Problem 1-2: Users of Accounting Information and Their Needs
Havre Company would like to buy a building and equipment to produce a new product line. Information about Havre is more useful to some people involved in the project than to others.
Complete the following chart by identifying the information listed with the user’s need to know the information. Identify the information as one of the following: a. Need to know, b. Helpful to know, or c. Not necessary to know.
1. Amount of current debt, repayment schedule, and interest rate
2. Fair market value of the building
3. Condition of the roof and heating and cooling, electrical, and plumbing systems
4. Total cost of the building, improvements, and equipment to set up production
5. Expected sales from the new product, variable production costs, and related selling costs.
Problem 1-5: Income Statement, Statement of Retained Earnings, and Balance Sheet
The following list, in alphabetical order, shows the various items that regularly appear on the financial statements of Maple Park Theatres Corp. The amounts shown for balance sheet items are balances as of September 30, 2012 (with the exception of retained earnings, which is the balance on September 1, 2012); and the amounts shown for income statement items are balances for the month ended September 30, 2012.
Accounts payable $17,600
Accounts receivable 6,410
Advertising expense 14,500
Capital stock 50,000
Concessions revenue 60,300
Cost of concessions sold 23,450
Dividends paid during the month 8,400
Furniture and fixtures 34,000
Notes payable 20,000
Projection equipment 25,000
Rent expense�”movies 50,600
Retained earnings 73,780
Salaries and wages expense 46,490
Ticket sales 95,100
Water, gas, and electricity 6,700
1. Prepare an income statement for the month ended September 30, 2012.
2. Prepare a statement of retained earnings for the month ended September 30, 2012.
3. Prepare a balance sheet at September 30, 2012.
4. You have $1,000 to invest. On the basis of the statements you prepared, would you use it to buy stock in Maple Park? Explain. What other information would you want before making a final decision?
Problem 2-4: Financial Statement Ratios
The following items, in alphabetical order, are available from the records of Walker Corporation as of December 31, 2012 and 2011:
Accounts payable 8400 5200
Accounts receivable 27830 35770
Cash 20200 19450
Cleaning supplies 450 700
Interest payable 0 1200
Inventory 24600 26200
Marketable securities 6250 5020
Note payable, due in six months 0 12000
Prepaid rent 3600 4800
Taxes payable 1450 1230
Wages payable 1200 1600
1. Calculate the following as of December 31, 2012 and 2011:
a. Working capital
b. Current ratio
2. On the basis of your answers to (1), comment on the company’s relative liquidity at the beginning and end of the year. Explain the change in the company’s liquidity from the beginning to the end of 2012.
Expert Consulting Services Inc. was organized on March 1, 2012, by two former college roommates. The corporation provides computer consulting services to small businesses. The following transactions occurred during the first month of operations.
March 2: Received contributions of $20,000 from each of the two principal owners of the new business in exchange for shares of stock.
March 7: Signed a two-year promissory note at the bank and received cash of $15,000. Interest, along with the $15,000, will be repaid at the end of the two years.
March 12: Purchased $700 in miscellaneous supplies on account. The company has 30 days to pay for the supplies.
March 19: Billed a client $4,000 for services rendered by Expert in helping to install a new computer system. The client is to pay 25% of the bill upon its receipt and the remaining balance within 30 days.
March 20: Paid $1,300 bill from the local newspaper for advertising for the month of March.
March 22: Received 25% of the amount billed to the client on March 19.
March 26: Received cash of $2,800 for services provided in assisting a client in selecting software for its computer.
March 29: Purchased a computer system for $8,000 in cash.
March 30: Paid $3,300 of salaries and wages for March.
March 31: Received and paid $1,400 in gas, electric, and water bills.
1. Prepare a table to summarize the preceding transactions as they affect the accounting equation. Identify each transaction with the date.
PROBLEM 3-5: Identification of Events With Source Documents
Many events are linked to a source document. Following is a list of events that occurred in an entity.
a. Paid a one-year insurance policy
b. Paid employee payroll
c. Provided services to a customer on account
d. Identified supplies in the storeroom destroyed by fire
e. Received payment of bills from customers
f. Purchased land for future expansion
g. Calculated Taxes Due
h. Entered into a car lease agreement and paid the tax, title, and license.
For each item, indicate if the event should be recorded. Identify one or more source documents generated from the event; which source document would be used to record the event when it produces more than one source document; and identify the information that is most useful in recoding the event in the accounts.
EXERCISE 4-26: Revenue Recognition, Cash and Accrual Basis
Hathaway Health Club sold three-year memberships at a reduced rate during its opening promotion. It sold 1,000 three-year nonrefundable memberships for $366 each. The club expects to sell 100 additional three-year memberships for $900 each over each of the next two years. Membership fees are paid when clients sign-up. The club’s bookkeeper has prepared the following income statement for the first year of business and projected income statements for Years 2 and 3. Cash-basis income statements:
Year 1 Year 2 Year 3
Sales 366000 90000 90000
Equipment* 100000 0 0
Salaries and wages 50000 50000 50000
Advertising 5000 5000 5000
Rent and utilities 36000 36000 36000
Net income (loss) 175000 -1000 -1000
*Equipment was purchased at the beginning of Year 1 for $100,000 and is expected to last for three years and then be worth $1,000.
1. Convert the income statements for each of the three years to the accrual basis.
2. Describe how the revenue recognition principle applies. Do you believe that the cash-basis or the accrual-basis income statements are more useful to management? To investors? Why?
PROBLEM 5-2: Calculation of Gross Profit Ratio for Wal-Mart and Target
The following information was summarized from the consolidated statements of income of Wal-Mart Stores, Inc. and Subsidiaries for the years ended January 31, 2011 and 2010, and the consolidated statements of operations of Target Corporation for the years ended January 29, 2011, and January 30, 2010. (For each company, years are labeled as 2010 and 2009, respectively, although Wal-Mart labels these as the 2011 and 2010 fiscal years.)[see the attached file for the table]
1. Calculate the gross profit ratios for Wal-Mart and Target for 2010 and 2009.
2. Which company appears to be performing better? What factors might cause the difference in the gross profit ratios of the two companies? What other information should you consider to determine how these companies are performing in this regard?
The following condensed income statements and balance sheets are available for Planter Stores for a two-year period. (All amounts are stated in thousands of dollars.)
Income Statements FY2012 FY2011
Revenues $35,982 $26,890
Cost of goods sold 12,594 9,912
Gross profit $23,388 $16,978
Operating expenses 13,488 10,578
Net income $9,900 $6,400
Balance Sheets December 31, 2012 December 31, 2011
Cash $9,400 $4,100
Inventory 4,500 5,400
Other current assets 1,600 1,250
Long-term assets, net 24,500 24,600
Total assets $40,000 $35,350
Current liabilities 9,380 10,600
Capital stock 18,000 18,000
Retained earnings 12,620 6,750
Total liabilities and stockholders’ equity $40,000 $35,350
Before releasing the 2012 annual report, Planter’s controller learns that the inventory of one of the stores (amounting to $500,000) was counted twice in the December 31, 2011, inventory. The inventory was correctly counted in the December 31, 2012 inventory.
1. Prepare revised income statements and balance sheets for Planter Stores for each of the two years. Ignore the effect of income taxes.
PROBLEM 6-1 Bank Reconciliation
The following information is available to assist you in preparing a bank reconciliation for Calico Corners on May 31, 2012:
a. The balance on the May 31, 2012, bank statement is $8,432.11.
b. Not included on the bank statement is a $1,250 deposit made by Calico Corners late on May 31.
c. A comparison between the canceled checks returned with the bank statement and the company records indicated that the following checks are outstanding at May 31:
No. 123 $23.40
No. 127 145.00
No. 128 210.80
No. 130 67.32
d. The Cash account on the company’s books shows a balance of $9,965.34.
e. The bank acts as a collection agency for interest earned on some municipal bonds held by Calico Corners. The May bank statement indicates interest of $465.00 earned during the month.
f. Interest earned on the checking account and added to Calico Corners’ account during May was $54.60. Miscellaneous bank service charges amounted to $50.00.
g. A customer’s NSF check in the amount of $166.00 was returned with the May bank statement.
h. A comparison between the deposits listed on the bank statement and the company’s books revealed that a customer’s check in the amount of $123.45 was recorded on the books during May but was never added to the company’s account.
The bank erroneously added the check to the account of Calico Closet, which has an account at the same bank.
i. The comparison of deposits per the bank statement with those per the books revealed that another customer’s check in the amount of $101.10 was correctly added to the company’s account.
In recording the check on the company’s books, however, the accountant erroneously increased the Cash account by $1011.00.
1. Prepare a bank reconciliation in good form.
PROBLEM 6-5: Internal Control
At Morris Mart Inc., all sales are on account. Mary Morris-Manning is responsible for mailing invoices to customers, recording the amount billed, opening mail, and recording the payment. Mary is very devoted to the family business and never takes off more than one or two days for a long weekend. The customers know Mary and sometimes send personal notes with their payments. Another clerk handles all aspects of accounts payable. Mary’s brother, who is president of Morris Mart, has hired an accountant to help with expansion.
1. List some problems with the current accounts receivable system.
2. What suggestions would you make to improve internal control?
3. How would you explain to Mary that she personally is not the problem?