西方财务会计课后题9-12答案 高中其它科目
课件
CHAPTER 9
1. To protect inventory from customer theft, retailers use two-way mirrors, cameras, security guards,
locked display cabinets, and inventory tags that set off an alarm if the inventory is removed from the
store.
2. Perpetual. The perpetual inventory system provides the more effective means of controlling inventories,
since the inventory account is updated for each purchase and sale. This also assists managers in deter-
mining when to reorder inventory items.
3. The receiving report should be reconciled to the initial purchase order and the vendor's invoice before
recording or paying for inventory purchases. This procedure will verify that the inventory received
matches the type and quantity of inventory ordered. It also verifies that the vendor's invoice is charging
the company for the actual quantity of inventory received at the agreed-upon price. 4. An employee should present a requisition form signed by an authorized manager before receiving inven-
tory items from the company's warehouse.
5. A physical inventory should be taken periodically to test the accuracy of the perpetual records. 6. a. Gross profit for the year was overstated by $18,500.
b. Merchandise inventory and owner’s equity were overstated by $18,500.
7. Fess Company. Since the merchandise was shipped FOB shipping point, title passed to Fess Company
when it was shipped and should be reported in Fess Company's financial statements at December 31, the
end of the fiscal year.
8. Manufacturer's
9. No, they are not techniques for determining physical quantities. The terms refer to cost flow assump-
tions, which affect the determination of the cost prices assigned to items in the inventory. 10. No, the term refers to the flow of costs rather than the items remaining in the inventory. The inventory
cost is composed of the earliest acquisitions costs rather than the most recent acquisitions costs. 11. a. Fifo c. Fifo, b. Lifo d. Lifo
12. Fifo
13. Lifo. In periods of rising prices, the use of lifo will result in the lowest net income and thus the lowest
income tax expense.
14. Yes. The inventory method may be changed for a valid reason. The effect of any change in method and
the reason for the change should be fully disclosed in the financial statements for the period in which the
change occurred.
15. Net realizable value (estimated selling price less any direct cost of disposition, such as sales commis-
sions).
16. By a notation next to "merchandise inventory" on the balance sheet or in a footnote to the financial
statements.
17. Inventories estimated by the gross profit method are useful in preparing interim statements and
in establishing an estimate of the cost of merchandise destroyed by fire or other disasters.
Ex. 9–1
Switching to a perpetual inventory system will strengthen Onsite Hardware’s internal controls over invento-
ry, since the store managers will be able to keep track of how much of each item is on hand. This should mi-nimize shortages of good-selling items and excess inventories of poor-selling items.
On the other hand, switching to a perpetual inventory system will not eliminate the need to take a physical inventory count. A physical inventory must be taken to verify the accuracy of the inventory records in a per-petual inventory system. In addition, a physical inventory count is needed to detect shortages of inventory due to damage or theft.
Ex. 9–2
Include in inventory: c, e, g, I,Exclude from inventory: a, b, d, f, h
Ex. 9–3
a.
Balance Sheet
Merchandise inventory $1,950 understated
Current assets $1,950 understated
Total assets $1,950 understated
1 1
Owner’s equity $1,950 understated
b.
Income Statement
Cost of merchandise sold $1,950 overstated
Gross profit $1,950 understated
Net income $1,950 understated
Ex. 9–4
When an error is discovered affecting the prior period, it should be corrected. In this case, the merchandise
inventory account should be debited and the owner’s capital account credited for $12,800. Failure to correct the error for 2005 and purposely misstating the inventory and the cost of merchandise sold
in 2006 would cause the balance sheets and the income statements for the two years to not be comparable
Ex. 9–5
Portable CD Players
Purchases Cost of Merchandise Sold Inventory
Unit Total Unit Total Unit Total Date Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost April1 35 50 1,750 5 26 50 1,300 9 50 450 11 15 53 795 9 50 450
15 53 795 21 9 50 450 12 53 636
3 53 159
28 4 53 212 8 53 424 30 7 54 378 8 53 424
7 54 378 Total cost of merchandise sold ....................................................................................... 2,121
Inventory, April 30: $802 ($424 + $378)Ex. 9–6
Cell Phones
Purchases Cost of Merchandise Sold Inventory
Unit Total Unit Total Unit Total Date Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost Mar.1 25 90 2,250 5 20 94 1,880 25 90 2,250
20 94 1,880 9 18 94 1,692 25 90 2,250
2 94 188 13 2 94 188 7 90 630
18 90 1,620
21 15 95 1,425 7 90 630
15 95 1,425 31 8 95 760 7 90 630
7 95 665 Total cost of merchandise sold ....................................................................................... 4,260
Inventory, March 31: $1,295 ($630 + $665) Ex. 9–7
a. $700 ($50 × 14 units),b. $663 [($45 × 5 units) + ($47 × 4 units) + ($50 × 5 units)]
Ex. 9–8
a. $360 (8 units at $33 plus 3 units at $32),b.$318 (6 units at $28 plus 5 units at $30)
c. $341 (11 units at $31; $1,240 ? 40 units = $31)
Cost of merchandise available for sale:
6 units at $28 .................................................................................. $ 168
12 units at $30 .................................................................................. 360
2 2
14 units at $32 .................................................................................. 448
8 units at $33 .................................................................................. 264
40 units (at average cost of $31) ...................................................... $1,240
Ex. 9–9
1. a. LIFO inventory < (less than) FIFO inventory
b. LIFO cost of goods sold > (greater than) FIFO cost of goods sold
c. LIFO net income < (less than) FIFO net income
d. LIFO income tax < (less than) FIFO income tax
2. Under the lifo conformity rule a company selecting lifo for tax purposes must also use lifo for financial
reporting purposes. Thus, in periods of rising prices the reported net income would be lower than would
be the case under fifo. However, the lower reported income would also be shown on the corporation’s
tax return; thus, there is a tax advantage from using lifo. Firms electing to use lifo believe the tax ad-
vantage from using lifo outweighs any negative impact from reporting a lower earnings number to
shareholders. Lifo is supported because the tax impact is a real cash flow benefit, while a lower lifo
earnings number (compared to fifo) is merely the result of a reporting assumption.
Ex. 9–10
Unit Unit Total
Inventory Cost Market Lower
Commodity QuantityPrice Price Cost Marketof C or M
M76 8 $150 $160$1,200 $1,280 $1,200
T53 20 75 70 1,500 1,400 1,400
A19 10 275 2602,750 2,600 2,600
J81 15 50 40 750 600 600
K10 25 101 105 2,525 2,625 2,525
Total $8,725 $8,505$8,325
Ex. 9–11
The merchandise inventory would appear in the Current Assets section, as follows:
Merchandise inventory—at lower of cost, fifo, or market .............................................. $8,325 Alternatively, the details of the method of determining cost and the method of valuation could be presented in a note.
Ex. 9–12
Cost Retail
Merchandise inventory, June 1 $160,000 $
180,000
Purchases in June (net) 680,000
1,020,000
Merchandise available for sale $840,000 $1,200,000
Ratio of cost to retail price:
$ 840,000,70% $1,200,000
Sales for June (net)
875,000
Merchandise inventory, June 30, at retail price $
325,000
Merchandise inventory, June 30,
at estimated cost ($325,000 × 70%) $ 227,500
Ex. 9–13
a. Merchandise inventory, Jan. 1 $180,000
Purchases (net), Jan. 1–May 17
750,000
Merchandise available for sale $930,000
Sales (net), Jan. 1–May 17 $1,250,000
Less estimated gross profit ($1,250,000 × 35%) 437,500
3 3
Estimated cost of merchandise sold
812,500
Estimated merchandise inventory, May 17 $117,500
b. The gross profit method is useful for estimating inventories for monthly or quarterly financial state-
ments. It is also useful in estimating the cost of merchandise destroyed by fire or other disasters. Ex. 9–14
a. Apple: 147.8 {$4,139,000,000 ? [($45,000,000 + $11,000,000) ? 2]}
American Greetings: 3.1 {$881,771,000 ? [($278,807,000 + $290,804,000) ? 2]}
b. Lower. Although American Greetings’ business is seasonal in nature, with most of its revenue generat-
ed during the major holidays, much of its nonholiday inventory may turn over very slowly. Apple, on
the other hand, turns its inventory over very fast because it maintains a low inventory, which allows it
to respond quickly to customer needs. Additionally, Apple’s computer products can quickly become ob-
solete, so it cannot risk building large inventories.
Ex. 9–15
Inventory, end of perioda. Number of days’ sales in inventory = Cost of goods sold/365
$2,973$4,175 Albertson’s, = 43 days,Kroger, = 40 days $25,242/365$37,810/365
Cost of goods sold$2,558 Safeway, = 42 days;Inventory turnover = $22,303/365Average inventory
$25,242$37,810
Albertson’s, = 8.2;Kroger, = 9.1 ($2,973,$3,196)/2($4,175,$4,178)/2
$22,303
Safeway, = 8.9 ($2,558,$2,437)/2
b. The number of days’ sale in inventory and inventory turnover ratios are consistent. Albertson’s has
slightly more inventory than does Safeway. Kroger has relatively less inventory (2–3 days) than does
Albertson’s and Safeway.
CHAPTER 10
1. A. TANGIBLE;B.CAPABLE OF REPEATED USE IN THE OPERATIONS OF THE BUSI-
NESS
e. Long-lived
2. a. Property, plant, and equipment, b. Current assets (merchandise inventory)
3. Real estate acquired as speculation should be listed in the balance sheet under the caption "Investments,"
below the Current Assets section.
4. $375,000
5. Ordinarily not; if the book values closely approximate the market values of fixed assets, it is coinciden-
tal.
6. a. No, it does not provide a special cash fund for the replacement of assets. Unlike most expenses,
however, depreciation expense does not require an equivalent outlay of cash in the period to which
the expense is allocated.
b. Depreciation is the cost of fixed assets periodically charged to revenue over their expected useful
lives.
7. 12 years
8. a. No,b. No
9. a. An accelerated depreciation method is most appropriate for situations in which the decline in prod-
uctivity or earning power of the asset is proportionately greater in the early years of use than in later
years, and the repairs tend to increase with the age of the asset.
4 4
b. An accelerated depreciation method re-duces income tax payable to the IRS in the earlier periods of
an asset’s life. Thus, cash is freed up in the earlier periods to be used for other business purposes.
c. MACRS was enacted by the Tax Reform Act of 1986 and provides for depreciation for fixed assets
acquired after 1986.
10. No. Accounting Principles Board Opinion No. 20, Accounting Changes, is quite specific about the
treatment of changes in depreciableassets’ estimated service lives. Such changes should be reflected in the
amounts for depreciation expense in the current and future periods. The amounts recorded for deprecia-
tion expense in the past are not affected.
11. Capital expenditures are recorded as assets and include the cost of acquiring fixed assets, adding a com-
ponent, or replacing a component of fixed assets. Revenue expenditures are recorded as expenses and
are costs that benefit only the current period and are incurred for normal maintenance and repairs of
fixed assets.
12. Capital expenditure (component replacement)
13. a. No, the accumulated depreciation for an asset cannot exceed the cost of the asset. To do so would
create a negative book value, which is meaningless.
b. The cost and accumulated depreciation should be removed from the accounts when the asset is no
longer useful and is removed from service. Presumably, the asset will then be sold, traded in, or dis-
carded.
14. a. All purchases of fixed assets should be approved by an appropriate level of management. In addi-
tion, competitive bids should be solicited to ensure that the company is acquiring the assets at the
lowest possible price.
b. A physical count of fixed assets will verify the accuracy of accounting records. It will also detect
missing fixed assets that should be removed from the records and obsolete or idle fixed assets that
should be disposed of.
15. a. Over the years of its expected usefulness,b. Expense as incurred
c. Goodwill should not be amortized, but written down when impaired.
Ex. 10–1
a. No. The $859,600 represents the original cost of the equipment. Its replacement cost, which may be
more or less than $859,600, is not reported in the financial statements.
b. No. The $317,500 is the accumulation of the past depreciation charges on the equipment. The recogni-
tion of depreciation expense has no relationship to the cash account or accumulation of cash funds. Ex. 10–2 $18,000 [($312,000 – $42,000) ? 15]
Ex. 10–3
$345,000 , $18,000 = $4.36 depreciation per hour 75,000 hours
1,250 hours at $4.36 = $5,450 depreciation for July
Ex. 10–4
a. Credit to
Accumulated
Truck No. Rate per Mile Miles Operated Depreciation
1 20.0 cents 40,000 $ 8,000
2 21.012,000 2,100* 3 17.5 36,000 6,300
4 20.021,000 4,200
Total $20,600
* Mileage depreciation of $2,520 (21 cents × 12,000) is limited to $2,100, which reduces the book
value of the truck to $6,600, its residual value.
b. Depreciation Expense—Trucks .................................................................. 20,600
Accumulated Depreciation—Trucks ............................................. 20,600
Ex. 10–5
First Year Second Year
a. 8 1/3% of $84,000 = $7,000 8 1/3% of $84,000 = $7,000
b. 16 2/3% of $84,000 = $14,000 16 2/3% of $70,000* = $11,667
*$84,000 – $14,000
5 5
Ex. 10–6
a. Year 1: 9/12 × [($54,000 – $10,800) ? 12] = $2,700
Year 2: ($54,000 – $10,800) ? 12 = $3,600
b. Year 1: 9/12 × 16 2/3% of $54,000 = $6,750
Year 2: 16 2/3% of ($54,000 – $6,750) = $7,875
Ex. 10–7
a.
Current Preceding
Year Year
Land and buildings $ 426,322,000 $ 418,928,000
Machinery and equipment 1,051,861,000 1,038,323,000
Total cost $1,478,183,000 $1,457,251,000
Accumulated depreciation 633,178,000 582,941,000
Book value $ 845,005,000 $ 874,310,000
A comparison of the book values of the current and preceding years indicates that they decreased. A
comparison of the total cost and accumulated depreciation reveals that Interstate Bakeries purchased
$20,932,000 ($1,478,183,000 – $1,457,251,000) of additional fixed assets, which was offset by the
additional depreciation expense of $50,237,000 ($633,178,000 – $582,941,000) taken during the cur-
rent year.
b. The book value of fixed assets should normally increase during the year. Although additional deprecia-
tion expense will reduce the book value, most companies invest in new assets in an amount that is at
least equal to the depreciation expense. However, during periods of economic downturn, companies
purchase fewer fixed assets, and the book value of their fixed assets may decline. This is apparently the
case with Interstate Bakeries.
Ex. 10–8
Capital expenditures:
New component: 4, 6, 7
Replacement component: 1, 2, 9, 10
Revenue expenditures: 3, 5, 8
Ex. 10–9
a. Mar. 15 Removal Expense ............................................................... 1,500
Cash ............................................................................. 1,500 b. Mar. 15 Depreciation Expense ......................................................... 6,000
Accumulated Depreciation ........................................... 6,000
15 Accumulated Depreciation .................................................. 18,000
Carpet .......................................................................... 18,000
30 Carpet ................................................................................. 45,000
Cash ............................................................................. 45,000 c. Dec. 31 Depreciation Expense ......................................................... 2,250*
Accumulated Depreciation ........................................... 2,250
*($45,000 ? 15 years) × 9/12
Ex. 10–10
a. Cost of equipment .................................................................................................... $240,000
Accumulated depreciation at December 31, 2006
(4 years at $22,500* per year) ................................................................... 90,000
Book value at December 31, 2006 ........................................................................... $150,000
*($240,000 – $15,000) ? 10 = $22,500
b. 1. Depreciation Expense—Equipment ..................................................... 11,250
Accumulated Depreciation—Equipment ..................................... 11,250
2. Cash .......................................................................................135,000
Accumulated Depreciation—Equipment ....................................... 101,250
Loss on Disposal of Fixed Assets ................................................. 3,750
Equipment ................................................................................... 240,000
Ex. 10–11
6 6
a. 2003 depreciation expense: $15,000 [($96,000 – $6,000) ? 6]
2004 depreciation expense: $15,000
2005 depreciation expense: $15,000,b. $51,000 ($96,000 – $45,000)
c. Cash ...........................................................................................38,000
Accumulated Depreciation—Equipment..................................................... 45,000
Loss on Disposal of Fixed Assets ............................................................... 13,000
Equipment ..................................................................................... 96,000 d. Cash ...........................................................................................53,000
Accumulated Depreciation—Equipment..................................................... 45,000
Equipment ..................................................................................... 96,000
Gain on Disposal of Fixed Assets ................................................. 2,000
Ex. 10–12
a. $205,000 ($315,000 – $110,000)
b. $303,750 [$315,000 – ($110,000 – $98,750)], or
$303,750 ($205,000 + $98,750)
Ex. 10–13
a. $205,000 ($315,000 – $110,000)
$315,000. The new printing press’s cost cannot exceed $315,000 on a similar exchange. The $18,500 b.
loss on disposal ($128,500 book value – $110,000 trade-in allowance) must be recognized.
Ex. 10–14
a. Depreciation Expense—Equipment ............................................................ 8,000
Accumulated Depreciation—Equipment ....................................... 8,000
b. Accumulated Depreciation—Equipment..................................................... 152,000
Equipment .................................................................................................. 385,000
Loss on Disposal of Fixed Assets ............................................................... 28,000
Equipment ..................................................................................... 280,000
Cash .............................................................................................. 35,000
Notes Payable ............................................................................... 250,000*
*$385,000 – $100,000 – $35,000
Ex. 10–15
a. $55,000. The new truck’s cost cannot exceed $55,000 in a similar exchange.
b. $54,000 ($55,000 – $1,000) or $54,000 ($30,000 + $24,000)
Ex. 10–16
a. $80,000,000 ? 100,000,000 tons = $0.80 depletion per ton
15,500,000 × $0.80 = $12,400,000 depletion expense
b. Depletion Expense ...................................................................................... 12,400,000
Accumulated Depletion ................................................................. 12,400,000
Ex. 10–17
a. ($472,500 ? 15) + ($75,000 ? 12) = $37,750 total patent expense
b. Amortization Expense—Patents ................................................................. 37,750
Patents .......................................................................................... 37,750 Ex. 10–18
a. Current year: Ratio of fixed assets to long-term liabilities (debt) = $181,758,000/$14,610,000 =
12.4
Preceding year: Ratio of fixed assets to long-term liabilities (debt) = $174,659,000/$12,150,000 =
14.4
b. The ratio of fixed assets to long-term liabilities has declined from 14.4 in the preceding year to 12.4 in
the current year. This indicates a decrease in the margin of safety for long-term creditors. However, the
ratio of fixed assets to long-term liabilities is large enough that Intuit will be able to borrow with rela-
tive ease.
Appendix Ex. 10–19
First year: 12/78 × $84,000 = $12,923,Second year: 11/78 × $84,000 = $11,846
Appendix Ex. 10–20
7 7
First year: 9/12 × 12/78 × $43,200 = $4,985
Second year: (3/12 × 12/78 × $43,200) + (9/12 × 11/78 × $43,200) = $6,231
CHAPTER 11
1. TO MATCH REVENUES AND EXPENSES PROPERLY, THE LIABILITY TO COVER
PRODUCT WARRANTIES SHOULD BE RECORDED IN THE PERIOD DURING WHICH THE SALE
OF THE PROD
UCT IS MADE.
2. When the defective product is repaired, the repair costs would be recorded by debiting Product Warran-
ty Payable and crediting Cash, Supplies, or another appropriate account.
3. Yes. Since the $5,000 is payable within one year, Company A should present it as a current liability at
September 30.
4. a. Income or withholding taxes, social security, and Medicare
b. Employees Income Tax Payable, Social Security Tax Payable, and Medicare Tax Payable 5. There is a ceiling on (a) the social security portion of the FICA tax and (d) federal unemployment com-
pensation tax.
The deductions from employee earnings are for amounts owed (liabilities) to others for such items as 6.
federal taxes, state and local income taxes, and contributions to pension plans.
7. Yes. Unemployment compensation taxes are paid by the employer on the first $7,000 of annual earnings
for each employee. Therefore, hiring two employees, each earning $12,500 per year, would require the
payment of twice the unemployment tax than if only one employee, earning $25,000, was hired. 8. 1. c; 2. c; 3. a; 4. b; 5. b
9. The use of special payroll checks relieves the treasurer or other executives of the task of signing a large
number of regular checks each payday. Another advantage of this system is that reconciling the regular
bank statement is simplified. The paid payroll checks are returned by the bank separately rom regular
checks and are accompanied by a statement of the special bank account. Any balance shown on the
bank's statement will correspond to the sum of the payroll checks outstanding because the amount of
each deposit is exactly the same as the total amount of checks drawn.
10. a. Input data that remain relatively unchanged from period to period (and therefore do not need to be
reintroduced into the system frequently) are called constants.
b. Input data that differ from period to period are called variables.
11. a. If employees’ attendance records are kept and their preparation supervised in such a manner as to
prevent errors and abuses, then one can be assured that wages paid are based on hours actually
worked. The use of ―In‖ and ―Out‖ cards, whereby employees indicate by punching a time clock
their time of arrival and departure, is especially useful. Employee identification cards or badges can
be very helpful in giving additional assurance.
b. The requirement that the addition of names on the payroll be supported by written authorizations
from the Personnel Department can help ensure that payroll checks are not being issued to fictitious
persons. Endorsements on payroll checks can be compared with other samples of employees' signa-
tures.
12. If the vacation payment is probable and can be reasonably estimated, the vacation pay expense should
be recorded during the period in which the vacation privilege is earned.
13. Employee life expectancies, expected employee retirement dates, employee turnover, employee
compensation levels, and invest-ment income on pension contributions are factors that influence
the future pension obligation of an employer.
Ex. 11–1
Current liabilities: 1Federal income taxes payable .............................................................................................. $ 42,000 2Advances on magazine subscriptions .................................................................................. 155,250
Total current liabilities ........................................................................................................ $197,250
12 $120,000 × 35%, 6,900 × $30 × 9/12 = $155,250
The nine months of unfilled subscriptions are a current liability because Web World received payment prior to providing the magazines.
Ex. 11–2
8 8
a. 1. Merchandise Inventory ........................................................................ 196,000 1 Interest Expense ............................................................................ 4,000
Notes Payable ............................................................................. 200,000
2. Notes Payable ...................................................................................... 200,000
Cash ............................................................................................ 200,000 b. 1. Notes Receivable ................................................................................. 200,000
Sales ............................................................................................ 196,000
Interest Revenue .......................................................................... 4,000
2. Cash .......................................................................................200,000
Notes Receivable ........................................................................ 200,000 1$200,000 × 8% × 90/360
Ex. 11–3
a. $90,000 × 6% × 90/360 = $1,350 for each alternative.
b. (1) $90,000 simple-interest note: $90,000 proceeds
(2) $90,000 discounted note: $90,000 – $1,350 interest = $88,650 proceeds
c. Alternative (1) is more favorable to the borrower. This can be verified by comparing the effective in-
terest rates for each loan as follows:
Situation (1): 6% effective interest rate
($1,350 × 360/90) ? $90,000 = 6%
Situation (2): 6.09% effective interest rate
($1,350 × 360/90) ? $88,650 = 6.09%
The effective interest rate is higher for the second loan because the creditor lent only $88,650 in return
for $1,350 interest over 90 days. In the simple-interest loan, the creditor must lend $90,000 for 90 days
to earn the same $1,350 interest.
Ex. 11–4
a. Accounts Payable ....................................................................................... 9,000
Notes Payable ............................................................................... 9,000 b. Notes Payable ............................................................................................. 9,000
Interest Expense ................................................................................... 75*
Cash .............................................................................................. 9,075
*$9,000 × 5% × 60/360 = $75
Ex. 11–5
a. June 30 Building .............................................................................. 730,000
Land.................................................................................... 250,000
Note Payable................................................................ 800,000
Cash ............................................................................. 180,000 b. Dec. 31 Note Payable ...................................................................... 40,000
Interest Expense ($800,000 × 8% × 1/2) ............................ 32,000
Cash ............................................................................. 72,000 c. June 30 Note Payable ...................................................................... 40,000
Interest Expense ($760,000 × 8% × 1/2) ............................ 30,400
Cash ............................................................................. 70,400 Ex. 11–6
a. $4,650,000, or the amount disclosed as the current portion of long-term debt.
b. By the end of 2002, the bank credit line was reduced to $299,000; thus, the bank credit line was nearly
paid off in 2002. The difference between the $34,783,000 that would be due in the coming period and
the $4,650,000 disclosed as the current portion must have been funded (i.e., replaced) by long-term
notes payable. Indeed, of the $50 million increase in the term loans
($95 million – $45 million), around $35 million must have been used to eliminate the bank credit line. c. The current liabilities declined by $4,351,000 ($4,650,000 – $299,000).
Ex. 11–7
a. Product Warranty Expense (2% × $750,000) ............................................. 15,000
Product Warranty Payable ............................................................ 15,000 b. Product Warranty Payable .......................................................................... 960
9 9
Wages Payable ............................................................................. 570
Supplies ............................................................................... 390 Ex. 11–8
a. The warranty liability represents estimated outstanding automobile warranty claims. Of these claims,
$14,166 million is estimated to be due during 2003, while the remainder ($9,125 million) is expected to
be paid after 2003. The distinction between short-term and long-term liabilities is important to creditors
in order to accurately evaluate the near-term cash demands on the business, relative to the quick assets
and other longer-term demands.
b. Product Warranty Expense .................................................... 14,355,000,000
Product Warranty Payable ....................................... 14,355,000,000
$20,410 + X – $12,000 = $23,291
X = $23,291 – $20,410 + $12,000
X = $14,881 million
c. The liability might have grown for a number of possible reasons. Often the estimated warranty liability
will increase if the underlying product sales are also increasing, as was the case for Ford during this
time. Alternatively, Ford’s actual claims experience might be declining. If the percent of sales estimate
remained unchanged, this would cause the liability to potentially increase. This partially explains the
increase, since only $12,000 million in claims were assumed to be paid, while the current estimated
claims payable was $13,605 million at December 31, 2001. Lastly, Ford could be increasing its esti-
mated warranty claims expense as a percent of current period sales.
Ex. 11–9
a. Damage Awards and Fines ......................................................................... 670,000
EPA Fines Payable ....................................................................... 390,000
Litigation Claims Payable ............................................................. 280,000
Note to Instructors: The ―damage awards and fines‖ would be disclosed on the income statement under
―other expenses.‖
b. The company experienced a hazardous materials spill at one of its plants during the previous period.
This spill has resulted in a number of lawsuits to which the company is a party. The Environmental
Protection Agency (EPA) has fined the company $390,000, which the company is contesting in court.
Although the company does not admit fault, legal counsel believes that the fine payment is probable. In
addition, an employee has sued the company. A $280,000 out-of-court settlement has been reached
with the employee. The EPA fine and out-of-court settlement have been accrued. There is one other
outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other
lawsuits and unknown liabilities may arise from this incident.
Ex. 11–10
a. Dec. 31 Pension Expense ................................................................. 315,000
Unfunded Pension Liability.......................................... 315,000
b. Jan. 15 Unfunded Pension Liability ................................................ 315,000
Cash ............................................................................. 315,000 Ex. 11–11
Quick Assetsa. Quick Ratio = Current Liabilities
$530,000 , $350,000 December 31, 2005: = 1.10 $800,000
$356,000 , $400,000 December 31, 2006: = 0.84 $900,000
b. The quick ratio has been decreased between the two balance sheet dates. The major rea-
son is a significant increase in inventory. Cash also declined, possibly to purchase the inven-
tory. As a result, quick assets actually declined, while the current liabilities increased. While
the quick ratio for December 31, 2006, is below 1.0, it is not yet at an alarming level. How-
ever, the trend suggests that the firm’s current asset (working capital) management should
be watched closely.
Ex. 11–12
10 10
a.
Apple Computer Inc. Dell Computer Corp.
Quick Ratio 2.96 0.81
Quick Assets Quick Ratio = Current Liabilities
Apple Computer Inc.:
$5,388 , $45 , $441 Quick ratio = = 2.96 $1,658
Dell Computer Corp.:
$8,924 , $306 , $1,394 Quick ratio = = 0.81 $8,933
b. It is clear that Apple Computer’s short-term liquidity is stronger than Dell’s. Apple’s quick ratio is
215% higher. Apple has a much stronger relative cash and short-term investment position than does
Dell. Apple’s cash and short-term investments are 80% of total current assets (261% of current liabili-
ties), compared to Dell’s 52% of total current assets (52% of current liabilities). In addition, Dell’s rel-
ative accounts payable position is larger than Apple’s, indicating the possibility that Dell has longer
supplier payment terms than does Apple. A quick ratio of 2.96 for Apple suggests ample flexibility to
make strategic investments with its excess cash, while a quick ratio of 0.81 for Dell indicates an effi-
cient but tight quick asset management policy.
CHAPTER 12
1. Each stockholder’s liability for corporation debts is limited to the amount invested in the corporation. A
corporation is responsible for its own obligations, and therefore, its creditors may not look beyond the
assets of the corporation for satisfaction of their claims.
2. The large investments needed by large businesses are usually obtainable only through the pooling of the
resources of many people. The corporation also has the advantages over proprietorships and partnerships
of transferable shares of ownership, and thus the continuity of existence, and limited liability of its own-
ers (stockholders).
3. No. Common stock with a higher par is not necessarily a better investment than com-mon stock with a
lower par because par is an amount assigned to the shares.
4. The broker is not correct. Corporations are not legally liable to pay dividends until the dividends are
declared. If the company that issued the cumulative preferred stock has operating losses, it could omit
dividends, first, on its common stock and, later, on its preferred stock.
5. Factors influencing the market price of a corporation's stock include the following:
a. Financial condition, earnings record, and dividend record of the corporation.
b. Its potential earning power.
c. General business and economic conditions and prospects.
6. No. Premium on stock is additional paid-in capital.
7. a. Unissued stock has never been issued, but treasury stock has been issued as fully paid and has sub-
sequently been reacquired.
b. As a deduction from the total of other stockholders' equity accounts.8. a. It has no
effect on revenue or expense.
b. It reduces stockholders' equity by $420,000.
9. a. It has no effect on revenue.; b. It increases stockholders' equity by $500,000.
10. The primary purpose of a stock split is to bring about a reduction in the market price per share and thus
to encourage more in-vestors to buy the company’s shares.
11. a. Sufficient retained earnings, sufficient cash, and formal action by the board of directors.
b. July 1, declaration date; August 15, record date; and September 1, payment date. 12. The company may not have had enough cash on hand to pay a dividend on the com-mon stock, or re-
sources may be needed for plant expansion, replacement of facilities, payment of liabilities, etc. 13. a. No change., b. Total equity is the same.
14. a. Current liability, b. Stockholders' equity
11 11
15. The primary advantage of the combined income and retained earnings statement is that it emphasizes net
income as the connecting link between the income statement and the retained earnings portion of stock-
holders’ equity.
16. The three classifications of appropriations are legal, contractual, and discretionary. Appropriations are
normally reported in the notes to the financial statements.
17. Such prior period adjustments should be reported as an adjustment to the beginning balance of
retained earnings.
Ex. 12–1
1st Year 2nd Year 3rd Year 4th Year 5th Year
a. Total dividend declared $ — $ 40,000 $80,000 $ 120,000 $140,000
Preferred dividend
(current) $ 25,000 $ 25,000 $ 25,000 $ 25,000 $25,000
Preferred dividend in
arrears (from year 1) 15,000 10,000 — —
b. Total preferred dividends $ 40,000 $35,000 $ 25,000 $25,000
Preferred shares outstanding ? 25,000 ? 25,000 ? 25,000 ?25,000
Preferred dividend per share $ 1.60 $ 1.40 $ 1.00 $1.00
Dividend for common shares
(a. – b.) $ — $ 45,000 $ 95,000 $115,000
Common shares outstanding ? 250,000 ? 250,000 ?250,000
Common dividend per share $ 0.18$ 0.38 $0.46
Ex. 12–2
a. July 7 Cash .................................................................................... 1,600,000
Common Stock ...................................................... 1,000,000
Paid-In Capital in Excess of Par—
Common Stock ............................................................. 600,000
Oct. 20 Cash .................................................................................... 1,800,000
Preferred Stock ............................................................ 1,500,000
Paid-In Capital in Excess of Par—
Preferred Stock ............................................................ 300,000 b. $3,400,000 ($1,600,000 + $1,800,000)
Ex. 12–3
Aug. 29 Land ........................................................................280,000
Common Stock ..................................................................... 150,000
Paid-In Capital in Excess of Par .................................. 130,000
Ex. 12–4
a. Cash ...........................................................................................50,000
Common Stock .............................................................................. 50,000 b. Organizational Expenses ..................................................................... 2,000
Common Stock .............................................................................. 2,000
Cash ...........................................................................................12,000
Common Stock .............................................................................. 12,000 c. Land .........................................................................................60,000
Building .......................................................................................200,000
Interest Payable* ........................................................................... 900
Mortgage Note Payable ................................................................ 180,000
Common Stock .............................................................................. 79,100
*An acceptable alternative would be to credit Interest Expense.
Ex. 12–5
Buildings ........................................................................................................... 80,000 Land .................................................................................................................. 45,000
Preferred Stock ........................................................................................... 100,000
Paid-In Capital in Excess of Par—
Preferred Stock ........................................................................................... 25,000
12 12
Cash .................................................................................................................. 475,000
Common Stock ........................................................................................... 400,000
Paid-In Capital in Excess of Par—
Common Stock ................................................................................ 75,000 Ex. 12–6
Jan. 5 Cash .....................................................................1,000,000
Common Stock ..................................................................... 1,000,000
18 Organizational Expenses ............................................................. 10,000
Common Stock ..................................................................... 10,000 Feb. 13 Land ..........................................................................50,000
Buildings ........................................................................280,000
Equipment ................................................................................... 120,000
Common Stock ..................................................................... 425,000
Paid-In Capital in Excess of Par—
Common Stock ..................................................................... 25,000 Apr. 1 Cash ........................................................................182,000
Preferred Stock ..................................................................... 175,000
Paid-In Capital in Excess of Par—
Preferred Stock ..................................................................... 7,000
Ex. 12–7
a. June 1 Treasury Stock .................................................................... 150,000
Cash ............................................................................. 150,000
July 8 Cash .................................................................................... 97,500
Treasury Stock ............................................................. 90,000
Paid-In Capital from Sale of
Treasury Stock ............................................................. 7,500
Nov. 2 Cash .................................................................................... 58,000
Paid-In Capital from Sale of
Treasury Stock .................................................................... 2,000
Treasury Stock ............................................................. 60,000 b. $5,500 credit
c. Crystal Springs may have purchased the stock to support the market price of the stock, to provide
shares for resale to employees, or for reissuance to employees as a bonus according to stock purchase
agreements.
Ex. 12–8
a. 125,000 shares (25,000 × 5),b. $33 per share ($165 ? 5)
Ex. 12–9
Stockholders’
Assets Liabilities Equity
(1) Declaring a cash dividend 0 + –
(2) Paying the cash dividend
declared in (1) – – 0
(3) Authorizing and issuing stock
certificates in a stock split 0 0 0
(4) Declaring a stock dividend 0 0 0
(5) Issuing stock certificates for
the stock dividend declared
in (4) 0 0 0
Ex. 12–10
Feb. 13 Cash Dividends ........................................................................... 120,000
Cash Dividends Payable ....................................................... 120,000 Mar. 15 No entry required.
13 13
Apr. 10 Cash Dividends Payable .............................................................. 120,000
Cash ..................................................................................... 120,000 Ex. 12–11
Feb. 9 No entry required. The stockholders ledger would be revised to record the increased number of
shares held by each stockholder.
Apr. 10 Cash Dividends ........................................................................... 57,000*
Cash Dividends Payable ....................................................... 57,000
* [(12,000 shares × $1) + (900,000 shares
× $0.05)]
May 1 Cash Dividends Payable .............................................................. 57,000
Cash ..................................................................................... 57,000 Oct. 12 Cash Dividends ........................................................................... 147,000*
Cash Dividends Payable ....................................................... 147,000
* [(12,000 shares × $1) + (900,000 shares
× $0.15)]
12 Stock Dividends .......................................................................... 432,000**
Stock Dividends Distributable .............................................. 360,000
Paid-In Capital in Excess of
Par—Common Stock ............................................................ 72,000
** (900,000 shares × 1% × $48)
Nov. 14 Cash Dividends Payable .............................................................. 147,000
Cash ..................................................................................... 147,000
14 Stock Dividends Distributable..................................................... 360,000
Common Stock ..................................................................... 360,000
Ex. 12–12
Stockholders’ Equity
Paid-in capital:
Preferred $2 stock, $100 par
(80,000 shares authorized,
7,500 shares issued) .................................... $750,000
Excess of issue price over par ............................ 90,000 $840,000
Common stock, no par, $5 stated
value (200,000 shares author-
ized, 112,500 shares issued) ....................... $562,500
Excess of issue price over par ............................ 75,000 637,500
From sale of treasury stock ................................ 63,750
Total paid-in capital .................................... $1,541,250
Ex. 12–13 BRAVO CORPORATION
Retained Earnings Statement
For the Year Ended July 31, 2006
Retained earnings, August 1, 2005 ................................................................ $ 2,213,400 Net income ..................................................................................... $558,000 Less dividends declared ................................................................................. 330,000
Increase in retained earnings ......................................................................... 228,000
Retained earnings, July 31, 2006................................................................... $ 2,441,400
Ex. 12–14
a. 1.9% ($1.26 ? $67.44)
b. Hershey’s dividend yield is above average for similar companies. Thus, it is likely that most stockhold-
ers are looking for current dividends as well as an increase in market price.
14 14