Financial Reporting & Analysis (7th Edition) Chapter 2 Solution PDF

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Financial Reporting and Analysis (7th Ed.)Chapter 2 SolutionsAccrual Accounting and Income Determination ExercisesExercisesE2-1. Distinguishing accrual-basis revenue from cash receipts (AICPA adapted)Because the subscription begins with the first issue of 2018, no revenue is recognized in 2017. No p...

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Fi nanci alRepor t i ngandAnal ysi s( 7th Ed. ) Chapt er2Sol ut i ons Accr ualAccount i ngandI ncomeDet er mi nat i on Exer ci ses Exer ci ses E21. Di st i ngui shi ngaccr ual basi sr evenuef r om cashr ecei pt s ( AI CPAadapt ed) Bec aus et hes ubs c r i pt i onbegi nswi t ht hefi r s ti s s ueof2018,nor ev enuei s r ec ogni z edi n2017.Nopr oduc tors er v i c ehasy etbeenpr ov i dedbyGee Companyt oi t sc us t omer s . Geer ec ei v edi nc as ht hef ul l amountof$36, 000i n2017. E22. Conver t i ngf r om cashr ecei pt st oaccr ual basi sr evenue ( AI CPAadapt ed) Wefi r s tanal y z et heact i v i t yi nt heDef er r edf eer ev enueac count ,whi c hi s s hownbel ow.Thi sacc ountr epr es ent st hel i abi l i t yt opr ov i degoodsor s er vi c esi nex c hangef orcons i der at i ont hathasal r eadybeenr ec ei v ed.Onc e t hegoodsors er v i c esar epr ov i ded,t hel i abi l i t yi sr el i ev edandt her ev enuei s r ec ogni z edi nt hei nc omes t at ement . Def er r edFeeRevenue $0 X $8, 000

Begi nni ngbal ance Pay ment sr ec ei v edi nadv anc e ofr ev enuer ec ogni t i on Endi ngbal anc e

Theac c ounti nc r eas edby$8, 000,whi c hi sex pl ai nedby$8, 000of pay ment sr ecei v edi nadv anc eofr ev enuebei ngr ec ogni z ed.I nt ot al ,Dr . Hami l t onr ecei v ed$200, 000f r om pat i ent s ,s o$200, 000–$8, 000= $192, 000oft her ec ei pt swer et opayoffac c ount sr ec ei v abl e.Us i ngt hat i nf or mat i onandt heamount st hatar egi v enf orbegi nni ngandendi ng ac count sr ec ei v abl e,wenowanal y z eAc c ount sr ec ei v abl eands howt hat Sal esr ev enuesar e$199, 000.

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Account sRecei vabl e Begi nni ng bal anc e Pat i entf ee r evenues Endi ngbal anc e

$18, 000 $192, 000 Col l ec t i onsonac count Y $25, 000

$18, 000+Y-$192, 000=$25, 000 Y=$199, 000 E23. Di st i ngui shi ngbet weenaccr ualbasi sexpenseandcash di sbur sement ( AI CPAadapt ed) Theamountofpr emi umspai dc anbedet er mi nedf r om aTacc ountanal y s i s ofpr epai di ns ur anc e. Pr epai dI nsur ance Begi nni ng bal anc e Pr emi umspai d Endi ngbal anc e

$210, 000 X $875, 000 Amount sc har gedt oi ns ur anc e ex pens e $245, 000

$210, 000+X-$875, 000=$245, 000 X=$910, 000 E24. Conver t i ngf r om casht oaccr ualbasi s Wefi r s tdet er mi nes al esr ev enuebyanal y z i ngAc count sr ec ei v abl e. Account sRecei vabl e Begi nni ng bal anc e Sal esr evenue Endi ngbal anc e

$139, 000 X $387, 000 Col l ec t i onsonac count $141, 000

$139, 000+X-$387, 000=$141, 000 X=$389, 000 I nor dert odet er mi necos tofgoodss ol d,wemus tanal y z et woacc ount s– I nv ent or yandAc c ount spay abl e.Eac hoft hes eacc ount sex pl ai nsapor t i onof 2-2 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

t hedi ffer enc ebet weenc as hpay ment sandcos tofgoodss ol dbecaus e I nv ent or yc hangesbyt hedi ffer enc ebet weenc os tofgoodss ol dand pur c has es ,andAcc ount spay abl ec hangebyt hedi ffer enc ebet ween pur c has esandpay ment st os uppl i er s . Account sPayabl e Pay ment son acc ount

BAP $131, 000 X

Begi nni ngbal ance I nvent or ypur chases

BAP19, 000 Endi ngbal anc e

Wedonotk nowt heamountofAc c ount spay abl eatei t hert hebegi nni ngor t heendoft hey ear ,butwedok nowAcc ount spay abl edec l i nedby $19, 000,whi c hwer epr es entabov ewi t ht heamount sBAPandBAP19, 000f ort hebegi nni ngandendi ngbal anc es ,r es pec t i v el y . $BAP+X-$131, 000=$BAP19, 000 X=$112, 000 Theanal y s i si ndi c at est hatk nowi ngt hec hangei nAcc ount spay abl ei s s uffic i entt odet er mi net hedi ffer encebet weenpur c has esandpay ment s . Nowt hatwehav edet er mi nedt heamountofi nv ent or ypur c has es ,wecan anal y z et heI nv ent or yacc ount . I nvent or y Begi nni ng bal anc e I nv ent or y pur c has es Endi ngbal anc e

BI 112, 000 Y

Costofgoodssol d

BI 39, 000

$BI+$112, 000-Y=$BI-$39, 000 Y=$151, 000 Aswast hec as ef orAcc ount spay abl e,wedonotk nowt hebegi nni ngand endi ngI nv ent or ybal anc es ,butt hec hangei ss uffic i entf orouranal y s i s . Cos tofgoodss ol di s$151, 000. Ther ef or e,gr os spr ofi ti s$389, 000-$151, 000=$238, 000.

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E25.Pr epar i ngamul t i pl est epi ncomest at ement Har dr ockMi ni ngCo. I ncomeSt at ement YearEndedDecember31,2017 ( $i n000)

Nets al es Cos tofpr oduc t ss ol d Gr os sPr ofi t Mar k et i ng,admi ni s t r at i v eandot herex pens es I nt er es tex pens e I nv es t mentl os s es * Res t r uc t ur i ngc har ges Ear ni ngsbef or ei nc omet ax es Pr ov i s i onf ori nc omet ax es I ncomef r om c ont i nui ngoper at i ons Pr ofi tondi s c ont i nuedoper at i ons ,netofi nc omet ax effec tof$3, 600* * Neti nc ome Ear ni ngsperc ommons har e: I ncomef r om c ont i nui ngoper at i ons Di s cont i nuedoper at i ons Neti nc ome

$5, 281, 954 ( 4, 765, 505) 516, 449 ( 193, 147) ( 17, 143) ( 57, 752) ( 8, 777) 239, 630 ( 71, 889) 167, 741 8, 400 $176, 141

$16. 77 0. 84 $17. 61

The“ Ot her ,net ”c apt i onasor i gi nal l yr epor t edi sbr ok endownasf ol l ows : *“ Ot her ,net ”asor i gi nal l yr epor t ed( $i n000) Les s :Res t r uc t ur i ngc har ge Pl us :Di s c ont i nuedoper at i ons I nv es t mentl os s es

$54, 529 ( 8, 777) 12, 000 $57, 752

Di s cont i nuedoper at i onsar epr es ent ed“ netoft ax ”ascal c ul at edbel ow.The “ r es t r uc t ur i ngl os s ”i si nf r equent ,t husi ti sas epar at el ydi s c l os edc omponent ofoper at i ngi nc ome.Remov i ngt hes et woi t emsf r om “ Ot her ,net ”l eav esonl y t hei nv es t mentl os s esi nt heor i gi nalc apt i on,whi c hs houl dber el abel ed “ i nv es t mentl os s es . ” * *Pr et axpr ofi tf r om di s c ont i nuedoper at i ons I ncomet ax esondi s c ont i nuedoper at i ons( 30% t ax

$12, 000 3, 600 2-4

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r at e) Di s cont i nuedoper at i ons ,netoft ax es

$8, 400

Thef or ei gnc ur r enc yl os s( $55, 000)doesnots ur pas sanyr eas onabl e mat er i al i t yt hr es hol d( e. g. ,gr eat ert han1% ofneti nc ome)s oi tmayr emai ni n “ mar k et i ng,admi ni s t r at i v eandot herex pens es . ”Hadt hi sl os sbeenmat er i al , s epar at edi s c l os ur easac omponentofoper at i ngi nc omewoul dhav ebeen war r ant ed. Pers har edi s c l os ur esar er equi r edont hef ac eoft hei nc omes t at ementf or i nc omef r om oper at i onsandi t emst hatf ol l owont hei nc omes t at ement .

E26.I ncomest at ementpr esent at i on Ev ent1i sadi s c ont i nuedoper at i onandwoul dappearont hei nc ome s t at ementbel owi nc omef r om cont i nui ngoper at i ons .Toqual i f yf or di s c ont i nuedoper at i ont r eat ment ,t hes ol dc omponentmus tr epr es enta s t r at egi cs hi f thav i ngamaj oreffec tont heoper at i onsorr es ul t s .Ast he t r ans ac t i onsar eas s umedt obemat er i al ,t hi sc ondi t i onf ordi s cont i nued oper at i onst r eat mentappear st obemet . Ev ent2woul dber epor t edasanunus ualori nf r equent l yoc c ur r i ngi t em and t huswoul dbei nc l udedi ni nc omef r om cont i nui ngoper at i ons . Ev ent3i sal s oanunus ual ori nf r equent l yoc c ur r i ngi t em,i nc l udedi ni nc ome f r om cont i nui ngoper at i ons . Ev ent4i sac hangei nac c ount i ngpr i nc i pl eandwoul dr equi r er et r os pec t i v e appl i c at i on( i . e. ,pr i ory eari ncomes t at ementnumber spr es ent edf or c ompar at i v epur pos eswoul dber es t at edt or efl ectt heav er agec os tmet hodof i nv ent or ycos t i ng) .Thec ur r enty eari nc omes t at ementnumber swoul dbe bas edont heav er agec os tmet hod.Theeffectoft heacc ount i ngpr i nc i pl e c hangeont hec ur r entper i odi nc omenumber swoul dbedi s c l os edi nanot et o t hefi nanc i al s t at ement sex pl ai ni ngt heac count i ngc hange. Ev ent5i sac hangei nac c ount i nges t i mat eandt huswoul dbei nc l udedi n i nc omef r om c ont i nui ngoper at i ons .Nos pec i al i nc omes t at ementdi sc l osur e oft hi sev enti sr equi r ed.Depr ec i at i onex pens ei n2017( andbey ond)wi l l be 2-5 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

c al c ul at edus i ngt he( new)s hor t erl i v es .Thati s ,t her emai ni ngbookv al ues wi l lbedepr ec i at edov ert her emai ni ngl i v es .Ther angeofequi pmentl i v es us edf ordepr ec i at i onpur pos esmayneedt obeadj us t edi nt henot est o Kr ewat c h’ sfi nanc i als t at ement s . Ev ent6i sanunus ualoni nf r equent l yoc c ur r i ngi t em andt huswoul dbe i nc l udedi ni nc omef r om cont i nui ngoper at i ons . Ev ent7i sanunus ualori nf r equent l yocc ur r i ngi t em andt huswoul dbe i nc l udedi ni nc omef r om cont i nui ngoper at i ons . E27.Det er mi ni nggai n( l oss)f r om di scont i nuedoper at i ons Munnst erCor por at i on Par t i alI ncomeSt at ement Fort heYear sEndedDecember31 2017 Oper at i ngi nc ome Pr ov i s i onf ori nc omet ax es I ncomef r om c ont i nui ngoper at i ons Di s cont i nuedoper at i ons : Los sf r om di s c ont i nueddi v i s i on,netof t axbenefi t sof$151, 500i n2017and $51, 000i n2016 Gai nf r om s al eofdi s cont i nueddi v i s i on, netoft ax esof$105, 000 Neti nc ome

2016

$ 1, 405, 000 $ 920, 000 421, 500 276, 000 983, 500 644, 000

( 353, 500) ( 119, 000) $

245, 000 -0875, 000 $ 525, 000

Thef ol l owi nganal y s i ss howshowt her ev i s edi nc omes t at ement sar eder i v ed t hr oughr e

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E28. Det er mi ni ngl ossondi scont i nuedoper at i ons Ther es ul t sofoper at i onsofanent i t ycl as si fi edashel df ors al ear et obe r epor t edi ndi s cont i nuedoper at i onsi nt heper i odsi nwhi c ht heyocc ur( netof t axeffec t s ) .ForRev s i ne,t hel os sf r om oper at i onsf ort hedi s c ont i nued s egmentwoul dbe$350, 000det er mi nedasf ol l ows : Los sf r om 1/ 1/ 17t o8/ 31/ 17 Los sf r om 9/ 1/ 17t o12/ 31/ 17 T ot alpr et axl os s T axbenefi tat30% Oper at i ngl os s ,netoft axeffec t s

( $300, 000) ( 200, 000) ( 500, 000) 150, 000 ( $350, 000)

Noneoft heex pect edpr ofi tf r om oper at i ngt hedi s c ont i nuedoper at i oni n2018 ort hees t i mat edgai nons al ei sr ec ogni z edi n2017.Thes eamount swi l l be r ec ogni z edi n2018ast heyoc c ur . E29. Det er mi ni ngper i odvs.pr oductcost s Per i odCos t Depr ec i at i ononofficebui l di ng

X 1

X

I nsur anceex pensef orf ac t or ybui l di ng Pr oductl i abi l i t yi ns ur anc epr emi um

X

Tr ans por t at i onc har gesf orr aw mat er i al s2

X

1

X

Fact or yr epai r sandmai nt enance 3

Rentf ori nv ent or ywar ehouse

Tr aceabl eCos t

X

Cos tofr awmat er i al s

X

Fact or ywages

X

Sal ar yt oc hi efex ecut i v eofficer

X

Depr ec i at i ononf act or y

X

Bonust of ac t or ywor k er s

X

Sal ar yt omar k et i ngs t aff

X 2-7

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Admi ni st r at i v eex pens es

X

Baddebte x pens e3

X

Adv er t i si nge x pense4

X

Resear c handdev el opment

X

5

X

1

X

War r ant yex pens e

El ect r i ci t yf orpl ant 1

Thes ear epr oduc tc os t s ;i . e.cos t si nc ur r edi nt hemanuf ac t ur i ngpr oc es s . Theyar et r ac eabl ei nt hatt heyc anbeas s i gnedt ouni t spr oduc edi nt he c ur r entper i od,ev eni ft hati sdonebys omeal l oc at i onmet hod. 2

Rentf ori nv ent or ywar ehous i ngcoul dbear guedt obeapr oductcos t . Howev er ,gener al l yc os t si nc ur r edaf t ert hepr oduc t i onpr oc es si sc ompl et e ar et r eat edasper i odc os t s . 3

Baddebtex pens ei st y pi cal l ydeduct edf r om s al est oar r i v eatNetSal es .I ti s notani nv ent or yc os tt hati spar tofCos tofgoodss ol d,buti ti ss t i l lmat c hedt o t heper i odoft her el at edr ev enue. 4

Adv er t i s i ngi snotpar toft hemanuf ac t ur i ngpr oc es sandt y pi c al l yc annotbe as s oc i at edwi t hs pec i fi cuni t sofpr oduc t i on.Ther ef or e,i ti sgener al l yt r eat ed asaper i odcos t . 5

War r ant yex pens ei smat c hedagai ns ts al esi nt heper i odi nwhi c ht he pr oduc t ss ubj ec tt owar r ant i esar es ol d,notwhent hewar r ant yc os t sar e i nc ur r ed.I ti snotani nv ent or yc os tt hatbec omespar tofc os tofgoodss ol d, buti ti smat c hedt ot heper i odoft her el at eds al e.

E210.Changei ni nvent or ymet hods Requi r ement1: Ret ai nedear ni ngsbal anc eatJ anuar y1,2017, us i ngLI FO I nc r eas edc umul at i v epr et axi nc omet hr ough Dec ember31,2016us i ngFI FO Les s :i nc omet axat30% I nc r eas edc umul at i v eneti nc omet hr ough Dec ember31,2016 Ret ai nedear ni ngsbal anc eatJ anuar y1,2017, us i ngFI FO

$1, 750, 000 $80, 000 ( 24, 000) 56, 000 $1, 806, 000 2-8

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Requi r ement2: 1/ 1/ 2017T or ec or dac hangei ni nv ent or ymet hod DR I nv ent or y $80, 000 CR Ret ai nedear ni ngs CR Ac c r uedt axl i abi l i t y

56, 000 24, 000

E211.Det er mi ni ngeffectofomi t t i ngyear endadj ust i ngent r i es OS=ov er s t at ed US=under s t at ed NE=noeffect I t em 1.Suppl i esI nvent or y Di r ect i onofeffec t Dol l aramountofeffect

Asset s OS $9, 000

Li abi l i t i es

Net I ncome

NE

OS $9, 000

Ex pens enotr ec or ded=$12, 000-$3, 000=$9, 000

2.Def er r edl andscapi ngr evenue Di r ect i onofeffec t NE Dol l aramountofeffect

OS $6, 000

US $6, 000

Rev enuenotr ec or ded=$6, 000f r om J ul y1,2017t oDec ember31,2017

3.Gasol i neExpense Di r ect i onofeffec t

NE

Dol l aramountofeffect

US

OS

$2, 500

$2, 500

US $4, 500

OS $4, 500

Gas ol i neex pensenotr ecor ded=$2, 500

4.I nt er estExpense Di r ect i onofeffec t Dol l aramountofeffect

NE

I nt er es tex pens ef or9mont hsnotac c r ued=$50, 000x0. 12x9/ 12=$4, 500 2-9 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5.Depr eci at i onExpense Di r ect i onofeffec t Dol l aramountofeffect

OS $10, 000

NE

OS $10, 000

Depr ec i at i onex pensenotr ecor ded=$30, 000/ 3=$10, 000

E212.Er r orCor r ect i on Requi r ement1: Att heendof2016,i nv ent or yi sunder s t at edby$8, 000andmus tbecor r ec t ed. Ac c umul at eddepr ec i at i oni sov er s t at edby$22, 300–$6, 000=$16, 300and mus tal s obec or r ec t ed.Not et hatwedet er mi nedt hes eamount sdi ffer ent l y . I nv ent or yi sabal anc es heetacc ountandwear egi v ent heamountbywhi c hi t i smi s s t at edatDec ember31,2016.I nt hec as eofacc umul at eddepr ec i at i on– al s oabal anc es heetac c ount–wear enotgi v ent heamountbywhi c ht he acc ounti smi s s t at ed.I ns t ead,wear egi v ent heamountbywhi c hdepr ec i at i on ex pens ewasmi s s t at ed,andi ti st hec umul at i v emi s s t at ementi ndepr ec i at i on ex pens et hatwi l lbet heamountbywhi c hac c umul at eddepr ec i at i oni s mi s s t at ed.Henc e,wes ummedt hedepr ec i at i onex pens emi s s t at ement st o der i v et heacc umul at eddepr ec i at i onmi s s t at ement . Thec or r ect i ngj our nal ent r yi sasf ol l ows : DR I nv ent or y DR Ac c umul at eddepr ec i at i on CR Ret ai nedear ni ngs

$8, 000 16, 300 $24, 300

Tounder s t andwhyt hebal anc i ngl i neoft heent r yi si nRet ai nedear ni ngs , c ons i derhowt heI nv ent or yandAc c umul at eddepr ec i at i onacc ount sbec ame mi s s t at ed.Amount si nt heI nv ent or yac c ountatt hebegi nni ngofaper i odor addedt oI nv ent or ydur i ngt hey earar ei noneoft wopl ac esatt heendoft he y ear .Theyhav eei t herbeenex pens edt hr oughc os tofgoodss ol dorar ei nt he endi ngI nv ent or yac countbal anc e.Ther ef or e,f orev er ydol l arbywhi c h I nv ent or yi st ool ow,cos tofgoodss ol d,c umul at i v el yov ert hel i f eoft hefi r m, hasbeent oohi gh.Asar es ul t ,c umul at i v eneti nc omeandt her ef or eRet ai ned ear ni ngsi sal s ot ool ow.Si mi l ar l yf ordepr ec i at i on,f orev er ydol l arbywhi c h acc umul at eddepr ec i at i oni st oohi gh,c umul at i v edepr ec i at i onex pens ehas 2-10 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

beent oohi ghandt her ef or ec umul at i v eneti nc omehasbeent ool ow.Asa r es ul t ,Ret ai nedear ni ngsi sunder s t at edandmus tbei nc r eas ed. Requi r ement2: As s umi ngi ti smat er i al ,t heer r ori scor r ec t edbyr es t at i ngal lmi s s t at edper i ods r et r oac t i v el y .The2017fi nanc i als t at ement swi l lpr es entpr i orper i odsas c or r ect ed.I naddi t i on,di s c l os ur eswi l ls howt hefi nanc i als t at ementeffect sof t heer r orc or r ec t i ononeac hoft her es t at edper i ods .

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E213.Er r orcor r ect i on Requi r ement1: Att heendof2016,I nv ent or yi sunder s t at edby$40, 000.I naddi t i on, Equi pmenti sunder s t at edby$70, 000andAc c umul at eddepr ec i at i oni s under s t at edby$3, 000[ ( $70, 000–$10, 000)÷10x. 5= $3, 000] .The adj us t i ngent r yi s : DR I nv ent or y DR Equi pment CR Acc umul at eddepr ec i at i on CR Ret ai nedear ni ngs

$40, 000 70, 000 $3, 000 107, 000

Tounder s t andwhyt hebal anc i ngl i neoft heent r yi si nRet ai nedear ni ngs , c ons i derhowt heI nv ent or y ,Equi pment ,andAc c umul at eddepr ec i at i on acc ount sbec amemi s s t at ed.Amount si nt heI nv ent or yac countatt he begi nni ngofaper i odoraddedt oI nv ent or ydur i ngt hey earar ei noneoft wo pl ac esatt heendoft hey ear .Theyhav eei t herbeenex pens edt hr oughcos tof goodss ol dorar ei nt heendi ngI nv ent or yac countbal anc e.Ther ef or e,f orev er y dol l arbywhi c hI nv ent or yi st ool ow,cos tofgoodss ol d,c umul at i v el yov ert he l i f eoft hefi r m,hasbeent oohi gh.Asar es ul t ,c umul at i v eneti nc omeand t her ef or eRet ai nedear ni ngsi sal s ot ool ow.Whenanequi pmentpur c has ei s ex pens edr at hert hanc api t al i z ed,neti nc omei sunder s t at ed,caus i ngRet ai ned ear ni ngst obeunder s t at ed.And,f orev er ydol l arofdepr ec i at i ont hati snot t ak enbuts houl dhav ebeen,cumul at i v edepr ec i at i onex pens ehasbeent ool ow andt her ef or ec umul at i v eneti nc omehasbeent oohi gh.Asar es ul t ,Ret ai ned ear ni ngsi sov er s t at edandmus tbei nc r eased.So,Ret ai ne...