Solution Manual for Financial Accounting, 12th Edition

FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Ethics Check (5-10 min.) For each of the situations listed, identify which of three principles (integrity, objectivity and independence, or due care) from the AICPA Code of Professional Conduct is violated. Assume all persons listed in the situations are members of the AICPA. Solution: a. b. c. d. Due care Due care Objectivity and independence Integrity Chapter 2: Transaction Analysis Page 1 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-1 (5 min.) Indicate whether each item would be considered to be a transaction at Gerbig Pet Grooming Corporation. Solution: a. b. c. d. e. f. g. h. Yes Yes No (no dollars involved yet) Yes No (no dollars involved) Yes No (no dollars involved yet) Yes Chapter 2: Transaction Analysis Page 2 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-2 (5 min.) Identify whether each item is an asset, liability, or equity account. Solution: a. b. c. d. e. f. g. h. i. j. L A L L E E A A E A Chapter 2: Transaction Analysis Page 3 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-3 (5 min.) Dan Crater opened a software consulting firm that immediately paid $28,000 for a computer system. Was Crater’s computer system an expense of the business? If not, explain. Solution: Crater’s payment was not an expense. Crater acquired an asset, Equipment, because the computer is an economic resource of the business. Chapter 2: Transaction Analysis Page 4 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-4 (5 min.) For each of the following items, give an example of a transaction that has the described effect on Dazzle’s accounting equation. Solution: a. b. c. d. e. Purchase of asset for cash Sale of asset for cash Collection of an account receivable Issuance of stock Revenue transaction (ex: provided services on account or for cash) Purchase of asset on account Borrow money Declaration and payment of dividends to owners Expense transaction (ex: received and paid utility bill) Pay a liability Return an asset purchased on account Chapter 2: Transaction Analysis Page 5 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-5 (5-10 min.) Requirements Complete the following chart to show the impact on the accounting equation from each transaction. Solution: Date Jan. 2 Jan. 4 Jan. 10 Jan. 15 Jan. 18 Jan. 21 Jan. 31 Assets Incr. Decr. X X X X X X X X Liabilities Incr. Decr. X Chapter 2: Transaction Analysis Stockholders’ Equity Incr. Decr. X X X X X Page 6 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-6 (5 min.) a. How much in total assets does Ford have? b. How much in liabilities does Ford owe? Solution: a. b. $10,500 ($8,000 + $2,500 + $7,200 – $7,200) $ 2,500 Chapter 2: Transaction Analysis Page 7 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-7 (5-10 min.) 1. Set up the following T-accounts of Fourth Investments, Inc.: Cash, Computer Equipment, Accounts Payable, and Common Stock. 2. Record the first two transactions of the business directly in the T- accounts without using a journal. 3. Show that total debits equal total credits. Solution: Reqs 1, 2 Cash 200,000 Computer Equipment 56,000 Accounts Payable Common Stock 56,000 200,000 Req 3 Total debits = $256,000 ($200,000 + $56,000) Total credits = $256,000 ($56,000 + $200,000) Chapter 2: Transaction Analysis Page 8 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-8 (5-10 min.) After these transactions, how much cash does the business have to work with? Use a Taccount to show your answer. Solution: Jul. 1 Jul. 6 Bal. Cash 26,000 8,500 29,000 Chapter 2: Transaction Analysis 5,500 Page 9 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-9 (10 min.) Journalize the transactions of Donovan Freeman, Architect. Include an explanation with each journal entry. Solution: Journal DATE ACCOUNT TITLES AND EXPLANATION 15 Cash July Note Payable Borrowed money from the bank. DEBIT 64,000 64,000 22 Accounts Receivable Service Revenue Performed service on account. 17,300 28 Cash Accounts Receivable Received cash on account. 16,000 29 Utilities Expense Cash Paid utility bill. 1,800 31 Salary Expense Cash Paid salary expense. 10,000 Chapter 2: Transaction Analysis CREDIT 17,300 16,000 1,800 10,000 Page 10 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-10 (10-15 min.) 1. Journalize the two transactions on the books of Mary Gervais, Consultant. Include an explanation for each transaction. 2. Open a T-account for Accounts Payable and post to Accounts Payable. Compute the balance and denote it as Bal. 3. How much does the business owe after both transactions? In which account does this amount appear? Solution: Req. 1 Journal DATE ACCOUNT TITLES AND EXPLANATION Supplies Accounts Payable Purchased supplies on account. Accounts Payable Cash Paid cash on account. DEBIT 4,300 CREDIT 4,300 3,450 3,450 Req. 2 Accounts Payable 3,450 Bal. 4,300 850 Req. 3 The business owes $850, as shown in the Accounts Payable account. Chapter 2: Transaction Analysis Page 11 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-11 (10-15 min.) 1. Record the two transactions on the books of Orman Consulting. Include an explanation for each transaction. 2. Post to these T-accounts: Cash, Accounts Receivable, and Service Revenue. Compute each account balance and denote it as Bal. Solution: Req. 1 Journal DATE ACCOUNT TITLES AND EXPLANATION Accounts Receivable Service Revenue Performed service on account. Cash Accounts Receivable Received cash on account. DEBIT 4,600 CREDIT 4,600 2,100 2,100 Req. 2 Bal. Cash 2,100 2,100 Bal. Accounts Receivable 4,600 2,500 2,100 Service Revenue Bal. Chapter 2: Transaction Analysis 4,600 4,600 Page 12 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-12 (15 – 20 min.) Journalize the following transactions. Include dates and a brief explanation for each journal entry. Solution: Journal DATE ACCOUNT TITLES AND EXPLANATION 1 Cash July Common Stock Issued stock to owner. 5 Accounts Receivable Service Revenue Provided (sold) services on account. DEBIT 13,000 13,000 8,000 8,000 9 Office Supplies Accounts Payable Purchased supplies on account. 600 10 Cash Service Revenue Provided (sold) services for cash. 3,100 12 Cash Accounts Receivable Collected cash on account. 8,000 600 3,100 8,000 24 Accounts Payable Cash Paid on account. 600 25 Utilities Expense Cash Paid expenses. 450 600 450 30 Office Furniture Note Payable Purchased furniture with note payable. 2,500 31 Salary Expense Cash Paid payroll. 3,100 Chapter 2: Transaction Analysis CREDIT 2,500 3,100 Page 13 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-13 (10 min.) Prepare the trial balance of Harbor Marine Company at December 31, 2018. List the accounts in their proper order. How much was the company’s net income or net loss? Solution: Harbor Marine Company Trial Balance December 31, 2018 ACCOUNT Cash Other assets Accounts payable Other liabilities Stockholders’ equity Revenues Expenses Total DEBIT CREDIT Millions $ 4 20 $ 6 2 5 37 26 50 $ 50 $ Harbor Marine Company’s net income: $11 million ($37 − $26) Chapter 2: Transaction Analysis Page 14 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-14 (10 min.) Calculate these amounts for the business: 1. Total assets 2. Total liabilities 3. Net income or net loss during December Solution: 1. Total assets = $101,500 ($4,500 + $28,000 + $5,000 + $45,000 + $19,000) 2. Total liabilities = $61,000 ($39,000 + $22,000) 3. Net income (loss) = $17,500 ($56,000 − $27,000 − $10,000 − $1,500) Chapter 2: Transaction Analysis Page 15 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-15 (10 min.) The purpose of this exercise is to help you learn how to correct three common accounting errors. Solution: Error 1. Total debits = $99,500 ($140,000 + $4,500 − $45,000) Total credits = $140,000 Difference = $40,500 ($140,000 − $99,500); $40,500 / 9 = $4,500 (an integer), which suggests either a transposition or a slide. Error 2. Total debits = $194,000 ($140,000 + $82,000 − $28,000) Total credits = $140,000 Difference = $54,000 ($194,000 − $140,000); $54,000 / 9 = $6,000 (an integer), which suggests either a transposition or a slide. Error 3. Total debits = $112,000 ($140,000 − $28,000) Total credits = $168,000 ($140,000 + $28,000) Difference = $56,000 ($168,000 − $112,000) $56,000 / 2 = $28,000 (original amount of accounts receivable). Chapter 2: Transaction Analysis Page 16 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual S2-16 (10 min.) Match the accounting terms with the corresponding definition. or meaning at the right. Solution: E A K H F G B D I J C L 1. Posting 2. Expense 3. Debit 4. Trial Balance 5. Equity 6. Net income 7. Receivable 8. Chart of accounts 9. Payable 10. Journal 11. Normal balance 12. Ledger Chapter 2: Transaction Analysis Page 17 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-17A (15-20 min.) Requirements 1. What criteria does an event have to meet to qualify as a financial transaction? Identify which of the listed events are financial transactions. 2. Journalize each of the transactions. 3. Indicate how the company’s assets, liabilities, and equity would be impacted by each transaction. Solution: Req. 1 In order to qualify as a financial transaction, there must be an event that has a financial impact on a business and can be measured reliably. Thus, the May events that do not meet these criteria include May 8 and May 18. Req. 2 DATE May 1 3 6 15 20 Journal ACCOUNT TITLES AND EXPLANATION Cash Ticket Revenue Sold admission tickets. Inventory Accounts Payable Purchased merchandise inventory on account. Cash Rental Revenue Rented lockers to guests. DEBIT 100,000 CREDIT 100,000 5,000 5,000 500 500 Salary Expense Cash Paid employees. 75,000 Cash Note Payable Borrowed money from bank. 200,000 75,000 200,000 Req. 3 Date May 1 May 3 May 6 May 15 May 20 Assets Incr Decr X X X X X Chapter 2: Transaction Analysis Liabilities Incr Decr Stk. Equity Incr Decr X X X X X Page 18 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-18A (10-15 min.) Requirements Set up the following T-accounts: Cash, Accounts Receivable, Office Supplies, Office Furniture, Accounts Payable, Common Stock, Dividends, Service Revenue, Salary Expense, and Rent Expense. Record the transactions directly in the T-accounts without using a journal. Determine the ending balance in each account. Solution: Bal. Cash 25,500 (b) (d) (e) (g) 18,850 (c) Bal. Office Supplies 700 700 (a) 1,500 2,900 250 2,000 (f) Bal. Accounts Receivable 11,000 11,000 (a) Bal. Office Furniture 9,400 9,400 Common Stock (a) Bal. 34,900 34,900 (g) Bal. Dividends 2,000 2,000 Service Revenue (f) Bal. 11,000 11,000 (d) Bal. Salary Expense 2,900 2,900 Rent Expense 1,500 1,500 (e) Accounts Payable 250 (c) Bal. Chapter 2: Transaction Analysis 700 450 (b) Bal. Page 19 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-19A (10-15 min.) State whether each event (1) increased, (2) decreased, or (3) had no effect on the total assets of the business. Identify any specific asset affected. Solution: a. b. c. d. Decreased assets (Cash) No effect on total assets. Increase in land offsets the decrease in cash. No effect on total assets. Increase in cash offsets the decrease in land. No effect on total assets. Increase in cash offsets the decrease in accounts receivable. e. f. g. h. i. j. Increased assets. (Equipment) No effect. (A personal transaction) Decreased assets (Cash) Increased assets. (Office supplies) Increased assets. (Cash) Increased assets (Cash) Chapter 2: Transaction Analysis Page 20 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-20A (15-20 min.) Requirements 1. Analyze the effects of these events on the accounting equation of the medical practice of Dr. Helen Samoa, P.C. 2. After completing the analysis, answer these questions about the business. a. How much are total assets? b. How much does the business expect to collect from patients? c. How much does the business owe in total? d. How much of the business’s assets does Samoa really own? e. How much net income or net loss did the business experience during its first month of operations? Solution: Req. 1 Analysis of Transactions ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY Cash Date Accounts Medical + Receivable + Supplies + Dec 6 150,000 9 (64,000) 12 2,400 15 Not a transaction of the business. 15-31 4,900 4,900 15-31 (3,600) (900) (400) 31 1,000 (1,000) 31 34,000 31 (1,300) 4,900 1,400 Bal. 119,700 Land = Accounts payable + Note Payable + Type of Stockholders’ Common Retained Stock + Earnings Equity Transaction 150,000 Issued stock 64,000 2,400 9,800 Service revenue (3,600) Salary expense (900) Rent expense (400) Utilities expense 34,000 64,000 (1,300) 1,100 34,000 150,000 4,900 Req. 2 $ 190,000 a. b. $ 4,900 c. $35,100 ($1,100 + $34,000) d. $154,900 ($190,000 − $35,100, or $150,000 + $4,900) e. $4,900 (Revenue, $9,800 minus expenses, $4,900 equals net income, $4,900.) Chapter 2: Transaction Analysis Page 21 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-21A (10-15 min.) Requirement 1. Record the transactions in the journal of Dr. Helen Samoa, P.C. List the transactions by date and give an explanation for each transaction. Solution: DATE Dec. 6 9 12 15 Journal ACCOUNT TITLES AND EXPLANATION Cash Common Stock Issued stock to owner. DEBIT 150,000 Land Cash Purchased land. 64,000 Medical Supplies Accounts Payable Purchased supplies on account. 2,400 2,400 Not a transaction of the business. 4,900 4,900 15-31 Salary Expense Rent Expense Utilities Expense Cash Paid expenses. 3,600 900 400 31 Cash Medical Supplies Sold supplies. 1,000 Cash Note Payable Borrowed money. 34,000 Accounts Payable Cash Paid on account. 1,300 31 150,000 64,000 15-31 Cash Accounts Receivable Service Revenue Performed service for cash and on account. 31 CREDIT Chapter 2: Transaction Analysis 9,800 4,900 1000 34,000 1,300 Page 22 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-22A (20-30 min.) Requirements 1. After journalizing the transactions of Exercise 2-20A, post the entries to the ledger, using T-accounts. Key transactions by date. Determine the ending balance in each account. 2. Prepare the trial balance of Dr. Helen Samoa, P.C., at December 31, 2018. 3. From the trial balance, determine total assets, total liabilities, and total stockholders’ equity on December 31. Solution: Cash Dec. 6 150,000 Dec. 9 15-31 4,900 15-31 31 1,000 31 31 34,000 Bal. 119,700 64,000 4,900 1,300 Dec 15-31 Bal. 1,000 Dec. Bal. Dec. Bal. 12 Medical Supplies 2,400 Dec. 31 1,400 Dec. 31 Accounts Payable 1,300 Dec. 12 Bal. 2,400 1,100 Common Stock Dec. 6 Bal. 150,000 150,000 Dec. 15-31 Bal. Salary Expense 3,600 3,600 Dec. 15-31 Bal. Utilities Expense 400 400 9 Accounts Receivable 4,900 4,900 Land 64,000 64,000 Note Payable Dec. Bal. 31 Service Revenue Dec. 15-31 Bal. Dec. 15-31 Bal. 34,000 34,000 9,800 9,800 Rent Expense 900 900 Dr. Helen Samoa, P.C. Trial Balance December 31, 2018 ACCOUNT DEBIT Cash $ 119,700 Accounts receivable 4,900 Medical supplies 1,400 Land 64,000 Accounts payable Note payable Common stock Service revenue Salary expense 3,600 Rent expense 900 Utilities expense 400 $ 194,900 Total CREDIT $ 1,100 34,000 150,000 9,800 $ 194,900 Req. 3 Total assets ($119,700 + $4,900 + $1,400 + $64,000) Total liabilities ($1,100 + $34,000) Total stockholders’ equity ($150,000 + $4,900*) $ 190,000 (35,100) $ 154,900 *Net income = $4,900 ($9,800 – $3,600 – $900 – $400) Chapter 2: Transaction Analysis Page 23 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-23A (10-15 min.) Requirements Prepare the journal entries that served as the sources for the seven transactions. Include an explanation for each entry. Determine the ending balance in each account. As Frontier moves into the next period, how much cash does the business have? How much does Frontier owe in total liabilities? Solution: Req. 1 Journal ACCOUNT TITLES AND EXPLANATION 1. Cash Common Stock Issued common stock. 2. Cash Note Payable Borrowed money; signed note payable. 3. Supplies Accounts Payable Purchased supplies on account. 4. Land Cash Note Payable Purchased land by paying cash and signing a note payable. DEBIT 8,500 CREDIT 8,500 9,000 9,000 800 800 38,000 13,000 25,000 5. Cash Supplies Sold supplies for cash. 45 6. Accounts Payable Cash Paid cash on account. 310 7. Equipment Cash Paid cash for equipment. 3,900 45 310 3,900 Cash balance = $335 ($8,500 + $9,000 − $13,000 + $45 − $310 − $3,900) Company owes $34,490 ($9,000 + $800 + $25,000 − $310) Chapter 2: Transaction Analysis Page 24 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-24A (10-20 min.) Requirements 1. Prepare the company’s trial balance at April 30, 2018, listing accounts in proper sequence, as illustrated in the chapter. For example, Accounts Receivable comes before Equipment. List the expense with the largest balance first, the expense with the next largest balance second, and so on. 2. Prepare the financial statement for the month ended April 30, 2018, which will show the company the results of operations for the month. Solution: Req 1. Deluxe Patio Service, Inc. Trial Balance April 30, 2018 DEBIT ACCOUNT $19,300 Cash 5,900 Accounts receivable 30,600 Equipment Accounts payable Note payable Common stock Retained earnings 3,300 Dividends Service revenue 8,300 Salary expense 2,100 Utilities expense Delivery expense 300 $ 69,800 Total CREDIT $4,600 21,500 16,700 6,300 20,700 $ 69,800 Req 2. Deluxe Patio Service, Inc. Income Statement For the Month Ended April 30, 2018 Service revenue $ 20,700 Salary expense $8,300 Utilities expense 2,100 Delivery expense 300 Total expenses 10,700 Net income $10,000 Chapter 2: Transaction Analysis Page 25 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-25A (15-25 min.) Requirement 1. Prepare the correct trial balance at September 30, 2018, complete with a heading. Journal entries are not required. Solution: Addison, Inc. Trial Balance September 30, 2018 ACCOUNT Cash Accounts receivable Inventory Supplies Land Accounts payable Common stock Sales revenue Insurance expense Salary expense Rent expense Utilities expense Total DEBIT $ 14,800 12,000 16,900 800 59,000 CREDIT $ 13,600 47,300 49,700 3,400 2,000 1,000 700 $ 110,600 $ 110,600 Computations: Cash: $14,100 + $700 = $14,800 Accounts Receivable: $12,700 − $700 = $12,000 Accounts Payable: $12,300 + $1,000 − $100 + $400 = $13,600 Common Stock: $47,100 + $200 = $47,300 Insurance Expense: $0 + $3,400 = $3,400 Utilities Expense: $300 + $400 = $700 Chapter 2: Transaction Analysis Page 26 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-26A (15-20 min.) 1. Solve for Cash. 2. Prepare the trial balance of Old Center at September 30, 2018. List the accounts in their proper order. How much was Old Center Company’s net income or net loss? Solution: Req. 1 (amounts in millions) Cash (X) + Other assets (23) = Accounts payable (8) + Other liabilities (2) + S/E (6) + Revenues (33) – Expenses (21) Cash (X) = 5 Req. 2 Old Center Company Trial Balance September 30, 2018 DEBIT ACCOUNT Cash $5 Other assets 23 Accounts payable Other liabilities Stockholders’ Equity Revenues Expenses 21 $49 Total CREDIT $8 2 6 33 $49 Net income is $12 ($33 – $21) Chapter 2: Transaction Analysis Page 27 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-27B (15-20 min.) Requirements 1. What criteria does an event have to meet to qualify as a financial transaction? Identify which of the listed events are financial transactions. 2. Journalize each of the transactions. 3. Indicate how the company’s assets, liabilities, and equity would be impacted by each transaction. Solution: Req. 1 In order to qualify as a financial transaction, there must be an event that has a financial impact on a business and can be measured reliably. Thus, the May events that do not meet these criteria include May 8 and May 18. Req. 2 DATE May 1 3 6 15 20 Journal ACCOUNT TITLES AND EXPLANATION Cash Ticket Revenue Sold admission tickets. Inventory Accounts Payable Purchased merchandise inventory on account. Cash Rental Revenue Rented lockers to guests. DEBIT 150,000 CREDIT 150,000 9,000 9,000 700 700 Salary Expense Cash Paid employees. 92,000 Cash Note Payable Borrowed money from bank. 400,000 92,000 400,000 Req. 3 Date May 1 May 3 May 6 May 15 May 20 Assets Incr Decr X X X X X Chapter 2: Transaction Analysis Liabilities Incr Decr Stk. Equity Incr Decr X X X X X Page 28 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-28B (10-15 min.) Record the following transactions directly in the T-accounts without using a journal. Use the letters to identify the transactions. Determine the ending balance in each account. Solution: Bal. Cash 23,500 (b) (d) (e) (g) 16,500 (c) Bal. Office Supplies 800 800 (a) (e) Accounts Payable 200 (c) Bal. (g) Bal. Dividends 2,900 2,900 (b) Bal. Salary Expense 2,800 2,800 Chapter 2: Transaction Analysis 1,100 2,800 200 2,900 (f) Bal. Accounts Receivable 10,700 10,700 (a) Bal. Office Furniture 8,600 8,600 800 600 (d) Bal. Common Stock (a) Bal. 32,100 32,100 Service Revenue (f) Bal. 10,700 10,700 Rent Expense 1,100 1,100 Page 29 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-29B (10-15 min.) State whether each event (1) increased, (2) decreased, or (3) had no effect on the total assets of the business. Identify any specific asset affected. Solution: a. b. c. d. e. f. g. h. i. j. No effect on total assets. Increase in notes receivable offsets the decrease in land. No effect on total assets. Increase in equipment offsets the decrease in cash. No effect. (A personal transaction) Increased assets. (Land) Increased assets. (Cash) Increased assets. (Accounts receivable) Decreased assets. (Cash) Decreased assets. (Cash) Increased assets. (Cash) Increased assets (Supplies) Chapter 2: Transaction Analysis Page 30 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-30B (10-20 min.) Requirements 1. Analyze the effects of these events on the accounting equation of the medical practice of Dr. Char Morin, P.C. 2. After completing the analysis, answer these questions about the business. a. How much are total assets? b. How much does the business expect to collect from patients? c. How much does the business owe in total? d. How much of the business’s assets does Morin really own? e. How much net income or net loss did the business experience during its first month of operations? Solution: Req. 1 Analysis of Transactions ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY Cash Date Accounts Medical + Receivable + Supplies + July 6 155,000 9 (62,000) 12 1,500 15 Not a transaction of the business. 15-31 4,550 4,550 15-31 (3,300) (1,400) (400) 31 500 (500) 31 33,000 31 (600) 4,550 1,000 Bal. 125,350 Land Accounts = payable + Note Payable + Type of Stockholders’ Retained Common Stock + Earnings Equity Transaction 155,000 Issued stock 62,000 1,500 9,100 Service revenue (3,300) Salary expense (1,400) Rent expense (400) Utilities expense 33,000 62,000 (600) 900 33,000 155,000 4,000 Req. 2 $ 192,900 a. b. $ 4,550 c. $33,900 ($900 + $33,000) d. $159,000 ($192,900 − $33,900, or $155,000 + $4,000) e. $4,000 (Revenue, $9,100 minus expenses, $5,100, equals net income, $4,000) Chapter 2: Transaction Analysis Page 31 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-31B (10-15 min.) Requirement 1. Record the transactions in the journal of Dr. Char Morin, P.C. List the transactions by date and give an explanation for each transaction. Solution: DATE July 6 9 12 15 Journal ACCOUNT TITLES AND EXPLANATION Cash Common Stock Issued stock to owner. DEBIT 155,000 155,000 Land Cash Purchased land. 62,000 Medical Supplies Accounts Payable Purchased supplies on account. 1,500 62,000 1,500 Not a transaction of the business. 15-31 Cash Accounts Receivable Service Revenue Performed service for cash and on account. 4,550 4,550 15-31 Salary Expense Rent Expense Utilities Expense Cash Paid expenses. 3,300 1,400 400 31 31 31 CREDIT 9,100 5,100 Cash Medical Supplies Sold supplies. 500 Cash Note Payable Borrowed money. 33,000 Accounts Payable Cash Paid on account. 600 Chapter 2: Transaction Analysis 500 33,000 600 Page 32 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-32B (20-30 min.) Requirements 1. Post the entries to the ledger, using T-accounts. Key transactions by date. Determine the ending balance in each account. 2. Prepare the trial balance of Dr. Char Morin, P.C., at July 31, 2018. 3. From the trial balance, determine total assets, total liabilities, and total stockholders’ equity on July 31. Solution: July 6 15-31 31 31 Bal. Cash 155,000 July 9 4,550 15-31 500 31 33,000 125,350 July Bal. 12 Medical Supplies 1,500 July 31 1,000 July 31 Accounts Payable 600 July 12 Bal. 1,500 900 Common Stock July 6 Bal. 155,000 155,000 July 15-31 Bal. Salary Expense 3,300 3,300 July 15-31 Bal. Utilities Expense 400 400 62,000 5,100 600 500 July 15-31 Bal. July Bal. Accounts Receivable 4,550 4,550 9 Land 62,000 62,000 Note Payable July Bal. 31 Service Revenue July 15-31 Bal. July 15-31 Bal. Dr. Char Morin, P.C. Trial Balance July 31, 2018 ACCOUNT Cash Accounts receivable Medical supplies Land Accounts payable Note payable Common stock Service revenue Salary expense Rent expense Utilities expense Total 33,000 33,000 9,100 9,100 Rent Expense 1,400 1,400 DEBIT $ 125,350 4,550 1,000 62,000 CREDIT $ 3,300 1,400 400 $ 198,000 900 33,000 155,000 9,100 $ 198,000 Req. 3 Total assets ($125,350 + $4,550 + $1,000 + $62,000) Total liabilities ($900 + $33,000) Total stockholders’ equity ($155,000 + $4,000*) $ 192,900 (33,900) $ 159,000 *Net income = $4,000 ($9,100 − $3,300 − $1,400 − $400) Chapter 2: Transaction Analysis Page 33 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-33B (10-15 min.) Requirements 1. Prepare the journal entries that served as the sources for the seven transactions. Include an explanation for each entry. Determine the ending balance in each account. As Gallagher moves into the next period, how much cash does the business have? How much does Gallagher owe in total liabilities? Solution: Req. 1 Journal ACCOUNT TITLES AND EXPLANATION 1. Cash Common Stock Issued common stock. 2. Cash Note Payable Borrowed money; signed note payable. 3. Supplies Accounts Payable Purchased supplies on account. 4. Land Cash Note Payable Purchased land by paying cash and signing a note payable. DEBIT 8,800 CREDIT 8,800 8,500 8,500 900 900 34,000 11,000 23,000 5. Cash Supplies Sold supplies for cash. 90 6. Accounts Payable Cash Paid cash on account. 290 7. Equipment Cash Paid cash for equipment. 4,000 90 290 4,000 Cash balance = $2,100 ($8,800 + $8,500 − $11,000 + $90 − $290 − $4,000) Company owes $32,110 ($8,500 + $900 + $23,000 − $290) Chapter 2: Transaction Analysis Page 34 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-34B (10-20 min.) Requirements 1. Prepare the company’s trial balance at April 30, 2018, listing accounts in proper sequence, as illustrated in the chapter. For example, Accounts Receivable comes before Equipment. List the expense with the largest balance first, the expense with the next largest balance second, and so on. 2. Prepare the financial statement for the month ended April 30, 2018, which will show the company the results of operations for the month. Solution: Req 1. Specialty Deck Service, Inc. Trial Balance April 30, 2018 DEBIT ACCOUNT Cash $19,200 Accounts receivable 5,300 Equipment 30,800 Accounts payable Note payable Common stock Retained earnings Dividends 3,100 Service revenue Salary expense 8,400 Utilities expense 2,300 Delivery expense 700 $ 69,800 Total CREDIT $4,300 21,000 16,200 7,800 20,500 $ 69,800 Req 2. Specialty Deck Service, Inc. Income Statement For the Month Ended April 30, 2018 Service revenue $ Salary expense $8,400 Utilities expense 2,300 700 Delivery expense Total expenses Net income Chapter 2: Transaction Analysis 20,500 11,400 $9,100 Page 35 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-35B (15-25 min.) Requirement 1. Prepare the corrected trial balance at September 30, 2018, complete with a heading. Journal entries are not required. Solution: St. James, Inc. Trial Balance September 30, 2018 ACCOUNT Cash Accounts receivable Inventory Supplies Land Accounts payable Common stock Sales revenue Insurance expense Salary expense Utilities expense Rent expense Total DEBIT $14,800 12,900 17,500 300 55,600 CREDIT $15,700 48,300 46,400 5,400 1,900 1,700 300 $ 110,400 _______ $ 110,400 Computations: Cash: $14,400 + $400 = $14,800 Accounts Receivable: $13,300 − $400 = $12,900 Accounts Payable: $11,500 + $4,000 − $400 + $600 = $15,700 Common Stock: $47,900 + $400 = $48,300 Insurance Expense: $0 + $5,400 = $5,400 Utilities Expense: $1,100 + $600 = $1,700 Chapter 2: Transaction Analysis Page 36 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-36B (15-20 min.) 1. Solve for Cash. 2. Prepare the trial balance of All Towne at September 30, 2018. List the accounts in their proper order. How much was All Towne Company’s net income or net loss? Solution: Req. 1 (amounts in millions) Cash (X) + Other assets (21) = Accounts payable (5) + Other liabilities (1) + S/E (4) + Revenues (33) – Expenses (16) Cash (X) = 6 Req. 2 All Towne Company Trial Balance September 31, 2018 DEBIT ACCOUNT Cash $6 Other assets 21 Accounts payable Other liabilities Stockholders’ Equity Revenues Expenses 16 $43 Total CREDIT $5 1 4 33 $43 Net income is $17 ($33 – $16) Chapter 2: Transaction Analysis Page 37 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Serial Exercise (20-30 min.) Requirements 1. Journalize the transactions for Olivia Matthews, Certified Public Accountant. Explanations are not required. 2. Post to the T-accounts. Key all items by date and determine the ending balance in each account. Denote an account balance on May 18, 2018, as Bal. 3. Prepare a trial balance at May 18, 2018. In the Serial Exercise of Chapter 3, we add transactions for the remainder of May and will require a trial balance at May 31. Solution: Req. 1 Date May Journal ACCOUNT TITLES AND EXPLANATION 2 Cash Common Stock 2 Rent Expense Cash DEBIT 12,000 12,000 500 500 3 Equipment Cash 1,800 4 Furniture Accounts Payable 6,000 5 Supplies Accounts Payable 900 9 Cash Service Revenue 600 12 Utilities Expense Cash 750 18 Accounts Receivable Service Revenue Chapter 2: Transaction Analysis CREDIT 1,800 6,000 900 600 750 3,100 3,100 Page 38 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Req. 2 May 2 9 Bal. Cash 12,000 May 600 2 3 12 9,550 May 5 Bal. Supplies 900 900 May 4 Bal. Furniture 6,000 6,000 Common Stock May 2 Bal. May 2 Bal. 500 1,800 750 Accounts Receivable May 18 3,100 Bal. 3,100 Rent Expense 500 500 May 3 Bal. 12,000 12,000 May 12 Bal. Equipment 1,800 1,800 Accounts Payable May 4 5 Bal. 6,000 900 6,900 Service Revenue May 9 18 Bal. 600 3,100 3,700 Utilities Expense 750 750 Req. 3 Olivia Matthews, Certified Public Accountant, P.C. Trial Balance May 18, 2018 ACCOUNT DEBIT Cash $ 9,550 Accounts receivable 3,100 Supplies 900 Equipment 1,800 Furniture 6,000 Accounts payable Common stock Dividends Service revenue Utilities expense 750 Rent expense 500 Salary expense $ 22,600 Total Chapter 2: Transaction Analysis CREDIT $6,900 12,000 3,700 $ 22,600 Page 39 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Quiz Q2-38 Q2-39 Q2-40 Q2-41 Q2-42 Q2-43 Q2-44 Q2-45 Q2-46 d d b d a d a d d Q2-47 a Q2-48 Q2-49 Q2-50 Q2-51 Q2-52 Q2-53 Q2-54 Q2-55 Q2-56 Q2-57 b d d b c d c b a c ($55,000 + $30,000 + $25,000) = $110,000 Chapter 2: Transaction Analysis Page 40 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual P2-58A (15-30 min.) Requirement 1. Write a short note to answer Veronica’s questions. In your note, state the amounts of Baker’s total assets, total liabilities, and net income or net loss for the year. Also show how you computed each amount. Solution: Dear Veronica, This trial balance lists the accounts of the company, along with their balances at December 31, 2018. The trial balance provides the data for computing total assets, total liabilities, and net income or net loss. Baker Specialties reports: a. Total assets = $395,000 ($13,000 + $49,000 + $5,000 + $103,000 + $225,000) b. Total liabilities = $144,400 ($50,400 + $94,000) c. Net income = $31,000 ($160,000 − $55,000 − $3,000 − $64,000 − $7,000) Chapter 2: Transaction Analysis Page 41 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual P2-59A (45-60 min.) Requirements 1. Analyze the effects of the preceding transactions on the accounting equation of Grueser Computing, Inc. 2. Prepare the income statement of Grueser Computing, Inc., for the month ended October 31, 2018. List expenses in decreasing order by amount. 3. Prepare the entity’s statement of retained earnings for the month ended October 31, 2018. 4. Prepare the balance sheet of Grueser Computing, Inc., at October 31, 2018. Solution: Req. 1 Analysis of Transactions ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY Cash Bal. a) b) c) d) e) f) g) h) Bal. 2,500 3,700 6,700 (4,700) Accounts + Receivable + Supplies 3,250 + Equipment Accounts + = payable 12,200 8,300 (1,900) (500) (3,400) 3,700 6,300 3,700 3,350 6,700 (1,300) 4,700 6,650 Chapter 2: Transaction Analysis 800 Issued stock Service revenue (4,700) 800 800 1,300 Common Retained Type of Stockholders’ Stock + Earnings + Equity Transaction 12,200 4,400 – 10,000 4,700 (1,900) (500) (3,400) 8,950 Service revenue Rent expense Advertising expense Dividends Page 42 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Req. 2 Grueser Computing, Inc. Income Statement Month Ended October 31, 2018 Revenues: Service revenue ($6,700 + $4,700) $ 11,400 Expenses: Rent expense Advertising expense Total expenses Net income $ 1,900 500 2,400 $ 9,000 Req. 3 Grueser Computing, Inc. Statement of Retained Earnings Month Ended October 31, 2018 Retained earnings, October 1, 2018 Add: Net income Subtotal Less: Dividends declared Retained earnings, October 31, 2018 $ 3,350 9,000 12,350 (3,400) $ 8,950 Req. 4 Grueser Computing, Inc. Balance Sheet October 31, 2018 ASSETS Cash Accounts receivable Supplies Equipment $ 3,700 6,650 800 12,200 Total assets $ 23,350 Chapter 2: Transaction Analysis LIABILITIES Accounts payable $ 4,400 STOCKHOLDERS’ EQUITY Common stock 10,000 Retained earnings 8,950 Total stockholders’ equity 18,950 Total liabilities and stockholders’ equity $ 23,350 Page 43 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual P2-60A (30-40 min.) Requirements 1. Journalize the transactions of Grueser Computing, Inc. Explanations are not required. 2. Prepare a T-Account for each account. Insert in each T-account its September 30 Balance as given (example: Cash $2,500). Then, post the October transactions to the T-accounts. 3. Compute the balance in each account. Solution: Req. 1 Journal ACCOUNT a. Cash Common Stock DEBIT 3,700 3,700 b. Cash Service Revenue 6,700 c. Accounts Payable Cash 4,700 d. Supplies Accounts Payable 800 e. Cash Accounts Receivable 1,300 f. Accounts Receivable Service Revenue 4,700 g. Rent Expense Advertising Expense Cash 1,900 500 h. Dividends Cash 3,400 Chapter 2: Transaction Analysis CREDIT 6,700 4,700 800 1,300 4,700 2,400 3,400 Page 44 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Reqs. 2 and 3 Cash 2,500 3,700 6,700 1,300 3,700 4,700 2,400 3,400 Accounts Receivable 3,250 1,300 4,700 6,650 12,200 12,200 4,400 Retained Earnings 800 800 Accounts Payable 4,700 8,300 800 Equipment Supplies Dividends Common Stock 6,300 3,700 10,000 Service Revenue 3,350 3,400 6,700 4,700 3,350 3,400 11,400 Rent Expense 1,900 1,900 Advertising Expense 500 500 The balances of all the accounts Cash through Common Stock agree with the ending balances obtained in Problem 2-59A. Chapter 2: Transaction Analysis Page 45 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual P2-61A (50-60 min.) Requirements 1. Record each transaction in the journal. Be sure to record the date in each entry. Explanations are not required. 2. Post the transactions to the T-accounts, using transaction dates as posting references. Determine the ending balance in each account. 3. Prepare the trial balance of Cloutier Services, Inc., at August 31 of the current year. 4. Michael Cloutier, the manager, asks you how much in total resources the business has to work with, how much it owes, and whether August was profitable (and by how much). Solution: Req. 1 Journal DATE ACCOUNT TITLES Aug. 2 Cash Common Stock DEBIT 69,000 69,000 3 Supplies Equipment Accounts Payable 500 11,800 4 Cash Service Revenue 5,600 7 Land Cash 33,000 11 Accounts Receivable Service Revenue 3,300 16 Accounts Payable Cash 11,800 17 Advertising Expense Cash 18 Cash Accounts Receivable 22 Utilities Expense Cash 12,300 5,600 33,000 3,300 11,800 560 560 1,200 1,200 390 390 29 Cash Service Revenue 3,000 31 Salary Expense Cash 2,500 31 Dividends Cash 2,000 Chapter 2: Transaction Analysis CREDIT 3,000 2,500 2,000 Page 46 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Req. 2 Aug. 2 4 18 29 Cash 69,000 Aug. 7 5,600 16 1,200 17 3,000 22 31 31 Bal. 28,550 Aug. 3 Bal. Equipment 11,800 11,800 Aug. 16 Accounts Payable 11,800 Aug. 3 Bal. 33,000 11,800 560 390 2,500 2,000 12,300 500 Aug. 11 Accounts Receivable 3,300 Aug. 18 Bal. 1,200 2,100 Aug. 3 Supplies 500 Bal. 500 Land 33,000 33,000 Aug. 7 Bal. Aug. 31 Bal. Dividends 2,000 2,000 Common Stock Aug. 2 Bal. 69,000 69,000 Aug. 31 Bal. Salary Expense 2,500 2,500 Service Revenue Aug. 4 11 29 Bal. 5,600 3,300 3,000 11,900 Aug. 22 Bal. Utilities Expense 390 390 Aug. 17 Bal. Advertising Expense 560 560 Req. 3 Cloutier Service, Inc. Trial Balance August 31, 20XX ACCOUNT Cash Accounts receivable Supplies Land Equipment Accounts payable Common stock Dividends Service revenue Salary expense Advertising expense Utilities expense Total $ DEBIT 28,550 2,100 500 33,000 11,800 CREDIT $ 500 69,000 2,000 11,900 $ 2,500 560 390 81,400 $ 81,400 Req. 4 Total resources (assets) = $75,950 ($28,550 + $2,100 + $500 + $33,000 + $11,800) Amount owed (total liabilities) = $500 Chapter 2: Transaction Analysis Page 47 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual P2-62A 40-50 min.) Requirements 1. Record each transaction directly in the T-accounts without using a journal. Use the letters to identify the transactions. Determine the ending balance in each account. 2. Prepare the trial balance of Samuels Music Services Corporation at January 31, 2018. Solution: Req. 1 (a) (b) (f) (j) Bal. Cash 41,000 (c) 61,000 (e) 3,700 (h) 1,500 (k) 52,900 (d) Bal. Supplies 340 340 (a) Bal. Building 110,000 110,000 Note Payable (b) Bal. Service Revenue (f) (g) Bal. (k) Bal. Rent Expense 1,000 1,000 46,000 6,300 200 1,800 (g) Bal. Accounts Receivable 12,800 (j) 11,300 (c) Bal. Music Equipment 46,000 46,000 (h) 61,000 61,000 (e) Bal. 3,700 12,800 (k) 16,500 Bal. (i) Bal. 1,500 Accounts Payable 200 (d) (i) Bal. 340 800 940 Common Stock (a) Bal. 151,000 151,000 Salary Expense 6,300 6,300 Advertising Expense 800 800 Utilities Expense 800 800 Req. 2 Samuels Music Services Corporation Trial Balance January 31, 2018 DEBIT ACCOUNT $ 52,900 Cash Accounts receivable 11,300 Supplies 340 Building 110,000 46,000 Music equipment Accounts payable Note payable Common stock Service revenue Salary expense 6,300 1,000 Rent expense 800 Utilities expense 800 Advertising expense Total $ 229,440 Chapter 2: Transaction Analysis CREDIT $ 940 61,000 151,000 16,500 $ 229,440 Page 48 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual P2-63B (15-30 min.) Requirement 1. Write a short note to answer Clara’s questions. In your note, state the amounts of Colby Design’s total assets, total liabilities, and net income or net loss for the year. Also show how you computed each amount. Solution: Dear Clara, This trial balance lists the accounts of the company, along with their balances at December 31, 2018. The trial balance provides the data for computing total assets, total liabilities, and net income or net loss. Colby Design reports: a. Total assets = $413,500 ($13,000 + $55,000 + $6,500 + $104,000 + $235,000) b. Total liabilities = $144,300 ($50,300 + $94,000) c. Net income = $76,000 ($200,000 − $28,000 − $6,000 − $85,000 − $5,000) Chapter 2: Transaction Analysis Page 49 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual P2-64B (45-60 min.) Requirements 1. Analyze the effects of the preceding transactions on the accounting equation of Davis Computing, Inc. 2. Prepare the income statement of Davis Computing, Inc., for the month ended October 31, 2018. List expenses in decreasing order by amount. 3. Prepare the statement of retained earnings of Davis Computing, Inc., for the month ended October 31, 2018. 4. Prepare the balance sheet of Davis Computing, Inc., at October 31, 2018. Solution: Req. 1 Analysis of Transactions ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY Cash Bal. a) b) c) d) e) f) g) h) Bal. 2,400 3,500 6,500 (4,400) Accounts + Receivable + Supplies 3,450 + Equipment Accounts = payable + 11,700 7,900 (1,800) (550) (2,700) 4,650 5,500 3,500 4,150 6,500 (1,700) 4,700 6,450 Chapter 2: Transaction Analysis 1,200 Issued stock Service revenue (4,400) 1,200 1,200 1,700 Common Retained Type of Stockholders’ Stock + Earnings + Equity Transaction 11,700 4,700 9,000 4,700 (1,800) (550) (2,700) 10,300 Service revenue Rent expense Advertising expense Dividends Page 50 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Req. 2 Davis Computing, Inc. Income Statement Month Ended October 31, 2018 Revenues: Service revenue ($6,500 + $4,700) $ 11,200 Expenses: Rent expense Advertising expense Total expenses $ 1,800 550 Net income 2,350 $ 8,850 Davis Computing, Inc. Statement of Retained Earnings For the Month Ended October 31, 2018 Retained earnings, October 1, 2018 Add: Net income Subtotal Less: Dividends declared $ 4,150 8,850 13,000 (2,700) Retained earnings, October 31, 2018 $ 10,300 Req. 3 Req. 4 Davis Computing, Inc. Balance Sheet October 31, 2018 ASSETS Cash Accounts receivable Supplies Equipment $ 4,650 6,450 1,200 11,700 Total assets $ 24,000 Chapter 2: Transaction Analysis LIABILITIES Accounts payable $ 4,700 STOCKHOLDERS’ EQUITY Common stock 9,000 Retained earnings 10,300 Total stockholders’ equity 19,300 Total liabilities and stockholders’ equity $ 24,000 Page 51 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual P2-65B (30-40 min.) Requirements 1. Journalize the transactions of Davis Computing, Inc. Explanations are not required. 2. Prepare a T-account for each account. Insert in each T-account its September 30 balance as given (example: Cash $2,400). Then, post the October transactions to the T-accounts. 3. Compute the balance in each account. Solution: Req. 1 Journal ACCOUNT a. Cash Common Stock DEBIT 3,500 3,500 b. Cash Service Revenue 6,500 c. Accounts Payable Cash 4,400 d. Supplies Accounts Payable 1,200 e. Cash Accounts Receivable 1,700 f. Accounts Receivable Service Revenue 4,700 g. Rent Expense Advertising Expense Cash 1,800 550 h. Dividends Cash 2,700 Chapter 2: Transaction Analysis CREDIT 6,500 4,400 1,200 1,700 4,700 2,350 2,700 Page 52 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Reqs. 2 and 3 Cash 2,400 3,500 6,500 1,700 4,650 4,400 2,350 2,700 Accounts Receivable 3,450 1,700 4,700 6,450 Equipment 11,700 1,200 1,200 Accounts Payable 4,400 7,900 1,200 11,700 Supplies Common Stock 5,500 3,500 4,700 Retained Earnings Dividends 9,000 Service Revenue 4,150 2,700 6,500 4,700 4,150 2,700 11,200 Rent Expense 1,800 1,800 Advertising Expense 550 550 The balances of all the accounts Cash through Common Stock agree with the ending balances obtained in Problem 2-64B. Chapter 2: Transaction Analysis Page 53 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual P2-66B (50-60 min.) Requirements 1. Record each transaction in the journal. Be sure to record the date in each entry. Explanations are not required. 2. Post the transactions to the T-accounts, using transaction dates as posting references. Determine the ending balance in each account. 3. Prepare the trial balance of Augusta Services, Inc., at March 31 of the current year. 4. Lauren Augusta, the manager, asks you how much in total resources the business has to work with, how much it owes, and whether March was profitable (and by how much). Solution: Req. 1 Journal DATE ACCOUNT TITLES Mar. 2 Cash Common Stock DEBIT 68,000 68,000 3 Supplies Equipment Accounts Payable 900 12,000 4 Cash Service Revenue 5,600 7 Land Cash 32,000 11 Accounts Receivable Service Revenue 4,700 16 Accounts Payable Cash 12,000 17 Advertising Expense Cash 18 Cash Accounts Receivable 22 Utilities Expense Cash 12,900 5,600 32,000 4,700 12,000 540 540 2,600 2,600 370 370 29 Cash Service Revenue 3,000 31 Salary Expense Cash 2,500 31 Dividends Cash 2,200 Chapter 2: Transaction Analysis CREDIT 3,000 2,500 2,200 Page 54 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Req. 2 Cash 68,000 Mar. 7 5,600 16 2,600 17 3,000 22 31 31 Mar. 2 4 18 29 Bal. Mar. Bal. 32,000 12,000 540 370 2,500 2,200 Mar. 11 Bal. Accounts Receivable 4,700 Mar. 18 2,100 Mar. 3 Bal. Supplies 900 900 2,600 29,590 3 Mar. 16 Equipment 12,000 12,000 Accounts Payable 12,000 Mar. 3 Bal. 12,900 900 Land 32,000 32,000 Mar. 7 Bal. Mar. 31 Bal. Dividends 2,000 2,000 Common Stock Mar. 2 Bal. 68,000 68,000 Mar. 31 Bal. Salary Expense 2,500 2,500 Service Revenue Mar. 4 11 29 Bal. 5,600 4,700 3,000 13,300 Mar. 22 Bal. Utilities Expense 370 370 Mar. 17 Bal. Advertising Expense 540 540 Req. 3 Augusta Services, Inc. Trial Balance March 31, 20XX ACCOUNT Cash Accounts receivable Supplies Land Equipment Accounts payable Common stock Dividends Service revenue Salary expense Advertising expense Utilities expense Total $ DEBIT 29,590 2,100 900 32,000 12,000 CREDIT $900 68,000 2,200 13,300 $ 2,500 540 370 82,200 $ 82,200 Req. 4 Total resources (assets) = $76,590 ($29,590 + $2,100 + $900 + $32,000 + $12,000) Amount owed (total liabilities) = $900 Chapter 2: Transaction Analysis Page 55 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual P2-67B (40-50 min.) Requirements 1. Record each transaction directly in the T-accounts without using a journal. Use the letters to identify the transactions. Determine the ending balance in each account. 2. Prepare the trial balance of Shreve Music Corporation at May 31, 2018. Solution: Req. 1 (a) (b) (f) (j) Bal. Cash 46,000 (c) 60,000 (e) 3,710 (h) 1,200 (k) 56,010 (c) Bal. Music Equipment 47,000 47,000 Note Payable (b) Bal. 60,000 60,000 Common Stock (a) Bal. 152,000 152,000 Service Revenue (f) (g) Bal. (k) Bal. 47,000 5,700 300 1,900 Advertising Expense 800 800 (g) Bal. Accounts Receivable 12,900 (j) 11,700 (d) Bal. Supplies 530 530 (a) Bal. Building 106,000 106,000 (h) Accounts Payable 300 (d) (i) Bal. (e) Bal. Salary Expense 5,700 5,700 3,710 12,900 16,610 (k) Bal. Rent Expense 1,100 1,100 (i) Bal. Utilities Expense 700 700 1,200 530 700 930 Req. 2 Shreve Music Corporation Trial Balance May 31, 2018 ACCOUNT Cash Accounts receivable Supplies Building Music equipment Accounts payable Note payable Common stock Service revenue Salary expense Rent expense Advertising expense Utilities expense Total Chapter 2: Transaction Analysis DEBIT $56,010 11,700 530 106,000 47,000 CREDIT $930 60,000 152,000 16,610 5,700 1,100 800 700 $229,540 $229,540 Page 56 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-68 (20-40 min.) Requirement 1. Prepare a T-account to compute each amount, a through c. Solution: a. Total cash paid during December: Cash 14,500 99,000 Dec. payments 7,250 Nov. 30 Bal. Dec. receipts Dec. 31 Bal. X= 106,250 $14,500 + $99,000 − X = $ 7,250 X = $106,250 b. Cash collections from customers during December: Nov 30 Bal. Dec. sales on account Dec. 31 Bal. Accounts Receivable 29,000 49,000 Dec. collections X= 27,000 51,000 $29,000 + $49,000 − X = $27,000 X = $51,000 c. Cash paid on notes payable during December: X= Dec. note payments Notes Payable Nov. 30 Bal. 20,000 Dec. new borrowing Dec. 31 Bal. 15,500 28,000 23,500 $15,500 + $28,000 − X = $23,500 X = $20,000 Chapter 2: Transaction Analysis Page 57 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-69 (20-30 min.) Requirements 1. Prepare a trial balance for the ledger accounts of Jubilee, Inc., as of October 31, 2018. 2. Determine the out-of-balance amount. The error lies in the Accounts Receivable account. Add the out-of-balance amount to, or subtract it from, Accounts Receivable to determine the correct balance of Accounts Receivable. After correcting Accounts Receivable, advise the top management of Jubilee, Inc., on the company’s a. total assets. b. total liabilities. c. net income or net loss for October. Solution: Req. 1 Jubilee, Inc. Trial Balance October 31, 2018 Cash…………………………… 4,100 Accounts receivable……….. 7,300 Land…………………………… 31,700 Accounts payable………….. Note payable………………… Common stock……………… Retained earnings………….. Service revenue…………….. Salary expense……………… 2,500 Advertising expense………. 1,200 Totals…………………………. $ 46,800 $ 6,700 5,400 23,900 1,200 9,800 $ 47,000 Out of balance by $200 The correct balance of Accounts Receivable is $7,500* ($7,300 + $200). After this correction, total debits will be $47,000 ($46,800 + $200), the same as total credits. Req. 2 a. Total assets b. Total liabilities c. Net income = $43,300 ($4,100 + $7,500* + $31,700) = $12,100 ($6,700 + $5,400) = $ 6,100 ($9,800 − $2,500 − $1,200) Chapter 2: Transaction Analysis Page 58 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual E2-70 (10-15 min.) Requirements 1. For this situation, show everything that both Marion and Ashland will report on their November and December income statements and on their balance sheets at November 30 and December 31. 2. After showing what each company should report, briefly explain how the Marion and Ashland data relate to each other. Solution: Req. 1 Marion Co.: Income statement Employee medical exp. November December $ 48,000 $ -0- Balance sheet Cash Accounts payable Nov. 30 $ 51,000 48,000 Ashland Hospital: Income statement Service revenue November December $ 48,000 $ -0- Balance sheet Cash Accounts receivable Nov. 30 $ -048,000 Dec. 31 $ 18,000 * 15,000 ** Dec. 31 $ 33,000 15,000 ** Req. 2 Explanation: Marion’s $48,000 expense is Ashland’s revenue of $48,000. Marion’s $33,000 cash payment is Ashland’s cash receipt of $33,000. Marion’s $15,000 account payable is Ashland’s account receivable of $15,000. Marion’s $48,000 account payable is Ashland’s account receivable of $48,000. *$51,000 − $33,000 = $18,000 **$48,000 − $33,000 = $15,000 Chapter 2: Transaction Analysis Page 59 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual P2-71 (20 min.) Requirements 1. For each of the preceding entries, indicate the effect of the error on cash, total assets, and net income. The answer for the first transaction has been provided as an example. Date May 1 Effect on Cash Effect on Total Assets Understated $1,700 Overstated $1,700 Effect on Net Income Overstated $1,700 2. What is the correct balance of cash if the balance of cash on the books before correcting the preceding transactions was $6,300? 3. What is the correct amount of total assets if the total assets on the books before correcting the preceding transactions was $20,000? 4. What is the correct net income for May if the reported income before correcting the preceding transactions was $9,000? Solution: Req. 1 Date May 1 2 5 10 16 25 Effect on Cash Understated $1,700 Understated $3,600 Correct Correct Correct Correct Effect on Net Income Effect on Total Assets Overstated $1,700 Understated $3,600 Understated $3,400 Correct Correct Overstated $3,900 Overstated $1,700 Understated $3,600 Understated $3,400 Correct Overstated $5,600 Correct Req. 2 Correct cash balance, $11,600 ($6,300 + $1,700 + $3,600) Req. 3 Correct total assets, $21,400 ($20,000 + $1,700 – $3,600 + $3,400 – $3,900) Req. 4 Correct net income, $8,800 ($9,000 – $1,700 + $3,600 – $3,400 + $5,500) Chapter 2: Transaction Analysis Page 60 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Serial Case (20-30 min.) Requirements 1. What would be the journal entry for each of the listed transactions? 2. For each listed transaction, how would Cheesecake Factory’s assets, liabilities, and equity be impacted? Solution: Req. 1 Date Feb Journal ACCOUNT TITLES AND EXPLANATION 1 Cash Sales Revenue 2 Inventory Accounts Payable 8 Advertising Expense Cash 11 Salary Expense Cash 12 Cash Note Payable 15 Utilities Expense Cash 19 Accounts Payable Cash 20 Cash Unearned Gift Card Revenue 27 Rent Expense Cash DEBIT 15,000 CREDIT 15,000 11,000 11,000 2,000 2,000 75,000 75,000 80,000 80,000 1,500 1,500 11,000 11,000 1,000 1,000 3,500 3,500 Req. 2 Effect Date Feb. 1 Assets increase $15,000 Equity increases $15,000 2 Assets increase $11,000 Liabilities increase $11,000 8 Equity decreases $2,000 Assets decrease $2,000 11 Equity decreases $75,000 Assets decrease $75,000 12 Assets increase $80,000 Liabilities increase $80,000 15 Equity decreases $1,500 Assets decrease $1,500 19 Liabilities decrease $11,000 Assets decrease $11,000 20 Assets increase $1,000 Liabilities increase $1,000 27 Equity decreases $3,500 Assets decrease $3,500 Chapter 2: Transaction Analysis Page 61 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Decision Case 1 (40-50 min.) Requirements 1. Set up the following T-accounts: Cash, Accounts Receivable, Supplies, Furniture, Accounts Payable, Notes Payable, Common Stock, Service Revenue, Salary Expense, Advertising Expense, and Rent Expense. 2. Record the transactions directly in the accounts without using a journal. Key each transaction by letter. Determine the ending balance in each account. 3. Construct a trial balance for Blast Networks, Inc., at the current date. List expenses with the largest amount first, the next largest amount second, and so on. 4. Compute the amount of net income or net loss for this first month of operations. Why or why not would you recommend that Barlow continue in business? Solution: Reqs. 1 and 2 Bal. Cash 7,000 (c) 6,000 (d) 2,500 (f) 1,200 (f) (j) 9,400 (c) Supplies 1,300 (a) (b) (h) (i) (j) (d) 1,300 1,800 2,000 1,200 1,000 (g) Bal. (e) Bal. Accounts Payable 1,000 (e) Bal. 5,400 4,400 Common Stock (a) 7,000 1,200 Furniture 5,400 Notes Payable (b) 6,000 Service Revenue (g) (h) Bal. 8,000 2,500 10,500 (f) Salary Expense 2,000 (f) Rent Expense 1,200 Advertising Expense 1,800 Chapter 2: Transaction Analysis Accounts Receivable 8,000 (i) 6,800 Page 62 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Req. 3 Blast Networks, Inc. Trial Balance Current Date DEBIT ACCOUNT Cash $ 9,400 Accounts receivable 6,800 Supplies 1,300 Furniture 5,400 Accounts payable Notes payable Common stock Service revenue Salary expense 2,000 Advertising expense 1,800 Rent expense 1,200 Total $ 27,900 CREDIT $ 4,400 6,000 7,000 10,500 $ 27,900 Req. 4 (net income or loss for first month of operations) Revenues: Service revenue Expenses: Salary expense Advertising expense Rent expense Total expenses Net income for month $ 10,500 $ 2,000 1,800 1,200 $ 5,000 5,500 Recommendation: Barton’s criteria for remaining in operation was to earn net income of $5,000. His actual result was just over this goal. Yes, I would recommend that he stay in business. Chapter 2: Transaction Analysis Page 63 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Decision Case 2 (20-30 min.) Requirement 1. Joe Ferritto has asked whether he should expand the restaurant. His banker says Ferritto may be wise to expand if (a) net income for the first month reached $10,000 and (b) total assets are at least $35,000. It appears that the business has reached these milestones, but Ferritto doubts whether his financial statements tell the true story. He needs your help in making this decision. Prepare a corrected income statement and balance sheet. (Remember that Retained Earnings, which was omitted from the balance sheet, should equal net income for the first month; there were no dividends.) After preparing the statements, give Joe Ferritto your recommendation as to whether he should expand the restaurant. Solution: Romano Castle, Inc. Income Statement Month Ended December 31, 2018 Sales revenue Cost of sales (expense) Rent expense Advertising expense Total expenses $ 42,000 22,000 6,000 5,000 33,000 Net income $ 9,000 Romano Castle, Inc. Balance Sheet December 31, 2018 ASSETS $ Cash Food inventory Furniture Total assets $ LIABILITIES 12,000 Accounts payable $ 8,000 5,000 STOCKHOLDERS’ EQUITY 10,000 Common stock 10,000 Retained earnings 9,000 Total stockholders’ equity 19,000 Total liabilities and 27,000 stockholders’ equity $ 27,000 Recommendation: Do not expand this month. The business falls short of the goals for both net income and total assets. However, Romano Castle, Inc. appears to be profitable, and assets are building toward Ferritto’s goals. Maybe next month. Chapter 2: Transaction Analysis Page 64 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Ethical Issues 1 Requirements Use the ethical decision model in Chapter 1 to answer the following questions: 1. What is the ethical issue? 2. Who are the stakeholders? What are the possible consequences to each? 3. Analyze the alternatives from the following standpoints: (a) economic, (b) legal, and (c) ethical. 4. What would you do? How would you justify your decision? How would your decision make you feel afterward? Solution: 1. The ethical issue is whether these alternatives of financing the business are proper from an economic, legal, and ethical standpoint. The stakeholders are Shabby Fitch, the bank, potential new creditors, and the friend who may become a stockholder. Consequences to the creditors are the inability of 2. the company to pay interest and the loan. Consequences to the investors are the inability of the company to pay dividends and the possibility of loss of investment if the company goes bankrupt. 3. Option 1: Option 2: Cash Common Stock 200,000 Land Common Stock 200,000 Common Stock Land 200,000 200,000 200,000 200,000 Option 1 is economically sound, perfectly legal, and also ethical because the sale of the stock is a valid transaction between the business and a stockholder. The consequences of this decision are that Fitch obtains additional financing at a cost (he now shares ownership of the business with his friend). The friend gives up cash in exchange for an ownership interest in the business. The bank and future creditors obtain complete and truthful disclosure of the manner in which the business has been financed. Option 2 represents “window dressing” (making the company look like an entity that it is not). Although it might be legal in the strictest sense of the word (and it might not), this option does not faithfully represent economic reality. Thus, it is not in accordance with GAAP, which is a substitute for the legal criterion. This option is also unethical because the receipt of the land by the business is not a real transaction. The transfer of the land back to Fitch means that the business never actually has the land for its use. It violates the rights of the bank and future creditors to give them information that is inaccurate and that does not faithfully represent economic reality. 4. The best option to take is definitely Option 1. The decision maker can walk away from this transaction confident that he or she told the truth. Chapter 2: Transaction Analysis Page 65 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Ethical Issue 2 Part A. Requirements 1. What is the ethical issue? 2. Who are the stakeholders? What are the possible consequences to each? 3. Analyze the alternatives from the following standpoints: (a) economic, (b) legal, and (c) ethical. 4. What would you do? How would you justify your decision? How would it make you feel afterward? Solution: 1. The ethical issue is whether you should question your grade, which is higher than you expected. Your choices are (a) discuss the grade with the professor; and (b) do not discuss the grade with the professor. 2,3. Stakeholders are you, the professor, the other students in the class, and the university. The possible consequences to you of discussing the grade with the professor is that it may lead to the discovery that the professor made a mistake in calculating the grade, which may lead to a downward adjustment. While this could possibly have adverse economic consequences (i.e., perhaps loss of scholarship if the grade is substantially lowered), it is unlikely that a letter-grade drop in one course would have such an impact on grade point average as to cause loss of a scholarship. There is no legal consequence to reporting a grade that is too high. The ethical consequence is generally positive on all concerned, as it leads to clarification of the true grade. 4. Student opinions will vary on this part. Chapter 2: Transaction Analysis Page 66 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Part B. Requirements 1. What is the ethical issue? 2. Who are the stakeholders and what are the consequences to each? 3. Analyze the alternatives from the following standpoints: (a) economic, (b) legal, and (c) ethical. 4. What would you do? How would you justify your decision? How would it make you feel? Solution: 1. The ethical issue in this case is whether you should question your grade, which is now lower than you expected. Your choices are (a) discuss the grade with the professor; and (b) do not discuss the grade with the professor. 2,3. Like part a, the stakeholders are you, the professor, the other students in the class, and the university. The possible consequences to you of discussing the grade with the professor is that it may lead to the discovery that the professor made a mistake in calculating the grade, which may lead to an upward adjustment. This could have positive economic consequences (i.e., perhaps keeping a scholarship). Like part a, the ethical consequence of this action is generally positive on all concerned, as it leads to clarification of the true grade. 4. Most students would probably respond “take it to the professor.” But shouldn’t we be just as concerned about knowing the true grade either way? The author recommends discussing the grade with the professor one way or the other. Part C. How is this situation like a financial accounting misstatement? How is it different? Solution: Both course grades and financial statements report results that people use in order to make decisions that can carry both positive and negative consequences. In both situations, it is important that the user receive relevant information, and that the information faithfully represent facts as they actually occurred. Chapter 2: Transaction Analysis Page 67 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Apple, Inc. (20-30 min.) 1. Set up T-accounts for beginning balances of Cash ($0* balance); Accounts Receivable, net (debit balance of $16,849 million); Inventories (debit balance of $2,349 million); Property, Plant, and Equipment, net (debit balance of $22,471 million); Other Non-Current Assets (debit balance of $ 5,422 million); Accounts Payable (credit balance of $35,490 million); Net Sales ($0 balance); Cost of Sales ($0 balance); Operating Expenses ($0 balance); Other Income/(Expense), net ($0 balance); Provision for Income Taxes ($0 balance). 2. Journalize Apple’s transactions a-j. Explanations are not required. 3. Post to the T-accounts, and compute the balance for each account. Key postings by transaction letters a–j. 4. For each of the following accounts, compare your computed balance to Apple’s actual balance as shown on its 2016 Consolidated Statement of Operations or Consolidated Balance Sheet in Appendix A at the end of the book. . Your amounts should agree with the actual figures. a. Accounts Receivable, net b. Inventories c. Property, Plant, and Equipment, net (assume no other activity in these assets than given in the problem) d. Other Non-Current Assets e. Accounts Payable f. Net Sales g. Cost of Sales h. Operating Expenses i. Other Income/(Expense), net j. Provision for Income Taxes 5. Use the relevant accounts from requirement 4 to prepare a summary, single-step income statement for Apple for 2016. Compare the net income (loss) you computed to Apple’s actual net income (loss). The two amounts should be equal. Solution: Reqs. 1 and 3 b. g. c. Cash 0 e. 216,734 f. 1,348 h. i. j. 40,929 Inventories 2,349 d. 131,159 2,132 129,355 24,239 15,685 3,335 4,539 a. Accounts Receivable, net 16,849 b. 216,734 215,639 15,754 131,376 i. Other Non-Current Assets 5,422 3,335 8,757 j. d. Property and Equipment, net 22,471 4,539 27,010 e. Cost of Sales 131,376 131,376 Other Income (Expense), net g. 1,348 1,348 Chapter 2: Transaction Analysis Accounts Payable 129,355 c. Net Sales a. 35,490 131,159 37,294 215,639 215,639 f. Operating Expenses 24,239 24,239 h. Provision for Income Taxes 13,973 13,973 Page 68 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Req. 2 (Millions) 215,639 215,639 a. Accounts Receivable, net and other Net Sales (Revenue) b. Cash Accounts Receivable, net 216,374 Inventories Accounts Payable. 131,159 Cost of Sales Inventories 131,376 Accounts Payable Cash 129,355 Operating Expenses Cash 24,239 g. Cash 1,348 h. Other Income (Expense), net Provision for Income Taxes Cash 15,685 c. d. e. f. i. j. 216,374 131,159 131,376 129,355 24,239 1,348 15,685 Other Non-Current Assets Cash 3,335 Property, Plant, and Equipment, net Cash 4,539 3,335 4,539 Req. 4 All the selected account balances agree with Apple, Inc.’s actual figures on the income statement or the balance sheet. Req. 5 Revenue: Net sales Other Income (Expense), net Total revenue Expenses: Cost of sales Operating expenses Provision for income taxes Total expenses Net Income (Millions) $ 215,639 1,348 $ 216,987 $ 131,376 24,239 15,685 171,300 $ 45,687 The net income of $45,687 million equals the net income reported on Apple’s income statement. Chapter 2: Transaction Analysis Page 69 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Under Armour, Inc. (20-30 min.) 1. Which was larger for Under Armour, Inc. during 2016: (1) net revenues, or (2) cash collected from customers? Why? Show computation. Assume all revenues are on credit. 2. Investors are vitally interested in a company’s sales and profits and its trends of sales and profits over time. Consider Under Armour’s net revenues and net income (net loss) during the period from 2014 through 2016. Compute the percentage increase or decrease in net sales and also in net income (net loss) from 2014 to 2016. Which item grew faster during this two-year period—net sales or net income (net loss)? Can you offer a possible explanation for these changes? Solution: Req. 1 During fiscal 2016, Under Armour, Inc. had more net revenues than cash collections. This is determined by analyzing net receivables, as follows: Net receivables: (Thousands) Balance at the end of fiscal 2015 + Sales during fiscal 2016 (from consolidated statements of income) – Collections from customers during fiscal 2016 = Balance at the end of fiscal 2016 $ $ 433,638 4,825,335 (X) 622,685 Solving for X, collections were $4,636,288 ($433,638 + $4,825,335 – $622,685). Another way to express this relationship is that when accounts receivable increase during the year, revenues must exceed cash collections. If accounts receivable decrease during the year, cash collections must exceed revenues. Req. 2 Net revenues increased overall, however the percentage change is less (21.75%) in 2016, compared to the 2015 percentage change (28.50%). Net income increased overall, however the percentage change is less in 2016. (10.49%) compared to the 2015 percentage change (11.79%). Net revenues grew (increased) faster than net income for the period examined. More factors affect net income than net revenues, so it is more likely that net income would increase at a slower rate than net revenues. In the fiscal year 2016, the company’s two largest expenses increased substantially, and dragged down net income. Cost of Goods Sold increased 25.61% and Selling/General/Administrative Expenses increased 21.79%. Net revenues (thousands) $ change Percentage change Net income (thousands) $ change Percentage change Chapter 2: Transaction Analysis 2016 2015 2014 $ 4,825,335 $ 3,963,313 $ 3,084,370 862,022 878,943 21.75% 28.50% ($862,022 ÷ $878,943 ÷ $3,963,313) $3,084,370) $ 256,979 $ 232,573 $ 24,406 24,531 10.49% 11.79% ($24,406 ÷ ($24,531 ÷ $232,573) $208,042) 208,042 Page 70 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Group project 1 Requirements 1. Make a detailed list of 10 factors you must consider as you establish the business. 2. Describe 10 of the items your business must arrange to promote and stage the concert. 3. Identify the transactions that your business can undertake to organize, promote, and stage the concert. Journalize the transactions, and post to the relevant T-accounts. Set up the accounts you need for your business ledger. 4. Prepare the income statement, statement of retained earnings, and balance sheet immediately after the rock concert—that is, before you have had time to pay all the business bills and to collect all receivables. 5. Assume that you will continue to promote rock concerts if the venture is successful. If it is unsuccessful, you will terminate the business within three months after the concert. Discuss how to evaluate the success of your venture and how to decide whether to continue in business. Solution: Student responses will vary. Chapter 2: Transaction Analysis Page 71 of 72 FINANCIAL ACCOUNTING – Twelfth Edition Solutions Manual Group project 2 Requirements 1. Obtain a copy of the business’s chart of accounts. 2. Prepare the company’s financial statements for the most recent month, quarter, or year. You may use either made-up account balances or balances supplied by the owner. Solution: Student responses will vary. Chapter 2: Transaction Analysis Page 72 of 72