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
3. Bad Debt Expense 3,840
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
Bad Debt Expense
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
Bad Debt Expense (3,840)
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
Bad Debt Expense 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-
Bad Debt Expense
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
6. Bad Debts Expense 96
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
Bad Debt Expense
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
Bad Debt Expense 96
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
Bad Debt Expense 96
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-
Bad Debt Expense
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
3. Bad Debt Expense 2,296
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
6. Bad Debts Expense 3,600
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
Selling & Adm. Expense
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
Bad Debt Expense $ 3,600
Credit Card Expense 17,200
Warranty Expense 3,000
Selling & Adm. Expense 96,000
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
Bad Debts Expense 13,500
Total Operating Expense (225,200)
Net Operating Income 91,200
Non-Operating Items
Interest Revenue 5,200
Interest Expense (30,000)
Gain on Sale of Equipment 8,000
Total Non-Operating Items (16,800)
Net Income $ 74,400