Chapter 1 To 8 Practice Problem Solutions

CHAPTER 1
EXERCISE 1-2
Public Private
Proprietorshi Partnershi Corporatio Corporatio
p p n n
1. No personal liability F F T T
Owner(s) pay(s) personal
2. T T F F
income tax on company profits
Generally easiest form of
3. F F T F
organization to raise capital
4. Ownership indicated by shares F F T T
Required to issue quarterly
5. F F T F
financial statements
6. Owned by one person T F F F
7. Limited life T T F F
Usually easiest form of
8. T F F F
organization to set up
Requires the use of IFRS as its
9. F F T F
accounting standards
10
Shares are closely held F F F T
.
EXERCISE 1-4
(a) (b)
1. O -
2. I -
3. F +
4. I -
5. O +
6. F +
7. I +
8. F -
9. F -
10. O -
EXERCISE 1-12
(a) Camping revenue $168,000

Expenses
Operating expenses $130,000
Income tax expense 10,000 140,000
Profit $ 28,000
(b) SEA SURF CAMPGROUND, INC.

Statement of Changes in Equity
Year Ended December 31, 2015
Common Retained Total

Shares Earnings Equity
Balance, January 1 $30,000 $18,000 $48,000
Issued common shares 10,000 10,000
Profit 28,000 28,000
Dividends (12,000) (12,000)
Balance, December 31 $40,000 $34,000 $74,000
Note to instructors: Students may list the accounts in the following statement in any order within
the assets, liabilities, and shareholders equity classifications as they have not yet learned how
to classify/order accounts.
SEA SURF CAMPGROUND, INC.

Statement of Financial Position
December 31, 2015
Assets
Cash $ 7,500
Supplies 2,500
Equipment 119,000
Total assets $129,000
Liabilities and Shareholders Equity

Liabilities
Accounts payable $ 5,000
Bank loan payable 50,000
Total liabilities 55,000
Shareholders equity
Common shares 40,000
Retained earnings 34,000
Total shareholders equity 74,000
Total liabilities and shareholders equity $129,000
SOLUTIONS TO PROBLEMS
PROBLEM 1-1A
(a) 1. The South Face Inc. is an external user of accounting information in assessing the
credit-worthiness of their customer.
2. An investor purchasing common shares of Orbite Online, Inc. is an external user.
3. In deciding whether to extend a loan, the Caisse dconomie Base Montral is an

external user.
4. As an employee of Tech Toy Limited, the CEO is an internal user.
(b) 1. In deciding to extend credit, South Face would focus its attention on the statement of
financial position of the new customer. The terms of credit they are extending require
repayment in a short period of time. Funds to repay the credit would come from cash
on hand and other current assets. The statement of financial position of the new
customer will show if the company has enough current assets to meet its current
obligations.
2. Since the investor intends to hold the shares for a long period of time (at least five
years), s(he) should focus on the companys income statement. The income
statement reports the companys past performance in terms of revenues, expenses,
and profit. This is generally regarded as a good indicator of the companys future
performance.
3. The Caisse is interested in two thingsthe ability of the company to make interest
payments on a monthly basis for the next three years and the ability to repay the
principal amount at the end of the three years. In order to evaluate both of these
factors, the focus should be on the statement of cash flows. This statement provides
information on the cash the company generates from its operations on an ongoing
basis. It also tells whether the company is currently borrowing or repaying debt.
4. The CEO should focus on the statement of cash flows as this statement clearly sets
out the cash generated from operating activities and the amount the company has
spent in the past on purchasing equipment and paying dividends.
Note to instructors: Other answers may be valid provided they are properly supported.
PROBLEM 1-2A
(a) 1. The professors should incorporate their business as a private corporation because of
their concerns about legal liabilities. A corporation is the only form of business that
provides limited liability. Since the professors do not need access to large amounts of
investment capital, a private corporation provides the limited liability advantage the
professors need.
2. Joseph should run his bicycle rental shop as a proprietorship because this is the
simplest and least costly form of business organization to establish and eventually
dissolve. He is the only person involved in the business and is planning to operate for
a limited time.
3. Robert and Tom should form a public corporation when they combine their
operations. This is the best form of business for them to choose because they expect
to raise funds in the coming year. A public corporation will enable them to raise
significant amounts of funds for their manufacturing company. A corporation may also
receive more favourable income tax treatment.
4. A partnership would be the most likely form of business for Darcy, Ellen, and Meg to
choose. It is simpler to form than a corporation and less costly.
5. Herv is most likely to select to operate his business as a private corporation. This
will assist him with the liability of storing goods for others. He will also be able to raise
funds to purchase equipment, rent space in airports, and hire employees. It is easier
to raise funds through a private corporation rather than a proprietorship or
partnership.
(b) 1. ASPE
2. ASPE
3. IFRS
4. ASPE
5. ASPE
PROBLEM 1-5A
(a) and (b)

(b)
Assets Liabilities Shareholders
(a) Equity
Accounts payable $6,400 L $ 6,400
Accounts receivable 10,800 A $10,800
Bank loan payable 9,000 L 9,000
Cash 1,250 A 1,250
Common shares 1,000 SE $ 1,000
Equipment 19,400 A 19,400
Income tax payable 2,000 L 2,000
Interest payable 100 L 100
Prepaid insurance 600 A 600
Retained earnings 12,250 SE 12,250
Salaries payable 1,000 L 1,000
Supplies 1,200 A 1,200
Unearned revenue 1,500 L 1,500
______ ______ ______
Totals $33,250 $20,000 $13,250
Assets = Liabilities + Shareholders equity

$33,250 = $20,000 + $13,250
(c) Beginning balance in Retained Earnings + Revenues Expenses Dividends = Ending balance in
Retained Earnings
$2,250 + $72,000 $50,000 $12,000 = $12,250
PROBLEM 1-7A
(a)
ONE PLANET COSMETICS CORP.
Income Statement
Month Ended June 30, 2015
Revenues
Service revenue $12,000
Expenses
Salaries expense $3,400
Office expense 1,500
Utilities expense 1,300
Supplies expense 1,200
Interest expense 800
Total expenses 8,200
Profit before income tax 3,800
Income tax expense 700
Profit $ 3,100

Month Ended June 30, 2015

Balance, June 1 $ 0 $ 0 $ 0
Profit 3,100 3,100
Dividends paid (1,000) (1,000)
Balance, June 30 $25,000 $ 2,100 $27,100
PROBLEM 1-7A (Continued)
(a) (Continued)
Note to instructors: Students may list the accounts in the following statement in any order
within the assets, liabilities, and shareholders equity classifications as they have not yet
learned how to classify/order accounts.

June 30, 2015
Assets
Cash $ 6,000
Accounts receivable 4,000
Supplies 1,400
Equipment 32,000
Liabilities
Shareholders equity
Retained earnings 0 2,100
(b) The financial statements must be prepared in the order of (1) income statement, (2)
statement of changes in equity, and (3) statement of financial position. This is because
each subsequent financial statement depends on information contained in the previous
statement. The profit from the income statement flows to the retained earnings account
on the statement of changes in equity. The shareholders equity totals in the statement of
changes in equity (for example, for common shares and retained earnings) then flow to
the shareholders equity section of the statement of financial position.
PROBLEM 1-8A
(a)
Activity
Cash dividends paid $ 10,000 financing
Cash paid to purchase equipment 35,000 investing
Cash payments for operating activities 120,000 operating
Cash receipts from operating activities 140,000 operating
Cash received from issue of long-term debt 20,000 financing
Cash received from issue of shares 20,000 financing
(b)
MAISON CORPORATION
Statement of Cash Flows
Operating activities
Cash receipts from operating activities $140,000
Cash payments for operating activities (120,000)
Net cash provided by operating activities $20,000
Investing activities
Purchase of equipment $(35,000)
Net cash used by investing activities (35,000)
Financing activities
Issue of long-term debt $ 20,000
Issue of shares 20,000
Payment of dividends (10,000)
Net cash provided by financing activities 30,000
Net increase in cash 15,000

Cash, January 1 12,000
Cash, December 31 $27,000
(c) The company is generating less cash from operating activities (+$20,000) than it is using
in total for its investing activities ($35,000) and the payment of dividends ($10,000). The
company, however, is making up the deficiency by generating cash from financing
activities. Cash from financing activities is not a renewable source of cash and usually
entails future cash payments in the form of interest on debt, principal repayment, and
dividend payments for shares.
Chapter 2
EXERCISE 2-5
BATRA CORPORATION
Income Statement
Year Ended July 31, 2015
Revenues
Rent revenue 18,500
Total revenues 99,600
Expenses
Rent expense 10,800
Depreciation expense 3,000
Interest expense 2,000
Supplies expense 900
Income tax expense 5,000
Profit $30,600
BATRA CORPORATION
Common Retained
Shares Earnings Total Equity
Balance, August 1, 2014 $ 6,000 $17,940 $23,940

Profit 30,600 30,600
Dividends 000 000 (12,000) (12,000)
Balance, July 31, 2015 $10,000 $36,540 $46,540
EXERCISE 2-5 (Continued)
BATRA CORPORATION
July 31, 2015
Assets
Current assets
Cash $ 5,060
Trading investments 20,000
Supplies 1,500
Total current assets $43,660
Property, plant, and equipment
Equipment $35,900
Less: Accumulated depreciation 6,000
Total property, plant, and equipment 29,900
Liabilities and Shareholders' Equity
Current liabilities
Interest payable 1,000
Total liabilities $27,020
Shareholders' equity
Common shares $10,000
Total liabilities and shareholders' equity $73,560
EXERCISE 2-9
(a) 7 (g) 1
(b) 10 (h) 6
(c) 11 (i) 4
(d) 3 (j) 5
(e) 2 (k) 9
(f) 8 (l) 12
EXERCISE 2-10
1. (a) The cost basis of accounting is involved in this situation.

(b) The cost basis of accounting has been violated. The land was reported at its fair value
when it should have remained at its historical cost.
2. (a) The fair value basis of accounting is involved in this situation.

(b) The principle has not been violated since the parcel of land is being held for resale
and not for use.
3. (a) The assumption involved in this situation is the going concern assumption.
(b) The going concern assumption has been violated. The elements on the statement of
financial position should have been classified between current and non-current.
PROBLEM 2-4A
(a)
MBONG CORPORATION
Income Statement
Revenues
Interest revenue 500
Total revenues $82,200
Expenses
Repair and maintenance expense 2,800
Insurance expense 2,200
Supplies expense 1,000
Profit $23,500
MBONG CORPORATION
Common Retained
Shares Earnings Total Equity
Balance, January 1 $30,000 $105,000 $135,000

Profit 23,500 23,500
Dividends _ _____ (5,000) (5,000)
(a) (Continued)
MBONG CORPORATION
December 31, 2015
Assets
Current assets
Cash $ 5,200
Supplies 200
Prepaid insurance 2,000
Total current assets $ 41,600
Land $40,000
Building $72,000
Less: Accumulated depreciationbuilding 18,000 54,000
Equipment $66,000
Less: Accumulated depreciationequipment 17,600 48,400

Current liabilities
Accounts payable $8,300
Salaries payable 3,000
Current portion of bank loan payable 1,500
Total current liabilities $ 12,800
Non-current liabilities
Bank loan payable ($15,000 - $1,500) 13,500
Common shares $ 34,200
Total liabilities and shareholders' equity $184,000
(b) The income statement reports the profit or loss for the period. This figure is then used in
the statement of changes in equity, along with dividends and any issues (or repurchases)
of shares to calculate the balances in common shares and retained earnings at the end
of the period. These ending balances are then used in the statement of financial position
to determine shareholders equity and complete the accounting equation.
PROBLEM 2-6A
(a)
Working capital = Current assets Current liabilities
Chen = $407,200 $166,325 = $240,875
Caissie = $190,400 $133,700 = $56,700
Current assets
Current ratio =
Current liabilities
Chen Caissie
$407,200 $190,400
= 2.4 :1 = 1.4 :1
$166,325 $133,700
Chen is significantly more liquid than Caissie. It has a higher current ratio and more
current assets available to pay current liabilities as they come due.
(b)
Total liabilities
Debt to total assets =
Total assets
Chen Caissie
($166,325 + $108,500) ($133,700 + $40,700)

= 29.3% = 52.8%
($407,200 + $532,000) ($190,400 + $139,700)
Caissie is considerably less solvent than Chen. Caissie's debt to total assets ratio of
52.8% is almost double that of Chens ratio of 29.3%. The lower the percentage of debt
to total assets the lower the risk that a company may be unable to pay its debts as they
come due.
(c)
Chen Caissie
Sales revenue $1,800,000 $620,000
Cost of goods sold 1,175,000 340,000
Operating expenses 283,000 98,000
Interest expense 10,000 4,000
Income tax expense 85,000 35,400
Total expenses 1,553,000 477,400
Profit $ 247,000 $142,600
Profit available to common shareholders

Earnings per share =
Weighted average number of common shares
Chen Caissie
$247,000 = $3.25 $142,600 = $2.30

76,000 62,000
Market price per share

Price-earnings ratio =
Earnings per share
Chen Caissie
$25.00 = 7.7 times $15.00 = 6.5 times

$3.25 $2.30
Based on the price-earnings ratio, investors believe that Chen will be more profitable
than Caissie in the future. It is difficult to compare earnings per share because Caissie
has more common shares issued than Chen, as well as having a different debt structure.
PROBLEM 2-10A
(a) The advantage of the fair value basis of accounting is that it represents a more up-to-date
measurement of the value of the asset reported. Consequently, the amounts reported are more
relevant to the financial statement users. The disadvantage of the fair value basis of accounting
and corresponding advantage of historical cost is that historical cost is more reliable and shows
the amount paid for the asset. The historical cost might provide a more faithful representation
because it can be easily verified and is neutral.
(b) The reason a company might choose to adopt the fair value basis of accounting for real estate
is that assets reported on the statement of financial position will have higher values than they
would using the historical cost of these assets. It is inherent in the nature of real estate that the
land will increase in value over time. Creditors will find the fair value a more relevant basis for
making lending decisions. The increase in the assets will have a corresponding increase in
equity.
(c) The reason a company might choose to adopt the cost basis of accounting for real estate is that
assets reported on the statement of financial position will have more faithful representation
because it reports the actual cost of the asset when it was acquired and this measurement can
be easily verified and it is neutral. There is also a significant cost to obtaining reliable fair value
information on a regular basis to be reported in the financial statements.
(d) When comparing real estate companies, the reader is well advised to read the
accounting policy note to the financial statements disclosing the measurement policy
used for the real estate property. One would need to determine the corresponding fair
value for real estate for the company using the cost basis of accounting. In fact, this
information is required to be disclosed for real estate companies even if they adopted the
cost basis of accounting to improve comparability and disclosure. Otherwise, trying to
compare businesses that use different bases of accounting would be very difficult.
Chapter 3
EXERCISE 3-3
(a) (b) (c)

Account Type of account Normal Balance Financial Statement
Accounts payable and Credit Statement of Financial
Liability
accrued liabilities Position
Credit Statement of Financial
Bank loan payable Liability
Position
Statement of Financial
Cash Asset Debit
Position
Statement of Changes
Dividends Dividend Debit
in Equity
Dividends payable Liability Credit
Position
Furniture, machinery, Statement of Financial
Asset Debit
and equipment Position
General and
Expense Debit Income Statement
administrative expenses
Goodwill Statement of Financial
Asset Debit
Position
Income tax expense Expense Debit Income Statement
Income taxes payable Liability Credit
Position
Debit
Interest expense Expense Income Statement
Inventories Asset Debit
Position
Prepaid expenses Asset Debit
Position
Receivables Asset Debit
Position
Revenues Revenue Credit Income Statement
Trademarks Asset Debit
Position
EXERCISE 3-8
(a), (b), and (c)
Transaction 1 Sept. 1: Issued common shares for $20,000 cash.
(a) Basic The asset account Cash is increased by $20,000; the shareholders
Analysis equity account Common Shares is increased by $20,000.
(b) Equation
Analysis
(c) DebitCredit
Analysis Debits increase assets: debit Cash $20,000.
Credits increase share capital (shareholders equity): credit

Common Shares $20,000.
Transaction 2 Sept.2: Performed $9,000 of services on account for a customer.
(a) Basic The asset account Accounts Receivable is increased by $9,000;

Analysis the revenue account Service Revenue is increased by $9,000.
(b) Equation
Analysis
(c) DebitCredit
Analysis Debits increase assets; debit Accounts Receivable $9,000.
Credits increase revenues; credit Service Revenue $9,000.

(a), (b), and (c) (Continued)
Transaction 3 Sept. 4: Purchased equipment for $12,000 paying $5,000 in cash

and borrowing the balance from the bank.
(a) Basic The asset account Equipment is increased by $12,000; the Asset
Analysis account Cash is decreased by $5,000 and the liability account
Bank Loan Payable increased by $7,000.
(b) Equation
Analysis
(c) DebitCredit
Analysis Debits increase assets: debit Equipment $12,000.
Credits decrease assets: credit Cash $5,000
Credits increase liabilities: credit Bank Loan Payable $7,000.
Transaction 4 Sept. 10: Purchased supplies on account for $500.
(a) Basic The asset account Supplies is increased by $500; the liability
Analysis account Accounts Payable is increased by $500.
(b) Equation
Analysis
(c) DebitCredit
Analysis Debits increase assets: debit Supplies $500.
Credits increase liabilities: credit Accounts Payable $500.

Transaction 5 Sept. 25: Received $4,500 cash in advance for architectural

services to be provided next month.
(a) Basic The asset account Cash is increased by $4,500; the liability
Analysis account Unearned Revenue is increased by $4,500.
(b) Equation
Analysis
(c) DebitCredit
Credits increase liabilities: credit Unearned Revenue $4,500.
Transaction 6 Sept. 30: Paid amount owing for supplies purchased Sept. 10.
(a) Basic The liability account Accounts Payable is decreased by $500; the
Analysis asset account Cash is decreased by $500.
(b) Equation
Analysis
(c) DebitCredit
Analysis Debits decrease liabilities: debit Accounts Payable $500.
Credits decrease assets: credit Cash $500.

Transaction 7 Sept. 30: Collected $5,000 on account owing from a customer.
(a) Basic The asset account Cash is increased by $5,000; the Asset account
Analysis Accounts Receivable is decreased by $5,000.
(b) Equation
Analysis
(c) DebitCredit
Credits decrease assets: credit Accounts Receivable $5,000.
(d) Sept. 1 Cash.................................................... 20,000

Common Shares......................... 20,000
2 Accounts Receivable.......................... 9,000

Service Revenue......................... 9,000
4 Equipment........................................... 12,000
Cash............................................ 5,000
Bank Loan Payable..................... 7,000
10 Supplies.............................................. 500
Accounts Payable........................ 500
25 Cash.................................................... 4,500
Unearned Revenue..................... 4,500
30 Accounts Payable............................... 500

Cash............................................ 500
30 Cash.................................................... 5,000
Accounts Receivable................... 5,000
(e)
Cash
Sept. 1 20,000 Sept. 4 5,000
Sept. 25 4,500 Sept. 30 500
Sept. 30 5,000
Bal. 24,000
Accounts Receivable
Sept. 2 9,000 Sept. 30 5,000
Bal. 4,000
Supplies
Sept. 10 500
Bal. 500
Equipment
Sept. 4 12,000
Bal. 12,000
Accounts Payable
Sept. 30 500 Sept. 10 500
Bal. 0
Bank Loan Payable

Sept. 4 7,000
Bal. 7,000
Unearned Revenue
Sept. 25 4,500
Bal. 4,500
Common Shares
Sept. 1 20,000
Bal. 20,000
Service Revenue
Sept. 2 9,000
Bal. 9,000
EXERCISE 3-11
(a)
SPEEDY DELIVERY SERVICE, INC.
Trial Balance
July 31, 2015
Debit Credit
Cash $ 8,000
Prepaid insurance 200
Equipment 99,000
Accumulated depreciationequipment $ 21,400
Accounts payable 9,500
Salaries payable 800
Bank loan payable, due 2017 39,000
Retained earnings, Aug. 1, 2014 20,850
Dividends 800
Service revenue 75,000
Salaries expense 25,000
Rent expense 9,000
Repairs and maintenance expense 5,700
Vehicles expense 4,750
Income tax expense 3,000 0
Totals $204,550 $204,550
(b)
Income Statement
Revenues
Expenses
Rent expense 9,000
Repair and maintenance expense 5,700
Vehicles expense 4,750
Profit $12,450


Balance, August 1, 2014 $27,000 $20,850 $47,850

Profit 12,450 12,450
Dividends (800) (800)
Balance, July 31, 2015 $38,000 $32,500 $70,500
(b) (Continued)

July 31, 2015
Assets
Current assets
Cash $ 8,000
Prepaid insurance 200
Total current assets $ 42,200
Equipment $99,000
Less: Accumulated depreciation 21,400
Current liabilities
Accounts payable $9,500
Salaries payable 800
Total current liabilities $ 10,300
Bank loan payable, due 2017 39,000
Common shares $38,000
(c) If the amount of the retained earnings was not known, it would be more difficult to prepare
the three financial statements in part (b) above. However, the beginning balance of
retained earnings could either be derived from the trial balance or worked backwards from
a balanced statement of financial position.
PR
O
B
L
E
M
3
-
6
A
(a)
Apr. 1 Cash.................................................................. 10,000
Equipment......................................................... 6,000
Common Shares........................................ 16,000
1 No entry. Not a transaction
2 Rent Expense................................................... 950

Cash.......................................................... 950
3 Supplies............................................................ 1,900
Accounts Payable...................................... 1,900
10 Accounts Receivable........................................ 900

Service Revenue....................................... 900
13 Cash.................................................................. 800
Unearned Revenue................................... 800
20 Cash.................................................................. 1,500
Service Revenue....................................... 1,500
21 Cash.................................................................. 500
Accounts Receivable................................. 500
23 Office Expense.................................................. 135

Accounts Payable...................................... 135
30 Salaries Expense.............................................. 1,900

Cash.......................................................... 1,900
30 Accounts Payable............................................. 950

Cash.......................................................... 950
30 Dividends.......................................................... 500
Cash.......................................................... 500
(b)
Cash
Apr. 1 10,000 Apr. 2 950

Apr. 13 800 Apr. 30 1,900
Apr. 20 1,500 Apr. 30 950
Apr. 21 500 Apr. 30 500
Bal. 8,500
Accounts Receivable
Apr. 10 900 Apr. 21 500
Bal. 400
Supplies
Apr. 3 1,900
Bal. 1,900
Equipment
Apr. 1 6,000
Bal. 6,000
Accounts Payable
Apr. 30 950 Apr. 3 1,900

Apr. 23 135
Bal. 1,085
Unearned Revenue
Apr. 13 800
Bal. 800
Common Shares
Apr. 1 16,000
Bal. 16,000
Dividends
Apr. 30 500
Bal. 500
Service Revenue
Apr. 10 900
Apr. 20 1,500
Bal. 2,400
Salaries Expense
Apr. 30 1,900
Bal. 1,900
Rent Expense
Apr. 2 950
Bal. 950
Office Expense
Apr.23 135
Bal. 135
(c) This suggestion is not a good idea. Journals are used to record transactions. Ledgers are not
intended to be used to capture the recording of transactions, but to tabulate the effects of
transactions in separate accounts. The balances arrived at in the ledger are then used to
communicate information to the users of the financial statements. If one attempted to omit the use
of journal entries, one could not retrace the transactions as they originated in the journal. One
would only see one side of a transaction at a time by looking at an account in the ledger. It would
become very confusing and unruly to try to keep track of transactions.
PROBLEM 3-7A
(a) and (c)
Cash
Feb. 28 Bal. 15,000 Mar. 2 10,000

Mar. 9 16,300 Mar. 12 17,000
Mar. 20 16,600 Mar. 13 12,000
Mar. 25 18,400 Mar. 19 950
Mar. 30 1,245 Mar. 23 3,000
Mar. 27 4,200
Mar. 30 2,000
Mar. 30 3,000
Bal. 15,395
Accounts Receivable
Mar. 30 1,245
Bal. 1,245
Land
Feb. 28 Bal. 85,000

Bal. 85,000
Buildings
Feb. 28 Bal. 77,000

Bal. 77,000
Equipment
Feb. 28 Bal. 20,000

Bal. 20,000
Accounts Payable
Mar. 12 17,000 Feb. 28 Bal. 12,000

Mar. 13 12,000 Mar. 2 17,000
Bal. 0
Mortgage Payable
Mar. 30 1,250 Feb. 28Bal. 118,000

Bal. 116,750
Common Shares
Feb. 28 Bal. 40,000

Bal. 40,000
Retained Earnings
Feb. 28 Bal. 27,000

Bal. 27,000
Fees Earned
Mar. 9 16,300
Mar. 20 16,600
Mar. 25 18,400
Bal. 51,300
(a) and (c) (Continued)
Concession Revenue
Mar. 30 2,490
Bal. 2,490
Rent Expense
Mar. 2 27,000
Mar. 23 3,000
Bal. 30,000
Salaries Expense
Mar. 27 4,200
Bal. 4,200
Advertising Expense
Mar. 19 950
Bal. 950
Interest Expense
Mar. 30 750
Bal. 750
Income Tax Expense
Mar. 30 3,000
Bal. 3,000
(b)
Mar.2 Rent Expense................................................... 27,000
Accounts Payable...................................... 17,000
Cash.......................................................... 10,000
2 No entry.
5 No entry.
9 Cash.................................................................. 16,300
Fees Earned.............................................. 16,300
12 Accounts Payable ............................................ 17,000

Cash.......................................................... 17,000
13 Accounts Payable ............................................ 12,000

Cash.......................................................... 12,000
19 Advertising Expense......................................... 950

Cash.......................................................... 950
20 Cash.................................................................. 16,600 0
Fees Earned.............................................. 16,600
23 Rent Expense................................................... 3,000 0

Cash.......................................................... 3,000
25 Cash.................................................................. 18,400 0
Fees Earned.............................................. 18,400

Cash.......................................................... 4,200
30 Cash.................................................................. 1,245
Accounts Receivable (2,490 50%)................ 1,245
Concession Revenue................................ 2,490
30 Mortgage Payable............................................. 1,250

Interest Expense............................................... 750
Cash.......................................................... 2,000
30 Income Tax Expense........................................ 3,000

Cash.......................................................... 3,000
(d)
THE STAR THEATRE, INC.
Trial Balance
March 31, 2015
Debit Credit
Cash $ 15,395
Land 85,000
Buildings 77,000
Equipment 20,000
Mortgage payable $116,750
Fees earned 51,300
Concession revenue 2,490
Rent expense 30,000
Advertising expense 950
Interest expense 750
Income tax expense 3,000 00
Totals $237,540 $237,540
PROBLEM 3-8A
(a) and (c)

Cash
Apr. 30 5,000
May 7 1,500 May 1 1,000
8 1,200 4 1,100
15 800 14 1,200
22 1,000 21 1,000
29 1,700 25 400
31 50
31 1,200
31 150
Bal. 5,100
Supplies
Apr. 30 500
Bal. 500
Equipment
Apr. 30 24,000
Bal. 24,000
Accounts Payable
Apr. 30 2,100
May 4 1,100 May 22 700
21 1,000 25 500
Bal. 1,200
Bank Loan Payable

Apr 30 10,000
Bal. 10,000
Unearned Revenue
Apr. 30 1,000
May 15 700 May 7 1,500
29 600
Bal. 1,200
Common Shares
Apr. 30 5,000
Bal. 5,000
Retained Earnings
Apr. 30 11,400
Bal. 11,400
Service Revenue
May 8 1,200
15 800
15 700
22 1,000
29 1,700
29 600
Bal. 6,000
Salaries Expense
May 14 1,200
31 1,200
Bal. 2,400
Rent Expense
May 1 1,000
Bal. 1,000
Supplies Expense
May 22 700
Bal. 700
Advertising Expense
May 25 500
Bal. 500
(a) (Continued)
Utilities Expense
May 25 400
Bal. 400
Interest Expense
May 31 50
Bal. 50
Income Tax Expense

May 31 150
Bal. 150
(b)
May 1 Rent Expense................................................... 1,000
Cash.......................................................... 1,000
4 Accounts Payable............................................. 1,100
Cash.......................................................... 1,100
7 Cash.................................................................. 1,500
Unearned Revenue................................... 1,500
8 Cash.................................................................. 1,200
Service Revenue....................................... 1,200

Cash.......................................................... 1,200
15 Cash.................................................................. 800
Service Revenue....................................... 800
15 Unearned Revenue .......................................... 700

Service Revenue....................................... 700
21 Accounts Payable............................................. 1,000 0

Cash.......................................................... 1,000
22 Cash.................................................................. 1,000
Service Revenue....................................... 1,000
22 Supplies Expense............................................. 700

Accounts Payable...................................... 700
(b) (Continued)
May 25 Advertising Expense......................................... 500

Accounts Payable........................................ 500
25 Utilities Expense............................................... 400

Cash............................................................ 400
29 Cash.................................................................. 1,700
Service Revenue....................................... 1,700
29 Unearned Revenue........................................... 600

Service Revenue....................................... 600
31 Interest Expense............................................... 50
Cash.......................................................... 50

Cash.......................................................... 1,200
31 Income Tax Expense........................................ 150

Cash.......................................................... 150
(d)
PAMPER ME SALON INC.
Trial Balance
May 31, 2015
Debit Credit
Cash $ 5,100
Supplies 500
Equipment 24,000
Unearned revenue 1,200
Common shares 5,000
Service revenue 6,000
Rent expense 1,000
Supplies expense 700
Advertising expense 500
Utilities expense 400
Interest expense 50
Income tax expense 150
Totals $34,800 $34,800
Chapter 4
EXERCISE 4-2
(a) (b)
Accrual Basis Cash Basis
Service revenue $52,000 $44,000
Expenses
Operating expenses 31,000 27,500
Insurance expense 1,000 2,000
32,000 29,500
Profit before income tax 20,000 14,500

Income tax expense 3,000 -
Profit $17,000 $ 14,500
(c) The accrual basis of accounting provides more useful information for decision makers
because it recognizes revenue when earned and expenses when incurred. This
provides a better measurement of performance because it records what has happened
regardless of the movement of cash. This also enhances the predictive ability of the
income statement.
EXERCISE 4-3
(a) 2015
June 1 Prepaid Insurance........................................................... 1,800
Cash....................................................................... 1,800
Aug. 31 Prepaid Rent................................................................... 6,500

Cash....................................................................... 6,500
Sept. 4 Cash ............................................................................... 3,600

Unearned Revenue............................................... 3,600
Nov. 30 Prepaid Cleaning............................................................. 2,000

Cash....................................................................... 2,000
Dec. 5 Cash ............................................................................... 1,500

Unearned Revenue............................................... 1,500
(b) 2015
Dec. 31 Insurance Expense.......................................................... 1,050
Prepaid Insurance.................................................. 1,050
($1,800 7/12 months = $1,050)
31 Rent Expense.................................................................. 5,200

Prepaid Rent.......................................................... 5,200
($6,500 4/5 months = $5,200)
31 Unearned Revenue......................................................... 1,600

Sponsorship Revenue........................................... 1,600
($3,600 4/9 games = $1,600)
. 31 Repairs and Maintenance Expense................................ 1,000

Prepaid Cleaning................................................... 1,000
31 Unearned Revenue......................................................... 1,025

Sponsorship Revenue........................................... 1,025
($1,500 $475 not played = $1,025 played)
(c)
Prepaid Insurance Insurance Expense

June 1 1,800
Dec. 31 Adj. 1,050 Dec. 31 Adj. 1,050
Dec. 31 Bal. 750
Prepaid Rent Rent Expense
Aug. 31 6,500 Dec. 31 Adj. 5,200

Dec. 31 Adj. 5,200
Dec. 31 Bal. 1,300
Unearned Revenue Sponsorship Revenue
Dec. 31 Adj. 1,600 Sept. 4 3,600 Dec. 31 Adj. 1,600

Dec. 31 Adj. 1,025 Dec. 5 1,500 Dec. 31 Adj. 1,025
Dec. 31 Bal. 2,475 Dec. 31 Bal. 2,625
Prepaid Cleaning Repairs and Maintenance Expense
Nov . 30 2,000 Dec. 31 Adj. 1,000 Dec. 31 Adj. 1,000
Dec. 31 Bal. 1,000
Note: The Cash account has not been included in this solution, as per the instructions.
EXERCISE 4-4
(a) 2015
Dec. 31 Depreciation Expense..................................................... 4,000
Accumulated DepreciationVehicles....................... 4,000
($28,000 7 = $4,000 per year)
31 Depreciation Expense..................................................... 4,000

Accumulated DepreciationEquipment................... 4,000
($12,000 3 = $4,000 per year)
31 Depreciation Expense..................................................... 2,000

Accumulated DepreciationFurniture...................... 2,000
($10,000 5 = $2,000 per year)
(b)
Vehicles Equipment Furniture
Cost $28,000 $12,000 $10,000

Accumulated $28,000 $12,000 $10,000
depreciation 74 16,000 3 2 10,000 51 2,000
Carrying amount $12,000 $ 2,000 $ 8,000

EXERCISE 4-5
(a) 2015
Dec. 31 Utilities Expense........................................................... 425
Accounts Payable............................................... 425
31 Salaries Expense......................................................... 2,000

Salaries Payable................................................. 2,000
($3,500 4/7 days = $2,000)
31 Interest Expense.......................................................... 188

Interest Payable.................................................. 188
($45,000 5% 1/12 months = $188 (rounded))
31 Accounts Receivable................................................... 300

Fees Earned....................................................... 300
31 Accounts Receivable................................................... 6,000

Rent Revenue.................................................... 6,000
(b) 2016
Jan. 11 Accounts Payable........................................................ 425
Cash................................................................... 425
4 Salaries Payable.......................................................... 2,000

Salaries Expense......................................................... 1,500
Cash................................................................... 3,500
1 Interest Payable........................................................... 188

Cash................................................................... 188
4 Cash............................................................................. 300
Accounts Receivable......................................... 300
2 Cash............................................................................. 6,000
Accounts Receivable......................................... 6,000
EXERCISE 4-8
(a) December entry: Cash 1,600

Unearned Revenue 1,600
January entry: Unearned Revenue 1,600

Service Revenue 1,600
Unearned Revenue
Jan. 1 Bal. 2,350
Adj. 1,600
Jan. 31 Bal. 750
The balance in Unearned Revenue on January 1, 2015 was $2,350 ($750 + $1,600).
(b) Journal entry to record depreciation: Depreciation Expense

Accumulated Depreciation
1 month = $60; Annual depreciation = $720 ($60 12)

Number of months depreciated = accumulated depreciation ($3,660) monthly
depreciation ($60) = 61 months or 5 years, 1 month
Therefore the equipment is 5 years, 1 month old. It would have been purchased on
January 1, 2010.
(c) Journal entry to adjust insurance: Insurance Expense

Prepaid Insurance
Since the prepaid insurance is $1,600, we can assume that 4 months ($1,600 $400
= 4) of the policy remain. Consequently, if it expires at $400 per month, then the policy
is $3,200 $400 = 8 months old and it was purchased on June 1, 2014.
Prepaid Insurance
June 1, 2014 4,800 June 30 to
Dec. 31 Adj. 2,800
Dec. 31, 2014 Bal. 2,000
Jan. 31 Adj. 400
Jan. 31, 2015 Bal. 1,600
The original insurance policy premium was $4,800 ($400 12). The monthly
adjustments made June 30 through December 31 totalled $2,800 ($400 7).
(d) Journal entry to adjust supplies: Supplies Expense

Supplies
Supplies Expense Supplies

Jan. 1 Bal. 900
Adj. 950 Purchase 750 Adj. 950
Jan. 31 Bal. 950 Jan. 31 Bal. 700
Derive the balance by working backward up through the T account. Therefore, the balance in
Supplies on January 1 was $900 ($700 + $950 $750).
(e) Journal entry to record income tax payable: Income Tax Expense
Income Tax Payable
Income Tax Expense Income Tax Payable

Jan. 1 Bal. 150
Adj. 100 Payment 100 Adj. 100
Jan. 31 Bal. 100 Jan. 31 Bal. 150
Derive the balance by working backward up through the T account. The balance in Income
Tax Payable on January 1 was $$150 ($150 $100 + $100). It is assumed that income tax
instalments are paid monthly and that the balance owing at December 31 (January 1) was
the adjustment required at year-end after the income tax return was prepared. This balance
owing must be paid within three months of the companys year-end.
PROBLEM 4-3A
1. (a) Mar. 31Interest Expense............................................................. 80

Interest Payable ...................................................... 80
($12,000 8% 1/12 months)
(b) Apr. 1 Interest Payable............................................................ 80

Cash......................................................................... 80
2. (a) Mar. 31Interest Receivable.......................................................... 250

Interest Revenue ..................................................... 250
(b) Apr. 1 Cash.............................................................................. 250

Interest Receivable................................................... 250
3. (a) Mar. 31Salaries Expense............................................................ 2,000

Salaries Payable (5 $200 2 days)...................... 2,000
(b) Apr. 3 Salaries Payable........................................................... 2,000

Salaries Expense ......................................................... 3,000
Cash......................................................................... 5,000
4. (a) Mar. 31Utilities Expense.............................................................. 550

Office Expense.............................................................. 200
Accounts Payable .................................................... 750
(b) Apr. 10 Accounts Payable......................................................... 750

Cash......................................................................... 750
5. (a) Mar. 31Accounts Receivable....................................................... 3,000

Service Revenue...................................................... 3,000
(b) Apr. 4 No entry required
Apr. 30 Cash.............................................................................. 2,000

Accounts Receivable................................................ 2,000
PROBLEM 4-4A
1. (a) June 1, 2014 Vehicles............................................................... 80,000

Cash............................................................ 80,000
(b) Nov. 30, 2015 Depreciation Expense......................................... 8,000

Accumulated DepreciationVehicles......... 8,000
($80,000 5 years 6/12)
2. (a) Oct. 1, 2015 Cash (400 $320)............................................... 128,000

Unearned Revenue..................................... 128,000
(b) Nov. 30, 2015 Unearned Revenue............................................. 32,000

Ticket Revenue ($128,000 2/8 plays)...... 32,000
3. (a) Feb. 17, 2015 Supplies............................................................... 2,100

Cash............................................................ 2,100
(b) Nov. 30, 2015 Supplies Expense ($1,000 + $2,100 $500)...... 2,600
Supplies...................................................... 2,600
4. (a) June 1, 2015 Cash.................................................................... 100,000

Bank Loan Payable..................................... 100,000
(b) Nov. 30, 2015 Interest Expense................................................. 500

Interest Payable.......................................... 500
($100,000 6% 1/12 months)
(c) Dec. 1, 2015 Interest Payable ................................................. 500

Cash............................................................ 500
5. (a) Nov. 2, 2015 Cash.................................................................... 200

Rent Revenue............................................. 200
(b) Nov. 30, 2015 Accounts Receivable........................................... 200

Rent Revenue............................................. 200
(c) Dec. 4, 2015 Cash.................................................................... 600

Accounts Receivable.................................. 200
Rent Revenue............................................. 400
6. (b) Nov. 30, 2015 Salaries Expense................................................ 1,000

Salaries Payable ($7,000 1/7 days)........ 1,000
(c) Dec. 7, 2015 Salaries Payable................................................. 1,000

Salaries Expense ............................................... 6,000
Cash............................................................ 7,000
7. (b) Nov. 30, 2015 Income Tax Expense........................................... 1,250

Income Tax Payable................................... 1,250
(c) Dec. 29, 2015 Income Tax Payable............................................ 1,250

Cash............................................................ 1,250
PROBLEM 4-6A
(a) Cash Balance, December 31, 2015 = $177,600 cash receipts $150,440 cash
payments = $27,160.
(b) (1)
CREATIVE DESIGNS LTD.
Income Statement
Revenues
Fees earned ($157,600 + $2,400).................................. $160,000
Expenses
Salaries expense ($59,800 + $3,050)............................. $62,850
Rent expense ($20,000 $2,000).................................. 18,000
Supplies expense ($6,800 $1,260).............................. 5,540
Advertising expense........................................................ 6,800
Depreciation expense ($35,400 6)............................... 5,900
Insurance expense ($3,840 11/12) ............................. 3,520
Office expense................................................................ 1,800
Total expenses....................................................... 104,410
Profit before income tax........................................................... 55,590
Income tax expense................................................................. 13,000
Profit ......................................................................................... $ 42,590
(2)

Balance, January 1 $ 0 $ 0 $ 0
Profit .................................................................... 42,590 42,590
Dividends 000 000 (10,000) (10,000)
Balance, December 31 $20,000 $ 32,590 $52,590
(b) (Continued)
(3)

December 31, 2015
Assets
Current assets
Cash............................................................................... $27,160
Accounts receivable ...................................................... 2,400
Supplies ......................................................................... 1,260
Prepaid rent.................................................................... 2,000
Prepaid insurance ($3,840 $3,520)............................. 320
Total current assets................................................ 33,140
Equipment...................................................................... $35,400
Less: Accumulated depreciationequipment................ 5,900 29,500
Total assets .......................................................................... $62,640

Current liabilities
Salaries payable ............................................................ $ 3,050
Income tax payable ($13,000 $6,000)....................... 7,000
Total current liabilities............................................. 10,050
Shareholders equity
Common shares ........$20,000
Retained earnings.......................................................... 32,590
Total shareholders equity...................................... 52,590
Total liabilities and shareholders equity.................................. $62,640
PROBLEM 4-10A
(a)
OZAKI CORP.
Adjusted Trial Balance
September 30, 2015
Debit Credit
Cash............................................................................................. $ 3,250
Accounts receivable..................................................................... 8,435
Supplies........................................................................................ 1,265
Equipment..................................................................................... 15,040
Accumulated depreciationequipment....................................... $ 750
Accounts payable......................................................................... 4,460
Salaries payable........................................................................... 840
Interest payable............................................................................ 105
Income tax payable...................................................................... 200
Unearned revenue........................................................................ 550
Bank loan payable........................................................................ 7,800
Common shares........................................................................... 7,000
Retained earnings........................................................................ 2,600
Dividends ..................................................................................... 700
Fees earned................................................................................ 22,485
Depreciation expense.................................................................. 750
Interest expense........................................................................... 105
Rent expense.............................................................................. 1,500
Salaries expense ......................................................................... 13,840
Supplies expense........................................................................ 485
Utilities expense........................................................................... 820
Income tax expense.................................................................... 600
Totals..................................................................................... $46,790 $46,790
(b) Closing Entries:
2015
Sept. 30 Fees Earned.................................................................... 22,485
Income Summary.................................................... 22,485
30 Income Summary............................................................. 18,100

Salaries Expense.................................................... 13,840
Rent Expense......................................................... 1,500
Utilities Expense..................................................... 820
Depreciation Expense............................................. 750
Supplies Expense................................................... 485
Interest Expense..................................................... 105
Income Tax Expense.............................................. 600
30 Income Summary............................................................. 4,385

Retained Earnings.................................................. 4,385
30 Retained Earnings........................................................... 700

Dividends................................................................ 700
(c)
OZAKI CORP.
Post-Closing Trial Balance
September 30, 2015
Debit Credit
Cash.................................................................................... $3,250
Accounts receivable............................................................ 8,435
............................................................................................. 1,265
Supplies............................................................................... 15,040
Equipment........................................................................... $ 750
Accumulated depreciationequipment.............................. 4,460
Accounts payable................................................................ 840
Salaries payable.................................................................. 105
Interest payable................................................................... 200
Income tax payable............................................................. 550
Unearned revenue............................................................... 7,800
Bank loan payable............................................................... 7,000
Common shares.................................................................. 0000 0 6,285
Retained earnings............................................................... $27,990 $27,990
.............................................................................................
Totals...............................................................................
PROBLEM 4-11A
(a) and (b)
Cash
May 31 Bal. 6,400
Accounts Receivable
May 31 Bal. 11,800
May 31 Adj. 1,780
May 31 Bal. 13,580
Supplies
May 31 Bal. 4,880
May 31 Adj. 3,540
May 31 Bal. 1,340
Prepaid Insurance
May 31 Bal. 4,550
May 31 Adj. 910
May 31 Bal. 3,640
Land
May 31 Bal. 106,370
Buildings
May 31 Bal. 168,000
Accumulated DepreciationBuildings
May 31 Bal. 16,800
May 31 Adj. 700
May 31 Bal. 17,500
Furniture
May 31 Bal. 33,600
Accumulated DepreciationFurniture
May 31 Bal. 13,440
May 31 Adj. 560
May 31 Bal. 14,000
Accounts Payable
May 31 Bal. 8,140
May 31 Adj. 2,240
May 31 Bal. 10,380
Salaries Payable
May 31 Adj. 1,590
May 31 Bal. 1,590
Interest Payable
May 31 Adj. 840
May 31 Bal. 840
Income Tax Payable

May 31 Adj. 1,000
May 31 Bal. 1,000
Unearned Revenue
May 31 Bal. 17,500
May 31 Adj. 2,500 May 31 Adj. 2,800
May 31 Bal. 17,800
Mortgage Payable
May 31 Bal. 126,000
(a) and (b) (Continued)
Common Shares
May 31 Bal. 60,000
Retained Earnings
May 31 Bal. 41,580
Dividends
May 31 Bal. 2,000
Rent Revenue
May 31 Bal.200,320
May 31 Adj. 2,800 May 31 Adj. 2,500
May 31 Adj. 1,780
May 31 Bal. 201,800
Salaries Expense
May 31 Bal. 98,700
May 31 Adj. 1,590
May 31 Bal. 100,290
Utilities Expense
May 31 Bal. 23,870
May 31 Adj. 2,240
May 31 Bal. 26,110
Interest Expense
May 31 Bal. 9,240
May 31Adj. 840
May 31 Bal. 10,080
Insurance Expense
May 31 Bal. 6,370
May 31 Adj. 910
May 31 Bal. 7,280
Advertising Expense
May 31 Bal. 1,000
Supplies Expense
May 31 Adj. 3,540
Depreciation Expense
May 31 Adj. 700
May 31 Adj. 560
May 31 Bal. 1,260
Income Tax Expense

May 31 Bal. 7,000
May 31 Adj. 1,000
May 31 Bal. 8,000
(b) 2015
1. May 31 Insurance Expense................................................ 910
Prepaid Insurance......................................... 910
($10,920 12 months)
2. 31 Supplies Expense.................................................. 3,540

Supplies ($4,880 $1,340).......................... 3,540
3. 31 Depreciation Expense............................................ 700

($168,000 20 years 1/12 months)
Accumulated DepreciationBuildings......... 700
4. 31 Depreciation Expense............................................ 560

($33,600 5 years 1/12 months)
Accumulated DepreciationFurniture......... 560
5. 31 Unearned Revenue (25 $100)............................ 2,500

Rent Revenue............................................... 2,500
6. 31 Rent Revenue........................................................ 2,800

Unearned Revenue....................................... 2,800
7. 31 Accounts Receivable............................................. 1,780

Rent Revenue............................................... 1,780
8. 31 Salaries Expense................................................... 1,590

Salaries Payable........................................... 1,590
9. 31 Interest Expense.................................................... 840

Interest Payable............................................ 840
[($126,000 8%) 1/12 months]
10. 31 Utilities Expense.................................................... 2,240

Accounts Payable......................................... 2,240
11. 31 Income Tax Expense.............................................. 1,000

Income Tax Payable..................................... 1,000
(c)
RAINBOW LODGE LTD.
May 31, 2015
Debit Credit
Cash.................................................................................... $ 6,400
Accounts receivable............................................................ 13,580
Supplies............................................................................... 1,340
Prepaid insurance................................................................ 3,640
Land..................................................................................... 106,370
Buildings.............................................................................. 168,000
Accumulated depreciationbuildings................................. $ 17,500
Furniture.............................................................................. 33,600
Accumulated depreciationfurniture.................................. 14,000
Accounts payable................................................................ 10,380
Salaries payable.................................................................. 1,590
Interest payable................................................................... 840
Income tax payable............................................................. 1,000
Unearned revenue............................................................... 17,800
Mortgage payable................................................................ 126,000
Common shares.................................................................. 60,000
Retained earnings............................................................... 41,580
Dividends............................................................................. 2,000
Rent revenue....................................................................... 201,800
Salaries expense................................................................. 100,290
Utilities expense.................................................................. 26,110
Interest expense.................................................................. 10,080
Insurance expense.............................................................. 7,280
Advertising expense............................................................ 1,000
Supplies expense................................................................ 3,540
Depreciation expense.......................................................... 1,260
Income tax expense............................................................ 8,000 000000 0
Totals............................................................................... $492,490 $492,490
(d) (1)
RAINBOW LODGE LTD.
Income Statement
Year Ended May 31, 2015
Revenues
Rent revenue................................................................... $201,800
Expenses
Salaries expense............................................................. $100,290
Utilities expense.............................................................. 26,110
Interest expense.............................................................. 10,080
Insurance expense.......................................................... 7,280
Supplies expense............................................................ 3,540
Depreciation expense..................................................... 1,260
Advertising expense........................................................ 1,000
Total expenses....................................................... 149,560
Profit before income tax........................................................... 52,240
Income tax expense................................................................. 8,000
Profit ......................................................................................... $44,240
(2)
RAINBOW LODGE LTD.
Year Ended May 31, 2015

Balance, June 1, 2014 $56,000 $41,580 $97,580

Profit................................................................... 44,240 44,240
Dividends 00 0000 (2,000) (2,000)
Balance, May 31, 2015 $60,000 $83,820 $143,820
(d) (Continued)
(3)
RAINBOW LODGE LTD.
May 31, 2015
Assets
Current assets
Cash............................................................... $ 6,400
Accounts receivable....................................... 13,580
Supplies......................................................... 1,340
Prepaid insurance.......................................... 3,640
Total current assets.................................... $ 24,960
Land............................................................... $106,370
Buildings......................................................... $168,000
Less: Accumulated depreciation................... 17,500 150,500
Furniture......................................................... $33,600
Less: Accumulated depreciation................... 14,000 19,600
Total property, plant, and equipment.......... 276,470
Total assets............................................................. $301,430

Current liabilities
Accounts payable........................................... $10,380
Salaries payable............................................ 1,590
Interest payable............................................. 840
Income tax payable........................................ 1,000
Unearned revenue......................................... 17,800
Total current liabilities................................. $ 31,610
Mortgage payable.......................................... 126,000
Total liabilities............................................. 157,610
Shareholders equity
Common shares............................................. $60,000
Retained earnings.......................................... 83,820
Total shareholders equity......................... 143,820
Total liabilities and shareholders equity................. $301,430
Solutions Manual 5-69 Chapter 5
Copyright 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
(e) The financial position and performance of a company can be evaluated in terms of
its liquidity, profitability and solvency.
Liquidity
Rainbow Lodge does not appear at first glance appear to have a healthy liquidity
position. Although it has a positive cash balance of $6,400, the company has a
current ratio of only 0.8:1 ($24,960 $31,610). This seems to indicate initially that
there are insufficient current assets to repay the companys current liabilities. It
should be noted that simply looking at the current ratio does not tell the whole story.
Of the total current liabilities, 56% ($17,800 $31,610) is made up of unearned
revenue, which will not require the payment of cash. On the other hand, there are
current assets that are not going to turn into cash such as supplies and prepaid
insurance. Excluding supplies, prepaid insurance and unearned revenue, the
revised current ratio is 1.4:1 [($24,960 $1,340 $3,640) ($31,610 $17,800)].
Profitability
According to the income statement, Rainbow Lodge was profitable in 2015 with after tax
profit of over $44,000. The lodge also has a positive balance in retained earnings,
which indicates it has been profitable in the past.
The company also paid out dividends of $2,000 in the past year, which may be of
interest to your friend if your friend is considering an income investment.
Solvency
The company has a large mortgage, which is in line with the cost of the property,
plant, and equipment. Shareholders equity is smaller, but by not a large margin,
than total liabilities.
Overall, Rainbow Lodge appears to have a healthy financial position. However, a

more complete analysis could be performed if your friend had access to prior years
financial statements or some industry information. We would then be able to
perform some comparative analysis to better evaluate Rainbows financial health.

Chapter 5
EXERCISE 5-6
(a) Dec. 3 Accounts Receivable........................................... 18,000

Sales............................................................... 18,000
3 Cost of Goods Sold.............................................. 10,000

Merchandise Inventory................................... 10,000
7 No entry necessary.
8 Sales Returns and Allowances............................ 1,200

Accounts Receivable...................................... 1,200
Merchandise Inventory........................................ 650

Cost of Goods Sold........................................ 650
11 Cash ($16,800 $336)........................................ 16,464

Sales Discounts [($18,000 $1,200) 2%]........ 336
Accounts Receivable ($18,000 $1,200)...... 16,800
(b) Dec. 3 Merchandise Inventory........................................ 18,000

Accounts Payable........................................... 18,000
7 Merchandise Inventory........................................ 450

Cash............................................................... 450
8 Accounts Payable................................................ 1,200

Merchandise Inventory................................... 1,200
11 Accounts Payable ($18,000 $1,200)................ 16,800

Merchandise Inventory
[($18,000 $1,200) 2%].......................... 336
Cash ($16,800 $336)................................... 16,464
(c) Sales..................................................................................... $18,000

Less: Sales returns and allowances.................................... $1,200
Sales discounts.......................................................... 336 1,536
Net sales.............................................................................. 16,464
Cost of goods sold ($10,000 $650)................................... 9,350
Gross profit........................................................................... $7,114

EXERCISE 5-8
(a)
BLUE DOOR CORPORATION
Income Statement (Single-Step)
Revenues
Sales.................................................................................. $2,400,000
Less: Sales returns and allowances...................$41,000
Sales discounts......................................... 8,500 49,500
Net sales............................................................................ 2,350,500
Interest revenue ................................................................ 30,000
Rent revenue .................................................................... 24,000 $2,404,500
Expenses
Cost of goods sold............................................................. $1,085,000
Salaries expense............................................................... 675,000
Depreciation expense........................................................ 125,000
Interest expense................................................................ 70,000
Advertising expense.......................................................... 55,000
Freight out......................................................................... 25,000
Insurance expense............................................................ 15,000 2,050,000
Profit before income tax................................................................................. 354,500
Income tax expense....................................................................................... 70,000
Profit............................................................................................................... $ 284,500

(b)
BLUE DOOR CORPORATION
Income Statement (Multiple-Step)
Sales.......................................................................................................... $2,400,000
Less: Sales returns and allowances.................................. $41,000
Sales discounts........................................................ 8,500 49,500
Net sales.................................................................................................... 2,350,500
Cost of goods sold..................................................................................... 1,085,000
Gross profit................................................................................................. 1,265,500
Operating expenses
Salaries expense........................................................... $675,000
Depreciation expense.................................................... 125,000
Advertising expense...................................................... 55,000
Freight out..................................................................... 25,000
Insurance expense........................................................ 15,000
Total operating expenses................................................................ 895,000
Profit from operations................................................................................. 370,500
Other revenues and expenses
Interest revenue ........................................................... $30,000
Rent revenue................................................................. 24,000
Interest expense............................................................ (70,000) (16,000)
Profit before income tax............................................................................. 354,500
Income tax expense................................................................................... 70,000
Profit........................................................................................................... $ 284,500
(a) The Blue Door Corporation is classifying its expenses by function, which is a method of
classifying expenses by functional areas. For smaller companies such as this one, the
difference between classification of items on the income statement by function or nature is
not significant although if listed by nature, cost of goods sold would typically be shown in two
parts: goods purchased and changes in inventory.
EXERCISE 5-10
(a)
MONTMORENCY LTE
Income Statement (Multiple-step)

Year Ended August 31, 2015
Net sales.................................................................................................... $7,090,000

Cost of goods sold..................................................................................... 4,030,000
Gross profit................................................................................................. 3,060,000
Operating expenses
Administrative expenses............................................... $670,000
Selling expenses........................................................... 260,000
Total operating expenses................................................................ 930,000
Profit from operations................................................................................. 2,130,000
Other expenses....................................................................................... 270,000
Profit before income tax............................................................................. 1,860,000
Income tax expense................................................................................... 560,000
Profit........................................................................................................... $1,300,000
(b) Expenses are classified by function (cost of goods sold, administrative, selling) and not
by nature.
(c) Gross profit margin $3,060,000 $7,090,000 = 43.2%
Profit margin $1,300,000 $7,090,000 = 18.3%

*EXERCISE 5-15
LIVELY LIMITED
Income Statement
Year Ended February 28, 2015
Sales revenue
Sales $435,500
Less: Sales discounts $27,300
Sales returns and allowances 15,600 42,900
Net sales 392,600
Cost of goods sold
Merchandise inventory, beginning $ 54,600
Purchases $273,000
Less: Purchase discounts 39,000
Purchase returns and allowances 20,800
Net purchases 213,200
Add: Freight in 8,450
Cost of goods purchased 221,650
Cost of goods available for sale 276,250
Less: Merchandise inventory, ending 79,300
Cost of goods sold 196,950
Gross profit 195,650
Operating expenses
Administrative expenses $120,900
Selling expenses 9,100
Total operating expenses 130,000
Profit from operations 65,650
Profit $ 48,550
(b)
Feb. 28 Merchandise Inventory (ending)................................ 79,300

Cost of Goods Sold................................................... 196,950
Purchase Returns and Allowances........................... 20,800
Purchase Discounts.................................................. 39,000
Merchandise Inventory (beginning)..................... 54,600
Purchases............................................................ 273,000
Freight In.............................................................. 8,450

PROBLEM 5-2A
(a) Phantom Book Warehouse Ltd. is a wholesaler. Its suppliers are publishers and its customers
are book stores.
(b)
June 1 Merchandise Inventory (140 $18).............................. 2,520
Accounts Payable............................................... 2,520
3 Accounts Receivable (150 $22)................................. 3,300

Sales................................................................... 3,300
Cost of Goods Sold (150 $18).................................... 2,700

Merchandise Inventory....................................... 2,700
5 Accounts Payable.......................................................... 180

Merchandise Inventory (10 $18)..................... 180
8 Accounts Receivable (80 $25)................................... 2,000

Sales................................................................... 2,000
Cost of Goods Sold (80 $18)...................................... 1,440

9 Sales Returns and Allowances...................................... 300

Accounts Receivable.......................................... 300
11 Merchandise Inventory (130 $15).............................. 1,950

Accounts Payable............................................... 1,950
12 Cash ($3,300 $66)...................................................... 3,234

Sales Discounts ($3,300 2%)..................................... 66
Accounts Receivable ......................................... 3,300
17 Cash ($1,700 $34)...................................................... 1,666

Sales Discounts ($1,700 2%)..................................... 34
Accounts Receivable ($2,000 $300) .............. 1,700
22 Accounts Receivable (125 $25)................................. 3,125

Sales................................................................... 3,125
Cost of Goods Sold (125 $15).................................... 1,875


(b) (Continued)
June 25 Sales Returns and Allowances...................................... 375

Accounts Receivable.......................................... 375
Merchandise Inventory (15 $15)................................ 225

Cost of Goods Sold............................................ 225
29 Accounts Payable ($2,520 $180)............................... 2,340

Cash................................................................... 2,340
(c)
May 31 3,150 June 3 2,700
7 720
June 1 2,520 5 180
11 1,950 8 1,440
25 225 22 1,875
June 30 Bal. 1,650
(d) Books on hand at June 30 = 175 + 140 150 10 80 + 130 125 + 15 = 95
Average cost per book
= $1,650 95 = $17.37

PROBLEM 5-5A
(b)
May 1 Merchandise Inventory.............................................. 5,800

Accounts Payable............................................ 5,800
3 Merchandise Inventory.............................................. 145

Cash................................................................. 145
4 Accounts Receivable................................................ 3,500

Sales................................................................ 3,500

Merchandise Inventory..................................... 2,100
7 Freight Out................................................................ 90
Cash................................................................. 90
8 Accounts Payable..................................................... 200

Merchandise Inventory..................................... 200
9 Accounts Payable ($5,800 $200)........................... 5,600

Merchandise Inventory ($5,600 1%)............. 56
Cash................................................................. 5,544
11 Supplies.................................................................... 400
Cash................................................................. 400
14 Cash ($3,500 $70)................................................. 3,430

Sales Discounts ($3,500 2%)................................ 70
Accounts Receivable....................................... 3,500
15 Cash ......................................................................... 1,000

18 Merchandise Inventory.............................................. 2,000

21 No entry required (freight paid by Harlow)
22 Cash ......................................................................... 6,500

Sales................................................................ 6,500

Merchandise Inventory..................................... 3,900

(b) (Continued)
May 29 Sales Returns and Allowances................................. 100

Cash................................................................. 100
Merchandise Inventory.............................................. 60
Cost of Goods Sold.......................................... 60
31 Cost of Goods Sold................................................... 149

Merchandise Inventory..................................... 149
($5,249* $5,100 = $149 shortage)
* Unadjusted balance in Merchandise Inventory account: $3,500 + $5,800 + $145 $2,100

$200 $56 + $2,000 $3,900 + $60 = $5,249

(a) and (b)
Cash
May 1 Bal. 7,000 May 3 145
May 14 3,430 May 7 90
May 15 1,000 May 9 5,544
May 22 6,500 May 11 400
May 29 100
May31 Bal. 11,651
Accounts Receivable
May 1 Bal. 1,500 May 14 3,500
May 4 3,500 May 15 1,000
May 31 Bal. 500
May 1 3,500 May 4 2,100
May 1 5,800 May 8 200
May 3 145 May 9 56
May 18 2,000 May 22 3,900
May 29 60 May 31 149
May 31 Bal. 5,100
Supplies
May 11 400
May 31 Bal. 400
Common Shares
May 1 Bal. 8,000
May 31 Bal. 8,000
Accounts Payable
May 8 200 May 1 5,800
May 9 5,600 May 18 2,000
May 31 Bal. 2,000
Sales
May 4 3,500
May 22 6,500
May 31 Bal. 10,000
Sales Returns and Allowances

May 29 100

May 31 Bal. 100
Sales Discounts
May 14 70
May 31 Bal. 70
Freight Out
May 7 90
May 31 Bal. 90
Cost of Goods Sold

May 4 2,100 May 29 60
May 22 3,900
May 31 149
May 31 Bal. 6,089
Retained Earnings
May 1 Bal. 4,000
May 31 Bal. 4,000

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

(c)
EAGLE HARDWARE STORE LTD.
Income Statement (Partial)
Month Ended May 31, 2015
Sales .................................................................................... $10,000

Less: Sales returns and allowances..................................... $100
Sales discounts........................................................... 70 170
Net sales................................................................................ 9,830
Cost of goods sold................................................................. 6,089
Gross profit............................................................................ $ 3,741
(d)
EAGLE HARDWARE STORE LTD.
Statement of Financial Position (Partial)
May 31, 2015
Assets
Cash............................................................................ $11,651
Accounts receivable.................................................... 500
Merchandise inventory............................................... 5,100
Supplies...................................................................... 400
Total current assets.......................................... $17,651

PROBLEM 5-7A
(b)
Dec. 31 Insurance Expense ($3,000 11/12).................................... 2,750

Prepaid Insurance........................................................ 2,750
31 Supplies Expense................................................................... 2,190

Supplies ($2,940 $750).............................................. 2,190
31 Depreciation Expense............................................................ 10,500

Accumulated DepreciationBuildings...................... 6,000
Accumulated DepreciationEquipment .................. 4,500
31 Salaries Expense.................................................................... 750

Salaries Payable.......................................................... 750
31 Interest Expense..................................................................... 735

Interest Payable............................................................ 735
31 Unearned Revenue ($4,000 $975)...................................... 3,025

Sales.............................................................................. 3,025
Cost of Goods Sold................................................................ 2,000

Merchandise Inventory................................................ 2,000
31 Income Tax Expense.............................................................. 500

Income Tax Payable..................................................... 500
31 Cost of Goods Sold................................................................ 2,950

Merchandise Inventory................................................ 2,950
($28,750 $2,000 = $26,750 $23,800 = $2,950 shortage)


(a) and (b)
Equipment
Cash Dec. 31 45,000
Dec. 31 17,000 Dec.31 Bal. 45,000
Dec.31 Bal. 17,000
Accumulated Depreciation
Accounts Receivable Equipment
Dec. 31 31,700 Dec. 31 18,000
Dec.31 Bal. 31,700 Dec. 31 4,500
Dec. 31 Bal. 22,500
Dec.31 28,750 Dec. 31 2,000 Accounts Payable
Dec. 31 2,950 Dec. 31 33,735
Dec. 31 Bal. 23,800 Dec.31 Bal. 33,735
Supplies Unearned Revenue

Dec. 31 2,940 Dec. 31 2,190 Dec. 31 3,025 Dec. 31 4,000
Dec. 31 Bal. 750 Dec.31 Bal. 975
Prepaid Insurance Salaries Payable

Dec. 31 3,000 Dec. 31 2,750 Dec. 31 750
Dec. 31 Bal. 250 Dec. 31 Bal. 750
Land Interest Payable

Dec. 31 30,000 Dec. 31 735
Dec.31 Bal. 30,000 Dec. 31 Bal. 735
Buildings Income Tax Payable

Dec. 31 150,000 Dec. 31 500
Dec.31 Bal. 150,000 Dec. 31 Bal. 500
Accumulated Depreciation Mortgage Payable

Buildings Dec. 31 147,100
Dec. 31 24,000 Dec.31 Bal. 147,100
Dec. 31 6,000
Dec. 31 Bal. 30,000


(a) and (b) (Continued) Salaries Expense
Dec. 31 30,950
Common Shares Dec. 31 750
Dec. 31 13,000 Dec. 31 Bal. 31,700
Dec.31 Bal. 13,000
Retained Earnings
Dec. 31 31,425
Dec.31 Bal. 31,425
Dividends
Dec. 31 2,000
Dec. 31 Bal. 2,000
Sales
Dec. 31 265,770
Dec. 31 3,025
Dec.31Bal. 268,795
Sales Returns and Allowances

Dec. 31 2,500
Dec. 31 Bal. 2,500
Sales Discounts
Dec. 31 3,275
Dec. 31 Bal. 3,275
Cost of Goods Sold

Dec. 31 171,225
Dec. 31 2,000
Dec. 31 2,950
Dec.31Bal. 176,175

Depreciation Expense Dec. 31 2,190

Dec. 31 10,500 Dec. 31 Bal. 2,190
Dec. 31 Bal. 10,500
Interest Expense
Utilities Expense Dec. 31 8,090
Dec. 31 5,100 Dec. 31 735
Dec. 31 Bal. 5,100 Dec. 31Bal. 8,825
Insurance Expense Income Tax Expense

Dec. 31 2,750 Dec.31 5,500
Dec. 31 Bal. 2,750 Dec. 31 500
Dec.31 Bal. 6,000
Supplies Expense

(c)
MESA INC.
December 31, 2015
Debit Credit
Cash.............................................................................. $ 17,000
Accounts receivable..................................................... 31,700
...................................................................................... 23,800
Merchandise inventory................................................. 750
Supplies........................................................................ 250
Prepaid insurance......................................................... 30,000
Land.............................................................................. 150,000
Buildings....................................................................... $ 30,000
Accumulated depreciationbuildings.......................... 45,000
Equipment..................................................................... 22,500
Accumulated depreciationequipment........................ 33,735
Accounts payable......................................................... 975
Unearned revenue........................................................ 750
Salaries payable........................................................... 735
Interest payable............................................................ 500
Income tax payable...................................................... 147,100
Mortgage payable......................................................... 13,000
Common shares........................................................... 31,425
Retained earnings......................................................... 2,000
Dividends...................................................................... 268,795
Sales............................................................................. 2,500
Sales returns and allowances....................................... 3,275
Sales discounts............................................................. 176,175
Cost of goods sold........................................................ 31,700
Salaries expense.......................................................... 10,500
Depreciation expense................................................... 5,100
Utilities expense............................................................ 2,750
Insurance expense....................................................... 2,190
Supplies expense......................................................... 8,825
...................................................................................... 6,000 0000 000
Interest expense...........................................................
Income tax expense.....................................................
Totals........................................................................ $549,515 $549,515


(d)
MESA INC.
Income Statement
Sales revenue
Sales................................................................... $268,795
Less: Sales returns and allowances.................. $2,500
Sales discounts......................................... 3,275 5,775
Net sales............................................................. 263,020
Cost of goods sold....................................................... 176,175
Gross profit................................................................... 86,845
Operating expenses
Salaries expense................................................. $31,700
Depreciation expense......................................... 10,500
Utilities expense.................................................. 5,100
Insurance expense.............................................. 2,750
Supplies expense......................................................... 2,190
Total operating expenses.................................... 52,240
Profit from operations................................................... 34,605
Interest expense................................................. 8,825
Profit before income tax............................................... 25,780
Income tax expense.................................................... 6,000
Profit............................................................................ $ 19,780

*PROBLEM 5-11A
(a)
June 1 Purchases (140 $18).............................................. 2,520
3 Accounts Receivable (150 $22)............................. 3,300

Sales................................................................ 3,300
5 Accounts Payable..................................................... 180

Purchase Returns and Allowances.................. 180
8 Accounts Receivable (80 $25)............................... 2,000

Sales................................................................ 2,000
9 Sales Returns and Allowances................................. 300

Accounts Receivable....................................... 300
11 Purchases (130 $15).............................................. 1,950

12 Cash ($3,300 $66).............................................. 3,234

Sales Discounts ($3,300 2%)............................... 66
Accounts Receivable ................................... 3,300
17 Cash ($1,700 $34)............................................ 1,666

Sales Discounts ($1,700 2%)............................... 34
Accounts Receivable ($2,000 $300) ........ 1,700
22 Accounts Receivable (125 $25)........................... 3,125

Sales............................................................. 3,125
25 Sales Returns and Allowances................................ 375

Accounts Receivable.................................... 375
29 Accounts Payable ($2,520 $180)......................... 2,340

Cash............................................................. 2,340

*PROBLEM 5-11A (Continued)

(b) The advantages of the periodic inventory system are that it is simpler and cheaper compared to a
perpetual inventory system. There are fewer accounting entries and cash registers need not be
able to read bar codes to apply the appropriate cost as is required in the perpetual inventory
system.
However, a perpetual inventory system enables management to monitor purchases and sales to
make the optimum use of the money available for stocking inventory. Fewer stock-outs are
experienced when using the perpetual system as reduction in inventory levels can be quickly
identified and restocking done before the business runs out of inventory. With the perpetual
system, cost of goods sold can be reported at any time and consequently, timely reporting of
results can be achieved. When customers make inquiries concerning the availability of stock
from a merchant, a quick reply can be obtained and provided when a perpetual inventory system
is used.
*PROBLEM 5-15A

ANDREAS ATHLETIC WEAR INC.

Income Statement
Sales revenue
Sales........................................................................................... $955,500
Less: Sales discounts................................................................ $22,500
Sales returns and allowances.......................................... 12,000 34,500
Net sales..................................................................................... 921,000
Cost of goods sold
Merchandise inventory, January 1.............................................. $ 60,750
Purchases ............................................................ $602,400
Less: Purchase discounts...................................... 33,750
Purchase returns and allowances................ 9,600
Net purchases........................................................ 559,050
Add: Freight in........................................................ 8,400
Cost of goods purchased............................................................ 567,450
Cost of goods available for sale.................................................. 628,200
Less: Merchandise inventory, December 31............................... 108,900
Cost of goods sold................................................................ 519,300
Gross profit........................................................................................ 401,700
Operating expenses
Administrative expenses............................................................. $271,350
Selling expenses......................................................................... 11,250
Total operating expenses..................................................... 282,600
Profit from operations........................................................................ 119,100
Interest expense....................................................................... 15,600
Profit before income tax..................................................................... 103,500
Income tax expense........................................................................... 24,000
Profit .................................................................................................. $ 79,500

*PROBLEM 5-15A (Continued)


Balance, January 1 $ 75,000 $102,900 $177,900

Profit 79,500 79,500
Dividends 000 0000 (12,000) (12,000)

December 31, 2015
Assets
Current assets
Cash.................................................................................................$ 25,500
Accountsreceivable .......66,300
Merchandise inventory.......................................................................108,900
Prepaid insurannce.......................................................................... 3,600
Totalcurrent assets....................................................................204,300
Land...................................................................... $112,500
Buildings................................................................ $285,000
Less: Accumulated depreciation........................... 77,700 207,300
Equipment............................................................. $165,000
Less: Accumulated depreciation........................... 64,350 100,650
Total property, plant, and equipment........... 420,450
Total assets......................................................................................$624,750

Current liabilities
Accounts payable...........................................................................$ 129,450
Salaries payable............................................................................................. 5,250
Property tax payable....................................................................................... 7,200
Unearned revenue.......................................................................................... 12,450
Current portion of mortgage payable.............................................. 18,750
Totalcurrent liabilities...............................................................173,100
Mortgage payable ($187,500 $18,750).........................................168,750
Total liabilities........................................................................................ 341,850
Shareholders equity
Common shares......................................................................... $112,500
Retained earnings...................................................................... 170,400
Total shareholders equity.........................................................282,900
Total liabilities and shareholders equity..........................................$624,750
Chapter 6
EXERCISE 6-2
(a) Ending inventory physical count.............................................................. $285,000

1. Add to inventory. Title remains with Novotna until purchaser
receives goods....................................................................................... 35,000
2. Add to inventory. Title passed to Novotna when goods were shipped. . 95,000
3. Add to inventory. Title passed to Novotna when goods were shipped. . 28,000
4. No effect. Title passes to purchaser upon shipment when terms are
FOB shipping point................................................................................ 0
5. Add to inventory. Novotna owns the goods out on consignment........... 30,500
6. Deduct from inventory. Obsolete inventory should be written off to
cost of goods sold.................................................................................. (15,000)
Correct inventory........................................................................................ $458,500
(b) Since inventory is usually the largest current asset on a companys statement of financial
position, errors can have a significant impact. In making a decision to grant a short-term
bank loan, the bank will be looking at Novotnas liquidity by calculating the current ratio as
well as the inventory turnover and days sales in inventory. Any error in the inventory
count will affect these ratios. In addition, the errors will also affect Novotnas profitability
by impacting the cost of goods sold on the income statement.

EXERCISE 6-6
(a) (1) FIFO
Date Purchases Cost of Goods Balance

Sold
June Beginning inventory 150 @ $5 = $ 750
1
12 230 @ $6 = 150 @ $5
$1,380 230 @ $6 =
2,130
15 150 @ $5
100 @ $6 = $1,350130 @ $6 =
780
16 450 @ $7 = 130 @ $6
3,150 450 @ $7 = 3,930
23 150 @ $8 = 130 @ $6
1,200 450 @ $7
150 @ $8 = 5,130
27 130 @ $6 10 @ $7
440 @ $7 = 3,860 150 @ $8 = 1,270
Total $5,730 $5,210 $1,270
Check: $5,210 + $1,270 = $6,480 ($750 + $5,730)
(a) (2) Average
Note: Unrounded numbers have been used in the average cost calculations, although the
numbers have been rounded to the nearest cent for presentation purposes. Because of this,
some amounts may not appear to multiply exactly because of the rounding in the
presentation.
Date Purchases Cost of Goods Sold Balance

June 1 Beginning inventory 150 @ $5.00 = $ 750.00
12 230 @ $6 = $1,380.00 380 @ $5.61 = 2,130.00
15 250 @ $5.61 = $1,401.32 130 @ $5.61 = 728.68
16 450 @ $7 = 3,150.00 580 @ $6.69 = 3,878.68
23 150 @ $8 = 1,200.00 730 @ $6.96 = 5,078.68
27 570 @ $6.96 = 3,965.54 160 @ $6.96 = 1,113.14
Total $5,730.00 $5,366.86 $1,113.14
Check: $5,366.86 + $1,113.14 = $6,480 ($750 + $5,730)
(b) The average cost method results in a higher cost of goods sold because the cost of
inventory is rising.
(c) The FIFO cost method results in a higher profit because it produces the lower cost of
goods sold when prices are rising.

(d) The FIFO cost method results in a higher ending inventory because the cost of inventory
is rising.
(e) Both cost methods result in the same pre-tax cash flow. The cost methods do not change
the pre-tax cash flows of a company.
EXERCISE 6-8
(a) Corrected merchandise inventory
2014 = $30,000 + $4,000 = $34,000

2015 = $37,000 $2,000 = $35,000
Corrected cost of goods sold
2014 = $154,000 $4,000 = $150,000

2015 = $168,000 + $2,000 + $4,000 = $174,000
(b) (1) and (2) Cost of goods sold and profit before income tax: The inventory error for 2014
will cause the cost of goods sold to be overstated by $4,000, which will cause profit and
retained earnings to be understated by the same amount. When the error reverses in
2015, cost of goods sold will be understated and profit will be overstated. Over the two
years the error will reverse and therefore the retained earnings balance will be correct at
the end of 2015.
The $2,000 overstatement of inventory in 2015 will cause the cost of goods sold to be
understated and the profit and retained earnings to be overstated by $2,000.
(3) The inventory error for 2014 will cause the merchandise inventoryan asset account
to be understated by $4,000.
The inventory error for 2015 will cause the merchandise inventory (asset) account to be
overstated by $2,000.
(4) The errors will not affect liabilities.
(5) Shareholders equity is also understated by $4,000 in 2014 (see retained earnings
explanation in previous section). Shareholders equity will also be overstated by
$2,000 in 2015 (see retained earnings explanation in previous section).
(c) Errors should be corrected as soon as they are discovered so that users have a more
accurate account of inventory on hand, gross profit and profit.
EXERCISE 6-10

(a)
Units Cost/Unit Total Cost NRV/Unit Total NRV LCNRV
Cameras:
Sony 4 $175 $ 700 $160 $ 640 $ 640
Canon 8 150 1,200 152 1,216 1,200
Light Meters:
Gossen 12 135 1,620 139 1,668 1,620
Seconic 10 115 1,150 110 1,100 1,100
Total $4,670 $4,624 $4,560
(b) Dec. 31 Cost of Goods Sold ($4,670 $4,560)................................ 110

Merchandise Inventory................................................ 110
(c) Dec. 31 Cost of Goods Sold (2 150).............................................. 300

Merchandise Inventory................................................ 300
PROBLEM 6-1A
(a) 1. The unsold consignment inventory should be included in Kananaskis inventory.

Include $900 ($1,800 $900) in inventory.
2. Exclude the items from Kananaskis inventory. Craft Producers Ltd. still owns the
inventory.
3. The inventory has been sold to the customer so the customer has ownership.
Exclude.
4. The sale will be recorded on February 23. The goods (cost, $560) should be
excluded from Kananaskis inventory at the end of February.
5. Kananaskis owns the goods once they are shipped on February 26. Include
inventory of $830 ($750 + $80).
6. Title of the goods does not transfer to Kananaskis until March 4. Exclude this
amount from the February 28 inventory.
7. Title to the goods does not transfer to the customer until March 7. Include the
$1,900 in ending inventory.
8. Include $1,260 in inventory.
(b) The revised ending inventory is:

Unadjusted inventory $150,000

Adjustments
1. February 1 $ 900
5. February 24 830
7. February 27 1,900
8. March 5 1,260 4,890
Adjusted inventory $154,890
PROBLEM 6-5A
(a) (1) FIFO
Date Description Purchases Cost of Goods Sold Ending Inventory
May 1 Purchase 12 $100 $1,200 12 $100 $1,200
3 Sale 8 $100 $ 800 04 100 400

4 100
8 Purchase 10 110 1,100 10 110 1,500
4 100
13 Sale 4 110 840 6 110 660
6 110
15 Purchase 6 115 690 6 115 1,350
20 Sale 6 110 660 6 115 690
27 Sale 4 115 460 2 115 230
31 Balance 28 $2,990 26 $2,760 2 $ 230
Check: $2,760 + $230 = $2,990

(a) (2) Average
Note: Unrounded numbers have been used in the average cost calculations, although
the numbers have been rounded to the nearest cent for presentation purposes.
Because of this, some amounts may not appear to multiply exactly because of the
rounding in the presentation.
Date Description Purchases Cost of Goods Sold Ending Inventory
July 1 Purchase 12 $100.00 $1,200.00 12 $100.00 $1,200.00
3 Sale 8 $100.00 $ 800.00 4 100.00 400.00
8 Purchase 10 110.00 1,100.00 14 107.14 1,500.00
13 Sale 8 107.14 857.14 6 107.14 642.86
15 Purchase 6 115.00 690.00 12 111.07 1,332.86
20 Sale 6 111.07 666.43 6 111.07 666.43
27 Sale 4 111.07 444.28 2 111.07 222.15
31 Balance 28 $2,990.00 26 $2,767.85 2 $ 222.15
Check: $2,767.85 + $222.15 = $2,990.00
(b) Save-Mart should consider the physical flow of its goods, the amount to be reported on
the statement of financial position, and the nature and use of its goods.
(c) The FIFO cost method produces a higher gross profit and profit as its cost of goods
sold are lower during periods of rising prices.
(d) FIFO produces a higher ending inventory during periods of rising prices.
(e) The pre-tax cash flows are the same no matter which cost method is used.

PROBLEM 6-8A
(a) (INCORRECT)
KMETA INC.
Income Statement
Year
Ended July 31
2015 2014 2013

Sales $340,000 $320,000 $300,000
Cost of goods sold 233,000 220,000 209,000
Gross profit 107,000 100,000 91,000
Operating expenses 68,000 64,000 64,000
Profit before income tax $ 39,000 $ 36,000 $ 27,000
Statement of financial position:

Merchandise inventory $40,000 $40,000 $24,000
(CORRECT)
KMETA INC.
Income Statement
........ Year Ended July 31
2015 2014 2013

Sales $340,000 $320,000 $300,000
Cost of goods sold 218,0003 244,0002 200,0001
Gross profit 122,000 76,000 100,000
Operating expenses 68,000 64,000 64,000
Profit before income tax $ 54,000 $ 12,000 $ 36,000
Statement of financial position:

Merchandise inventory $40,000 $25,0005 $33,0004
1
$209,000 $9,000 = $200,000
2
$220,000 + $9,000 + $15,000 = $244,000
3
$233,000 $15,000 = $218,000
4
$24,000 + $9,000 = $33,000
5
$40,000 $15,000 = $25,000

PROBLEM 6-10A
(a)
Total Cost Total NRV LCNRV

(1) June 30 $4,740,000 $5,100,000 $4,740,000
(2) July 31 5,695,000 5,460,500 5,460,500
(3) August 31 4,482,500 4,345,000 4,345,000
(b) (1) June 30 No entry
(2) July 31 Cost of Goods Sold........................................... 234,500

Merchandise Inventory....................... 234,500
($5,695,000 $ 5,460,000 = $234,500)
(3) Aug. 31 Cost of Goods Sold.......................................... 137,500

Merchandise Inventory....................... 137,500
($4,482,500 $4,345,000 = $137,500)
(c) There are no significant differences in recording LCNRV under ASPE rather than
IFRS.

*PROBLEM
PROBLEM
6-15A
6-
(a)
(1)Periodic Inventory System
COST OF GOODS AVAILABLE FOR SALE
Date Explanation Units Unit Cost Total Cost

Aug. 1 Beginning inventory 50 $90 $ 4,500
4 Purchase 180 92 16,560
18 Purchase 70 94 6,580
28 Purchase 40 95 3,800
Total 340 $31,440
Units Sold = 160 + 100 = 260

Units in Ending inventory = 340 260 = 80
Step 1: Ending Inventory

Unit Total
Units Cost Cost
40 $95 $3,800
40 94 3,760
80 $7,560
Step 2: Cost of Goods Sold

Cost of goods available for sale $31,440
Less: Ending inventory 7,560
Cost of goods sold $23,880
Proof: Cost of Goods Sold
Unit Total
Units Cost Cost
50 $90 $ 4,500
180 92 16,560
30 94 2,820
260 $23,880
Chapter 7
EXERCISE 7-2
1. (a) It is possible to detect this type of fraud by comparing the amount of inventory
consumed during the evening with the sales that were recorded in cash registers.
(b) This fraud can be prevented by segregating the duties of those individuals
handling the drinks to those individuals having access to the cash register. If

additional staff is not available, the floor supervisor should keep a close eye on the
bartender or inventory could be counted once a day.
2. (a) It is possible to detect this type of fraud as the bottles of liquor sold to
establishments are not the same as those sold at a liquor store. A special label is
attached, which can be detected at the end of the shift. As well, if the additional
empty bottles are on hand at the end of the shift, when the inventory consumed
(including the bartenders bottle) at the end of the bartenders shift is compared to
sales, a discrepancy will be noticed.
handling the drinks to those individuals having access to the cash register. If
additional staff is not available, the floor supervisor should keep a close eye on the
bartender and do a bottle count at the end of the shift.
3. (a) It is possible to detect this type of fraud if someone notices that the number of
appointments and services given by the spa does not reconcile to the revenue
deposited in the bank account for the day. Most businesses of this nature will have
someone comparing the bank deposit slips with the appointment schedule (often
the schedule will be printed off a day or day prior to the schedule date).
handling the appointments, to those handing the cash, and again to those
individuals making the bank deposit. If additional staff is not available, the owner of
the spa should at least make the bank deposit and require that the appointments
be written in ink.
4. (a) It is possible to detect this type of fraud but likely only after the first instance of
fraud. The individual in charge of approving the bank reconciliation could insist on
looking at the cheques returned by the bank and detect the unauthorized cheque.
handling the cheques with the individual preparing the bank reconciliation, and by
being vigilant in scrutinizing the bank reconciliation and its supporting documents.
EXERCISE 7-6

Bank Books
Item Add Deduct Add Deduct Adjusting
(Credit) (Debit) (Debit) (Credit) Entry
1. Deposits in transit at the end of No
April
2. Deposits in transit at the
beginning of April that cleared NA NA NA NA No
the bank in April
3. Outstanding cheques at the end No
of April
4. Outstanding cheques at the
beginning of April that cleared NA NA NA NA No
the bank in April
5. Cheque written for $250
recorded in error as $520 on the Yes
books
6. Deposit of $400 made in error
by the bank to the companys No
account
7. Bank service charges Yes
8. EFT, collection on account not Yes
previously recorded by company
9. NSF cheque received from Yes
customer
10. Interest earned on bank account Yes
EXERCISE 7-10
Suggestions to improve cash management practices for Tory, Hachey, and Wedunn:
1. Prepare a cash budget.

2. Adopt a time docketing accounting system which will track work performed on files for
individual clients.
3. Invoice clients monthly as work progresses using the accounting records established for
docketing time.
4. To the extent practicable, ask clients for retainers before work on files begins. Use the
retainers received to apply payments for monthly invoices sent to clients.
5. When retainers are used up, request additional retainers until the case is completed.
6. Establish an operating line of credit with the bank for day-to-day operations.
7. Arrange a non-current loan for renovations and equipment with repayment terms
structured to coincide with expected future cash inflows.
8. Negotiate terms with suppliers that allow for delayed payments.
9. To the extent necessary, obtain additional investments from the three lawyers to ensure
payment to suppliers and employees are made on time.

SOLUTIONS TO PROBLEMS
PROBLEM 7-1A
(a) Control Activities Application to Cash Receipts
Authorization of transactions and Only cashiers are authorized to sell tickets. Only
activities the manager and cashier can handle cash. Only
ushers authorize entrance.
Segregation of duties The duties of receiving cash and admitting

customers are assigned to the cashier and to the
doorperson. The manager maintains custody of
the cash, and the company accountant records
the cash.
Documentation Tickets are prenumbered. Cash count sheets are

prepared and initialled. Deposit slips are
prepared.
Physical controls Cash is deposited in a bank vault nightly.

Prenumbered tickets are locked into the machine
by the manager and the machine is used to issue
tickets.
Independent checks of Cash counts are made by the manager at the

performance end of each cashiers shift. Daily comparisons
are made by the head cashier and accounting
department of cash received, deposited and
recorded.
Human resource controls Cashiers are bonded.
(b) Actions by the usher and cashier to collaborate to misappropriate cash include:
1. Instead of tearing the tickets, the usher could return the tickets to the cashier who
could resell them, and the two could divide the cash.
2. The cashier could issue a lower priced ticket than paid for and the usher would
admit the customer. The difference between the ticket issued and the cash received
could be divided between the usher and cashier.

PROBLEM 7-3A
(a) Control Weaknesses (b) Recommendations
1. No segregation of duties between receiving the The duties of receiving cash and
cash and admitting students to the lessons. The admitting students should be
instructor could admit students for free or charge assigned to separate individuals.
extra and pocket the difference or report fewer
students and pocket the extra money.
2. There is no segregation of duties in the accounting An independent person should

function. The general manager could prepare approve the invoices for payment
fictitious invoices for payment or write cheques to and prepare the bank
himself and not be detected because the general reconciliations.
manager also prepares the bank reconciliation.
3. Each sales person is responsible for determining An independent and experienced

credit policies and they receive a commission person should be responsible for
based on sales. They could provide credit to setting credit limits for customers.
customers who should not receive credit in order to Credit limit criteria should be
earn the commission on the sale. determined by the company and
consistently applied.
4. All programmers have access to the accounting Access to the accounting records
software which could provide unauthorized should be restricted and
changes to the accounting records (such as wage protected with password or
rates). biometric restrictions.
5. Eliminating receiving reports and purchase orders Receiving reports and purchase
causes problems when invoices from suppliers are orders should be reinstated.
received. Accountants will not be able to verify if
the invoice pertains to items that have actually
been received or approved. Incorrect or fictitious
invoices may be paid or unauthorized orders made.

PROBLEM 7-5A
(a) BEAUPRLTD.
Bank Reconciliation
July 31
Cash balance per bank statement................................................ $21,062
Less: Outstanding cheques ($1,844 $1,378)........................... $ 466

Deposit incorrectly posted by bank.................................... 1,800 2,266
Adjusted cash balance per bank.................................................. $18,796
Cash balance per books............................................................... $14,786

Add: EFT collections................................................................... 4,110
18,896
Less: Bank service charges......................................................... 100
Adjusted cash balance per books................................................. $18,796
The salaries are not a reconciling item because they were recorded by both the bank
and the company.
(b) July 31 Cash ......................................................................... 4,110

31 Bank Charges Expense............................................ 100

Cash................................................................ 100

PROBLEM 7-7A
(a)
October 31, adjusted cash balance per bank reconciliation.................... $23,812
Add: Cash receipts in November............................................................. 21,438
Less: Cash disbursements in November................................................. 30,968
November 30, unadjusted cash balance................................................. $14,282
(b) HAMPTONS LIMITED

Bank Reconciliation
November 30
Balance per bank statement............................................. $18,958

Add: Deposits in transit (Nov. 30 cash receipt).............. 2,676
21,634
Less: Outstanding cheques
No. 2474............................................................ $1,008
No. 2480............................................................ 1,224
No. 2482............................................................ 1,660 3,892
Adjusted cash balance per bank...................................... $17,742
Balance per books [from (a)]............................................ $14,282

Add: EFT collection...................................................... 5,008
19,290
Less: NSF cheque and fee ($500 + $80)...................... $580
Bank service charges.......................................... 50
Error in recording cheque No. 2476
($4,760 $5,660)................................................ 900
Error in Nov. 20 deposit ($5,908 $5,890)........... 18 1,548
Adjusted cash balance per books.................................... $17,742
(c) Nov. 30 Cash ............................................................................. 5,008

Notes Receivable................................................ 4,400
Interest Revenue................................................. 608
30 Bank Charges Expense................................................ 50

Cash.................................................................... 50
30 Accounts Receivable (Giasson Developments)........... 580

Cash.................................................................... 580
30 Accounts Payable.......................................................... 900

Cash..................................................................... 900

30 Accounts Receivable..................................................... 18
Cash..................................................................... 18

PROBLEM 7-8A
(a) and (b) Cash and cash equivalents (reported in Current Assets section)
Cash:
1. Cash on hand................................................................ $ 5,000
2. Commercial bank savings account............................... 100,000
Commercial bank chequing account............................. 25,000
US bank account (Canadian equivalent)...................... 45,000
Total cash................................................................................. 175,000
Cash equivalents:
5. Government of Canada Bond....................................... 75,000
Total cash and cash equivalents.............................................. $250,000
(c) 3. Restricted cash would be reported as a current or non-current asset, depending

on the timing of the equipment replacement.
4. Amounts due from employees (travel advances) would be classified as other

receivables account called Advances to Employees.
5. Trading investments would be listed separately in the current assets section of

the statement of financial position and would include the term deposit which
matures in 120 days (to be a cash equivalent it would have to mature in 90 days
or less) and the shares of Shoppers Drug Mart. The classification of the shares
could also be non-current depending on managements intentions for holding
the shares.
6. Unused postage stamps would be included in Supplies.
7. NSF cheques would be included in Accounts Receivable, assuming the

company expects collection. If collection is doubtful, they might be provided for
as part of Bad Debts Expense or written off as uncollectable.
8. This amount would be reported as restricted cash in the non-current assets

section of the statement of financial position.

Chapter 8
EXERCISE 8-2
(a)
Feb. 2 Accounts Receivable (Andrew Noren)............................. 1,140

Sales........................................................................ 1,140
4 Sales Returns and Allowances........................................ 140

Accounts Receivable (Andrew Noren)..................... 140
5 Accounts Receivable (Dong Corporation)....................... 760

Sales........................................................................ 760
8 Cash................................................................................. 842
Sales........................................................................ 842
10 Accounts Receivable (Discovery Sports)......................... 920

Sales........................................................................ 920

(a) (Continued)
Feb. 14 Cash ($760 $15)................................................. 745

Sales Discount ($760 2%).................................. 15
Accounts Receivable (Dong Corporation).... 760
17 Accounts Receivable (Andrew Noren).................. 696

Sales............................................................. 696
22 Accounts Receivable (Batstone Corporation)........ 1,738

Sales............................................................. 1,738
28 Cash ...................................................................... 1,000

Accounts Receivable (Andrew Noren).......... 1,000
(b) Accounts Receivable Subsidiary Ledger
Andrew Noren Dong Corporation

Feb. 2 1,140 Feb. 4 140 Feb. 5 760 Feb. 14 760
17 696 28 1,000 Feb. 28 Bal. 0
Feb. 28 Bal. 696
Batstone Corporation Discovery Sports (Company Credit Card)

Feb. 22 1,738 Feb. 10 920
Feb. 28 Bal. 1,738 Feb. 28 Bal. 920
General Ledger Control Account
Accounts Receivable
Feb. 2 1,140 Feb. 4 140
5 760 14 760
10 920 28 1,000
17 696
22 1,738
Feb. 28 Bal. 3,354
(c) Subledger listing

Andrew Noren.................................................................................. $ 696
Dong Corporation ............................................................................ 0
Batstone Corporation....................................................................... 1,738
Discovery Sports (Company credit card)........................................ 920
Total................................................................................................. $3,354

Balance per general ledger control account.................................... $3,354

EXERCISE 8-4
(a) Age of Accounts Amount % Estimated Uncollectible

0-30 days $260,000 2 $ 5,200
31-60 days 50,400 10 5,040
61-90 days 34,000 30 10,200
Over 90 days 25,600 50 12,800
$33,240
(b) Mar. 31 Bad Debts Expense.............................................. 24,440

Allowance for Doubtful Accounts.................. 24,440
($33,240 $8,800)
(c) The net realizable value of the accounts receivable at March 31 is as follows:
Accounts receivable................................................................. $370,000

Less: Allowance for doubtful accounts..................................... 33,240
Net realizable value.................................................................. $336,760
EXERCISE 8-7
Nov. 1 Notes Receivable............................................................. 48,000

Cash......................................................................... 48,000
Dec. 1 Notes Receivable............................................................. 8,400

Sales........................................................................ 8,400
Cost of Goods Sold.......................................................... 5,000

Merchandise Inventory............................................. 5,000
15 Notes Receivable............................................................. 16,000

Accounts Receivable............................................... 16,000
Feb. 1 Cash................................................................................. 8,484

Notes Receivable..................................................... 8,400
Interest Revenue ($8,400 6% 2/12).................. 84
28 Interest Receivable.......................................................... 1,513

Interest Revenue...................................................... 1,513
Calculation of interest revenue on February 28:

Bouchard note: $48,000 8% 4/12 = $1,280
Aqualina note: $16,000 7% 2.5/12 =. 233
Total accrued interest $1,513

28 Bad Debt Expense........................................................... 16,000

Allowance for Doubtful Notes.................................. 16,000
PROBLEM 8-2A
(a) Accounts Receivable....................................................... 3,800,000

Sales............................................................................ 3,800,000
Cash................................................................................ 4,084,000
Accounts Receivable................................................... 4,084,000
(b) Allowance for Doubtful Accounts..................................... 116,000

Accounts Receivable................................................... 116,000
(c) Accounts Receivable....................................................... 8,000

Allowance for Doubtful Accounts................................ 8,000
Cash................................................................................ 8,000
Accounts Receivable................................................... 8,000
(d) Bad Debts Expense [see (e)].......................................... 92,000

Allowance for Doubtful Accounts................................ 92,000
(e)
Accounts Receivable
Beg. Bal. 1,600,000
Sales 3,800,000 Collections 4,084,000
Recovery 8,000 Write off 116,000
Collections 8,000
End Bal.
1,200,000
Allowance for Doubtful Accounts

Beg. Bal 88,000
Write off 116,000 Recovery 8,000
Bad debts 92,000
End Bal 72,000

Before bad debts expense was recorded, the Allowance account had a debit balance of
$20,000 ($88,000 $116,000 + $8,000). To adjust this to $72,000 requires a credit to
this account of $92,000 with an offsetting debit to Bad Debts Expense.
(f) AZIM ENTERPRISES LTD.

Statement of Financial Position (partial)
Assets
Current assets
Accounts receivable................................................................. $1,200,000
Less: Allowance for doubtful accounts..................................... 72,000
Net realizable value 1,128,000
PROBLEM 8-4A
(a) Total estimated allowance for doubtful accounts:
Estimated Estimated
Number of Days Accounts Percentage Uncollectible
Outstanding Receivable Uncollectible Accounts
0-30 days $240,000 1% $ 2,400
31-60 days 120,000 5% 6,000
61-90 days 100,000 10% 10,000
Over 90 days 60,000 25% 5,000
Total $520,000 $33,400
(b) (1)
Bad Debts Expense.................................................................. 13,400
Allowance for Doubtful Accounts........................................ 13,400
[$33,400 $20,000]
(2) If the allowance for doubtful accounts had an unadjusted debit balance of
$20,000, the bad debts expense in the entry above would be $53,400
($33,400 + $20,000)
(c) Allowance for Doubtful Accounts........................................................ 4,000

Accounts Receivable.......................................................... 4,000
(d) Accounts Receivable 1,700

Allowance for Doubtful Accounts........................................ 1,700
Cash........................................................................................... 1,700
Accounts Receivable.......................................................... 1,700
(e) Part (a): The total estimated allowance for doubtful accounts =
$520,000 6% = $31,200.
Part (b): (1) The journal entry would record bad debts expense of $11,200
($31,200 $20,000)
(2) If the allowance for doubtful accounts had an unadjusted debit

balance of $20,000, the bad debts expense in the entry above
would be $51,200 ($31,200 + $20,000)
Parts (c) and (d): no change

(f) Aging the individual accounts should produce a more accurate estimate of the net
realizable value of the receivables. As the receivables get older, a higher
percentage is applied to them when calculating the amount of uncollectible
accounts. This is more accurate because older receivables have a greater
probability of not being collected.
40,000
PROBLEM 8-8A
(a) Notes receivable total $61,000 and interest receivable $603 at September 30,
2015:
RES Inc. $17,000 6% 6/12 = $510

Ihara Ltd. 17,500 4% 1/12 = 58
Dragon Limited 6,000 7% 1/12 = 35
MGH Corp. 20,500 5% 0/12 = 0
Total $61,000 $603
(b) Oct. 1 Cash ($17,500 4% 1/12)...................... 58

Interest Receivable............................ 58
31 Accounts Receivable.................................. 6,070

Notes Receivable............................... 6,000
Interest Receivable
($6,000 7% 1/12)......................... 35
Interest Revenue
($6,000 7% 1/12)......................... 35
31 Cash........................................................... 17,595
Notes Receivable............................... 17,000
Interest Receivable
($17,000 6% 6/12)....................... 510
Interest Revenue
($17,000 6% 1/12)....................... 85
31 Interest Receivable..................................... 143

Interest Revenue................................ 143
Ihara Ltd. $17,500 4% 1/12 = $ 58
MGH Corp. $20,500 5% 1/12 =. 85
Total $143
31 Bad Debt Expense..................................... 17,500

Allowance for Doubtful Notes............. 17,500
(c)
Interest Receivable Notes Receivable

Bal. see (a) 603 Oct. 1 58 Bal. see (a) Oct. 31 6,000
Oct. 31 143 31 35 61,000 31 17,000
31 510
Bal. 143 Bal. 38,000
Allowance for Doubtful Notes

Bal. 0
Oct. 31 17,500
Bal. 17,500
(d)
TARDIF CORPORATION
Balance Sheet (partial)
October 31, 2015
___________________________________________________________________________
Assets
Current assets
Notes receivable........................................................... $38,000
Less: Allowance for doubtful notes................................ 17,500 $20,500
Interest receivable.........................................................
PROBLEM 8-9A
CANADIANA CORPORATION
Statement of Financial Position (Partial)
December 31, 2015
(in thousands)
Assets
Current assets
Cash $ 592
Trading investments 196
Accounts receivable $1,630
Less: Allowance for doubtful accounts 32 1,598
Notes receivable 2,481
Income tax receivable 99
Merchandise inventory 1,902
Supplies 85
Total current assets 6,953
Non-current assets
Notes receivable 101
Land $ 1,077
Buildings $2,734
Less: Accumulated depreciation 960 1,774
Equipment $737
Less: Accumulated depreciation 488 249 3,100

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CHAPTER 1

(a) Camping revenue $168,000

(b) SEA SURF CAMPGROUND, INC.

Common Retained Total

SEA SURF CAMPGROUND, INC.

Liabilities and Shareholders Equity

2. An investor purchasing common shares of Orbite Online, Inc. is an external user.

3. In deciding whether to extend a loan, the Caisse dconomie Base Montral is an

4. As an employee of Tech Toy Limited, the CEO is an internal user.

(a) and (b)

Assets = Liabilities + Shareholders equity

ONE PLANET COSMETICS CORP.

Common Retained Total

ONE PLANET COSMETICS CORP.

Liabilities and Shareholders Equity

Net increase in cash 15,000

Balance, August 1, 2014 $ 6,000 $17,940 $23,940

Liabilities and Shareholders' Equity

1. (a) The cost basis of accounting is involved in this situation.

2. (a) The fair value basis of accounting is involved in this situation.

Balance, January 1 $30,000 $105,000 $135,000

Liabilities and Shareholders' Equity

($166,325 + $108,500) ($133,700 + $40,700)

Profit available to common shareholders

$247,000 = $3.25 $142,600 = $2.30

Market price per share

$25.00 = 7.7 times $15.00 = 6.5 times

(a) (b) (c)

(a), (b), and (c)

Transaction 1 Sept. 1: Issued common shares for $20,000 cash.

Credits increase share capital (shareholders equity): credit

Transaction 2 Sept.2: Performed $9,000 of services on account for a customer.

(a) Basic The asset account Accounts Receivable is increased by $9,000;

Credits increase revenues; credit Service Revenue $9,000.

(a), (b), and (c) (Continued)

Transaction 3 Sept. 4: Purchased equipment for $12,000 paying $5,000 in cash

Credits decrease assets: credit Cash $5,000

Credits increase liabilities: credit Bank Loan Payable $7,000.

Transaction 4 Sept. 10: Purchased supplies on account for $500.

Credits increase liabilities: credit Accounts Payable $500.

(a), (b), and (c) (Continued)

Transaction 5 Sept. 25: Received $4,500 cash in advance for architectural

Credits increase liabilities: credit Unearned Revenue $4,500.

Credits decrease assets: credit Cash $500.

(a), (b), and (c) (Continued)

Transaction 7 Sept. 30: Collected $5,000 on account owing from a customer.

Credits decrease assets: credit Accounts Receivable $5,000.

(d) Sept. 1 Cash.................................................... 20,000

2 Accounts Receivable.......................... 9,000

30 Accounts Payable............................... 500

Bank Loan Payable

SPEEDY DELIVERY SERVICE, INC.

Common Retained Total

Balance, August 1, 2014 $27,000 $20,850 $47,850

SPEEDY DELIVERY SERVICE, INC.

Liabilities and Shareholders' Equity

1 No entry. Not a transaction

2 Rent Expense................................................... 950

10 Accounts Receivable........................................ 900

23 Office Expense.................................................. 135

30 Salaries Expense.............................................. 1,900

30 Accounts Payable............................................. 950

Apr. 1 10,000 Apr. 2 950