Exercise 7-20 (LO 7-8)
Requirement 1
Step 1: Test for Impairment
The long-term asset is impaired since future cash flows ($7.1 million) are less than
book value ($8.6 million).
Requirement 2
Step 1: Test for Impairment
The long-term asset is not impaired since future cash flows ($10 million) exceed book
Exercise 7-21
Requirement 1
January 1
Debit
Credit
Equipment
19,500
Cash
19,500
(Purchase equipment for cash)
January 4
Debit
Credit
Accounts Payable
9,500
Cash
(Pay cash on account)
Inventory
82,900
Accounts Payable
82,900
(Purchase inventory on account)
January 15
Debit
Credit
Cash
22,000
Accounts Receivable
22,000
(Receive cash on account)
January 19
Debit
Credit
Salaries Expense
29,800
Cash
29,800
(Pay for salaries)
January 28
Debit
Credit
Utilities Expense
16,500
Cash
16,500
(Pay for utilities)
January 30
Debit
Credit
Accounts Receivable
Sales Revenue
(Sell inventory on account)
Cost of Goods Sold
Exercise 7-21 (continued)
Requirement 2
(a) January 31
Debit
Credit
Depreciation Expense
300
Accumulated Depreciation
300
(Record depreciation)
($300 = [$19,500−$1,500] / 60 months)
(b) January 31
Debit
Credit
Bad Debt Expense
5,900
Allowance for Uncollectible Accounts
5,900
(c) January 31
Debit
Credit
Interest Receivable
50
Interest Revenue
(Adjust interest revenue)
($50 = $12,000×5%×1/12)
(d) January 31
Debit
Credit
Salaries Expense
Salaries Payable
32,600
(Adjust salaries payable)
(e) January 31
Income Tax Expense
Income Tax Payable
9,000
(Adjust income taxes)
Exercise 7-21 (continued)
Requirement 3
TNT Fireworks
Adjusted Trial Balance
January 31, 2018
Accounts
Debit
Credit
Cash
$ 5,400
Accounts Receivable
223,000
Interest Receivable
50
Inventory
4,200
Notes Receivable
12,000
Land
155,000
Equipment
19,500
Allowance for Uncollectible Accounts
$ 8,100
Accumulated Depreciation
Accounts Payable
88,200
Salaries Payable
32,600
Income Tax Payable
9,000
Common Stock
220,000
Retained Earnings
50,000
Sales Revenue
220,000
Interest Revenue
50
Cost of Goods Sold
115,000
Salaries Expense
62,400
Utilities Expense
16,500
Bad Debt Expense
5,900
Depreciation Expense
Income Tax Expense
9,000
$628,250
$628,250
Exercise 7-21 (continued)
Requirement 3 (continued)
Accounts
Ending
Balance
Beginning balance in bold, entries during
January in blue, and adjusting entries in red.
Cash
5,400
=
58,700−19,500−9,500+22,000−29,800−16,500
Accounts Receivable
223,000
=
25,000−22,000+220,000
Interest Receivable
50
=
50
Inventory
4,200
=
36,300+82,900−115,000
Notes Receivable
=
Land
155,000
=
Equipment
=
Allowance for Uncollectible Accounts
8,100
=
2,200+5,900
Accumulated Depreciation
=
Accounts Payable
=
14,800−9,500+82,900
Salaries Payable
=
32,600
Income Tax Payable
9,000
=
Common Stock
220,000
=
Retained Earnings
=
Sales Revenue
220,000
=
Interest Revenue
50
=
50
Cost of Goods Sold
115,000
=
Salaries Expense
=
Utilities Expense
=
Bad Debt Expense
5,900
=
5,900
Depreciation Expense
=
Income Tax Expense
9,000
=
Exercise 7-21 (continued)
Requirement 4
TNT Fireworks
Multiple-Step Income Statement
For the month ended January 31, 2018
Sales revenue
$220,000
Cost of goods sold
115,000
Gross profit
$105,000
Utilities expense
Bad debt expense
Depreciation expense
Total operating expenses
Interest revenue
Income tax expense
Net income
$ 10,950
Requirement 5
TNT Fireworks
Balance Sheet
January 31, 2018
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$ 5,400
Accounts payable
Accounts receivable
223,000
Salaries payable
Less: Allowance
214,900
Income tax payable
Interest receivable
Total current liabilities
129,800
Inventory
Total current assets
224,550
Long-term assets:
Notes receivable
12,000
Stockholders’ Equity
Land
155,000
Common stock
220,000
Equipment
19,500
Retained earnings
60,950
*
Less: Accumulated depreciation
280,950
Total assets
$410,750
$410,750
Exercise 7-21 (concluded)
Requirement 6
January 31, 2018
Debit
Credit
Sales Revenue
220,000
Interest Revenue
50
Retained Earnings
220,050
(Close revenue accounts)
Retained Earnings
209,100
115,000
(Close expense accounts)
Requirement 7
(a) The return on assets ratio is:
(b) The profit margin is:
(c) The asset turnover ratio is:
PROBLEMS: SET A
Problem 7-1A (LO 7-1)
Land
Building
Purchase price of land
$70,000
Demolition of old building
9,000
Sale of salvaged materials
Architect fees (for new building)
Legal fees (for title investigation of land)
3,000
Building construction costs
Interest costs related to the construction
Totals
$643,000
Problem 7-2A (LO 7-1)
Requirement 1
The ovens should be recorded in the equipment account as detailed in the
following schedule:
Purchase price
$700,000
Freight costs
35,000
Electrical connections
Labor costs
Bread dough used in testing ovens
Safety guards
Total equipment
$780,200
Requirement 2
The repair costs of $4,000 for the oven damaged during installation should not be
Problem 7-3A (LO 7-2)
1. The amount Fresh Cut paid for goodwill is $1 million calculated
as follows:
(in millions)
Purchase price
$12.0
Less:
(2.7)
Goodwill
$ 1.5
2.
(in millions)
Debit
Credit
Accounts Receivable (at fair value)
1.6
Equipment (at fair value)
9.9
Notes Payable (at fair value)
Cash (at purchase price)
7-30 Financial Accounting, 1e
Problem 7-4A (LO 7-3)
1. Capitalize
2. Expense
3. Capitalize
4. Capitalize
5. Expense
6. Expense
increase earnings reported in the current year.
Problem 7-5A (LO 7-4)
Requirement 1 Straight-Line
University Car Wash
Calculation
End of Year Amounts
Year
Depreciable
Cost*
X
Depreciation
Rate
=
Depreciation
Expense
Accumulated
Depreciation
Book
Value**
1
$246,000
1/6
$41,000
41,000
$239,000
2
1/6
82,000
3
1/6
5
1/6
6
1/6
Total
Requirement 2 Double-declining-balance
University Car Wash
Calculation
End of Year Amounts
Year
Beginning
Book Value
X
Depreciation
Rate*
=
Depreciation
Expense
Accumulated
Depreciation
Book
Value**
1
$270,000
1/3
$90,000
90,000
$180,000
3
1/3
190,000
4
1/3
216,667
5
1/3
234,445
6
Total
*** Amount needed to reduce book value to residual value.
Requirement 3 Activity-based
University Car Wash
Calculation
End of Year Amounts
Year
Hours
Used
X
Depreciation
Rate*
=
Depreciation
Expense
Accumulated
Depreciation
Book
Value**
1
3,100
$20.50
$63,550
63,550
$206,450
2
1,100
$20.50
22,550
86,100
183,900
3
1,200
$20.50
24,600
159,300
4
2,800
$20.50
57,400
101,900
6
1,200
$20.50
24,600
Problem 7-6A (LO 7-5)
Requirement 1
a. Goodwill is not amortized.
Debit
Credit
b. Amortization Expense. . . . . .. .. . . .
11,750*
11,750
18,500*
Requirement 2
University Testing Services
Balance Sheet
December 31, 2018
(Intangible Assets section)
Intangible Assets
Goodwill
$310,000
Patents ($82,250 – $11,750)
Problem 7-7A (LO 7-4, 7-5)
Requirement 1
Debit
Credit
Depreciation Expense
58,880*
Accumulated Depreciation
58,880
Depreciation Expense
25,000*
Accumulated Depreciation
25,000
Requirement 2
Debit
Credit
Amortization Expense
50,000*
Patent
50,000
Requirement 3
Solich Sandwich Shop
December 31, 2018
Cost
Accumulated
Depreciation
Book
Value
Land
$ 95,000
–
$ 95,000
Building
Equipment
Patent
Problem 7-8A (LO 7-6)
Requirement 1
Requirement 2
Cost of the oven
$910,000
Less: Accumulated depreciation
(170,000)
$740,000
Requirement 3
Sale amount
$700,000
Less:
Cost of the oven
$910,000
Less: Accumulated depreciation
(170,000)
Loss
Requirement 4
Debit
Credit
Cash
700,000
Accumulated Depreciation
Loss
Equipment
Problem 7-9A (LO 7-7)
Requirement 1
Sub Station
Net
Income
÷
Average
Total Assets
=
Return
on Assets
$25,922
÷
($75,183 + $116,371)/2
=
27.1%
÷
Average
Total Assets
=
÷
($75,183 + $116,371)/2
=
Requirement 2
Planet Sub
Net
Income
÷
Average
Total Assets
=
Return
on Assets
$3,492
÷
($38,599 + $44,533)/2
=
8.4%
÷
Average
Total Assets
=
÷
($38,599 + $44,533)/2
=
1.5 times
Requirement 3
Sub Station has the higher profit margin, while Planet Sub has the higher asset
Problem 7-10A (LO 7-7)
Requirement 1
Sandwiches Only
Net
Income
÷
Average
Total Assets
=
Return
on Assets
$170,000
÷
$500,000
=
34.0%
÷
Average
Total Assets
=
÷
$500,000
=
Requirement 2
Sandwiches and Smoothies
Net
Income
÷
Average
Total Assets
=
Return
on Assets
$260,000
÷
$900,000
=
28.9%
÷
Average
Total Assets
=
÷
$900,000
=
Requirement 3
Do not go forward with the expansion plans. The return on assets, profit margin, and
7-38 Financial Accounting, 1e
PROBLEMS: SET B
Problem 7-1B (LO 7-1)
Land
Building
Purchase price of land
$90,000
Land clearing costs
5,000
Sale of firewood to a worker
Architect fees (for new building)
Legal fees (for title investigation of land)
3,500
Building construction costs
Problem 7-2B (LO 7-1)
Requirement 1
Purchase price
$341,000
Shipping costs
16,000
Labor costs
17,000
Electrical work
Pizza dough for testing ovens
New timers
Total equipment
$379,900
Requirement 2