SOLUTIONS TO EXERCISES - CHAPTER 7

EXERCISE 7-1

a.

Scott Cleaning Service

T-Accounts
     

Assets

=

Liabilities

+

Equity
                           

Cash

      

Retained Earnings

20X4

                

 20X4

  

2.

   8,000

                    

 cl

  9,900

Bal.

   8,000

                    

 Bal.

  9,900

20X5

                        

3.

   9,000

                

Revenue

Bal.

17,000

                    

 20X4

  
                   

cl

10,000

 1.

10,000

Accounts Receivable

                

 Bal.

       -0-

20X4

                      

 20X5

  

1.

10,000

 2.

   8,000

                

 2.

12,000

Bal.

   2,000

                    

 Bal.

12,000

20X5

                          

2.

12,000

 1.

        80

            

Bad Debts Expense
   

 3.

   9,000

            

20X4

      

Bal.

   4,920

                

3.

     100

 cl

     100
                   

Bal.

       -0-

    

Allow. for Bad Debts

            

20X5

      
   

 20X4

              

4.

     226

    
   

 3.

      100

            

Bal.

     226

    
   

 Bal.

      100

                    
   

 20X5

                      

1.

         80

 4.

      226

                    
   

 Bal.

      246

                    
                           

EXERCISE 7-1 (cont.)

b.

Scott Cleaning Service

Financial Statements

For the Period Ended December 31, 20X4
 

Income Statement
         
 

Revenue

  

$10,000

  
         
 

Expenses

  

 

 
 

    Bad Debt Expense

  

(100)

  
         
 

Net Income

  

$  9,900

  
         

Statement of Changes in Equity
         
 

Beginning Contributed Capital

$      -0-

    
 

Plus: Capital Acquisitions

-0-

    
 

Ending Contributed Capital

  

$      -0-

  
         
 

Beginning Retained Earnings

-0-

    
 

Plus: Net Income

9,900

    
 

Ending Retained Earnings

  

9,900

  
         
 

Total Equity

  

$9,900

  
         

EXERCISE 7-1 b. (cont.)

Scott Cleaning Service

Financial Statements
         

Balance Sheet

As December 31, 20X4
         
 

Assets

      
 

   Cash

  

$8,000

  
 

   Accounts Receivable

$2,000

    
 

   Less: Allow. for Doubtful Acct.

(100)

1,900

  
         
 

Total Assets     

 

$9,900

  
         
 

Liabilities

  

$    - 0-

  
         
 

Equity

      
 

   Contributed Capital

$      -0-

    
 

   Retained Earnings

9,900

    
 

Total Equity

  

9,900

  
         
 

Total Liabilities and Equity

  

$9,900

  
         

Statement of Cash Flows

For the Period Ending December 31, 20X4
       
 

Cash Flows From Operating Activities:

    
 

  Inflow from Customers

   $8,000

  
       
 

Cash Flows From Investing Activities

            -0-

  
       
 

Cash Flows From Financing Activities

            -0-

  
       
 

Net Change in Cash

      8,000

  
 

Plus: Beginning Cash Balance

            -0-

  
 

Ending Cash Balance

   $8,000

  
       

EXERCISE 7-1 (cont.)

c.   For accounting equation T-accounts, see a. above.

Scott Cleaning Service

Financial Statements

For the Period Ended December 31, 20X5

  
 

Income Statement
         
 

Revenue

  

$12,000

  
         
 

Expenses

  

 

 
 

  Bad Debt Expense

  

(226)

  
         
 

Net Income

  

$11,774

  
         

Statement of Changes in Equity

  
           
 

Beginning Contributed Capital

$      -0-

      
 

Plus: Capital  Acquisition

-0-

      
 

Ending Contributed Capital

  

$        -0-

    
           
 

Beginning Retained Earnings

$9,900

      
 

Plus: Net Income

11,774

      
 

Ending Retained Earnings

  

21,674

    
           
 

Total Equity

  

$21,674

    
           

EXERCISE 7-1 c. (cont.)

Scott Cleaning Service

Financial Statements
 

Balance Sheet

As of December 31, 20X5
         
 

Assets

      
 

  Cash

  

$17,000

  
 

  Accounts Receivable

$ 4,920

    
 

  Less: Allow. for Doubtful Accts.

(246)

4,674

  
 

Total Assets     

 

$21,674

  
         
 

Liabilities

  

$      -0-

  
         
 

Equity

      
 

  Contributed Capital

$       -0-

    
 

  Retained Earnings

21,674

    
 

Total Equity

  

21,674

  
         
 

Total Liabilities and Equity

  

$21,674

  
         

Statement of Cash Flows
       
 

Cash Flows From Operating Activities:

    
 

   Inflow from Customers

   $  9,000

  
       
 

Cash Flows From Investing Activities

             -0-

  
       
 

Cash Flows From Financing Activities

             -0-

  
       
 

Net Change in Cash

       9,000

  
 

Plus: Beginning Cash Balance

       8,000

  
 

Ending Cash Balance

  $17,000

  
       

EXERCISE 7-2

 

Event

Assets

=

Liab.

+

Equity

  

Rev.

–

Exp.

=

Net Inc.

  

Cash Flow

  
                               
 

1.

+

  

n/a

  

+

  

+

  

n/a

  

+

  

n/a

  
 

2.

+ –

  

n/a

  

n/a

  

n/a

  

n/a

  

n/a

  

+  OA

  
 

3.

–

  

n/a

  

–

  

n/a

  

+

  

–

  

n/a

  
 

4.

+ –

  

n/a

  

n/a

  

n/a

  

n/a

  

n/a

  

n/a

  
                               

EXERCISE 7-3

a.  Analyze the Accounts Receivable account:

Accounts Receivable
   

Beginning Balance

$ 1,000

Plus: Revenue on Account

 5,000

Less: Write-off

( 60)

Less: Ending Balance

(1,200)

Collections of Accounts Rec.

$ 4,740
   

b.  Analyze the Allowance for Doubtful Accounts account:

Allowance for Doubtful Accounts
   

Beginning Balance

$ 50

Less: Write-off

( 60)

Less: Ending Balance

( 75)

Bad Debt Expense

$ 85
   

Note to Instructor:  This information can also be shown in T-Account format.

EXERCISE 7-4

Selected T-Accounts:

Cash

  

Allowance for Doubt Acct.

  

Bad Debt Expense

20X7

      

12/31/X6

  

20X7

  

2.          876

      

Bal.      2,784

  

5.      3,668

  

4.  188,000

      

20X7

      
     

1.       3,240

2.              876

      

Accounts Receivable

    

Bal.          420

      

12/31/X6

      

5.          3,668

      

Bal. 77,000

      

Bal.      4,088

      

20X7

              

2.          876

1.      3,240

            

3.  196,000

2.          876

            
 

4.  188,000

            

Bal. 81,760

              
               

20X7 transactions:

1.   Bad accounts written off: $3,240

2.      Collected previously written off accounts:      876

3.   Sales on account:      196,000

4.      Collections of accounts receivable:      188,000

5.   Uncollectible accounts;           5% of Acct. Rec.

a.  1.     Allowance for Doubtful Accounts, 12/31/X7: $  4,088

     2.     Accounts Receivable, 12/31/X7     81,760

     3.    Net Realizable Value: $81,760 – $4,088 =     77,672

b.   Bad Debt Expense 20X7 ($81,760 x 5%) = $4,088 - $420 =    $3,668

c.   The recovery of the previously written off account will cause two asset exchange transactions.  First, reinstate the accounts receivable; + Accounts Receivable, +Allowance for Doubtful Accounts.  Second, record the collection of the accounts receivable; +Cash, – Accounts Receivable.

EXERCISE 7-5

Accounts Receivable

  

Allowance for Doubt. Accts.

Cr. Sales    310,000

coll.         285,000

  

chg. Off            275

est.                  1,017
 

chg. Off           275

    

Bal.                    742

Bal.               24,725

        
         
         

a.       

1.          $24,725 (see above)

2.      $742 ($24,725 x 3%)

3.               $1,017 (estimate of bad debts, see above)

4.          $23,983 ($24,725 - $742)

b.

1.               $24,725 (same as above)

2.               $275 (the amount charged off)

3.          $24,725 (the balance of accounts receivable)

EXERCISE 7-9

Note:  T-Accounts are provided for the use of the instructor.

Assets

=

Liabilities

+

Equity
         

Cash

  

Warranties Payable

  

Revenue

Sales   105,000

Pur. 90,000

  

Pd.       150

Est.   6,300

    

Sales  105,000
 

Pd.       150

    

Bal.   6,150

      

Bal. 14,850

          

Cost of Goods Sold
           

Sold 90,000

  

Inventory

            

Pur. 90,000

Sold 90,000

        

Warranty Expense

Bal.         -0-

          

Est.    6,300

  
               

Wendy’s Computers

Financial Statements
 

Income Statement
         
 

Revenue

  

$105,000

  
         
 

Cost of Goods Sold

  

(90,000)

  
         
 

Gross Margin

  

15,000

  
         
 

Warranty Expense

  

(6,300)

  
         
 

Net Income

  

$       8,700

  
         

Statement of Cash Flows
         
 

Cash Flows From Operating Activities:

      
 

      Inflow from Customers

$105,000

    
 

      Outflow for Inventory

(90,000)

    
 

      Outflow for Warranty Expense

(150)

    
 

Net Cash Flow from Operating Expenses

  

$14,850

  
         
 

Cash Flows From Investing Activities

  

-0-

  
         
 

Cash Flows From Financing Activities

  

-0-

  
         
 

Net Change in Cash

  

14,850

  
 

Plus: Beginning Cash Balance

  

-0-

  
 

Ending Cash Balance

  

$14,850

  
         

EXERCISE 7-9 (cont.)

The difference between net income and cash flows from operating activities is the difference in the amount of warranty expense accrued and the amount actually paid.  The estimated warranty expense based on a percent of sales amounted to $6,300, but only $150 of that amount was actually paid.

EXERCISE 7-10

a.

 

Event

Assets

=

Liab.

+

Equity

  

Rev.

-

Exp.

=

Net Inc.

  

Cash Flow

  
                               
 

Est.

n/a

  

+

  

-

  

n/a

  

+

  

-

  

     n/a

  
 

Pd.

-

  

-

  

n/a

  

n/a

  

n/a

  

n/a

  

-  OA

  
                               

Event

Account Titles

Debit

Credit
       

b.

      

Est.

Warranty Expense

700

  
 

     Warranty Payable

  

700
       

c.

      

Payment

Warranty Payable

298

  
 

     Cash

  

298
       

d. Warranty obligations may be uncertain, but they usually represent legal liabilities that must be recognized in the accounts.

EXERCISE 7-11

Note:  T-Accounts are provided for the use of the instructor.

Cash

  

Notes Payable

  

Revenue

1.   90,000

      

1.  100,000

    

2. 27,500

2. 27,500

      

Bal. 100,000

    

Bal. 27,500

Bal. 117,500

              
     

Disc. on Notes Pay.

  

Interest Expense
     

1. 10,000

3.     8,333

  

3. 8,333*

  
     

Bal. 1,667

    

Bal. 8,333

  

* $10,000 x 10/12 = $8,333

a.   Total Liabilities:

Notes Payable

$100,000

Less: Discount on Notes Payable

(1,667)

Total Liabilities

$  98,333
   

b.      Income Reported on the Income Statement:

Revenue

$27,500

Less: Interest Expense

(8,333)

Net Income

$19,167

c.   Cash Flows From Operating Activities:

            Inflow from Customer      $27,500

EXERCISE 7-11 (cont.)

d.

Tebett’s General Journal
       

Date

Account Titles

Debit

Credit
       

3/1/X6

Cash

90,000

  
 

Discount on Notes Payable

10,000

  
 

          Notes Payable

  

100,000
       

12/31/X6

Interest Expenses

8,333

  
 

     Discount on Notes Payable

  

8,333
       

2/28/X7

Interest Expense

1,667

  
 

     Discount on Notes Payable

  

1,667
       

2/28/X7

Notes Payable

100,000

  
 

     Cash

  

100,000
       

EXERCISE 7-12

a.

     

Balance Sheet

  

Income Statement

  

Statement of

 
 

Event

  

Assets

=

Liabilities

+

Equity

  

Rev.

-

Exp.

=

Net Inc.

  

Cash Flows

  
     

Cash

=

Notes Pay.

-

Disc. on NP

+

Ret. Ear.

                  
                                     
 

1.

  

13,500

=

15,000

-

1,500

+

n/a

  

n/a

-

n/a

=

n/a

  

13,500 FA

  
                                     
     

Balance Sheet

  

Income Statement

  

Statement of

 
 

Event

  

Assets

=

Liabilities

+

Equity

  

Rev.

-

Exp.

=

Net Inc.

  

Cash Flows

  
     

Cash

=

Notes Pay.

+

Int. Pay.

+

Ret. Ear.

                  
                                     
 

2.

  

15,000

=

15,000

+

n/a

+

n/a

  

n/a

-

n/a

=

n/a

  

15,000 FA

  
                                     

b.      Discount Note:           15,000 x 10% =      $1,500

      Short-Term Note:               15,000 x 10% =      $1,500

c.      Discount Note:           Principal      $13,500.

      Short-Term Note:               Principal      $15,000.

d.      Effective Interest Rate = Interest Paid ¸ Principal Amount

      Discount Note:           $1,500 ¸ $13,500 = 11.11%

      Short-Term Note:               $1,500 ¸ $15,000 = 10%

The effective interest rate is higher for the discount note.  Both notes paid the same amount of interest, but only $13,500 of cash was received from the loan for the discount note.

EXERCISE 7-13

Marque Dollar

General Journal
       

Date

Account Titles

Debit

Credit
       

a.

      

6/1/X6

Cash

17,600

  
 

Discount on Notes Payable

2,400

  
 

     Notes Payable

  

20,000
       

b.

      

12/31/X6

Interest Expense*

1,400

  
 

     Discount on Notes Payable

  

1,400
       

c.

      

5/31/X7

Interest Expense**

1,000

  
 

     Discount on Notes Payable

  

1,000
       

5/31/X7

Notes Payable

20,000

  
 

     Cash

  

20,000
       

*$2,400 x 7/12 = $1,400

**$2,400 x 5/12 = $1,000