Problems

Problem 3-1

Not an expense for June - not incurred.

Expense for June

Expense for June

Expense for June

Expense for June

Not an expense for June - asset acquired.

Problem 3-2

Revenues$275,000

a. Expenses – Cost of goods sold ................................$164,000 Rent ................................................................3,300 Salaries ................................ 27,400 Taxes ................................ 1,375 Other ................................ 50,240 246,315 Net income $28,685

Problem 3-3

Beginning inventory ................................$27,000 Purchases ................................ 78,000 Available for sale ................................ Ending inventory ................................($31,000) Cost of goods sold ................................$74,000 Problem 3-4

a. (1) Sales ................................ $85,000 Cost of goods sold ................................45,000 Gross margin ................................$40,000

(2) 47 percent gross margin ($40,000 / $85,000)

(3) 11 percent profit margin (9000/85000)

The Woden Corporation had a tax rate of 40 percent ($6,000 / $15,000) on its pretax profit that represented 17.7 percent of its sales ($15,000 / $85,000). The company’s operating expenses were 82.3 percent of sales ($70,000 / $85,000) and its cost of goods sold was 53 percent of sales. The company’s gross margin was 47 percent of sales ($40,000 / $85,000).

Problem 3-5

Depreciation. Each year for the next 5 years depreciation will be charged to income.

No income statement charge. Land is not depreciated.

Cost of goods sold. $3,500 charged to current year’s income. $3,500 charged to next year’s income.

Subscription expense. $36 charged to current year. $36 charged to next year. Alternatively, $72 charged to current year on grounds $72 is immaterial.

Problem 3-6

Asset value: October 1, 20X5 $30,000 December 31, 20X5 26,250 December 31, 20X6 11,250 December 31, 20X7 0 Expenses: 20X5 $3,750 ($1,250 x 3 months) 20X6 $15,000 ($1,250 x 12 months) 20X7 $11,250 ($1,250 x 9 months) One month’s insurance charge is $1,250 ($30, 000 / 24 months)

Problem 3-7

QED ELECTRONICS COMPANY Income Statement for the month of April, ----.

Sales ................................................................ $33,400 Expenses:

Bad debts ................................................................$ 645 Parts ................................................................3,700 Interest ................................................................880 Wages ................................................................10,000 Utilities ................................................................800 Depreciation ................................ 2,700 Selling ................................................................1,900 Administrative ................................ 4,700 ______

25,325 Profit before taxes ................................ 8,075 Provision for taxes ................................ 2,800. Net income $5,275

Truck purchase has no income statement effect. It is an asset.

Sales are recorded as earned, not when cash is received. Bad debt provision of 5 percent related to sales on credit ($33,400 - $20,500) must be recognized. Wages expense is recognized as incurred, not when paid.

March’s utility bill is an expense of March when the obligation was incurred.

Income tax provision relates to pretax income. Must be matched with related income.

Problem 3-8

First calculate sales: Sales ($45,000 / (1 - .45)) ................................ $81,818+ Beginning inventory ................................$35,000 Purchases ................................................................$40,000 Total available ................................ 75,000 Ending inventory ................................ 30,000 Cost of goods sold ................................ $45,000 Gross margin ................................ $36,818 If the gross margin percentage is 45 percent, the cost of goods sold percentage must be 55 percent.

Once sales are determined, calculate net income:

Net income ($81,818 x .1) $8,182

Next, prepare balance sheet:

Assets Liabilities Current assets ($50,000 x 1.6) ................................

$ 80,000

Current liabilities ................................

$ 50,000

Other assets ($218,182 - $50,000) ................................

138,182

Long term debt 40,000

Total liabilities ................................$ 90,000 Owners’ equity Beginning balance ................................$120,000 Plus net income ................................ 8,182 Ending balance ................................$128,182

Total assets ................................

$218,182+ Total liabilities

and owners’ equity ................................

$218,182 + Total assets = Total liabilities and Owner’s equity. Problem 3-9

Sales LC 26,666,667 [LC 20,000,000 x (200 / 150)]

January cash LC 1,000,000 [LC 500,000 x (200 / 100)]

December cash LC 600,000

At year-end the company was more liquid in terms of nominal currency (LC 600,000 versus LC 500,000) but in terms of the purchasing power of its cash it was worse off (LC 1,000,000 versus LC 600,000).