C3-1 (continued)
Req. 6
VANISHING GAMES CORPORATION
Statement of Retained Earnings
For the Month Ended January 31, 2015
Retained Earnings, January 1, 2015
$ 1,419,700
Add (Subtract): Net Income (Loss)
1,650
Subtract: Dividends
0
Retained Earnings, January 31, 2015
$ 1,421,350
Req. 7 VANISHING GAMES CORPORATION
Balance Sheet
At January 31, 2015
Assets
Current Assets
Cash
$ 1,431,500
Accounts Receivable
212,500
Supplies
17,700
Total Current Assets
1,661,700
Equipment
908,000
Building
422,000
Land
1,200,000
Total Assets
$ 4,191,700
Liabilities
Current Liabilities
Accounts Payable
$ 113,350
Unearned Revenue
73,500
Total Current Liabilities
186,850
Notes Payable (long-term)
83,500
Total Liabilities
270,350
Stockholders’ Equity
Common Stock
2,500,000
Retained Earnings
1,421,350
Total Stockholders’ Equity
3,921,350
Total Liabilities and Stockholders’ Equity
$ 4,191,700
Req. 8
Net Profit Margin=Net Income
Fundamentals of Financial Accounting, 5/e 3-61
ANSWERS TO SKILLS DEVELOPMENT CASES
S3–1
S3-2
Req. 1
Lowe’s sales revenues increased in the year ended January 31, 2014, by
$2,896,000,000 (= $53,417,000,000 – $50,521,000,000). This is a change of 5.7%
Req. 2
Like Home Depot, the largest expense on the most recent income statement for Lowe’s
is Cost of Sales. Cost of Sales consists primarily of the actual cost of merchandise sold
S3-3
S3-4
Req. 1
Costs that have probable future economic benefits are capitalized as assets.
Req. 2
The author means that expenses are put on the balance sheet as an asset and not
recorded as expenses until a later date. It is acceptable under GAAP to capitalize costs
that have benefits for future periods, however, the author is implying that these items
actually are expenses that should be reported on the income statement as incurred.
Req.3
S3-5
This type of ethical dilemma occurs frequently. It requires you to weigh one
ethical principle (loyalty) against another (honesty). The situation is difficult personally
because of the possible repercussions to you if you do not fulfill your boss’s request. At
the same time, the ethical and professional response is to follow the revenue principle
and account for the cash collection as unearned revenue (as was done). To record the
by relying on them to purchase stock at inflated prices. In addition, creditors may lend
funds to the insurance company based on the misleading information. The negative
impact of the discovery of misleading financial information will cause stock prices to fall,
causing stockholders to lose on their investment. Creditors will be concerned about
future debt repayment. You will also experience diminished self-respect because of the
S3-6
Req. 1
a. Cash increased $75,000, and Common Stock (Stockholders’ Equity) increased
$75,000. Therefore, transaction (a) was an issuance of the capital stock of the
corporation for $75,000 cash.
b. Cash decreased $5,000, Equipment (an asset) increased $20,000, and Notes
Payable (a liability) increased $15,000. Therefore, transaction (b) was a purchase of
S3-6 (continued)
Req. 2
HORDICHUK PAINTING SERVICE COMPANY
Unadjusted Trial Balance
At January 31
Debit
Credit
$ 60,000
10,000
4,000
20,000
18,000
$ 1,000
19,000
75,000
41,000
1,000
23,000
$136,000
$136,000
S3-7
S3-7 (continued)
Fundamentals of Financial Accounting, 5/e 3-67
CC3-1
Req. 1
May 1
Prepaid Insurance (+A)…………..
Cash (-A)……………………….
3,000
3,000
May 4
No transaction; therefore, no journal entry
May 7
Accounts Receivable (+A)……….
Service Revenue (+R, +SE)….
860
860
May 10
Supplies (+A) ……………………...
Accounts Payable (+L)………..
800
800
May 13
Advertising Expense (+E, –SE)….
Cash (-A) ………………………
60
60
May 16
Accounts Payable (-L)……………
Cash (-A)……………………….
200
200
May 19
Cash (+A)……….……….…..…….
Unearned Revenue (+L) ……
1,900
1,900
May 20
Cash (+A)…………………………….
Note Payable (long-term) (+L).
5,000
5,000
May 22
Equipment (+A)……………………
Cash (-A)……………………….
500
500
May 25
Utilities Expense (+E, –SE)……….
Cash (-A)……………………….
500
500
Req. 2
Preliminary net income = Revenues – Expenses
= $860 – 60 – 500 = $300
Net profit margin = Net Income / Revenues = $300/860 = 0.349 or 34.9%.
Req. 3
C (All of the above)