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西方财务会计课后题9-12答案


CHAPTER 9 1. To protect inventory from customer theft, retailers use two-way mirrors, cameras, security guards, locked display cabinets, and inventory tags that set off an alarm if the inventory is removed from the store. 2. Perpetual. The perpetual inventory system provides the more effective means of controlling inventories, since the inventory account is updated for each purchase and sale. This also assists managers in determining when to reorder inventory items. 3. The receiving report should be reconciled to the initial purchase order and the vendor's invoice before recording or paying for inventory purchases. This procedure will verify that the inventory received matches the type and quantity of inventory ordered. It also verifies that the vendor's invoice is charging the company for the actual quantity of inventory received at the agreed-upon price. 4. An employee should present a requisition form signed by an authorized manager before receiving inventory items from the company's warehouse. 5. A physical inventory should be taken periodically to test the accuracy of the perpetual records. 6. a. Gross profit for the year was overstated by $18,500. b. Merchandise inventory and owner’s equity were overstated by $18,500. 7. Fess Company. Since the merchandise was shipped FOB shipping point, title passed to Fess Company when it was shipped and should be reported in Fess Company's financial statements at December 31, the end of the fiscal year. 8. Manufacturer's 9. No, they are not techniques for determining physical quantities. The terms refer to cost flow assumptions, which affect the determination of the cost prices assigned to items in the inventory. 10. No, the term refers to the flow of costs rather than the items remaining in the inventory. The inventory cost is composed of the earliest acquisitions costs rather than the most recent acquisitions costs. 11. 12. 13. 14. a. Fifo c. Fifo; b. Lifo d. Lifo Fifo Lifo. In periods of rising prices, the use of lifo will result in the lowest net income and thus the lowest income tax expense. Yes. The inventory method may be changed for a valid reason. The effect of any change in method and the reason for the change should be fully disclosed in the financial statements for the period in which the change occurred. Net realizable value (estimated selling price less any direct cost of disposition, such as sales commissions). By a notation next to "merchandise inventory" on the balance sheet or in a footnote to the financial statements.
Inventories estimated by the gross profit method are useful in preparing interim statements and in establishing an estimate of the cost of merchandise destroyed by fire or other disasters.

15. 16.
17.

Ex. 9–1 Switching to a perpetual inventory system will strengthen Onsite Hardware’s internal controls over inventory, since the store managers will be able to keep track of how much of each item is on hand. This should minimize shortages of good-selling items and excess inventories of poor-selling items. On the other hand, switching to a perpetual inventory system will not eliminate the need to take a physical inventory count. A physical inventory must be taken to verify the accuracy of the inventory records in a perpetual inventory system. In addition, a physical inventory count is needed to detect shortages of inventory due to damage or theft. Ex. 9–2 Include in inventory: c, e, g, I;Exclude from inventory: a, b, d, f, h Ex. 9–3 a. Balance Sheet Merchandise inventory $1,950 understated Current assets $1,950 understated Total assets $1,950 understated Owner’s equity $1,950 understated
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b. Income Statement Cost of merchandise sold $1,950 overstated Gross profit $1,950 understated Net income $1,950 understated Ex. 9–4 When an error is discovered affecting the prior period, it should be corrected. In this case, the merchandise inventory account should be debited and the owner’s capital account credited for $12,800. Failure to correct the error for 2005 and purposely misstating the inventory and the cost of merchandise sold in 2006 would cause the balance sheets and the income statements for the two years to not be comparable Ex. 9–5 Portable CD Players Purchases Cost of Merchandise Sold Inventory Unit Total Unit Total Unit Total Date Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost April1 35 50 1,750 5 26 50 1,300 9 50 450 11 15 53 795 9 50 450 15 53 795 21 9 50 450 12 53 636 3 53 159 28 4 53 212 8 53 424 30 7 54 378 8 53 424 7 54 378 Total cost of merchandise sold ...................................................................................... 2,121 Inventory, April 30: $802 ($424 + $378)Ex. 9–6 Cell Phones Purchases Cost of Merchandise Sold Inventory Unit Total Unit Total Unit Total Date Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost Mar.1 25 90 2,250 5 20 94 1,880 25 90 2,250 20 94 1,880 9 18 94 1,692 25 90 2,250 2 94 188 13 2 94 188 7 90 630 18 90 1,620 21 15 95 1,425 7 90 630 15 95 1,425 31 8 95 760 7 90 630 7 95 665 Total cost of merchandise sold ...................................................................................... 4,260 Inventory, March 31: $1,295 ($630 + $665) Ex. 9–7 a. $700 ($50 × 14 units);b. Ex. 9–8 a. c. $663 [($45 × 5 units) + ($47 × 4 units) + ($50 × 5 units)]

$360 (8 units at $33 plus 3 units at $32);b.$318 (6 units at $28 plus 5 units at $30) $341 (11 units at $31; $1,240 ÷40 units = $31) Cost of merchandise available for sale: 6 units at $28 ................................................................................. $ 168 12 units at $30 ................................................................................. 360 14 units at $32 ................................................................................. 448

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8 units at $33 ................................................................................. 40 units (at average cost of $31) ......................................................

264 $1,240

Ex. 9–9 1. a. LIFO inventory < (less than) FIFO inventory b. LIFO cost of goods sold > (greater than) FIFO cost of goods sold c. LIFO net income < (less than) FIFO net income d. LIFO income tax < (less than) FIFO income tax 2. Under the lifo conformity rule a company selecting lifo for tax purposes must also use lifo for financial reporting purposes. Thus, in periods of rising prices the reported net income would be lower than would be the case under fifo. However, the lower reported income would also be shown on the corporation’s tax return; thus, there is a tax advantage from using lifo. Firms electing to use lifo believe the tax advantage from using lifo outweighs any negative impact from reporting a lower earnings number to shareholders. Lifo is supported because the tax impact is a real cash flow benefit, while a lower lifo earnings number (compared to fifo) is merely the result of a reporting assumption. Ex. 9–10 Unit Unit Total Inventory Cost Market Lower Commodity QuantityPrice Price Cost Marketof C or M M76 8 $150 $160$1,200 $1,280 $1,200 T53 20 75 70 1,500 1,400 1,400 A19 10 275 2602,750 2,600 2,600 J81 15 50 40 750 600 600 K10 25 101 105 2,525 2,625 2,525 Total $8,725 $8,505$8,325 Ex. 9–11 The merchandise inventory would appear in the Current Assets section, as follows: Merchandise inventory—at lower of cost, fifo, or market ............................................. $8,325 Alternatively, the details of the method of determining cost and the method of valuation could be presented in a note. Ex. 9–12 Cost Retail Merchandise inventory, June 1 $160,000 $ 180,000 Purchases in June (net) 680,000 1,020,000 Merchandise available for sale $840,000 $1,200,000 Ratio of cost to retail price:

$ 840,000 ? 70% $1,200,000
Sales for June (net) 875,000 Merchandise inventory, June 30, at retail price 325,000 Merchandise inventory, June 30, at estimated cost ($325,000 × 70%) Ex. 9–13 a. Merchandise inventory, Jan. 1 Purchases (net), Jan. 1–May 17 750,000 Merchandise available for sale Sales (net), Jan. 1–May 17 Less estimated gross profit ($1,250,000 × 35%) Estimated cost of merchandise sold 812,500

$

$ $180,000

227,500

$930,000 $1,250,000 437,500

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Estimated merchandise inventory, May 17 $117,500 The gross profit method is useful for estimating inventories for monthly or quarterly financial statements. It is also useful in estimating the cost of merchandise destroyed by fire or other disasters. Ex. 9–14 a. Apple: 147.8 {$4,139,000,000 ÷[($45,000,000 + $11,000,000) ÷2]} American Greetings: 3.1 {$881,771,000 ÷[($278,807,000 + $290,804,000) ÷2]} b. Lower. Although American Greetings’ business is seasonal in nature, with most of its revenue generated during the major holidays, much of its nonholiday inventory may turn over very slowly. Apple, on the other hand, turns its inventory over very fast because it maintains a low inventory, which allows it to respond quickly to customer needs. Additionally, Apple’s computer products can quickly become obsolete, so it cannot risk building large inventories. Ex. 9–15 b. a.

Inventory, end of period Cost of goods sold/365 $2,973 $4,175 Albertson’s, = 43 days;Kroger, = 40 days $25,242/36 5 $37,810/36 5 Cost of goods sold $2,558 Safeway, = 42 days;Inventory turnover = Average inventory $22,303/36 5
Number of days’ sales in inventory =

Albertson’s,

$25,242 $37,810 = 8.2;Kroger, = 9.1 ($2,973 ? $3,196)/2 ($4,175 ? $4,178)/2

Safeway, b.

$22,303 = 8.9 ($2,558 ? $2,437)/2

The number of days’ sale in inventory and inventory turnover ratios are consistent. Albertson’s has slightly more inventory than does Safeway. Kroger has relatively less inventory (2–3 days) than does Albertson’s and Safeway.

CHAPTER 10 1. A. TANGIBLE;B.CAPABLE OF REPEATED USE IN THE OPERATIONS OF THE BUSINESS e. Long-lived
2. a. Property, plant, and equipment; b. Current assets (merchandise inventory) 3. Real estate acquired as speculation should be listed in the balance sheet under the caption "Investments," below the Current Assets section. 4. $375,000 5. Ordinarily not; if the book values closely approximate the market values of fixed assets, it is coincidental. 6. a. No, it does not provide a special cash fund for the replacement of assets. Unlike most expenses, however, depreciation expense does not require an equivalent outlay of cash in the period to which the expense is allocated. b. Depreciation is the cost of fixed assets periodically charged to revenue over their expected useful lives. 7. 12 years 8. a. 9. a. No;b. No An accelerated depreciation method is most appropriate for situations in which the decline in productivity or earning power of the asset is proportionately greater in the early years of use than in later years, and the repairs tend to increase with the age of the asset. b. An accelerated depreciation method re-duces income tax payable to the IRS in the earlier periods of an asset’s life. Thus, cash is freed up in the earlier periods to be used for other business purposes.

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c. 10.

11.

12. 13.

14.

MACRS was enacted by the Tax Reform Act of 1986 and provides for depreciation for fixed assets acquired after 1986. No. Accounting Principles Board Opinion No. 20, Accounting Changes, is quite specific about the treatment of changes in depreciableassets’ estimated service lives. Such changes should be reflected in the amounts for depreciation expense in the current and future periods. The amounts recorded for depreciation expense in the past are not affected. Capital expenditures are recorded as assets and include the cost of acquiring fixed assets, adding a component, or replacing a component of fixed assets. Revenue expenditures are recorded as expenses and are costs that benefit only the current period and are incurred for normal maintenance and repairs of fixed assets. Capital expenditure (component replacement) a. No, the accumulated depreciation for an asset cannot exceed the cost of the asset. To do so would create a negative book value, which is meaningless. b. The cost and accumulated depreciation should be removed from the accounts when the asset is no longer useful and is removed from service. Presumably, the asset will then be sold, traded in, or discarded. a. All purchases of fixed assets should be approved by an appropriate level of management. In addition, competitive bids should be solicited to ensure that the company is acquiring the assets at the lowest possible price. b. A physical count of fixed assets will verify the accuracy of accounting records. It will also detect missing fixed assets that should be removed from the records and obsolete or idle fixed assets that should be disposed of. Over the years of its expected usefulness;b. Expense as incurred
c. Goodwill should not be amortized, but written down when impaired.

15. a.

Ex. 10–1 a. No. The $859,600 represents the original cost of the equipment. Its replacement cost, which may be more or less than $859,600, is not reported in the financial statements. b. No. The $317,500 is the accumulation of the past depreciation charges on the equipment. The recognition of depreciation expense has no relationship to the cash account or accumulation of cash funds. Ex. 10–2 $18,000 [($312,000 – $42,000) ÷15] Ex. 10–3

$ 345 ,000 ? $18,000 = $4.36 depreciation per hour 75 ,000 hours

1,250 hours at $4.36 = $5,450 depreciation for July Ex. 10–4 a.

Truck No. Rate per Mile Miles Operated 1 20.0 cents 40,000 $ 8,000 2 21.012,000 2,100* 3 17.5 36,000 6,300 4 20.021,000 4,200 Total $20,600 * Mileage depreciation of $2,520 (21 cents × 12,000) is limited to $2,100, which reduces the book value of the truck to $6,600, its residual value. b. Depreciation Expense—Trucks ................................................................. 20,600 Accumulated Depreciation—Trucks ............................................ 20,600 Ex. 10–5 First Year Second Year a. 8 1/3% of $84,000 = $7,000 8 1/3% of $84,000 = $7,000 b. 16 2/3% of $84,000 = $14,000 16 2/3% of $70,000* = $11,667 *$84,000 – $14,000 Ex. 10–6 a. Year 1: 9/12 × [($54,000 – $10,800) ÷12] = $2,700 Year 2: ($54,000 – $10,800) ÷12 = $3,600

Credit to Accumulated Depreciation

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b.

Year 1: 9/12 × 16 2/3% of $54,000 = $6,750 Year 2: 16 2/3% of ($54,000 – $6,750) = $7,875 Ex. 10–7 a. Current Preceding Year Year Land and buildings $ 426,322,000 $ 418,928,000 Machinery and equipment 1,051,861,000 1,038,323,000 Total cost $1,478,183,000 $1,457,251,000 Accumulated depreciation 633,178,000 582,941,000 Book value $ 845,005,000 $ 874,310,000 A comparison of the book values of the current and preceding years indicates that they decreased. A comparison of the total cost and accumulated depreciation reveals that Interstate Bakeries purchased $20,932,000 ($1,478,183,000 – $1,457,251,000) of additional fixed assets, which was offset by the additional depreciation expense of $50,237,000 ($633,178,000 – $582,941,000) taken during the current year. b. The book value of fixed assets should normally increase during the year. Although additional depreciation expense will reduce the book value, most companies invest in new assets in an amount that is at least equal to the depreciation expense. However, during periods of economic downturn, companies purchase fewer fixed assets, and the book value of their fixed assets may decline. This is apparently the case with Interstate Bakeries. Ex. 10–8 Capital expenditures: New component: 4, 6, 7 Replacement component: 1, 2, 9, 10 Revenue expenditures: 3, 5, 8 Ex. 10–9 a. Mar. 15 Removal Expense ............................................................... 1,500 Cash.................................................................................... 1,500 b. Mar. 15 Depreciation Expense ........................................................ 6,000 Accumulated Depreciation ................................................. 6,000 15Accumulated Depreciation ................................................................... 18,000 Carpet ................................................................................. 18,000 30 Carpet 45,000 Cash.................................................................................... 45,000 c. Dec. 31 Depreciation Expense ........................................................ 2,250* Accumulated Depreciation ................................................. 2,250 *($45,000 ÷15 years) × 9/12 Ex. 10–10 a. Cost of equipment ................................................................................................... $240,000 Accumulated depreciation at December 31, 2006 (4 years at $22,500* per year) ................................................................... 90,000 Book value at December 31, 2006 .......................................................................... $150,000 *($240,000 – $15,000) ÷10 = $22,500 b. 1. Depreciation Expense—Equipment .................................................... 11,250 Accumulated Depreciation—Equipment .................................... 11,250 2. Cash .......................................................................................135,000 Accumulated Depreciation—Equipment...................................... 101,250 Loss on Disposal of Fixed Assets ................................................. 3,750 Equipment................................................................................... 240,000 Ex. 10–11 a. 2003 depreciation expense: $15,000 [($96,000 – $6,000) ÷6] 2004 depreciation expense: $15,000 c. 2005 depreciation expense: $15,000;b. $51,000 ($96,000 – $45,000) Cash ...........................................................................................38,000
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Accumulated Depreciation—Equipment ................................................... 45,000 Loss on Disposal of Fixed Assets .............................................................. 13,000 Equipment .................................................................................... 96,000 d. Cash ...........................................................................................53,000 Accumulated Depreciation—Equipment ................................................... 45,000 Equipment .................................................................................... 96,000 Gain on Disposal of Fixed Assets ................................................ 2,000 Ex. 10–12 a. $205,000 ($315,000 – $110,000) b. $303,750 [$315,000 – ($110,000 – $98,750)], or $303,750 ($205,000 + $98,750) Ex. 10–13 a. $205,000 ($315,000 – $110,000) b. $315,000. The new printing press’s cost cannot exceed $315,000 on a similar exchange. The $18,500 loss on disposal ($128,500 book value – $110,000 trade-in allowance) must be recognized. Ex. 10–14 a. Depreciation Expense—Equipment ........................................................... 8,000 Accumulated Depreciation—Equipment...................................... 8,000 b. Accumulated Depreciation—Equipment ................................................... 152,000 Equipment .................................................................................................. 385,000 Loss on Disposal of Fixed Assets .............................................................. 28,000 Equipment .................................................................................... 280,000 Cash .............................................................................................. 35,000 Notes Payable ............................................................................... 250,000* *$385,000 – $100,000 – $35,000 Ex. 10–15 a. $55,000. The new truck’s cost cannot exceed $55,000 in a similar exchange. b. $54,000 ($55,000 – $1,000) or $54,000 ($30,000 + $24,000) Ex. 10–16 a. $80,000,000 ÷100,000,000 tons = $0.80 depletion per ton 15,500,000 × $0.80 = $12,400,000 depletion expense b. Depletion Expense ..................................................................................... 12,400,000 Accumulated Depletion ................................................................ 12,400,000 Ex. 10–17 a. ($472,500 ÷15) + ($75,000 ÷12) = $37,750 total patent expense b. Amortization Expense—Patents ................................................................ 37,750 Patents .......................................................................................... 37,750 Ex. 10–18 a. Current year: Ratio of fixed assets to long-term liabilities (debt) = $181,758,000/$14,610,000 = 12.4 Preceding year: Ratio of fixed assets to long-term liabilities (debt) = $174,659,000/$12,150,000 = 14.4 b. The ratio of fixed assets to long-term liabilities has declined from 14.4 in the preceding year to 12.4 in the current year. This indicates a decrease in the margin of safety for long-term creditors. However, the ratio of fixed assets to long-term liabilities is large enough that Intuit will be able to borrow with relative ease. Appendix Ex. 10–19 First year: 12/78 × $84,000 = $12,923;Second year: 11/78 × $84,000 = $11,846 Appendix Ex. 10–20 First year: 9/12 × 12/78 × $43,200 = $4,985 Second year: (3/12 × 12/78 × $43,200) + (9/12 × 11/78 × $43,200) = $6,231

CHAPTER 11
1. TO MATCH REVENUES AND EXPENSES PROPERLY, THE LIABILITY TO COVER

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PRODUCT WARRANTIES SHOULD BE RECORDED IN THE PERIOD DURING WHICH THE SALE OF THE PROD UCT IS MADE. 2. When the defective product is repaired, the repair costs would be recorded by debiting Product Warranty Payable and crediting Cash, Supplies, or another appropriate account. 3. Yes. Since the $5,000 is payable within one year, Company A should present it as a current liability at September 30. 4. a. Income or withholding taxes, social security, and Medicare b. Employees Income Tax Payable, Social Security Tax Payable, and Medicare Tax Payable 5. There is a ceiling on (a) the social security portion of the FICA tax and (d) federal unemployment compensation tax. 6. The deductions from employee earnings are for amounts owed (liabilities) to others for such items as federal taxes, state and local income taxes, and contributions to pension plans. 7. Yes. Unemployment compensation taxes are paid by the employer on the first $7,000 of annual earnings for each employee. Therefore, hiring two employees, each earning $12,500 per year, would require the payment of twice the unemployment tax than if only one employee, earning $25,000, was hired.
8. 1. c; 2. c; 3. a; 4. b; 5. b

9. The use of special payroll checks relieves the treasurer or other executives of the task of signing a large number of regular checks each payday. Another advantage of this system is that reconciling the regular bank statement is simplified. The paid payroll checks are returned by the bank separately rom regular checks and are accompanied by a statement of the special bank account. Any balance shown on the bank's statement will correspond to the sum of the payroll checks outstanding because the amount of each deposit is exactly the same as the total amount of checks drawn. 10. a. Input data that remain relatively unchanged from period to period (and therefore do not need to be reintroduced into the system frequently) are called constants. b. Input data that differ from period to period are called variables. 11. a. If employees’ attendance records are kept and their preparation supervised in such a manner as to prevent errors and abuses, then one can be assured that wages paid are based on hours actually worked. The use of ―In‖ and ―Out‖ cards, whereby employees indicate by punching a time clock their time of arrival and departure, is especially useful. Employee identification cards or badges can be very helpful in giving additional assurance. b. The requirement that the addition of names on the payroll be supported by written authorizations from the Personnel Department can help ensure that payroll checks are not being issued to fictitious persons. Endorsements on payroll checks can be compared with other samples of employees' signatures. 12. If the vacation payment is probable and can be reasonably estimated, the vacation pay expense should be recorded during the period in which the vacation privilege is earned.
13. Employee life expectancies, expected employee retirement dates, employee turnover, employee compensation levels, and invest-ment income on pension contributions are factors that influence the future pension obligation of an employer.

Ex. 11–1 Current liabilities: Federal income taxes payable ............................................................................................. Advances on magazine subscriptions ................................................................................. Total current liabilities ........................................................................................................
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$ 42,0001 155,2502 $197,250

$120,000 × 35%; 26,900 × $30 × 9/12 = $155,250 The nine months of unfilled subscriptions are a current liability because Web World received payment prior to providing the magazines. Ex. 11–2 a. 1. Merchandise Inventory........................................................................ 196,000 Interest Expense ........................................................................... 4,0001 Notes Payable ............................................................................. 200,000 2. Notes Payable ...................................................................................... 200,000 Cash ............................................................................................ 200,000

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b. 1. Notes Receivable................................................................................. 200,000 Sales ............................................................................................ 196,000 Interest Revenue ......................................................................... 4,000 2. Cash .......................................................................................200,000 Notes Receivable ........................................................................ 200,000 1 $200,000 × 8% × 90/360 Ex. 11–3 a. $90,000 × 6% × 90/360 = $1,350 for each alternative. b. (1) $90,000 simple-interest note: $90,000 proceeds (2) $90,000 discounted note: $90,000 – $1,350 interest = $88,650 proceeds c. Alternative (1) is more favorable to the borrower. This can be verified by comparing the effective interest rates for each loan as follows: Situation (1): 6% effective interest rate ($1,350 × 360/90) ÷$90,000 = 6% Situation (2): 6.09% effective interest rate ($1,350 × 360/90) ÷$88,650 = 6.09% The effective interest rate is higher for the second loan because the creditor lent only $88,650 in return for $1,350 interest over 90 days. In the simple-interest loan, the creditor must lend $90,000 for 90 days to earn the same $1,350 interest. Ex. 11–4 a. Accounts Payable ....................................................................................... 9,000 Notes Payable ............................................................................... 9,000 b. Notes Payable............................................................................................. 9,000 Interest Expense ...................................................................................75* Cash .............................................................................................. 9,075 *$9,000 × 5% × 60/360 = $75 Ex. 11–5 a. June 30 Building.............................................................................. 730,000 Land ................................................................................... 250,000 Note Payable ............................................................... 800,000 Cash ............................................................................. 180,000 b. Dec. 31 Note Payable ...................................................................... 40,000 Interest Expense ($800,000 × 8% × 1/2)............................ 32,000 Cash ............................................................................. 72,000 c. June 30 Note Payable ...................................................................... 40,000 Interest Expense ($760,000 × 8% × 1/2)............................ 30,400 Cash ............................................................................. 70,400 Ex. 11–6 a. $4,650,000, or the amount disclosed as the current portion of long-term debt. b. By the end of 2002, the bank credit line was reduced to $299,000; thus, the bank credit line was nearly paid off in 2002. The difference between the $34,783,000 that would be due in the coming period and the $4,650,000 disclosed as the current portion must have been funded (i.e., replaced) by longterm notes payable. Indeed, of the $50 million increase in the term loans ($95 million – $45 million), around $35 million must have been used to eliminate the bank credit line. c. The current liabilities declined by $4,351,000 ($4,650,000 – $299,000). Ex. 11–7 a. Product Warranty Expense (2% × $750,000) ............................................ 15,000 Product Warranty Payable ............................................................ 15,000 b. Product Warranty Payable ......................................................................... 960 Wages Payable ............................................................................. 570 Supplies ............................................................................... 390 Ex. 11–8 a. The warranty liability represents estimated outstanding automobile warranty claims. Of these claims, $14,166 million is estimated to be due during 2003, while the remainder ($9,125 million) is expected to be paid after 2003. The distinction between short-term and long-term liabilities is important to

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creditors in order to accurately evaluate the near-term cash demands on the business, relative to the quick assets and other longer-term demands. b. Product Warranty Expense ................................................... 14,355,000,000 Product Warranty Payable ....................................... 14,355,000,000 $20,410 + X – $12,000 = $23,291 X = $23,291 – $20,410 + $12,000 X = $14,881 million c. The liability might have grown for a number of possible reasons. Often the estimated warranty liability will increase if the underlying product sales are also increasing, as was the case for Ford during this time. Alternatively, Ford’s actual claims experience might be declining. If the percent of sales estimate remained unchanged, this would cause the liability to potentially increase. This partially explains the increase, since only $12,000 million in claims were assumed to be paid, while the current estimated claims payable was $13,605 million at December 31, 2001. Lastly, Ford could be increasing its estimated warranty claims expense as a percent of current period sales. Ex. 11–9 a. Damage Awards and Fines ........................................................................ 670,000 EPA Fines Payable ....................................................................... 390,000 Litigation Claims Payable ............................................................ 280,000 Note to Instructors: The ―damage awards and fines‖ would be disclosed on the income statement under ―other expenses.‖ b. The company experienced a hazardous materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $390,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $280,000 out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been accrued. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident. Ex. 11–10 a. Dec. 31 Pension Expense ................................................................ 315,000 Unfunded Pension Liability......................................... 315,000 b. Jan. 15 Unfunded Pension Liability ............................................... 315,000 Cash ............................................................................. 315,000 Ex. 11–11 a.

Quick Assets Current Liabilitie s $530,000 ? $350,000 December 31, 2005: = 1.10 $800,000 $356,000 ? $400,000 December 31, 2006: = 0.84 $900,000
Quick Ratio =

b.

The quick ratio has been decreased between the two balance sheet dates. The major reason is a significant increase in inventory. Cash also declined, possibly to purchase the inventory. As a result, quick assets actually declined, while the current liabilities increased. While the quick ratio for December 31, 2006, is below 1.0, it is not yet at an alarming level. However, the trend suggests that the firm’s current asset (working capital) management should be watched closely. Ex. 11–12 a. Apple Computer Inc. Dell Computer Corp. Quick Ratio 2.96 0.81 Quick Ratio =

Quick Assets Current Liabilitie s

Apple Computer Inc.:
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Quick ratio =

$5,388 ? $45 ? $441 = 2.96 $1,658 $8,924 ? $306 ? $1,394 = 0.81 $8,933

Dell Computer Corp.: Quick ratio = b.

1.

2.

3. 4.

5.

6. 7.

It is clear that Apple Computer’s short-term liquidity is stronger than Dell’s. Apple’s quick ratio is 215% higher. Apple has a much stronger relative cash and short-term investment position than does Dell. Apple’s cash and short-term investments are 80% of total current assets (261% of current liabilities), compared to Dell’s 52% of total current assets (52% of current liabilities). In addition, Dell’s relative accounts payable position is larger than Apple’s, indicating the possibility that Dell has longer supplier payment terms than does Apple. A quick ratio of 2.96 for Apple suggests ample flexibility to make strategic investments with its excess cash, while a quick ratio of 0.81 for Dell indicates an efficient but tight quick asset management policy. CHAPTER 12 Each stockholder’s liability for corporation debts is limited to the amount invested in the corporation. A corporation is responsible for its own obligations, and therefore, its creditors may not look beyond the assets of the corporation for satisfaction of their claims. The large investments needed by large businesses are usually obtainable only through the pooling of the resources of many people. The corporation also has the advantages over proprietorships and partnerships of transferable shares of ownership, and thus the continuity of existence, and limited liability of its owners (stockholders). No. Common stock with a higher par is not necessarily a better investment than com-mon stock with a lower par because par is an amount assigned to the shares. The broker is not correct. Corporations are not legally liable to pay dividends until the dividends are declared. If the company that issued the cumulative preferred stock has operating losses, it could omit dividends, first, on its common stock and, later, on its preferred stock. Factors influencing the market price of a corporation's stock include the following: a. Financial condition, earnings record, and dividend record of the corporation. b. Its potential earning power. c. General business and economic conditions and prospects. No. Premium on stock is additional paid-in capital. a. Unissued stock has never been issued, but treasury stock has been issued as fully paid and has subsequently been reacquired.
b. As a deduction from the total of other stockholders' equity accounts.8. effect on revenue or expense. a. It has no

b. It reduces stockholders' equity by $420,000.
9. a. It has no effect on revenue.; b. It increases stockholders' equity by $500,000.

10.

The primary purpose of a stock split is to bring about a reduction in the market price per share and thus to encourage more in-vestors to buy the company’s shares. 11. a. Sufficient retained earnings, sufficient cash, and formal action by the board of directors. b. July 1, declaration date; August 15, record date; and September 1, payment date. 12. The company may not have had enough cash on hand to pay a dividend on the com-mon stock, or resources may be needed for plant expansion, replacement of facilities, payment of liabilities, etc. 13. a. No change.; b. Total equity is the same. 14. a. Current liability; b. Stockholders' equity 15. The primary advantage of the combined income and retained earnings statement is that it emphasizes net income as the connecting link between the income statement and the retained earnings portion of stockholders’ equity. 16. The three classifications of appropriations are legal, contractual, and discretionary. Appropriations are normally reported in the notes to the financial statements.
17. Such prior period adjustments should be reported as an adjustment to the beginning balance of retained earnings.

Ex. 12–1

11

1st Year a.

2nd Year

3rd Year

4th Year

5th Year

Total dividend declared $ — $ 40,000 $80,000 $ Preferred dividend (current) $ 25,000 $ 25,000 $ 25,000 $ 25,000 Preferred dividend in arrears (from year 1) 15,000 10,000 b. Total preferred dividends $ 40,000 $35,000 $ Preferred shares outstanding ÷ 25,000 ÷ 25,000 ÷ 25,000 Preferred dividend per share $ 1.60 $ 1.40 $ 1.00 Dividend for common shares (a. – b.) $ — $ 45,000 $ 95,000 Common shares outstanding ÷ 250,000 ÷ 250,000 Common dividend per share $ 0.18$ 0.38 Ex. 12–2 a. July 7 Cash.................................................................................... Common Stock ..................................................... Paid-In Capital in Excess of Par— Common Stock ............................................................ Oct. 20 Cash.................................................................................... Preferred Stock ............................................................ Paid-In Capital in Excess of Par— Preferred Stock ............................................................ b. $3,400,000 ($1,600,000 + $1,800,000) Ex. 12–3 Aug. 29 Land ........................................................................280,000 Common Stock .................................................................... Paid-In Capital in Excess of Par ................................. Ex. 12–4 a. Cash ...........................................................................................50,000 Common Stock ............................................................................. b. Organizational Expenses ..................................................................... Common Stock ............................................................................. Cash ...........................................................................................12,000 Common Stock ............................................................................. c. Land .........................................................................................60,000 Building .......................................................................................200,000 Interest Payable* .......................................................................... Mortgage Note Payable ................................................................ Common Stock ............................................................................. *An acceptable alternative would be to credit Interest Expense. Ex. 12–5 Buildings ........................................................................................................... Land .................................................................................................................. Preferred Stock .......................................................................................... Paid-In Capital in Excess of Par— Preferred Stock .......................................................................................... Cash .................................................................................................................. Common Stock........................................................................................... Paid-In Capital in Excess of Par— Common Stock ................................................................................ Ex. 12–6 Jan. 5 Cash .....................................................................1,000,000 Common Stock .................................................................... 18 Organizational Expenses ............................................................

120,000 $140,000 $25,000 — — 25,000 $25,000 ÷ 25,000 $1.00 $115,000 ÷ 250,000 $0.46 1,600,000 1,000,000 600,000 1,800,000 1,500,000 300,000

150,000 130,000

50,000 2,000 2,000 12,000

900 180,000 79,100

80,000 45,000 100,000 25,000 475,000 400,000 75,000

1,000,000 10,000
12

Feb.

13

Apr.

1

Common Stock .................................................................... Land ..........................................................................50,000 Buildings..................................................................................... Equipment................................................................................... Common Stock .................................................................... Paid-In Capital in Excess of Par— Common Stock .................................................................... Cash ........................................................................182,000 Preferred Stock .................................................................... Paid-In Capital in Excess of Par— Preferred Stock ....................................................................

10,000 280,000 120,000 425,000 25,000 175,000 7,000

Ex. 12–7 a. June

1 Treasury Stock ................................................................... 150,000 Cash ............................................................................. 150,000 July 8 Cash.................................................................................... 97,500 Treasury Stock............................................................. 90,000 Paid-In Capital from Sale of Treasury Stock............................................................. 7,500 Nov. 2 Cash.................................................................................... 58,000 Paid-In Capital from Sale of Treasury Stock ................................................................... 2,000 Treasury Stock............................................................. 60,000 b. $5,500 credit c. Crystal Springs may have purchased the stock to support the market price of the stock, to provide shares for resale to employees, or for reissuance to employees as a bonus according to stock purchase agreements. Ex. 12–8 a. 125,000 shares (25,000 × 5);b. Ex. 12–9 $33 per share ($165 ÷5) Stockholders’ Equity – 0 0 0

Assets (1) (2) Declaring a cash dividend 0 Paying the cash dividend declared in (1) – (3) Authorizing and issuing stock certificates in a stock split 0 (4) Declaring a stock dividend 0 (5) Issuing stock certificates for the stock dividend declared in (4) 0 Ex. 12–10 Feb. 13 Cash Dividends ........................................................................... Cash Dividends Payable ...................................................... Mar. 15 No entry required. Apr. 10 Cash Dividends Payable ............................................................. Cash .....................................................................................

Liabilities + – 0 0

0 120,000 120,000

0

120,000 120,000

Ex. 12–11 Feb. 9 No entry required. The stockholders ledger would be revised to record the increased number of shares held by each stockholder. Apr. 10 Cash Dividends ........................................................................... Cash Dividends Payable ...................................................... * [(12,000 shares × $1) + (900,000 shares 57,000* 57,000

13

May Oct.

1 12

12

Nov.

14 14

× $0.05)] Cash Dividends Payable ............................................................. Cash ..................................................................................... Cash Dividends ........................................................................... Cash Dividends Payable ...................................................... * [(12,000 shares × $1) + (900,000 shares × $0.15)] Stock Dividends.......................................................................... Stock Dividends Distributable ............................................. Paid-In Capital in Excess of Par—Common Stock ........................................................... ** (900,000 shares × 1% × $48) Cash Dividends Payable ............................................................. Cash ..................................................................................... Stock Dividends Distributable .................................................... Common Stock ....................................................................

57,000 57,000 147,000* 147,000

432,000** 360,000 72,000 147,000 147,000 360,000 360,000

Ex. 12–12 Stockholders’ Equity Paid-in capital: Preferred $2 stock, $100 par (80,000 shares authorized, 7,500 shares issued) ................................... $750,000 Excess of issue price over par ........................... 90,000 Common stock, no par, $5 stated value (200,000 shares authorized, 112,500 shares issued) ....................... $562,500 Excess of issue price over par ........................... 75,000 From sale of treasury stock ............................... Total paid-in capital ................................... Ex. 12–13 BRAVO CORPORATION Retained Earnings Statement For the Year Ended July 31, 2006

$840,000

637,500 63,750 $1,541,250

Retained earnings, August 1, 2005 ............................................................... $ 2,213,400 Net income .................................................................................... $558,000 Less dividends declared ................................................................................ 330,000 Increase in retained earnings......................................................................... 228,000 Retained earnings, July 31, 2006 .................................................................. $ 2,441,400 Ex. 12–14 a. 1.9% ($1.26 ÷$67.44) b. Hershey’s dividend yield is above average for similar companies. Thus, it is likely that most stockholders are looking for current dividends as well as an increase in market price.

14


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