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Financial Accounting An Integrated Statements Approach 2nd Edition Jonathan E. Duchac, James M. Reeve, Carl S. Warren - Solutions

On March 1, 2006, Tim Cochran established Star Realty, which completed the following transactions during the month:a. Tim Cochran transferred cash from a personal bank account to an account to be used for the business in exchange for capital stock, $12,000.b. Purchased supplies on account, $850.c.
On July 1, 2006, Leon Cruz established an interior decorating business, Ingres Designs. During the remainder of the month, Leon Cruz completed the following transactions related to the business:July 1 Leon transferred cash from a personal bank account to an account to be used for the business in
Socket Realty acts as an agent in buying, selling, renting, and managing real estate. The account balances at the end of May 2007 of the current year are as shown at the top of the following page:The following business transactions were completed by Socket Realty during June 2007:June 1 Paid rent
The data necessary to adjust Socket Realty accounts from Problem 4-3A as of June 30, 2007, are as follows:a. Prepaid insurance expired during June, $280.b. Office supplies on hand at June 30, $580.c. Depreciation on office equipment, $160.d. Unearned fees earned during June, $480.e. Accrued fees as
Heritage Company offers legal consulting advice to death-row inmates. Heritage Company prepared the following trial balance at April 30, 2006, the end of the current fiscal year:The data needed to determine year-end adjustments are as follows:a. Accrued fees revenue at April 30 are $2,800.b.
On January 2, 2006, Lela Peterson established Acadia Realty, which completed the following transactions during the month:a. Lela Peterson transferred cash from a personal bank account to an account to be used for the business in exchange for capital stock, $9,000.b. Paid rent on office and
On November 2, 2006, Nicole Oliver established an interior decorating business, Devon Designs. During the remainder of the month, Nicole completed the following transactions related to the business:Nov. 2 Nicole transferred cash from a personal bank account to an account to be used for the business
Gypsum Realty acts as an agent in buying, selling, renting, and managing real estate. The account balances at the end of March 2007 of the current year are as follows:The following business transactions were completed by Gypsum Realty during April 2007:Apr. 1 Paid rent on office for April, $8,000.2
The data necessary to adjust Gypsum Realty accounts from Alternate Problem 4-3B as of April 30, 2007, are as follows:a. Prepaid insurance expired during April, $500.b. Office supplies on hand at April 30, $1,750.c. Depreciation on office equipment, $250.d. Unearned fees earned during April,
Flamingo Company maintains and repairs warning lights, such as those found on radio towers and lighthouses. Flamingo Company prepared the following trial balance at July 31, 2006, the end of the current fiscal year:The data needed to determine year-end adjustments are as follows:a. Fees revenue
The Gap Inc. is a global specialty retailer operating stores selling casual apparel, personal care, and other accessories for men, women, and children under The Gap, Banana Republic, and Old Navy brands. The Gap Inc. designs virtually all of its products, which are manufactured by independent
Assume that The Gap Inc. has credit agreements that require a long-term liability to EBITDA ratio that does not exceed 3:1. Financial requirements such as this are called loan or credit covenants. The violation of a loan or credit covenant can result in the debt becoming due immediately, as well as
The following income statement (in millions) is adapted from the 2004 10-K filing of Time Warner:Revenues .................... $42,089Cost of revenues ................. 24,449Gross profit ................... $17,640Selling, administrative, and other expenses ........ 10,300Amortization of
The following income statement (in thousands) is from the Securities and Exchange Commission 10-K filing by Amazon.com for the year ending December 31, 2004:Included in the preceding income statement is depreciation and amortization expense of $75,724.1. Compute the EBITDA for 2004.2. Based upon
WorldCom, Inc., allegedly reported nearly $4 billion as fixed assets on its balance sheet, rather than as operating expense on its income statement. Of this amount, $3.06 billion should have been expensed in 2001, rather than debited as a fixed asset. As a result of this discovery, WorldCom lost
On the Internet, go to the google.com Web site and perform an advanced search for “EBITDA.” Review the articles for a discussion of the advantages and disadvantages of using EBITDA as a financial analysis tool. Pick one or more articles, read them, and summarize your findings.
The income statements for Amazon.com, Google, Inc., and Borders, lnc., for a recent year are provided below.In addition, the statement of cash flows revealed the following line item in the cash flows from operations section of the statement:1. Determine EBITDA (earnings before interest, taxes,
Mohawk Industries is a leading distributor of carpets and rugs in the United States. The company sells its carpets and rugs to locally owned, independent carpet retailers, home centers such as Home Depot and Lowe’s, and department stores such as Sears. Mohawk’s carpets are marketed under the
At the end of the current month, Ross Heimlich prepared a trial balance for Main Street Motor Co. The credit side of the trial balance exceeds the debit side by a significant amount. Ross has decided to add the difference to the balance of the miscellaneous expense account in order to complete the
The following discussion took place between Heather Sims, the office manager of Sedgemoor Data Company, and a new accountant, Ed Hahn.Ed: I’ve been thinking about our method of recording entries. It seems that it’s inefficient. Heather: In what way?Ed: Well—correct me if I’m wrong—it
The following excerpt is from a conversation between Peter Kaiser, the president and chief operating officer of Sprocket Construction Co., and his neighbor, Doris Nesmith:Doris: Peter, I’m taking a course in night school, “Intro to Accounting.” I was wondering—could you answer a couple of
The following is an excerpt from a telephone conversation between Pedro Mendoza, president of Goliath Supplies Co., and Natalie Weich, owner of Flint Employment Co.:Pedro: Natalie, you’re going to have to do a better job of finding me a new computer programmer. That last guy was great at
Assume that you recently accepted a position with the Bozeman National Bank as an assistant loan officer. As one of your first duties, you have been assigned the responsibility of evaluating a loan request for $150,000 from Sasquatch.com, a small corporation. In support of the loan application,
What is interest? How does simple interest differ from compound interest?
What is the difference between the cost of merchandise purchased and the cost of merchandise available for sale? Can they be the same amount? Explain.
What is the difference between the cost of merchandise available for sale and the cost of merchandise sold? Can they be the same amount? Explain.
Name at least three accounts that would normally appear in the financial statements of a merchandising business, but would not appear in the chart of accounts of a service business.
How does the accounting for sales to customers using bank credit cards, such as MasterCard and VISA, differ from accounting for sales to customers using nonbank credit cards, such as American Express? Explain.
Sometimes a retailer will not accept American Express, but will accept MasterCard or VISA. Why would a retailer accept one and not the other?
At some Texaco, Chevron, or Conoco gasoline stations, the cash price per gallon is 3 or 4 cents less than the credit price per gallon. As a result, many customers pay cash rather than use their credit cards. Why would a gasoline station owner establish such a policy?
Assume that you purchased merchandise with credit terms 2/10, n/30. On the date the invoice is due, you don’t have the cash to pay the invoice. However, you can borrow the necessary money at an 8% annual interest rate. Should you borrow the money to pay the invoice? Explain.
Who bears the transportation costs when the terms of sale are? (a) FOB shipping point, (b) FOB destination?
Bernard Office Equipment, which uses a perpetual inventory system, experienced a normal inventory shrinkage of $19,290. (a) What accounts would be debited and credited to record the adjustment for the inventory shrinkage at the end of the accounting period? (b) What are some causes of inventory
Assume that Joist Inc. (the consignee) included $40,000 of inventory held on consignment for Dory Company (the consignor) as part of its physical inventory. (a) What is the effect of this error on Joist’s financial statements? (b) Would Joist’s error also cause a misstatement in Dory’s
CVS Corporation operates drugstores throughout the United States, selling prescription drugs, general merchandise, cosmetics, greeting cards, food, and beverages. For 2004, CVS reported (in thousands) net sales of $30,594,300, cost of sales of $22,563,100, and operating income of $1,454,700.a.
Walgreen Company operates drugstores throughout the United States, selling prescription drugs, general merchandise, cosmetics, food, and beverages. For 2004, Walgreen reported (in thousands) net sales of $37,508,200, cost of sales of $27,310,400, and operating income of $2,126,100.a. Determine
Based upon the data shown in Exercises 5–1 and 5–2, comment on the operating performance of CVS in comparison to Walgreen.
During the current year, merchandise is sold for $200,000 cash and for $950,000 on account. The cost of the merchandise sold is $805,000.a. What is the amount of the gross profit?b. Compute the gross profit as a percent of sales.c. Will the income statement necessarily report a net income? Explain.
Office Depot operates a chain of office supply stores throughout the United States. For 2004, Office Depot reported (in thousands) net sales of $13,564,699, gross profit of $4,256,139, and operating income of $529,977.a. Determine the cost of goods sold.b. Determine the cost of goods sold as a
The following data were extracted from the accounting records of Meniscus Company for the year ended April 30, 2006:Merchandise inventory, May 1, 2005 ....... $ 121,200Merchandise inventory, April 30, 2006 ...... 142,000Purchases ................... 985,000Purchases returns and allowances
Identify the errors in the following schedule of cost of merchandise sold for the current year ended December 31,2006:
Summary operating data for The Meriden Company during the current year ended June 30, 2006, are as follows: cost of merchandise sold, $3,240,000; administrative expenses, $300,000; interest expense, $47,500; rent revenue, $30,000; net sales, $5,400,000; and selling expenses, $480,000. Prepare a
Two items are omitted in each of the following four lists of income statement data. Determine the amounts of the missing items, identifying them byletter.
How many errors can you find in the following incomestatement?
On January 31, 2006, the balances of the accounts appearing in the ledger of Calloway Company, a furniture wholesaler, are as follows:a. Prepare a multiple-step income statement for the year ended January 31, 2006.b. Compare the major advantages and disadvantages of the multiple-step and
Journalize the entries for the following transactions:a. Sold merchandise for cash, $6,900. The cost of the merchandise sold was $4,830.b. Sold merchandise on account, $7,500. The cost of the merchandise sold was $5,625.c. Sold merchandise to customers who used MasterCard and VISA, $10,200. The
During the year, sales returns and allowances totaled $235,750. The cost of the merchandise returned was $141,450. The accountant recorded all the returns and allowances by debiting the sales account and crediting Cost of Merchandise Sold for $235,750. Was the accountant’s method of recording
After the amount due on a sale of $7,500, terms 2/10, n/eom, is received from a customer within the discount period, the seller consents to the return of the entire shipment. The cost of the merchandise returned was $4,500. (a) What is the amount of the refund owed to the customer? (b) Journalize
The debits and credits for three related transactions are presented in the following T accounts. Describe eachtransaction.
Merchandise is sold on account to a customer for $18,000, terms FOB shipping point, 3/10, n/30. The seller paid the transportation costs of $375. Determine the following: (a) Amount of the sale, (b) Amount debited to Accounts Receivable, (c) Amount of the discount for early payment, and(d) Amount
Cheddar Company purchased merchandise on account from a supplier for $8,500, terms 2/10, n/30. Before payment was due, Cheddar Company returned $800 of the merchandise and received full credit.a. If Cheddar Company pays the invoice within the discount period, what is the amount of cash required for
Determine the amount to be paid in full settlement of each of the following invoices, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discountperiod.
A retailer is considering the purchase of 100 units of a specific item from either of two suppliers. Their offers are as follows:A: $400 a unit, total of $40,000, 2/10, n/30, plus transportation costs of $625.B: $403 a unit, total of $40,300, 1/10, n/30, no charge for transportation.Which of the
The debits and credits from four related transactions are presented in the following T accounts. Describe eachtransaction.
Enid Co., a women’s clothing store, purchased $7,500 of merchandise from a supplier on account, terms FOB destination, 2/10, n/30. Enid Co. returned $1,200 of the merchandise, receiving a credit memorandum, and then paid the amount due within the discount period. Journalize Enid Co.’s entries
Journalize entries for the following related transactions of Regius Company:a. Purchased $12,000 of merchandise from Loew Co. on account, terms 2/10, n/30.b. Paid the amount owed on the invoice within the discount period.c. Discovered that $3,000 of the merchandise was defective and returned items,
A sale of merchandise on account for $4,000 is subject to a 7% sales tax. (a) Should the sales tax be recorded at the time of sale or when payment is received? (b) What is the amount of the sale?(c) What is the amount debited to Accounts Receivable? (d) What is the title of the account to which the
Bill expects to receive $3,000 from his grandfather when he graduates from college three years from today. What is the present value of the $3,000 if the relevant interest rate is 6% compounded anually?
A corporation issues $10,000,000 of 6% bonds to yield interest at the rate of 5%. (a) Was the amount of cash received from the sale of the bonds greater or less than $10,000,000? (b) Identify the following terms related to the bond issue: (1) Face amount, (2) Market or effective rate of
The following data relate to a $1,000,000, 6% bond issue for a selected semiannual interest period:Bond carrying amount at beginning of period . $1,150,000Interest paid at end of period .......... 30,000Interest expense allocable to the period ...... 28,750(a) Were the bonds issued at a discount or
Bonds Payable has a balance of $750,000, and Discount on Bonds Payable has a balance of $12,500. If the issuing corporation redeems the bonds at 99, is there a gain or loss on the bond redemption?
What is the number of times interest charges are earned if the business has net income before taxes of $600,000 and a $1,500,000 face value bond payable with a coupon rate of 10%?
Ski World Magazine Inc. sold 5,200 annual subscriptions of Ski World for $50 each during December 2006. These new subscribers will receive monthly issues, beginning in January 2007. In addition, the business had taxable income of $225,000 during the first calendar quarter of 2007. The federal tax
Collins Lighting Co. issues a 90-day note for $600,000 to Wolfman Supply Co. for merchandise inventory. Wolfman discounts the note at 10%.a. Journalize Collins’ entries to record:1. The issuance of the note.2. The payment of the note at maturity.b. Journalize Wolfman’s entries to record:1. The
A borrower has two alternatives for a loan:(1) Issue a $75,000, 90-day, 7% note or (2) Issue a $75,000, 90-day note that the creditor discounts at 7%.a. Calculate the amount of the interest expense for each option.b. Determine the proceeds received by the borrower in each situation.c. Which
A business issued a 60-day, 8% note for $60,000 to a creditor on account. Record the entries for (a) The issuance of the note and (b) The payment of the note at maturity, including interest.
On June 30, Zahovik Game Company purchased land for $125,000 and a building for $365,000, paying $190,000 cash and issuing an 8% note for the balance, secured by a mortgage on the property. The terms of the note provide for 20 semiannual payments of $15,000 on the principal plus the interest
The Sun Construction Company borrowed $1,200,000 on July 1, 2007, at an annual interest rate of 12%. The note payable is to be repaid in annual installments of $300,000, plus accrued interest, on each June 30th beginning June 30, 2008, until the note is paid in full (on June 30, 2011). Determine
An employee earns $32 per hour and 1½ times that rate for all hours in excess of 40 hours per week. Assume that the employee worked 50 hours during the week. Assume further that the FICA tax rate was 7.5% and federal income tax to be withheld was $410.a. Determine the gross pay for the week.b.
In the following summary of data for a payroll period, some amounts have been intentionally omitted:a. Calculate the amounts omitted in lines (1), (3), (7), and (11).b. Record the entry for the payroll accrual.c. Record the entry for paying thepayroll.
According to a summary of the payroll of Pendant Publishing Co., $800,000 of payroll was subject to the 7.5% FICA tax. Also, $17,500 was subject to state and federal unemployment taxes.a. Calculate the employer’s payroll taxes using the following rates: state unemployment, 4.3%; federal
Tower Controls Co. had a gross salary payroll of $750,000 for the month ending March 31. The complete payroll is subject to a FICA tax rate of 7.5%. Only $30,000 of this payroll is subject to state and federal unemployment taxes of 4% and 0.5%, respectively. The employees’ income tax withholding
A business provides its employees with varying amounts of vacation per year, depending on the length of employment. The estimated amount of the current year's vacation pay is $325,600. Record the adjusting entry required on January 31, the end of the first month of the current year, to accrue the
Using the present value tables in Appendix A, calculate the present value of the following:1. $250,000 to be received three years from today, assuming an annual interest rate of 6%.2. $2,500 to be received annually at the end of each of 10 periods, discounted at 8%. 3. $4,000 receivable at the end
General Motors’ 8.375% bonds due in 2033 were reported in The Wall Street Journal as selling for 100.245 on February 18, 2005.Were the bonds selling at a premium or at a discount on February 18, 2005? Explain.
Hic-Tec Co. produces and distributes fiber-optic cable for use by telecommunications companies.Hic-Tec Co. issued $10,000,000 of 20-year, 9% bonds on April 1 of the current year, with interest payable on April 1 and October 1. The fiscal year of the company is the calendar year.Record the entries
Fajitas Corporation wholesales oil and grease products to equipment manufacturers. On March 1, 2006, Fajitas Corporation issued $10,000,000 of five-year, 11% bonds. The bonds were issued for $10,386,057 to yield an effective interest rate of 10%. Interest is payable semiannually on March 1 and
On the first day of its fiscal year, Jones Company issued $6,000,000 of five-year, 8% bonds to finance its operations of producing and selling home electronics equipment. Interest is payable semiannually. The bonds were issued at an effective interest rate of 11%. Refer to the tables in Appendix A
JTD Corporation issued $800,000 of 20-year, 12% bonds on January 1, 2006, when the market rate of interest was 10%. Interest is payable annually on December 31. Use the present values tables in Appendix A.a. Calculate the price of the bonds on January 1, 2006, the date the bonds were issued.b.
Farouk Corp., a wholesaler of office furniture, issued $8,000,000 of 30-year, 9% callable bonds on March 1, 2006, with interest payable on March 1 and September 1. The fiscal year of the company is the calendar year. Record the entries for the following selected transactions:2006Mar. 1 Issued the
Loumos Corp. produces and sells automotive and aircraft safety belts. To finance its operations, Loumos Corp. issued $15,000,000 of 25-year, 8% callable bonds on June 1, 2006, with interest payable on June 1 and December 1. The fiscal year of the company is the calendar year. Record the entries for
Integrated Systems, Inc., recognized service revenue of $300,000 on its financial statements in 2007. Assume, however, that the Tax Code requires this amount to be recognized for tax purposes in 2008. The taxable income for 2007 and 2008 is $2,000,000 and $2,500,000, respectively. Assume a tax
In-Tune Audio Company warrants its products for one year. The estimated product warranty is 3% of sales. Assume that sales were $400,000 for January. In February, a customer received warranty repairs requiring $205 of parts and $300 of labor.a. Record the adjusting entry required at January 31, the
During a recent year, Motorola, Inc., had sales of $31,323,000,000. An analysis of Motorola’s product warranty payable account for the year was as follows:Product warranty payable, January 1 ... $ 359,000,000Product warranty expense ........ 648,000,000Warranty claims paid* ........
Several months ago, Endurance Battery Company experienced a hazardous materials spill at one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $200,000. The company is contesting the fine. In addition, an employee is seeking $600,000 damages related to the
The current assets and current liabilities for Apple Computer Inc. and Gateway Inc. are shown as follows at the end of a recent fiscal period:a. Determine the current and quick ratios for both companies. Round to two decimal places.b. Interpret the ratio differences between the twocompanies.
The following data were taken from recent annual reports of Trump Hotels and Casino Resorts, Inc., which owns and operates casino-based entertainment resorts in Atlantic City, New Jersey.a. Determine the number of times interest charges were earned for the current and preceding years. Round to two
Yum! Brands, Inc., is a nationwide restaurant company whose brands include Taco Bell, KFC, and Pizza Hut. Selected balance sheet information is as follows for two comparative dates.In addition, the income statement for these two periods showed the following income before tax and interest expense
Motley Corporation issued $4,000,000, five-year, 8% bonds on January 1, 2007. The bonds were issued at an effective interest rate of 11%, resulting in Motley Corporation receiving cash proceeds of $3,547,740.80. The company uses the effective interest rate method to amortize bond discounts and
On March 1, 2006, Fulton Corporation issued $5,000,000, five-year, 11% bonds at an effective interest rate of 10%, receiving cash proceeds of $5,193,028.50. Interest is paid semiannually on March 1 and September 1. Fulton Corporation’s fiscal year begins on March 1. The company uses the effective
The following items were selected from among the transactions completed by Wiggins Manufacturing during the current year:Apr. 7 Borrowed $30,000 from First Financial Corporation, issuing a 60-day, 12% note for that amount.May 10 Purchased equipment by issuing a $90,000, 120-day note to Brown
The following accounts, with the balances indicated, appear in the ledger of Roan Outdoor Equipment Company on December 1 of the current year:Salaries Payable ............ 'FICA Tax Payable ......... $ 6,667Employees Federal Income Tax Payable . 8,566Employees State Income Tax Payable .. 8,334State
Mitchell Inc. produces and sells voltage regulators. On July 1, 2006, Mitchell Inc. issued $14,000,000 of 10-year, 11% bonds priced to yield an effective interest rate of 10%. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar
On July 1, 2006, Brushy Mountain Communications Equipment Inc. issued $10,000,000 of 10-year, 9% bonds when the market rate of interest was 12%. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.Instructions1. Calculate the
Topspin Co. produces and sells synthetic string for tennis rackets. The following transactions were completed by Topspin Co., whose fiscal year is the calendar year:2006July 1 Issued $15,000,000 of five-year, 14% callable bonds dated July 1, 2006, at an effective rate of 12%. Interest is payable
The following items were selected from among the transactions completed by Davidson Co. during the current year:Feb. 15 Purchased merchandise on account from Ranier Co., $36,000, terms n/30.Mar. 17 Issued a 30-day, 8% note for $36,000 to Ranier Co., on account.Apr. 16 Paid Ranier Co. the amount
The following accounts, with the balances indicated, appear in the ledger of South Mountain CableView Co. on December 1 of the current year:Salaries Payable ............. €”FICA Tax Payable .......... $ 9,657Employees Federal Income Tax Payable . 12,321Employees State Income Tax Payable
Canton Corporation produces and sells ski equipment. On July 1, 2006, Canton Corporation issued $12,000,000 of 10-year, 12% bonds priced to yield an effective interest rate of 11%. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the
On July 1, 2006, Cougar Corporation, a wholesaler of used robotic equipment, issued $7,500,000 of 10-year, 10% bonds when the market rate of interest was 13%. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.Instructions1.
The following transactions were completed by Douthett Inc., whose fiscal year is the calendar year:2006July 1 Issued $25,000,000 of five-year, 8% callable bonds dated July 1, 2006, at an effective rate of 10%. Interest is payable semiannually on December 31 and June 30.Dec. 31 Paid the semiannual

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