application problem 3

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M3- Application Problem

E4-5 Which economic events are relevant and objectively measurable?

The Brown Corporation experienced the following financial events on October 10, 2017:

  1. The company entered into a new contract with the employees’ union that calls for a $2.00 per hour increase in wages, a longer lunch break, and cost-of-living adjustments, effective January 1, 2018.
  2. The company issued $200,000 in bonds that mature on October 10, 2027. The terms of the bond issuance stipulate that interest is to be paid semi-annually at an annual rate of 10 percent.
  3. The company president retired and was replaced by the vice president of finance.
  4. The company received $10,000 from a customer in settlement of an open account receivable.
  5. The company paid $1,000 interest on an outstanding loan. The interest is applicable to September 2017 and is included on the books as a liability, “Interest Payable.”
  6. The market value of all the company’s long-lived assets is $275,000. They are currently reported on the balance sheet at $250,000.
  7. The company purchased a fire insurance policy for $1,500 that will pay the Brown Corporation $1 million if its primary production plant is destroyed. The policy insures the company from November 1, 2017, through October 31, 2018.
  8. The company placed an order to have $10,000 of inventory shipped on October 17, 2017.

Indicate whether each of these economic events has accounting significance (i.e., whether the company would prepare a journal entry for the event). In each case, explain why or why not.

E4-9 Preparing a statement of cash flows from journal entries.

Small and Associates, a small manufacturing firm, entered into the following cash transactions during January 2017:

  1. Issued 600 shares of stock for $25 each.
  2. Sold services for $4,000 cash.
  3. Paid salaries and wages of $1,600.
  4. Purchased land as a long-term investment for $9,000 cash.
  5. Paid a $2,000 dividend.
  6. Sold land with a book value of $3,000 for $3,500 cash.
  7. Paid $1,500 to the bank: $900 to reduce the principal on an outstanding loan and $600 as an interest payment.
  8. Paid miscellaneous expenses of $1,800.

E4-14 Recognizing accrued wages.

The Hurst Corporation pays its employees every Friday for the five-day week just ended. On January 2, 2018, the company paid its employees $70,000 for the week beginning Monday, December 29.

  • Assuming that the employees earned salaries and wages evenly throughout the week, prepare any adjusting journal entries that were necessary on the closing date of December 31, 2017.
  • Prepare the journal entry that would be recorded on Friday, January 2, when the wages are paid.
  • Complete a chart like the following.
    • Prepare a journal entry for each transaction. Indicate the classification and the effect on the accounting equation.
    • Prepare a cash T-account and compute the company’s cash balance as of the end of January. Assume a beginning balance of $4,000.

2017

2018

Total

Salaries and wages expense

Cash outflow associated with wages

E4-18 (a, b) Preparing journal entries and the cash flow statement.

Rahal and Watson, a small manufacturing company, entered into the following cash transactions during January 2017:

  1. Issued 800 shares of common stock for $30 each.
  2. Collected $3,900 on outstanding accounts receivable.
  3. Paid salaries and wages for the month of January of $1,530.
  4. Purchased land as a long-term investment for $12,000 cash.
  5. Paid a $6,000 dividend.
  6. Sold a piece of equipment with a book value of $5,000 for $7,000 cash.
  7. Paid $2,000 to the bank: $900 to reduce the principal on an outstanding loan and $1,100 as an interest payment.
  8. Paid miscellaneous expenses of $5,000.

P4-3 (a, b, and on item c, only income statement and balance sheet)

Journal entries and preparing the four financial statements

  1. Issued 1,000 shares of common stock at $95 per share.
  2. Paid $2,600 for each of 12 months to rent office and warehouse space for 2017. The rent was paid on the last day of each month.
  3. Made total sales for services of $190,000: $65,000 for cash and $125,000 on account.
  4. Purchased land for $32,000.
  5. Borrowed $75,000 on December 31. The note payable matures in two years.
  6. Salaries and wages totalling $80,000 were paid during the year.
  7. Miscellaneous expenses totalling $40,000 were paid during the year.
  8. $56,000 was received from customers as payment on account.
  9. Declared and paid a dividend of $26,000.

REQUIRED:

  • Prepare journal entries for these transactions.
  • Establish T-accounts for each account, and post the journal entries to these T-accounts.
  • Prepare an income statement, statement of shareholders’ equity, a December 31, 2017 balance sheet, and statement of cash flows for 2017.

P4-5 Comprehensive problem.

The December 31, 2017, balance sheet of Tybee Corporation is provided below (in millions).

Assets

Liabilities and Shareholders’ Equity

Cash

$ 24

Accounts payable

$  4

Accounts receivable

15

Interest payable

3

Supplies

6

Unearned revenue

12

Prepaid insurance

12

Notes payable

54

Equipment

$ 50 

Common stock

20

Less: Accumulated depreciation

(12)

Retained earnings

 12

Net equipment

38

Land

  10

Total

$105

Total

$105

Transactions during January 2018:

  • Paid $5 for employee salaries and wages.
  • Collected $10 cash from customers for work previously performed and billed.
  • Purchased equipment for $5 cash.
  • Purchased $2 of supplies for cash.
  • Paid $3 to a vendor for supplies previously purchased on credit in December 2017.
  • Paid the interest owed as of December 31, 2017.
  • Completed $18 in services for customers, receiving 50 percent payment in cash and billing the remainder.
  • Paid $15 to reduce outstanding notes payable.
  • Collected $5 for the issuance of common shares.

As of 1/31/18:

  • Had performed 25 percent of the services for which it had been paid in advance.
  • Owes $1 for interest that will be paid next month.
  • Depreciated equipment in the amount of $4.
  • Physical count of supplies reveals $3 on hand.
  • Declared and paid a cash dividend in the amount of 50 percent of January’s net income.

REQUIRED:

  • Prepare the journal entries to record transactions and to adjust and close accounts.

P4-9 Inferring adjusting journal entries from changes in T-account balances

The following information is available for Derrick Company:

Account

T-Account Balance
before Adjustments

T-Account Balance
after Adjustments

Prepaid Rent

14,500    

11,800    

Prepaid Insurance

 8,500    

 7,800    

Accumulated Depreciation

36,000    

38,400    

Salaries Payable

 1,300    

 2,500    

Unearned Revenues

   800    

   600    

Service Revenue

87,600    

87,800    

Rent Expense

 6,500    

 9,200    

Insurance Expense

 5,500    

 6,200    

Depreciation Expense

     0    

 2,400    

Salaries and Wages Expense

 3,500    

 4,700    

REQUIRED:

Prepare the adjusting journal entries that gave rise to the changes indicated

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