8-54 Financial Accounting, 5e
Additional Perspective 8-1 (in General Ledger)
Students will be given the following existing trial balance.
Great Adventures, Inc.
Trial Balance
December 31, 2022
Accounts
Debit
Credit
Cash
$ 89,070
Accounts Receivable
50,000
Allowance for Uncollectible Accounts
$ 2,400
Inventory
7,000
Prepaid Insurance
Equipment
Accumulated Depreciation
25,250
Accounts Payable
20,800
Deferred Revenue
25,000
Warranty Liability
-0-
Contingent Liability
-0-
Income Tax Payable
14,500
Interest Payable
-0-
Notes Payable (current)
-0-
Notes Payable (long-term)
30,000
Common Stock
20,000
Retained Earnings
33,450
Service Revenue
44,500
Sales Revenue
100,000
Interest Revenue
Sales Discounts
Cost of Goods Sold
38,500
Insurance Expense
Rent Expense
Salaries Expense
Supplies Expense
Bad Debt Expense
2,400
Repairs and Maintenance Expense
Warranty Expense
-0-
Loss
-0-
Interest Expense
1,050
Income Tax Expense
8-56 Financial Accounting, 5e
Additional Perspective 8-1 (in General Ledger, continued)
750
750
10,000
20,000
20,000
12,000
12,000
Additional Perspective 8-1 (in General Ledger, continued)
Great Adventures, Inc.
Income Statement
For the period ended December 31, 2022
Service revenue
$ 44,500
Sales revenue
120,000
Sales discounts
(350)
164,150
Cost of goods sold
Depreciation Expense
Insurance Expense
Rent Expense
Salaries Expense
Supplies Expense
500
Bad Debt Expense
2,400
Repairs and Maintenance Expense
400
Warranty Expense
4,000
Loss
12,000
Total operating expenses
Interest revenue
Interest expense
Income tax expense
8-58 Financial Accounting, 5e
Additional Perspective 8-1 (in General Ledger, continued)
Great Adventures, Inc.
Balance Sheet
December 31, 2022
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$ 89,070
Accounts payable
$ 20,800
Accounts receivable
50,000
Deferred Revenue
5,000
Allow for Uncoll Accts
(2,400)
Warranty Liability
4,000
Inventory
Contingent Liability
Prepaid Insurance
Income tax payable
Total current assets
Interest payable
Notes Payable (current)
Long-term assets:
Total assets
Additional Perspective 8-1 (in General Ledger, concluded)
Dec. 31, 2022
Debit
Credit
Service Revenue
44,500
Sales Revenue
120,000
Interest Revenue
Dec. 31, 2022
Retained Earnings
Financial Analysis: American Eagle
AP8-2
($ in thousands)
Requirement 1
Total Current
Assets
÷
Total Current
Liabilities
=
Current
Ratio
2017
Requirement 2
Quick
Assets
÷
Total Current
Liabilities
=
Acid-Test
Ratio
2018
$491,917
÷
$485,221
=
1.01
2017
Requirement 3
If American Eagle used $100 million in cash to pay $100 million in accounts payable,
its current ratio and acid-test ratio will improve since they are greater than 1. The
calculations are provided as follows:
Total Current
Assets
÷
Total Current
Liabilities
=
Current
Ratio
Before
$968,530
÷
$485,221
=
2.00
After
÷
=
Total Current
Before
÷
$485,221
=
After
÷
=
Financial Analysis: The Buckle
AP8-3
($ in thousands)
Requirement 1
Total Current
Assets
÷
Total Current
Liabilities
=
Current
Ratio
=
=
Requirement 2
Quick
Assets
÷
Total Current
Liabilities
=
Acid-Test
Ratio
2018
$224,507
÷
$97,906
=
2.29
2017
÷
=
Requirement 3
If Buckle purchased $50 million of inventory by debiting inventory and crediting
accounts payable, its current ratio and acid-test ratio would weaken. The calculations
are provided as follows:
Total Current
Assets
÷
Total Current
Liabilities
=
Current
Ratio
Before
$360,584
÷
$97,906
=
3.68
After
$360,584 + $50,000
÷
$97,906 + $50,000
=
2.78
Assets
÷
Total Current
Liabilities
=
Ratio
Before
$224,507
÷
$97,906
=
2.29
After
$224,507 + $50,000
÷
=
8-62 Financial Accounting, 5e
Comparative Analysis: American Eagle vs. The Buckle
AP8-4
($ in thousands)
Requirement 1
Total
Current
Assets
÷
Total
Current
Liabilities
=
Current
Ratio
American Eagle
$968,530
÷
$485,221
=
2.00
Buckle
÷
=
3.68
Requirement 2
Quick
Assets
÷
Total
Current
Liabilities
=
Acid-Test
Ratio
American Eagle
$491,917
÷
$485,221
=
1.01
Buckle
$224,507
÷
=
2.29
Requirement 3
The purchase of additional inventory with accounts payable will decrease the current
Ethics
AP8-5
1. Eugene’s decision will have no effect on current assets but will understate current
liabilities.
2.
($ in millions)
Treatment
Total
Current
Assets
÷
Total
Current
Liabilities
=
Current
Ratio
Service
3. Yes.
By recording the cash received as revenue, the reported current ratio remains above
4. No.
Receiving cash in advance from customers is considered a liability. While Caribbean
Cruise Line has received the cash, it remains obligated to provide services to
8-64 Financial Accounting, 5e
Internet Research
AP8-6
This case provides an opportunity for students to research stock price and accounting
Written Communication
AP8-7
a. In order to record a contingent liability, the loss must be probable and the amount
must be reasonably estimable. A loss and liability will not be recorded for the
employee strikes, even though the likelihood of loss is probable (virtually certain),
Warranty Expense 15,000
Warranty Liability 15,000
(Loss contingency for warranties)
c. The likelihood of loss is reasonably possible rather than probable, so a contingent
AP8-8
Requirement 1
Yes.
Quattro can use the estimate for warranty expense to manage the reported amount of
net income. Quattro can report lower net income in 2021 by recording more warranty
Requirement 2
($ in millions)
Net Income Before
Warranty Expense
−
Warranty
Expense
=
Net Income
Requirement 3
Yes.
By recording $50 million in warranty expense in 2021 and $30 million in warranty