Quiz 1 Key

A501 QUIZ I SUGGESTED SOLUTIONS WINTER 2006 Part I. 1. d 3. a 5. c 7. a 9. a 2. b 4. b 6. b 8. a 10. d Part I. Calculations: d. Borrowing money from a bank and issuing shares of stock are both financing activities. Purchasing merchandise on account and selling merchandise to customers are both operating activities. There are no investing activities listed. b. Cash from operating activities of $377,200 ? $436,100 cash used by investing activities ? $349,300 cash used by financing activities = $408,200 decrease in cash. Beginning balance (?) ? $408,200 decrease = $83,600 ending balance. Therefore, beginning balance = $491,800. a. Use our Assets = Liabilities + Stockholders? Equity formula: Assets = Liabilities + Equity $1,391,500 = $598,800 + $ 792,700 632,400 revenues (594,300) expenses (31,100) dividends 54,700 new stock issued $1,469,100 = $614,700 + $ 854,400 4. b. Use the formula Assets = Liabilities + Stockholders? Equity: Assets = Liabilities + S. Equity $1,079,400 $1,079,400 785,800 $785,800 596,000 (596,000) $1,865,200 = $1,381,800 + $ 483,400 5. c. The rent on the building is $34,800 ÷ 24 months = $1,450 per month x 10 months of prepaid rent left at December 31, 2005 (2 months of rent were used in 2004, and 12 months of rent were used in 2005) = $14,500. The rent on the furniture is $19,200 ÷ 24 months = $800 per month x 19 months of prepaid rent left at December 31, 2005 = $15,200. Total prepaid rent = $14,500 + $15,200 = $29,700. 6. b. Beginning balance of $1,628,900 + Revenues of $6,707,500 ? Expenses (?) ? Dividends of $518,100 = $2,452,300 ending balance. (The issuance of stock for cash does not affect retained earnings.) Therefore, Expenses were $5,366,000. This is not one of the answers, so solve for net income: $6,707,500 ? $5,366,000 = $1,341,500. 7. a. Because none of the services had been provided by December 31, 2005, the entire $43,500 received should be reported as a liability (such as ?Unearned Revenue?). Therefore, liabilities are understated, and revenues and retained earnings are overstated. Receipt of cash from a customer is a cash inflow from operating activities, regardless of whether or not the related revenue has been earned. Therefore, there is no effect on cash flow from operating activities. 8. a. $250,000 (one-fourth of $1,000,000 was earned and is revenue) + $3,000 for services provided for cash ($159,000 ? $126,000 ? $30,000) ? $287,000 cash expenses ? $322,200 accrued expenses + $394,400 of accrued revenue = $38,200 accrual-basis net income. 9. a. Analyze Wages Payable: Balance at 12/31/04 of $628,900 + Wages Expense for 2005 of $3,242,300 ? Cash paid for Wages in 2005 (?) = Balance at 12/31/05 of $922,500. Therefore, Cash paid for Wages in 2005 was $2,948,700. (The Wages Expense for 2004 had been properly reflected in Wages Payable at 12/31/04; therefore, it does not affect the analysis of Wages Payable in 2005.) 10. d. Analyze Unearned Revenue: Balance at 12/31/04 of $31,600 + Cash Received in Advance (?) ? Revenue earned in 2005 = Unearned Revenue at 12/31/05 of $36,800. Therefore, Cash Received in Advance was $659,600. Unearned Revenue (a liability) increased by $5,200 = $36,800 ? $31,600. Part II. a. In journal entry form: a. Cash (increase) 60,000 Note Payable (increase) 10,000 Common Stock (increase) 50,000 b. Inventory (increase) 1,000 Accounts Payable (increase) 1,000 . c. Two Parts: Accounts Receivable (increase) 2,000 Sales Revenue (increase) 2,000 Cost of Goods Sold (increase) 1,000 Inventory (decrease) 1,000 d. Equipment (increase) 9,000 Cash (decrease) 9,000 e. Interest Expense (increase) 100 Note Payable (decrease) 10,000 Cash (decrease) 10,100 f. Cash (increase) 2,000 Accounts Receivable (decrease) 2,000 g. Depreciation Expense (increase) 250 Equipment (decrease) 250 (or Accumulated Depreciation) h. Wages Expense (increase) 800 Wages Payable (increase) 800 b. Stock Issued + Sales Rev. ? Cost of Goods Sold ? Interest Exp. ? Depreciation Exp. ? Wages Exp. = Total Stockholders? Equity. Thus, $50,000 + $2,000 ? $1,000 ? $100 ? $250 ? $800 = $49,850. Part III. Part A. Note: These three accounts (Prepaid expenses, Accrued compensation expense, and Accrued advertising cost) would not be used under the cash basis of accounting. Instead, Marvel would simply record expense as payment is made. 1. Since the three accounts relate only to expenses, using the cash basis of accounting for expenses would have no effect on revenue for the year ended December 31, 2004. 2. Since the balance in Prepaid Expenses decreased, the company paid less than the expense recognized by $461. Since the balance in Accrued Compensation Expense decreased, the company paid $1,471 more than the Compensation Expense recognized. Similarly, since the balance in Accrued Advertising Cost decreased, the company paid $1,836 more than the Advertising Expense recognized. Thus, the net effect is that cash basis expense would be ($461) + $1,471 + $1,836 = $2,846 higher. 3. Total Assets would be $2,273 lower at December 31, 2004 (no Prepaid Expenses). 4. Think in terms of the balance sheet equation. Total assets would be $2,273 lower, and total liabilities would be $4,682 lower (i.e., $4,074 + $608). Thus, total shareholders? equity would be $2,409 higher at December 31, 2004: ($2,273) = ($4,682) + $2,409 Part B. 1. Note: Analyze this part using the same approach as in multiple-choice question 10 for Unearned Revenue. Revenue recognized from direct mail order = $513,468 x 30% = $154,040.4. Beginning Def. Subs. Rev. of $30,308 + Cash Received in Advance (?) ? Revenue Recognized of $154,040.4 = Ending Def. Subs. Rev. of $27,033. Thus, cash collected from direct mail order customers was $150,765.4. 2. Analyze Accounts Receivable in the normal way. Revenue recognized from retail outlet sales = $513,468 x 60% = $308,080.8 Beginning Accounts Receivable of $51,820 + Revenue Recognized of $308,080.8 ? Cash Received (?) = Ending Accounts Receivable of $73,576. Thus, cash received from retail outlets was $286,324.8. 3. Analyze the Inventories account. Beginning Inventory of $12,975 + Purchases (?) ? Cost of Goods Sold of $159,859 = Ending Inventory of $6,587. Thus, Purchases for 2004 were $153,471. 4. Analyze Accounts Payable. Beginning Accounts Payable of $18,455 + Purchases of $153,471 (from part 3. above) ? Cash Paid for Inventory (?) = Ending Accounts Payable of $6,006. Thus, cash paid for inventory was $165,920.