Exercise answer
Chapter 2
Exercise 2.6 (14th edition)
Transaction Assets=Liabilities+Owners’ Equity
a I I NE
b NE*NE NE
c D D NE
d D D NE
e I NE I
f I I NE
g I NE I
h NE*NE NE
i NE*NE NE
Exercise 2.8 (14th edition)
a.(1)Owner’s equity:
Johanna Small, capital....................................................................................$390,000 *$850,000 in assets - $460,000 in liabilities
(2)Partners’ equity:
Johanna Small, capital....................................................................................$240,000
Mikki Yato, capital.........................................................................................?150,000
Total partners’ equity.................................................................................$390,000 *Yato’s capital = $390,000 - Small’s capital, $240,000
(3)Stockholders’ equity:
Capital stock...................................................................................................$250,000
Retained earnings...........................................................................................?140,000
Total stockholders’ equity..........................................................................$390,000 *Capital stock = 25 ? $10,000. Retained earnings = $390,000 - capital stock.
b.Yes; the form of Fellingham’s organization is relevant to a lender. If the company is not incorporated, the
owner or owners are personally liable for the debts of the business organization. Thus, if the business is
organized as a sole proprietorship, it is actually Small’s personal debt-paying ability that determines the
collectibility of loans to the business. If the business is a partnership, all of the partners are personally liable for the company’s debts.
If Fellingham Software is organized as a corporation, however, a lender may look only to the corporate entity for payment.
Chapter 3
Exercise 3.2
a.Costs of owning and operating an automobile (estimates will vary; the following list is only
an example):
Insurance...................................................................................................................$1,000 Gasoline (15,000 miles at 30 mpg. ? $1.80/gal.) (900)
Registration and license (100)
Repairs and maintenance (200)
Depreciation..............................................................................................................1,200 Interest on car loan*.. (500)
Annual total...............................................................................................................$3,900 Average cost per mile ($3,900 ÷ 15,000 miles)........................................................$0.26
b.Although you spent no money during this trip, you incurred significant costs. For example,
you have used much of the gasoline in your tank. Also, the more miles you drive, the higher your repair and maintenance costs, depreciation, and insurance. Assuming that it cost you about 26 cents per mile to own and operate your vehicle, about $26 would be a reasonable estimate of your “driving expenses.”
Exercise 3.5
a.Liabilities at the beginning of the year: $6.0 billion – $3.9 billion = $2.1 billion
b.Owners’ equity at the end of the year: $6.3 billion – $2.2 billion = $4.1 billion
c.Ending owners’ equity (from part b).....................$4,100,000,000
Less: Beginning owners’ equity............................(3,900,000,000)
Increase in owners’ equity.....................................$ 200,000,000
Less: Increase in capital stock...............................(135,000,000)
Net income.............................................................$ 65,000,000
Chapter 4
Exercise 4.8
a.The total interest expense over the life of the note is $5,400 ($120,000 ? .09 ?6/12 = $5,400)
The monthly interest expense is $900 ($5,400 ÷ 6 = $900).
b.The liability to the bank at December 31, 2005, is $121,800 (Principal, $120,000 + $1,800
accrued interest).
c.2005
Oct.31Cash.....................................................................................120,000
Notes Payable.................................................120,000 Obtain from bank six-month loan with interest at 9% a year.
d.De31Interest Expense900
Interest Payable (900)
To accrue interest expense for December on note payable
($120,000 ? 9% ?1/12).
e.The liability to the bank at March 31, 2006, is $124,500, consisting of $120,000 principal plus
$4,500 accrued interest for five months.
Exercise 4.14
a.None (or Materiality). Accounting for immaterial items is not “wrong” or a “violation” of
generally accepted accounting principles; it is merely a waste of time. The bookkeeper
is failing to take advantage of the concept of materiality, which permits charging immaterial costs directly to expense, thus eliminating the need to record depreciation in later periods.
b.Matching.
c.Realization.
Chapter 5
Exercise 5.12
a.(1)Lift Ticket Revenue, $210,000 ($850,000 - $640,000)
(2)Cash, $116,000
b.(1)Lift Ticket Revenue, $960,000 ($990,000 - $30,000)
(2)Cash, $138,000
c.January was the best month with respect to lift ticket revenue ($640,000 - $200,000 =
$440,000). December, however, was the best month with respect to net cash flow
($59,000 - $9,000 = $50,000).
Exercise 5.14
Error Net
Income Total
Assets
Total
Liabilities
Retained
Earnings
a.Recorded a dividend as an
expense in the income statement.
U NE NE NE
b.Recorded unearned revenue as
earned revenue in the income
statement.
O NE U O
c.Failed to record accrued wages
payable at the end of the period.
O NE U O
d.Recorded a declared but unpaid
dividend by debiting Dividends
and crediting Cash.
NE U U NE
e.Failed to disclose a pending
lawsuit in the notes accompanying
the financial statements.NE NE NE NE 、
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Chapter 6
Exercise 6.8
Net Sales Beginning
Inventory
Net
Purchases
Ending
Inventory
Cost of
Goods
Sold
Gross
Profit Expenses
Net
Income
or (Loss)
a. b. c. d. e.240,000
480,000
630,000
810,000
531,000
?76,000
?72,000
207,000
261,000
156,000
104,000
272,000
400,500
450,000
393,000
?35,200
80,000
166,500
135,000
153,000
144,800
264,000
441,000
576,000
396,000
?95,200
216,000
189,000
234,000
135,000
?72,000
196,000
148,500
270,000
150,000
23,200
20,000
40,500
(36,000)
(15,000)
Chapter 7
Exercise 7.8
a.Uncollectible Accounts Expense...........................................................200,000
Allowance for Doubtful Accounts.................................................200,000 To record estimated uncollectible accounts expense at 2.5% of net
credit sales ($8,000,000 2.5% = $200,000).
b.Uncollectible Accounts Expense155,000
Allowance for Doubtful Accounts............................................155,000 To increase balance in allowance account to required $84,000:
Credit balance at beginning of year............................. Write-offs during year................................................. Temporary debit balance............................................. Required year-end credit balance................................ Required adjustment for year......................................$25,000 (96,000) $71,000 84,000 $155,000
c.Uncollectible Accounts Expense...............................................................96,000
Accounts Receivable......................................................................96,000 To record as uncollectible expense only those accounts determined
during the year to be uncollectible.
d.Adjusting the balance in the Allowance for Doubtful Accounts account based upon the aging
schedule will provide to investors and creditors the most accurate assessment of the company’s liquidity. This method is the only approach to take into consideration the underlying declining probability of collecting outstanding accounts as they become increasingly past due.
Chapter 8
Exercise 8.1
a.Flow assumption
b.Average-cost method
c.Specific identification
d.LIFO method
e.FIFO method
f.Retail method
CHAPTER 9
Exercise 9.1
a.Two factors have caused the truck to depreciate: (1) physical deterioration and (2)
obsolescence. The miles driven during the past six years have caused wear and tear on all of the truck’s major components, including its engine, transmission, brakes, and tires. As these components deteriorate, their fair market values, in turn, depreciate.
Furthermore, during the time that you have owned the truck, innovations have been developed leading to improved fuel economy, higher horsepower, better handling, and more corrosion-resistant materials. These innovations have made the truck obsolete in many respects. As the design and engineering technologies associated with the truck become more and more outdated, its fair market value will continue to depreciate.
b.No. It is not likely that the bank will lend you an additional $5,000, even if you agree to
pledge your truck as collateral. Your truck will continue to depreciate in value each year. By the time you begin repayment of your loan, it will be worth less to the bank than its current fair market value.
c.Depreciation is a process of cost allocation,not a process of valuation. As such,
accounting records do not attempt to show the current fair market values of business assets. Only by coincidence would the balance sheet show $10,000 in accumulated depreciation on this truck.
Exercise 9.2
a.Capital expenditure
b.Revenue expenditure
c.Revenue expenditure
d.Capital expenditure
e.Revenue expenditure (too small in amount to capitalize regardless of length of useful
life)
f.Capital expenditure
CHAPTER 10
Exercise 10.1
You would need to save $7,760, as shown in the following loan amortization table:
Interest Period
Annual
Payment
Annual
Interest
Expense @ 8%
Reduction
in Unpaid
Balance
Unpaid
Balance
Date of Graduation$10,000 Year 1$1,490$800$690 9,310
Year 2?1,490?745?745 8,565
Year 3?1,490?685?805 7,760
CHAPTER 11
Exercise 11.2
a.Double taxation
b.Market value
c.None (Retained earnings is not an amount of cash; it is an element of owners’ equity.)
https://www.wendangku.net/doc/98413281.html,mon stock
e.None (Dividends in arrears are prior years’ dividends owed to holders of cumulative
preferred stock.)
f.Publicly owned corporation
g.Paid-in capital
h.Retained earnings
i.None (Book value is common stockholders’ equity divided by the number of common
shares outstanding.)
j.None (The price of preferred stock varies inversely with interest rates.)
CHAPTER 12
Exercise 12.2
a.Extraordinary item
b.None (Treasury stock is not an asset; it represents shares that have been reacquired by
the company, not shares that have not yet been issued.)
c.Stock dividend
d.Additional paid-in capital
e.Prior period adjustment
f.P/e ratio (Market price divided by earnings per share.)
g.Discontinued operations (Showing the discontinued operations in a separate section of
the income statement permits presentation of the subtotal, Income from Continuing Operations.)
h.Diluted earnings per share
https://www.wendangku.net/doc/98413281.html,prehensive income