Waking Up Early

1. Waking Up Early

2. Exercise 2-9 Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc. In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles. • The president of Gonzales, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made. Miscellaneous Expense 29,000 Cash 29,000 • Merchandise inventory that cost $620,000 is reported on the balance sheet at $690,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value. Inventory 70,000 Sales Revenue 70,000

3. Exercise 2-9 • The company is being sued for $500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry. Loss from Lawsuit 500,000 Liability for Lawsuit 500,000 • Because the general level of prices increased during the current year, Gonzales, Inc. determined that there was a $16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made. Depreciation Expense 16,000AccumDepr – Equip 16,000

4. Exercise 2-9 • Gonzales, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at $800,000 was written off as follows. Retained Earnings 800,000 Goodwill 800,000 • Because of a “fire sale,” equipment obviously worth $200,000 was acquired at a cost of $155,000. The following entry was made. Equipment 200,000 Cash 155,000 Sales Revenue 45,000

5. Discussion Question Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown. • Loss on inventory write-down. Other expenses or losses section or in a separate section, appropriately labeled as an unusual item, if unusual or infrequent but not both. • Loss from strike. Operating expense section or other expenses and losses section or in a separate section, appropriately labeled as an unusual item, if unusual or infrequent but not both.

6. Discussion Question Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown. • Bad debt expense. Operating expense section, as a selling expense, but sometimes reflected as an administrative expense. • Loss on disposal of a component of the business. Separate section after income from continuing operations, entitled discontinued operations.  • Gain on sale of machinery. Other revenues and gains section or in a separate section, appropriately labeled as an unusual item, if unusual or infrequent but not both.

7. Discussion Question Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown. • Interest revenue. Other revenues and gains section. • Depreciation Expense. Operating expense section, normally administrative. If a manufacturing concern, may be included in cost of goods sold. • Material write-offs of notes receivable. Other expenses or losses section or in separate section, appropriately labeled as an unusual item, if unusual or infrequent but not both.

8. E4-6B The following balances were taken from the books of SchimankCorp. on December 31, 2014. Assume the total effective tax rate on all items is 34%. Prepare a multiple-step income statement; 100,000 shares of common stock were outstanding during the year. Accumdeprec—equipment $ 56,000 Accumdeprec—building 39,200 Notes receivable 217,000 Selling expenses 271,600 Accounts payable 238,000 Bonds payable 140,000 Admin & general expenses 135,800 Accrued liabilities 44,800 Interest expense 84,000 Notes payable 140,000 Loss from earthquake damage (extraordinary item) 210,000 Common stock 700,000 Retained earnings 29,400 Interest revenue $ 120,400 Cash 71,400 Sales 1,932,000 Accounts receivable 210,000 Prepaid insurance 28,000 Sales returns & allowances 210,000 Allowance for bad debts 9,800 Sales discounts 63,000 Land 140,000 Equipment 280,000 Building 196,000 Cost of goods sold 869,400

9. E4-6B

10. Example 1 Bryant Co. reports the following information for 2012: Sales revenue $750,000 Cost of goods sold $500,000 Operating expenses $ 80,000 Unrealized holding loss on available-for-sale securities $ 50,000 Bryant declared and paid a cash dividend of $10,000 in 2012. Bryant Co. has January 1, 2012, balances in common stock $350,000; accumulated other comprehensive income $80,000; and retained earnings $90,000. It issued no stock during 2012. • Prepare a statement of stockholders’ equity.

11. Example 1 *($750,000 – $500,000 – $80,000)

12. E4-17B Cash dividends declared $210,000 Ret earnings, 1/1/2014 840,000 Cost of goods sold 1,190,000 Selling expenses 420,000 Sales 2,660,000 The following information was taken from the records of Cantu Inc. for the year 2014. Income tax applicable to income from continuing operations $261,800; income tax applicable to loss on discontinued operations $35,700; income tax applicable to extraordinary gain $45,220; income tax applicable to extraordinary loss $28,560; and unrealized holding gain on available-for-sale securities $21,000. Extraordinary gain $133,000 Loss on disc ops 105,000 Admin expenses 336,000 Rent revenue 56,000 Extraordinary loss 84,000 Shares outstanding during 2014 were 100,000. (a) Prepare a multiple-step income statement for 2014, (b) prepare a retained earnings statement for 2014 and (c) show how comprehensive income is reported using the one statement format.

13. E4-17B

14. E4-17B