Financial Accounting
Financial Accounting
10th Edition
ISBN: 9781260481563
Author: Libby, Robert
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 5, Problem 1CON

1.

To determine

Complete the tabulation by indicating (+ for increase, -for decrease and NE for no effect), for the effect of the transactions on gross profit, operating income, and return on assets.

1.

Expert Solution
Check Mark

Answer to Problem 1CON

Prepare a table showing the effects of transaction on gross profit, operating income and current assets as given below:

Effects of transaction on the listed category of financial statement
TransactionGross ProfitOperating incomeCurrent assets
a. Paid herself a dividend of $10,000 as the sole stockholder.NENE($10,000)
b. Recorded advance payments from customers of $10,000.NENE$2,000
c. Paid the current month’s rent in cash, $500.NE($500)($500)
d. Purchased a new truck for $14,000 and signed a note payable for the whole amount. The truck was not placed in service until January 2015.NENENE
e. Recorded depreciation expense on office equipment of $600.NE($600)NE
f. Accrued interest expense on the note payable to the bank was $400.NENENE

Table (1)

Explanation of Solution

Current asset: Current asset are those assets which can be easily converted into cash. These assets should be consumed within a year or operating cycles whichever is less.

Gross Profit or Gross Margin: Gross Profit is the difference between the net sales, and the cost of goods sold. Gross profit usually appears on the income statement of the company.

Operating income: Operating income refers to the income generated from the operation of business, or the revenue generated from the services offered by the company. Operating income is also known as Income before tax.

The effects on the transaction can be explained as follows:

a. Paid herself a dividend of $10,000 as the sole stockholder.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Retained earnings (−SE)  $10,000 
     Cash (−A)   $10,000
 ( To record the payment of dividend)   

Table (2)

  • Retained earnings are a component of stockholders’ equity. Payment of dividend decreases the balance of retained earnings. Thus, it is debited with $10,000.
  • Cash is a current asset. Payment of cash dividend decreases the cash account by $10,000. Thus, cash is credited with $10,000.

b. Recorded advance payments from customers of $2,000.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Cash (+A) $2,000 
 Deferred revenue (+L)  $2,000
 ( To record the cash received from customers as advance payment)   

Table (3)

  • Cash is a current asset. Receipt of advance payment from the customers increase the cash account by $2,000. Thus, cash is credited with $2,000.
  • Deferred revenue is a liability. Advance payment of cash from customers increases the liabilities. Hence, it is credited with $2,000.

c. Paid the current month’s rent in cash, $500.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Rent expense(+E, −SE) $500 
 Cash(−A)  $500
 ( To record the payment of rent expense for the current month)   

Table (4)

  • Rent expense is a component of income statement that decreases the net income by $500. Thus, rent expense is debited with $500.
  • Cash is a current asset. Payment of cash decreases the balance of cash account. Hence, it is credited with $500.

d. Purchased a new truck for $14,000 and signed a note payable for the whole amount. The truck was not placed in service until January 2015.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Equipment (Truck)(+A) $14,000 
 Note payable(+L)  $14,000
 ( To record the payment of rent expense)   

Table (5)

  • Equipment (Truck) is an asset. Purchase of equipment (truck) increases the asset by $14,000. Thus, it is debited with $14,000.
  • Note payable is a liability. Purchase of equipment (truck) through the issuance of note payable increases the liability by $14,000. Hence, it is credited with $14,000.

e. Recorded depreciation expense on office equipment of $600.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Depreciation expense (+E, −SE) $600 
 Accumulate depreciation (−A)  $600
 ( To record the payment of depreciation expense)   

Table (6)

  • Depreciation expense is a component of income statement that decreases the net income by $600. Thus, depreciation expense is debited with $600.
  • Accumulated depreciation is a contra asset. There is an increase in accumulated depreciation that decreases the value of asset. Hence, it is credited with $600.

f. Accrued interest expense on the note payable to the bank was $400.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Interest expense (+E, −SE) $400 
 Interest payable (+L)  $400
 ( To record the accrued interest expense on note payable)   

Table (7)

  • Interest expense is a component of income statement that decreases the net income by $400. Thus, interest expense is debited with $400.
  • Interest payable is a current liability. There is an increase in the liability and hence, it is credited with $400.

2.

To determine

Complete the tabulation by indicating (+ for increase, -for decrease and NE for no effect), for the effect of the transactions on financial ratios.

2.

Expert Solution
Check Mark

Answer to Problem 1CON

Prepare a table showing the effects of transaction on the under-mentioned ratios as given below:

Effects of transaction on ratios
TransactionNet profit marginTotal asset turnoverReturn on assets
a. Paid herself a dividend of $10,000 as the sole stockholder.NEIncreaseIncrease
b. Recorded advance payments from customers of $10,000.NEDecreaseDecrease
c. Paid the current month’s rent in cash, $500.DecreaseIncreaseDecrease
d. Purchased a new truck for $14,000 and signed a note payable for the whole amount. The truck was not placed in service until January 2015.NEDecreaseDecrease
e. Recorded depreciation expense on office equipment of $600.DecreaseIncreaseDecrease
f. Accrued interest expense on the note payable to the bank was $400.DecreaseNEDecrease

Table (8)

Explanation of Solution

Net profit margin ratio: Net profit is the financial ratio that shows the relationship between the net profit and net sales (Operating revenue). Net profit is the difference between total operating revenue and total operating expenses. It can be calculated by dividing net profit and operating revenue.Net profit margin ratio can be calculated by using the following formula:

Net profit margin=Net incomeNet sales

Total Asset turnover: Total asset turnover is a ratio that measures the productive capacity of the total assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total asset.

Total asset turnover=Net salesAverage total assets

Return on assets: Return on assets is the financial ratio which determines the amount of net income earned by the business with the use of total assets owned by it. It indicates the magnitude of the company’s earnings relative to its total assets. The formula is stated below:

Return on assets=Net incomeAverage total assets

The effects on the transaction can be explained as follows:

a. Paid herself a dividend of $10,000 as the sole stockholder.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Retained earnings (−SE)  $10,000 
     Cash (−A)   $10,000
 ( To record the payment of dividend)   

Table (9)

  • Retained earnings are a component of stockholders’ equity. Payment of dividend decreases the balance of retained earnings. Thus, it is debited with $10,000.
  • Cash is a current asset. Payment of cash dividend decreases the cash account by $10,000. Thus, cash is credited with $10,000.

b. Recorded advance payments from customers of $2,000.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Cash (+A) $2,000 
 Deferred revenue (+L)  $2,000
 ( To record the cash received from customers as advance payment)   

Table (10)

  • Cash is a current asset. Receipt of advance payment from the customers increase the cash account by $2,000. Thus, cash is credited with $2,000.
  • Deferred revenue is a liability. Advance payment of cash from customers increases the liabilities. Hence, it is credited with $2,000.

c. Paid the current month’s rent in cash, $500.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Rent expense (+E, −SE) $500 
 Cash (−A)  $500
 ( To record the payment of rent expense for the current month)   

Table (11)

  • Rent expense is a component of income statement that decreases the net income by $500. Thus, rent expense is debited with $500.
  • Cash is a current asset. Payment of cash decreases the balance of cash account. Hence, it is credited with $500.

d. Purchased a new truck for $14,000 and signed a note payable for the whole amount. The truck was not placed in service until January 2015.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Equipment (Truck) (+A) $14,000 
 Note payable (+L)  $14,000
 ( To record the payment of rent expense)   

Table (12)

  • Equipment (Truck) is an asset. Purchase of equipment (truck) increases the asset by $14,000. Thus, it is debited with $14,000.
  • Note payable is a liability. Purchase of equipment (truck) through the issuance of note payable increases the liability by $14,000. Hence, it is credited with $14,000.

e. Recorded depreciation expense on office equipment of $600.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Depreciation expense (+E, −SE) $600 
 Accumulate depreciation (+XA, −A)  $600
 ( To record the payment of depreciation expense)   

Table (13)

  • Depreciation expense is a component of income statement that decreases the net income by $600. Thus, depreciation expense is debited with $600.
  • Accumulated depreciation is a contra asset. There is an increase in accumulated depreciation that decreases the value of asset. Hence, it is credited with $600.

f. Accrued interest expense on the note payable to the bank was $400.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Interest expense (+E, −SE) $400 
 Interest payable (+L)  $400
 ( To record the accrued interest expense on note payable)   

Table (14)

  • Interest expense is a component of income statement that decreases the net income by $400. Thus, interest expense is debited with $400.
  • Interest payable is a current liability. There is an increase in the liability and hence, it is credited with $400.

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Chapter 5 Solutions

Financial Accounting

Ch. 5 - Prob. 11QCh. 5 - Prob. 12QCh. 5 - Prob. 13QCh. 5 - 14. Briefly define return on assets and what it...Ch. 5 - 1. If average total assets increase, but net...Ch. 5 - 2. If a company plans to differentiate its...Ch. 5 - 3. If a company reported the following items on...Ch. 5 - 4. Which of the following is one of the possible...Ch. 5 - Prob. 5MCQCh. 5 - Prob. 6MCQCh. 5 - Prob. 7MCQCh. 5 - Prob. 8MCQCh. 5 - Prob. 9MCQCh. 5 - 10. Net income was $850,000. Beginning and ending...Ch. 5 - Prob. 1MECh. 5 - Prob. 2MECh. 5 - Finding Financial Information: Matching Financial...Ch. 5 - Prob. 4MECh. 5 - Determining Financial Statement Effects of Sales...Ch. 5 - Recording Sales and Cost of Goods Sold and...Ch. 5 - Computing and Interpreting Return on...Ch. 5 - E5-1 Matching Players in the Accounting...Ch. 5 - Prob. 2ECh. 5 - E5-3 Finding Financial Information: Matching...Ch. 5 - Prob. 4ECh. 5 - Campbell Soup Company is the world’s leading maker...Ch. 5 - Prob. 6ECh. 5 - Macy’s, Inc., operates the two best-known high-end...Ch. 5 - E5-8 Preparing a Classified (Multiple-Step) Income...Ch. 5 - Tableau Software provides business analytics...Ch. 5 - Prob. 10ECh. 5 - Prob. 11ECh. 5 - Prob. 12ECh. 5 - Pacific Gas and Electric Company is a giant public...Ch. 5 - Hasbro is one of the world’s leading toy...Ch. 5 - Prob. 15ECh. 5 - Prob. 16ECh. 5 - The TJX Companies, Inc., which operates the T.J....Ch. 5 - Analyzing and Evaluating Return on Assets from a...Ch. 5 - What would be the direction of the effect of the...Ch. 5 - Prob. 1PCh. 5 - Matching Definitions with Balance Sheet-Related...Ch. 5 - Exquisite Jewelers is developing its annual...Ch. 5 - Prob. 4PCh. 5 - Prob. 5PCh. 5 - Prob. 6PCh. 5 - Prob. 7PCh. 5 - Prob. 8PCh. 5 - Preparing a Multiple-Step Income Statement with...Ch. 5 - Prob. 1APCh. 5 - Prob. 2APCh. 5 - Prob. 3APCh. 5 - Prob. 4APCh. 5 - Prob. 1CONCh. 5 - Prob. 2CONCh. 5 - Refer to the financial statements of American...Ch. 5 - Refer to the financial statements of Express, Inc....Ch. 5 - Prob. 3CPCh. 5 - Prob. 4CPCh. 5 - Making Decisions as a Manager: Evaluating the...Ch. 5 - Megan Company (not a corporation) was careless...Ch. 5 - Prob. 7CP
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