ACC

Financial Accounting

Practice Problems

These exercises are not to be submitted for a grade, but completing them will help you understand the concepts in this lesson.

Exercise 3-9A page, 169 and 3-10A on page 170

Exercise 3-16A and 3-17A on page 172

Problem 3-31A on page 179

Exercise 4-14A on page 242

Exercise 3-9A Recording receivables and identifying their effect on financial statements

Rice Company performed services on account for $30,000 in 2013, its first year of operations. Rice collected $24,000 cash from accounts receivable during 2013 and the remaining $6,000 in cash during 2014.

Required

a. Record the 2013 transactions in T-accounts.

b. Record the 2013 transactions in a horizontal statements model like the following one.

Assets = Liab + Equity Rev. - Exp. = Net Inc. Cash Flow

Cash + Accts Rec = Ret. Earn

c. Determine the amount of revenue Rice would report on the 2013 income statement.

d. Determine the amount of cash flow from operating activities Rice would report on the 2013 statement of cash flows.

e. Open a T-account for Retained Earnings, and close the 2013 Service Revenue account to the Retained Earnings account.

f. Record the 2014 cash collection in the appropriate T-accounts

g. Record the 2014 transaction in a horizontal statements model like the one shown in Requirement b.

h. Assuming no other transaction occur in 2014, determine the amount of net income and the net cash flow from operating activities for 2014.

Exercise 3-10A Recording supplies and identifying their effect on financial statement

Nickie Hern started and operated a small family consulting firm in 2013. The firm was affected by two events: (1) Hern provided $36,000 of services on account, and (2) she purchased $10,000 of supplies on account. There were $1,800 of supplies on hand as of December 31, 2013.

Required

a. Open T-accounts and record the two transactions in the accounts.

b. Record the required year-end adjusting entry to reflect the use of supplies.

c. Record the above transactions in a horizontal statements model like the following one.

Assets = Liab. + Equity Rev. - Exp. = Net Inc. Cash Flow

Acct + Supplies = Accts. + Ret.

Rec Pay. Earn.

d. Explain why the amounts of net income and net cash flow from operating activities differ.

e. Record and post the required closing entries, and prepare a post-closing trial balance.

Exercise 3-16A Recording prepaid items and identifying their effect on financial

statements

Washington Mining began operations by issuing common stock for $150,000. The company paid $135,000 cash in advance for a one-year contract to lease machinery for the business. The lease agreement was signed on March 1, 2013, and was effective immediately. Washington Mining received $172,500 of cash revenue in 2013.

a. Record the March 1 cash payment in general journal format.

b. Record in general journal format the adjustment required as of December 31, 2013.

c. Record all 2013 events in a horizontal statements model like the following one:

Assets = Liab. + Equity Rev. - Exp. = Net Inc. Cash Flow

Cash + Prep. = Common + Ret.

Rent Stock Earn.

d. What amount of net income would Washington Mining report on the 2013 income statement? What is the amount of net cash flow from operating activities for 2013?

e. Determine the amount of prepaid rent Washington Mining would report on the December 31, 2013, balance sheet.

Exercise 3-17A Preparing closing entries

The following financial information was taken from the books of Walker Spa:

Account Balances as of December 31, 2013

Accounts Receivable $54,000

Accounts Payable 15,000

Advertising Expense 7,000

Cash 80,000

Common Stock 40,000

Dividends 10,000

Land 27,000

Prepaid Rent 6,400

Rent Expense 15,600

Retained Earnings 1/1/2013 38,800

Salaries Expense 64,000

Salaries Payable 23,600

Service Revenue 153,000

Supplies 800

Supplies Expense 5,000

Required

a. Prepare the journal entries necessary to close the temporary accounts December 31, 2013, for Walker Spa.

b. What is the balance in the Retained Earnings account after the closing entries are posted?

Problem 3-31A Effect of errors on the trial balance

The following trial balances was prepared from the ledger accounts of Smith Inc.:

SMITH INC

Trial Balance

May 31, 2013

Account Titles Debit Credit

Cash $7,200

Accounts Receivable 1,770

Supplies 400

Prepaid Insurance 2,400

Land 5,000

Accounts Payable $1,500

Common Stock 1,800

Retained Earnings 7,390

Dividends 400

Service Revenue 19,600

Rent Expense 3,600

Salaries Expense 9,000

Operating Expense 2,500

Totals $32,290 $30,290

The accountant for Smith, Inc., made the following errors during May 2013:

1. The cash purchase of land for $3,000 was recorded as a $5,000 debit to Land and a $3,000 credit to Cash.

2. A $1,600 purchase of supplies on account was properly recorded as a debit to the Supplies account but was incorrectly recorded as a credit to the Cash account.

3. The company provided services valued at $7,800 to a customer on account. The accountant recorded the transaction in the proper accounts but in the incorrect amount of $8,700.

4. A $1,200 cash receipt from a customer on an account receivable was not recorded.

5. An $800 cash payment of an account payable was not recorded.

c. The May utility bill, which amounted to $1,050 on account, was not recorded.

Required

a. Identify the errors that would cause a difference in the total amounts of debits and credits that would appear in a trial balance. Indicate whether the Debit or Credit column would be larger as a result of the error.

b. Indicate whether each of the preceding errors would overstate, understate, or have no effect on the amount of total assets, liabilities, and equity. Your answer should take the following form:

Event No. Assets = Liabilities + Stockholders’ Equity

1 Overstate No effect No effect

c. Prepare a corrected trial balance.

Exercise 4-14A Comprehensive exercise with purchases discounts

The Wedding Shop (TWS) started the 2013 accounting period with the balances given in the financial statements model shown below. During 2013 TWS experienced the following business events:

1. Purchased $60,000 of merchandise inventory on accounts, terms 2/10, n/30.

2. The goods that were purchased in Event 1 were delivered FOB shipping point. Freight costs of $1,500 were paid in cash by the responsible party.

3. Returned $3,000 of goods purchased in Event 1.

4a. Recorded the cash discount on the goods purchased in Event 1.

4b. Paid the balance due on the account payable within the discount period.

5a. Recognized $59,000 of cash revenue from the sale of merchandise.

5b. Recognized $45,000 of cost of goods sold.

6. The merchandise in Event 5a was sold to customers FOB destination. Freight cost of $1,400 were paid in cash by the responsible party.

7. Paid cash of $9,000 for selling and administrative expenses.

8. Sold the land for $14,500 cash.

Required

a. Record the above transactions in a financial statements model like the one shown below.

Event Acct Com. Ret. Rev./ Net Cash

No. Cash + Inventory + Land = Pay. + Stk. + Earn Gain - Exp = Inc. Flow

Bal $60,000 + $8,000 + $12,000 = -0- + 50,000 + 30,000 NA - NA = NA NA

b. Prepare a multistep income statement. Include common size percentages on the income statement.

c. TWS’s gross margin percentage in 2012 was 34%. Based on the common size data in the income statement, did TWS raise or lower its prices in 2013?

d. Assuming a 5% rate of growth, what is the amount of net income expected for 2014?