Concept explainers
(LO 10–2, 10–4, 10–5, 10–8)
On January 1, 2018, the general ledger of Grand Finale Fireworks includes the following account balances:
Accounts | Debit | Credit |
Cash | $ 42,700 | |
Accounts Receivable | 44,500 | |
Supplies | 7,500 | |
Equipment | 64,000 | |
Accumulated Depreciation | $ 9,000 | |
Accounts Payable | 14,600 | |
Common Stock. $1 par value | 10,000 | |
Additional Paid-in Capital | 80,000 | |
45,100 | ||
Totals | $158,700 | $158,700 |
During January 2018, the following transactions occur:
January | 2 | Issue an additional 2,000 shares of $1 par value common stock for $40,000. |
January | 9 | Provide services to customers on account, $14,300. |
January | 10 | Purchase additional supplies on account, $4,900. |
January | 12 | Repurchase 1,000 shares of |
January | 15 | Pay cash on accounts payable, $16,500. |
January | 21 | Provide services to customers for cash, $49,100. |
January | 22 | Receive cash on accounts receivable, $16,600. |
January | 29 | Declare a cash dividend of $0.30 per share to all shares outstanding on January 29. The dividend is payable on February 15. (Hint: Grand Finale Fireworks had 10,000 shares outstanding on January 1, 2018 and dividends are not paid on treasury stock.) |
January | 30 | Reissue 600 shares of treasury stock for $20 per share. |
January | 31 | Pay cash for salaries during January, $42,000. |
Required:
1. Record each of the transactions listed above.
2. Record
a. Unpaid utilities for the month of January are $6,200.
b. Supplies at the end of January total $5,100.
c. Depreciation on the equipment for the month of January is calculated using the straight-line method. At the time the equipment was purchased, the company estimated a service life of three years and a residual value of $10,000.
d. Accrued income taxes at the end of January are $2,000.
3. Prepare an adjusted
4. Prepare a multiple-step income statement for the period ended January 31, 2018.
5. Prepare a classified
6. Record closing entries.
7. Analyze the following for Grand Finale Fireworks:
a. Calculate the return on equity for the month of January. If the average return on equity for the industry for January is 2.5%, is the company more or less profitable than other companies in the same industry?
b. How many shares of common stock are outstanding as of January 31, 2018?
c. Calculate earnings per share for the month of January. (Hint: To calculate average shares of common stock outstanding take the beginning shares outstanding plus the ending shares outstanding and divide the total by 2.) If earnings per share was $3.60 last year (i.e., an average of $0.30 per month), is earnings per share for January 2018 better or worse than last year’s average?
1.
To record: Each of the transactions.
Explanation of Solution
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Record each of the given transactions.
Date | Account Title and Explanation | Debit ($) | Credit($) |
2018 | |||
January 2 | Cash | 40,000 | |
Common stock
| 2,000 | ||
Additional paid in capital (difference) | 38,000 | ||
(To record issuance of 2,000 shares of common stock for $40,000) | |||
January 9 | Accounts receivable | 14,300 | |
Service revenue | 14,300 | ||
(To provide services on account) | |||
January 10 | Supplies | 4,900 | |
Accounts payable | 4,900 | ||
(To record the purchase of supplies on account) | |||
January 12 | Treasury stock
| 18,000 | |
Cash | 18,000 | ||
(To record the repurchase of 1,000 shares of treasury stock) | |||
January 15 | Accounts payable | 16,500 | |
Cash | 16,500 | ||
(To record the payment of cash on account) | |||
January 21 | Cash | 49,100 | |
Service revenue | 49,100 | ||
(To record the service provided for cash) | |||
January 22 | Cash | 16,600 | |
Accounts receivable | 16,600 | ||
(To record the receipt of cash on account) | |||
January 29 | Dividends
| 3,300 | |
Dividends Payable | 3,300 | ||
(To record the declaration of cash dividend) | |||
January 30 | Cash
| 12,000 | |
Treasury stock
| 10,800 | ||
Additional paid in capital(difference) | 1,200 | ||
(To record the reissue of treasury stock above the cost) | |||
January 31 | Salaries expense | 42,000 | |
Cash | 42,000 | ||
(To record the payment of monthly salaries) |
Table (1)
Working note:
Compute the number of share outstanding as of January 29:
Details | Number of shares |
Common shares at the beginning of the year | 10,000 |
Add: Addition common stock issued | 2,000 |
Less: Treasury stock held | (1,000) |
Number of shares outstanding as of January 29 | 11,000(1) |
Table (2)
2.
To record: The adjusting entries on January 31.
Explanation of Solution
Adjusting entries: Adjusting entries are the journal entries which are recorded at the end of the accounting period to correct or adjust the revenue and expense accounts, to concede with the accrual principle of accounting.
Record the adjusting entries on January 31.
Date | Account Title and Explanation | Debit ($) | Credit($) | |
2018 | ||||
a | January 31 | Utilities expense | 6,200 | |
Utilities payable | 6,200 | |||
(To record the accrued utilities expenses for the month of January ) | ||||
b | January 31 | Supplies expense (2) | 7,300 | |
Supplies | 7,300 | |||
(To adjust the supplies) | ||||
c | January 31 | Depreciation expense (3) | 1,500 | |
Accumulated depreciation | 1,500 | |||
(To record the depreciation expense for the month of January) | ||||
d | January 31 | Income tax expense | 2,000 | |
Income tax payable | 2,000 | |||
(To record the income tax expense for the month of January) |
Table (3)
Working note:
Compute supplies expense incurred in the month of January.
Compute the depreciation expense for the month of January.
3.
To prepare: adjusted trial balances as of January 31, 2018.
Explanation of Solution
Adjusted trial balance:
Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.
Prepare adjusted trial balances as of January 31, 2018.
Account title | Debit | Credit |
Cash | $83,900 | |
Accounts Receivable | 42,200 | |
Supplies | 5,100 | |
Equipment | 64,000 | |
Accumulated Depreciation | 10,500 | |
Accounts Payable | 3,000 | |
Utilities Payable | 6,200 | |
Dividends Payable | 3,300 | |
Income Tax Payable | 2,000 | |
Common Stock | 12,000 | |
Additional Paid-in Capital | 119,200 | |
Retained Earnings | 45,100 | |
Dividends | 3,300 | |
Treasury Stock | 7,200 | |
Service Revenue | 63,400 | |
Salaries Expense | 42,000 | |
Utilities Expense | 6,200 | |
Supplies Expense | 7,300 | |
Depreciation Expense | 1,500 | |
Income Tax Expense | 2,000 | |
Totals | $264,700 | $264,700 |
Table (4)
Working note:
Prepare T-account to determine the ending balance of each account.
Cash | |||
Beginning balance | 42,700 | January 12 | 18,000 |
January 2 | 40,000 | January 15 | 16,500 |
January 21 | 49,100 | January 31 | 42,000 |
January 22 | 16,600 | ||
January 30 | 12,000 | ||
Ending Balance | 83,900 |
Accounts receivable | ||||
Beginning balance | 44,500 | January 22 | 16,600 | |
January 9 | 14,300 | |||
Ending Balance | 42,200 |
Supplies | |||
Beginning balance | 7,500 | January 31 | 7,300 |
January 10 | 4,900 | ||
Ending Balance | 5,100 |
Equipment | |||
Ending balance | 64,000 |
Accumulated depreciation | |||
Beginning balance | 9,000 | ||
January 31 | 1,500 | ||
Ending Balance | 10,500 |
Accounts payable | |||
January 15 | 16,500 | Beginning balance | 14,600 |
January 10 | 4,900 | ||
Ending Balance | 3,000 |
Utilities payable | |||
Beginning balance | 6,200 |
Dividend payable | |||
Beginning balance | 3,300 |
Income tax payable | |||
Beginning balance | 2,000 |
Common stock | |||
Beginning balance | 10,000 | ||
January 2 | 2,000 | ||
Ending Balance | 12,000 |
Additional paid in capital | |||
Beginning balance | 80,000 | ||
January 2 | 38,000 | ||
January 30 | 1,200 | ||
Ending Balance | 119,200 |
Retained earnings | |||
Beginning balance | 45,100 |
Dividends | |||
Beginning balance | 3,300 |
Treasury stock | |||
January 30 | 10,800 | Beginning balance | 18,000 |
Ending Balance | 7,200 |
Service revenue | |||
January 9 | 14,300 | ||
January 21 | 49,100 | ||
Ending Balance | 63,400 |
Salaries expense | |||
Ending balance | 42,000 |
Utilities expense | |||
Ending balance | 8,200 |
Supplies expense | |||
Ending balance | 7,300 |
Depreciation expense | |||
Ending balance | 1,500 |
Income tax expense | |||
Ending balance | 2,000 |
4.
To prepare: A multiple-step income statement for the period ended January 31, 2018.
Explanation of Solution
Income statement:
The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare a multiple-step income statement for the period ended January 31, 2018.
GF Fireworks | |
Income statement | |
For the month ended January 31, 2018 | |
Particulars | Amount in $ |
Service revenue | $63,400 |
Less: Expenses | |
Salaries expense | 42,000 |
Utilities expense | 6,200 |
Supplies expense | 7,300 |
Depreciation expense | 1,500 |
Income before taxes | 6,400 |
Less: Income tax expense | 2,000 |
Net income | $ 4,400 |
Table (5)
5.
To prepare: A classified balance sheet as of January 31, 2018.
Explanation of Solution
Balance sheet:
This is a financial statement that shows the assets available (owner’s equity and outsider’s equity) and owed liabilities from investing, as well as the financial activities of a company. This statement reveals the financial health of a company. Thus, this statement is also called as the Statement of Financial Position. It helps users to know the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities. The main components of a balance sheet are assets, liabilities, and stockholders’ equity.
Prepare a classified balance sheet as of January 31, 2018 as follows:
GF Fireworks | |||
Balance sheet | |||
As of January 31, 2018 | |||
Assets | Amount | Liabilities | Amount |
Cash | $ 83,900 | Accounts payable | $ 3,000 |
Accounts receivable | 42,200 | Utilities payable | 6,200 |
Supplies | 5,100 | Dividends payable | 3,300 |
Total current assets | 131,200 | Income tax payable | 2,000 |
Equipment | 64,000 | Total current liabilities | 14,500 |
Less: Accumulated Depreciation | (10,500) | Stockholders’ Equity | |
Common stock | 12,000 | ||
Additional paid-in capital | 119,200 | ||
Retained earnings | 46,200 | ||
Treasury stock | (7,200) | ||
Total stockholders’ equity | 170,200 | ||
Total assets | $184,700 | Total liabilities and stockholders’ equity | $184,700 |
Table (6)
Working note:
Calculate the amount of retained earnings as follows:
6.
To record: Closing entries.
Explanation of Solution
Closing entries:
Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts such as revenues account, expenses account and dividend account to the retained earnings account. Closing entries produce a zero balance in each temporary account.
Record the closing entries as follows:
Date | Account Title and Explanation | Debit ($) | Credit($) |
2018 | |||
January 31 | Service revenue | 63,400 | |
Retained earnings | 63,400 | ||
(To close the revenue account ) | |||
January 31 | Retained earnings | 59,000 | |
Salaries expense | 42,000 | ||
Utilities expense | 6,200 | ||
Supplies expense | 7,300 | ||
Depreciation expense | 1,500 | ||
Income tax expense | 2,000 | ||
(To close all expenses account) | |||
January 31 | Retained earnings | 3,300 | |
Dividend | 3,300 | ||
(To close the dividend account) |
Table (7)
7. a.
To calculate: Return on equity, compare and analyze it with 2.5% of industry rate of return on equity.
Explanation of Solution
Return on equity ratio: It is a profitability ratio that measures the profit generating ability of the company from the invested money of the shareholders. The formula to calculate the return on equity is as follows:
Calculate the return on equity for GF Fireworks as follows:
Step 1: Calculate total stockholders’ equity of GF Fireworks as of January 1, 2018.
Step 2: Calculate the return on equity of GF Fireworks as of January 31, 2018.
Thus, the return on equity of GF Fireworks as of January 31, 2018 is 2.9%. GF Fireworks’ return on equity of 2.9% is higher than the industry return on equity of 2.5%, which shows that GF Fireworks profitability is better than other companies in the same industry.
7. b.
Explanation of Solution
Outstanding stock: It refers to the number of shares that are held by the existing stockholders of the company.
Compute the number of share outstanding as of January 31, 2018 as follows:
Details | Number of shares | Number of shares |
Number of Common shares outstanding as of January 1, 2018 | 10,000 | |
Add: Addition common stock issued on January 2, 2018 | 2,000 | |
Total number of common stock issued | 12,000 | |
Less: Number of treasury stock repurchased on January 12, 2018 | (1,000) | |
Add: Number of treasury stock reissued on January 30, 2018 | 600 | |
Total number of treasury stock held | (400) | |
Number of shares outstanding as of December 1 | 11,600 |
Table (8)
Hence, the number of share outstanding as of January 31, 2018 is 11,600.
7. c.
To calculate: The earnings per share compare and analyze it with last year’s earnings per share average.
Explanation of Solution
Earnings per share:
Earnings per share represent the amount of income earned per share of outstanding common stock in a period. This ratio is used for analyzing the profitability of company’s stockholders’.
The following formula can be used to calculate earnings per share:
Calculate the earnings per share of GF Fireworks as follows:
Hence, the earnings per share of GF Fireworks are $0.41. Comparatively, $0.41 of earnings per share in January 2018 is higher than the last year’s earnings per share of $0.30, which shows that January 2018 is better than the last year’s average earnings per share.
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Chapter 10 Solutions
Financial Accounting
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