HOMEWORK – 2

HW-2
FINANCIAL REPORTING AND ANALYSIS
SAMRAT KANITKAR
FT222092
 PROBLEM 3-7
Transaction Analysis and Journal Entries Recorded Directly in T-Accounts

Date
Assets = Liabilities + Shareholders' Equity Activity
Cash Building Land Equipment Concessions Rent Receivable Notes Payable Accounts Payable Concessions Payable Capital Stock Retained Earnings
Oct-01 $ 40,000.00 $ 40,000.00
Oct-02 $ -12,500.00 $ 35,000.00 $ 90,000.00 $ 1,12,500.00 Down Payment of $12500
Oct-03 $ -2,500.00 $ 5,000.00 $ 2,500.00 Down Payment of $2500
Oct-12 $ 3,700.00 $ 3,700.00
$ 1,800.00 $ 1,800.00
Oct-13 Ticket Sales + Concessions Stand
$ 2,400.00 $ 2,400.00
Oct-17 $ 1,500.00 $ 1,500.00 Theater Rent - Accrued
Oct-23 $ 750.00 $ -750.00 50% Theater Rent Received
$ 2,000.00 $ 2,000.00
Oct-24 Ticket Sales + Concessions Stand
$ 2,800.00 $ 2,800.00
Oct-26 $ -3,000.00 $ -3,000.00 Dividends Paid
Oct-27 $ -500.00 $ -500.00 Utilities Expense
Oct-30 $ -2,400.00 $ -2,400.00 Wages Expense
$ 1,800.00 $ 1,800.00
Oct-31 Ticket Sales + Concessions Stand
$ 2,500.00 $ 2,500.00

T - Accounts

Cash Land
$ 40,000.00 $ 12,500.00 $ 35,000.00
$ 1,800.00 $ 2,500.00 $ 35,000.00
$ 2,400.00 $ 3,000.00
$ 750.00 $ 500.00
$ 2,000.00 $ 2,400.00 Building
$ 2,800.00 $ 90,000.00
$ 1,800.00 $ 90,000.00
$ 2,500.00
$ 54,050.00 $ 20,900.00
$ 33,150.00 Equipment
$ 5,000.00
$ 5,000.00 Balance of T-Accounts
Concessions Debits $ 1,67,600.00
$ 3,700.00
Credits $ 1,67,600.00
$ 3,700.00 Rent Receivable
$ 1,500.00 $ 750.00
$ 750.00
Notes Payable
$ 1,12,500.00
$ 1,12,500.00 Capital Stock
$ 40,000.00
$ 40,000.00
Accounts Payable
$ 2,500.00
$ 2,500.00 Retained Earnings
$ 3,000.00 $ 1,800.00
$ 500.00 $ 2,400.00
Concessions Payable $ 2,400.00 $ 1,500.00
$ 3,700.00 $ 2,000.00
$ 3,700.00 $ 2,800.00
$ 1,800.00
$ 2,500.00
$ 5,900.00 $ 14,800.00
$ 8,900.00
 PROBLEM 3-8
Trial Balance and Financial Statements

Trial Balance as of October 31, 2012

Account Debits Credits
Cash $ 33,150.00
Building $ 90,000.00
Land $ 35,000.00
Equipment $ 5,000.00
Concessions $ 3,700.00
Rent Receivable $ 750.00 Income Statement for the Month ended
Notes Payable $ 1,12,500.00
Accounts Payable $ 2,500.00 October 31, 2012
Concessions Payable $ 3,700.00
Capital Stock $ 40,000.00 Revenues
Retained Earnings $ 8,900.00 Concessions Revenue $ 7,700.00
TOTALS $ 1,67,600.00 $1,67,600.00 Ticket Sales $ 5,600.00
Rent Revenue $ 1,500.00
Total Revenues $ 14,800.00

Statement of Retained Earnings for Expenses

Salaries and Wages Expense $ 2,400.00
the month ended October 31, 2012 Utilities $ 500.00
Total Expenses $ 2,900.00

Retained Earnings as of 1 September, 2012 $ - Net Income $ 11,900.00

Net Income as of 1 September, 2012 $ 11,900.00
Dividends Paid $ -3,000.00

Retained Earnings as of October 30, 2012 $ 8,900.00

Classified Balance Sheet as of October 31, 2012

Assets Liabilities Shareholder's Equity

Current Assets Current Liabilities Capital Stock $ 40,000.00

Cash $ 33,150.00 Accounts Payable $ 2,500.00 Retained Earnings (as of 30 Sept, 2012) $ 8,900.00
Concessions $ 3,700.00 Concessions Payable $ 3,700.00
Rent Receivable $ 750.00 Total Current Liabilities $ 6,200.00
Total Current Assets $ 37,600.00
Long Term Liabilities
Long Term Assets Notes Payable $ 1,12,500.00
Building $ 35,000.00 Total Long Term Liabilities $ 1,12,500.00
Land $ 90,000.00
Equipment $ 5,000.00 Total Liabilities $ 1,18,700.00 Total Shareholders' Equity $ 48,900.00
Total Long Term Assets $ 1,30,000.00

Total Assets $ 1,67,600.00 Total Liabilities and Shareholders' Equity $ 1,67,600.00

 PROBLEM 4-3A
Adjusting Entries – Annual Adjustments

Adjusting Journal Entries on December 31, 2012

Entry Account Debit Credit Calculations

a. Depreciation Expense - Furniture $ 3,000.00 Depreciation per year = (25000-4000)/7 = $3000

Accumulated Depreciation - Furniture $ 3,000.00

b. Office Supplies Expense $ 13,200.00 Office Supplies used = 1200 + 12900 - 900 = $13200
Office Supplies on Hand $ 13,200.00

Service Revenue to be realized per month = 8800/8 = $1100

c. Customer Deposits $ 6,600.00
For 6 months, Service Revenue Realized = 6 x 1100 = $6600
Service Revenue $ 6,600.00

Prepaid Rent = $4000 per month. For 4 months, Prepaid

d. Prepaid Rent Expense $ 16,000.00
Rent Expense = 4 x 4000 = $16000
Rent Paid in Advance $ 16,000.00

Interest = (3/12) * (6/100) * 30000 = $450

e. Interest Expense $ 300.00
For two months of realization, Interest = (450/3)*2 = $300
Interest Payable $ 300.00

f. Salary and Wages Expense $ 1,660.00 Salary to be accounted for = 2 * (4150/5) = $1660
Salary and Wages Payable $ 1,660.00

Income Statement Adjustments

Revenues
Service Revenue $ 6,600.00
Hence if Ogonquit's Accountant
Revenue Adjustments $ 6,600.00
forgets to record adjusting
Entries on December 31, 2012,
Expenses
then the Net Income in the
Depreciation Expense - Furniture $ 3,000.00
Income Statement will be
Office Supplies Expense $ 13,200.00
Overstated for the year ended
Prepaid Rent Expense $ 16,000.00
December 31, 2012 by an
Interest Expense $ 300.00
amount equal to $27560
Salary and Wages Expense $ 1,660.00
Expense Adjustment $ 34,160.00
Adjustment to Net Income $ -27,560.00
PROBLEM 4-4A
Recurring and Adjusting Entries

Entry Transaction Debit Credit

Issued additional shares of stock to owners; shares
a. 1 11,12
issued at greater than par
b. Purchased Office Equipment for Cash 5 1
c. Collected open accounts receivable from customer 1 2
d. Purchased office supplies on account 4 7
e. Paid office rent for the next six months 3 1
f. Paid Interest on an interim financing note 18,10 1
g. Paid Salaries and Wages 16,8 1
Purchased office equipment; made a down payment in
h. 5 1,10
cash and signed an interim financing note
i. Provided services on account 2 13
j. Recorded depreciation on equipment 17 6
k. Recorded Income Taxes due next month 19 9
l. Recorded the used office supplies 14 4
m. Recorded the used portion of prepaid rent 15 3
 PROBLEM 4-5
Use of Account balances as a basis for Adjusting Entries – Annual Adjustments

Adjusting Journal Entries for

December 31, 2012
Account Debit Credit Calculations
$7200 for a 3 Year Policy:
Prepaid Insurance Expense $ 1,000.00 Insurance expense to be realized per year = {(7200/3)/12} = $200
Prepaid Insurance $ 1,000.00 For a period of 5 months, Realization = 5 x 200 = $1000
12-month Rent collected in advance = $6000
Rent Collected in Advance $ 3,500.00 Rent Revenue per month = 6000/12 = $500
Rent Revenue $ 3,500.00 Rent Revenue to be realized for 7 months = 7 x 500 = $3500

Interest for 9-month period = 50000 x (9/100) x (9/12) = $3375

Interest Revenue $ 1,500.00
Revenue for 4 months = 3375 x 4/9 = $1500
Notes Receivable $ 1,500.00

1. If the entries are made at the end of every month, then the Prepaid
Insurance is being recognized at the rate of $200 per month.
2. Before the entry for December 31, 2012 is made, the expense was
recognised until November, 30, 2012. Hence, the Prepaid Insurance Account
had been credited 4 times, that is, it was credited by:
$200 x 4 = $800
3. So the Balance in the Prepaid Insurance Account before the adjusting
entry for the December 31, 2012 was made, was:
$7200 - $800 = $6400
PROBLEM 4-37
Accrual of interest on a Loan

Calculation:
Principal = $50000
Rate of Interest = 12%p.a.
Period = 2 months
Interest (2 Months) = 50000*(12/100)*(2/12) = $1000
Interest per month = 1000/2 = $500

Journal entries
Date Account Debit Credit

Jul-01 Cash $ 50,000.00 Real Time Entry

Notes Payable $ 50,000.00

Jul-31 Interest Expense $ 500.00 Adjusting Entry

Interest Payable $ 500.00

Interest Payable $ 500.00

Aug-31 Interest Expense $ 500.00 End of Period Entry
Notes Payable $ 50,000.00
Cash $ 51,000.00

If the entry for July 31 is not made, then

the Expenses at the end of the month of
July would decrease and the Net Income
for July would be Overstated by $500
(Interest Expense not being recorded).
As a result, the true value of Net Income
would not be obtained for the month
ending July 31.
Hence, it is highly recommended that the
adjusting journal entry for July 31 be made.
 PROBLEM 5-13A
Inventory Costing Methods – Periodic System

Inventory Costing (Weighted Average Method) Income Statement for year

Date of Ending
ended 2012
Units Unit Cost Total Cost Sold Goods
Purchase
Weighted
Inventory (Weighted Average Method)
Beginning
4000 $ 20.00 $ 80,000.00 Average Cost
Inventory 11000 1500 Sales Revenue $ 3,30,000.00
Cost of Cost of Goods Sold $ 1,83,040.00
Cost of Goods
Feb-04 2000 $ 18.00 $ 36,000.00 Ending Gross Profit $ 1,46,960.00
Sold
Apr-12 3000 $ 16.00 $ 48,000.00 Inventory Operating Expenses $ 60,000.00
Sep-10 1000 $ 14.00 $ 14,000.00 Income before Tax $ 86,960.00
Dec-05 2500 $ 12.00 $ 30,000.00 $ 1,83,040.00 $ 24,960.00 Income Tax Expenses (30%) $ 26,088.00
Total Units 12500 $2,08,000.00 $ 16.64 Net Income $ 60,872.00

Inventory Costing (LIFO Method)

Income Statement for year
ended 2012
Units (LIFO Method) Total Cost (LIFO Method)
Date of
Units Unit Cost
(LIFO Method)
Purchase
Ending Cost of Goods Ending
Goods Sold
Inventory Sold Inventory Sales Revenue $ 3,30,000.00
Beginning
4000 2500 1500 $ 20.00 $ 50,000.00
Inventory $ 30,000.00 Cost of Goods Sold $ 1,78,000.00
Gross Profit $ 1,52,000.00
Feb-04 2000 2000 $ 18.00 $ 36,000.00 Operating Expenses $ 60,000.00
Apr-12 3000 3000 $ 16.00 $ 48,000.00 Income before Tax $ 92,000.00
Sep-10 1000 1000 $ 14.00 $ 14,000.00 Income Tax Expenses (30%) $ 27,600.00
Dec-05 2500 2500 $ 12.00 $ 30,000.00 Net Income $ 64,400.00
Total Units 12500 11000 1500 $1,78,000.00 $ 30,000.00

Income Statement for year

Inventory Costing (FIFO Method) ended 2012
Units (FIFO Method) Total Cost (FIFO Method) (FIFO Method)
Date of
Units Ending Unit Cost Cost of Goods Ending
Purchase Goods Sold
Inventory Sold Inventory Sales Revenue $ 3,30,000.00
Beginning
4000 $ 20.00 $ 80,000.00
Inventory 4000 Cost of Goods Sold $ 1,90,000.00
Gross Profit $ 1,40,000.00
Feb-04 2000 2000 $ 18.00 $ 36,000.00 Operating Expenses $ 60,000.00
Apr-12 3000 3000 $ 16.00 $ 48,000.00 Income before Tax $ 80,000.00
Sep-10 1000 1000 $ 14.00 $ 14,000.00 Income Tax Expenses (30%) $ 24,000.00
Dec-05 2500 1000 1500 $ 12.00 $ 12,000.00 $ 18,000.00 Net Income $ 56,000.00
Total Units 12500 11000 1500 $1,90,000.00 $ 18,000.00
If the prices are forecasted to change their pattern to
a rising trend, then the LIFO Method would be the
best to calculate Inventory costs as it would yield
minimum Income tax. However, a Company is not
allowed to change its method of Inventory Allocation
in order to enjoy the benefit of savings in Income Tax
that come along with a change in the Price Trends. It
is supposed to consistently follow the methods used
for calculation of Net Income and Inventory
Allocation. A change in the calculation methods can
be permitted only in a scenario wherein the company
is able to provide a justification other than Income
tax savings, for the same.

I order for Fees Corporation Ltd. to pay the least

amount of Income Tax, I would recommend the FIFO
Method of Inventory allocation.
It can be observed that the prices are falling with
time. In a scenario like this, the FIFO Method of
Inventory Allocation generates the Highest amount
($190000) of Cost of Goods Sold (COGS).
As a result, the Expenses in the Statement of Income
increase and therefore the Net Income becomes
lesser ($56000) as compared to that from other
methods.
This facilitates Minimum valuation for applicable
Income Tax.