Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
Question
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Chapter 4, Problem 2COMP

1, 2, 3 and 5

To determine

Prepare T-accounts for the accounts on the trial balance and enter beginning balances.

1, 2, 3 and 5

Expert Solution
Check Mark

Explanation of Solution

T-account:

T-account refers to an individual account, where the increases or decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.

This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:

(a)The title of the account

(b)The left or debit side

(c)The right or credit side

Prepare the T-account (amounts in thousands):

Cash (A) account

Beginning Balance5b18
a20e28
c5f3
d56h11
g8  
j3k10
 Ending Balance27  
Accounts Receivable (A) account
Beginning Balance4  
d14g8
Ending Balance10  

Supplies (A) account

Beginning Balance2  
i10l8
Ending Balance4  

Small tools (A) account

Beginning Balance6  
f3  
Ending Balance8

Equipment (A) account

Beginning Balance

b

0

18

  
    
Ending Balance18

Accumulated depreciation (xA) account

  Beginning Balance

0

  m2
  Ending Balance2

Other assets (A) account
Beginning Balance9  
    
Ending Balance9  

Accounts payable (L) account

h11Beginning Balance7
  e7
  i10
  Ending Balance13

Notes  payable (L) account

  Beginning Balance0
  a20
  Ending Balance20
   

Wages payable (L) account

  Beginning Balance0
  o3
  Ending Balance3
Interest payable (L) account
  Beginning Balance0
  n1
 Ending Balance1

Income taxes  payable  (L) account

  Beginning Balance0
  p4
 Ending Balance4
Unearned revenue  (L) account
  Beginning Balance0
  j3
 Ending Balance3

Common Stock (SE) account

  Beginning Balance

6

  c1
 Ending Balance7

Additional paid-in capital account

  Beginning Balance

9

  c4
 Ending Balance13
Retained earnings (SE) account
  Beginning Balance4
k10  
  Closing entry16
 Ending Balance10
Service Revenue (R) account
  Balance0
Closing entry70d70
 Ending Balance0
Depreciation expense (E) account
Balance0  
m2Closing entry2
Ending Balance0 
Income Tax Expense ( E) account
Balance0  
p4Closing entry4
Ending Balance0 
Interest Expense ( E) account
Balance0  
n1Closing entry1
Ending Balance0 

Remaining Expense ( E) account

Balance 0  
e35  
l9Closing entry44
Ending Balance0 
Wages Expense (E) account
Balance 0  
o3Closing entry3
Ending Balance0  

2.

To determine

Record the journal entries for transactions (a) to (k).

2.

Expert Solution
Check Mark

Explanation of Solution

Journal entries for the transactions (a) to (k) as follows:

DateAccount Title and ExplanationDebit ($)Credit ($)
a)Cash (+A)20,000 
 Notes payable (Short-term) (+L) 20,000
 (To record borrowed cash on note)  
  
b)Equipment (+A)18,000 
 Cash (-A) 18,000
 (To record purchase of equipment)  
  
c)Cash (+A)5,000 
 Common Stock (+SE) 1,000
 Additional paid-in capital (+SE) 4,000
 (To record issued common stock for cash and additional paid in capital)  
  
d)Cash (+A)56,000 
 Accounts Receivable (+A)14,000 
 Service Revenue (+R, +SE) 70,000
 (To record service revenue earned during the year 2017)  
  
e)Remaining expenses (+A)35,000 
 Accounts payable (+L) 7,000
 Cash (-A) 28,000
 (To record Purchase of remaining expenses)  
  
f)Small tools (+A)3,000 
 Cash (-A) 3,000
 (To record other assets)  
  
g)Cash (+A)8,000 
 Accounts Receivable (-A) 8,000
 (To record cash collected on customer’s account)  
  
h)Accounts payable (-L)11,000 
 Cash (-A) 11,000
 (To record cash paid to creditors)  
  
i)Supplies (+A)10,000 
 Accounts payable  (+L) 10,000
 (To record supplies purchased for future use)  
  
j)Cash (+A)3,000 
 Unearned revenue (+L) 3,000
 (To record unearned revenue)  
  
k)Retained earnings (-SE)10,000 
 Cash (-A) 10,000
 (To record retained earnings)  

Table (1)

3.

To determine

Record Adjusting journal entries (l) to (p)

3.

Expert Solution
Check Mark

Explanation of Solution

Prepare adjusting journal entries (l) to (p):

DateAccount Title and ExplanationDebit ($)Credit ($)
    l.Remaining  expense (+E, -SE) 9,000 
 Supplies(-A) ($12,000$4,000) 8,000
 Small tools (-A) ($9,000$8,000) 1,000
 (To record the use of supplies and small tools)  
  
   m.Depreciation expense (+E, -SE)2,000 
 Accumulated depreciation – (+xA, -A) 2,000
 (To record adjusting entry for depreciation expense)  
  
    n.Interest expense (+E, -SE) ($20,000×10100×612)1,000 
 Interest payable(+L) 1,000
 (To record the adjusting entry for interest expense)  
  
o.Wages expense (+E, -SE)3,000 
 Wages payable (+L) 3,000
 (To record the adjusting entry for wages expenses)  
  
p.Income tax expense(+E, -SE) 4,000 
 Income tax payable(+L) 4,000
 (To record the adjusting entry for income tax expense)  

Table (2)

l.

  • Remaining expense is an expense account which is a component of stockholders equity. There is an increase in the expense which decreases the stock holders’ equity. Hence, debit remaining expense with $9,000.
  • Supplies are asset. There is a decrease in the asset. Hence, credit asset with $8,000.
  • Small tools are asset. There is a decrease in the asset. Hence, credit asset with $1,000.

m.

  • Depreciation expense is an expense account which is a component of stockholders’ equity. There is an increase in expense account which decreases the stockholders’ equity. Hence, debit depreciation expense with $2,000.
  • Accumulated depreciation is a contra-asset. There is a decrease in the asset. Hence, credit accumulated depreciation with $2,000.

n.

  • Interest expense is an expense account which is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit interest expense with $1,000.
  • Interest payable is a liability. There is an increase in the liability. Hence, credit wages with $1,000.

o.

  • Wages expense is an expense account which is a component of stockholders equity. There is an increase in the expense which decreases the stock holders’ equity. Hence, debit wages expense with $3,000.
  • Wages payable is a liability. There is an increase in the liability. Hence, credit wages payable with $3,000.

p.

  • Income tax expense is an expense account which is a component of stock holders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit interest expense with $4,000.
  • Income tax payable is a liability. There is an increase in the liability. Hence, credit, interest payable with $4,000.

4.

To determine

Prepare an income statement, Statement of stockholders’ equity and balance sheet.

4.

Expert Solution
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Explanation of Solution

Prepare an income statement for the year ended December 31, 2016:

Incorporation FR
Income statement
For the year ended December 31, 2016
ParticularsAmount ($)
Revenues: 
Service revenue70,000
Total revenues70,000
Less: Expenses 
Depreciation expense2,000
Wages expense3,000
Remaining expense44,000
Total operating expenses21,000
Operating income53,000
Less: Other item 
Interest expense1,000
Pretax income20,000
Less: Income tax expense4,000
Net income16,000
Earnings per share ($16,00070,000shares)$0.23

Table (3)

Incorporation FR net income is $16,000.

Prepare a statement of Stockholders’ equity:

Incorporation FR
Statement of stockholders’ equity
For the year ended December 31, 2016
ParticularsCommon StockAdditional Paid-in CapitalRetained earningsTotal Stockholders' Equity
Balance, January 1, 2017$6,000$9,000 $4,000$19,000
   Additional stock issuance1,0004,0005,000
   Net income16,00016,000
   Dividends declared(10,000)(10,000)
Balance, December 31, 2017$7,000$13,000$10,000$30,000

Table (4)

Prepare a balance sheet for the year December 31, 2016:

Incorporation FR
Balance Sheet
At December 31, 2016
AssetsAmount ($)Liabilities and Stockholders’ EquityAmount ($)
Current Assets:Current Liabilities:
Cash27,000Accounts payable  13,000
Accounts receivable10,000Notes payable20,000
Supplies 4,000Interest payable1,000
Small tools8,000Wages payable 3,000
  Income taxes payable4,000
Unearned revenue3,000
      Total current assets49,000      Total current liabilities44,000
Land13,000Stockholders' Equity:
Equipment18,000    Common stock7,000
Less: Accumulated depreciation(2,000)    Additional paid-in capital13,000
     Net book value16,000    Retained earnings10,000
Other assets9,000      Total stockholders' equity30,000
Total assets74,000Total liabilities and stockholders' equity74,000

Table (5)

The balance sheet agrees with the $74,000 of both assets and liabilities columns.

5.

To determine

Identify the type of transaction for (a) to (k) for the statement of cash flows and the direction and the amount of the effect.

5.

Expert Solution
Check Mark

Explanation of Solution

Identify the type of transaction for (a) to (k) for the statement of cash flows and the direction and the amount of the effect:

TransactionType of Effect on Cash FlowsDirection and Amount of Effect
a.F+20,000
b.I-18,000
c.F+5,000
d.O+56,000
e.O-28,000
f.O-3,000
g.O+8,000
h.O-11,000
i.NENE
j.O+3,000
k.F-10,000

Table (6)

Statement of cash flow:

A statement that shows the inflows and outflows of cash or cash equivalents is known as a cash flow statement. A cash flow statement includes the following three components.

  1. 1. Cash flows from operating activities:

These are the cash produced by the normal business operations.

The following amounts are to be adjusted from the Net Income to calculate the cash flows from the operating activities.

  • Deduct increase in current assets.
  • Deduct decrease in current liabilities.
  • Add decrease in current assets.
  • Add the increase in current liability.
  • Add depreciation expense.
  • Add loss on sale of plant assets.
  • Less gain on sale of plant assets.
  1. 2. Cash flows from investing activities:

These are the amount of cash used for the purchase of any fixed assets, and any cash receives from the sale of fixed assets.

  • Deduct the amount of cash used to purchase any fixed assets from cash flows from investing activities to calculate the net cash provided or used for investing activities.
  • Add the amount of cash received from the sale of any fixed assets to cash flows from investing activities to calculate the net cash provided or used from investing activities.
  1. 3. Cash flows from financing activities:

These are the sources of finance of the business.

  • Add the amount of cash received from any source of finance like amount from stockholders, debenture holders, or from any fixed liability to the cash flows from financing activities to calculate the net cash used or provided by the financing activities.
  • Deduct the payment of dividend and interest from the cash flows from financing activities to calculate the net cash used or provided by the financing activities.
  • Deduct the amount of cash paid to purchase the treasury stocks from the cash flows from financing activities to calculate the net cash used or provided by the financing activities.

Note:

I refer to investing activity.

F refers to financing activity.

O refers to operating activity.

NE refers to no effect.

6.

To determine

Prepare the closing entry for Incorporation FR on December 31, 2016.

6.

Expert Solution
Check Mark

Explanation of Solution

Prepare closing entries for Incorporation FR on December 31, 2016:

DateAccount Title and ExplanationDebit ($)Credit ($)
December 31, 2017Service revenue(-R)70,000 
Retained earnings(+SE) 16,000
Depreciation expense(-E) 2,000
Interest expense (-E)  1,000
Income tax expense(-E) 4,000
Wages expense(-E) 3,000
Remaining expense(-E) 44,000
 (To record the closing entries for Incorporation FR)  

Table (7)

For closing of temporary accounts, the balances of revenues, expenses, and dividend accounts will be transferred to retained earnings in order to bring zero balance for expenses and revenues accounts.

7.

To determine

Compute Current ratio, Total asset turnover and net profit margin and explain the results to suggest about the Company FR.

7.

Expert Solution
Check Mark

Explanation of Solution

  1. (a) Calculation of current ratio:

Current ratio=Current assetsCurrent liabilities=$49,000$44,000=1.11:1

The current ratio is 1.11:1.

For Incorporation FR, suggests that their current ratio is having sufficient current assets to pay current liabilities.

  1. (b) Calculation of total asset turnover:

Total asset turnover ratio =SalesrevenuesAverage total assets=$70,000($26,000+$74,0002)=$70,000$50,000=1.40

For Incorporation FR, suggests that the total asset turnover ratio has generated $1.40 for every dollar of assets.

  1. (c) Calculation of net profit margin:

Net profit margin = Net income Sales=$16,000$70,000=0.23

For Incorporation FR, suggests that the net profit margin earns $0.23 for every dollar in sales that it generates.

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Chapter 4 Solutions

Financial Accounting, 8th Edition

Ch. 4 - Explain why the income statement accounts are...Ch. 4 - Prob. 12QCh. 4 - Which of the following accounts would not appear...Ch. 4 - Which account is least likely to appear in an...Ch. 4 - Prob. 3MCQCh. 4 - Prob. 4MCQCh. 4 - Prob. 5MCQCh. 4 - An adjusted trial balance a. Shows the ending...Ch. 4 - JJ Company owns a building. Which of the following...Ch. 4 - Prob. 8MCQCh. 4 - Prob. 9MCQCh. 4 - If a company is successful in acquiring several...Ch. 4 - Prob. 1MECh. 4 - Matching Definitions with Terms Match each...Ch. 4 - Matching Definitions with Terms Match each...Ch. 4 - Prob. 4MECh. 4 - Prob. 5MECh. 4 - Prob. 6MECh. 4 - Prob. 7MECh. 4 - Prob. 8MECh. 4 - Prob. 9MECh. 4 - Prob. 10MECh. 4 - Prob. 11MECh. 4 - Prob. 12MECh. 4 - Prob. 1ECh. 4 - Prob. 2ECh. 4 - Prob. 3ECh. 4 - Prob. 4ECh. 4 - Prob. 5ECh. 4 - Prob. 6ECh. 4 - Prob. 7ECh. 4 - Prob. 8ECh. 4 - Prob. 9ECh. 4 - Recording Transactions Including Adjusting and...Ch. 4 - Prob. 11ECh. 4 - Prob. 12ECh. 4 - Inferring Transactions Deere Company is the...Ch. 4 - Analyzing the Effects of Errors on Financial...Ch. 4 - Prob. 15ECh. 4 - Prob. 16ECh. 4 - Prob. 17ECh. 4 - Prob. 18ECh. 4 - Prob. 19ECh. 4 - Prob. 20ECh. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Prob. 3PCh. 4 - Prob. 4PCh. 4 - Prob. 5PCh. 4 - Prob. 6PCh. 4 - Prob. 7PCh. 4 - Prob. 1APCh. 4 - Prob. 2APCh. 4 - Prob. 3APCh. 4 - Prob. 4APCh. 4 - Prob. 5APCh. 4 - Prob. 6APCh. 4 - Prob. 7APCh. 4 - Prob. 1COMPCh. 4 - Prob. 2COMPCh. 4 - Prob. 1CPCh. 4 - Prob. 2CPCh. 4 - Prob. 3CPCh. 4 - Prob. 4CPCh. 4 - Prob. 5CPCh. 4 - Prob. 6CPCh. 4 - Prob. 7CPCh. 4 - Prob. 8CPCh. 4 - Prob. 9CPCh. 4 - Prob. 1CC
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