Financial Accounting, 9/e 4-61
COMP4-2. (continued)
Req. 3
l.
Remaining expenses (+E, −SE) ……………………
9,000
Supplies (−A) ……………………………………..
8,000
Small tools (−A) ………………………………….
1,000
[Supplies used ($12 – 4) and small tools used
($9 – 8)]
Req. 4
FURNITURE REFINISHERS, INC.
Income Statement
For the Year Ended December 31, 2017
Operating Revenues:
Service revenue
$70 000
Operating Expenses:
Depreciation expense
2,000
Wages expense
3,000
Remaining expenses
Total operating expenses
Operating Income
Other Item:
Interest expense
Pretax income
Income tax expense
Net Income
Depreciation expense (+E, −SE) …………………..
2,000
Accumulated depreciation (+XA, −A) ……..
2,000
Interest payable (+L) …………………………...
($20,000 principal x .10 x 6/12)
Wages expense (+E, −SE) …………………………..
3,000
Wages payable (+L) …………………………...
Income tax expense (+E, −SE) ……………………..
Income taxes payable (+L) …………………..
COMP4-2. (continued)
FURNITURE REFINISHERS, INC.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2017
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Total
Stockholders’
Equity
Balance, January 1, 2017
$ 4,000
FURNITURE REFINISHERS, INC.
Balance Sheet
At December 31, 2017
Assets
Liabilities and Stockholders’ Equity
Current Assets:
Current Liabilities:
Cash
$27,000
Accounts payable
$13,000
Accounts receivable
10,000
Notes payable
20,000
Supplies
4,000
Wages payable
3,000
Small tools
8,000
Interest payable
1,000
Total current assets
49,000
Income taxes payable
4,000
Unearned revenue
3,000
Equipment
18,000
Total current liabilities
Less: Accum. deprec.
16,000
7,000
13,000
Other assets
9,000
10,000
Total stockholders’ equity
30,000
Financial Accounting, 9/e 4-63
COMP4-2. (continued)
Req. 5
Transaction
Type of Effect on
Cash Flows
Direction and
Amount of Effect
a.
F
+20,000
b.
I
-18,000
c.
F
+5,000
Req. 6
December 31, 2017, Closing Entry
Service revenue (−R) …………………………..………
70,000
Retained earnings (+SE) …………………….
16,000
d.
+56,000
e.
-28,000
-3,000
g.
+8,000
h.
-11,000
+3,000
k.
F
-10,000
COMP4-2. (continued)
Req. 7
(a) Current ratio = Current assets Current liabilities
= $49,000 $44,000
= 1.11
This suggests that Furniture Refinishers, Inc. generates $1.40 of revenue for
every dollar of assets.
(c) Net profit margin = Net income Sales (or Operating) Revenue
= $16,000 $70,000
= 0.23 or 23%
Financial Accounting, 9/e 4-65
CASES AND PROJECTS
FINANCIAL REPORTING AND ANALYSIS CASES
CP4–1.
2. The quarter ended January 31, 2015, was its best quarter in terms of sales at
$1,071,853,000 (this quarter covered the holiday shopping season, the biggest part
3. Other income (net) is an aggregate of many accounts, but a summary entry for them
all would be: Other income (net) (-R)……. 3,737,000
Retained Earnings (+SE) 3,737,000
4. As disclosed in Note 6, Accounts Receivable consists of (in thousands):
Franchise receivable
24,945
Merchandise sell-offs and vendor receivables
12,953
Credit card program receivable
Marketing cost reimbursements
Gift card receivable
Landlord construction allowances
Other
Total
5. Total asset turnover ratio (dollars are in thousands):
Fiscal year
Ended
Sales
Revenue
Average
Total Assets*
=
Total Asset
Turnover
1-31-2015
$3,282,867
($1,696,908 +$1,694,164)/2
$1,695,536
=
1.936
1-29-2014
=
1.916
CP4–2
2. The company reported $207,032 thousand in Deferred rent and other liabilities. This
information is disclosed on the balance sheet.
3. Prepaid rent (an asset) usually represents rent that a company has paid in advance
to its landlords. If a company also rents property to tenants, deferred rent (a liability)
4. Accrued Liabilities would consist of costs that have been incurred by the end of the
accounting period but which have not yet been paid.
5. Interest Income is related to the company’s short-term and long-term marketable
securities (investments).
6. The company’s income statement accounts (revenues, expenses, gains, and losses)
7. Prepaid Expenses is an asset account. As such, it is a permanent account that
8. The company reported basic earnings per share of $1.70 for the year ended January
31, 2015, $1.92 for the year ended January 31, 2014, and $1.63 for the year ended
January 31, 2013.
9. Total asset turnover (dollars in thousands):
Fiscal year
Ended
Sales
Revenue
Average
Total Assets*
=
Total
Asset
Turnover
CP4–2 (cont.)
Financial Accounting, 9/e 4-67
In fiscal year ended January 31, 2015, Urban Outfitters generated $1.62 in revenues for
each dollar of assets The company’s total asset turnover ratio increased from 1/31/2014
1. American Eagle Outfitters reported an advertising expense of $73.1 million for the
most recent year (Note 2 under Advertising Costs). Urban Outfitters reported $103.9
million of advertising costs for the year. (See Note 2 under Advertising).
2.
American Eagle Outfitters
Urban Outfitters
Year
Ended
Advertising
Expense /
Net Sales
Advertising
Expense /
Net Sales
3.
Industry
Average
American Eagle
Outfitters
Urban
Outfitters
Advertising/Sales =
4.0%
2.9%
3.1%
4. Both accounting policies are similar indicating that advertising costs are expensed
when the marketing campaigns become publicly available. Urban Outfitters
capitalizes expenses associated with direct-to-consumer advertising (catalogs) and
CP4–3. (continued)
5.
Year
Ended
American Eagle
Outfitters
Urban
Outfitters
2015:
Total Asset
=
Sales
$3,282,867
=
1.936
$3,323,077
=
1.617
Turnover
2014:
Total Asset
=
Sales
$3,305,802
1.916
$3,086,608
1.536
Turnover
Average
2013:
Total Asset
=
Sales
$3,475,802
1.875
$2,794,925
1.704
Average
$1,695,536
$2,054,978
6.
Industry
Average
American Eagle
Outfitters
Urban
Outfitters
Total Asset
Turnover Ratio =
(for fiscal year
ended 2015)
2.017
1.936
1.617
Financial Accounting, 9/e 4-69
CP4–4.
Account
Current
Year
Balance
Financial
Statement
Effect on
Cash Flows
1. Rent revenue
$510,000
Income statement
+ $500,000
2. Salary expense
73,000
Income statement
− 70,000
(1)
Rent Revenue
(2)
Salary Expense
(3) Maintenance
Supplies Expense
500,000 (a)
(e) 70,000
Used 13,000
10,000 (b)
(f) 3,000
510,000
73,000
13,000
(4)
Rent Receivable
(5) Receivables
from Employees
(6) Maintenance
Supplies
(b) 10,000
(g) 2,000
13,000 used
10,000
2,000
(j) 2,000
(7) Unearned
Rent Revenue
(8)
Salaries Payable
14,000 (c)
(d) 6,000
6,000 Bal.
Inferred
3,000 (f)
14,000
3,000
6,000 (d) to employees
70,000 (e) to employees
2,000 (g) to employees
8,000 (i) to suppliers
3. Maintenance supplies expense
Income statement
4. Rent receivable
5. Receivables from employees
6. Maintenance supplies
8. Salaries payable
CP4–5.
Req. 1
Unadjusted
Trial Balance
Adjusted
Trial Balance
Post-Closing
Trial Balance
Account
Debit
Credit
Debit
Credit
Debit
Credit
Cash
25,000
25,000
25,000
Maintenance supplies
Service equipment
service equipment
Remaining assets
Note payable, 6%
Interest payable
600
600
Income taxes payable
13,020
13,020
Wages payable
400
400
Unearned revenue
13,600
3,600
3,600
Common stock
Additional paid-in capital
Retained earnings
Service revenue
Expenses
Ending Retained Earnings = Beg., $12,000 + Net income, ($224,000 – $183,520)
Req. 2
(a) To record the amount of supplies used during the current year, $500, and to
reduce the supplies account to the amount remaining on hand at the end of the
current year.
CP4–5. (continued)
Req. 3
Closing Entry on December 31 of the Current Year:
Service revenue (from the adjusted trial balance) (−R) ……… 224,000
Retained earnings (+SE) …………………………………….. 40,480
Expenses (from the adjusted trial balance) (−E) ……… 183,520
Req. 4
CP4–6.
Transaction (a):
1. This transaction will affect Carey’s financial statements for 14 years (from 2016
through 2029) in conformity with the matching principle. [$14,000 ÷ $1,000 per year
= 14 years]
4. An adjusting entry each year over the life of the asset would be recorded to reflect
the allocation of the cost of the asset when used to generate revenues:
Depreciation expense (+E, −SE) . . . . . . . .
1,000
Accumulated depreciation (+XA, −A) .
1,000
Transaction (b):
1. This transaction will affect Carey’s financial statements for 2 years—2018 and 2019–
–because four month’s rent revenue was earned in 2018, and two months’ rent
revenue will be earned in 2019.
4. Yes, an adjusting entry must be made to (a) increase the Rent Revenue account by
$10,000 for two months’ rent earned in 2019 and (b) to decrease the liability to $0
CP4–6. (continued)
Transaction (c):
1. This transaction will directly affect Carey’s financial statements for two years, with
the expense incurred in 2018 and the cash payment in 2019.
2. The $7,500 should be reported as wage expense in the 2018 income statement and
as a liability on the 2018 balance sheet. On January 5, 2019, the liability will be
3. Yes, an adjusting entry must be made to (a) record the $7,500 as an expense in
2018 (matching principle) and (b) to record the liability which will be paid in 2019.
Transaction (d):
1. Yes, service revenue of $45,000 (i.e., $60,000 x 3/4) should be recorded as earned
by Carey in conformity with the revenue principle. Service revenue is recognized as
the service is performed.
2. Recognition of revenue earned but not collected by the end of 2018 requires an
adjusting entry. This adjusting entry is necessary to (a) record the revenue earned
3. February 15, 2019—Completion of the last phase of the service contract and cash
collected in full:
CP4–7.
Req. 1
CRYSTAL’S DAY SPA AND SALON, INC.
Income Statement
For the Year Ended December 31, 2018
Items
Cash
Basis Per
Crystal’s
Statement
Explanation of Changes
Corrected
Basis
Revenues:
Spa fees
$1,215,000
See * below.
$1,102,000
Expenses:
Office rent
Exclude rent for Jan. 2019 ($130,000 ÷ 13) (g)
Utilities
No change
Telephone
See ** below.
Salaries
Add December 2018 salary ($18,000 ÷ 12) (e)
Supplies
See *** below.
Miscellaneous
No change
Depreciation
Given for 2018 (c)
Total expenses
Net income
*
Cash collected for spa fees
$1,215,000
Fees earned in prior years (a)
-142,000
Fees earned in 2018 but not yet collected (b)
+ 29,000
Fees earned in 2018
$1,102,000
**
$12,200 telephone paid + $1,400 December 2018 telephone bill – $1,800
December 2017 bill paid in 2018 = $11,800
Beg. 3,125
End. 5,200
Financial Accounting, 9/e 4-75
CP4–7. (continued)
Req. 2
Memo to Crystal Mullinex should include the following:
(1) Net income was overstated by $122,525 because of inappropriate recognition of
revenue (overstated by $113,000) and expenses (understated by $9,525).
(2) Some other items the parties should consider in the pricing decision:
(a) A correct balance sheet at December 31, 2018.
(b) Collectability of any receivables (if they are to be sold with the business).
CRITICAL THINKING CASES
CP4–8.
Req. 1
2017
Adjusting Entries
Debit
Credit
12/31
(a)
Supplies expense (+E, −SE)…………………
2,200
Supplies (−A)……………………………….
2,200
($4,000 – $1,800 = $2,200)
(b)
Insurance expense (+E, −SE)…………………….
3,000
Prepaid insurance (−A)……………………
3,000
($6,000 ÷ 2 years)
(c)
Depreciation expense (+E, −SE)…………………
8,000
Accumulated depreciation (+XA, −A)…….
(d)
Salaries expense (+E, −SE)…………………………
3,200
Salaries payable (+L)………………………
3,200
(e)
Transportation revenue (−R, −SE) ………
7,000
Unearned transportation revenue (+L)……
7,000
Transportation revenue is too high and needs to be
reduced and an Unearned Revenue account
created for the appropriate amount.
Income tax expense (+E, −SE)……………………
Income tax payable (+L)……………………
To record 2017 income tax computation:
Transportation revenue: $85,000 − $7,000 = $78,000
Expenses: $47,000 + $2,200 + $3,000
Financial Accounting, 9/e 4-77
CP4–8. (continued)
Req. 2
STOSCHECK MOVING CORPORATION
Corrections to 2017 Financial Statements
Amounts
Reported
Changes
Debit Credit
Corrected
Amounts
2017 Income Statement:
Revenue:
Transportation revenue
$ 85,000
e
7,000
$ 78,000
Expenses:
Salaries expense
17,000
d
3,200
20,200
December 31, 2017, Balance Sheet
Assets:
Current Assets:
Cash
$ 2,000
$ 2,000
Receivables
3,000
3,000
Supplies
4,000
a
2,200
Prepaid insurance
b
3,000
Total current assets
15,000
9,800
Equipment
40,000
40,000
Less: Accumulated deprec.
0
8,000
Remaining assets
27,000
Total assets
$82,000
$68,800
Liabilities:
Current Liabilities:
Accounts payable
$ 9,000
$ 9,000
Salaries payable
0
d
3,200
3,200
Unearned transportation revenue
0
e
7,000
7,000
Income tax payable
0
f
5,110
5,110
Total current liabilities
9,000
24,310
Stockholders’ Equity
Common stock
35,000
35,000
Retained earnings
Total stockholders’ equity
equity
Supplies expense
12,000
a
2,200
14,200
Other expenses
18,000
18,000
Insurance expense
0
b
3,000
3,000
Depreciation expense
0
8,000
8,000
Income tax expense
0
f
5,110
Total expenses
Net income
$ 38,000
CP4–8. (continued)
Req. 3
Omission of the adjusting entries caused:
(a) Net income to be overstated by $28,510.
Req. 4
(a) Earnings per share:
Unadjusted — $38,000 net income 10,000 shares = $3.80 per share
Adjusted — $ 9,490 net income 10,000 shares = $0.95 per share
Financial Accounting, 9/e 4-79
CP4–8. (continued)
Req. 5
To the Stockholders of Stoscheck Moving Corporation:
We regret to inform you that your request for a $30,000 loan has been denied.
Total assets were overstated by $13,200 (i.e., $82,000 – $68,800). Supplies was
overstated by $2,200, prepaid insurance was overstated by $3,000, and the net book
value of the equipment was overstated by $8,000 because annual depreciation was not
properly recognized. Further, total liabilities were understated by $15,310.
requirement for small start-up businesses.
If you would like us to reconsider your application, please provide us the current market
values of any assets you would pledge as collateral.
Regards,
(your name)
Loan Application Department, Your Bank
CP4–9.
Req. 1 Cash from Operations: $36,000
CP4–9. (continued)
Req. 4
Adjusting entry (cash receipt credited to Unearned Subscriptions Revenue):
Unearned Subscriptions Revenue (L)
Subscriptions Revenue (R)
9/1 36,000
AJE 7,000
AJE 7,000
End. 29,000
End. 7,000
Req. 5
a. $9,000 revenue target based on cash sales:
This target is not clearly defined. Does management mean any cash
subscriptions received during the period? Your region generated $36,000 in
cash subscriptions. By this assumption, your region far exceeded the company’s
target. You may be entitled to a generous bonus due to your strong
b. $9,000 revenue target based on accrual accounting:
This situation is the same as the second assumption under a. Your region
earned $2,000 less than expected by the company.
FINANCIAL REPORTING AND ANLYSIS PROJECT
CP4–10.