P4.22.
(continued)
b.
Note to Instructor: Students should be able to determine the net loss amount
because there are so few transactions to analyze in Problem 4-21 (the solution to these
transactions is provided on the text’s website). Begin the in-class discussion by asking,
“What do you think went wrong that caused such a large net loss?”
Point out that it is not unusual for a start-up company to show a significant net
loss in the first year of operations—because of the cost of organizing the
business, and because the revenue-generating process may be delayed for several
months (or longer) until the firm’s products can be successfully marketed.
Kissick Co. is a merchandising firm (not a manufacturer) because it has
purchased $320,000 of Merchandise Inventory. The company must be renting its
store location because it has incurred rent expense of $60,000, but owns no land
or buildings.
assets!
$500,000 in sales.
P4.23.
a.
Net sales ……. ……….. ……….. ……….. ……….. ……….. ……….. ……….. ……….. $372,000
Cost of goods sold ….. ……….. ……….. ……….. ……….. ……….. ……….. ……….. (166,000)
Gross profit … ……….. ……….. ……….. ……….. ……….. ……….. ……….. ……… $206,000
P4.24.
a.
Net sales …….. ……….. ……….. ……….. ……….. ……….. ……….. ……….. ……….. $210,000
Cost of goods sold ….. ……….. ……….. ……….. ……….. ……….. ……….. ……….. (78,000)
Gross profit … ……….. ……….. ……….. ……….. ……….. ……….. ……….. ……….. $132,000
P4.25.
Balance Sheet Income Statement .
b.
c.
d.
-950
-4,800 (Note: An increase in Supplies Expense
Expense decreases Net Income.) -4,800
1/31/16. Remove from the expense account and set up as an asset the cost of the paper
napkins on hand January 31.
1/10/16. Set up as an asset the cost of paper napkins purchased for cash.
Supplies
+4,800
1/31/16. Record the cost of paper napkins used in January.
Supplies Supplies
Journal entries:
a.
1/10/16
Dr. Paper Napkin Expense (or Supplies Expense) .. ……….. ……….. 4,800
Cr. Cash ……….. ……….. ……….. ……….. ……….. ……….. ……… 4,800
To record as an expense the cost of paper napkins purchased for cash.
P4.25.
(continued)
d.
1/31/16
P4.26.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
a.
b.
e.
Cash Rent Exp.
-18,000 -18,000
Prepaid Rent Rent Exp.
-6,000 -6,000
Prepaid Rent Rent Exp.
-6,000 -6,000
Journal entries:
a.
Dr. Rent Expense …. ……….. ……….. ……….. ……….. ……….. ……….. 18,000
P4.26.
(continued)
e.
The payment should be initially recorded with a debit to Prepaid Rent (as in part c),
Dr. Rent Expense … ……….. ……….. ……….. ……….. ……….. ……….. 6,000
P4.27.
Note: The key to this problem is for students to see that transactions have a direct
effect on the financial statements. To answer the questions in part b, students should be
thinking about how Campbell would record each of the transactions. To answer the
questions in part c, solve for the missing amounts in T-accounts for inventories, accounts
c.
Marketing, selling, and
administrative expenses….. +1,508 -1,508
Purchases of inventory
on account ……….. …………… +5,461 +5,461
Likewise, it is possible that some of Campbell’s “research and development expenses” and “restructuring charges”
were run through the “payable to suppliers and others” caption. Thus, the answer for “payments to suppliers and
others” in part c is a crude approximation at best.
The $6,965 answer would need to be adjusted down (reduced) for any marketing, general and administrative expenses
that did not go through “payable to suppliers and others” and for any of these same expenses that were run though
P4.28.
a.
Total revenues ……… ……….. ……….. ……….. $32,100 $ $ 2,340 $34,440
Total expenses ……… ……….. ……….. ……….. $10,200 $ 1,980 $ 2,040 $10,140
Net income …. ……….. ……….. ……….. ……….. $21,900 $ 1,980 $ 4,380 $24,300
BIG BLUE RENTAL CORP. Adjustments / Corrections .
Income Statement—August 2016 Preliminary Debit Credit Final
Commission revenue . ……….. ……….. ……….. $27,000 $ $a)1,500 $28,500
Interest revenue ……… ……….. ……….. ……….. 5,100 f ) 840 5,940
Paid-in capital ……….. ……….. ……….. ……….. $14,400 $ $ $14,400
Notes receivable …….. ……….. ……….. ……….. 78,000 78,000
Commissions receivable…….. ……….. ……….. — a)1,500 1,500
Interest receivable ….. ……….. ……….. ……….. — f ) 840 840
Prepaid rent … ……….. ……….. ……….. ……….. — e)2,040 2,040
Supplies ……… ……….. ……….. ……….. ……….. 3,900 b)1,080 2,820
Net income …. ……….. ……….. ……….. ……….. 21,900 1,980 4,380 24,300
Dividends …… ……….. ……….. ……….. ……….. — g) 8,400 (8,400)
Balance, August 31 … ……….. ……….. ……….. $54,540 $ 10,380 $ 4,380 $48,540
Total stockholders’ equity ….. ……….. ……….. $68,940 $ 10,380 $ 4,380 $62,940
Total liabilities and stockholders’ equity …… $84,300 $ 10,380 $13,680 $87,600
P4.28.
(continued)
a.
Calculation for item c:
$14,400 Notes payable * 10% interest rate * 1/12 = $120 accrued interest, one month.
Thus, the $240 preliminary balance in the Interest Payable account makes sense because
it represents interest for two months on the note payable that had been accrued between
the last interest payment date (May 31) and the end of last month (July 31).
Calculation for item e:
b.
Adjustments are made at the end of an accounting period to properly reflect accrual
accounting in the financial statements. The accrual of a revenue item (i.e., an income
statement account) that has been earned but not yet collected will also result in an
increase to an asset account (i.e., a balance sheet account).
In this problem, items (a, commissions) and (f, interest) are examples of revenue accruals
that also result in increases to the related receivable accounts. Likewise, adjustments that
c.
Accrual accounting recognizes revenues and expenses as they occur, even though the cash
receipt from the revenue or the cash disbursement related to the expense may occur before
or after the event that causes revenue or expense recognition. Another way of stating this
would be to say that most adjustments are caused by either 1) the early or late receipt of
P4.28.
c.
(continued)
When cash is received before the related revenue is earned, or when cash is paid before the
related expense has been incurred, reclassification-type adjustments are necessary. An
C4.29.
a.
Commissions expense. Since DeBauge Realtors, Inc. is a service firm, the company
would not report cost of goods sold, and the other costs of operating the business are
likely to be less than the commissions expense that would be paid to Jeff and Kristi, and
to any non-owner sales associates employed by the firm.
Advertising expense is material in amount. The owners of the firm would be interested
in knowing how much was spent on advertising so that an assessment could be made of
the relative value received (i.e., commissions revenue per dollar spent on advertising).
$15,000 Interest Expense / $150,000 Note Payable = 10% effective interest rate.
Earnings before taxes ……….. ……….. ……….. ……….. ……….. ……….. ……… $150,000
Average income tax rate = Income tax expense / Earnings before taxes