Chapter 4 Problems
|4-8|4-11|4-8a|4-11a|Case 4-3|Case 4-5|
Hellar Company was established to manufacture components for the auto industry. The components are shipped the same day they are produced. The following events took place during the first year of operations.
a. Issued common stock for a $50,000 cash investment.
b. Purchased a delivery truck at the beginning of the year at a cost of $10,000 cash. The truck is expected to last five years and will be worthless at the end of that time.
c. Manufactured and sold 500,000 components the first year. The costs incurred to manufacture the components are (1) $1,000 monthly rent on a facility that included utilities and insurance; (2) $400,000 of raw materials purchased on account; $100,000 is still unpaid as of year-end but all materials were used in manufacturing; and (3) $190,000 paid in salaries and wages to employees and supervisors.
d. Paid $100,000 to sales and office staff for salaries and wages.
e. Sold all components on account for $2 each. _ As of year-end, $150,000 is due from customers.
1. How much revenue will Hellar recognize under the cash basis and under the accrual basis?
2. Describe how Hellar should apply the matching principle to recognize expenses.
3. Prepare an income statement under the accrual basis. Ignore income taxes.
Moonlight Bay Inn is incorporated on January 2, 1995, by its three owners, each of whom contributes $20,000 in cash in exchange for shares of stock in the business. In addition to the sale of stock, the following transactions are entered into during the month of January:
January 2: A Victorian inn is purchased for $50,000 in cash. An appraisal performed on this date indicates that the land is worth $15,000 and the remaining balance of the purchase price is attributable to the house. The owners estimate that the house will have an estimated useful life of 25 years and an estimated salvage value of $5,000.
January 3: A two-year, 12%, $3_0,000 promissory note was signed at the Second State Bank. Interest and principal will be repaid on the maturity date of January 3, 1997.
January 4: New furniture for the inn is purchased at a cost of $15,000 in cash. The furniture has an estimated useful life of 10 years and no salvage value.
January 5: A 24-month property insurance policy is purchased for $6,000 in cash.
January 6: An advertisement for the inn is placed in the local newspaper. Moonlight Bay pays $450 cash for the ad, which will run in the paper throughout January.
January 7: Cleaning supplies are purchased on account for $950. The bill is payable within 30 days.
January 15: Wages of $4,230 for the first half of the month are paid in cash.
January 16: A guest mails the business $980 in cash as a deposit for a room to be rented for two weeks. The guest plans to stay at the inn during the last week of January and the first week of February.
January 31: Cash receipts from rentals of rooms for the month amount to $8,300.
January 31: Cash rec_eipts from operation of the restaurant for the month amount to $6,600.
January 31: Each stockholder is paid $200 in cash dividends.
1. Determine the effect on the accounting equation of each of the preceeding transactions.
2. Prepare a list of accounts for Moonlight Bay Inn at January 31, 1995. Reflect the recurring transactions for the month of January but not the necessary month-end adjustments.
3. Determine the effect on the accounting equation of the necessary adjustments at January 31, 1995, for each of the following:
a. Depreciation of the house.
b. Depreciation of the furniture.
c. Interest on the promissory note.
d. Recognition of the expired portion of the insurance.
e. Recognition of th earned portion of the guest's deposit.
f. Wages earned during the second half of January amount to $5,120 and will be paid on February 3.
g. Cleaning supplies on hand on January 31 amount to $230.
h. A gas and electric bill that is received from the city amounts to $740 and is payable by February 5.
i. Inc_ome taxes are to be accrued at a rate of 30% of income before taxes.
4. Prepare in good form the following financial statements:
a. Income statement for the month of January.
b. Statement of retained earnings for the month of January.
c. Balance sheet at January 31, 1995.
5. Assume that you are the loan officer at Second State Bank (refer to the transaction on January 3). What are your reactions to Moonlight's first month of operations? Are you comfortable with the loan you made?
Alice's Catering Service makes sandwiches for vending machines. The sandwiches are delivered to the vendor on the same day that they are made. The following events have taken place during the first year of operations.
a. On the first day of the year, issued common stock for a $20,000 cash investment and $10,000 investment of equipment. The equipment is expected to last 10 years and will be worthless at the end of that time.
b. Purchased a delivery truck a_t the beginning of the year at a cost of $14,000 cash. The truck is expected to last five years and will be worthless at the end of that time.
c. Made and sold 50,000 sandwiches during the first year of operations. The costs incurred to make the sandwiches are (1) $800 monthly rent on a facility that included utilities and insurance; (2) $25,000 of meat, cheese, bread, and condiments; all food was purchased on account, and $4,000 is still unpaid at year-end even though all of the food has been used; and (3) $35,000 paid in salaries and wages to employees and supervisors.
d. Paid $12,000 for part-time office staff salaries.
e. Sold all sandwiches on account for $2 each. As of year-end, $25,000 is still due from the vendors.
1. How much revenue will Alice's recognize under the cash basis and under the accrual basis?
2. Explain how accountants apply the revenue recognition principle to Alice's small business. What conditions would allow Alice to use the cash method to recognize revenue?
3. Prepare an income_ statement according to the accrual method. Ignore income taxes.
A list of accounts for Tenfour Trucking Company at January 31, 1995, follows. It reflects the recurring transactions for the month of January but does not reflect any month-end adjustments.
| Cash | $27,340 |
| Accounts Receivable | 41,500 |
| Prepaid Insurance | 18,000 |
| Warehouse | 40,000 |
| Accumulated Depreciation - Warehouse | 21,600 |
| Truck Fleet | 240,000 |
| Accumulated Depreciation - Truck Fleet | 112,500 |
| Land | 20,000 |
| Accounts Payable | 32,880 |
| Notes Payable | 50,000 |
| Interest Payable | 4,500 |
| Customer Deposits | 6,000 |
| Capital Stock | 100,000 |
| Retained Earnings | 40,470 |
| Freight Revenue | 165,670 |
| Gas and Oil Expense | 57,330 |
| Maintenance Expense | 26,400 |
| Wage and Salary Expense | 43,050 |
| Dividends | 20,000 |
1. Determine the effect on the accounting equation of the adjustments necessary for the following items:
a. Prepaid insurance represents the cost of a 24-month policy pu__rchased on January 1, 1995.
b. The warehouse has an estimated useful life of 20 years and an estimated salvage value of $4,000.
c. The truck fleet has an estimates useful life of six years and an estimated salvage value of $15,000.
d. The promissory note was signed on January 1, 1994. Interest at an annual rate of 9% and the principal of $50,000 are due on December 31, 1995.
e. The customer deposits represent amounts paid in advance by new customers. A total of $4,500 of the balance in Customer Deposits wa__s earned during January 1995.
f. Wages and salaries earned by employees at the end of January but not yet paid amount to $8,200.
g. Income taxes are accrued at a rate of 30% at the end of each month.
2. Prepare the following financial statements:
a. Income statement for the month of January.
b. Statement of retained earnings for the month ended January 31.
c. Balance sheet at January 31.
3. Compute Tenfour's current ratio. What does this ratio tell you about the company's liquidity?
4. Explain why it is not possible to compute a gross profit ratio for Tenfour. Describe a ratio that you believe would be a meaningful measure of profitability for a trucking company. Feel free to "invent" a ratio if you think it would be a meaningful measure of profitability.
Case 4-3 The Use of Net Income and Cash Flow to Evaluate a Company
After you have gained five years of experience with a large CPA firm, one of your clients, Software Solutions, asks you to take over as chief financial officer for the business. Software Solutions advises its clients on the purchase of software products and assists them in installing the programs on their computer systems. Because the business is relatively new (it began servicing clients in January 1995), its accounting records are somewhat limited. In fact, the only statement available is an income statement for the first year:
|
Statement of Income For The Year Ended December 31, 1995 |
||
| Revenues | $1,250,000 | |
| Expenses: | ||
Salaries and wages |
$480,000 | |
Supplies |
65,000 | |
Utilities |
30,000 | |
Rent |
120,000 | |
Depreciation |
345,000 | |
Interest |
138,000 | |
Total expenses |
1,178,000 | |
| Net income | $72,000 | |
Listum & Sellum, INC., is a medium-size Midwestern real estate company. It was founded five years ago by its two principal stockholders, Willie Listum and Dewey Sellum. Willie is president of the company and Dewey is vice-president of sales.
