FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E3-76
(60 min.)
Requirement
Solution:
a. Net income:
Service revenue:
($161,000 + $1,650 + $32,200) 194,850$
Expenses:
Salary ($37,000 + $3,500) 40,500$
b. Total assets:
Cash 7,300$
Accounts receivable ($7,500 + $32,200) 39,700
Building 110,000$
Less: Accum. Depr. ($15,600 + $2,600) (18,200) 91,800
Without opening any accounts, making any journal entries, or using a work
sheet, provide Mr. Hodge with the requested information. The business is not
subject to income tax.
Chapter 3: Accrual Accounting and Income Page 81 of 105
Supplies 3,100
Insurance 1,500
Advertising 7,300
Utilities 2,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
c. Total liabilities:
Accounts payable 6,100$
d. Total stockholders’ equity:
Common stock $ 14,000
Retained earnings, beginning 46,000$
Add: Net income 137,850
Less: Dividends declared. (16,000) 167,850
Chapter 3: Accrual Accounting and Income Page 82 of 105
Salary payable 3,500
Unearned service revenue
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P3-77
(20 min.)
Solution:
Cash (a) 29,300$ Accounts payable (g) 5,000$
Accounts receivable (c) 1,500 Advertising payable(h) 200
Supporting computations
(a)
Bal. 12/31/2015 1,900 11,400 Salaries paid
Cash collections from 1,300 Dividends paid
Issuance of common stock 12,000 1,800 Payments of accounts
Bal. 1/31/2016 29,300
(b)
Gift certificate revenue earned 700 1,100 Sale of gift certificates
Based on these statements, prepare the Balance Sheet for January 31, 2016.
Cash
ASSETS
LIABILITIES
Tidy Car, Inc.
Balance Sheet
January 31, 2016
Chapter 3: Accrual Accounting and Income Page 83 of 105
Supplies (d) 2,000 Salary payable (i) 300
Total current assets 32,800 Unearned gift certificate
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
(c)
Accounts Receivable
Bal. 12/31/2015 2,600
(d)
Bal. 12/31/2015 1,800
Purchase of supplies 3,300 3,100 Supplies expense
Bal. 1/31/2016 2,000
(e) Equipment = $40,000 ($34,000 + $6,000)
(f) Accumulated depreciation = $13,600 ($6,800 + $6,800)
(g)
Accounts Payable
3,500 Bal. 12/31/2015
Payments on account 1,800 3,300 Purchase of supplies
5,000 Bal. 1/31/2016
(h) $3,000 Advertising expense – $2,800 advertising paid
(i)
Salary Payable
1,700 Bal. 12/31/2015
Salaries paid 11,400 10,000 Salary expense
(j) Common Stock = $22,000 ($10,000 + $12,000)
(k)
Chapter 3: Accrual Accounting and Income Page 84 of 105
Revenue on account 36,500 37,600 Collections from customers*
Bal. 1/31/2016 1,500
* Excludes the $1,100 for gift certificates which was received in advance,
not on account
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Decision Case 1
(25 min.)
Requirements
Solution:
Req. 1 Unadjusted trial balance:
Debit Credit
8,000
4,200
Cash
Accounts receivable
1. How much out of balance is the trial balance? Notes Payable (the only error) is
understated.
2. Rock City Services needs to make the following adjustments at January 31:
a. Supplies of $400 were used during January.
b. The balance of Prepaid Rent was paid on January 1 and covers the whole year
2017. No adjustment was made on January 31.
c. At January 31, Rock City Services owed employees $1,000.
d. Unearned service revenue of $500 was earned during January.
Prepare a corrected, adjusted trial balance. Give Notes Payable its correct balance.
3. After the error is corrected and after these adjustments are made, compute the
current ratio of Rock City Services, Inc. If your business had this current ratio, could
you sleep at night?
Chapter 3: Accrual Accounting and Income Page 85 of 105
800
1,200
3,400
–
900
–
Prepaid rent
Accounts payable
Salary payable
Unearned service revenue
Note payable, due in 3 years
Common stock
Retained earnings
Service revenue
Salary expense
Rent expense
Advertising expense
Supplies expense
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2 Adjusted trial balance:
Debit Credit
$ 8,000
4,200
Req. 3
Cash
Accounts receivable
$8,000 + $4,200 + $400 + $1,100
Chapter 3: Accrual Accounting and Income Page 86 of 105
400
1,100
4,400
100
900
400
Supplies ($800 – $400)
Prepaid rent ($1,200 x 11/12)
Land ($41,000 + $2,000)
Accounts payable
Salary payable
Unearned service revenue ($700 – $500)
Note payable, due in 3 years
Common stock
Retained earnings
Service revenue ($9,100 + $500)
Salary expense ($3,400 + $1,000)
Rent expense ($1,200 x 1/12)
Advertising expense
Supplies expense
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Decision Case 2
(20-30 min.)
Requirement
Solution:
$ 32,000
$ 12,000
Sales revenue
Month Ended October 31, 2016
Cost of goods sold
Income Statement
1. Prepare corrected financial statements for Hilda’s Coffee Shop, Inc.: single step
Income Statement, Statement of Retained Earnings, and Balance Sheet. Then, based
on Petrochuck’s goals and your corrected statements, recommend to Petrochuck
whether she should expand the restaurant.
Hilda’s Coffee Shop, Inc.
Chapter 3: Accrual Accounting and Income Page 87 of 105
Insurance expense
Retained earnings, October 1, 2016
Add: Net income
Less: Dividends declared
Depreciation expense
Wages expense
Rent expense
Month Ended October 31, 2016
Hilda’s Coffee Shop, Inc.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
8,000$ 7,000$
5,000 3,000
Cash
Hilda’s Coffee Shop, Inc.
Accounts payable
Unearned revenue
Balance Sheet
LIABILITIES
Food inventory
ASSETS
October 31, 2016
Chapter 3: Accrual Accounting and Income Page 88 of 105
1,000 10,000
4,000
Prepaid insurance
Dishes, silver
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Decision Case 3
(30-40 min.)
Requirements
Solution:
Req. 1 (your highest price)
26,000$
4,000$
Req. 2 (Gambol’ asking price)
$ 93,000
$ 104,000
$ 154,000
Less: Dividends declared
Ending retained earnings
Common stock
Revenue ($22,000 + $4,000)
Less: Expenses
Multiplier to compute price
Beginning retained earnings
Add: Net income
Advertising revenue ($22,000 + $4,000)
Expenses:
Salary
1. Assume that the most you would pay for the business is 16 times the
amount of monthly net income you could expect to earn from it. Compute
this possible price.
2. Gambol states that the least he will take for the business is two times its
stockholders’ equity on June 30. Compute this amount.
3. Under these conditions, how much should you offer Gambol? Give your
reason (Challenge)
June 30, 2016
Calculation of Asking Price Based on Stockholders’ Equity
Gambol Advertising, Inc.
Chapter 3: Accrual Accounting and Income Page 89 of 105
15,000$
Utilities
Other (unrecorded)
Salary of your manager
Your expected monthly net income
Multiplier to compute price
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 3
You may start by offering Gambol approximately $225,000 for the business. His asking
price is $308,000 so you are starting out quite far apart. If Gambol appears especially
Chapter 3: Accrual Accounting and Income Page 90 of 105
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Ethical Issues 1
Requirements
Solution:
Dec. XXX
XXX
2
1. Journalize the revenue transaction (without dollar amounts), and indicate how
recording this revenue in December would affect the current ratio and the debt ratio.
2. Analyze this transaction according to the Decision Framework for Making Ethical
Judgments in Chapter 1:
a. What is the issue?
b. Who are the stakeholders and what are the alternatives? Weigh them from the
standpoint of economic, legal, and ethical implications.
c. What decision would you make?
3. Propose for Green Horizons a course of action that is ethical.
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 company, the bank, the stockholders, and the company’s other
Accounts Receivable
Sales Revenue
Chapter 3: Accrual Accounting and Income Page 91 of 105
The authors would suggest either of two actions. Green Horizons can either:
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
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 for additional work
Chapter 3: Accrual Accounting and Income Page 92 of 105
b.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Ethical Issues 2
Requirements
Solution:
Req. 1
Req. 2
1. Compute the overall effect of these transactions on the company’s reported income
for 2016. Is reported net income overstated or understated?
2. Why did Dusek take these actions? Are they ethical? Give your reason, identifying
the parties helped and the parties harmed by Dusek’s action. Consult the Decision
Framework for Making Ethical Judgments in Chapter 1. Which factor (economic, legal,
or ethical) seems to be taking precedence? Identify the stakeholders and the potential
consequences to each.
3. As a personal friend of Tim’s, what advice would you give him?
It appears that Dusek wants to improve the company’s reported income in order to
These transactions overstate the reported income of the company by $31,000
Chapter 3: Accrual Accounting and Income Page 93 of 105