3-1–25
ATC 3-3
a.
The fiscal year-ends should be matched to the companies as follows:
February 2, is the closing date for Michaels. By January 31, the Christmas
rush is over.
July 31, is the closing date for Vail Resorts, Inc. Clearly, a ski resort company would
not want to close its books on December 31. Thus, before the ski season gets
3-1–26
ATC 3-3 (cont.)
b. Assuming a company chooses the slowest time of its year to close its
books, its balance sheet may not represent the remainder of its fiscal
year for the following reasons.
3-2–27
ATC 3-4
a. First compute Netflix’s liabilities:
Stockholders’
Assets – Equity = Liabilities
2013: $5,412,563 – $1,333,561 = $4,079,002
1. b. Based on the debt to assets ratio Netflix’s financial risk decreased
2. c. Based on the ROA ratio Netflix managed its assets better in 2013
3-6–28
3. ATC 3-5
a. Debt to assets:
Biogen: $ 3,242 ÷ $11,863 = 27.3%
4. b. Based on the debt to assets ratio Amgen has the highest level of
5. c. Based on the ROA ratio Biogen managed its assets better than
Amgen.
6. d. Based on the ROE ratio Amgen’s owners received a slightly better
3-6–29
ATC 3-6
The following information should be contained in the memo:
a.
Present Return on Assets:
$425,000 $3,500,000 = 12.1%
If the asset is sold for $1,500,000:
ATC 3-7
a. This answer represents one acceptable solution out of many possible alternatives.
Eight identifiable events for Argon and seven for Rogan are shown below under
accounting equations. The financial statements on the following pages are drawn
3-6–31
ATC 3-7 a. (cont)
ARGON
FINANCIAL STATEMENTS
Income Statement
Balance Sheet
Sheep Flow Statement
Rev.
75
Assets:
Operating Act.
Gain
3
Sheep
714
Inflow from Rev.
75
Int. Exp.
(24)
Fence
40
Investing Act.
Fence Exp.
(10)
Land
54
Purchased Land
(20)
Net Inc.
44
Total Assets
808
Built Fence
(50)
Sold Land
9
Liabilities
Net from Inv.
(61)
Sheep Pay.
400
Financing Act.
Int. Pay.
24
Owner Invest.
300
Stk. Equity
Borrowing
400
Com. Stock
340
Net from Fin.
700
Ret. Ear.
44
Net Change in Sheep
714
Total Liab. & S. Eq.
808
ROGAN
FINANCIAL STATEMENTS
Income Statement
Balance Sheet
Sheep Flow Statement
Rev.
53
Assets:
Operating Act.
Dead S. Ex.
(2)
Sheep
516
Inflow from Rev.
53
Pred. Exp.
(5)
Land
40
Outflow for Exp.
(7)
Net Inc.
46
Total Assets
556
Net from Oper.
46
Stk. Equity
Financing Activity
Com. Stock
510
Acq. from Owner
300
Ret. Earn.
46
Acq. from Owner Wife
170
Total Liab. & Eq.
556
Net Change in Sheep
516
3-6–32
ATC 3-7 (cont.)
1. Rogan’s equity is larger with a total of 556 compared to Argon’s total of
384.
2. Rogan produced the larger amount of net income with a total of 46
3. Based on conventional accounting standards Rogan would be assigned
heir to the family fortune.
c. Argon has seven more acres of land than Rogan (27 v. 20). Remember that
Argon purchased an additional ten acres and sold three of them. Since the
land has increased in value by one sheep per acre, the gain on Argon’s
3-6–33
ATC 3-7 (cont.)
e. Rogan lost approximately 1% of his herd to predators (i.e., 5 516). Applying
this percentage to Argon’s herd suggests that he saved approximately 7 sheep
(i.e. 714 x .01) by building the fence. Since the fence cost approximately 10
sheep per year of useful life (i.e. 50 5) the decision to build the fence appears
debt of 424 sheep. Rogan would lose 258 sheep (i.e., 516 2). However, since
he has no debt, he would also retain an equity base of 258 sheep. Accordingly,
Argon would be bankrupt but Rogan would still be in business. Financial risk is
shown in financial statements by reporting the amount of liabilities that
companies have incurred. The level of this risk can be measured with a debt-
3-6–34
ATC 3-8
This solution is based on Nike’s May 31, 2013 Form 10-K. Dollar amounts are
(1)Liabilities must be computed:
Assets − Shareholders’ Equity = Liabilities
3-6–35
SOLUTION TO COMPREHENSIVE PROBLEM – CHAPTER 3
a.
Pacilio Security Services, Inc.
General Journal, 2013
Event
Account title
Debit
Credit
1.
Salaries Payable
1,200
Cash
1,200
2.
Notes Payable
2,000
Cash
2,000
3.
Cash
11,000
Accounts Receivable
21,000
Security Service Revenue
32,000
4.
Prepaid Rent
3,000
Cash
3,000
5.
Supplies
700
Accounts Payable
700
6.
Salaries Expense
9,000
Cash
9,000
7.
Other Operating Expense
4,200
Accounts Payable
4,200
8.
Cash
1,200
Unearned Revenue
1,200
9.
Cash
19,000
Accounts Receivable
19,000
10.
Accounts Payable
5,950
Cash
5,950
11.
Advertising Expense
1,800
Cash
1,800
12.
Dividends
4,650
Cash
4,650
3-6–36
3-6–37
COMPREHENSIVE PROBLEM – CHAPTER 3 a. (cont.)
Pacilio Security Services, Inc.
General Journal, 2013
Event
Account title
Debit
Credit
13.
No Entry
14.
Supplies Expense ($65 + $700 − $120)
645
Supplies
645
15.
Rent Expense1
2,800
Prepaid Rent
2,800
16.
Unearned Revenue2
500
Security Services Revenue
500
17.
Salaries Expense
1,000
Salaries Payable
1,000
3-6–38
COMPREHENSIVE PROBLEM – CHAPTER 3 (cont.)
b.
Pacilio Security Services, Inc. T-Accounts for 2013
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
Accounts Payable
Common Stock
Bal.
8,900
1.
1,200
10.
5,950
Bal.
1,050
Bal.
8,000
3.
11,000
2.
2,000
5.
700
8.
1,200
4.
3,000
7.
4,200
9.
19,000
6.
9,000
Bal.
-0-
Retained Earnings
10.
5,950
Bal.
2,815
11.
1,800
12.
4,650
Unearned Revenue
Bal.
12,500
16.
500
Bal.
200
Dividends
8.
1,200
12.
4,650
Bal.
900
Bal.
4,650
Accounts Receivable
Bal.
1,500
9.
19,000
Security Service
Revenue
3.
21,000
Salaries Payable
3.
32,000
Bal.
3,500
1.
1,200
Bal.
1,200
16.
500
17.
1,000
Bal.
32,500
Supplies
Bal.
1,000
Bal.
65
14.
645
Advertising Expense
5.
700
Notes Payable
11.
1,800
Bal.
120
2.
2,000
Bal.
2,000
Bal.
1,800
Bal.
-0-
Prepaid Rent
Other Operating
Expense
Bal.
800
15.
2,800
7.
4,200
4.
3,000
Bal.
4,200
Bal.
1,000
Rent Expense
Land
15.
2,800
Bal.
4,000
Bal.
2,800
Salaries Expense
6.
9,000
17.
1,000
Bal.
10,000
Supplies Expense
3-6–39
14.
645
Bal.
645
3-6–40
COMPREHENSIVE PROBLEM – CHAPTER 3 (cont.)
c.
Pacilio Security Services, Inc.
Trial Balance
December 31, 2013
Cash
$ 12,500
Accounts Receivable
3,500
Supplies
120
Prepaid Rent
1,000
Land
4,000
Unearned Revenue
$ 900
Salaries Payable
1,000
Common Stock
8,000
Retained Earnings
2,815
Dividends
4,650
Security Service Revenue
32,500
Advertising Expense
1,800
Other Operating Expense
4,200
Rent Expense
2,800
Salaries Expense
10,000
Supplies Expense
645
Totals
$45,215
$45,215
3-6–41
COMPREHENSIVE PROBLEM – CHAPTER 3 (cont.)
d.
Pacilio Security Services, Inc.
Income Statement
For the Year Ended December 31, 2013
Service Revenue
$32,500
Expenses
Advertising Expense
$ 1,800
Other Operating Expenses
4,200
Rent Expense
2,800
Salaries Expense
10,000
Supplies Expense
645
Total Expenses
19,445
Net Income
$13,055
Pacilio Security Services, Inc.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2013
Beginning Common Stock
$ 8,000
Plus: Common Stock Issued
-0-
Ending Common Stock
$ 8,000
Beginning Retained Earnings
$ 2,815
Plus: Net Income
13,055
Less: Dividends
(4,650)
Ending Retained Earnings
11,220
Total Stockholders’ Equity
$19,220
3-6–42
COMPREHENSIVE PROBLEM – CHAPTER 3 d. (cont.)
Pacilio Security Services, Inc.
Balance Sheet
As of December 31, 2013
Assets
Cash
$12,500
Accounts Receivable
3,500
Supplies
120
Prepaid Rent
1,000
Land
4,000
Total Assets
$21,120
Liabilities
Unearned Revenue
$ 900
Salaries Payable
1,000
Total Liabilities
$ 1,900
Stockholders’ Equity
Common Stock
$ 8,000
Retained Earnings
11,220
Total Stockholders’ Equity
19,220
Total Liabilities and Stockholders’ Equity
$21,120
3-6–43
COMPREHENSIVE PROBLEM – CHAPTER 3 d. (cont.)
Pacilio Security Services, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2013
Cash Flows From Operating Activities:
Cash Receipts from Customers1
$31,200
Cash Payment for Expenses2
(20,950)
Net Cash Flow from Operating Activities
$10,250
Cash Flows From Investing Activities:
Cash Flows From Financing Activities:
Cash Payments on Loan
$ (2,000)
Cash Payments for Dividends
(4,650)
Net Cash Flow from Financing Activities
(6,650)
Net Increase in Cash
3,600
Plus: Beginning Cash Balance
8,900
Ending Cash Balance
$12,500
3-6–44
COMPREHENSIVE PROBLEM – CHAPTER 3 (cont.)
e.
Date
Account Titles
Debit
Credit
Closing Entries
Dec. 31
Security Service Revenue
32,500
Retained Earnings
32,500
Dec. 31
Retained Earnings
19,445
Advertising Expense
1,800
Other Operating Expenses
4,200
Rent Expense
2,800
Salaries Expense
10,000
Supplies Expense
645
Dec. 31
Retained Earnings
4,650
Dividends
4,650