(45-60 min.) P 3-64A
Req. 1
(All amounts in millions)
Current ratio
=
Total current assets
=
$15.8
=
1.84
Total current liabilities
$8.6
$13.9
Debt ratio
=
Total liabilities
=
$8.6 + $5.3
=
0.43
Total assets
$32.1
Req. 2
Current Ratio
Debt Ratio
a.
$15.8 + $2.4
=
2.12
$13.9
=
0.40
$8.6
$32.1 + $2.4
b.
$15.8 + $2.0
=
2.07
$13.9 + $2.0
=
0.47
$8.6
$32.1 + $2.0
c.
$15.8 − ($8.6 × 1/2)
=
2.67
$13.9 − ($8.6 × 1/2)
=
0.35
($8.6 × 1/2)
$32.1 − ($8.6 × 1/2)
d.
$15.8 − $.7
=
1.76
$13.9
=
0.44
$8.6
$32.1 − $.7
e.
$15.8
=
1.74
$13.9 + $0.5
=
0.45
$8.6 + $0.5
$32.1
f.
$15.8 − $1.5
=
1.66
$13.9 + $2.5
=
0.47
$8.6
$32.1 + $4.0 − $1.5
g.
$15.8
=
1.84
$13.9
=
0.44
$8.6
$32.1− $0.4
(continued) P 3-64A
Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
(20-30 min.) P 3-65B
Req. 1
Hudson Tax Consulting
Amount of Revenue (Expense) for December
Date
Cash Basis
Accrual Basis
Dec.
1
Expense
$ (3,500)
Expense
$ 0
4
Expense
(900)
Expense
0
5
Revenue
1,500
Revenue
1,500
8
Expense
(140)
Expense
(140)
11
Revenue
0
Revenue
3,100
19
Expense
0
Expense
0
24
Revenue
3,100
Revenue
0
26
Expense
(2,800)
Expense
0
29
Expense
(800)
Expense
(800)
31
Expense
0
Expense ($3,500 / 5)
(700)
31
Revenue
0
Revenue
400
31
Expense
0
Expense
(210)
Req. 2
Income (loss)
before tax
$(3,540)
Income before tax
$3,150
Req. 3
The accrual-basis measure of net income is preferable because it accounts
for revenues and expenses when they occur, not when they are received or
(10-20 min.) P 3-66B
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Dec.
31
a. Insurance Expense ……………………….
3,200*
Prepaid Insurance ……………………
3,200
To record insurance expense
31
b. Salary Expense ($5,500 × 1/5) …………
1,100
Salary Payable… ………………………
1,100
To accrue salary expense.
31
c. Interest Receivable ………………………..
500
Interest Revenue ………………………
500
To accrue interest revenue.
31
d. Supplies Expense ………………………….
6,680**
Supplies ………………………………….
6,680
To record supplies expense.
31
e. Unearned Service Revenue
($11,900 × 60%) ……………………………..
7,140
Service Revenue ………………………
7,140
To record revenue that was collected
in advance.
31
f. Depreciation Expense – Office ………
Furniture ……………………………..
Depreciation Expense – Equipment
3,500
5,800
Accumulated Depreciation –
Office Furniture ……………………
3,500
Accumulated Depreciation –
Equipment …………………………. .
5,800
To record depreciation expense.
_____
* $800 + $3,600 − $1,200 = $3,200
** $2,700 + $6,400 − $2,420 = $6,680
(45-60 min.) P 3-67B
Req. 1
Kingston, Inc.
Adjusted Trial Balance
March 31, 2015
TRIAL BALANCE
ADJUSTMENTS
ADJUSTED
TRIAL BALANCE
ACCOUNT TITLE
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
Cash
11,200
11,200
Accounts receivable
2,900
(a) 3,650
6,550
Prepaid rent
2,100
(b) 525*
1,575
Supplies
2,400
(c) 2,090
310
Furniture
63,000
63,000
Accumulated depreciation
3,700
(d) 1,750**
5,450
Accounts payable
4,000
4,000
Salary payable
(e) 6,300***
6,300
Common stock
13,000
13,000
Retained earnings
52,300
52,300
Dividends
2,300
2,300
Service revenue
14,030
(a) 3,650
17,680
Salary expense
2,600
(e) 6,300***
8,900
Rent expense
(b) 525*
525
Utilities expense
530
530
Depreciation expense
(d) 1,750**
1,750
Supplies expense
(c) 2,090
_____
2,090
87,030
87,030
14,315
14,315
98,730
98,730
* $2,100 ÷ 4 = $525
** $63,000 ÷ 3 = $21,000 ÷ 12 = $1,750
*** $10,500 × 3/5 = $6,300
(continued) P 3-67B
Req. 2 (continued)
Kingston, Inc.
Income Statement
Month Ended March 31, 2015
Revenues:
Service revenue
$17,680
Expenses:
Salary expense
$8,900
Supplies expense
2,090
Depreciation expense
1,750
Utilities expense
530
Rent expense
525
Total expenses
13,795
Net income
$ 3,885
Kingston, Inc.
Statement of Retained Earnings
Month Ended March 31, 2015
Retained earnings, March 1, 2015
$52,300
Add: Net income
3,885
Subtotal
56,185
Less: Dividends declared
(2,300)
Retained earnings, March 31, 2015
$53,885
(continued) P 3-67B
Req. 2 (continued)
Kingston, Inc.
Balance Sheet
March 31, 2015
ASSETS
LIABILITIES
Current assets:
Current liabilities:
Cash
$11,200
Accounts payable
$ 4,000
Accounts receivable
6,550
Salary payable
6,300
Prepaid rent
1,575
Total current liabilities
10,300
Supplies
310
Total current assets
19,635
Furniture $63,000
STOCKHOLDERS’ EQUITY
Less: Accum.
Common stock
13,000
deprec. (5,450)
57,550
Retained earnings
53,885
Total stockholders’ equity
66,885
______
Total liabilities and
______
Total assets
$77,185
stockholders’ equity
$77,185
(10-20 min.) P 3-68B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Apr.
30
Accounts Receivable ($7,150 − $6,800) …………..
350
Rental Revenue ………………………………………..
350
To accrue rental revenue.
30
Interest Receivable ($400 − $0) ………………………
400
Interest Revenue ($700 − $300) ………………….
400
30
Supplies Expense ($500 − $0) ………………………..
500
Supplies ($1,300 − $800) …………………………..
500
To record supplies expense.
30
Insurance Expense ($1,500 − $0) ……………………
1,500
Prepaid Insurance ($2,400 − $900) …………….
1,500
To record insurance expense.
30
Depreciation Expense ($1,400 − $0) ………………..
1,400
Accumulated Depreciation
($10,200 − $8,800) …………………………………….
1,400
To record depreciation expense.
30
Wage Expense ($2,630 − $1,300) …………………….
1,330
Wages Payable ($1,330 − $0) …………………….
1,330
To accrue salary expense.
30
Unearned Rental Revenue ($2,000 − $950) ………
1,050
Rental Revenue* ………………………………………
1,050
To record revenue that was collected in
advance.
(continued) P 3-68B
Req. 2
(20-30 min.) P 3-69B
Req. 1
L. Farrish Corporation
Income Statement
Year Ended May 31, 2014
Revenues:
Service revenue
$90,600
Expenses:
Salary expense
$36,200
Rent expense
10,100
Insurance expense
3,600
Interest expense
2,600
Supplies expense
2,500
Depreciation expense
1,200
56,200
Income before tax
34,400
Income tax expense
7,100
Net income
$27,300
L. Farrish Corporation
Statement of Retained Earnings
Year Ended May 31, 2014
Retained earnings, May 31, 2013
$ 3,500
Add: Net income
27,300
Subtotal
30,800
Less: Dividends declared
(6,000)
Retained earnings, May 31, 2014
$24,800
(continued) P 3-69B
Req. 1 (continued)
L. Farrish Corporation.
Balance Sheet
May 31, 2014
ASSETS
LIABILITIES
Cash
$21,500
Accounts payable
$ 8,700
Accounts receivable
10,600
Unearned service
Supplies
2,100
revenue
900
Prepaid rent
1,800
Interest payable
500
Income tax payable
2,100
Equipment
$37,300
Note payable
17,700
Less: Accum.
Total liabilities
29,900
deprec.
(3,600)
33,700
STOCKHOLDERS’ EQUITY
Common stock
15,000
Retained earnings
24,800
Total stockholders’ equity
39,800
Total liabilities and
Total assets
$69,700
stockholders’ equity
$69,700
Req. 2
(20 min.) P 3-70B
Req. 1
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Closing Entries
Jan.
31
Service Revenue ……………………………….
92,700
Retained Earnings ………………………….
92,700
31
Retained Earnings ……………………………..
40,400
Salary Expense ………………………………
21,700
Supplies Expense …………………………..
4,800
Advertising Expense ………………………
11,500
Depreciation Expense …………………….
2,000
Interest Expense …………………………….
400
31
Retained Earnings ……………………………..
22,300
Dividends ………………………………………
22,300
Req. 2
Retained Earnings
Jan. 31, 2014 Expenses
40,400
Jan. 31, 2013 Bal.
10,600
Jan. 31, 2014 Dividends
22,300
Jan. 31, 2014 Revenues
92,700
Jan. 31, 2014 Bal.
40,600
Net income = $52,300 ($92,700 – $40,400)
Req. 3
(30-40 min.) P 3-71B
Req. 1
Lazy River Services, Inc.
Balance Sheet
January 31, 2014
ASSETS
Current assets:
Cash …………………………………………………………….
$17,400
Accounts receivable ……………………………………..
17,200
Prepaid expenses …………………………………………
5,500
Supplies ……………………………………………………….
4,000
Total current assets ………………………………….
44,100
Plant assets:
Equipment ……………………………………………………
$42,800
Less: accumulated depreciation …………………….
(6,900)
35,900
Other assets ………………………………………………………
12,200
Total assets ……………………………………………………….
$92,200
LIABILITIES
Current liabilities:
Accounts payable …………………………………………
$13,900
Current portion of note payable ……………………..
2,700
Salary payable ………………………………………………
2,600
Unearned service revenue …………………………….
3,600
Total current liabilities ………………………………
22,800
Note payable, long-term ……………………………………..
15,600
Total liabilities …………………………………………………..
38,400
STOCKHOLDERS’ EQUITY
Common stock ………………………………………………….
13,200
Retained earnings … ………………………………………….
40,600*
Total stockholders’ equity… …………………………..…..
53,800
Total liabilities and stockholders’ equity ……………..
$92,200
*See next page
(continued) P 3-71B
Req. 1 (continued)
(45-60 min.) P 3-72B
Req. 1
(All amounts in millions)
(continued) P 3-72B
Req. 3
Challenge Exercises and Problem
(20-25 min.) E 3-73
(Dollar amounts in thousands)
December 31, 2014
Current assets = $11,100 ($1,500 + $5,900 + $2,700 + $1,000)
Current liabilities = $6,100 ($2,600 + $1,600 + $1,900)
Net working capital = $5,000 ($11,100 – $6,100)
Current
=
$11,100
=
1.82
ratio
$6,100
January 31, 2015
Current assets = $10,700 ($9001 + $6,8002 + $2,7003 + $3004)
Current liabilities = $5,200 ($1,2005 + $1,6006 + $2,4007)
Net working capital = $5,500 ($10,700 – $5,200)
Current
=
$10,700
=
2.06
ratio
$5,200
_____
Computations of January 31, 2015 balances:
1Cash = $1,500 − $7,300 + $8,100 − $1,400 = $900
2Receivables = $5,900 + $9,000 − $8,100 = $6,800
3No change in the Inventory balance.
4Prepaid expenses = $1,000 − $700 = $300
5Accounts payable = $2,600 − $1,400 = $1,200
6No change in the Unearned Revenues balance.
7Accrued expenses payable = $1,900 + $500 = $2,400
Conclusion: Baltimore’s net working capital and current ratio
(60 min.) E 3-74
a.
Net income:
Service revenue:
($161,000 + $1,650 + $32,200) ………………….
$194,850
Expenses:
Salary ($37,000 + $3,500) ………………………..
$ 40,500
Depreciation – building ………………………….
2,600
Supplies ………………………………………………..
3,100
Insurance ………………………………………………
1,500
Advertising ……………………………………………
7,300
Utilities ………………………………………………….
2,000
57,000
Net income …………………………………………………
$137,850
b.
Total assets:
Cash ………………………………………………………….
$ 7,300
Accounts receivable ($7,500 + $32,200) ………..
39,700
Supplies ($4,600 − $3,100) …………………………..
1,500
Prepaid insurance ($3,500 − $1,500) …………….
2,000
Building ……………………………………………………..
$110,000
Less: Accum. Depr. ($15,600 + $2,600) …………
(18,200)
91,800
Land …………………………..………………………………
53,000
Total assets …………………………………………..
$195,300
(continued) E 3-74
c.
Total liabilities:
Accounts payable ………………………………….
$ 6,100
Salary payable ……………………………………….
3,500
Unearned service revenue
($5,500 − $1,650) ………………………………..
3,850
Total liabilities ……………………………………….
$ 13,450
d.
Total stockholders’ equity:
Common stock ………………………………………
$ 14,000
Retained earnings, beginning …………………
$ 46,000
Add: Net income……………………………………
137,850
Subtotal
183,850
Less: Dividends declared. ……………………..
(16,000)
167,850
Total stockholders’ equity ………………………
$181,850
e.
Total assets
= Total liabilities + Total stockholders’ equity
$195,300
= $13,450 + $181,850
(20 min.) P 3-75
Mobile Detail Inc.
Balance Sheet
January 31, 2014
ASSETS
LIABILITIES
Cash (a)
$ 15,300
Accounts payable (g)
$ 3,000
Accounts receivable (c)
1,400
Advertising payable(h)
500
Supplies (d)
1,000
Salary payable (i)
500
Total current assets
Equipment (e) $35,000
Less: Accum.
deprec.(f) (12,000)
17,700
23,000
Unearned gift certificate
revenue (b)
Total liabilities
1,200
5,200
STOCKHOLDERS’ EQUITY
Total assets
______
$40,700
Common stock (j)
Retained earnings (k)
Total stockholders’
equity
Total liabilities and
stockholders’ equity
18,000
17,500
35,500
______
$40,700