Solutions Chapter 3 – Set B Exercises – Libby 7e
E3–1B
Req. 1
Cash Basis
Income Statement
Accrual Basis
Income Statement
Revenues:
Cash sales
Customer deposits
$635,000
35,000
Revenues:
Sales to customers
$875,000
Req. 2
Accrual basis financial statements provide more useful information to external users.
Financial statements created under cash basis accounting normally postpone (e.g.,
Inventory purchases
Wages paid
Cost of sales
Wages expense
E3–2B
Activity
Revenue Account Affected
Amount of Revenue Earned in June
a.
None
No revenue earned in September;
earnings process is not yet complete.
b.
Interest revenue
$32 (= $2,400 x 16% x 1month/12 months)
f.
None
Payment related to revenue recorded
previously in (e) above.
g.
None
No revenue earned in June; earnings
process is not yet complete.
h.
None
No revenue is earned; the issuance of
stock is a financing activity.
i.
None
No revenue earned in June; earnings
process is not yet complete.
k.
None
No revenue earned in June; earnings
process is not yet complete.
Sales revenue
Sales revenue
Sales revenue
d.
None
No transaction has occurred; exchange of
promises only.
revenue earned when goods are delivered.
E3–3B
Activity
Expense Account Affected
Amount of Expense Incurred in
January
a.
Utilities expense
$4,320
b.
Advertising expense
$142(= $426 x 1 month/3 months) incurred
in January. The remainder is a prepaid
expense (A) that is not incurred until
February and March.
f.
Cost of goods sold
$27,500 (= 250 books x $110 per book)
g.
None
December expense paid in January.
h.
Commission expense
$13,720
Supplies expense
k.
Wages expense
Insurance expense
$400 (= $4,800 ÷ 12 months)
Repairs expense
$750
n.
Utilities Expense
$179
o.
Consulting Expense
$2,380
p.
None
December expense paid in January.
None
Expense will be recorded when the related
revenue has been earned.
None
Expense will be recorded in the future when
the related revenue has been earned.
E3–4B
Balance Sheet
Income Statement
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
a.
+7,047
NE
+7,047
NE
NE
NE
b.
+654,721
+654,721
NE
NE
NE
NE
c.
+40,000
+40,000
NE
NE
NE
NE
Transaction (f) results in an increase in an asset (property, plant, and equipment) and a
decrease in an asset (cash). Therefore, there is no net effect on assets.
E3–5B
(in thousands)
a.
Equipment (+A) …………………………………………………………
1,285
Cash (−A) ……………………………………………………………..
1,285
Debits equal credits. Assets increase and decrease by the same amount.
b.
Cash (+A) …………………………………………………………………
Debits equal credits. Assets and liabilities increase by the same amount.
Accounts receivable (+A) …………………………………………….
NE
NE
+345,477
e.
NE
NE
NE
NE
NE
NE
NE
NE
NE
g.
+71,250
NE
h.
NE
+2,340
+2,340
NE
+2,340
NE
NE
d.
Accounts payable (−L) ………………………………………………..
7,580
Cash (−A) ……………………………………………………………..
7,580
Debits equal credits. Assets and liabilities decrease by the same amount.
e.
Inventory (+A) ……………………………………………………………
42,990
Accounts payable (+L) …………………………………………….
42,990
Debits equal credits. Assets and liabilities increase by the same amount.
Wages (or Salaries) expense (+E, −SE) ………………………..
Cash (−A) ……………………………………………………………..
Debits equal credits. Expenses decrease retained earnings (part of
stockholders’ equity). Stockholders’ equity and assets decrease by the same
amount.
g.
Cash (+A) …………………………………………………………………
29,480
Accounts receivable (−A) ………………………………………..
Debits equal credits. Assets increase and decrease by the same amount.
h.
Fuel expense (+E, −SE) …………………………..…………………
1,986
Cash (−A) ……………………………………………………………..
1,986
Debits equal credits. Expenses decrease retained earnings (part of
stockholders’ equity). Stockholders’ equity and assets decrease by the same
amount.
Retained earnings (−SE) …………………………………………….
Cash (−A) ……………………………………………………………..
amount.
Utilities expense (+E, −SE) ………………………………………….
Accounts payable (+L) …………………………………………….
Debits equal credits. Expenses decrease retained earnings (part of
stockholders’ equity). Together, stockholders’ equity and liabilities decrease by
the same amount as assets.
stockholders’ equity). Stockholders’ equity and assets increase by the same
amount.
E3–6B
Req. 1
a. Cash (+A) …………………………………………………………. 3,500,000
Short-term note payable (+L) ……………………… 3,500,000
Debits equal credits. Assets and liabilities increase by the same amount.
d. Repair and maintenance expense (+E, −SE) …………. 42,000
Cash (−A) ………………………………………………… 42,000
Debits equal credits. Expenses decrease retained earnings (part of stockholders’
equity). Stockholders’ equity and assets decrease by the same amount.
e. Cash (+A) …………………………………………………………. 175,000
Unearned pass revenue (+L) ……………………… 175,000
Debits equal credits. Since the season passes are sold before Kaye Resorts
provides service, revenue is deferred until it is earned. Assets and liabilities
increase by the same amount.
E3–6B (continued)
g. Cash (+A) …………………………………………………………. 170,000
Ski lesson revenue (+R, +SE) …………………….. 170,000
Debits equal credits. Revenue increases retained earnings (part of stockholders’
equity). Stockholders’ equity and assets increase by the same amount.
h. Cash (+A) …………………………………………………………. 4,200
Unearned rent revenue (+L) ………………………. 4,200
Debits equal credits. Since the rent is received before the townhouse is used,
revenue is deferred until it is earned. Assets and liabilities increase by the same
amount.
Req. 2
Accounts Receivable
Beg. bal. 1,400
(f) 600
250 (j)
End. bal. 1,750
E3–7B
Req. 1 and 2
Cash
Accounts Receivable
Supplies
Beg. 7,400
Beg.15,000
Beg. 990
Equipment
Land
Building
Beg. 14,000
Beg. 10,000
Beg. 32,500
Accounts
Payable
Unearned Fee
Revenue
Note
Payable
4,800
56,000
Contributed Capital
Retained Earnings
Rebuilding Fee Revenue
10,200 Beg.
1,200 (h)
(j) 1,300
2,590 Beg.
0 Beg.
14,750 (a)
11,400
1,290
14,750
Rent Revenue
Wages Expense
Utilities Expense
0 Beg.
Item (f) is not a transaction; there has been no exchange.
E3–7B (continued)
Req. 3
Net income using the accrual basis of accounting:
Revenues
$15,070
($14,750 + $320)
– Expenses
12,475
($12,000 + $475)
Net Income
(accrual basis)
$ 2,595
Assets
=
Liabilities
+
Stockholders’ Equity
$15,850
$ 5,735
$ 11,400
6,600
4,800
1,290
Req. 4
Net income using the cash basis of accounting:
Cash receipts
$23,870
(transactions a through d)
14,120
(transactions g, i, and k)
Net Income
$ 9,750
Cash basis net income ($9,750) is higher than accrual basis net income ($2,595)
because of the differences in the timing of recording revenues versus receipts and
expenses versus disbursements between the two methods. The $8,800 higher amount
in cash receipts over revenues includes cash received prior to being earned (from (b),
$400) and cash received after being earned (in (d), $8,400). The $1,645 higher amount
$475).
$81,820
$15,285
E3–8B
Req. 1
George’s Piano Rebuilding Company
Income Statement (unadjusted)
For the Month Ended January 31, 2011
Operating Revenues:
Rebuilding fees revenue
$ 14,750
Total operating revenues
14,750
Req. 2
George’s Piano Rebuilding Company
Statement of Stockholders’ Equity (unadjusted)
For the Month Ended January 31, 2011
Contributed
Capital
Retained
Earnings
Total
Stockholders’
Equity
Balance, December 31, 2010
$ 10,200
$ 2,590
$12,790
Balance, January 31, 2011
$15,285
Operating Expenses:
Wages expense
Utilities expense
Total operating expenses
Operating Income
Other Item:
Rent revenue
Net Income
E3–8B (continued)
Req. 3
George’s Piano Rebuilding Company
Balance Sheet (unadjusted)
At January 31, 2011
Assets
Current assets:
Cash
Total Assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Unearned fee revenue
Total current liabilities
$ 15,850
$ 81,820
$ 5,735
4,800
10,535
E3–9B
Req. 1 and 2
Cash
Accounts Receivable
Supplies
Beg. 0
(a)120,000
75,000 (b)
7,850 (d)
Beg. 0
(a) 4,000
Beg. 0
(a) 600
Equipment
Building
Accounts Payable
200
Beg. 0
Beg. 0
0 Beg.
Note Payable
Mortgage Payable
Contributed Capital
0 Beg.
100,000 (c)
0 Beg.
165,000(b)
0 Beg.
144,600 (a)
100,000
165,000
144,600
Retained
Earnings
Retail Store Revenue
Decorating Revenue
300
6,700
Supplies Expense
Beg. 0
Beg. 0
Beg. 0
200
0 Beg.
0 Beg.
0 Beg.
Fuel Expense
Beg. 0
(h) 289
289
(e) 3,700
E3–10B
Req. 1
Transaction
Brief Explanation
a
Issued capital stock to shareholders for $83,300 cash.
b
Purchased store fixtures for $24,200 cash.
Req. 2
Vicky’s Kite Company
Income Statement
For the Month Ended April 30, 2011
Sales Revenue
Expenses:
Cost of sales
$ 21,760
11,600
on account.
and the balance on account. The cost of the goods sold was $11,600.
e
Used $1,080 of utilities during the month, not yet paid.
Paid $1,760 in wages to employees.
and $760 related to goods or services to be provided in the future.
E3–10B (continued)
Vicky’s Kite Company
Balance Sheet
At April 30, 2011
Assets
Liabilities and Shareholders’ Equity
Current Assets:
Current Liabilities:
Cash
$57,015
Accounts payable
$12,680
Total Assets
102,498
Total Liabilities &
Shareholders’ Equity
102,498
Accounts receivable
Inventory
Prepaid expenses
Contributed capital
E3–11B
Req. 1
Accounts receivable increases with customer sales on account and decreases with
cash payments received from customers.
Req. 2
Accounts
Receivable
Prepaid
Expenses
Unearned
Subscriptions
1/1 844
1/1 125
69 1/1
96 12/31
Computations:
Beginning
+
“+”
−
“−”
=
Ending
Accounts
receivable
844
+
1,729
−
?
?
=
=
530
2,043
Prepaid
expenses
125
+
?
?
=
=
118
Unearned
subscriptions
+
?
?
=
=