1: Units-of-Production depreciation expense for year 2, $22,500.
8-12
8-4
Req. 2: Acquisition cost of the machine is $23,500.
Req. 1: The journal entry to record the sale of property and equipment includes: Gain on sale of property and equipment, credit $91.
8-5
Req. 1: The adjusting entry for 2009, Depreciation Expense, debit $6,000. Accumulated Depreciation, credit $6,000.
8-13
Req. 1(c): Loss on sale of long-lived asset, $400.
8-14
Req. 1(b): Gain on sale of long-lived asset, $1,100,000.
8-15
Req. 1: Estimated useful life, 7 years.
8-6
2b: For 2010: Under Assets: Cash -$12,000. Equipment +$12,000.
8-7
Req. 1: (c) Double-Declining-Balance year 3 depreciation expense, $500. Note: Book Value cannot be below the residual value.
8-16
Req. 2: Depletion for 2011, $51,000.
8-17
Req. 3: Total Amortization Expense reported on the Income Statement for 2010, $16,650.
8-8
Req. 1: (c) Double-Declining-Balance Depreciation Expense, Year 3, $40,320.
8-18
Req. 3: Balance Sheet, Total for Intangible Assets, $111,240.
8-9
Management of Ford Motor Company probably anticipated that the pre-1999 tools would be more productive or efficient in the earlier part of their lives. In which case, an accelerated depreciation method would provide the best matching of expenses with revenues in the same period. In 1999, Ford’s management may have recognized a change in the technology of the special tools, such that a better matching would occur using the unitsof-production depreciation method, in which the amount of the depreciation expense computed varies by actual production levels each period.
8-19
Req. 2: Leasehold Improvements, credit $13,750.
8-20
(1) Location is the Balance Sheet or the Notes to the financial statements.
8-21
Net book value on Jan 1, 2010 is $46,000.
8-22
Req. 3: Depreciation Expense for 2012 after the major renovation, $4,550.
8-23
Req. 2: Depreciation Expense after the change in estimates, $14,750 per year.
8-1
Req. 2: Equipment cost, $85,040.
Managers often prefer the straight-line method because it results in lower depreciation expense and higher net income in the earlier years of an asset’s life when compared with the accelerated methods. Since straight-line depreciation results in higher income in the early years, it also would result in higher taxes in the earlier years of the
8-2
Req. 2: Net Book (or carrying) Value, $676,000.
8-3
Req. 2: Depreciation Expense, debit $8,400.
8-4
Req. 1: Depreciation Expense, $3,866.
8-5
Req. 1 (c): Accumulated Depreciation balance, end of year 2, $18,000.
8-10
Problems
McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 10
8-6
Req. 1 (b) (2): Loss on disposal of machine, debit $200.
8-7
Req. 2: Cash proceeds from disposals and transfers, $1,090.5.
8-8
Req. 2: (c) No amortization on the leasehold improvements this year, since improvements were constructed on December 31.
8-9
Req. 1: Goodwill, $171,000.
8-10
Req. 1 (b): Copyright amortization for one year, $1,125.
8-11
Req. 1 (b): Book Value at end of 2010, $260,000.
the property was sold at book value. The cash proceeds to Eastman Kodak were $322 million. 8-9
Req. 1: The interest coverage ratio is a measure of the ability of a company to meet its obligatory interest payments from current operations.
8-10
Req. 2: The consistency principle prevents management from changing accounting methods on an arbitrary basis to manipulate income, but it does not prevent nor require use of a different method when there is a change in circumstance.
8-11
Req. 1 (b): Fixed asset turnover ratio is lower (-) because the denominator is higher due to interest capitalization.
Alternate Problems 8-1
Req. 2: June 1, 2011, Additional paid-in capital, credit $6,000.
8-2
Req. 2: Book value of building, $248,000.
8-3
Req. 2: Depreciation Expense, debit $18,160.
8-4
Req. 1: Depreciation Expense, $226.
8-5
Req. 1 (b): Machine B, Dec 31, 2010, (2), Gain on disposal of machine, credit $1,700.
8-6
Req. 2 (b): Leasehold Improvements amortization expense to be recorded on December 31, 2010, $1,560.
8-7
Req. 2 (a): Book value of patent, Jan 1, 2010, $14,880.
Chapter 9 Mini-Exercises
Cases
9-1
The second year, $11,000.
9-2
Dec 31: Interest Expense, debit $7,250.
9-3
1: Computed from balance sheet data.
9-4
Current Ratio, 2.63.
9-5
(b): Current Ratio decreases, Working Capital Decreases.
9-6
2012: Buzz must record the loss and the liability because the out of court settlement made the $150,000 loss probable.
9-7
$231,600.
9-8
$92,169.
9-9
Total is $380,442.
9-10
It is much better to save $16,250 for 10 years. X = $17,039.
8-1
(5) Fixed Asset Turnover ratio, 6.76.
8-2
(6) Fixed Asset Turnover ratio, 3.29.
8-3
(1) Fixed Assets as a % of Total Assets of American Eagle Outfitters is 24.2%.
8-4
(2) Hotels & Motels: Wyndham Worldwide (WYN), Starwood (HOT), Marriott (MAR).
9-11
8-5
Req. 1: Estimated useful life is 12.36 years.
Exercises
8-6
Req. 1: The use of a depreciation percentage is just another way of expressing an expected life. The expected lives of buildings and improvements are 10 years (1/10 or 10%) to 25 years (1/25 or 4%).
9-1
Req. 1 (b): Current Ratio, 1.64.
9-2
Req. 2: FICA taxes payable - employer, credit $15,000.
9-3
Req. 2: FICA taxes payable, $12,000.
Req. 1: The cost of property, plant, and equipment at the end of the current year is $3,911 million.
9-4
Req. 2: Interest Expense, debit $64,000.
9-5
Req. 1: December 31: Liabilities, Interest Payable +. Stockholders’ Equity, Interest Expense -.
8-7
8-8
Since there was no gain or loss on disposal,
McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 11
9-6
obligation as a liability on its balance sheet.
Analysts want to evaluate the short term obligations of a business in order to assess liquidity.
9-12
Req. 2: Deferred Income Tax Liability: on the 2009 Balance Sheet, $900. On the 2010 Balance Sheet, $0.
9-7
X = $500,000.
9-8
Req. 2: August 31, Cash paid $47,250 (Principal plus interest).
9-13
Req. 2: Deferred Income Tax Asset: in 2009, Debit $1,280. In 2010, credit $1,280.
9-9
The note does not give us sufficient information to reach a definitive conclusion. No obligation for future payments is recorded if the lease is short-term, but the note indicates that the leases are long-term and are designed to provide long-term occupancy rights. The critical issue is whether the leases meet one of the criteria to be classified as a capital lease, in which case, the present value of the lease payments would be recorded as a liability.
9-14
Req. 3: This note explains the cause of the difference between taxes currently payable and tax expense for each year. It is not the amount of deferred taxes reported on the balance sheet.
9-15
Req. 3: $20,528.
9-16
The winner should select the cash payment.
9-17
Deposit an additional $251,710.
9-18
$42,116.
9-19
Present value of unequal payments, $72,357.
9-20
PV of cash payments, $159,410.
9-21
PV of the annuity, $374,094.
9-22
Purchase price, $125,825.
9-23
Req. 2: Time value of money or Interest, $9,562.
9-24
Req. 1: $79,997.
9-25
Req. 2: Balance, $30,386.
9-26
Req. 3: Interest in year 3, $433.
9-10
9-11
The question of whether a lease will be recorded as a liability depends on the specific facts and circumstances associated with the lease. A short-term lease probably would not have to be recorded as a liability, but a longterm lease would probably be recorded as a liability. The assistant is correct in the sense that assets could be acquired under a lease and, if the transaction is structured in the proper manner, no liability would be recorded. A liability is “a probable future sacrifice of economic benefits that arises from past transactions.” To be recorded, the amount of a liability must be subject to a reasonable estimate. The employees of American Airlines earn their retirement benefits by performing work for the company. These benefits are a form of deferred compensation and are directly related to a past transaction (exchanging work for compensation). American Airlines has an economic obligation to pay for health care and life insurance in the future as part of employee retirement benefits. However, it is difficult to determine the exact amount of the liability for these benefits. Under GAAP, it is not necessary to know the “exact” amount of a liability in order to record it. The liability must be one that can be reasonably estimated. The FASB requires companies to record liabilities for retirement benefits using reasonable estimates of future obligations. American Airlines reported this
Problems
McGraw-Hill/Irwin Financial Accounting, 6e
9-1
Req. 2: Interest expense, debit $42,000.
9-2
Req. 3: Total Current Liabilities, $48,750.
9-3
Req. 2: April 1, a financing activity, has no effect on operating activities.
9-4
Req. 2 (b): Rent Revenue Collected in Advance, credit $800.
9-5
Req. 1 (c): Assets: Cash +. Liabilities, no impact. Stockholders’ Equity, Revenue +.
9-6
Req. 2: For 2010: Unearned Revenue, debit $54,000,000.
9-7
Req. 3: Report a Liability.
9-8
(c) Remain the same.
9-9
If management has the intent and ability to refinance a short-term liability, it will not result in a cash outflow. In this circumstance, it is appropriate to reclassify the debt as long
© Copyright 2009 by the McGraw-Hill Companies, Inc. 12
term.
9-7
The jackpot does not have a present value of $3 million.
9-10
Req. 2: Balance sheet, Deferred Income Tax Liability, $1,980.
9-11
Req. 1: Present value of debt, $114,995.
9-12
Option 1, $7,680,750.
Chapter 10 Mini-Exercises
9-13
Req. 1: Annual deposit, $27,028.
10-1
(3) Statement of Cash Flows
9-14
Req. 1: Interest earned = $13,265.
10-2
Issue price, $600,000.
10-3
Issue Price, $750,449.
10-4
June 30, 2009, Bond Interest Expense, debit $51,700.
Alternate Problems 9-1
Req. 3: Total current liabilities, $908,000.
9-2
Req. 2: April 30, No effect.
10-5
9-3
Req. 2: In year 2009, no revenue has been earned. The liability is $23 million.
June 30, 2009, Discount on Bonds Payable, credit $1,000.
10-6
Issue Price, $567,958.
9-4
(C) Decrease.
10-7
9-5
The contractual agreement allows General Mills to reclassify the current borrowings as noncurrent debt, which would improve the current ratio and other measures of liquidity.
December 31, 2009, Premium on Bonds Payable, debit $2,000.
10-8
December 31, 2009, Bond Interest Expense, debit $63,000.
10-9
Most analysts look at the times interest earned ratio as a measure of a company’s ability to meet its required interest payments.
9-6
Req. 2: Total Interest Earned = $536,800.
9-7
Option 1 is best, it gives the highest return.
9-8
Req. 2: The Fund balance on December 31, 2011, $1,048,992.
10-10
If the interest rates fall after the issuance of a bond, the bond’s price will increase. The company will report a loss on the debt retirement.
9-1
Req. 3: Long-term liabilities, $109,708,000.
10-11
9-2
Req. 1: Accrued Compensation, $5,092,000.
9-3
Req. 2: Urban Outfitters’ Current Ratio, 2.7.
9-4
Req. 2: If the monthly payments actually include principal and interest, the cash selling price is equal to the present value of the monthly payments, $118,669.
When a company issues a bond at a discount, the interest expense each period will be more than the cash payment for the interest. When a company issues a bond at a premium, the interest expense will be less than the cash payment for the interest. Neither is affected by the method used to amortize the discount or premium.
9-5
(d) Current Ratio, increases. Working Capital, No change. Liquidity, No change.
10-12
9-6
Refusing to accept merchandise would result in a higher current ratio (assuming that it is currently greater than one). If merchandise is purchased on credit, a constant amount added to current liabilities and current assets results in a lower current ratio. Management could actually improve the current ratio by shipping merchandise to customers because it would record accounts receivable based on selling price and reduce inventory based on cost.
Cash paid to retire a bond is reported in the financing activities section of the Statement of Cash Flows. Cash paid for interest payments is reported in the operating activities section.
Cases
Exercises
McGraw-Hill/Irwin Financial Accounting, 6e
10-1
(4) Stated rate, coupon rate, or contract rate.
10-2
If bonds with a $10,000 face value were purchased, the issue price would be $8,950 and they would provide a cash yield of 7.3%.
© Copyright 2009 by the McGraw-Hill Companies, Inc. 13
10-3
When a bond offers a conversion feature, its value will be affected by the value of the common stock. As the price of the stock goes up, the bond becomes more valuable. Given that the stock now sells for $90 per share, each bond is worth at least $3,913 based on the stated conversion factor.
10-16
Req. 2: Bond Interest Expense, debit $93,476.
10-17
Req. 2: Year 2009 Interest Expense, $411.
10-18
Req. 1: Premium on Bonds Payable, credit $76,774.
10-19
Req. 1: Bond Premium, credit $135,915.
10-4
Case B: Issue price, $111,169.
10-20
Loss on bond call, debit $48,000.
10-5
Case C: Issue price, $432,055.
10-21
Bond Discount, credit $25,000.
10-6
Applied Technologies’ ratios look better than Innovative Solutions’ ratios. Applied Technologies has a lower debt-to-equity ratio than Innovative Solutions., which means Applied Technologies is less leveraged and has less risk.
10-22
(4) Impacts Statement of Cash Flows; report $940,000 payment in financing section.
Problems 10-1
Req. 1(d): Interest Expense actual results for 2009, $4,000.
10-7
Issue price, $91,893.
10-8
Req. 1: Cash, debit $701,862.
10-2
Req. 1: Each Interest Payment is $12,000.
10-9
Req. 2: Bond Interest Expense, debit $24,651.
10-3
Req. 1 (a): Cash received at issue, Case B, $475,000.
10-10
Req. 1: Issue price, $279,000.
10-4
10-11
Req. 2: Discount, $52.
Req. 1 (a): December 31, 2009, Case C, Interest Expense, $9,600.
10-12
The effective interest rate (Market Rate) for a bond is determined by market forces and not the company. It appears that American intended to sell the bonds close to par value, which would be achieved by having a coupon rate that was the same as the market rate. It is virtually impossible to issue a bond at a point when the coupon rate and the market rate are exactly the same.
10-5
Req. 1: Issue Price, $173,161.
10-6
Req. 2: June 30, Bond Interest Expense, $32,361.
10-7
Req. 4: Carrying Value of Bond Payable on December 31, $891,718.
10-8
Req. 2(c): 2009, Bond Interest Expense, $87,075.
10-9
Req. 2: June 30, Bond Interest Expense, $86,408.
10-10
Req. 1: Issue Price, $725,765.
10-11
Req. 1: Issue Price is $311,366.
10-12
Req. 4: Premium on Bonds Payable, $808.
10-13
When a bond is sold for a premium, the amount of cash collected is greater than the maturity value. This extra amount is called a bond premium. Bond Premiums are amortized over the life of a bond. When bond premium amortization is recorded, the amount of bond premium is reduced. The reduction reported in the note is the result of the required amortization of the bond premium.
10-14
Req. 1: The company used cash on hand to retire their bonds prior to their maturity date.
10-13
The Disney bond includes a conversion feature that permits bond holders to convert their bond into stock at a set price per share. This conversion feature enhances the potential return for investors and permits the issuer to pay a lower rate of interest.
10-14
Assuming that both companies offer the same business risk, many people might prefer the bond that had the slightly higher yield, which is Walt Disney at 9.5%. If interest rates were to fall significantly, companies might decide to call their bonds and issue new ones at a lower interest rate. In this case, a zero coupon bond offers an extra margin of protection.
10-15
Req. 2: Bond Interest Expense, debit $43,717.
McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 14
10-15
enabling them to protect their rights as stockholders.
Req. 3: Financing, outflow.
Alternate Problems
11-2
The number of unissued shares is 90,000.
10-1
Req. 4: Bonds Payable, $2,000,000.
11-3
Cash, debit $3,570,000 in both cases.
10-2
Case B: Net liability on the balance sheet at end of 2011, $98(000’s).
11-4
10-3
Req. 2: 2009 Interest expense, $85,564.
10-4
Req. 4: Amount reported for bonds payable for 2009 will be $1,932,286.
10-5
Req. 1: Issue price, $934,983.
Common stock is the basic voting stock issued by a corporation. It ranks after preferred stock for dividends and assets distributed upon liquidation of the corporation. Common stock has more potential for growth than preferred stock, if the company is profitable.
10-6
Req. 2: 2009 Interest expense, $270,340.
11-5
10-7
Req. 1: Loss on Bond Retirement, debit $2,720,000.
(3) Assets increase $370,000. Liabilities no effect. Stockholders’ Equity increases $370,000. Net Income no effect.
11-6
$130,000.
11-7
April 15, Retained Earnings, debit $65,000.
11-8
Total to preferred stockholders, $800,000.
11-9
Stock split: no change in assets, no change in liabilities, no change in common stock, no change in stockholders’ equity, decrease in market value.
11-10
Common Stock, credit $800,000.
Cases 10-1
Req. 2: Bonds must be reported unless the company has not issued any. Therefore, the company must not have issued bonds.
10-2
Req. 3: The notes disclose that the company has established an unsecured line of credit.
10-3
Req. 1: Primary source of cash flow for both companies is from their operating activities.
10-4
Req. 2: Principal, $130,760,000. The bonds would sell for 32.6% of par value, which is $130,760,000 for bonds with a $400,000,000 face value.
10-5
10-6
Exercises
People invest in different securities for a variety of reasons. Bondholders are interested in fixed income and low risk. They are willing to give up higher returns for lower risk. It is not unethical to offer an investor a lower-risk, lower-return investment. Some students approach this question with the perspective that people’s jobs are more important than people’s money. The portfolio manager’s have a fiduciary responsibility to the investors, not the workers.
Chapter 11 Mini-Exercises 11-1
Being able to vote is the most important of the rights because this ensures that the owners have an input at the stockholders’ meeting and some control of the management of the corporation, thus
McGraw-Hill/Irwin Financial Accounting, 6e
11-1
Shares outstanding, 2,430,534,575.
11-2
Req. 3: Shares outstanding, 140,000.
11-3
Req. 1: Total Contributed Capital, $380,000.
11-4
Req. 4: EPS = $12.50
11-5
Req. 2: Stockholders’ Equity, $131,000.
11-6
Req. 6: Treasury stock cost per share, $20.26.
11-7
Req. 2: Stockholders’ Equity, $2,448,000.
11-8
Total Stockholders’ Equity at the end of 2006, $67,978.
11-9
Total Stockholders’ Equity, $3,140,000.
11-10
Req. 1 (b): Common Stock, no par, credit $240,000.
11-11
Req. 1: Number of preferred shares issued, 5,000.
11-12
Req. 2: Retained Earnings at the end of 2006, $35,115,600,000.
11-13
Req. 3: Shares held in treasury stock do not
© Copyright 2009 by the McGraw-Hill Companies, Inc. 15
participate in dividend payments. Thus, the purchase of treasury stock will reduce the amount of dividends that the company must pay in future years.
11-26
Retained Earnings before a stock dividend and stock split and after a stock split, $1,300,000. Retained Earnings after a stock dividend, $1,044,000.
11-14
Req. 1: Total Stockholders’ Equity, $907,000.
11-27
11-15
Req. 1 (c): Capital in excess of par, debit $150.
11-16
Req. 3: The sale of treasury stock for more or less than its original purchase price does not have an impact on net income. The transaction affects only Balance Sheet accounts. The sale of treasury stock is reported as a cash inflow from financing activities on the Statement of Cash Flows.
Req. 1: A corporation does not need to earn net income in a given year in order to declare and pay dividends. There are two requirements: (1) the balance of Retained Earnings should be sufficient to pay dividends, and (2) there must be sufficient cash on hand.
11-28
The fact that dividends are in arrears indicates that the company has been experiencing some financial difficulty. Most companies do not want to suspend dividend payments because it will erode investor confidence. Typically, companies are experiencing severe cash flow problems when they take this type of drastic action. A financially troubled company may never pay dividends again.
11-17
Req. 1: Case 1, When companies unexpectedly announce increases in dividends, stock prices typically increase.
11-18
Req. 1 (b): Total dividend to common shareholders, $50,000.
11-19
Effect of cash dividend (preferred) on assets: no effect on declaration date, decreased by the amount of the dividend ($7,200) on payment date. Effect of stock dividend (common) on assets: no effect because no assets are disbursed.
11-20
Number of shares outstanding, 345,844,300.
11-21
Req. 1: Cinergy is a utility company that is very established, has stable business operations, but has very little opportunity for growth. Therefore, they have the ability to have a high dividend yield. Starbucks is a fairly new company with a high opportunity for growth. Due to the fact that they are retaining all of their earnings to invest into their growth, they have a 0% dividend yield.
Problems 11-1
(4) Dividend per share, $0.60.
11-2
Total Contributed Capital, $639,000.
11-3
(a) Contributed Capital in excess of Par, common, credit $264,000.
11-4
Req. 3: In most cases, stockholders should not care whether common stock is issued as par or no-par value stock. The various types of common stock do not offer any real economic advantages to investors.
11-5
Total Stockholders’ Equity, $1,465,000.
11-6
(a) Treasury Stock, debit $64,971.
11-7
Req. 3: The sale of treasury stock for more or less than cost has no impact on the reported net income for a company. The sale of treasury stock does affect the Statement of Cash Flows because it is an inflow of cash from financing activities.
11-22
Req. 1: Total stockholders’ equity before and after stock dividends, $1,216,000.
11-23
January 9: Retained Earnings, debit $775,000,000.
11-24
Common stock both before and after a stock split and before a stock dividend, $600,000. Common stock after a stock dividend, $900,000.
11-8
Req. 3: While there would be an economic loss on this transaction, an accounting loss would not be recorded. Instead, Capital in excess of par would be reduced.
11-25
Req. 1: No entry on Feb 12 or Feb 20. Entry on March 16, Retained Earnings, debit $760,000.
11-9
Req. 1: Case C: Total dividend to common shareholders, $31,000.
McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 16
11-10
11-11
11-12
11-13
dividends, a stock dividend will not prevent a negative response. Unfortunately, there is no easy way to solve this problem.
Req. 2: Dell has a very aggressive program to repurchase stock from investors. Some companies elect to pay out extra cash in dividends, while others use the cash to repurchase their stock. With fewer shares outstanding, EPS will be higher, which may be reflected in a higher stock price.
11-6
(c) Cash Dividend on Preferred: there are only two overall effects: (1) Assets, decreased $40,000 and (2) Stockholders’ Equity decreased $40,000. Stock dividend on common has no effect on Assets, Liabilities, or Stockholders’ Equity.
Chapter 12 Mini-Exercises
Req. 1: The only journal entry needed is on June 18, Retained Earnings, debit $12,500 million. Req. 2: Case C: Total Stockholders’ Equity, $191,000.
Alternate Problems 11-1
Req. 2: the balance in the Contributed Capital in Excess of Par account appears to be $118,500,000.
11-2
(c) Treasury Stock, common, debit $114,000.
11-3
Total Stockholders’ Equity, $36,979,000.
11-4
(c) Retained Earnings, debit $340,867.
11-5
Case C: Preferred Dividend per share, $2.40. Common Dividend per share, $.049.
12-1
(7) B.
12-2
Investment in Bonds, debit $1,250,000.
12-3
December 31, 2011: Net Unrealized Loss/Gain – TS, debit $37,500.
12-4
December 15, 2011: Investment Income, credit $22,500.
12-5
12/31Transaction: Assets -$37,500. Stockholders’ Equity -$37,500. Expenses +$37,500. Net Income -$37,500.
12-6
12/31 Transaction: Assets -$37,500. Stockholders’ Equity -$37,500.
12-7
December 31, 2011: Investments in Affiliated Companies, debit $60,000.
12-8
7/2 Transaction: Assets +6,000,000 and Assets -6,000,000. No net effect on Assets.
12-9
Goodwill, debit $65,000.
12-10
Return on assets, 2012, 1.55.
12-11
Disney reports a large amount of goodwill because it has purchased other businesses, paying more than the fair market value of the net assets of the acquired companies.
Cases 11-1
Req. 2: Dividends per share was $0.28.
11-2
Req. 3: The company does not have any Treasury Stock.
11-3
There is not an easy answer to this question. This case is used to discuss corporate governance and responsibility.
Exercises
Req. 3: Many investors are interested in the appreciation of stock rather than the amount of dividends. Note that although American Eagle paid dividends, its dividend yield ratio is low. Thus, investors would still be relying on American Eagle’s stock appreciating in value.
12-1
Req. 1: Investment in bonds, debit $10,000,000.
12-2
(B) Equity Method, $100,000.
12-3
December 31, 2011: Allowance to value at market – TS, debit $49,000.
12-4
December 31, 2012: Net Unrealized loss/gain – SAS, debit $42,000.
11-4
The number of common shares outstanding is 106.52 million shares.
12-5
December 31, 2010: credit Allowance to Value at Market – TS, $150,000.
11-5
The payment of a stock dividend is a cosmetic solution with no cash flow effects. If the stock is valued by the market for its steady
12-6
December 31, 2010: debit Net Unrealized Loss/Gain – SAS $150,000.
McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 17
12-7
Req. 3: Investment in Affiliated Companies (equity basis), $264,600.
12-8
Req. 2: Dividends received from affiliated companies (cash received), + $13,650.
12-9
Goodwill, debit $320 (in millions).
12-10
Req. 1: Return on Assets, 20%.
12-11
Consolidation is an accounting process that brings together financial information from two or more companies to make it appear as if there is a single economic entity. During consolidation, it is necessary to eliminate intercompany transactions because a single economic entity cannot logically do business with itself. It makes no sense, for example, to report as a liability an amount that an entity owes itself.
Alternate Problems 12-1
Req. 3: No journal entry is required. A decrease in the market value of bonds in the held-tomaturity portfolio is not recorded.
12-2
Req. 2: December 31, 2011: Net unrealized loss/gain – SAS, debit $45,000.
12-3
Req. 3 (b): 2011 Statement of Stockholders’ Equity, under Other Comprehensive Income, Net Unrealized gain/loss – SAS of ($24,000).
12-4
Req. 1: Case A: The market value method must be used by the company because it owns 15% of the total shares. When ownership is less than 20%, the market value method must be used .
12-5
Case B: Operating Activities, dividends received, +$48,000.
12-12
Req. 2: Goodwill purchased, $31,000.
12-6
Req. 3: Total Assets = $610,000.
12-13
Net Income, $137,000.
12-7
Req. 1: 2006 Return on Assets, 7.1%.
Problems
Cases
12-1
Req. 1: When bonds are purchased, the company increases Investment in Bonds Held-to-Maturity and decreases Cash.
12-1
Req. 2: 2006 Return on Assets, 0.216.
12-2
Req. 3: Current year Return on Assets, 0.139.
12-2
Req. 1: December 31, 2009: Net Unrealized Loss/Gain – TS, debit $20,000.
12-3
Req. 1: Profit Margin, American Eagle Outfitters, 0.139.
12-3
Req. 2(c): Dividends received 2011, $16,175.
12-4
12-4
Req. 3: December 31, 2010, Investment in Affiliated Companies, debit $13,500.
12-5
Req. 1: Case B: The equity method must be used by Company D because it owns 35% of the outstanding common shares of Company C. The equity method must be used if the level of ownership is at least 20%, but not more than 50%.
Req. 1: Under the equity method, the investment account (i.e., $560,000) increased by the proportionate share in income reported by the investee corporation and decreased by the proportionate share of the dividends declared by the investee corporation. Thus, the increase in the investment account was caused by an excess of investment income over dividends received.
12-5
12-6
Req. 3(a): In both Case A and Case B, the investment would be reported on the Balance Sheet under Long-Term Investments as follows: Case A would report Investment in SAS, at market $180,000. Case B would report Investment in Affiliated Company $904,000.
12-7
Operating Activities, Dividends received from affiliated companies (cash received) +101,250.
12-8
Goodwill purchased, $41,000.
12-9
Req. 1: 2006 Return on Assets, 3.5%.
12-10
Req. 2: Goodwill purchased, $13,000.
Under the purchase method of accounting in both the U.S. and under IFRS, identifiable intangible assets acquired in a business combination are initially valued at fair value. Those assets with indefinite useful lives and any goodwill amounts are not amortized. They are subjected to periodic impairment reviews and any impairment write-downs are recorded as losses on the income statement. Those intangible assets with limited useful lives are amortized on a straight-line basis and recorded as an expense on the income statement.
McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 18
12-6
12-7
This case deals with inside information. The plan to acquire 80% of another company is significant because, when announced, it will affect the stock price of the other company. It is wrong both legally and ethically to trade on insider information regardless the size of your proposed investment. It is also wrong to pass insider information on to another individual even if you do not profit directly from the information. The assets, liabilities, revenues and expenses of the two companies will be added together. It is unlikely that the two companies have significant intercompany transactions such as intercompany sales. The analyst cannot simply add the two financial statements together because the investment account must be eliminated and the assets of the acquired company stated at their fair value. Unfortunately, this information is not available publicly. Because the assets of the subsidiary are restated to fair value, the return on assets ratio for the combined company will be less than a weighted average of the two companies before consolidation.
Chapter 13 Mini-Exercises 13-1
(2) F.
13-2
(5) +.
13-3
(4) I.
13-4
Quality of Income Ratio, 61%
13-5
Net Cash flow from investing activities, $(35)
13-6
Net Cash flow from financing activities, $50.
13-7
Purchase of building with mortgage payable: Yes.
13-6
Net cash flow from operating activities, $21,575.
13-7
Req. 1: Net cash flow from operating activities, $27,200.
13-8
Req. 1: Cash flows from operating activities, $174,558.
13-9
Inventories increase.
13-10
Accounts Payable increases.
13-11
Req. 1: Year 2: Cash flows from investing activities, Proceeds from sale of equipment, +$11,616.
13-12
Book Value of sold equipment, $4,770.
13-13
Req. 1: Cash flow from operating activities, $6,084.
13-14
Cash flow from financing activities, $(478).
13-15
Cash flow from operating activities, $(700).
13-16
Req. 1: Cash flow from financing activities, $74,869.
13-17
Req. 1: Both transactions are considered noncash investing and financing activities, and are not reported on the statement of cash flows. The transactions must be disclosed in a separate schedule or in the footnotes.
13-18
Net cash flow from operating activities, $21,575.
13-19
Req. 1: Cash collected from customers, +$68,000.
13-20
Req. 1: Cash payments to suppliers, ($47,139).
13-21
Total Balance, 12/31/2011, $235,300.
Problems
Exercises
13-1
Req. 1: Cash flow from operating activities, $55,550.
13-2
Req. 1: Cash flow from operating activities, $16,000.
13-1
(9) I.
13-2
(8) O.
13-3
13-3
(7) -NCFO, Prepaid Expenses, debit. Cash, credit.
Req. 1: Cash flow from financing activities, $6,450.
13-4
(1) NE. Inventory, debit. Accounts Payable, credit.
Req. 2: Cash flow from operating activities, $781.
13-5
Req. 2: Cash flow from operating activities, $28,800.
13-4 13-5
(8) Only on the Statement of Cash Flows prepared using the Indirect Method.
McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 19
Alternate Problems 13-1
always be less than or equal to the current ratio.
Req. 1: Cash flow from operating activities, $26,000.
13-2
Req. 1: Cash flow from financing activities, $10,000.
13-3
Req. 1: Cash flow from operating activities, $26,000.
14-8
New stock price is $257.76.
14-9
Market price per share is $70.
14-10
Profit Margin and Current Ratio will decrease.
Exercises Cases
14-1
(2) Wholesale candy company (high inventory turnover).
13-1
Req. 3: Free cash flow, $461,808 thousand.
14-2
13-2
Req. 2: Tax payments of $52,535 thousand were made (located near the bottom of the Statement of Cash Flows).
(4) Drug Company (high gross profit, low inventory turnover).
14-3
(1) Cable TV Company (no gross profit; high property and equipment).
13-3
Req. 1: Quality of income ratio, American Eagle Outfitters, 1.93.
14-4
(3) Automobile dealer (high cost of inventory, low property and equipment).
13-4
Net Cash flow from operating activities, $119,347.
14-5
(9) E.
13-5
Carlyle should seek additional capital to support an increased level of operations. Without this extra capital, it is unlikely that Carlyle can continue in business.
14-6
2/2/2007, Net Earnings Percentage, 6.62%.
14-7
Current Assets, $58,000.
14-8
(1) Will increase the Current Ratio assuming cash was collected from the sale.
14-9
Inventory Turnover is 5.6.
14-10
Financial leverage percentage (positive), 6.0%.
14-11
Current ratio after transaction 4 is 1.68.
14-12
Cost of Goods Sold is $6,699,504,400.
14-13
Accounts Receivable Turnover is 9.5.
14-14
Current ratio after transaction 6 is 1.58.
14-15
Inventory Turnover is 7.05.
13-6
Req. 2: By recording the transaction as a regular sale, Enron reports the cash received as a cash inflow from an operating activity. Had the transaction been recorded as a loan, Enron would have reported the cash received as a cash inflow from a financing activity.
Chapter 14 Mini-Exercises 14-1
Cost of Goods Sold is $932,400.
14-2
Sales amount is $31,198.
Problems
14-3
15.6%.
14-1
14-4
15%.
14-5
If the average sales volume remains the same, then cost of goods sold will remain the same. If inventory decreases by 25%, the inventory turnover ratio will increase.
(1) Company A has a high level of liquidity as shown by the current ratio, but the low quick ratio indicates that much of the liquidity is tied up in inventory.
14-2
(2) Company A appears to have the ability to borrow additional funds, given its low debt/equity ratio.
14-3
Starbucks: (A) 33.
14-4
Since JCPenny has a higher gross profit margin, higher profit margin, stronger ROA, and stronger ROE, JCPenny is the stronger
14-6
Current Assets = $920,000.
14-7
A mistake has been made in this case because the quick ratio is greater than the current ratio. This is not possible, because by their definitions the quick ratio must
McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 20
company and probably the better investment.
14-1
American Eagle’s Return on Equity is 30.1%.
14-5
Req. 1: (2) Return on Assets for Armstrong Company is 12.33%.
14-2
Urban Outfitters’ Earnings Per Share is $0.71.
14-6
Req. 1: Net Income increased $4,000 from 2009 to 2010.
14-3
14-7
Req. 2: (f ) Return on equity, 36.4%.
Urban Outfitters’ Price Earnings Ratio is 35.2. American Eagle’s Price Earnings Ratio is 12.1. The Industry Price Earnings Ratio is 22.47.
14-8
Average Collection Period is 92.17 days.
14-4
Case 2: Average Total Assets = $1,000,000.
14-9
(5) EPS – Company A will have a higher ratio because of reporting higher net income.
14-5
14-10
Tests on profitability: (1) Return on Equity, 65.8%.
The two areas where we would expect the largest difference are profit margin and asset turnover. We would expect the “high quality” company to have higher margins. The “low cost” company could produce high returns to the owners.
Alternate Problems 14-1
Company A shows a high EPS but a low Return on Assets. There are a number of possible explanations for this situation. The high debt/equity ratio suggests that Company A is highly leveraged and is able to generate high earnings for stockholders by using a large amount of debt financing.
14-2
Company A appears to be very profitable based on both Return on Assets and profit margin. The use of leverage has enhanced the Return on Assets.
14-3
Coca-Cola is the stronger company and probably is the better investment. The biggest differences between the two companies are the P/E rate, ROA, and the gross profit margin. Coca-Cola has a much larger P/E ratio, meaning that the market sees Coca-Cola as having more potential for growth than Pepsi. The ROA ratio for Coke is much better than Pepsi, but Coke does appear to have a more risky capital structure because of its higher debt-to-equity ratio. Coke pays out a higher percentage of its earnings in dividends.
14-4
Req. 1: (6) 2010 Fixed asset turnover, 3.62. An indication of how efficiently management is using fixed assets.
14-5
Req. 1(a): (2) Return on Assets = 7.71%.
14-6
Req. 1: (a) 2009 Profit Margin % for 2012 is 11%.
14-7
Profit Margin is 4.5%.
Cases McGraw-Hill/Irwin Financial Accounting, 6e
© Copyright 2009 by the McGraw-Hill Companies, Inc. 21
