A501 PRACTICE QUIZ I SUGGESTED SOLUTIONS WINTER 2006 Part I. 1. e 3. e 5. c 7. a 9. c 2. c 4. b 6. d 8. e 10. b Part I. Calculations: e. Use our Assets = Liabilities + Stockholders? Equity formula: Assets = Liabilities + Equity $1,236,000 = $531,600 + $ 704,400 588,000 revenues (554,400) expenses (27,600) dividends 48,000 new stock issued $1,304,400 = $546,000 + $ 758,400 c. Again, we use our Assets = Liabilities + Stockholders? Equity formula. We can assume the beginning balances are zero (or any amount you like). Assets = Liabilities + Equity -0- = -0- + -0- $4,983,000 revenues (4,682,000) expenses 178,000 new stock issued (253,500) dividends $608,500 = $383,000 + $ 225,500 e. If Company Z promises to pay for services that have been performed, this is an account receivable and revenue; the revenue affects the income statement. If the services have not been performed, then no revenue has been earned. Using supplies is an expense, but purchasing supplies is not. b. Wages Payable decreased by $29,592 (i.e., $93,096 ? $63,504), so the firm actually paid more cash to the workers than was recorded as expense: $546,480 + $29,592 = $576,072. The extra amount paid had been recorded as Wage Expense in the prior period. c. Revenue $3,328,000 ? Expenses ? ( Expenses = $2,766,000 ? Dividends (450,000) + Stock issued 850,000 Change in S.E. $ 962,000 d. Cash-basis income = accrual-basis income of $1,761,300 ? the $185,400 increase in Accounts Receivable [$463,500 ? $278,100] (this was recorded as revenue but it was not collected in cash) ? the $46,350 increase in Accounts Payable [$162,225 ? $115,875] (these are expenses that were deducted in arriving at accrual-basis income but were not paid in cash) = $1,529,550. 7. a. Use the formula Assets = Liabilities + Stockholders? Equity: Assets = Liabilities + S. Equity $1,081,350 $2,250,000 $1,961,550 1,473,750 1,675,350 3,256,200 317,700 876,150 482,850 $6,687,450 = $3,050,550 + $3,636,900 8. e. These two errors cancel each other out, and so there is no effect on assets, liabilities, and stockholders' equity. The firm should have recorded $4,500 of revenue for the first sale and $1,000 of revenue for the second sale, a total of $5,500 in revenue. Instead, the firm recorded $5,400 of revenue for the first sale and $100 of revenue for the second sale, still a total of $5,500 in revenue. 9. c. There are many ways to work this problem, but one way is to: 1) set up four T-accounts (they do come in handy sometimes), one each for Accounts Receivable, Unearned Revenue, Revenue, and Cash, 2) enter the known amounts, and 3) make some assumptions and move the amounts to the Unearned Revenue account: Assume, for example, that one-half of the Revenue [$1,122,400 ( 2] = $561,200 was recorded on account and is a debit to Accounts Receivable and one-half was earned from those who pay in advance and is a debit to Unearned Revenue. This gives $860,800 + $561,200 ? $892,800 = $529,200 as the necessary credit to Accounts Receivable and the amount of cash received from sales on account. This leaves $1,275,200 ? $529,200 = $746,000 as the cash that must have been paid in by those who pay in advance for their services. The balance in Unearned Revenue, therefore, is $640,000 + $746,000 ? $561,200 earned = $824,800. Any number of assumptions will work, including the assumption that all Revenue and Cash amounts came from Unearned Revenue except for the $32,000 in Revenue that came from the increase in Accounts Receivable [$892,800 ? $860,800 = $32,000]. b. The increase in Prepaid Rent reduces Rent Expense and increases net income by $1,820; the increase in Unearned Revenue reduces Revenue and decreases net income by $3,330; the increase in Wages Payable increases Wage Expense and decreases net income by $1,660; the increase in Accounts Receivable indicates an increase in accrued Revenue so this increases net income by $2,225. The total effect on net income is a $945 decrease. Part II. a. In journal entry form: 1. Inventory 481,918 Accounts Payable 481,918 2. Store Supplies 1,000 Accounts Payable 1,000 3. Cash 800,000 Accounts Receivable 15,804 Sales Revenue 815,804 4. Cost of Goods Sold 465,000 Inventory 465,000 5. Cash 37,183 Accounts Receivable 37,183 6. Property & Equipment 39,987 Accounts Payable 39,987 7. Long-Term Liabilities 50,000 Cash 50,000 8. Accounts Payable 514,114 Cash 514,114 9. Retained Earnings 908 Cash 908 10. Supplies Expense 705* Store Supplies 705 *Calculated: Beg. Store Supp. + Supplies Purchased ? Supplies Used = End. Store Supp. $5,592 +$1,000 (from 2. above) ? Supplies Used = $5,887 11. Insurance Expense 605** Prepaid Insurance 605 **Calculated: Beg. Prepd. Ins. + Premiums Paid ? Premiums Expired = End. Prepd. Ins. $1,296 + $0 ? Premiums Expired = $691 b. Sales Rev. ? Cost of Goods Sold ? Supplies Exp. ? Insurance Exp. ? Depreciation Exp. ? Wages Exp. = Net Income. Thus, $815,804 - $465,000 - $705 - $605 = $349,494. Part III. 1. a. Analyze Accts. Rec.: Beg. A/R + Credit Sales ? Cash Collections = End. A/R. Thus, $21,600 + $497,000 - $485,700 = $32,900. The $2,400 beginning balance of Prepd. Rent expired on April 30, and, thus, was an expense for the year 2005. Of the $8,400 paid on May 1, 8/12 (or $5,600) would have expired by December 31, 2005. Thus, total rent expense was $2,400 + $5,600 = $8,000. c. Analyze Prepaid Rent: Beg. Prepd. Rent + Rent Paid ? Rent Expense = End. Prepd. Rent. Thus, $2,400 + $8,400 - $8,000 (from part b.) = $2,800. d. Analyze Accounts Payable: Beg. A/P + Purchases ? Cash Paid = End. A/P. Thus, $14,200 + $291,000 - $292,100 = $13,100. e. Analyze Unearned Revenue: Beg. Un. Rev. + Cash Received in Advance ? Rev. Earned = End. Un. Rev. Thus, $6,100 + $73,100 - $71,500 = $7,700. 2. First solve for Revenues: Revenues ? Expenses = Net Income. Thus, $275 - $210 = $65. Next, use our expanded balance sheet formula: Assets = Liabilities + (Paid-in Capital + Retained Earnings) $230 = $70 + $50 + $110 $ 65 Net Income 2 Stock Issued $(30) dividends $255 = $58 + $ 52 + $145 3. a. The only calculation required was for the overtime: 74 hrs. x $12/hr. x 150% = $1,332. Journal Entry: Wages Expense 1,332 Wages Payable 1,332 Commissions Expense 2,300 Commissions Payable 2,300 Or, in a single entry: Wages Expense (or a similar acct.) 3,632 Wages Payable 3,632 b. The main point to note in this problem is that all cash receipts were initially recorded as revenue, even though the receipts had not been earned. Our adjusting entry, therefore, will require that we adjust the revenue account downward and set up the proper amount in an Unearned Revenue account. All $61,050 of the monthly fees received in the first quarter of the year [(i.e., (110 x $85 x 3) + (55 x $200 x 3) had been earned by 3/31/05. Therefore, no adjustment is needed for these receipts; they are properly included in revenue. However, only 3/12 of the $653,500 of the initial payments had been earned by 3/31/05. The other 9/12 (or $490,125) was unearned at 3/31/05. So our adjusting journal entry should be: Monitoring Fee Revenue 490,125 Unearned Revenue 490,125
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