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understanding financial accounting

Financial Accounting In An Economic Context 3rd Edition Jamie Pratt - Solutions

Valentine Manufacturing purchased a printing press on January 1, 1997 for $24,000 cash. Using the straight-line method, the company depreciated the press over a three-year useful life. REQUIRED:a. Compute the book value of the printing press at the end of each of the three years.b. Complete a chart
Washington Forest Products began operations on January 1, 1996. On December 31, 1996 the company’s accountant ascertains that the following amounts should be reported as expenses on the income statement. Insurance expense $20,000 Supplies expense 11,000 Rent expense 14,000 A review of the
The following journal entries were recorded by Lauren Retailing during the month of July. 1. Cash Accounts Receivable Sales 5,000 3,000 8,000 4. Accounts Payable Cash 2,800 2,800 2. Cash Accounts Receivable 2,000 2,000 5. Cost of Goods Sold Inventory 3,700 3,700 3. Inventory Accounts Payable 5,800
Rahal and Watson, a small manufacturing company, entered into the following cash transac¬ tions during January of 1997. 1. Issued 800 shares of common stock for $30 each. 2. Collected $3,900 on outstanding accounts receivable. 3. Paid wages for the month of January of $1,530. 4. Purchased land as
Peters Company was in business for two years, during which it entered into the following transactions. Year 1 1. The owners contributed $24,000 cash. 2. At the beginning of the year, rented a warehouse for two years with a prepaid rent payment of $12,000. 3. Purchased $10,000 of inventory on
Condensed balance sheets for 1996 and 1997, and the 1997 income statement for Melvin International is provided below. 1997 1996 Current assets $22,000 $18,500 Long-term assets 56,000 50,000 Total assets $78,000 $68,500 Current liabilities $18,000 $15,000 Long-term liabilities 37,000 45,000
Baimer and Associates has operated for one year. Its unadjusted trial balance follows. (Appendix 5A: Unadjusted Trial Balance Complete a work sheet) Account Debit Credit Cash 4,200 Accounts Receivable 14,800 Rent Receivable 0 Inventory 19,000 Prepaid Insurance 1,200 Office Equipment 42,500
Excerpts from the financial statements of Dunbar Manufacturing are provided below. Wages Cash payments for wages during 1997 $35,000 Wages payable as of December 31, 1997 17,000 Wage expense on the 1997 income statement 39,000 Rent Prepaid rent as of December 31, 1996 $12,000 Prepaid rent as of
P5—2 (T-accounts and the accounting equation) The following T-accounts reflect seven different transactions that Rodman Container Company entered into during 1997. For each transaction, describe what occurred and how it affected the accounting equation. Cash Accounts Receivable Equipment (a)
P5—3 (Journal entries and preparing the four financial statements) Ryan Hope, controller of Hope, Inc., provides you with the following information concerning Hope during 1997. (Hope, Inc., began operations on January 1, 1997.) 1. Issued 1,000 shares of common stock at $95 per share. 2. Paid
P5-4 The December 31, 1996 balance sheet for Morrison Home Services is summarized below. (Preparing the four financial statements) Assets Liabilities and Stockholders Cash $10,000 Liabilities $ 6,000 Receivables 4,000 Common stock 10,000 Long-term assets 10,000 Retained earnings Total liabilities
P5—5 (Effects oftransactions on the income statement and statement of cash flows) Ten transactions are listed below. For each one, indicate what specific accounts are affected as well as the direction (increase or decrease) of the effect. Also indicate whether the transaction would increase or
P5-6 (The effects of adjusting journal entries on the accounting equation)
P5-7 (Preparing adjusting journal entries)
P5-8 (Inferring adjusting journal entriesfrom changes in T-account balances) Beta Alloys made the following adjusting journal entries on December 31, 1996. Journal entry explanations have been omitted. 1. Wage Expense 10,000 5. Depreciation Expense 20,000 Wages Payable 10,000 Accum. Depr. 20,000 2.
P5-9 (Reconciling accrual and cashflow dollar amounts)
P5-10 (Revenue recognition, cost expiration, and cashflows)
P5-1 1 (The effects of transactions on financial ratios) Burkholder Corporation borrowed $28,000 from its bank on January 1, 1996, at an annual interest rate of 10 percent. The $28,000 principal is to be paid as a lump sum at the end of the period ofthe loan, which is after December 31, 1997. This
P5-12 (Effects ofdifferent forms offinancing on the financial statements) The following condensed balance sheet for December 31, 1997 comes from the records of Buzz and Associates. Assets Liabilities and Stockholders’ Equity Cash $ 10,000 Current liabilities $ 20,000 Other current asset 40,000
P5-1 3 (Effects of events on financial ratios) The following balances were taken from the December 31, 1996 balance sheet of Wellington Boating. Current assets $23,000 Long-term assets 57,000 Current liabilities 15,000 Long-term liabilities 40,000 Stockholders’ equity 25,000 Early in 1997
P5-14 (Effects of events on financial ratios) The following balances were taken from the December 31, 1996 balance sheet of Morris Homes. Current assets $ 87,000 Long-term assets 109,000 Current liabilities 37,000 Long-term liabilities 90,000 Stockholders’ equity 69,000 Early in 1997 Morris is
P5-15 (Effects of events on financial ratios) The following balances were taken, from the December 31, 1996 balance sheet of Mariner Enterprises. Current assets $15,000 Long-term assets 60,000 Current liabilities 18,000 Long-term liabilities 45,000 Stockholders’ equity 12,000 Early in 1997
P5—1 6 (Appendix 5A: Completing the work sheet and preparing the financial statements) The following unadjusted trial balance is presented for J. Feeney, Inc., as of December 31, 1997. Unadjusted Trial Balance Account Debit Credit Cash Accounts Receivable Merchandise Inventory Prepaid Rent
P5-17 (Appendix 5A: Comprehensive problem) 3. The company made an $18,000 rent payment on July 1, which covers the subsequent twelve-month period. 4. A physical count on December 31, 1997 indicates that $62,000 of supplies are on hand. 5. The company will pay employees $30,000 for wages earned for
P5-18 (Appendix 5B: Taccounts analysis) 9.Issued additional common stock for $120,000 cash. 10. On September 30, 1997 a customer gave the company a note due on May 1, 1998 in pay¬ ment of a $72,000 account receivable. 11. The company declared and paid a cash dividend of $50,000. 12. The company
P5-19 (Appendix 5B: Taccounts analysis) Mayberry Enterprises has two sources of revenue. It sells advertising displays to retail firms and provides a consulting service on how to mount and use these displays. You represent a large manufacturing company that is considering purchasing Mayberry. You
You are a credit analyst for First American Bank, and Badger Business has applied for a loan. The company claims to have more than tripled profits from 1996 to 1997 and believes that it should be given prime credit terms. In addition, you note that Badger has expanded its opera¬ tions, recently
Several years ago MCI Communications Corporation purchased Satellite Business Systems (SBS) from International Business Machines Corporation (IBM). In the transaction, MCI issued common stock to IBM valued at $376 million and signed a note payable tor $104 mil¬ lion. MCI received miscellaneous
The “Big 3” auto makers (General Motors, Ford, and Chrysler) did not have good years in 1990 and 1991. To bolster cash reserves and raise credit ratings, each of the three had major stock issuances during the period. General Motors raised about $600 million, Ford raised over $750 million, and
Several years ago the Boeing Company reported a profit increase over the previous year of about 18 percent. Net cash flows due to operating activities, on the other hand, dropped sig¬ nificantly to a negative $680.1 million. REQUIRED:a. Boeing reported depreciation of approximately $300 million
The W. T. Grant Company was the nation’s largest retailer when it filed for bankruptcy in 1975, only one year after it had reported profits of over $20 million for more than 10 consecutive years. Yet, cash flow provided by operations started dipping as early as 1969 and remained neg¬ ative until
An article published in The Wall StreetJournal (October 21, 1992) entitled “Polluted Numbers: Audit Report Shows How Far Chambers Would Go For Profits” describes how Chambers Development Co., a large waste-disposal firm, used inappropriate accounting methods to “report strong profits while
Herbert S. Bailey, Jr. published the following poem in Publishers Weekly (Jan. 13, 1975) which was written in the meter of Edgar Allen Poe’s famous poem, The Raven. Though my bottom line is black, I amflat upon my back. My cash flows out and customers pay slow. The growth ofmy receivables is
Refer to the financial statements of MCI and compute the book gain or loss recognized during 1994 on the sale of marketable securities. Note that MCI carries marketable securities in both the “Current assets” and “Other assets” sections of the balance sheet, and the “Investing activ¬
Refer to the financial statements of MCI and compute the book value of Communication System property and equipment (including the “Systems in service” and “Other property and equipment” accounts) sold during 1994. Assume that the depreciation charge recorded by MCI during 1994 was
Assume that a corporation holds cash of $50,000 throughout a period of time in which the gen¬ eral price level increases by 6 percent. Does the corporation have more or less than $50,000 of purchasing power at the end of the period? By how much? Would such a gain or loss be reflected in the
Palomar Paper Products purchased land in 1981 for $15,000 cash. The company has held the land since that time. In 1996 Palomar purchased another tract of land for $15,000 cash. Assume that prices in general increased by 60 percent from 1981 to 1996. REQUIRED:a. Assuming that Palomar made only these
Name the valuation base(s) that are used for each of the asset and liability accounts shown here. Some assets and liabilities can use more than one valuation base. Original Fair Market Present Replacement Cost Value (FMV) value Cost Cash Short-Term Investments Inventories Prepaid Expenses Long-Term
Cascades Enterprises ordered 4,000 brackets from McKey and Company on December 1, 1996 for a contracted price of $40,000. McKey completed manufacturing the brackets on January 17 of the next year and delivered them to Cascades on February 9.McKey received a check for $40,000 from Cascades on March
Lahmont Bridge Builders built a bridge for the state of Maryland over a two-year period. The contracted price for the bridge was $600,000. The costs incurred by Lahmont and the payments from the State of Maryland over the two-year period follow. Period 1 Period 2 Total Costs incurred by Lahmont
E4—6 (Assets and depreciation—which assumption and principle?) RDP and Brothers purchased a panel truck for $25,000 on January 1, 1996. They estimated the life of the truck to be five years, and they planned to depreciate an equal amount in each of the five years. REQUIRED:a. In line with
E4-7 (The concept of materiality) Original cost Depreciation expense Accumulated depreciation Net book valueb. Why didVbp decide to initially recognize the cost as an asset rather than treat it as an expense? Wlmbasic assumption of financial accounting are you relying upon in this deci¬ sion?c.
E4—8 (Changing accounting methods and net v income) The net income amounts for Hauser and Bradley over the four-year period beginning in 1994 follow. 1994 1995 1996 1997 $21,000 $24,000 $23,000 $29,000 After further examination of the financial report, you note that Hauser and Bradley made
E4-9 (Appendix 4A: Future value/single sum) (Appendix 4A: Present value/single sum) (Appendix 4A: Future value/ordinary annuity) (Appendix 4A: Future value/annuity due) (Appendix 4A: Present value/ordinary’ annuity)c. What principle of financial accounting makes it difficult to make such changes?
Describe the conditions under which Hauser and Bradley would be allowed to make changes in their accounting methods.
If $150 were invested today, how large a sum could be withdrawn at the end of the following time periods at the following compound interest rates. Complete the following table. Time Periods (Years) Compound Interest Rates 5 lO 15 5% 10% 15% Compute the present value of $10,000 received at the end
If $150 were invested at the end of each year over the following time periods at the following interest rates, how large a sum could be withdrawn at the end of the final time period? Complete the following table. Time Periods (Years) Compound Interest Rates 5 lO 15 5% 10% 15% If $150 were invested
Complete the following table. Time Periods (Years) Compound Interest Rates 5 lO 15 5% 10% 15% Compute the present value of $10,000 received at the end of each year over the following time periods at the following discount rates. Complete the following table. Time Periods (Years) Compound Interest
E4-14 (Appendix 4A: Present value/annuity due) Compute the present value of $10,000 received at the beginning of each year over the follow¬ ing time periods at the following discount rates. Complete the following table. Time Periods (Years) Compound Interest Rates 5 lO 15 5% 10% 15%
E4— 1 5 rate. (Appendix 4A: Presenta. value ofdifferentb. payment patterns)c. Compute the present value ofthe payment patterns provided below, given an 8 percent discount rate. $50 at the end of year 2; $100 at the end of year $100 at the end of years 1, 2, 3, 4; $100 at the ena o] $60 at the end
E4—1 6 -JM V/Vll. rate. (Appendix 4A: Presenta. value of differentb. payment patterns)c. $50 at the end of year 2; $100 at the end of year 5; $80 at the beginning of year 8.$100 at the beginning of years 1, 2, 3, 4; $100 at the beginning of year 8.$60 at the beginning of years 5, 6, 7, 8; $100 at
Ben Watson found $25,000 lying on the sidewalk and decided to invest the money. He believes that he can earn a 10 percent rate (compounded annually) on his investment for the first four years, 12 percent for the following three years, and 15 percent for the following five years. REQUIRED:a. How
E4—1 8 (Appendix 4A: Present value offuture bond payments—ordinary annuity and annuity due) Rudnicki Corporation raises money by issuing bonds. The bond agreement states that Rudnicki must make interest payments in the amount of $40,000 at the end of each year for ten years and make a $500,000
E4-19 (Appendix 4A: The highest present value) Congratulations! You have just won the lottery. The lottery board offers you three different options for collecting your winnings: 1.You will receive payments of $500,000 at the end of each year for twenty years. 2.You will receive a lump-sum payment
E4-2Q (Appendix 4A: Comparing ordinary annuities and annuities due) Consider a three-year $700 ordinary annuity (the first payment is one year from now) and a three-year $700 annuity due (the first payment is now). Assume a discount rate of 10 percent. REQUIRED: For each of the two annuities,
E4-21 (Appendix 4A: Different terms offinancing) Dunn Drafting Company is considering expanding its business by purchasing new equipment. Because of constraints on how much the company can spend for new equipment, the president wants to make sure that the company enters into the best possible deal.
The Croziers have a three-year-old son named Ryan, and they want to provide for Ryan’s col¬ lege education. They estimate that it will cost $40,000 per year for four years when Ryan enters college fifteen years from now. Assume that all investments can earn a 10 percent annual inter¬ est rate,
E4-23 (Appendix 4A: Saving for a college education—future value) The Smithsons have a nine-year-old daughter named Emily, and they wish to provide for her college education. They estimate that it will cost $30,000 per year for four years when Emily enters college ten years from now. Assume that
On January 1, 1996, you purchased a piece of property for $10,000. On December 31 of that year you sold the property for $20,000. Assume that the general rate of inflation for 1996 was 10 percent. REQUIRED:a. According to generally accepted accounting principles, how much gain would be recorded in
Would the $20,000 you received at the end of the period enable you to purchase twice as many goods and services? Why or why not?c. How much of the accounting gain computed in (a) could be attributed to inflation, and how much could be attributed to the fact that the property rose in value? Do
Assume that on January 1, Bush Enterprises borrowed $4,760 from Banking Corporation, promising to pay $5,000 at the end of one year. The effective rate of interest on the loan is approximately 5 percent ([$5,000 - $4,760]/ $4,760). Suppose that the general rate of infla¬ tion for that year was 10
Three years ago Yeagley and Sons purchased the three assets listed in the following table. The chief financial officer, Kathy Dillon, is presently trying to decide what to do with each asset. (The irrelevance of She has three choices for each of the assets: (1) she can sell it, (2) she can sell it
Sales data for 1995, 1996, and 1997 for Easy Growth Inc. follow. 1995 1996 1997 Sales $80,000 $120,000 $160,000 After reviewing the growth in sales, Milton Smarts, the company president, commented that according to the financial statements, sales doubled from 1995 to 1997. Assume that the general
The December 31 balance sheet and the income statement for the period ending December 31 for Buyable Goods follow. (This problem requires knowledge of present value. Refer to Appendix 4A.) Balance Sheet Income Statement Current assets Long-lived assets $10,000 20,000 Liabilities Common stock
On January 1, 1996 Barry Smith established a company by donating $90,000 and used all of the cash to purchase an apartment house. At the time he estimated that cash inflows due to rentals would be $65,000 per year, while annual cash outflows to manage and maintain it would be $45,000. He felt that
The December 31, 1996 balance sheet of Myers and Myers, prepared under generally accepted accounting principles, follows. (This problem requires knowledge of present value calcula¬ tions. Refer to Appendix 4A.) Assets Cash $ 10,000 Short-term investments 14,000 Land 20,000 Buildings and machinery
This problem is designed to follow P4-7. Suppose that Myers and Myers paid no dividends during 1997, and the December 31, 1997 balance sheet is listed below. (This problem requires knowledge of present value calculations. Refer to Appendix 4A.) Chapter 4 The Measurement Fundamentals of Financial
The Maple Construction Company agreed to construct twelve monuments for the city of Elderton. The total contract price was $2.4 million, and total estimated costs were $1,140,000. The construction took place over a four-year period, and the following schedule indicates the monuments completed,
Hydra Aire, Inc., sells appliances to Seasons Department Store. A recent order requires Hydra Aire to manufacture and deliver 500 toasters at a price of $100 per unit. Hydra Aire’s manu¬ facturing costs are approximately $40 per unit. The following schedule summarizes the pro¬ duction and
The net income and working capital accounts for two companies in the same industry, ABC Company and XYZ Company, follow. ABC XYZ 1/1—12/31 Net income $ 10,000 $24,000 12/31 Working capital $ 16,000 $30,000 After reviewing the complete financial statements of the two companies, you note that ABC
Joe McGuire is a CPA who has recently completed the audit of Nelson Repairs, Inc. The audited balance sheet and income statement follow. Chapter 4 The Measurement Fundamentals of Financial Accounting 177 Balance Sheet Income Statement Current assets $ 60,000 Long-term assets 140,000 Total assets
Not requiring disclo¬ sure and losing the lawsuit gives rise to Error
Comment on the costs that Joe would incur from each of these two errors. Which of the two errors would be more costly? Which of the two outcomes (winning or losing the suit) is more likely to occur?b. Suppose that Joe estimates that the cost of Error 1 is $10,000 and the cost of Error 2 is $50,000.
Wharton Company is planning to make the following investments.
$ 1,000 at the end of each year for five years at a 10 percent annual rate. Wharton Company will leave the accumulated principal and earnings in the bank for another five years at a 12 percent annual rate.
$3,000 at the end of each year for seven years at a 15 percent annual rate. Wharton will not make the first $3,000 payment until 4 years from now. 178 Part 2 Use, Measurement, and Mechanics of Financial. Statements P4-15 (Appendix 4A: Computing present value and equivalent value of contract cash
The terms of three different contracts follow.
$8,000 received at the beginning of each year for ten years, compounded at a 6 percent annual rate.
$8,000 received today and $20,000 received ten years from today. The relevant interest rate is 12 percent.
$8,000 received at the end of Years 4, 5, and
The relevant annual interest rate is 10 per¬ cent. REQUIRED:a. Compute the present value of each contract.b. Compute the equivalent value of each contract at the end of Years 5 and 10.
Boulder Wilderness Adventures purchased rafting and kayaking equipment by issuing a note to Recreational Co-op, the seller of the equipment. The note required a down payment of $5,000, annual payments of $10,000 at the end of each year for five years (the first payment to be one year from now), and
Joy Don Corp. sells a building to Trifle and Life in exchange for a note. The note specifies a lump¬ sum payment of $300,000 ten years in the future and annual payments (beginning today) of $2,000 at the beginning of each year for ten years. Assume an annual interest rate of 10 percent. Chapter 4
Most airlines offer promotional programs in which passengers accumulate miles over time; when they have earned enough miles, they receive free tickets. Currently, airlines do not make any accounting entries for these free tickets. The free rider merely uses available seats or, on occasion,
A recent report on Blockbuster Video commented that Blockbuster seems to have unusual suc¬ cess in opening new franchises during the Christmas season. It appears that during each of the past few years product sales to new franchises have increased significantly in the fourth quar¬ ter. The report
When a television network buys the rights to show a series for film, the cost of the rights are treated as assets on the balance sheet as “program rights.” Several years ago ABC’s practice was to “expense” 80% of the cost in the period when the show first appears on the air. Subsequently,
In 1993, Procter & Gamble Company made an accounting method change that decreased 1993 net income by a total of $925 million. The net income dollar amounts reported by the company for 1992, 1993, and 1994 follow (dollars in millions). 1992 $1,872 1993 $ (656) 1994 $2,211 REQUIRED:a. Recalculate net
On March 3, 1993 the common stock price of Leslie Fay, the nation’s second largest maker of women’s apparel, dropped from 12 3/8 to 5 1/4, when it was discovered that reported profits of $23.9 million were actually losses of $13.7 million. Hundreds of angry shareholders imme¬ diately filed
Forbes (June 20, 1994) reports: “Yes, there are hidden reserves in Switzerland, Germany and Sweden. But that doesn’t mean that there is more to these companies than meets the eye. Loosey-goosey reserves cut both ways. They could mean that a company’s book value is understated. But they could
The chapter listed and defined four basic assumptions, four principles of measurement, and two exceptions. Review the annual report of MCI, and find at least one example of each of these ten concepts. Also, indicate the accounts on MCI’s balance sheet that use present value as a valuation base.
The balance sheet of Kmart Corporation as ofJanuary 25, 1995 included a long-term debt with a principal amount of $100 million. The annual interest rate on the debt was 12.5%, and the principal amount was due in ten years (2005). The $100 million amount on the balance sheet was equal to the present
In the chapter businesses are compared to fruit trees. Briefly describe how the root system, trunk, and branches of a fruit tree lead to the production of fruit and how this process is similar to the activities of a business.
List and define the three basic activities of a business.
Where are operating activities reflected on the financial statements?
Where are investing activities reflected on the financial statements?
Where are financing activities reflected on the financial statements?
What are the differences between debt and equity investments? What are the characteristics of each? Give three examples of debt investments. What kind of financial informa¬ tion would interest a debt investor (creditor)? How does it differ from the information that would interest an equity
If financial statements are to encourage the exchange of capital among investors, creditors, and managers, of what two general concepts must they provide measures? Explain the similarities and differences between these two concepts.
The balance sheet is associated with a specific date. The income statement, statement of retained earnings, and statement of cash flows are each associated with a period of time. What does this mean in terms of the kind of information each statement provides, and how is each statement related to
What is an asset? List the asset accounts on the balance sheet. In what order are they listed? Why?

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