Financial Accounting

What is the total amount of stockholders' equity at December 31, 2022?

Stockholder’s equity + net income - dividends + issuance of common stock to stockholder’s

Why does payment of an account payable lead to a decrease in assets and a decrease in liabilities?

When a company pays off an account payable (a liability it owes to a supplier or vendor), it reduces its assets (cash or bank account balance) because the payment is made using those resources. At the same time, the payment decreases the company's liabilities because the account payable is settled, meaning the company no longer owes that amount

Accounts payable normal baance

Credit

The trial balance of Stevens Corporation had accounts with the following normal
balances: Cash $5,000, Service Revenue $85,000, Salaries and Wages Payable
$4,000, Salaries and Wages Expense $40,000, Rent Expense $10,000, Common
Stock $42,000, Dividends $13,000, and Equipment $61,000. In preparing a trial
balance, the total in the debit column is:

$129,000.

The trial balance had….. In preparing a trial balance, the normal debit column would be…..

Determine which accounts have what normal balance

Normal debit balance acronym

AED

• Assets

• Expenses

• Dividends

Normal credit balance acronym

CRL (pronounced crill)

• common stock

• revenues

• liabilities

Net income

Revenues - expenses

Wilson Company has a weekly payroll of $100,000. The year ends on a Thursday, December 31, but Wilson Company does not pay their employees until Friday, January 1. The adjusting entry for Wilson Company at December 31 is:

DR. Salaries and Wages Expense 80,000
CR. Salaries and Wages Payable 80,000

Why do adjustments for accrued revenues have an assets and revenues account relationship?

Adjustments for accrued revenues reflect income that has been earned by a company but not yet received or recorded by the end of the accounting period. This creates a relationship between an asset account and a revenue account because

Why do adjustments for unearned revenues decrease liabilities and increase revenues?

• When the company fulfills part (or all) of this obligation, it reduces the liability account since it no longer owes the customer for that portion

• As the company delivers the goods or services, it recognizes the earned revenue in the appropriate period, increasing its revenue account

  • Debit unearned revenue (liability)

  • Credit service revenue (revenue)

    • The debit decreases liability unearned revenue which has a normal credit balance

    • The credit increases service revenue which has a normal credit account

Rivera Company computes depreciation on delivery equipment at $1,000 for the month of June. The adjusting entry to record this depreciation is as follows:

DR. Depreciation Expense 1,000
CR. Accumulated Depreciation – Equipment 1,000

The trial balance shows Supplies $1,350 and Supplies Expense $0. If $600 of supplies are on hand at the end of the period, the adjusting entry is

DR. Supplies Expense 750
CR. Supplies 750
DR. Supplies Expense 600
CR. Supplies 600

In a classified balance sheet, assets are usually classified using the following categories:

current assets; long-term investments; property, plant, and equipment; and
intangible assets

Classified balance sheet first asset

Current assets

Classified balance sheet second asset

long term investments

Classified balance sheet third asset

Property, plant, and equipment

Classified balance sheet fourth asset

Intangible assets

An account that will have a zero balance after closing entries have been journalized and posted is

Service revenue

Service revenue has a zero balance after closing because

it is a temporary account used to track revenue for a specific accounting period.

• Revenue resets after the race

When a company uses the periodic inventory system

The company does not know cost of goods sold without taking a physical inventory

If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending inventory is $50,000, cost of goods sold is:

$390,000

If sales revenues are $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, the gross profit is

$90,000

A credit sale of $750 is made on June 13, terms 2/10, net/30. A return of $50 is granted on June 16. The amount received as payment in full on June 23 is:

$686.

Under a perpetual inventory system, when goods are purchased for resale by a company:

purchases on account are debited to Inventory

Falk Company’s ending inventory is understated $4,000. The effects of this erroron the current year’s cost of goods sold and net income, respectively, are:

overstated, understated.

In periods of rising prices, LIFO will produce:

lower net income than FIFO

As a result of a thorough physical inventory, Railway Company determined that it
had inventory worth $180,000 at December 31, 2015. This count did not take into
consideration the following facts: Rogers Consignment store currently has goods
worth $35,000 on its sales floor that belong to Railway but are being sold on
consignment by Rogers. The selling price of these goods is $50,000. Railway
purchased $13,000 of goods that were shipped on December 27, FOB destination,
that will be received by Railway on January 3. Determine the correct amount of
inventory that Railway should repor

$215,000

The use of prenumbered checks in disbursing cash is an application of the
principle of:

documentation procedures

Ginter Co prepares its financial statements annually at 12/31. Ginter Co. holds
Kolar Inc.’s $10,000, 120-day, 9% note. The note was issued on October 1. How
much interest revenue will be accrued at 12/31 when Ginter prepares its year end
financial statements?

$225

Ginter Co. holds Kolar Inc.’s $10,000, 120-day, 9% note. The entry made by Ginter Co. when the note is collected, assuming no interest has been previously accrued,
is:

DR: Cash 10,300

CR: Notes receivable 10,000

CR: Interest Revenue 300

Blinka Retailers accepted $50,000 of Citibank Visa credit card charges for
merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry
to record this transaction by Blinka Retailers will include a credit to Sales Revenue
of $50,000 and a debit(s) to

Cash (48,000) and Service Charge Expense (2,000)

Hughes Company has a credit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on review and aging of its accounts receivable at the end of the year, Hughes
estimates that $60,000 of its receivables are uncollectible. The amount of bad debt
expense which should be reported for the year is:

$55,000.

Which method is required by generally accepted accounting principles?

Allowance method (Percentage-of-receivables basis)

Hughes Company has a credit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on review and aging of its accounts receivable at the end of the year, Hughes
estimates that $60,000 of its receivables are uncollectible. The amount of bad debt
expense which should be reported for the year is:

$65,000

Martha Beyerlein Company incurred $150,000 of research and development costs in its laboratory to develop a patent granted on January 2, 2015. On July 31, 2015, Beyerlein paid $35,000 for legal fees in a successful defense of the patent. The
total amount debited to Patents through July 31, 2015, should be:

$35,000

Bennie Razor Company has decided to sell one of its old manufacturing machines on June 30, 2015. The machine was purchased for $80,000 on January 1, 2011, and was depreciated on a straight-line basis for 10 years assuming no salvage value. If the machine was sold for $26,000, what was the amount of the gain or
loss recorded at the time of the sale?

$18,000.

Alex Corp owns a piece of equipment with the following facts at December 31, 2022:

Historical cost: $10,000
Accumulated Depreciation $6,000

What is the equipment’s book value at December 31, 2022

$4,000

Micah Bartlett Company purchased equipment on
January 1, 2014, at a total invoice cost of $400,000. The equipment has an estimated salvage value of $10,000 and an estimated useful life of 5 years. The amount of accumulated depreciation at December 31, 2015, if the straight-lin method of depreciation is used, is:

$156,000

Erin Danielle Company purchased equipment and incurred the following costs:

Cash price $24,000
Sales taxes 1,200
Insurance during transit 200
Installation and testing 400
Depreciation 100
Total costs $25,900

What amount should be recorded as the cost of the equipment?

$25,800

On January 1, 2022, Hurley Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on January 1. The amount of interest expense that Hurley will record in 2022 related to this bond is

$64,000

Andrews Inc. issues a $497,000, 10% 3-year mortgage note on January 1. The
note will be paid in three annual installments of $200,000, each payable at the end
of the year. What is the amount of interest expense that should be recognized by
Andrews Inc. in the second year?

$34,670

Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that:

the contractual interest rate exceeds the market
interest rate

Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1. What amount should Sensible report as a current
liability for Unearned Service Revenue at December 31?

$4,500.

The total gross earnings for the week for the employees of XYZ Company was
$100,000. Federal income tax withholding was $15,000 and FICA withholding was
$6,000. (The payroll is paid on Saturday for the week ending Friday.)The journal
entry that XYZ Company would record when recording the payroll for the week
would include:

Credit to Salaries and Wages Payable of $79,000

In the stockholders’ equity section, the cost of treasury stock is deducted from

total paid-in capital and retained earnings.

ABC Corporation issues 1,000 shares of $10 par value common stock at $12 per share. In recording the transaction, credits are made to

Common Stock $10,000 and Paid-in Capital in
Excess of Par $2,000

You have a controlling interest if

you own more than 50% of a company’s stock

Assume that Horicon Corp acquired 25% of the common stock of Sheboygan Corp. on January 1, 2015, for $300,000. During 2015, Sheboygan Corp. reported net income of $160,000 and paid total dividends of $60,000. If Horicon uses the equity method to account for its investment, the balance in the investment account on
December 31, 2015, will be:

$325,000

Pryor Company receives net proceeds of $42,000 on the sale of stock investments that cost $39,500. This transaction will result in reporting in the income statement a:

gain of $2,500 under “Other revenues and gains.”

The following data are available for Allen Clapp
Corporation.

Net income $200,000
Depreciation expense 40,000
Dividends paid 60,000
Gain on disposal of land 10,000
Decrease in accounts receivable 20,000
Decrease in accounts payable 30,000

Net cash provided by operating activities is:

$220,000

Which is an example of a cash flow from a financing activity?

Issuance of debt for cash.

Cash dividends paid to stockholders are classified on the statement of cash flows as

financing activities

Which is an example of a cash flow from an investing activity?

Receipt of cash from the sale of equipment

Perpetual System

Maintains detailed records of the cost of each inventory purchase and sale

Calculation of cost of goods sold

Beginning inventory $ 100,000
Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold $775,000

Assume Sauk Stereo returned goods costing $300 to PW Audio Supply on May 8.

DR: Accounts payable

CR: Inventory

In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting:

Inventory

Pays balance due on the last day of the return period

DR: Accounts payable

CR: Cash

CR: Inventory

• Inventory is the balance due times the percent

• Cash is the total cost after inventory is subtracted

Buys merchandise on account

Returns defective goods

DR: Inventory

CR: Accounts payable

DR: Accounts payable

CR: Inventory

Recording Sales of Merchandise

PW Audio Supply records the sale of $3,800 on May 4 to Sauk Stereo on account as follows (assume the merchandise cost PW Audio Supply $2,400)

DR: Cash or Accounts Receivable

CR: Sales Revenue

DR: Cost of Goods Sold

CR: Inventory

Sales Revenue

Contra-revenue account

Sales Returns and Allowances

Prepare the entry PW Audio Supply would make to record the credit for returned goods on May 8 that had a $300 selling price (assume a $140 cost).
Assume the goods were not defective

DR: Sales Returns and Allowances [selling price]

CR: Accounts Receivable [selling price]

DR: Inventory [cost]

CR: Cost of Goods Sold [cost]

The cost of goods sold is determined and recorded each time a sale occurs in:

a perpetual inventory system only

Inventory Adjusting Entry

Suppose that PW Audio Supply has an unadjusted
balance of $40,500 in Merchandise Inventory. Through a physical count, PW Audio determines that its actual merchandise inventory
at year-end is $40,000. On December 31 the company would make an adjusting entry as follows

DR: Cost of Goods Sold [unadjusted balance - actual merchandise]

CR: Inventory [unadjusted balance - actual merchandise]

Multi step income statement for the retarded

Sales

Sales revenue

LESS: Sales returns

Sales discounts

Net Sales

Cost of Goods Sold

Gross Profit

LESS: Operating Expenses

= Income from operations

ADD: Other Revenue and Gains

LESS: Other Expenses and Losses

NET INCOME BABY

Interest expense on multi step balance sheet

Classified as an other expense

Gross profit rate

Gross profit / net sales

Single-Step Income Statement

Subtract total expenses from total revenues

Gain on disposal of plant assets is a:

Revenue

Recording purchase of merchandise

Illustration: On the basis of the sales invoice and receipt of the merchandise ordered from PW Audio Supply, Sauk Stereo records the $3,800 purchase as follows

DR: Purchases

CR: Accounts payable

Hasbeen included in the inventory goods held on consignment for Falls Co., costing $15,000

Goods of $15,000 held on consignment should be deducted from the inventory count

First-in, First-out (FIFO)

Often parallels actual physical flow of merchandise

Each of the three cost flow methods is acceptable under GAAP

Each of the three cost flow methods is acceptable under GAAP

Both inventory and net income are higher when companies use:

FIFO in a period of inflation

High Inventory Levels

may incur high carrying costs (e.g.,
investment, storage, insurance, obsolescence, and damage)

Human Resource Controls

• Bond employees who handle cash.
• Rotate employees’ duties and
require vacations.
• Conduct background checks

On July 5, Polo returns merchandise worth $100 to Jordache Co

DR: Sales Returns and Allowances 100
CR: Accounts Receivable 100

On May 1, Wilton sold merchandise on account to Bates for $50,000 terms, 3/15, net 45.

On May 4, Bates returned merchandise with a sales price of $2,000. On May 14, Wilton receives payment from Bates for the
balance due.

Prepare journal entries to record the May transactions on
Wilton’s books.

May 1

DR: Accounts Receivable 50,000
CR: Sales Revenue 50,000

May 4

DR: Sales Returns and Allowances 2,000
CR: Accounts Receivable 2,000

May 14

DR: Cash ($48,000 − $1,440) 46,560
DR: Sales Discounts ($48,000 × .03) 1,440
CR: Accounts Receivable 48,000

Allowance for Doubtful
Accounts

a contra-asset account

Write Off:

DR: Allowance for doubtful accounts

CR: Accounts receivable

Recovery of an Uncollectible Account

Illustration: On July 1, 2023, R. A. Ware pays the $500 amount that Hampson had written off on March 1. Hampson makes these entries:

DR: Accounts Receivable

CR: Allowance for doubtful accounts

Example of Capital Expenditure

A company spends $10,000 to install a new engine in the same delivery truck, improving its fuel efficiency and extending its useful life by 5 years.

Example of Revenue Expenditure

A company spends $500 to replace a worn-out tire on one of its delivery trucks.

Chapter 9 depreciation straight line bs

Depreciation Expense

Accumulated Depreciation

Cost - accumulated depreciation = book value

Compare book value to proceeds or the sold price to equate which is greater or lesser

Cost - accumulated depreciation = book value

Compare book value to proceeds or the sold price to equate which is greater or lesser

Book value is not in the journal entry when selling property plant or equipment owever

DR: Cash 16,000
DR: Accumulated Depreciation 49,000
CR: Equipment 60,000
CR: Gain on Disposal of Plant Assets 5,000

llustration: National Labs purchases a patent at a cost of $60,000 on June 30. National estimates the useful life of the patent to be eight years. Prepare the journal entry to record the amortization
for the six-month period ended December 31

DR: Amortization Expense 3,750
CR: Patents 3,750

Stockholder Rights

Vote

Share

Preemptive right

Residual claim

Illustration: Assume that instead of $1 par value stock, Hydro- Slide, Inc. has $5 stated value no-par stock and the company issues 5,000 shares at $8 per share for cash

DR: Cash 40,000
CR: Common Stock 25,000
CR: Paid-in Capital in Excess of Stated Value—Common Stock 15,000

Illustration: Attorneys have helped Jordan Company incorporate. They have billed the company $5,000 for their services. They agree to accept 4,000 shares of $1 par value common stock in payment of their bill. At the time of the exchange, there is no established market price for the stock. Prepare the journal entry for this transaction.

DR: Organization Expense 5,000
CR: Common Stock (4,000 × $1) 4,000
CR: Paid-in Capital in Excess of Par—
Common Stock
1,000

preferred stockholders

Generally do not have voting rights

Illustration: Medland Corporation declares a 10% stock dividend on its 50,000 shares of $10 par value common stock. The current fair market value
of its stock is $15 per share. Record the entry on the declaration date:

DR: Stock Dividends (50,000 x 10% x $15) 75,000
CR: Common Stock Dividends Distributable 50,000
CR: Paid-in Capital in Excess of Par—Common Stock 25,000

Which of the following statements about small stock dividends is true?

Market value per share should be assigned to the
dividend shares

In the stockholders’ equity section, Common Stock
Dividends Distributable is reported as a(n)

addition to capital stock

Assume that Kuhl corporation receives net proceeds of $53,000 on the sale of the Doan Inc. bonds on January 1, 2023, after receiving
the interest due. Prepare the entry to record the sale of the bonds

DR: Cash 53,000
CR: Debt Investments 50,000
CR: Gain on Sale of Debt Investments 3,000

Less than 20% of ownership

Illustration: On July 1, 2022, Sanchez Corporation acquires 1,000 shares (10% ownership) of Beal Corporation common stock at $40 per share. The entry for the purchase is:

DR: Stock Investments (1,000 x $40) 40,000
CR: Cash 40,000