ACCT1101 – Introduction to Financial Accounting

Assignment Suggested Solutions – Chapter 3

Assignment Questions - Suggested Answers

(E3-7, E3-10, E3-11, P3-4, P3-6)

E3–7. (dollars in millions)

a. Buildings (+A) ..................................................................... 432
Equipment (+A) .................................................................. 254
Cash (A) ................................................................... 686
Debits equal credits. Assets increase and decrease by the same amount.

b. Cash (+A) ........................................................................... 119

Short-term notes payable (+L) ................................... 119
Debits equal credits. Assets and liabilities increase by the same amount.

c. Cash (+A) ........................................................................... 26,813

Accounts receivable (+A) .................................................... 28,558
Service revenue (+R, +SE) ......................................... 55,371
Debits equal credits. Revenue increases retained earnings (part of
stockholders' equity). Stockholders' equity and assets increase by the same
amount.

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ACCT1101 – Introduction to Financial Accounting
Assignment Suggested Solutions – Chapter 3

E3–7. (continued)

d. Accounts payable (L) ........................................................ 132,074

Cash (A) ................................................................... 132,074
Debits equal credits. Assets and liabilities decrease by the same amount.

e. Inventory (+A) ..................................................................... 41,683

Accounts payable (+L) ................................................ 41,683
Debits equal credits. Assets and liabilities increase by the same amount.

f. Wages expense (+E, SE) ................................................. 6,540

Cash (A) ................................................................... 6,540
Debits equal credits. Expenses decrease retained earnings (part of
stockholders' equity). Stockholders' equity and assets decrease by the same
amount.

g. Cash (+A) ........................................................................... 22,043

Accounts receivable (A) ........................................... 22,043
Debits equal credits. Assets increase and decrease by the same amount.

h. Fuel expense (+E, SE) ..................................................... 1,750

Cash (A) ................................................................... 1,750
Debits equal credits. Expenses decrease retained earnings (part of
stockholders' equity). Stockholders' equity and assets decrease by the same
amount.

i. Retained earnings (SE) .................................................... 698

Dividends payable (+L) ............................................... 698
Debits equal credits. Liabilities increase and stockholders’ equity decrease by
the same amount, keeping the equation in balance.

j. Utilities expense (+E, SE) ................................................. 121

Cash (A) ................................................................... 110
Accounts payable (+L) ................................................ 11
Debits equal credits. Expenses decrease retained earnings (part of
stockholders' equity). Together, stockholders' equity and liabilities decrease by
the same amount as assets.

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ACCT1101 – Introduction to Financial Accounting
Assignment Suggested Solutions – Chapter 3

E3–10.

Req. 1 and 2

Cash Accounts Receivable Supplies

Beg. 6,400 Beg.32,000 Beg. 1,500
(a) 19,000 2,300 (g) 7,200 (d) (k) 960
(b) 600 16,500 (i)
(c) 850 2,200 (j)
(d) 7,200 960 (k)
12,090 24,800 2,460

Equipment Land Building

Beg. 9,500 Beg. 7,400 Beg. 25,300
(h) 920
10,420 7,400 25,300

Accounts Unearned Long-term

Payable Revenue Note Payable
9,600 Beg. 3,840 Beg. 48,500 Beg.
(g) 2,300 400 (e) 600 (b)
7,700 4,440 48,500

Additional
Common Stock Paid-in Capital Retained Earnings
1,600 Beg. 7,000 Beg. 11,560 Beg.
100 (h) 820 (h) (j) 2,200
1,700 7,820 9,360

Rebuilding Fees Rent

Revenue Revenue
0 Beg. 0 Beg.
19,000 (a) 850 (c)
19,000 850

Wages Expense Utilities Expense

Beg. 0 Beg. 0
(i) 16,500 (e) 400
16,500 400

Item (f) is not a transaction; there has been no exchange.

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ACCT1101 – Introduction to Financial Accounting
Assignment Suggested Solutions – Chapter 3

E3–10. (continued)

Req. 3

Net income using the accrual basis of accounting:

Revenues $19,850 ($19,000 + $850)

– Expenses 16,900 ($16,500 + $400)
Net Income $ 2,950
(accrual basis)

Assets = Liabilities + Stockholders’ Equity

$12,090 $ 7,700 $ 1,700
24,800 4,440 7,820
2,460 48,500 9,360
10,420 2,950 net income
7,400
25,300
$82,470 $60,640 $21,830

Req. 4

Net income using the cash basis of accounting:

Cash receipts $27,650 (transactions a through d)

– Cash disbursements 19,760 (transactions g, i, and k)
Net Income $ 7,890
(cash basis)

Cash basis net income ($7,890) is higher than accrual basis net income ($2,950)
because of the differences in the timing of recording revenues versus receipts and
expenses versus disbursements between the two methods. The $7,800 higher amount
in cash receipts over revenues includes cash received prior to being earned (from (b),
$600) and cash received after being earned (in (d), $7,200). The $2,860 higher amount
in cash disbursements over expenses includes cash paid after being incurred in the
prior period (in (g), $2,300), plus cash paid for supplies to be used and expensed in the
future (in (k), $960), less an expense incurred in January to be paid in February (in (e),
$400).

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ACCT1101 – Introduction to Financial Accounting
Assignment Suggested Solutions – Chapter 3

E3–11.

STACEY’S PIANO REBUILDING COMPANY

Income Statement (unadjusted)
For the Month Ended January 31

Operating Revenues:
Rebuilding fees revenue $ 19,000
Total operating revenues 19,000
Operating Expenses:
Wages expense 16,500
Utilities expense 400
Total operating expenses 16,900
Operating Income 2,100
Other Item:
Rent revenue 850
Net Income $ 2,950

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ACCT1101 – Introduction to Financial Accounting
Assignment Suggested Solutions – Chapter 3

P3–4.

Req. 1 and 2

Cash Accounts Receivable Supplies

Beg. 0 Beg. 0 Beg. 0
(a) 30,200 5,250 (b) (h) 825 600 (k) (d) 1,560
(e) 11,000 1,560 (d)
(h) 2,675 11,000 (f)
(k) 600 400 (g)
(m) 1,200 550 (i)
1,300 (j)
400 (l)
25,215 225 1,560

Inventory Prepaid Expenses Equipment

Beg. 0 Beg. 0 Beg. 0
(c) 6,000 1,600 (h) (b) 5,250 (f) 2,750
600 (m)
3,800 5,250 2,750

Furniture and Fixtures Accounts Payable Notes Payable

Beg. 0 0 Beg. 0 Beg.
(f) 8,250 (i) 550 6,000 (c) 11,000 (e)
8,250 5,450 11,000

Common Additional Paid-in

Stock Capital
0 Beg. 0 Beg.
40 (a) 30,160 (a)
40 30,160

Sales Revenue Cost of Goods Sold Repair Expense

0 Beg. Beg. 0 Beg. 0
3,500 (h) (h) 1,600 (l) 400
1,200 (m) (m) 600
4,700 2,200 400

Advertising Expense Wage Expense

Beg. 0 Beg. 0
(g) 400 (j) 1,300
400 1,300

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ACCT1101 – Introduction to Financial Accounting
Assignment Suggested Solutions – Chapter 3

P3–4. (continued)

Req. 3
KAYLEE’S SWEETS
Income Statement (unadjusted)
For the Month Ended February 28
Revenues:
Sales revenue $ 4,700

Expenses:
Cost of goods sold 2,200
Advertising expense 400
Wage expense 1,300
Repair expense 400
Total expenses 4,300
Net Income $ 400

Req. 4

Date: (today’s date)

To: Kaylee James
From: (your name)
After analyzing the effects of transactions for Kaylee’s Sweets for February, the
company has realized a profit of $400. This is 8.5% of sales revenue. However, this is
based on unadjusted amounts. There are several additional expenses that will
decrease the net income amount, perhaps resulting in a net loss. These include rent,
supplies, depreciation on the use of the equipment, furniture, and fixtures, interest on
the borrowing, and wages. Therefore, the company does not appear to be profitable,
which is common for small businesses at the beginning of operations. A focus on
maintaining expenses while increasing revenues should result in profit in future periods.
It would also be useful to prepare a budget of cash flows each month for the upcoming
year to decide how potential cash shortages will be handled.

Req. 5
Net Income ÷ Net Sales Revenue = Net Profit Margin Ratio
2021 $22,000 $93,500 0.235 or 23.5%
2020 11,000 82,500 0.133 or 13.3%
2019 4,400 55,000 0.080 or 8.0%

The ratio increased each year, nearly quadrupling in three years. This suggests that the
company’s management is very effective at generating sales and controlling expenses.
As long as the expenses related to opening the new store are not greater as a
percentage of sales revenue than currently, the company should continue to experience
a high net profit margin. Based on this rationale, the manager should be promoted.
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ACCT1101 – Introduction to Financial Accounting
Assignment Suggested Solutions – Chapter 3

P3–6.

Req. 1 (in millions, except par value)

Debit Credit
(a) Cash (+A) 1,390
Receivables (+A) 24,704
Delivery service revenue (+R, +SE) 26,094

(b) Property and equipment (+A) 3,434

Long-term notes payable (+L) 3,434

(c) Rent expense (+E, –SE) 3,136

Prepaid expenses (+A) 4,728
Cash (–A) 7,864

(d) Repairs expense (+E, –SE) 864

Cash (–A) 864

(e) Cash (+A) 24,285

Receivables (–A) 24,285

(f) Long-term notes payable (-L) 150

Cash (–A) 150

(g) Cash (+A) 16

Common stock (+SE) [20 x $0.10 par value] 2
Additional paid-in capital (+SE) [difference] 14

(h) Wages expense (+E, –SE) 9,276

Cash (–A) 9,276

(i) Spare parts, supplies, and fuel (+A) 6,564

Cash (–A) 6,564

(j) Spare parts, supplies, and fuel expense (+E, –SE) 6,450
Spare parts, supplies, and fuel (–A) 6,450

(k) Accounts payable (–L) 784

Cash (–A) 784

(l) No entry required.

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ACCT1101 – Introduction to Financial Accounting
Assignment Suggested Solutions – Chapter 3

P3–6. (continued)

Req. 2 (in millions)

Spare Parts, Supplies,
Cash Receivables and Fuel
Beg. 884 7,864 (c) Beg. 1,549 Beg. 394
(a) 1,390 864 (d) (a) 24,704 24,285 (e) (i) 6,564 6,450 (j)
(e) 24,285 150 (f)
(g) 16 9,276 (h)
6,564 (i)
784 (k)
1,073 1,968 508
Property and
Prepaid Expenses Other Current Assets Equipment (net)
Beg. 108 Beg. 879 Beg. 13,894
(c) 4,728 (b) 3,434
4,836 879 17,328
Other Noncurrent Accounts Accrued Expenses
Assets Payable Payable
Beg. 2,552 1,257 Beg. 2,070 Beg.
(k) 784
2,552 473 2,070
Other Current Long-Term Other Noncurrent
Liabilities Notes Payable Liabilities
1,939 Beg. 1,490 Beg. 3,290 Beg.
(f) 150 3,434 (b)
1,939 4,774 3,290
Common Additional Paid-in Retained
Stock Capital Earnings
1 Beg. 607 Beg. 9,606 Beg.
2 (g) 14 (g)
3 621 9,606
Delivery Service Rent Repairs
Revenue Expense Expense
0 Beg. Beg. 0 Beg. 0
26,094 (a) (c) 3,136 (d) 864
26,094 3,136 864
Wages Spare Parts, Supplies,
Item l does not
Expense and Fuel Expense
constitute a transaction.
Beg. 0 Beg. 0
(h) 9,276 (j) 6,450
9,276 6,450

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ACCT1101 – Introduction to Financial Accounting
Assignment Suggested Solutions – Chapter 3

P3–6. (continued)

Req. 3

FedEx
Income Statement (unadjusted)
For the Year Ended May 31 (current year)
(in millions)

Revenues:
Delivery service revenue $ 26,094
Expenses:
Rent expense 3,136
Wages expense 9,276
Spare parts, supplies, and fuel expense 6,450
Repairs expense 864
Total expenses 19,726
Net Income $ 6,368

Req. 4

Net Profit Margin Ratio = Net Income = $6,368 = 0.24 or 24%

Net Sales (or Operating) $26,094
Revenues

The net profit margin ratio suggests that the company obtained $0.24 in net income for
every $1 in service revenue. To analyze this result, we would need to calculate the ratio
for the company over time to observe the trend in how effectively management is at
generating sales and/or controlling expenses. We would also need the industry ratio or
competitors’ ratios for the current period to determine how the company is doing in
comparison to others in the industry.

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