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Problem 1.

Adjusting entries (18 points)


The following trial balance was taken from the books of Fisk Corporation on December
31, 2004.
Account
Credit
Cash
Accounts Receivable
Note Receivable
Allowance for Doubtful Accounts
Merchandise Inventory
Unexpired Insurance
Furniture and Equipment
Accumulated Depreciation of F. & E.
Accounts Payable
Common Stock
Retained Earnings
Sales
Cost of Goods Sold
Salaries Expense
Rent Expense
Totals

Debit
$ 12,000
40,000
7,000
$ 1,800
54,000
4,800
125,000
15,000
10,800
44,000
55,000
310,000
131,000
50,000
12,800
$436,600

$436,600

At year end, the following items have not yet been recorded.
a. Insurance expired during the year, $2,000.
b. Estimated bad debts, 1% of gross sales.
c. Depreciation on furniture and equipment, 12% per year.
d. Interest at 8% is receivable on the note for one full year.
e. Rent paid in advance at December 31, $5,400 (originally charged to expense).
f. Accrued salaries at December 31, $5,800.
Instructions
(a) Prepare the necessary adjusting entries.
a. Insurance Expense
Unexpired Insurance
b. Bad Debt Expense
Allowance for Doubtful Accounts
c. Depreciation Expense
Accumulated Depreciation
d. Accrued Interest Receivable
Interest Revenue
e. Prepaid Rent
Rent Expense
f. Salary Expense
Salaries payable

2,000
2,000
3,100
3,100
15,000
15,000
560
560
5,400
5,400
5,800
5,800

Problem 2 Multiple-step income statement (15 points)


Presented below is information related to Gregg Company.
Retained earnings, December 31, 2003
Sales
Selling and administrative expenses
Hurricane loss (pre-tax) on plant (extraordinary item)
Cash dividends declared on common stock
Cost of goods sold
Gain resulting from computation error on depreciation charge in 2002 (pre-tax)
Other revenue
Other expenses

$ 650,000
1,600,000
240,000
250,000
33,600
960,000
520,000
60,000
50,000

Instructions
Prepare in good form a multiple-step income statement for the year 2004. Assume a
30% tax rate and that 100,000 shares of common stock were outstanding during the
year.

Solution - Problem 2
Gregg Company
INCOME STATEMENT
For the Year Ended December 31, 2004
Sales
Cost of goods sold
Gross profit
Selling and administrative expenses
Income from operations
Other revenue
Other expenses
Income before taxes
Income taxes
Income before extraordinary item
Extraordinary loss, net of applicable income taxes of $75,000
Net income
Per share of common stock
Income before extraordinary item
Extraordinary item, net of tax
Net income

$2.87
(1.75)
$1.12

$1,600,000
960,000
640,000
240,000
400,000
60,000
(50,000
410,000
(123,000
287,000
(175,000
$ 112,000

Problem 3 Balance sheet format (20 points)


The following balance sheet has been submitted to you by an inexperienced
bookkeeper. List your suggestions for improvements in the format of the balance sheet.
Consider both terminology deficiencies as well as classification inaccuracies.
Densen Industries, Inc.
Balance Sheet
For the Period Ended 12/31/04
Assets
Fixed AssetsTangible
Equipment
$110,000
Less: reserve for depreciation
(40,000) $ 70,000
Factory supplies
22,000
Land and buildings
400,000
Less: reserve for depreciation
(150,000)
250,000
Plant site held for future use
90,000
432,000
Current Assets
Accounts receivable
175,000
Cash
80,000
Inventory
220,000
Treasury stock (at cost)
20,000
495,000
Fixed Assets--Intangible
Goodwill
80,000
Notes receivable
40,000
Patents
26,000
146,000
Deferred Charges
Advances to salespersons
60,000
Prepaid rent
27,000
Returnable containers
75,000
162,000
TOTAL ASSETS
$1,235,000
Liabilities
Current Liabilities
Accounts payable
$140,000
Allowance for doubtful accounts
8,000
Common stock dividend distributable
35,000
Income taxes payable
42,000
Sales taxes payable
17,000
242,000
Long-Term Liabilities, 5% debenture bonds, due 2010
500,000
Reserve for contingencies
150,000
650,000
TOTAL LIABILITIES
892,000
Equity
Capital stock, $10.00 par value, issued 10,000 shares with
60 shares held as treasury stock
$150,000
Capital surplus
90,000

Dividends paid
Earned surplus
TOTAL EQUITY
343,000
TOTAL LIABILITIES AND EQUITY
$1,235,000

(20,000)
123,000

Note 1. The reserve for contingencies has been created by charges to earned surplus
and has been established to provide a cushion for future uncertainties.
Note 2. The inventory account includes only items physically present at the main plant
and warehouse. Items located at the company's branch sales office amounting
to $25,000 are excluded since the company has consistently followed this
procedure for many years.
Solution Problem. Balance Sheet Format
1. The heading should be as of a specific date rather than for a period of time.
2. Reserve for Depreciation is poor terminology; the title Accumulated Depreciation is
more appropriate.
3. Land and buildings should be segregated into two accounts. The Accumulated
Depreciation account should only be reported for the buildings.
4. Plant site held for future use should be shown in the Investments section.
5. Current assets should be shown on the balance sheet first in most situations;
current assets are listed usually in order of liquidity; factory supplies should be
shown as a current asset.
6. Treasury stock is not an asset, but a contra account to stockholders' equity in most
situations.
7. Notes receivable should be reported as a current asset or an investment.
8. The deferred charge items should be reclassified as follows in most situations:
Advances to salespersonscurrent asset
Prepaid rentcurrent asset
Returnable containerscurrent asset
9. Allowance for doubtful accounts should be shown as a contra account to accounts
receivable.
10. Common stock dividend distributable should be shown in stockholders' equity.
11. 5% debenture bonds should be shown on a separate line.
12. Reserve for Contingencies should be shown as an appropriation of retained
earnings. The authors prefer the term "appropriation" to the term "reserve."
13. Capital stock should be shown at the par value of the shares issued, $100,000.
Any excess should be included in a paid-in capital account.
14. Capital surplus and earned surplus are poor terminology. The terms "additional
paid-in capital" and "retained earnings" are more appropriate.
15. The dividends paid title is a misnomer. It probably is a dividends declared item that
should be closed to retained earnings.
16. No reference in the body of the statement is made to the notes. The order of the
notes is wrong.
17. Note 2 indicates that the inventory account is understated by $25,000.

Problem 4 Calculation of net income from the change in stockholders' equity (5 points)
Presented below are changes In the account balances of Ping Company during the year,
except for retained earnings.
Increase
Increase
(Decrease)
(Decrease)
Cash
$25,000
Accounts payable
$35,000
Accounts receivable (net)
(13,000)
Bonds payable
(20,000)
Inventory
52,000
Common stock
72,000
Plant Assets (net)
57,000
Paid-in capital
16,000
The only entries in Retained Earnings were for net income and a dividend declaration of
$20,000.
Compute the net income for the current year.

Computation of net income


Change in assets ($134,000 $13,000)
Change in liabilities ($35,000 $20,000)
Change in stockholders' equity
Add: Dividend declared
Less: Investment by stockholders
Net income

$121,000
15,000
106,000
20,000
(88,000)
$ 38,000

Increase
Increase
Increase

Problem 5 Income statement relationships (6 points)


Fill in the appropriate blanks for each of the independent situations below.
Company A
Company B
Company C
Sales
(a) $_______
$343,400
Beginning inventory
52,600
(d) _______
Net purchases
190,300
255,600
Ending inventory
52,200
105,000
Cost of goods sold
(b) _______
(e) _______
Gross profit
85,300
98,000
Operating expenses
(c) _______
50,000
Income before taxes
10,000
(f) _______
Solution
(a) $276,000
(b) $190,700
(c) $75,300

(d) $94,800
(e) $245,400
(f) $48,000