B. When revenues are recorded and the goods have not yet been provided the revenue must be decreased and unearned revenue must be recorded. Unearned revenue is a liability. Revenues and expenses are not recorded together in the same adjustment (a.). Decreasing revenues decreases owner’s equity (d.).
See Adjusting Entries

A. The amount paid for interest is always the maturity value x the stated rate. A discount represents additional interest expense over the life of the bond. A premium represents lower interest expense over the life of the bond. Total interest expense is computed as: Maturity value x stated % = per year x years = interest paid (also an expense) $200,000 x 0.06 = $12,000 x 5 = $60,000 + additional interest expense not paid until maturity $8,000 the discount. Total interest expense = $68,000. Maturity value of $200,000 x .96 = $192,000 received; difference of $8,000. See Bonds Payable

A. A liability that is not probable is not reported on the financial statements and is only reported in the footnotes. The company must state the range of the estimated loss in the footnotes. See Current Liabilities – Contingencies

C. The matching principle states that revenues must be recorded when earned and all expenses incurred to generate the revenue must be reported in the same period as the revenue. When cash is paid or received is not relevant. All other choices report the expense in the same period as the revenue. See Income Statement

D. Ending inventory is subtracted from inventory available to get cost of goods sold. When you subtract a higher inventory amount, you get a lower cost of goods sold. Lower cost of goods sold gives higher gross profit and higher net income. (Sales – CGS = GP – Operating Expense = Operating Income) See Inventory

B. Paying a supplier for inventory previously purchased is paying a liability. It does not mean the company receives more inventory. Cash is reduced when payment is made and the amount owed (accounts payable) is reduced also. See Journal Entries

A. Retained earnings is cumulative income and losses less cumulative dividends paid. This is the income that is kept in the company and not returned to shareholders. (b) is cash returned to shareholders. (c. & d.) are increased when common stock is issued to raise capital. See Owner’s Equity and Balance Sheet

A. The word earned is always an increase to revenue. The company has provided the service of letting someone use their money. Interest is always recorded as “other revenue or expense” unless the company is a financial institution. See Income Statement

A. Current market value is closest to the last cost. The first cost is considered sold first and therefore is cost of goods sold when FIFO is used. First cost will be most different from last cost, which is current market value. See Inventory

B. The accrual method of accounting requires revenues to be recorded when earned and expenses to be recorded when incurred. When an amount is paid or collected does not matter. Earned means the goods or services has been provided and nothing is owed to the customer. See Income Statement

A.	Accounts Receivable	6,860,000	
	Cash				   140,000
		Sales				7,000,000


B.	
Cash					6,607,000
	Accounts Receivable		6,607,000

Collections are recorded to receivables, so use the accounts receivable account to
determine the amount:

Beginning accounts receivable	1,279,000
+ credit sales				    6,860,000  
- collections				         ??
- write-offs				       (32,000)
= Ending accounts receivable	    1,500,000

Collections must be 6,607,000 for ending accounts receivable to be 1,500,000

C.	
Allowance for uncollectible accounts	32,000
	Accounts Receivable			     32,000


D.	
Bad Debt Expense					150,920
	Allowance for uncollectible accounts		150,920

Credit sales x historical % of sales
6,860,000 x 0.022 = 150,920 Bad debt expense

The amount calculated is the amount of bad debt expense recorded (the current balance in the allowance account does not matter)

Cash sales have no risk of collection and do not require an allowance. Do not include cash sales when determining bad debt expense.

E.	
Bad Debt Expense				12,800
	Allowance for uncollectible accounts 	12,800

Ending accounts Receivable x historical % of A/R = Ending balance in allowance
1,500,000 x 0.062 = 93,000

The amount that must be recorded to get the ending balance to 93,000 is computed as follows:

Beginning allowance balance	             (112,200)
-  Write-offs					       32,000
= balance before adjustment		    (  80,200)
+ bad debt expense    			     (12,800)  must be
= balance allowance account must be	(  93,000)

The allowance account is a contra asset and must have a negative beginning and
ending balance.

To find retained earnings, first make total liabilities and owner’s equity the same amount as total assets. The two amounts have to be the same. You then subtract total liabilities from total liabilities and owner’s equity to get what total owner’s equity must be. Add treasury stock and subtract common stock from total owner’s equity to get the retained earnings amount.

Do not forget to subtotal and total.
This is very important and will cost you points.

Revenues and Expenses are not reported on the balance sheet.
Dividends paid is not reported on the balance sheet.
Dividends are included in retained earnings and are not reported separately.

B. Issuance of the bond

Cash			270,646
	Premium		    20,646
	Bond Payable	   250,000

C. Interest is paid on July 1, 2008

Interest Expense	 10,689
Premium		       1,811
	Cash 			12,500

Salaries and wage expense			362,170					
    Federal income tax withholding payable		59,415
	Social security tax withholding payable		21,215 **
	Medicare tax withholding payable			  5,251 
	Health insurance premium payable		19,485
	Pension plan withholding payable			17,200
	Day care payable					    12,495
	Salaries payable				            227,109 ***

** computed as salaries and wages expense x given % (362,170 – 20,000)
*** salaries and wage expense less all payables, amount that balances the journal entry

Payroll Tax Expense			     44,574	
	Social security tax withholding payable	   21,215 
	Medicare tax withholding payable		     5,251 
	FUTA Payable				             2,535 
	SUTA Payable				           15,573 

The payroll tax expense amount is the total of all payables in this entry

Do not do both entries together in the same entry. There are two plugs (salaries payable and payroll tax expense) and you will not be able to determine the amounts if you do it as one entry.

Important to Note:

Issuing common stock is an increase in cash and an increase in owner’s equity.
It is not a revenue or an expense and is not reported on the income statement.

Dividends paid is a direct reduction to retained earnings reported on the balance sheet.
Dividends paid is not an expense and is not reported on the income statement.

Accrued expense is a liability that is reported only on the balance sheet.
Prepaid expense is an asset that is reported only on the balance sheet.

Closing 1 of 6 manufacturing plants is not selling a major part of the business.
The company continues in this business and is closing one to change operations to make the company more profitable. This is a restructuring expense.

First: Reformat the information to list the inventory in order and determine the quantity and dollar amount that is available.

A. FIFO
First ones purchased are the first ones sold. Start from the top and go down until you get to 1,600 units sold.

Inventory on     1/1	  300  x  $15.00  =	$  4,500
Purchase 	 1/15  500  x  $16.00  =	$  8,000
Purchase	       2/5    800  x  $16.50  =	$13,200

Total sold		1,600		=         $25,700  cost of goods sold

Use all 800 of the 2/5 purchase because that is what you need to get to 1,600 sold.

Sales			     43,200	
- Cost of goods sold     (25,700)
= Gross Profit               17,500


Ending inventory is always
			
  Available			 $35,450   
- Cost of goods sold	  ($25,700)
= Ending inventory	          $   9,750

B. LIFO
Last ones purchased are the first ones sold. Start at the bottom and go up until you get to a total of 1,600 units sold.

Purchase     	 3/15  	600  x  $16.25  =	$  9,750
Purchase 	 2/5	    800  x  $16.50  =	$13,200
Purchase	     1/15      200  x  $16.00  =	$  3,200

Total sold		1,600		=         $26,150  cost of goods sold

You only use 200 of the 1/15 purchase because that is all you need to get you to 1,600 sold.

Sales			     43,200	
- Cost of goods sold    (26,150)
= Gross Profit               17,050

Ending inventory is always
			
  Available			  $35,450   
- Cost of goods sold	    ($26,150)
= Ending inventory		  $  9,300

C. Weighted Average method: Use “Available” to get the average cost per unit

      Total $ Available	
Total Quantity Available         

$35,450 = $16.11
  2,200
	
   Units sold			    1,600
x Average cost per unit	$  16.11
= Cost of goods sold	$25,776


Sales				      43,200	
- Cost of goods sold	     (25,776)
= Gross Profit                        17,424

Ending inventory is always
			
  Available			$35,450   
- Cost of goods sold	($25,776)
= Ending inventory		$  9,674

Balance Sheet – investment at fair market value:
Purple		 	 90,000		       75,000
White			270,000                     210,000

Unrealized gain/loss is reported on the income statement
Dividend revenue is reported on the income statement
Investments are reported at fair market value on the balance sheet

						     1st Year		   2nd Year
Assets:

	Investments S/T (White)	          270,000               210,000
	Investments L/T (Purple)		 90,000		   75,000

Owner’s Equity
	Accumulated Gain/(Loss)          (10,000)             (25,000)

Income Statement:
    Other Revenue/Expense:
         Dividend Revenue			  10,000  		10,000
         Unrealized Gain/(Loss)              50,000		    (60,000)

B. If the investments were held with significant influence the equity method would be used. The investments are not adjusted to fair market value.

20% of each company’s profit or loss would be reported as investment revenue (income) or investment expense (loss). The income/loss will also change the investment account (income +, loss -).

Dividends received under the equity method are not reported as revenues (income); they decrease the investment account.

A1.
Cash            150,000
       S/T Notes Payable         50,000
       L/T Notes Payable         100,000

Asset – Increase – Debit
Liabilities – Increase – Credits

2.
Inventory              75,000
             Accounts Payable          75,000

Asset – Increase – Debit
Liability – Increase – Credit

3.
Computer Equipment        5,000
             Cash                              3,000
             Accounts Payable          2,000

Asset – Increase – Debit
Asset – Decrease – Credit
Liability – Increase – Credit

4.
Office Furniture         6,700
           Cash                  6,700

Asset – Increase – Debit
Asset – Decrease – Credit

5.
Rent Expense       2,000
         Cash                2,000

Expense – Increase – Debit
Asset – Decrease – Credit

6.
Prepaid Advertising 500
             Cash                    500

Asset – Increase – Debit
Asset – Decrease – Credit

7.
Salaries Expense     7,200
              Cash                       5,300
              Salaries Payable    1,900

Expense – Increase – Debit
Asset – Decrease – Credit
Liability – Increase – Credit

8.
Accounts Receivable    39,000
            Sales                       39,000

Cost of Goods Sold       24,000
          Inventory                   24,000

Asset – Increase – Debit
Revenue – Increase – Credit
Expense – Increase – Debit
Asset – Decrease – Credit

9.
Office Supplies       100
       Accounts Payable      100

Asset – Increase – Debit
Liability – Increase – Credit

10.
Accounts Payable       25,000
              Cash                   25,000

Liability – Decrease – Debit
Asset – Decrease – Credit

11.
Cash                2,600
        Unearned Revenue        2,600

Asset – Increase – Debit
Liability – Increase – Credit

               Cash
______________________
150,000         |          3,000
                      |          6,700
2,600             |          2,000
                      |             500
                      |          5,300
                      |        25,000
__________  |__________
152,600         |        42,500
110,100         |

C. Adjustments

1.
Interest Expense    12,000
       Interest Payable     12,000

Notes Payable 150,000 x .08 = 12,000 incurred for this year.

3. / 4.
Depreciation Expense       163
      Accumulated Depreciation      163

Cost / Life x (# months used /12 months):

Computer Equipment
$5,000 / 5 = $1,000 x 1/12 = 83
+
Furniture
$6,700 / 7 x 1/12 = 80

6.
Advertising Expense          250
          Prepaid Advertising           250

Expense the 1 month that has been incurred

9.
Office Supplies Expense       80
         Office Supplies                 80

The office supplies no longer there have been used up and must be expensed
(100 – 20 left = 80 used)

11.
Unearned Revenue        1,300
       Revenue                       1,300

Half the services have been provided to the customer by the end of the month and must be recorded as revenue (no longer owed).

A. Annual depreciation expense

54,000 – 15,000 = $7,800
        5 years

Used 7 months (June – December):

$7,800 x 7/12 = $4,550 for year 1
(only expense the part of the year it was used)

Year 2 is a full year: $7,800

B.
100% / 5 = 20% x 2 = 40% x (54,000 – 0) = $21,600

Used 7 months (June – December):

$21,600 x 7/12 = $12,600 for year one

Same 40% x (54,000 – 12,600) =
$16,560 for year 2

C.
Loss				  13,650
Cash				  28,000
Accumulated depreciation  12,350
	Machine			        54,000

Accumulated depreciation is the total depreciation expense recorded for all years and the partial year (if any) up to the date of the sale.
Machine is decreased for the original cost.
Loss is the difference in cash received and the book value at the time or sale or the amount it takes to make the journal entry balance.

Cash received	     28,000
- Book Value            (41,650)
= Loss                      (13,650)

 ** 54,000 - 4,550 + 7,800 = 41,650 
total accumulated depreciation
       Year 1 + Year 2

Authorized stock is not recorded; it is the total number of shares the company can issue.

Prior Year:

Cash				80,000
	Common Stock		8,000
	Additional PIC – CS	 72,000

Cash				25,000
	Preferred Stock		25,000	



Current Year:

Treasury Stock		18,000
	Cash				18,000

Cash				36,000
	Treasury Stock		18,000 (# sh. x $6)
	Paid In Capital – TS		18,000 plug

No entry is made for a stock split. Par value decreases to $0.50.
The 8,000 shares issued is changed to 16,000 shares.

Total par does not change so the account common stock does not change.
Divide Par Value
Multiply # Shares

Retained Earnings		1,500
	Dividends Payable		1,500

Dividends Payable		1,500
	Cash				1,500

500 shares x $50 par x 6% = 1,500 total dividends paid