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9-150
PROBLEM 9-25B (cont.)
Brown Company
Balance Sheet
As of December 31, 2016
Assets
Current Assets
Cash
$ 46,000
Accounts Receivable
$88,000
Less: Allow. for Doubtful
Accounts
(14,000)
74,000
Merchandise Inventory
126,000
Interest Receivable
1,600
Prepaid Rent
18,000
Supplies
4,500
Notes Receivable
12,500
Total Current Assets
$282,600
Property, Plant and Equipment
Buildings and Equipment
206,000
Less: Accumulated Depreciation
(46,000)
160,000
Land
75,000
Total Property, Plant and
Equipment
235,000
Total Assets
$517,600
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable
$ 35,000
Unearned Revenue
27,000
Warranties Payable
4,500
Interest Payable
6,000
Salaries Payable
48,000
Total Current Liabilities
$120,500
Long-Term Liabilities
Notes Payable
140,000
Total Long-Term Liabilities
140,000
Total Liabilities
260,500
9-151
Stockholders’ Equity
Common Stock
90,000
Retained Earnings*
167,100
Total Stockholders’ Equity
257,100
Total Liabilities and Stockholders’
Equity
$517,600
9-152
PROBLEM 9-26B
a. Current Assets Collie Spaniel
Cash $12,000 $15,000
Merchandise inventory 20,000 55,000
Accounts receivable 22,000 25,000
9-153
PROBLEM 9-27B
a.
Ball Company
Effect of Transactions on Financial Statements
No.
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
2016
1.
+
+
NA
NA
NA
NA
+ FA
2.
+
NA
+
+
NA
+
+ OA
3.
−
NA
−
NA
+
−
− OA
4.
NA
+
−
NA
+
−
NA
2017
1.
+
NA
+
+
NA
+
+ OA
2.
−
NA
−
NA
+
−
− OA
3a.
NA
+
−
NA
+
−
NA
3b.
−
−
NA
NA
NA
NA
−
OA,FA
9-154
PROBLEM 9-27B (cont.) (Appendix)
b.
Ball Company
General Journal 2016 and 2017
Date
Account Titles
Debit
Credit
2016
1.
Cash
37,600
Discount on Notes Payable ($40,000 x 6%)
2,400
Notes Payable
40,000
2.
Cash
130,000
Service Revenue
130,000
3.
Selling and Adm. Expenses
98,000
Cash
98,000
4.
Interest Expense*
1,800
Discount on Notes Payable
1,800
Closing Entries
5. cl
Service Revenue
130,000
Retained Earnings
130,000
Retained Earnings
99,800
Selling and Adm. Expenses
98,000
Interest Expense
1,800
2017
1.
Cash
215,000
Service Revenue
215,000
2.
Selling and Adm. Expenses
151,000
Cash
151,000
3a.
Interest Expense*
600
Discount on Notes Payable
600
3b.
Notes Payable
40,000
Cash
40,000
*2016: $2,400 x 9/12 = $1,800
9-155
9-156
PROBLEM 9-27B b. (cont.) (Appendix)
Ball Company
General Journal, 2016 and 2017
2017
Closing Entries
4. cl
Service Revenue
215,000
Retained Earnings
215,000
Retained Earnings
151,600
Selling and Adm. Expenses
151,000
Interest Expense
600
9-157
PROBLEM 9-27B b. (cont.) (Appendix)
Ball Company
T-Accounts
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
Notes Payable
Retained Earnings
2016
2016
2016
1. 37,600
3. 98,000
1. 40,000
cl 99,800
cl 130,000
2. 130,000
Bal. 40,000
Bal. 30,200
Bal. 69,600
2017
2017
2017
3b. 40,000
cl. 151,600
cl 215,000
1. 215,000
2. 151,000
Bal. -0-
Bal. 93,600
3b. 40,000
Bal. 93,600
Discount on Notes Pay.
Service Revenue
2016
2016
1. 2,400
4. 1,800
cl 130,000
2. 130,000
Bal. 600
Bal. -0-
2017
2017
3a. 600
cl 215,000
1. 215,000
Bal. -0-
Bal. -0-
Selling and Adm. Exp.
2016
3. 98,000
cl 98,000
Bal. -0-
2017
2. 151,000
cl 151,000
Bal. -0-
Interest Expense
2016
4. 1,800
cl 1,800
Bal. -0-
2017
3a. 600
cl 600
Bal. -0-
9-158
PROBLEM 9-27B (cont.) (Appendix)
c.
Ball Company
Financial Statements
For the Year Ended December 31
Income Statements
2016
2017
Service Revenue
$130,000
$215,000
Expenses
Selling and Adm. Expenses
98,000
151,000
Interest Expense
1,800
600
Total Expenses
( 99,800)
(151,600)
Net Income
$ 30,200
$ 63,400
Statements of Changes in Stockholders’ Equity
2016
2017
Beginning Common Stock
$ -0-
$ -0-
Plus: Stock Issued
-0-
-0-
Ending Common Stock
-0-
-0-
Beginning Retained Earnings
-0-
30,200
Plus: Net Income
30,200
63,400
Ending Retained Earnings
30,200
93,600
Total Stockholders’ Equity
$30,200
$93,600
9-159
PROBLEM 9-27B c. (cont.) (Appendix)
Ball Company
Financial Statements
Balance Sheets
As of December 31
2016
2017
Assets
Cash
$69,600
$93,600
Total Assets
$69,600
$93,600
Liabilities
Notes Payable
$40,000
$ -0-
Less: Discount on Notes Payable
(600)
-0-
Total Liabilities
39,400
-0-
Stockholders’ Equity
Common Stock
-0-
-0-
Retained Earnings
30,200
93,600
Total Stockholders’ Equity
30,200
93,600
Total Liabilities and Stockholders’ Equity
$69,600
$93,600
9-6
PROBLEM 9-27B c. (cont.) (Appendix)
Ball Company
Statements of Cash Flows
For the Year Ended December 31
2016
2017
Cash Flows From Operating Activities:
Inflow from Customers
$130,000
$215,000
Outflow for Expenses
(98,000)
(151,000)
Outflow for Interest
-0-
(2,400)
Net Cash Flow from Operating Activities
32,000
61,600
Cash Flows From Investing Activities
-0-
-0-
Cash Flows From Financing Activities:
Inflow from Loan
37,600
-0-
Ourflow to repay Loan
-0-
(37,600)
Net Cash Flow From Financing Activities
37,600
(37,600)
Net Change in Cash
69,600
24,000
Plus: Beginning Cash Balance
-0-
69,600
Ending Cash Balance
$69,600
$93,600
9-7
ANSWERS TO QUESTIONS – CHAPTER 9
1. A cash payment to creditors is an asset use transaction. This type of
2. Current liabilities are liabilities that are payable within one operating
cycle. A long-term debt is due in more than one year from the date
3. The entry to record accrued interest consists of a debit to Interest
4. The maker of a note is sometimes called the issuer. It is the party
5. The going concern assumption is based upon the premise that since
6. An adjusting entry for accrued but unpaid interest is necessary for
7. Big does not pay any interest in 2016. All interest is paid at the
8. Collection of sales tax is not revenue. The retailer is merely acting
9. A contingent liability is a potential liability arising from a past event.
9-8
10. The three categories of contingent liabilities are:
1. Probable and reasonably estimated
2. Reasonably possible
3. Remote
11. Only contingent liabilities that are probable and reasonably
12. Contingent liabilities that are probable and reasonably estimated are
recognized in the financial statements, but contingent liabilities that
13. Contingent liabilities that are probable but not reasonably estimable
and those that are reasonably possible but not reasonably estimated
14. A warranty is a guarantee of a product or service.
15. Recognizing future warranty obligations will increase liabilities and
16. Warranty cost is not shown on the statement of cash flows until the
17. A business supervises, directs, and controls the work of an
18. Wages generally refers to compensation earned based on the
9-9
19. The W-2 form provides the employee and the federal and state
government the amount of gross earnings and amounts withheld by
20. The two components of the FICA tax are the Social Security tax and
the Medicare tax. The Social Security tax funds the social security
21. The FICA tax is paid one half by the employee and one half by the
employer. Social Security tax is only paid on approximately the first
22. Gross pay is the total amount of salaries or wages earned before any
23. Amounts withheld from an employee’s pay are a liability because
these withholdings must be paid to the appropriate parties, e.g.
24. Proceeds from the Federal Unemployment Tax are used to finance
25. Total compensation cost includes salaries and wages, the
9-10
26. Example of fringe benefits include vacation pay, sick pay, medical,
27. A classified balance sheet is one that separates assets and liabilities
28. Liquidity refers to a business’s ability to generate short-term cash
29. This is generally true. A high current ratio indicates the ability of a
company to meet its short-term debt obligations. However, if the
30. With an interest-bearing note, accrued interest is added to the face
made.
31. The carrying value of a discount note is computed by subtracting the
account.
32. The effective rate of interest is higher on the discounted note because
the actual amount of interest paid is more than the amount of the
9-11
Discounted Interest
Bearing
Face Value $10,000 $10,000
33. Amortization of discount reduces net income on the income
34. Event Effect on Accounting Equation
Issuing Discount Note Increase in Cash (asset); Increase in
Notes Payable (liability); Increase in
35. Discount on Notes Payable is a contra-liability account that is
9-12
SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 9
EXERCISE 9-1A
a. $-0-; No interest was paid in 2016. (Interest will be paid in 2017 when
9-13
PROBLEM 9-2A
a. $12,000 x 8% = $960; $960 x 4/12 = $320
b. $320
c. $-0-; No interest was paid in 2016. (Interest will be paid in 2017 when the note matures.)
d.
Darby Company
Statements Model for 2016
Balance Sheet
Income Statement
Statement of
Cash Flows
Event
Assets
=
Liabilities
+
Stockholders’ Equity
Rev.
-
Exp.
=
Net Inc.
No.
Cash
=
Notes
Payable
+
Int.
Payable
+
Common
Stock
+
Ret.
Earn.
1.
I
NA
NA
NA
I
I
NA
I
I OA
2.
I
I
NA
NA
NA
NA
NA
NA
I FA
3.
NA
NA
I
NA
D
NA
I
D
NA
EXERCISE 9-3A
a. Book Sales $250,000
Miscellaneous Items Sales 85,000
EXERCISE 9-4A a.
Topeca Supply
General Journal for 2016
Event
Account Titles
Debit
Credit
1. Nov.
Cash ($165,000 x 1.07)
176,550
Sales Revenue
165,000
Sales Tax Payable
11,550
2. Dec. 10
Sales Tax Payable
11,550
Cash
11,550
3. Dec.
Cash ($180,000 x 1.07)
192,600
Sales Revenue
180,000
Sales Tax Payable
12,600
