REVISION EXERCISES SOLUTIONS

Exercise 1

Prepare journal entries to record the following transactions entered into by the Merando
Company:

2021

June 1 Received a $10,000, 6%, 1-year note from Dan Gore as full payment on his account.
Nov. 1 Sold merchandise on account to Barlow, Inc., for $14,000, terms 2/10, n/30.
Nov. 5 Barlow, Inc., returned merchandise worth $1,000.
Nov. 9 Received payment in full from Barlow, Inc.
Dec. 31 Accrued interest on Gore's note.

Solution

Date Debit Credit

Notes Receivable Jun. 1 10,000
Accounts Receivable—D. Gore 2021 10,000

Accounts Receivable—Barlow, Inc. Nov. 1 14,000

Sales Revenue 2021 14,000

Sales Returns and Allowances Nov. 5 1,000

Accounts Receivable—Barlow, Inc. 2021 1,000

Cash Nov. 9 12,740

Sales Discounts ($13,000 x 0.02) 2021 260
Accounts Receivable—Barlow, Inc. (sales – ret.) × (1 – .02) 13,000

Interest Receivable Dec. 31 350

Interest Revenue ($10,000 x 6% x (7 ÷ 12) = $350) 2021 350

Cash Jun. 1 10,600

Notes Receivable 2022 10,000
Interest Receivable 350
Interest Revenue ($10,000 x 6% x (5 ÷ 12) = $250) 250
Exercise 2

Erickson Company had a $300 credit balance in Allowance for Doubtful Accounts at December 31, 2020,
before the current year's provision for uncollectible accounts. An aging of the accounts receivable revealed
the following:
Estimated Percentage
Uncollectible
Current Accounts $170,000 1%
1–30 days past due 15,000 3%
31–60 days past due 12,000 6%
61–90 days past due 5,000 15%
Over 90 days past due 9,000 30%
Total Accounts Receivable $211,000

(a) Prepare the adjusting entry on December 31, 2020, to recognize bad debts expense.
(b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $300
debit balance before the current year's provision for uncollectible accounts. Prepare the adjusting entry
for the current year's provision for uncollectible accounts.

Solution

Estimated Percentage Estimated

Uncollectible Uncollectible
Current Accounts $170,000 1% $1,700
1–30 days past due 15,000 3% 450
31–60 days past due 12,000 6% 720
61–90 days past due 5,000 15% 750
Over 90 days past due 9,000 30% 2,700
Total Accounts Receivable $211,000 $6,320*
**(A/R amounts × est. uncoll. %)

(a) Bad Debt Expense ..................................................................................... 6,020

Allowance for Doubtful Accounts ($6,320 – $300) ........................ 6,020
(To adjust the allowance account to total estimated uncollectible)
(Est. uncoll. amount – end. ADA bal.)

(b) Bad Debt Expense ..................................................................................... 6,620

Allowance for Doubtful Accounts ($6,320 + $300) ........................ 6,620
(To adjust the allowance account to total estimated uncollectible)
Exercise 3

Revson Corporation purchased land adjacent to its plant to improve access for trucks making
deliveries. Expenditures incurred in purchasing the land were as follows: purchase price, $55,000;
broker’s fees, $6,000; title search and other fees, $5,000; demolition of an old building on the
property, $5,700; grading, $1,200; digging foundation for the road, $3,000; laying and paving
driveway, $25,000; lighting $7,500; signs, $1,500.

List the items and amounts that should be included in the Land account.

Solution

Purchase price $55,000

Broker’s fees 6,000
Title search and other fees 5,000
Demolition of old building 5,700
Grading 1,200
Land acquisition cost $72,900

Exercise 4

Equipment was acquired on January 1, 2013, at a cost of $75,000. The equipment was originally
estimated to have a salvage value of $5,000 and an estimated life of 10 years. Depreciation has
been recorded through December 31, 2016, using the straight-line method. On January 1, 2017,
the estimated salvage value was revised to $7,000 and the useful life was revised to a total of 8
years.

a. Calculate the book value at the time of the revision (January 1, 2017).
b. Determine the depreciation expense for 2017.

Solution

(A) Step 1: Calculate the book value at the time of the revision:

$75,000 - $5,000
= $7,000 annual depreciation expense
10 years

4 years have been depreciated: $7,000 *4 = $28,000

Book value at the time of the revision = Cost of Equipment – Accumulated Depreciation
= (Cost – (ann.dep. × 4 yrs.))
= $75,000 – $28,000 = $47,000

(B) Step 2: Calculate the revised annual depreciation:

 (Book value Salvage value) ÷ (8 yrs. – 4 yrs.)

$47,000 - $7,000 = $10,000 revised annual depreciation

4 years remaining

The depreciation expense for 2017 is $10,000.

Exercise 5

Journal entries for independent situations.

a. Faster Company purchased equipment in 2010 for $104,000 with an estimated salvage value of $8,000 and
a 10-year useful life. At December 31, 2016, there was $67,200 in the Accumulated Depreciation account
for this equipment using the straight-line method of depreciation. On March 31, 2017, the equipment was
sold for $21,000.
Prepare the appropriate journal entries to remove the equipment from the books of Faster Company on
March 31, 2017.

b. Lewis Company sold equipment for $11,000 on September 1. The equipment originally cost $25,000 in
2014 and $6,000 was spent on a major overhaul in 2017 (charged to the Equipment account). Accumulated
Depreciation on the equipment to the date of disposal was $20,000.
Prepare the appropriate journal entry to record the disposition of the equipment.

c. Selby Company sold equipment that had a book value of $13,500 for $15,000 on July 5. The equipment
originally cost $45,000 and it is estimated that it would cost $57,000 to replace the equipment.
Prepare the appropriate journal entry to record the disposition of the equipment.

Solution

a.

Date Debit Credit

Depreciation Expense Mar. 31 2,400
Accumulated Depreciation—Equipment 2,400
To record depreciation expense for the first 3 months of 2017.
=[(Cost – sal. val.) ÷ 10 yrs] × 3/12….
=($104,000 – 8,000) ÷ 10 years × (3/12)
=$9,600 × (3/12) = $2,400

Cash Mar. 31 21,000

Loss on Disposal of Plant Assets 13,400
 Accumulated Depreciation—Equipment ($67,200 + $2,400) 69,600
Equipment 104,000

b.

Date Debit Credit

Cash Sept. 1 11,000
Accumulated Depreciation—Equipment 20,000
Equipment 31,000

c.

Date Debit Credit

Cash Jul. 5 15,000
Accumulated Depreciation—Equipment 31,500
Equipment 45,000
Gain on Disposal of Plant Assets 1,500

Exercise 6

3. Use the following information to perform the calculations below (using the indirect method). Clearly
label the amount of each answer as positive or negative and show all your calculations.

Net income $401,000 Beginning accounts payable $119,000

Depreciation expense 97,000 Ending accounts payable 146,000
Beginning accounts receivable 420,000 Purchase of long-term assets 612,000
Ending accounts receivable 439,000 Issuance of long-term debt 220,000
Beginning inventory 516,000 Issuance of stock for cash 180,000
Ending inventory 550,000 Issuance of stock for long-term assets 110,000
Beginning prepaid insurance 42,000 Purchase of treasury stock 64,000
Ending prepaid insurance 48,000 Sale of long-term investment at cost 56,000

a. Calculate the amount of cash flows from operating activities.

b. Calculate the amount of cash flows from investing activities.

c. Calculate the amount of cash flows from financing activities.

d. Calculate the net change in cash.

Solution

a. Cash flows from operating activities

Net income $401,000
Depreciation expense 97,000
Increase in accounts receivable (19,000)
Increase in inventory (34,000)
Increase in prepaid insurance (6,000)
Increase in accounts payable 27,000
Cash flows from operating activities $466,000

b. Cash flows used in investing activities

Purchase of long-term assets $(612,000)
Sale of long-term investments 56,000
Cash flows used in investing activities $(556,000)
c. Cash flows from financing activities
Issue of long-term debt $220,000
Issue of stock for cash 180,000
Purchase of treasury stock (64,000)
Cash flows from financing activities $336,000

d. Net change in cash

Increase from operating activities $466,000
Decrease from investing activities (556,000)
Increase from financing activities 336,000
Net increase in cash $246,000
Exercise 7

The comparative condensed balance sheets of Roadway Corporation are presented below:

ROADWAY CORPORATION
Condensed Balance Sheets
December 31
Assets 2020 2019
Current assets $ 76,000 $ 80,000
Property, plant and equipment (net) 99,000 90,000
Intangibles 25,000 40,000
Total assets $ 200,000 $ 210,000
Liabilities and Stockholders’ Equity
Current Liabilities $ 40,800 $ 48,000
Long-term liabilities 143,000 150,000
Stockholders’s equity 16,200 12,000
Total liabilities and stockholders’ equity $ 200,000 $ 210,000

Requirement:

a. Prepare a horizontal analysis to show the change of the balance sheet date for Roadway Corporation
using 2019 as a base.
b. Prepare a vertical analysis of the balance sheet data for Roadway Corporation in columnar form for
2020.
Solution:

a.

b.
Exercise 8

Rondo Corporation’s comparative balance sheets are presented as below:

RONDO CORPORATION
Balance Sheet
December 31
2020 2019
Cash $ 5,300 $ 3,700
Account receivable 21,200 23,400
Inventory 9,000 7,000
Land 20,000 26,000
Buildings 70,000 70,000
Accumulated depreciation – buildings (15,000) (10,000)
Total $ 110,500 $ 120,100

Account payable $ 10,370 $ 31,100

Common stock 75,000 69,000
Retained earnings 25,130 20,000
Total $ 110,500 $ 120,100

Rondo’s 2020 income statement included net sales of $ 120,000, cost of goods sold of $ 70,000 and net income
of $ 14,000.

Requirements:

Compute the following ratios for 2020

c. Current ratio.
d. Accounts receivable turnover.
e. Inventory turnover.
f. Profit margin.
g. Asset turnover.
h. Return on assets.
i. Return on common stockholders’ equity.
j. Debt to assets ratio

Solution

a. ($5,300 + $21,200 + $9,000)/$10,370 = 3.42 times

b. $120,000/[($21,200 + $23,400)/2] = 5.38 times

c. $70,000/[($9,000 + $7,000)/2] = 8.8 times

d. $14,000/$120,000 = 11.7%

e. $120,000/[($110,500 + $120,100)/2] = 1.04 times

f. $14,000/[($110,500 + $120,100)/2] = 12.1%

g. $14,000/{[($75,000 + $25,130) + ($69,000 + $20,000)]/2} = 14.8%

h. $10,370/$110,500 = 9.4%