SOLUTIONS TO PROBLEMS - CHAPTER 7

PROBLEM 7-1A
a.
Event Number Type of Transaction

20X6
1. Asset Source
2. Asset Exchange
3. Asset Use

20X7
1. Asset Source
2. Asset Exchange
3. Asset Exchange
4. Asset Exchange
5. Asset Use
6. Asset Use

b. 20X6 and 20X7
Effect of Transactions on Financial Statements

No. Assets = Liab. + Equity Rev. Exp. = Net Inc. Cash Flows
20X6
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

20X7
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 n/a n/a n/a
4a. + n/a n/a n/a n/a n/a n/a
4b. + n/a n/a n/a n/a n/a + OA
5. n/a n/a + OA
6. n/a n/a + n/a

PROBLEM 7-1A (cont.)

Note: All requirements for 20X6 are completed for c., d. and e. ; then the requirements for 20X7 are completed.
c.
Stanford & Sons

Date Account Titles Debit Credit

20X6
1. Accounts Receivable 255,000
Service Revenue 255,000

2. Cash 159,000
Accounts Receivable 159,000

Allowance for Doubtful Accounts 3,840

Stanford & Sons
T-Accounts, 20X6

Assets = Equity

Cash Accounts Receivable Service Revenue
2. 159,000 1. 255,000 2. 159,000 1. 255,000
Bal. 159,000 Bal. 96,000 Bal. 255,000

Allow. for Doubtful Accounts
3. 3,840* 3. 3,840
Bal. 3,840 Bal. 3,840

*\$96,000 x 4% =\$3,840; \$3,840 \$-0- = \$3,840

PROBLEM 7-1A (cont.)

d.
Stanford & Sons
Financial Statements
For the Period Ended 20X6

Income Statement

Service Revenue \$255,000

Net Income \$251,160

Statement of Changes in Equity

Beginning Contributed Capital \$ -0-
Plus: Capital Acquired -0-
Ending Contributed Capital \$ -0-

Beginning Retained Earnings -0-
Plus: Net Income 251,160
Ending Retained Earnings 251,160

Total Equity \$251,160

PROBLEM 7-1A d. (cont.)

Stanford & Sons
Financial Statements

Balance Sheet
As of the End of the Period 20X6

Assets
Cash \$159,000
Accounts Receivable \$ 96,000
Less: Allowance for Doubtful Accounts (3,840) 92,160
Total Assets \$251,160

Liabilities \$ -0-

Equity
Contributed Capital \$ -0-
Retained Earnings 251,160
Total Equity 251,160

Total Liabilities and Equity \$251,160

Statement of Cash Flows
For the Period Ending 20X6

Cash Flows From Operating Activities:
Inflow from Customers \$159,000
Net Cash Flow from Operating Activities \$159,000

Cash Flows From Investing Activities -0-

Cash Flows From Financing Activities -0-

Net Change in Cash 159,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance \$159,000

PROBLEM 7-1A (cont.)
e.
Stanford & Sons

Date Account Titles Debit Credit

20X6 Closing Entries
1. Service Revenue 255,000
Retained Earnings 255,000

2. Retained Earnings 3,840

T-Accounts 20X6 Closing Entries

Assets = Equity

Cash Accounts Receivable Retained Earnings
Bal. 159,000 Bal. 96,000 2. 3,840 1. 255,000
Bal. 251,160
Allow. for Doubt. Acc.
Bal. 3,840 Service Revenue
1. 255,000 Bal. 255,000
Bal. -0-

Bal. 3,840 2. 3,840
Bal. -0-

Stanford & Sons
After Closing Trial Balance
December 31, 20X6

Account Title Debit Credit

Cash \$159,000
Accounts Receivable 96,000
Allowance for Doubtful Accounts \$ 3,840
Retained Earnings 251,160

Totals \$255,000 \$255,000

PROBLEM 7-1A (cont.)

c. (20X7)
Stanford & Sons

Date Account Titles Debit Credit

20X7
1. Accounts Receivable 408,000
Service Revenue 408,000

2. Cash 411,000
Accounts Receivable 411,000

3. Allowance for Doubtful Accounts 1,800
Accounts Receivable 1,800

4a. Accounts Receivable 600
Allowance for Doubtful Accounts 600

4b. Cash 600
Accounts Receivable 600

5. Operating Expenses 126,000
Cash 126,000

Allowance for Doubtful Accounts 96

PROBLEM 7-1A c. (cont.)
20X7
Stanford & Sons
T-Accounts 20X7

Assets = Equity

Cash Accounts Receivable Retained Earnings
Bal. 159,000 Bal. 96,000 Bal. 251,160
2. 411,000 5. 126,000 1. 408,000 2. 411,000
4b. 600 4a. 600 3. 1,800 Service Revenue
Bal. 444,600 4b. 600 1. 408,000
Bal. 91,200 Bal. 408,000

Allow. for Doubtful Accounts
Bal. 3,840 6. 96
3. 1,800 4a. 600 Bal. 96
Bal. 2,640
6. 96* Operating Expense
Bal. 2,736 5. 126,000
Bal. 126,000

*\$91,200 x 3% = \$2,736; \$2,736 \$2,640 = \$96

PROBLEM 7-1A

d. (20X7)
Stanford & Sons
Financial Statements
For the Period Ended 20X7

Income Statement

Service Revenue \$408,000

Expenses
Operating Expenses \$126,000
Total Expenses (126,096)

Net Income \$281,904

Statement of Changes in Equity

Beginning Contributed Capital \$ -0-
Plus: Capital Acquired -0-
Ending Contributed Capital \$ -0-

Beginning Retained Earnings 251,160
Plus: Net Income 281,904
Ending Retained Earnings 533,064

Total Equity \$533,064

PROBLEM 7-1A d. (cont.)
20X7
Stanford & Sons
Financial Statements

Balance Sheet
As of the End of the Period 20X7

Assets
Cash \$444,600
Accounts Receivable \$ 91,200
Less: Allowance for Doubtful Accounts (2,736) 88,464
Total Assets \$533,064

Liabilities \$ -0-

Equity
Contributed Capital \$ -0-
Retained Earnings 533,064
Total Equity 533,064

Total Liabilities and Equity \$533,064

Statement of Cash Flows
For the Period Ending 20X7

Cash Flows From Operating Activities:
Inflow from Customers \$411,600
Outflow for Expenses (126,000)
Net Cash Flow from Operating Activities \$285,600

Cash Flows From Investing Activities -0-

Cash Flows From Financing Activities -0-

Net Change in Cash 285,600
Plus: Beginning Cash Balance 159,000
Ending Cash Balance \$444,600

PROBLEM 7-1A (cont.)
e. (20X7)
Stanford & Sons

Date Account Titles Debit Credit

20X7 Closing Entries
1. Service Revenue 408,000
Retained Earnings 408,000

2. Retained Earnings 126,096
Operating Expenses 126,000

Stanford & Sons
T-Accounts 20X7 Closing Entries

Assets = Equity

Cash Accounts Receivable Retained Earnings
Bal. 444,600 Bal. 91,200 Bal. 251,160
2. 126,096 1. 408,000
Bal. 533,064
Allow. for Doubtful Accounts
Service Revenue
Bal 2,736 1. 408,000 Bal. 408,000
Bal. -0-

Bal. 96 2. 96
Bal. -0-

Operating Expense
Bal. 126,000 2. 126,000
Bal. -0-

PROBLEM 7-1A e. (cont.)
20X7

Stanford & Sons
After Closing Trial Balance
December 31, 20X7

Account Title Debit Credit

Cash \$444,600
Accounts Receivable 91,200
Allowance for Doubtful Accounts \$ 2,736
Retained Earnings 533,064

Totals \$535,800 \$535,800

PROBLEM 7-2A
a.
Sales on Account \$292,000
Less: Ending Balance of Accounts Receivable (57,400)
Collections of Accounts Receivable \$234,600

b. Ending Accounts Receivable Balance \$57,400 x 4% = \$2,296 of Bad Debt Expense

c.
Martin's Appliance
General Journal, 20X2

Event Account Title Debit Credit

1. Accounts Receivable 292,000
Revenue 292,000

2. Cash 234,600
Accounts Receivable 234,600

Allowance for Doubtful Accounts 2,296

d. Accounts Receivable Ending Balance \$57,400
Less: Allowance for Doubtful Accounts (2,296)
Net Realizable Value of Accounts Receivable \$55,104

PROBLEM 7-2A (cont.)
e.

Martin's Appliance
Effect of Events on Financial Statements

Event Assets = Liab + Equity Rev. Exp. = Net Inc. Cash Flows
Cash + Acct. Rec. Allow. = n/a + Ret. Earn.
1. n/a + 292,000 n/a = n/a + 292,000 292,000 n/a = 292,000 n/a
2. 234,600 + (234,600) n/a = n/a + n/a n/a n/a = n/a 234,600 OA
3. n/a + n/a 2,296 = n/a + (2,296) n/a 2,296 = (2,296) n/a
Totals 234,600 + 57,400 2,296 = -0- + 289,704 292,000 2,296 = 289,704 234,600

PROBLEM 7-3A
a.
Effect of Transactions on Financial Statements

No. Assets = Liab. + Equity Rev. Exp. = Net Inc. Cash Flows
20X5
1. + n/a + n/a n/a n/a + FA
2. + n/a n/a n/a n/a n/a OA
3a. + n/a + + n/a + + OA
3b. + n/a + + + + n/a
3c. + n/a + + n/a + n/a
3d. n/a n/a + n/a
4. + n/a n/a n/a n/a n/a + OA
5. + n/a n/a n/a n/a n/a + OA
6. n/a n/a + n/a
7. n/a + n/a + n/a
8. n/a n/a + OA

Legend:
3a. Cash Sales
3b. Credit Card Sales (remember that the credit card expense is recorded)
3c. Sales on Account
3d. Cost of Sales

PROBLEM 7-3A (cont.)

b.
Buzz Company
General Journal, 20X5

Date Account Titles Debit Credit

1. Cash 300,000
Contributed Capital 300,000

2. Inventory 1,050,000
Cash 1,050,000

3a. Cash 580,000
Sales Revenue 580,000

3b. Accounts Receivable Credit Card Co. 412,800
Credit Card Expense 17,200
Sales Revenue 430,000

3c. Accounts Receivable 440,000
Sales Revenue 440,000

3d. Cost of Goods Sold 780,000
Inventory 780,000

4. Cash 412,800
Accounts Receivable Credit Card Co. 412,800

5. Cash 320,000
Accounts Receivable 320,000

Accounts Receivable 3,600

7. Warranty Expense 3,000
Warranty Payable 3,000

8. Selling and Administrative Exp. 96,000
Cash 96,000

PROBLEM 7-3A b. (cont.)

Buzz Company
T-Accounts

Assets = Liabilities + Equity

Cash Warranty Payable Contributed Capial
1. 300,000 2. 1,050,000 7. 3,000 1. 300,000
3a. 580,000 8. 96,000 Bal. 3,000 Bal. 300,000
4. 412,800
5. 320,000 Sales Revenue
Bal. 466,800 3a. 580,000
3b. 430,000
Accounts Receivable 3c. 440,000
3b. 412,800 4. 412,800 Bal. 1,450,000
3c. 440,000 5. 320,000
6. 3,600 Cost of Goods Sold
Bal. 116,400 3d. 780,000
Bal. 780,000
Inventory
2. 1,050,000 3d. 780,000 Bad Debt Expense
Bal. 270,000 6. 3,600
Bal. 3,600

Credit Card Expense
3b. 17,200
Bal. 17,200

Warranty Expense
7. 3,000
Bal. 3,000

8. 96,000
Bal. 96,000

PROBLEM 7-3A (cont.)
c.
Buzz Company
Financial Statements
For the Period Ended 20X5

Income Statement

Sales Revenue \$1,450,000

Cost of Goods Sold (780,000)

Gross Margin 670,000

Operating Expenses
Credit Card Expense 17,200
Warranty Expense 3,000

Total Expense (119,800)

Net Income \$ 550,200

Statement of Changes in Equity

Beginning Contributed Capital \$ -0-
Plus: Capital Acquired 300,000
Ending Contributed Capital \$300,000

Beginning Retained Earnings -0-
Plus: Net Income 550,200
Ending Retained Earnings 550,200

Total Equity \$850,200

PROBLEM 7-3A c. (cont.)

Buzz Company
Balance Sheet
As of the End of the Period 20X5

Assets
Cash \$466,800
Accounts Receivable 116,400
Merchandise Inventory 270,000
Total Assets \$853,200

Liabilities
Warranty Expense Payable \$ 3,000

Equity
Contributed Capital \$300,000
Retained Earnings 550,200
Total Equity 850,200

Total Liabilities and Equity \$853,200

PROBLEM 7-3A c. (cont.)

Buzz Company
Statement of Cash Flows
For the Period Ending 20X5

Cash Flows From Operating Activities:
Inflow from Customers \$1,312,800
Outflow for Inventory (1,050,000)
Outflow for Expenses (96,000)
Net Cash Flow from Operating Activities \$166,800

Cash Flows From Investing Activities -0-

Cash Flows From Financing Activities:
Cash Inflow from Capital Acquisition 300,000
Net Cash Flow from Financing Activities 300,000

Net Change in Cash 466,800
Plus: Beginning Cash Balance -0-
Ending Cash Balance \$466,800

PROBLEM 7-4A
7-4A Assets Liability Equity
2006 Cash n/p - Disc. Re/E Rev - Exp = N/I Cash Flow
Beg. Bal. 0 0 0 0 0 0 0 0
1 90,000 100,000 10,000 FA 90,000
2 168,000 168,000 168,000 168,000 OA 168,000
3 -66,000 -66,000 -66,000 -66,000 OA -66,000
4 -4,166 -4166 -4,166 -4,166 n/a
Balance 192,000 100,000 5,834 97,834 168,000 -70,166 97,834 192,000
2007
1 592,000 592,000 592,000 592,000 OA 592,000
2 -208,000 -208,000 -208,000 -208,000 OA -208,000
3 -100,000 -100,000 OA -10,000
3 -5,834 -5,834 -5834 -5,834 FA -90,000
Balance 476,000 0 0 476,000 592,000 -213,834 378,166 476,000

I. Income Statement
2006 2007
revenue 168,000 592,000
expense 70,166 213,834

Net income 97,834 378,166

II. Balance Sheet
A. Assets 2006 2007
Cash 192,000 476,000
Liability
Note pay. 100,000 0
Discount (5,834) 0
B. Total Liab. 94,166 0
Equity
R/E 97,834 476,000
Total Equity 192,000 476,000

III.
IV. Statement of Change in Equity
2006 2007
Beginning Contrib. Cap 0 0
Ending Contrib. Cap 0 0
Beginning R/E 0 97,834
N/I 97,834 476,000
Distr. 0 0
Ending R/E 97,834 476,000
Total Equity 97,834 476,000

V. Statement of Cash Flows
2006 2007
Operating Activities
Rev. from customers 168,000 592,000
Paid expences (66,000) (298,000)
Investing Activities 0 0
Financing Activities
Inflow from creditors 90,000 90,000
Net change in cash 192,000 476,000
Beginning cash bal 0 90,000

Ending cash balance 192,000 476,000

a.
Brown & Company
Effect of Transactions on Financial Statements

No. Assets = Liab. + Equity Rev. Exp. = Net Inc. Cash Flows
20X6
1 + + n/a n/a n/a n/a + FA
2. + n/a + + n/a + + OA
3. n/a n/a + OA
4. n/a + n/a + n/a

20X7
1. + n/a + + n/a + + OA
2. n/a n/a + OA
3a. n/a + n/a + n/a
3b. n/a n/a n/a n/a OA,FA

PROBLEM 7-4A (cont.) b.
Brown & Company
General Journal 20X6 and 20X7

Date Account Titles Debit Credit
20X6
1. Cash 90,000
Discount on Notes Payable 10,000
Notes Payable 100,000

2. Cash 168,000
Service Revenue 168,000

3. Operating Expense 66,000
Cash 66,000

4. Interest Expense1 4,167
Discount on Notes Payable 4,167

Closing Entries

5. cl. Service Revenue 168,000
Retained Earnings 168,000

cl. Retained Earnings 70,167
Operating Expense 66,000
Interest Expense 4,167

20X7
1. Cash 592,000
Service Revenue 592,000

2. Operating Expense 208,000
Cash 208,000

3a. Interest Expense2 5,833
Discount on Notes Payable 5,833

3b. Notes Payable 100,000
Cash 100,000

1\$10,000 x 5/12 = \$4,167
2\$10,000 x 7/12 = \$5,833

PROBLEM 7-4A b. (cont.)

Brown & Company
General Journal 20X6 and 20X7

Date Account Titles Debit Credit

20X7 Closing Entries

4. cl Service Revenue 592,000
Retained Earnings 592,000

cl Retained Earnings 213,833
Operating Expense 208,000
Interest Expense 5,833

PROBLEM 7-4A b. (cont.)

Brown & Company
T-Accounts

Assets = Liabilities + Equity

Cash Notes Payable Retained Earnings
20X6 20X6 20X6
1. 90,000 3. 66,000 1. 100,000 cl 70,167 cl 168,000
2. 168,000 Bal. 100,000 Bal. 97,833
Bal. 192,000 20X7 20X7
20X7 3b. 100,000 cl 213,833 cl 592,000
1. 592,000 2. 208,000 Bal. -0- Bal. 476,000
3b. 100,000
Bal. 476,000 Discount on Notes Pay. Service Revenue
20X6 20X6
1. 10,000 4. 4,167 cl 168,000 2. 168,000
Bal. 5,833 Bal. -0-
20X7 20X7
3a. 5,833 cl 592,000 1. 592,000
Bal. -0- Bal. -0-

Interest Expense
20X6
4. 4,167 cl 4,167
Bal. -0-
20X7
3a. 5,833 cl 5,833
Bal. -0-

Operating Expenses
20X6
3. 66,000 cl 66,000
Bal. -0-
20X7
2. 208,000 cl 208,000
Bal. -0-

PROBLEM 7-4A (cont.)
c.
Brown & Company
Financial Statements

Income Statements

20X6 20X7

Revenue \$168,000 \$592,000

Expenses
Operating Expense 66,000 208,000
Interest Expense 4,167 5,833

Total Expenses (70,167) (213,833)

Net Income \$ 97,833 \$378,167

Statements of Changes in Equity

20X6 20X7

Beginning Contributed Capital \$ -0- \$ -0-
Plus: Capital Acquired -0- -0-
Ending Contributed Capital -0- -0-

Beginning Retained Earnings -0- 97,833
Plus: Net Income 97,833 378,167
Ending Retained Earnings 97,833 476,000

Total Equity \$ 97,833 \$476,000

PROBLEM 7-4A c. (cont.)

Brown & Company
Balance Sheets

20X6 20X7

Assets
Cash \$192,000 \$476,000
Total Assets \$192,000 \$476,000

Liabilities
Notes Payable \$100,000 \$ -0-
Less, Discount on Notes Payable (5,833) -0-
Total Liabilities 94,167 -0-

Equity
Contributed Capital -0- -0-
Retained Earnings 97,833 476,000
Total Equity 97,833 476,000

Total Liabilities and Equity \$192,000 \$476,000

PROBLEM 7-4A c. (cont.)

Brown & Company
Statements of Cash Flows

20X6 20X7

Cash Flows From Operating Activities:
Inflow from Customers \$168,000 \$592,000
Outflow for Expenses (66,000) (208,000)
Ouflow for Interest -0- (10,000)
Net Cash Flow from Operating Activities 102,000 374,000

Cash Flows From Investing Activities -0- -0-

Cash Flows From Financing Activities:
Cash Inflow from Loan 90,000
Cash Outflow to Repay Loan (90,000)
Net Cash Flow From Financing Activities 90,000 (90,000)

Net Change in Cash 192,000 284,000
Plus: Beginning Cash Balance -0- 192,000
Ending Cash Balance \$192,000 \$476,000

PROBLEM 7-5A

Event Type of Event
Assets
Liabilities Contributed Capital Retained Earnings Net Income Cash Flow
a. AE + n/a n/a n/a n/a
b. AS + n/a n/a + + n/a
c. AE + n/a n/a n/a n/a +
d. AS/AE + n/a n/a + + +
e. AS + n/a n/a + + +
f. AU n/a n/a n/a
g. AU n/a n/a
h. AS + n/a n/a + + +
i. AU n/a n/a n/a
j. AS + + n/a n/a n/a +
k. AS + n/a n/a + + n/a
l. AU n/a n/a n/a
m. CE n/a + n/a n/a
n. AE + n/a n/a n/a n/a +
o. CE NA + n/a n/a

PROBLEM 7-6A
Balance Sheet
As of December 31, 20XX

Assets
Current Assets
Cash \$ 22,200
Accounts Receivable \$112,500
Less: Allow. for Doubtful Accounts (5,000) 107,500
Interest Receivable 620
Prepaid Rent 12,000
Supplies 2,000
Inventory 153,500
Notes Receivable 15,000
Total Current Assets \$312,820

Property, Plant and Equipment
Land 45,000
Equipment 75,000
Less: Accumulated Depreciation (37,500) 37,500
Total Property, Plant and Equipment 82,500

Total Assets \$395,320

Liabilities and Equity
Current Liabilities
Accounts Payable \$ 57,500
Unearned Revenue 55,600
Warranties Payable 1,620
Interest Payable 2,200
Salaries Payable 11,500
Total Current Liabilities \$128,420

Long-Term Liabilities
Notes Payable 132,500
Less: Discount on Notes Payable (3,000)
Total Long-Term Liabilities 129,500

Total Liabilities 257,920

Equity
Contributed Capital 50,000
Retained Earnings 87,400*
Total Equity 137,400

Total Liabilities and Equity \$395,320

*Must be computed: (\$23,000 + \$74,400 \$10,000 = \$87,400)

PROBLEM 7-6A (cont.)

Income Statement
For the Period Ending December 31, 20XX

Sales Revenue \$495,000

Cost of Goods Sold (178,600)

Gross Margin 316,400

Operating Expense
Salaries Expense \$120,000
Operating Expenses 87,500
Warranty Expense 4,200