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1- 3. 1- 4. b. c. d. e.

The concept of historical cost determines the balance sheet valuation of land. The realization concept requires that a transaction has occurred for the profit to be recognized. a. Entity f. Historical cost g. Disclosure

Realization Materiality Conservatism Historical cost

PROBLEM 1-2 1. 2. 3. 4. 5. o a b l d 6. 7. 8. 9. 10. e f j i g 11. 12. 13. 14. 15. h k c m n

PROBLEM 1-5 a. Sales on credit Cost of inventory sold on credit Payment to sales clerk Income $ 80,000 <65,000> <10,000> $ 5,000 $ 60,000 <55,000> <10,000> $< 5,000>

Collections from customers Payment for purchases Payment to sales clerk Loss CASH 1-7 GOING CONCERN? A. B.

b.

The going-concern assumption is that the entity in question will remain in business for an indefinite period of time. Yes. The potential problem is that the firm may not be able to continue in business as a going concern. This puts into question the recoverability and classification of assets or the amounts and classification of liabilities.

C.

This disclosure puts the user of the statements on warning that the statements may be misleading if the company cannot continue as a going concern.

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2- 1.

a. b. c. d. e.

Unqualified opinion with explanatory paragraph Unqualified opinion with explanatory paragraph Unqualified opinion Adverse opinion Qualified opinion

PROBLEM 2-5 a. 4 The balance sheet equation is defined as assets are equal to liabilities plus owners' equity. Assets ($40,000) = liabilities? + owners' equity ($10,000). Assets ($100,000) = liabilities ($40,000) + owners' equity? Accounts receivable is a balance sheet account and therefore a permanent account. Insurance expense is an income statement account and therefore a temporary account. Expenses, assets, and dividends all have a normal balance of a debit.

b.

c.

d.

e.

f. PROBLEM 2-8 c d b a

1 2 3 4

CASE 2-6 WHO IS RESPONSIBLE? a. The official position as presented by the accounting profession is that the financial statements are the responsibility of the Companys management. The accountant (auditor) expresses an opinion on the financial statements based on the audit. The audit is to be conducted in accordance with generally accepted auditing standards. Society appears to focus on the role of the independent auditor as a public watchdog. This includes taking responsibility for the financial statements. This role is broader than the official position as to the responsibility of the accountant (auditor).

b.

c.

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Another factor is that the accountant (auditor) is perceived as having the ability to pay, either directly, or by way of insurance. d. e. Unqualified opinion. No. We would expect these audited financial statements to be free of material misstatement.

PROBLEM 3-1

Airlines International Balance Sheet December 31, 2003 $ 28,837 10,042 $ 67,551 248 67,303 16,643 3,963 $126,788 11,901 $809,980 220,541 589,439 727 $728,855

ASSETS: Current assets: Cash Marketable securities Accounts receivable Less: Allowance for doubtful accounts Inventory Prepaid expenses Total current expenses Investment and special funds Property, plant, and equipment: Property, plant, and equipment Less: Accumulated depreciation Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable Accrued expenses Unearned transportation revenue Current installments of long-term debt Total current liabilities Long-term debt, less current portion Deferred income taxes Stockholders' equity: Common stock Capital in excess of par
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$ 77,916 23,952 6,808 36,875 $145,551 393,808 42,070 $ 7,152 72,913

Retained earnings 67,361 Total stockholders' equity Total liabilities and stockholders' equity $728,855

147,426

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PROBLEM 3-3 Alleg, Inc. Balance Sheet December 31, 2003


ASSETS Current assets: Cash Marketable securities Accounts receivable Inventories Total current assets Plant and equipment: Land and buildings Machinery and equipment Less: Accumulated depreciation Total plant and equipment Intangibles: Goodwill Patents Other assets Total assets LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable Current maturities of long-term debt Total current liabilities Long-term liabilities: Mortgages payable Bonds payable Deferred income taxes Total long-term liabilities Stockholders equity: Common stock, no par value 21,000 shares authorized at $1 par value, 10,000 shares issued Additional paid-in capital Retained earnings Total stockholders equity Total liabilities and stockholders equity $ 13,000 17,000 26,000 30,000 86,000 57,000 125,000 182,000 61,000 121,000 8,000 10,000 18,000 50,000 $275,00 0

$ 15,000 11,000 26,000 80,000 70,000 18,000 168,000

10,000 38,000 33,000 81,000 $275,00 0

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PROBLEM 3-5 a. b. c. d. e. f. g. h. i. j. Heading date is wrong. 2003. It should read December 31,

Disclose allowance for doubtful accounts. Treasury stock should be deducted from stockholders' equity. Land and building are disclosed net. depreciation should be disclosed. Accumulated

Short-term U.S. Notes should be classified under current assets. Supplies should be classified under current assets. Bonds payable should be under long-term liabilities. Premium on bonds payable should be presented with bonds payable under long-term liabilities. Minority interest should be presented before stockholders' equity. Redeemable preferred stock should be presented before stockholders' equity.

PROBLEM 3-6 a. b. c. d. e. f. g. h. Balance sheet should be in the heading. $10,000 cash should be classified under other assets (restricted for payment of long-term note). Disclose accumulated depreciation related to building. Patent should be classified under intangibles. Organizational costs should be disclosed under intangibles. Prepaid insurance should be under current assets. Dividends payable should be classified as a current liability. Notes payable and bonds payable due in the years 2006 and 2013 respectively, should not be classified as a current liability.

PROBLEM 3-7 a. The dividends would reduce retained earnings on the balance sheet.
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b. c. d. e. f. g. h. PROBLEM

You would disclose a contingent liability in footnote format. No accounting recognition is given for possible general business risks for which losses cannot be estimated. This subsequent event requires a footnote. Restricted cash should be classified as a long-term asset. Securities held for control should be classified as long-term investments. Land must be listed at cost. It will have to be written back down. This would be disclosed in a footnote. (Also on the income statement, the loss will be disclosed as an extraordinary item.) 3-9 Preferred Common

a.

Year 1 0 Year 2 Preferred Cumulative from year 1 10,000 shares x $100 par value = $1,000,000 x 10% $100,000 Year 2 dividend 10,000 shares x $100 par value = $1,000,000 x 10% Total Year 3 Preferred Year 3 dividend 10,000 shares x $100 par value = $1,000,000 x 10% Common The common gets the remaining dividends because the preferred is nonparticipating Total

$100,000 $200,000

$100,000

$100,000

$120,000 $120,000

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b. Year 1 Year 2 Preferred Arrears (see computation in a.) Year 2 dividend (See computation in a.) Total Year 3 Preferred Year 3 dividend (See computation in a.) Common 80,000 shares x $5 = $400,000 x 10% = 40,000 2% to preferred (2% x $1,000,000) 2% to common (2% x $400,000) Remaining dividend to common Total c. Year 1 Year 2 Preferred Arrears (see computation in a.) Year 2 Dividend (See computation in a.) Total Year 3 Preferred Year 3 dividend (See computation in a.) Common 80,000 shares x $5 = $400,000 x 10% = 40,000
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Preferred 0

Common 0

$100,000 $100,000 $200,000

$100,000

40,000 20,000 8,000 $120,000 Preferred 0 52,000 $100,000 Common 0

$100,000 $100,000 $200,000

$100,000

40,000

Fully participating; therefore, the remaining dividend will be split between preferred and common in proportion to their outstanding stock at total par value. Total par value of preferred $1,000,000 71.43% Total par value of common $ 400,000 28.57% Total $1,400,000 100.00% Preferred 71.43% x $80,000 = Common 28.57% x $80,000 = Total $ 57,144 $157,144 $ 22,856 $ 62,856

d. Year 1 Year 2 Preferred Year 2 dividend (See computation in a.) Common Remainder to common Total Year 3 Preferred Year 3 dividend (See computation in a.) Common Remainder to common Total

Preferred 0

Common 0

$100,000 $100,000 $100,000

$100,000

$100,000 $100,000 $120,000 $120,000

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PROBLEM 4-1 a.

Decher Automotives Income Statement For the Year Ended December 31, 2003 $1,000,000 $ 650,000 460,000 $1,110,000 440,000 670,000 330,000 $ 43,000 62,000 105,000 225,000 10,000 235,000 20,000 215,000 100,000 115,000 (30,000) 85,000 $ $ 1.15 (.30) .85

Sales Cost of sales Beginning inventory Purchases Merchandise available for sale Less: Ending inventory Cost of sales Gross profit Operating expense: Selling expenses Administrative expenses Operating income Other income: Dividend income

Other expense: Interest expense Income before taxes and extraordinary items Income taxes Income before extraordinary items Extraordinary items: flood loss, net of tax Net income b. Earnings per share: Before extraordinary items Extraordinary items (loss) Net income c.

Decher Automotives Income Statement For the Year Ended December 31, 2003 $1,000,000 10,000 1,010,000

Revenue: Sales Other income Total revenue Expenses:


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Cost of sales Operating expenses Interest expense Income before taxes and extraordinary items Income taxes Income before extraordinary items Extraordinary items, flood loss, net of tax Net income PROBLEM 4-5 Tax Rate = Taxes Income Before Taxes = $20,000 $40,000

$670,000 105,000 20,000

795,000 215,000 100,000 115,000 30,000 $85,000

50%

Provision for unusual write-offs Less: tax effects (50% x $50,000) Net item Extraordinary charge, net of tax of $10,000

$50,000 25,000 $25,000 $50,000

Net earnings (loss) (30,000) Net earnings with nonrecurring items removed ([$30,000)+$25,000+$50,000] $45,000 PROBLEM 4-6 Sales Cost of sales Gross profit Operating expenses: Administrative expenses Selling expense Operating income Interest expense Earnings before tax Income tax (48%) Net income Earnings per share $9.26
1

$4,000,000 2,000,000 2,000,000 $400.0001 600,0002 1,000,000 1,000,000 110,0003 890,000 427,200 $ 462,800

Administrative expenses are 20% of $2,000,000. This is 10% of sales. Therefore, sales are $4,000,000. 2 150% times $400,000 3 $1,000,000 x 11% = $110,000 PROBLEM 4-14 a. No. This loss does not relate to the cost of goods sold. It is likely an extraordinary loss meeting the criteria of being of unusual in nature and infrequent in occurrence. b. No. Land is carried at historical cost. c. Yes. The cost of machinery and equipment should be charged to a fixed asset account.
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d. e. f.

No. Depreciation should be recognized over the period of use. Yes. Some loss to employees would be expected and it is immaterial in relation to the cost of goods sold. No. This car should not be recorded on the companys books, unless it is to be used for company business.

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