Solutions Guide: Please reword the answers to essay type parts so as to guarantee that

your answer is an original. Do not submit as your own.

E7-2)
1.

Cash balance of $925,000. Only the checking account balance should be reported as
cash. The certificates of deposit of $1,400,000 should be reported as a temporary
investment, the cash advance to subsidiary of $980,000 should be reported as a
receivable, and the utility deposit of $180 should be identified as a receivable from
the gas company.

2.

Cash balance is $584,650 computed as follows:

Checking account balance
Overdraft
Petty cash
Coin and currency

$600,000
(17,000)
300
1,350
$584,650

Cash held in a bond sinking fund is restricted. Assuming that the bonds are
noncurrent, the restricted cash is also reported as noncurrent.
3.

Cash balance is $599,800 computed as follows:

Checking account balance
Certified check from customer

$590,000
9,800
$599,800

The postdated check of $11,000 should be reported as a receivable. Cash restricted

due to compensating balance should be described in a note indicating the type of
arrangement and amount. Postage stamps on hand are reported as part of office
supplies inventory or prepaid expenses.
4.

Cash balance is $85,000 computed as follows:

Checking account balance
Money market mutual fund

$37,000
48,000
$85,000

The NSF check received from customer should be reported as a receivable.

5.

Cash balance is $700,900 computed as follows:

Checking account balance
Cash advance received from customer

$700,000
900
$700,900

Cash restricted for future plant expansion of $500,000 should be reported as a

noncurrent asset. Short-term treasury bills of $180,000 should be reported as a
temporary investment. Cash advance received from customer of $900 should also be
reported as a liability; cash advance of $7,000 to company executive should be
reported as a receivable; refundable deposit of $26,000 paid to federal government
should be reported as a receivable.
E7-8)
(a)

Allowance for Doubtful Accounts..........................................

6,000

Accounts Receivable....................................................
(b)

6,000

Accounts Receivable

$800,000

Less: Allowance for Doubtful Accounts

40,000

Net realizable value

(c)

$760,000

Accounts Receivable

$794,000

Less: Allowance for Doubtful Accounts

34,000

Net realizable value

$760,000

E8-5)
(a)

Inventory December 31, 2002 (unadjusted)

Transaction 2
Transaction 3
Transaction 4
Transaction 5
Transaction 6
Transaction 7
Transaction 8
Inventory December 31, 2002 (adjusted)

(b)

Transaction 3
Sales

$234,890
13,420
-0-08,540
(10,438)
(10,520)
1,500
$237,392

12,800

Accounts Receivable
(To reverse sale entry in 1999)
Transaction 4
Purchases (Inventory)

12,800

15,630

Accounts Payable
(To record purchase of merchandise
in 1999)

15,630

Transaction 8
Sales Returns
Accounts Receivable

2,600
2,600

E8-14)
(a)

(1)

LIFO

600 @ $6.00 =

$3,600

100 @ $6.08 =

608
$4,208

(2)

Average cost
Total cost

Total units

$33,655*

= $6.35 average cost per unit

5,300

700 @ $6.35 = $4,445

*Units

Price

Total Cost

600

$6.00

$ 3,600

1,500

$6.08

9,120

800

$6.40

5,120

1,200

$6.50

7,800

700

$6.60

4,620

500

$6.79

3,395

5,300

(b)

(1)

FIFO

$33,655

500 @ $6.79 =

$3,395

200 @ $6.60 =

1,320
$4,715

(2)

LIFO

100 @ $6.00 =

$ 600

100 @ $6.08 =

608

500 @ $6.79 =

3,395
$4,603

(c)

Total merchandise available for sale

$33,655

Less inventory (FIFO)

4,715

Cost of goods sold

(d)

$28,940

FIFO.

E8-25)

Current $
2004
2005
2006
2007
2008
2009

$ 80,000
115,500
108,000
122,200
154,000
176,900

Price Index

Base Year $

1.00
1.05
1.20
1.30
1.40
1.45

$ 80,000
110,000
90,000
94,000
110,000
122,000

Change from
Prior Year

$+30,000
(20,000)
+4,000
+16,000
+12,000

Ending InventoryDollar-value LIFO:

2004

2005

$80,000

2008

$80,000 @ 1.00 =

$ 80,000

10,000 @ 1.05 =

10,500

$80,000 @ 1.00 =

$ 80,000

4,000 @ 1.30 =

5,200

30,000 @ 1.05 =

31,500

16,000 @ 1.40 =

22,400

$111,500

2006

$80,000 @ 1.00 =

$ 80,000

10,000 @ 1.05 =

10,500

$118,100

2009

$80,000 @ 1.00 =

$ 80,000

10,000 @ 1.05 =

10,500

$ 90,500

2007

$80,000 @ 1.00 =

$ 80,000

10,000 @ 1.05 =

10,500

4,000 @ 1.30 =

5,200

4,000 @ 1.30 =

5,200

16,000 @ 1.40 =

22,400

12,000 @ 1.45 =

17,400
$135,500

$ 95,700

E15-13)
(a)

No entrysimply a memorandum note indicating the number of shares has increased

to 18 million and par value has been reduced from
$10 to $5 per share.

(b)

Retained Earnings ($10 X 9,000,000)..................................

Common Stock Dividend Distributable.......................

90,000,000

Common Stock Dividend Distributable..............................

Common Stock...............................................................

90,000,000

(c)

90,000,000

90,000,000

Stock dividends and splits serve the same function with regard to the securities
markets. Both techniques allow the board of directors to increase the quantity of
shares and reduce share prices into a desired trading range.
For accounting purposes the 20%25% rule reasonably views large stock dividends
as substantive stock splits. In this case, it is necessary to capitalize par value with a
stock dividend because the number of shares is increased and the par value remains
the same. Earnings are capitalized for purely procedural reasons.

E15-18)
(a)

1.

2.

Dividends PayablePreferred (2,000 X $10)..........................

Dividends PayableCommon (20,000 X $2)...........................
Cash.............................................................................

20,000
40,000

Treasury Stock........................................................................
Cash (1,700 X $40)......................................................

68,000

60,000

68,000

3.

4.

5.

Land.........................................................................................
..................................................................................................
Treasury Stock (700 X $40).......................................
Paid-in Capital From Treasury Stock......................

30,000

Cash (500 X $105)...................................................................

Preferred Stock (500 X $100)....................................
Paid-in Capital in Excess of Par
Preferred..................................................................

52,500

Retained Earnings (1,900* X $45)........................................

Common Stock Dividend Distributable
(1,900 X $5)..............................................................
Paid-in Capital in Excess of Par
Common...................................................................

85,500

28,000
2,000

50,000
2,500

9,500
76,000

*(20,000 1,700 + 700 = 19,000; 19,000 X 10%)

6.

7.

Common Stock Dividend Distributable...............................

Common Stock............................................................

9,500

Retained Earnings..................................................................
Dividends PayablePreferred
(2,500 X $10)............................................................
Dividends PayableCommon
(20,900* X $2)..........................................................

66,800

*(19,000 + 1,900)
(b)

Anne Cleves Company

Stockholders Equity
December 31, 2007

Capital stock
Preferred stock, 10%, $100 par, 10,000 shares
authorized, 2,500 shares issued and

9,500

25,000
41,800

outstanding
Common stock, $5 par, 100,000 shares
authorized, 21,900 shares issued, 20,900
shares outstanding
Total capital stock
Additional paid-in capital
Total paid-in capital
Retained earnings

$250,000

109,500
359,500
205,500
565,000
627,700

Total paid-in capital and retained earnings

Less: Cost of treasury stock (1,000 shares common)
Total stockholders equity

1,192,700
40,000
$1,152,700

Computations:
Preferred stock
$200,000 + $50,000 = $250,000
Common stock
$100,000 + $ 9,500 = $109,500
Additional paid-in capital: $125,000 + $2,000 + $2,500 + $76,000 = $205,500
Retained earnings: $450,000 $85,500 $66,800 + $330,000 = $627,700
Treasury stock $68,000 $28,000 = $40,000
E16-20)
(a)

Revenues
Expenses:
Other than interest
Bond interest (60 X $1,000 X .08)
Income before income taxes
Income taxes (40%)
Net income

$17,500
$8,400
4,800

13,200
4,300
1,720
$ 2,580

Diluted earnings per share:

$2,580 + (1.40)($4,800)
2,000 + 6,000
(b)

Revenues
Expenses:

$5,460
8,000

$.68
$17,500

Other than interest

Bond interest (60 X $1,000 X .08 X 4/12)
Income before income taxes
Income taxes (40%)
Net income

$8,400
1,600

10,000
7,500
3,000

$ 4,500

Diluted earnings per share:

$4,500 + (1.40)($1,600)
2,000 + (6,000 X 1/3 yr.)
(c)

$5,460
4,000

$1.37

Revenues
Expenses:
Other than interest
Bond interest (60 X $1,000 X .08 X 1/2)
Bond interest (40 X $1,000 X .08 X 1/2)
Income before income taxes
Income taxes (40%)
Net income

$17,500
$8,400
2,400
1,600

12,400
5,100
2,040

$ 3,060

Diluted earnings per share (see note):

$3,060 + (1.40)($4,000)
2,000 + (2,000 X 1/2 yr.) + 4,000 + (2,000 X 1/2)

$5,460
8,000

P16-7)

(a)

Basic EPS

$1,200,000 ($3,000,000 X .06)

600,000*

= $1.70 per share

*$6,000,000 $10

(b)

Diluted EPS

(Net income Preferred dividends) + Interest

savings (net of tax)
Average common shares + Potentially dilutive
common shares

$.68

$1,200,000 $180,000a + $96,000b

600,000 + 10,000c + 80,000d

$1,116,000
690,000

= $1.62 per share

a

$3,000,000 X .06; Preferred stock is not assumed converted since conversion would
be antidilutive.

$2,000,000 X .08 X (1 .40)

c

Market price Option price

Market price

$25 $20
$25
d

X Number of options = incremental shares

X 50,000 = 10,000

($2,000,000 $1,000) X 40 shares/bond