C4.29.
(continued)
f.
The corporate form of organization protects the owners by providing limited liability,
such that their personal assets that have not been invested in the business are free from
the reach of the business creditors—even in corporate bankruptcy proceedings. The
primary disadvantage of the corporate form is that business profits are taxed twice—once
at the corporate level, and a second time at the individual level when dividends are paid
g.
Businesses are often required to make quarterly tax payments based on their estimated
annual taxable income, so DeBauge Realty, Inc. has probably already paid a substantial
portion of its 2016 tax bill.
h.
Working capital = CA – CL Current ratio = CA / CL
12/31/16
Cash and short-term investments …… ……….. ……….. ……….. ……….. ……….. $ 90,000
Accounts receivable, net ……. ……….. ……….. ……….. ……….. ……….. ……….. 120,000
Total current assets (A) ……… ……….. ……….. ……….. ……….. ……….. ……….. $210,000
C4.29.
(continued)
i.
ROI = MARGIN x TURNOVER
NET INCOME NET INCOME SALES* .
AVERAGE TOTAL ASSETS = SALES* x AVERAGE TOTAL ASSETS
$102,000 = $102,000 x $426,000
C4.30.
a.
utilization is, because a substantial portion of the firm’s profits will need to be invested
the depreciation adjustment, the wear and tear of long-term assets results in a loss of their
economic value.
Gerrard Construction Co. is an excavation contractor, and has invested substantially all
of its resources in property, plant, and equipment (i.e., heavy, earth-moving machinery).
Not surprisingly, depreciation expense is material in amount. The owners of the firm
would be interested in knowing what the approximate “economic” cost of fixed asset
b.
Depreciation expense is high because Gerrard Construction Co. is a highly capital-
intensive firm. Interest expense is high because the firm has a large amount of long-term
C4.30.
(continued)
c.
Operating income …… ……….. ……….. ……….. ……….. ……….. ……….. ……….. $28,600,000
Interest expense ……… ……….. ……….. ……….. ……….. ……….. ……….. ……….. (7,600,000)
Earnings before taxes ……….. ……….. ……….. ……….. ……….. ……….. ……… $21,000,000
Average income tax rate = Income tax expense / Earnings before taxes
= $6,400,000 / $21,000,000 = 30.5% (rounded)
e.
Cash and short-term investments …… ……….. ……….. ……….. ……….. ……….. $ 5,600,000
Accounts receivable, net ……. ……….. ……….. ……….. ……….. ……….. ……….. 19,600,000
Total current assets …. ……….. ……….. ……….. ……….. ……….. ……….. ……….. $25,200,000
Current assets are low, in relative terms, because construction firms are capital-intensive.
As an excavation contractor, the firm provides services to its customers, but does not sell
goods.
g.
Working capital = Current assets – Current liabilities
Current ratio = Current assets / Current liabilities
12/31/16
Cash and short-term investments …… ……….. ……….. ……….. ……….. ……….. $ 5,600,000
Accounts receivable, net ……. ……….. ……….. ……….. ……….. ……….. ……….. 19,600,000
C4.30.
(continued)
h.
ROI = MARGIN x TURNOVER
NET INCOME NET INCOME SALES* .
AVERAGE TOTAL ASSETS = SALES* x AVERAGE TOTAL ASSETS
* Net revenues is used for sales.
ROE = Net income / Average stockholders’ equity Note: Ending stockholders’ equity =
The firm’s profitability measures appear to be within the normal range of expectation.
ROE is significantly higher than ROI because Gerrard Construction Co. has relied very
heavily on long-term borrowings to finance the acquisition of its property, plant, and
equipment. Trend data for the company and for the construction industry (or data for
close competitors) are needed to increase the validity of this conclusion.
i.
Since there were no changes in paid-in capital during the year, the beginning paid-in
capital would also be $20,000,000. Thus, the beginning retained earnings would be
$45,200,000 (total stockholders’ equity at December 31, 2015 of $65,200,000 less
$20,000,000 paid-in capital).
Retained Earnings
Beginning balance 45,200,000
Dividends declared and paid ??? Net income 14,600,000
Ending balance 58,800,000
Instructor’s Manual / Solutions Manual
TAKE-HOME QUIZ — CHAPTER 4 NAME__________________________
1. Mikor has an account payable of $7,700 due to Smiley, Inc., one of its suppliers. The amount
was due to be paid on October 15, 2016. Mikor only had enough cash on hand then to pay $1,700
of the amount due, so Mikor’s treasurer called Smiley‘s treasurer and agreed to sign a note payable
for the balance. The note was dated October 15, 2016, had an interest rate of 8% per annum, and
was payable with interest on December 31, 2016.
Use the horizontal model, or write the journal entry, to show the effect of:
a. The October 15, 2016 payment of $1,700 and the creation of a note payable for the balance
owed.
2. On January 10, 2016, Jeanco paid $2,100 rent for a storage facility for the period from
January 10 through May 31. The rent charge is $450 per month.
Use the horizontal model, or write the journal entry, to show the effect of:
a. The January 10, 2016 rent payment assuming that the disbursement was recorded as an
expense.
Chapter 4 The Bookkeeping Process and Transaction Analysis
TAKE-HOME QUIZ — CHAPTER 4 (continued)
c. Show an alternative way of recording the disbursement of $2,100 on January 10, 2016.
3. A bookkeeper prepared the year-end financial statements of Giftwrap, Inc. The income
statement showed net income of $3,900, and the balance sheet showed beginning retained
earnings of $39,200. No dividends were declared or paid during the year. The firm’s accountant
reviewed the bookkeeper’s work and determined that adjusting entries should be made which
would increase revenues by $2,200, and decrease expenses by $900.
a. What will be the amount of net income after the above adjustments are recorded?
b. What was the ending retained earnings balance on the balance sheet prepared by the
bookkeeper?
c. What is the correct ending balance in retained earnings to be reported on the balance sheet?
1. a. Dr. Accounts Payable ………………………………………………………………. 7,700
Cr. Cash……………………………………………………………………………. 1,700
Cr. Note payable ………………………………………………………………. 6,000
c. Dr. Note Payable …………………………………………………………………….. 6,000
Dr. Interest Payable …………………………………………………………………. 20
Dr. Interest Expense ………………………………………………………………… 80
Cr. Cash …………………………………………………………………………… 6,100
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
a. Cash Accounts Payable
-1,700 -7,700
c. Cash Note Payable Interest Exp.
-6,100 -6,000 -80
Interest Payable
2. a. Dr. Rent Expense ………………………………………………………………….. 2,100
Cr. Cash……………………………………………………………………………. 2,100
b. Dr. Prepaid Rent ($450 * 2/3 month = $300 expense. $2,100 – $300 = $1,800) ….. 1,800
Chapter 4 The Bookkeeping Process and Transaction Analysis
TAKE-HOME QUIZ KEY — CHAPTER 4 (continued)
2. e. There are no differences on either the income statement or the balance sheet. After the
adjusting entry is recorded at the end of January, the firm will show $300 of rent expense and
$1,800 of prepaid rent.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
a. Cash Rent Expense
-2,100 -2,100
c. Cash
-2,100
-300 -300
Net
3. a. Income
Before adjustments………………………………………………………………………………. $ 3,900
b. and c.
Bookkeeper Corrected
Retained earnings, beginning balance ………………………………. $39,200 $39,200
Net income …………………………………………………………………… 3,900 7,000