(continued) P 3-75
Supporting computations
(a) Cash
Bal. 12/31/2013
1,300
Cash collections from
customers
Issuance of common stock
31,000
8,000
12,500
500
5,000
Salaries paid
Dividends paid
Purchase of equipment
5,500
Payments of accounts
payable
1,500
Advertising paid
1,500
Bal. 1/31/2014
15,300
(b) Unearned Gift Certificate Revenue
800
Bal. 12/31/2013
Gift certificate revenue earned
600
1,000
Sale of gift certificates
1,200
Bal. 1/31/2014 (given)
(c) Accounts Receivable
Bal. 12/31/2013
2,000
Revenue on account
29,400
30,000
Collections from customers*
Bal. 1/31/2014
1,400
(d) Supplies
Bal. 12/31/2013
1,500
Purchase of supplies
3,500
4,000
Supplies expense
Bal. 1/31/2014
1,000
(continued) P 3-75
(g) Accounts Payable
5,000
Bal. 12/31/2013
Payments on account
5,500
3,500
Purchase of supplies
3,000
Bal. 1/31/2014
(h) $2,000 Advertising expense – $1,500 advertising paid
(i) Salary Payable
1,000
Bal. 12/31/2013
Salaries paid
12,500
12,000
Salary expense
500
Bal. 1/31/2014
(k) Retained Earnings
12,000
Bal. 12/31/2013
Dividends
500
6,000
Net income
17,500
Bal. 1/31/2014
Decision Cases
(25 min.) Decision Case 1
Req. 1 Unadjusted trial balance:
Debit Credit
Cash……………………………………..
$ 8,000
Accounts receivable………………….
4,200
Supplies…………………………………
800
Prepaid rent……………………………
1,200
Land……………………………………..
43,000
Accounts payable……………………..
$12,000
Salary payable…………………………
–0–
Unearned service revenue…………..
700
Note payable, due in 3 years………..
23,400
Common stock………………………..
5,000
Retained earnings…………………….
9,300
Service revenue……………………….
9,100
Salary expense………………………...
3,400
Rent expense…………………………..
–0–
Advertising expense………………….
900
Supplies expense……………………..
–0–
Totals……………………………………
$61,500
$59,500
Out of balance $2,000
(continued) Decision Case 1
Req. 2 Adjusted trial balance:
Debit Credit
Cash………………………………………………
$ 8,000
Accounts receivable…………………………..
4,200
Supplies ($800 – $400)..……………………….
400
Prepaid rent ($1,200 x 11/12)…………………
1,100
Land ($41,000 + $2,000)……………………….
43,000
Accounts payable………………………………
$12,000
Salary payable………………………………….
1,000
Unearned service revenue ($700 – $500)…..
200
Note payable, due in 3 years…………………
25,400
Common stock…………………………………
5,000
Retained earnings……………………………..
9,300
Service revenue ($9,100 + $500)…………….
9,600
Salary expense ($3,400 + $1,000)……………
4,400
Rent expense ($1,200 x 1/12)………………..
100
Advertising expense…………………………..
900
Supplies expense………………………………
400
Total………………………………………………
$62,500
$62,500
Req. 3
(20-30 min.) Decision Case 2
Mark’s Coffee Shop, Inc.
Income Statement
Month Ended October 31, 2014
Sales revenue ……………………………………
$32,000
Cost of goods sold …………………………….
$12,000
Wages expense …………………………………
5,000
Rent expense …………………………………….
4,000
Insurance expense …………………………….
1,000
Depreciation expense ………………………..
1,000
23,000
Net income ………………………………………..
$ 9,000
Mark’s Coffee Shop, Inc.
Statement of Retained Earnings
Month Ended October 31, 2014
Retained earnings, October 1, 2014 ……………….
$ 0
Add: Net income ………………………………………….
9,000
Less: Dividends declared …………………………….
(3,000)
Retained earnings, October 31, 2014 ……………..
$6,000
(continued) Decision Case 2
Mark’s Coffee Shop, Inc.
Balance Sheet
October 31, 2014
ASSETS
LIABILITIES
Cash
$ 8,000
Accounts payable
$ 7,000
Food inventory
5,000
Unearned revenue
3,000
Prepaid insurance
1,000
10,000
Dishes, silver
4,000
Fixtures $24,000
OWNERS’ EQUITY
Less: Accum.
Common stock
$25,000
deprec. (1,000)
23,000
Retained earnings
6,000
31,000
Total assets
$41,000
Total liabilities and equity
$41,000
Recommendation: Do not expand the business. It is not meeting
Brandford’st goals for net income or for total
assets.
(30-40 min.) Decision Case 3
Req. 1 (your highest price)
Advertising revenue ($22,000 + $4,000)
$26,000
Expenses:
Salary
$4,000
Utilities
900
Other (unrecorded)
1,100
Salary of your manager
5,000
11,000
Your expected monthly net income
$15,000
Multiplier to compute price
X 16
Your highest price
$240,000
Req. 2 (Williams’ asking price)
SW Advertising, Inc.
Statement of Retained Earnings and Common Stock
June 30, 2014
Beginning retained earnings
$ 93,000
Add: Net income
Revenue ($22,000 + $4,000)
$26,000
Less: Expenses
($4,000 + $900 + $1,100)
(6,000)
20,000
Subtotal
113,000
Less: Dividends declared
(9,000)
Ending retained earnings
$104,000
Common stock
50,000
Stockholders’ equity, June 30, 2014
$154,000
Multiplier to compute price
X 2__
Williams’ asking price
$308,000
(continued) Decision Case 3
Req. 3
You may start by offering Williams approximately $225,000 for the
Ethical Issues
Ethical Issue 1
1. The journal entry to record the revenue is:
Dec.
Accounts Receivable…………
XXX
Sales Revenue……………..
XXX
2. a. – c. The issue is whether it is ethical to record the revenue in the
current year. The contract has been signed, but the implication is that
the company will not have done everything it needs to do in order to
earn the revenue in the current year. The stakeholders are the
(continued) Ethical Issue 1
3. The authors would suggest either of two actions. Cross Timbers can
either:
a. Report the current ratio of 1.47 and the debt ratio of .51 because
these are the true values. Then tell the bank of the signed contract
Copyright © 2015 Pearson Education Inc. Chapter 3 Accrual Accounting and Income
3-91
Ethical Issue 2
1. These transactions overstate the reported income of the company by
$21,000 ($10,000 + $10,000 + $1,000).
2. It appears that Almond wants to improve the company’s reported
income in order to borrow on favorable terms. Her action is unethical
and probably illegal as well because she is deliberately overstating
the company’s reported income.
interest revenue. In the extreme, the public is robbed if taxpayers
wind up financing the bailout of a failed institution.
(continued) Ethical Issue 2
3. Personal advice will vary from student to student. The purpose of
asking this question is to challenge students to take the high road
of ethical conduct by having nothing to do with Almond’s scheme.
The authors would advise Lail, the accountant, to take these
Focus on Financials: Amazon.com, Inc.
(15-20 min.)