Forensic Accounting: Case Study

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 Carefully follow the instructions in file “Forensic Accounting CaseStudy1.pdf”  as well as the data provided in the additional exhibits.  Exhibit 2 has been transformed into an excel file. I have analyzed the data in a few different ways and I have attached it to the question. I need a 1-1.5 page memorandum answering the case study questions located in the “Forensic Accounting CaseStudy1.pdf” file. I have also included a sample version of a memorandum so you can understand how it should be written. Thank you.

  • Memorandum

    To: Tech Startup Inc. Controller’s Group Files

    From: [Student Name], Controller’s Group Analyst

    Re: Lease of 15 Tech Drive

    Date: X/X/XXXX

    Facts

    See facts as given in case study.

    Issues/ Question

    Should the lease arrangement be classified as an operating lease or as a capital lease?

     

    Analysis

    Lessee must determine whether to account for its lease as a capital or operating lease. ASC 840-10-25-1 provides the following lease classification criteria:

    25-1 A lessee and a lessor shall consider whether a lease meets any of the following four criteria as part of classifying the lease at its inception under the guidance in the Lessees Subsection of this Section (for the lessee) and the Lessors Subsection of this Section (for the lessor):

    a. Transfer of ownership. The lease transfers ownership of the property to the lessee by the end of the lease term….

    b. Bargain purchase option. The lease contains a bargain purchase option.

    c. Lease term. The lease term is equal to 75 percent or more of the estimated economic life of the leased property…

    d. Minimum lease payments. The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor…

    In addition to these four criteria, ASC 840 provides the following guidance regarding lessees’ application of lease classification criteria:

    25-29 If at its inception a lease meets any of the four lease classification criteria in paragraph 840-10-25-1, the lease shall be classified by the lessee as a capital lease.

    Accordingly, Lessee has analyzed each criterion individually to determine whether it is met for this lease.

    Analysis—Transfer of Ownership

    The lease does not call for transfer of ownership at the end of the lease term. This condition for capital lease treatment is therefore not met.

    Analysis—Bargain Purchase Option

    Lessee is given the option to purchase the leased property at the end of the lease term for a price ($16.25M) that is below the estimated lease-end fair value of the property ($17M). This contractual provision bears further consideration.

    The glossary of ASC 840-10 defines a bargain purchase option as:

    A provision allowing the lessee, at his option, to purchase the leased property for a price that is sufficiently lower than the expected fair value of the property at the date the option becomes exercisable that exercise of the option appears, at lease inception, to be reasonably assured.

    Little other guidance is provided within the Codification to assist a lessee in determining whether a purchase option is, in fact, a bargain. However EY’s guide book, Lease Accounting (2014), Section 2.4 (page 2), offers additional guidance for applying this condition. In particular, EY notes that—when determining whether exercise of a purchase option meets the threshold of being reasonably assured—entities should consider factors such as (1) how far into the future the purchase option is being offered, where a longer term could decrease the likelihood of exercise, and (2) the stability of the property’s value. An excerpt of this guidance follows:

    The further into the future a lessee is required to consider, the less precise will be the estimates of future needs for the leased asset. Also, the fair value of certain types of assets is more likely to change over time than will the value of other types of assets (e.g., the future value of a technology asset, such as a computer, is more difficult to predict than the future value of a relatively stable asset, such as a fully-leased commercial office building located in a prime area).

    Accordingly, the further into the future the option date, the lower the option price must be in relation to the estimated future fair value to reasonably assure exercise. Also, the relationship at a future point in time between the option price and the estimated future fair value should be lower for an asset subject to significant changes in value than would be the case for an asset having a relatively stable value.

    In this case, the determination is judgmental. Although the option is fairly far into the future (10 years is somewhat long given that the company is a tech startup whose needs could change), the building is supposedly in a prime area and thus a $750K discount off of its purchase price could be compelling.

    In Section 2.4.3 of its Lease Accounting guide, EY goes on to emphasize (in Illustration 2-2) that external factors should be considered when determining whether exercise of a purchase option is reasonably assured:

    Illustration 2-2: Determining whether a bargain purchase option exists

    Assume a company leases equipment from a lessor under a 5-year lease that includes an option for the lessee to purchase the equipment at the end of the lease term for $900,000. The lessee estimates that the equipment will have a fair value at the end of the lease term of $1,000,000. The equipment is expected to be readily available in the market at the end of the lease term.

    The lessee determined that the purchase option would not be considered reasonably assured of exercise and therefore a bargain because while it is priced below estimated fair value, the discount is not so significant that exercise rises to the level of reasonably assured. Therefore, the option does not qualify as a bargain purchase option.

    Again, consistent with this guidance, the purchase option in this case is close enough to the estimated future fair value of the building that its exercise likely does not rise to the level of being reasonably assured. This is especially true in this case when you consider the company’s specific situation as a tech startup. Accordingly, a bargain purchase option is not deemed to exist.

    Analysis—Lease Term

    This lease is for a 10-year term, which is 25% of the estimated useful life of the leased property. As this is below the 75% threshold for capital lease classification, this condition is not met.

    Considering also the definition of lease term, any bargain renewal options should also be included in the lease term. In this case, no such renewal options are present.

    Analysis—Minimum Lease Payments

    Lessee will pay $50,000 monthly plus a contingent amount determined as 1% of its sales. Lessee must evaluate whether these rental payments exceed 90% of the fair value of the leased property and, accordingly, would result in capital lease treatment.

    ASC 840-10-25-4 provides the following guidance indicating that lease payments based on sales volume should not be considered when calculating the minimum lease payments payable under the lease:

    > Minimum-Lease-Payments Criterion

    25-4 This guidance addresses what constitutes minimum lease payments under the minimum-lease-payments criterion in paragraph 840-10-25-1(d) from the perspective of the lessee and the lessor. Lease payments that depend on a factor directly related to the future use of the leased property, such as machine hours of use or sales volume during the lease term, are contingent rentals and, accordingly, are excluded from minimum lease payments in their entirety. (Example 6 [see paragraph 840-10-55-38] illustrates this guidance.) [Emphasis added]

    Example 6 of Topic 840-10’s implementation guidance further illustrates this point, stating that rental payments based on sales are contingent, and should not be counted in determining minimum lease payments. The guidance states that: “the future sales for the lease term do not exist at lease inception…”

    > > Example 6: Applying the Definition of Contingent Rentals—Rentals Contingent on Factor Related to Future Use

    55-38 This Example illustrates paragraph 840-10-25-4, which states that lease payments that depend on a factor directly related to the future use of the leased property, such as machine hours or use of sales volume during the lease term, are contingent rentals and, accordingly, are excluded from minimum lease payments in their entirety. Assume that a lease agreement for retail store space stipulates a monthly base rental of $200 and a monthly supplemental rental of one-fourth of one percent of monthly sales volume during the lease term. Even if the lease agreement is a renewal for store space that had averaged monthly sales of $25,000 for the past 2 years, minimum lease payments would include only the $200 monthly base rental; the supplemental rental is a contingent rental that is excluded from minimum lease payments. The future sales for the lease term do not exist at lease inception, and future rentals would be limited to $200 per month if the store were subsequently closed and no sales were made thereafter. [Emphasis added]

    Therefore, the 1% of sales (an estimated $20,000 per month) shall be excluded when determining the minimum lease payments for purposes of the 90% test.

    Therefore, the fixed monthly rental payment shall be used to evaluate whether the minimum lease payments condition is met. These payments amount to: $50,000 per month, times 12 months, times 10 years, equals a total lease payment of $6 million (ignoring discounting). This is less than 90% of the fair value of the leased property.

    Notably, had Lessee concluded that the lease contained a bargain purchase option, this option would also need to be included when determining minimum lease payments, per par. 25-6:

    25-6 If the lease contains a bargain purchase option, only the minimum rental payments over the lease term and the payment called for by the bargain purchase option shall be included in the minimum lease payments.

    However, given our conclusion that no bargain purchase option is present, this amount shall be excluded from the calculation, and the 90% condition for capital lease treatment is not met.

    Conclusion

    This lease shall be classified as an operating lease. None of the four conditions for capital lease accounting was met. Namely, (1) the lease does not transfer ownership at the end of the lease term, (2) the lease does not contain a bargain purchase option that is reasonably assured of being exercised, (3) the lease term is less than 75% of the economic life of the leased asset, and (4) the minimum lease payments are less than 90% of the fair value of the leased asset.

    Judgment was involved in determining that the end-of-lease term purchase option is not considered a bargain. In this case, the Lessee’s business circumstances (of being a tech startup) were considered, in addition to the length into the future (10 years) at which this option is offered, and the amount of discount versus the expected fair value of the leased asset, which was not deemed significant enough to cause the purchase option to rise to the level of being reasonably assured.

 
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Activity-Based Costing and Management:

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Running Head: SOLUTIONS TO MANAGERIAL ACCOUNTING EXERCISES 1

 

SOLUTIONS TO MANAGERIAL ACCOUNTING EXERCISES 13

 

 

 

 

 

 

 

 

 

 

 

 

 

Solutions to Managerial Accounting Exercises

Student’s Name:

Course Name & Number:

Instructor’s Name:

Institution:

Date Submitted:

 

 

 

 

Chapter 5: Activity-Based Costing and Management:

Exercise 5-26 Page 201

1. Under a costing system that allocates overhead on the basis of direct-labor hours, the material-handling costs allocated to one lens would be what amount?

Material-handling cost per lens:

$50,000 x 200 = $1,000

[(25×200) ÷ (25×200)]A

A Direct-labor hour’s total number

Therefore, material-handling cost per lens is $1,000

 

2. Answer the same question a in requirement (1), but for mirrors.

Material-handling cost per mirror:

$50,000 x 200 = $1,000

[(25×200) ÷ (25×200)]A

A Direct-labor hour’s total number

Therefore, material-handling cost per mirror is $1,000

3. Under activity-based costing (ABC), the material-handling activity costs allocated to one lens would be what amount? The cost driver for the material-handling activity is the number of material moves.

Material-handling cost per lens:

[($50,000 ÷ (5 + 15)*)] x 5** = $500

25

Where: * Material moves’ total number

** The lens product line material moves’ number

Therefore, the material-handling cost per lens is $500

4. Answer the same question as in requirement (3), but for mirrors

Material-handling cost per mirror:

[($50,000 ÷ (5 + 15)*)] x 15** = $1,500

25

Where: * Material moves’ total number

** The mirror product line material moves’ number

Exercise 5-27 Page 201

1. Calculate the monthly quality-control cost to be assigned to the Satin Sheen product line under each of the following product-costing systems. (Round to the nearest dollar)

a. Traditional system, which assigns overhead on the basis of direct-labor cost

Quality-control costs = 14.5% x Direct-labor Costs

Quality-control costs assigned to Satin Sheen line = 14.5% x $27,500

= $3,988

b. Activity-based costing

Activity: Pool Rate: Quantity for Satin Sheen: Assigned Cost
Incoming material inspection $11.50 Per Type 12 Types $138
In-Process Inspection 0.14 Per Unit 17.500 Units $2,450
Product Certification 77.00 Per Order 25 Orders $1,925
Total Quality-Control Costs Assigned     $4,513

 

2. Does the traditional product-costing system overcost or undercost the Satin Sheen product line with respect to quality-control costs? By what amount?

The traditional product-costing system undercosts Satin Sheen product line with respect to quality-control costs, by $525 = $4,513 – $3,988

Exercise 5-28 Page 202

1. Divide these costs into activity cost pools, and identify a cost driver for assigning each pool of costs to products. Calculate the total cost in each activity cost pool.

Cost Pool 1: Unit-Level I

Raw materials and components 2,950,000 Yen

Inspection 30,000 Yen

Total Cost 2,980,000 Yen

Cost driver for assigning pool 1 is raw-material cost

Cost Pool 2 : Unit-Level I

Depreciation, Machinery 1,400,000 Yen

Electricity, Machinery 120,000 Yen

Equipment Maintenance, Wages 150,000 Yen

Equipment Maintenance, Parts 30,000 Yen

Total Cost 1,700,000 Yen

Cost driver for assigning pool 2 is number of units produced

Cost Pool 3: Batch-Level I

Setup Wages 40,000 Yen

Total Cost 40,000 Yen

Cost driver for assigning pool 3 is number of production runs.

Cost Pool 4: Product-Sustaining Level

Engineering Design 610,000 Yen

Total Cost 610,000 Yen

Cost driver for assigning pool 4 is product parts number

Cost Pool 5: Facility-Level I

Depreciation, Plant 700,000 Yen

Insurance, Plant 600,000 Yen

Electricity, Light 60,000 Yen

Custodial Wages, Plant 40,000 Yen

Property Taxes 120,000 Yen

Natural Gas, Heating 30,000 Yen

Total Cost 1,550,000 Yen

Cost driver for assigning pool 5 include costs allocated towards supporting departments, costs allocated to products, square footage, and number of nits manufactured.

Exercise 5-33 Page 203

The activities of Finger Lakes Winery can be classified as:

U: Unit-level I

B: Batch-level I

P: Product-sustaining-level

F: Facility-level

 

 

 

Activity: Classification:
(1) P
(2) P
(3) P
(4) P
(5) P
(6) P
(7) P
(8) B
(9) B
(10) B
(11) B
(12) B
(13) U
(14) U
(15) U
(16) U
(17) B
(18) F
(19) F

 

 

 

Exercise 5-34 Page 204

Choose two activities or accounts from each of the four classifications and explain why you agree or disagree with the ABC project team’s classification.

Carrier Corporation for each of the activity levels the definitions that include:

· Unit: occurs every time a unit is produced. For example utility cost for production equipment. It more often than not relates directly to production volume

· Batch: performed for each batch acquired as well as produced. For example, moving raw materials between the production line and stock room, besides setting-up a machine for a run.

· Product-sustaining: performed towards maintaining product designs, parts, models, and processes. For example, maintaining materials bill, expediting parts and issuing product changes orders. To support key manufacturing capability besides process, sustaining activities are mandatory.

· Facility: performed towards enabling production. Therefore, at the most basic level they are fundamental towards supporting the business entity. For example cleaning and managing the structure.

Without a doubt, these definitions are consistent with those provided in the chapter. An argument for the ABC project team’s classification would be that the activity was characterized by the activity-level classification definition. An argument against the ABC project team’s classification would be that the specific activity did not satisfy the definition. For instance, conveying materials is a batch-level activity for the reason that a raw material should be shifted to the product location whenever a production batch besides run is commenced. Whereas, a facility-level account includes depreciation since plant and equipment correspond to the production facilities provision cost in which manufacturing can occur.

Exercise 5-35 Page 204:

1. Prepare a schedule showing Redwood Company’s total selling cost for each order size and the per-skein selling cost within each order size.

Redwood Company

Selling Costs Computation by Order Size and Skein within Each Order Size

  Order Size
  Small Medium Large Total
Sales CommissionsA[Unit Cost: $675,000/225,000 = $3.00 Per Box] $6,000 $135,000 $534,000 $675,000
CatalogsB [Unit Cost: $295,400/590,800 =$0.50 Per Catalog 127,150 105,650 62,600 295,400
Costs of Catalog SalesC [Unit Cost: $105,000/175,000 = $0.60 Per Skein] 47,400 31,200 26,400 105,000
Credit and CollectionD [Unit Cost: $60,000/6,000 = $10 Per Order 4,850 24,150 31,000 60,000
Total Cost Per Order Size $185,400 $296,000 $854,000 $1,135,400
Units [Skeins] SoldE 103,000 592,000 2,180,000  
Unit Cost Per Order SizeE $1.80 $0.50 $0.30  

A Retail Sales in Boxes x Unit Cost:

Small: 2,000 x $3

Medium: 45,000 x $3

Large: 178,000 x $3

B Catalogs Distributed x Unit Cost

C Catalog Sales x Unit Cost

D Number of Retail Orders x Unit Cost

E Small: [2,000 x 12] + 79,000 = 103,000

Medium: [45,000 x 12] + 52,000 = 592,000

Large: [178,000 x 12] + 44,000 = 2,180,000

Total Cost Per Order Size ÷ Units Sold

2. Explain how the analysis of the selling costs for skeins of knitting yarn is likely to impact future pricing and product decisions at Redwood Company.

Selling costs analysis demonstrates that small orders cost more than large orders; which could influence management towards marketing large orders more insistently as well as offering discounts for them.

Chapter 6: Activity-Analysis, Cost Behavior, and Cost Estimation:

Exercise 6-25 Page 259:

1. Use the high-low method to estimate the company’s energy cost behavior and express it in equation form.

The High-low Method:

Variable Cost/Pint = (Energy cost @ High level – Energy Cost/Pint @ Low Level)

(High Level – Low Level)

= (24,100 – 22,100)

(41,000 – 21,000)

= $2,000 ÷ 20,000 Pints Produced = $0.10/Pint

 

 

Total Cost @ 41,000 Pints = $24,000

Less Variable Cost @ 41,000 Pints (41,000 x $0.10) = $4,100

Fixed Cost = $20,000

Let:

Y represent Total Energy Cost

X represent Number of pints produced

Y = 0.10X + $20,000

2. Predict the energy cost for a month in which 26,000 pints of applesauce are produced.

Y = 0.10X + $20,000

Y = (0.10 x 26,000) + $20,000 = $22,600

Therefore, the energy cost for a month in which 26,000 pints of applesauce are produced is $22,600

Exercise 6-30 Page 261:

1. Use the high-low method to estimate the variable cost per tour mile traveled and the fixed cost per month.

Variable Cost/tour mile = (12,500 – 11,000)/(20,000 – 8,000)

= 1,500 ÷ 12,000 = 0.125 per tour mile

Total Cost = $12,500

Total Variable Cost = 0.125 x 20,000 = (2,500)

Fixed Cost = 10,000 real

2. Develop a formula to express the cost behavior exhibited by the company’s maintenance cost.

Let Y represent Total cost

Let X represent Tour miles driven

Therefore, Y = 10,000 + 0.125x

3. Predict the level of maintenance cost that would be incurred during a month when 22,000 tour miles are driven. Remember to express your answer in terms of the real).

Using Y = 10,000 + 0.125x

Y = 10,000 + 0.125 x (22,000) = 12,750 real

Therefore, the level of maintenance cost that would be incurred during a month when 22,000 tour miles are driven is 12,750 real

4. Build a spreadsheet: Construct an Excel spreadsheet to solve all of the preceding requirements. Show how the solution will change if the following information changes: in March there were 21,000 miles traveled and the cost was 12,430 real.

The level of maintenance cost could exceed the cost.

Problem 6-35 Page 263:

For each of the cost items described below, choose the graph (see below) that best represents it.

1. Graph (e)

2. Graph (a)

3. Graph (g)

4. Graph (c)

5. Graph (b)

6. Graph (h)

7. Graph (i)

8. Graph (f)

9. Graph (d)

10. Graph (k)

11. Graph (l)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reference:

Hansen, D.R., & Mowen, M.M. (2017). Managerial accounting (8th ed.). Boulverd Mason, OH: Thomson Higher Education.

 
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Exercise 2-15 A Prepaid Items On Financial Statements

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Exercise 2-15A

Prepaid items on financial statements

Life, Inc., experienced the following events in 2016, its first year of operation:

1. Performed counseling services for $36,000 cash.

2. On February 1, 2016, paid $18,000 cash to rent office space for the coming year.

3. Adjusted the accounts to reflect the amount of rent used during the year.

Required

Based on this information alone:

a. Record the events under an accounting equation.

TABLE PROVIDED BELOW

 

EXERCISE 2-15A

a.

Life, Inc.

Effect of Events on the Accounting Equation
 
  Assets = Stockholders’ Equity
 

Event

  

Cash

 Prepaid Rent  

=

  

Retained Earnings
1. Performed Services 36,000     36,000
2. Prepaid Rent (18,000) 18,000   NA
3. Used Rent   (18,000)   (18,000)       
Totals 18,000 0  = 18,000
         

*

 

b. Prepare an income statement, balance sheet, and statement of cash flows for the 2016 accounting period.

Life, Inc.

Income Statement

For the Year Ended December 31, 2016
       
     Revenue 36,000  
     Expense 18,000  
       
     Net Income 18,000  
       

 

 

 

 

Life, Inc.

Balance Sheet

As of December 31, 2016
         
  Assets      
        Cash 36,000    
        Prepaid Rent 18,000    
  Total Assets 54,000    
                      
  Liabilities (18,000)    
         
  Stockholders’ Equity      
        Retained Earnings      
  Total Stockholders’ Equity      
         
  Total Liab. and Stockholders’ Equity      
         

EXERCISE 2-15A b. (cont.)

 

Life, Inc.

Statement of Cash Flows

For the Year Ended December 31, 2016
         
  Cash Flows From Operating Activities:      
     Cash Receipt from Revenue      
     Cash Payment for Rent      
  Net Cash Flow from Operating Activities      
         
  Cash Flows From Investing Activities      
         
  Cash Flows From Financing Activities:      
         
  Net Change in Cash      
  Plus: Beginning Cash Balance      
  Ending Cash Balance      
         

 

c. Ignoring all other future events, what is the amount of rent expense that would be recognized

in 2017?

 

EXERCISE 2-19A

 

Exercise 2-19A on page 111

Exercise 2-19A Supplies, unearned revenue, and the financial statements model

Hart, Attorney at Law, experienced the following transactions in 2016, the first year of

operations:

1. Accepted $36,000 on April 1, 2016, as a retainer for services to be performed evenly over the

next 12 months.

2. Performed legal services for cash of $54,000.

3. Purchased $2,800 of office supplies on account.

4. Paid $2,400 of the amount due on accounts payable.

5. Paid a cash dividend to the stockholders of $5,000.

6. Paid cash for operating expenses of $31,000.

7. Determined that at the end of the accounting period $200 of office supplies remained on

hand.

8. On December 31, 2016, recognized the revenue that had been earned for services performed

in accordance with Transaction 1.

Required

Show the effects of the events on the financial statements using a horizontal statements model

like the following one. In the Cash Flows column, use the initials OA to designate operating activity, IA for investing activity, FA for financing activity, and NC for net change in cash. Use NA

to indicate accounts not affected by the event. The first event has been recorded as an example.

Event

Assets 5 Liabilities 1 Stk. Equity

No. Cash 1 Supplies 5 Accts. Pay 1 Unearn. Rev. 1 Ret. Earn. Rev. 2 Exp. 5 Net Inc. Cash Flow

1. 36,000 1 NA 5 NA 1 36,000 1 NA NA 2 NA 5 NA 36,000 OA

TABLE PROVIDED BELOW

 

 

 

Hart Attorney At Law

Effect of Transactions on the Financial Statements for 2016
 
    Balance Sheet   Income Statement   Statement of
    Assets = Liabilities + S. Equity   Rev – Exp. = Net Inc.   Cash Flows
 

No.

    

Cash

  

+

  

Supplies

  

=

 Accts. Payable  

+

 Unearn. Rev.  

+

 Retained

Earnings

                
1.     +   =   +   +       –   =      
2.     +   =   +   +       –   =      
3.     +   =   +   +       –   =      
4.     +   =   +   +       –   =      
5.     +   =   +   +       –   =      
6.     +   =   +   +       –   =      
7.     +   =   +   +       –   =      
8.     +   =   +   +       –   =      
Totals   51,600 + 200 = 400 + 9,000 + 42,400   81,000 – 33,600 = 47,400   51,600  NC
                                     

 

 

 

 

 

 

 

 

 

 

 

 

 

EXERCISE 2-27A

 

Exercise 2-27A Effect of accounting events on the income statement and statement

of cash flows

Required

Explain how each of the following events or series of events and the related adjusting entry will

affect the amount of net income and the amount of cash flow from operating activities reported

on the year-end financial statements. Identify the direction of change (increase, decrease, or NA)

and the amount of the change. Organize your answers according to the following table. The first

event is recorded as an example. If an event does not have a related adjusting entry, record only

Cash Flows from

Net Income Operating Activities

Event/ Direction of Amount of Direction of Amount of

Adjustment Change Change Change Change

a NA NA Decrease $9,000

Adj Decrease $2,250 NA NA

a. Paid $9,000 cash on October 1 to purchase a one-year insurance policy.

b. Purchased $2,000 of supplies on account. Paid $500 cash on accounts payable. The ending

balance in the Supplies account, after adjustment, was $300.

c. Provided services for $10,000 cash.

d. Collected $2,400 in advance for services to be performed in the future. The contract called for

services to start on May 1 and to continue for one year.

e. Accrued salaries amounting to $5,600.

f. Sold land that cost $3,000 for $3,000 cash.

g. Acquired $15,000 cash from the issue of common stock.

h. Earned $12,000 of revenue on account. Collected $8,000 cash from accounts receivable.

i. Paid cash operating expenses of $4,500.

e. Paid cash for rent expense.

f. Performed services for cash.

g. Performed services for clients on account.

h. Collected cash from accounts receivable.

i. Received cash for services to be performed in the future.

j. Purchased land with cash.

TABLE PROVIDED BELOW

 

   

Net Income

 Cash Flow from

Operating Activities
 

Event/Adj.

 Direction of Change Amount of Change Direction of Change Amount of Change
a. Event

Adj.

        
b. Event

Adj.

        
b.   Event

No adj.

        
d. Event

Adj.

        
e.  Event

No adj.

        
f.   Event

No adj.

        
f.       Event

No adj.

        
g.   Event

No adj.

        
h.   Event

No adj.

        

 

 

 

 

 
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Chapter 3 WileyPlus

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Chapter 3 WileyPlus

 

Brief Exercise 1-9

Do It! Review 1-3

Exercise 3-1

Exercise 3-6

Brief Exercise 3-4

Do It! Review 3-4

Problem 3-5A

 

Brief Exercise 1-9

At the beginning of the year, Goren Company had total assets of $856,100 and total liabilities of $519,000. (Treat each item independently.)

(a) If total assets increased $177,500 during the year and total liabilities decreased $82,900, what is the amount of stockholders’ equity at the end of the year?

Stockholders’ equity$

 

(b) During the year, total liabilities increased $104,500 and stockholders’ equity decreased $65,800. What is the amount of total assets at the end of the year?

Total assets$http://edugen.wileyplus.com/edugen/art2/common/pixel.gif

 

(c) If total assets decreased $83,400 and stockholders’ equity increased $101,700 during the year, what is the amount of total liabilities at the end of the year?

Total liabilities$

 

Do It! Review 1-3

Marsh Corporation began operations on January 1, 2014. The following information is available for Marsh Corporation on December 31, 2014.

Accounts payable        $ 8,230                        Notes payable              $ 13,460

Accounts receivable    5,230               Rent expense               13,230

Advertising expense    4,260               Retained earnings        ?

Cash                            6,330               Service revenue           31,460

Common stock                        18,230             Supplies                       5,130

Dividends                    5,730               Supplies expense         1,440

Equipment                   30,030

 

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Prepare an income statement for Marsh Corporation.

Prepare a retained earnings statement for Marsh Corporation. (List items that increase retained earnings first.)

Prepare a balance sheet for Marsh Corporation. (List assets in order of liquidity.)

 

Exercise 3-1

Selected transactions for Warner Advertising Company, Inc., are listed here.

Describe the effect of each transaction on assets, liabilities, and stockholders’ equity.

 

1. Issued common stock to investors in exchange for cash received from investors.

2. Paid monthly rent.

3. Received cash from customers when service was performed.

4. Billed customers for services performed.

5. Paid dividend to stockholders.

6. Incurred advertising expense on account.

7. Received cash from customers billed in (4).

8. Purchased additional equipment for cash.

9. Purchased equipment on account.

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Exercise 3-6

Selected transactions for Home Place, an interior decorator corporation, in its first month of business, are as follows.

1. Issued stock to investors for $15,710 in cash.

2. Purchased used car for $10,150 cash for use in business.

3. Purchased supplies on account for $240.

4. Billed customers $4,820 for services performed.

5. Paid $230 cash for advertising start of the business.

6. Received $1,730 cash from customers billed in transaction (4).

7. Paid creditor $360 cash on account.

8. Paid dividends of $390 cash to stockholders.

 

For each transaction indicate the basic type of account debited and credited (asset, liability, stockholders’ equity); the specific account debited and credited (Cash, Rent Expense, Service Revenue, etc.); whether the specific account is increased or decreased; and the normal balance of the specific account.

Journalize the transactions. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

 

Brief Exercise 3-4

For each of the following accounts, indicate the effect of a debit or a credit on the account and the normal balance.

Debit Effect     Credit Effect    Normal Balance

(a)        Accounts Payable

(b)        Advertising Expense

(c)        Service Revenue

(d)        Accounts Receivable

(e)        Retained Earnings

(f)        Dividends

 

Do It! Review 3-4

Joel Blocker recorded the following transactions during the month of April.

Apr. 3 Cash                                        1,970

Service Revenue                                1,970

16        Rent Expense                           410

Cash                                                  410

20        Salaries and Wages Expense    450

Cash                                                  450

 

Post these entries to the Cash account of the general ledger to determine the ending balance in cash. The beginning balance in cash on April 1 was $3,370. (Post entries in the order of journal entries presented in the question.)

 

Problem 3-5A

Foyle Architects incorporated as licensed architects on April 1, 2014. During the first month of the operation of the business, these events and transactions occurred:

Apr. 1  Stockholders invested $23,584 cash in exchange for common stock of the corporation.

1          Hired a secretary-receptionist at a salary of $491 per week, payable monthly.

2          Paid office rent for the month $1,179.

3          Purchased architectural supplies on account from Burlington Company $1,703.

10        Completed blueprints on a carport and billed client $2,489 for services.

11        Received $917 cash advance from J. Madison to design a new home.

20        Received $3,669 cash for services completed and delivered to M. Svetlana.

30        Paid secretary-receptionist for the month $1,964.

30        Paid $393 to Burlington Company for accounts payable due.

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Journalize the transactions. (If no entry is required, select “No entry” for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

 

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Post to the ledger T-accounts. (Post entries in the order of journal entries presented in the question.)

Prepare a trial balance on April 30, 2014.

 

 

 
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