Problems

Problem 3-1
Not an expense for June - not incurred.
Expense for June
Expense for June
Expense for June
Expense for June
Not an expense for June - asset acquired.
Problem 3-2
Revenues$275,000
a. Expenses

$164,000
Cost of goods sold ................................
Rent ................................................................
3,300
Salaries ................................ 27,400
Taxes ................................
1,375
Other ................................
50,240
246,315

Net income $28,685

Problem 3-3
$27,000
Beginning inventory ................................
Purchases ................................78,000
Available for sale................................
Ending inventory ................................
($31,000)
$74,000
Cost of goods sold ................................
Problem 3-4
a. (1)

Sales ................................ $85,000

Cost of goods sold................................
45,000
Gross margin ................................
$40,000

(2) 47 percent gross margin ($40,000 / $85,000)

(3) 11 percent profit margin (9000/85000)
The Woden Corporation had a tax rate of 40 percent ($6,000 / $15,000) on its pretax profit that
represented 17.7 percent of its sales ($15,000 / $85,000). The companys operating expenses were 82.3
percent of sales ($70,000 / $85,000) and its cost of goods sold was 53 percent of sales. The companys
gross margin was 47 percent of sales ($40,000 / $85,000).

Problem 3-5
Depreciation. Each year for the next 5 years depreciation will be charged to income.
No income statement charge. Land is not depreciated.
Cost of goods sold. $3,500 charged to current years income. $3,500 charged to next years income.
Subscription expense. $36 charged to current year. $36 charged to next year. Alternatively, $72 charged
to current year on grounds $72 is immaterial.
Problem 3-6
Asset value:
October 1, 20X5
December 31, 20X5
December 31, 20X6
December 31, 20X7

$30,000
26,250
11,250
0

Expenses:
20X5 $3,750 ($1,250 x 3 months)
20X6 $15,000 ($1,250 x 12 months)
20X7 $11,250 ($1,250 x 9 months)
One months insurance charge is $1,250 ($30, 000 / 24 months)
Problem 3-7
QED ELECTRONICS COMPANY
Income Statement for the month of April, ----.
$33,400
Sales ................................................................
Expenses:
$ 645
Bad debts ................................................................
Parts ................................................................
3,700
Interest ................................................................
880
Wages ................................................................
10,000
Utilities ................................................................
800
Depreciation ................................ 2,700
Selling................................................................
1,900
Administrative ................................ 4,700
______
25,325
Profit before taxes ................................
8,075
Provision for taxes ................................
2,800.
Net income
$5,275
Truck purchase has no income statement effect. It is an asset.
Sales are recorded as earned, not when cash is received. Bad debt provision of 5 percent related to sales
on credit ($33,400 - $20,500) must be recognized. Wages expense is recognized as incurred, not when
paid.

Marchs utility bill is an expense of March when the obligation was incurred.
Income tax provision relates to pretax income. Must be matched with related income.
Problem 3-8
First calculate sales:
Sales ($45,000 / (1 - .45)) ................................ $81,818+
Beginning inventory ................................
$35,000
$40,000
Purchases ................................................................
Total available ................................ 75,000
Ending inventory ................................30,000
Cost of goods sold ................................
$45,000
Gross margin ................................
$36,818
If the gross margin percentage is 45 percent, the cost of goods sold percentage must be 55 percent.
Once sales are determined, calculate net income:
Net income ($81,818 x .1) $8,182
Next, prepare balance sheet:
Assets
Current assets
$ 80,000
($50,000 x 1.6) ................................
Other assets
($218,182 - $50,000) ................................
138,182

Liabilities
Current liabilities ................................
$ 50,000
Long term debt
40,000
Total liabilities ................................$ 90,000

Total assets ................................

$218,182+
+

Owners equity
$120,000
Beginning balance ................................
Plus net income ................................ 8,182
Ending balance ................................
$128,182
Total liabilities
and owners equity ................................
$218,182

Total assets = Total liabilities and Owners equity.

Problem 3-9
Sales LC 26,666,667 [LC 20,000,000 x (200 / 150)]
January cash LC 1,000,000 [LC 500,000 x (200 / 100)]
December cash LC 600,000
At year-end the company was more liquid in terms of nominal currency (LC 600,000 versus LC 500,000)
but in terms of the purchasing power of its cash it was worse off (LC 1,000,000 versus LC 600,000).