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Darden School ACC, Q1 2019, Textbook Financial Acctg.

Practice Problem
Solutions (do not copy or distribute by ANY means)

M2-26.

a. Increase assets (Office Equipment)


Decrease assets (Cash)
b. Increase assets (Accounts Receivable)
Increase equity (Service Revenue)
c. Decrease equity (Rent Expense)
Decrease assets (Cash)
d. Increase assets (Cash)
Increase equity (Service Revenue)
e. Increase assets (Cash)
Decrease assets (Accounts Receivable)
f. Increase assets (Office Equipment)
Increase liabilities (Accounts Payable)
g. Decrease equity (Salaries Expense)
Decrease assets (Cash)
h. Decrease liabilities (Accounts Payable)
Decrease assets (Cash)
i. Decrease equity (Retained Earnings)
Decrease assets (Cash)

E2-44.

Transaction

Balance Sheet Income Statement


Cash Noncash Contrib. Earned Net
Transaction + = Liabilities + + Revenues - Expenses =
Asset Assets Capital Capital Income
(1) Receive €50,000 in +50,000 +50,00
exchange for common 0
Cash
stock. = - =
Comm
on
Stock
(2) Borrow €10,000 from +10,000 +10,000
bank.
Cash = Notes - =
Payable

(3) Purchase €2,000 of +2,000 +2,000


supplies inventory on
Inventory = Accounts - =
credit.
Payable

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(4) Receive €15,000 cash +15,000 +15,000 +15,000
from customers for +15,000
Cash = Retained Revenue - =
services provided.
Earnings

(5) Pay €2,000 cash to - 2,000 - 2,000


supplier in part (3). = - =
Cash Accounts
Payable

(6) Receive order for future +3,500 +3,500


services with €3,500 = Unearned - =
Cash
advance payment.
Revenue

(7) Pay €5,000 cash - 5,000 - 5,000


dividend to = - =
Cash Retained
shareholders.
Earnings

(8) Pay employees €6,000 - 6,000 - 6,000 +6,000


cash for compensation - 6,000
Cash = Retained - Wages =
earned.
Earnings Expense

(9) Pay €500 cash for - 500 - 500 +500


interest on loan in (2). - 500
Cash = Retained - Interest =
Earnings Expense
Totals 65,000 + 2,000 = 13,500 + 50,000 + 3,500 15,000 - 6,500 = 8,500

E2-48.

a.
1. Cash (+A).................................................................................
20,000
Common stock (+SE)........................................................... 20,000

2. Inventory (+A)...........................................................................
2,000
Accounts payable (+L)......................................................... 2,000

3. Accounts receivable (+A).........................................................


3,000
Sales (+R, +SE)................................................................... 3,000

4. Cost of goods sold (+E, -SE).................................................... 2,000


Inventory (-A)....................................................................... 2,000

5. Cash (+A).................................................................................
3,000
Accounts receivable (-A)...................................................... 3,000

6. Equipment (+A)........................................................................
5,000
Notes payable (+L).............................................................. 5,000

7. Wages expense (+E, -SE)........................................................ 1,000


Cash (-A).............................................................................. 1,000

8. Notes payable (-L)....................................................................


5,000

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Cash (-A).............................................................................. 5,000

9. Retained earnings (-SE)........................................................... 2,000


Cash (-A).............................................................................. 2,000

b.
+ Cash (A) - - Common Stock (SE) +
(1) 20,000 1,000 (7) 20,000 (1)
(5) 3,000 5,000 (8)
2,000 (9)
- Sales Revenue (R) +
3,000 (3)
+ Inventory (A) -
(2) 2,000 2,000 (4)
+ Cost of Goods Sold (E) -
(4) 2,000
+ Accounts Receivable (A) -
(3) 3,000 3,000 (5)
+ Wages Expense (E) -
+ Equipment (A) - (7) 1,000
(6) 5,000

- Retained Earnings (SE) +


- Accounts Payable (L) + (9) 2,000
2,000 (2)

- Notes Payable (L) +


(8) 5,000 5,000 (6)

P2-58.

a.
1. Cash (+A).................................................................................
7,000
Common stock (+SE)........................................................... 7,000

2. Rent expense (+E,-SE)............................................................ 750


Cash (-A).............................................................................. 750

3. Advertising expense (+E, -SE).................................................


500
Accounts payable (+L)......................................................... 500

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4. Cash (+A).................................................................................
15,000
Notes payable (+L).............................................................. 15,000

5. Cash (+A).................................................................................
1,200
Counseling services revenue (+R,+SE).............................. 1,200

6. Accounts receivable (+A).........................................................


6,800
Counseling services revenue (+R,+SE).............................. 6,800

7. Salary expense (+E,-SE).......................................................... 2,200


Cash (-A).............................................................................. 2,200

8. Utilities expense (+E,-SE)........................................................ 370


Cash (-A).............................................................................. 370

9. Retained earnings (dividend paid) (-SE).................................. 900


Cash (-A).............................................................................. 900

10. Land (+A)..................................................................................


13,000
Cash (-A).............................................................................. 13,000

11. Interest expense (+E,-SE) 100


Cash (-A).............................................................................. 100

b.
+ Cash (A) - - Accounts Payable (L) +
(1) 7,000 750 (2) 500 (3)
(4) 15,000 2,200 (7)
(5) 1,200 370 (8)
900 (9) - Notes Payable (L) +
13,000 (10) 15,000 (4)
100 (11)

- Common Stock (SE) +


+ Accounts Receivable (A) - 7,000 (1)
(6) 6,800

- Retained Earnings (SE) +


+ Land (A) - (9) 900
(10) 13,000

- Counseling Services Rev. (R) +


+ Rent Expense (E) - 1,200 (5)

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(2) 750 6,800 (6)

+ Salary Expense (E) - + Advertising Expense (E) -


(7) 2,200 (3) 500

+ Interest Expense (E) - + Utilities Expense (E) -


(11) 100 (8) 370

M4-26. (INDIRECT METHOD)

Net income $ 45,000


Add (deduct) items to convert net income to cash basis
Add back depreciation 8,000
Subtract gain on sale of investments (9,000)
Subtract change in operating assets:
Accounts receivable (9,000)
Inventory (6,000)
Prepaid rent 2,000
Add change in operating liabilities:
Accounts payable 4,000
Income tax payable (2,000)
Net cash provided by operating activities $ 33,000

E4-38.

a. The analysis from the chapter shows that

Cash flow Change in accounts Net income


+ Change in inventory = +
(payments) payable (COGS expense)
-776 -320
X + = + -54,823
(=6,076-6,852) (=4,315-4,635)

The solution to this is that X = -$54,823 + 776 - 320 = -$54,367. So, the payments to suppliers
reduced cash by $54,367 million in fiscal year 2014.

b. The net property and equipment account increased by $119 million (=$12,257 – $12,138).
Depreciation expense would have decreased this balance by $1,316 million in fiscal year 2014,
so the net investment must have been $1,435 million (=$119 + $1,316) to result in the ending
balance of $12,257 million.

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c. With the beginning balance of $21,523 million in retained earnings, net earnings of $2,031
would have increased retained earnings to $23,554 million. But the ending balance in retained
earnings is $22,229 million, so Walgreens must have paid $1,325 million in dividends
(=$23,554 - $22,229).

E4-40.

a. The net increase in property and equipment was $2,151,755 (= $95,174,198 - $93,022,443), and
the expenditures should have increased this by $2,380,287. Therefore, the original cost of the
property and equipment sold must have been $228,532 (= $2,380,287 - $2,151,755).

Depreciation expense should have increased the accumulated depreciation account by


$3,778,563, but the account increased by only $3,575,465. The accumulated depreciation on
the property and equipment sold must account for the difference, making it $203,098
(=$3,778,563, - $3,575,465).

b. The book value of the property and equipment sold was $25,434 (=$228,532 – $203,098), and
the reported gain on sale of the property and equipment was $22,693. Therefore, the cash
proceeds must have been $48,127 (= $25,434 + $22,693).

c.
Cash (+A) $ 48,127
Accumulated depreciation (-XA, +A) 203,098
Property and equipment, cost (-A) $ 228,532
Gain on sale of property and equipment (+R, +SE) 22,693

d. Retained earnings decreased by $544,752 (= $18,728,462 – 19,273,214), and net income was
$921,829, which would increase retained earnings. The overall decrease would be accounted
for by cash dividends paid to shareholders, and the amount is $1,466,581 ($544,752 +
$921,829). The dividends paid are approximately equal to previous years and demonstrates that
companies are reluctant to cut dividends, even when earnings are lower.

E4-44.

1. True ---
2. False $25
3. False $10
4. False $0

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P4-46. (INDIRECT METHOD)

a. Cash, December 31, 2016.................................................................. $11,000


Cash, December 31, 2015.................................................................. 5,000
Cash increase during 2016................................................................. $ 6,000

b. STATEMENT OF CASH FLOWS (INDIRECT METHOD)

WOLFF COMPANY
Statement of Cash Flows
For Year Ended December 31, 2016

Net Cash Flow from Operating Activities


Net Income $56,000
Add (Deduct) Items to Convert Net Income to Cash Basis
Depreciation 17,000
Accounts Receivable Increase (9,000)
Inventory Increase (30,000)
Prepaid Insurance Decrease 2,000
Accounts Payable Decrease (3,000)
Wages Payable Increase 3,000
Income Tax Payable Decrease (1,000)
Net Cash Provided by Operating Activities $35,000
Cash Flows from Investing Activities
Purchase of Plant Assets (55,000)
Cash Flows from Financing Activities
Issuance of Bonds Payable 55,000
Payment of Dividends (29,000)
Net Cash Provided by Financing Activities 26,000
Net Increase in Cash 6,000
Cash at Beginning of Year 5,000
Cash at End of Year $11,000

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