Fundamentals of Financial Accounting Phillips, Libby and Libby: Answer the following: 6.

Chapter 2- PB2-2 , PB2-2 Recording Transactions (in a Journal and T-Accounts), Preparing and Interpreting the Balance Sheet Starbucks is a coffee company-a big coffee company. During a 10-year period, the number of Starbucks locations grew from 165 to over 5,800 stores-an average increase of 43 percent every year. The following is adapted from a recent Starbucks annual report. Starbucks' year-end is September 30 and dollars are reported in thousands. Cash $ 174,500 Accounts payable $462,600 Accounts receivable 97,500 Short-term bank loans 74,900 Inventories 263,200 Long-term debt 5,100 Other current assets 312,100 Other long-term liabilities 23,500 Property, plant, and equipment 1,265,800 Contributed capital 930,300 Other long-term assets 179,500 Retained earnings 796,200 Assume that the following events occurred in the following quarter, which ended December 31: a. Paid $10,400 cash for additional other long-term assets. b. Issued additional shares of stock for $5,300 in cash. c. Purchased property, plant, and equipment; paid $11,800 in cash and signed additional longterm loans for $8,900. d. Sold, at cost, other long-term assets for $3,000 cash. e. Conducted negotiations to purchase a coffee farm, which is expected to cost $7,400. Required: 1. Prepare journal entries to record transactions a-e.

a.

dr Other long-term assets(+A) cr Cash (-A) dr Cash (+A) cr Contributed capital (+SE) dr Property, plant, and equipment (+A) cr Cash (A)

10,400 10,400 5,300 5,300 20,700 11,800

b.

c.

cr Long-term debt (+L) d. dr Cash (+A) cr Other long-term assets (A) No effect 3,000

8,900

3,000

e.

2. Create T-accounts for each of the accounts on the balance sheet and enter the balances at the end of September as beginning balances for the October 1-December 31 quarter. 3. Enter the effects of the transactions in T-accounts (including referencing) and determine the December 31 balances. Req. 2 and 3 Cash Beg. 174,500 (b) 5,300 10,400 (a) (d) 3,000 11,800 (c) 160,600 Other Current Assets Beg. 312,100 312,100 Accounts Receivable 97,500 Inventories Beg. 263,200

Beg.

97,500

263,200 Other Long-term Assets Beg. 179,500 (a) 10,400 3,000 (d) 186,900 Long-Term Debt 5,100 Beg. 8,900 (c) 14,000

Property, Plant, and Equipment Beg. 1,265,800 (c) 20,700 1,286,500

Accounts Payable 462,600 Beg. 462,600 Other Long-Term Liabilities 23,500 Beg. 23,500

Short-term Bank Loans 74,900 Beg. 74,900

Contributed Capital 930,300 Beg. 5,300 (b) 935,600

Retained Earnings 796,200 Beg. 796,200

4. Explain your response to event e.

The negotiations to purchase a coffee farm were not included in the transactions. Because event (e) involves only negotiations, it does not constitute an exchange of cash, goods, or services and thus is not a transaction. 5. Prepare a classified balance sheet at December 31. Starbucks Balance Sheet At December 31 (in thousands of dollars) Assets Current assets Cash Accounts receivable Inventories Other current assets Total current assets Property, plant, and equipment Other long-term assets Total Assets Liabilities Current liabilities Accounts payable Short-term bank loans Total current liabilities Long-term debt Other long-term liabilities Total Liabilities Stockholders Equity Contributed capital Retained earnings Total Stockholders Equity Total Liabilities and Stockholders Equity

$ 160,600 97,500 263,200 312,100 833,400 1,286,500 186,900 $2,306,800

$ 462,600 74,900 537,500 14,000 23,500 575,000 935,600 796,200 1,731,800 $2,306,800

6. As of December 31, has the financing for the investment in assets made by Starbucks primarily come from liabilities or stockholders' equity? As of December 31, financing for Starbucks assets has come primarily from stockholders equity. Stockholders equity financed $1,731,800 of the companys total assets and liabilities financed $575,000.

7. Chapter 3- PB3-1,

PB3-1 Recording Nonquantitative Journal Entries Abercrombie & Fitch Co. is a specialty retailer of casual apparel. The company's brand was established in 1892. It became a public company in 1996 and then was spun off from The Limited in 1998. The following is a series of accounts for Abercrombie. The accounts are listed alphabetically and numbered for identification. Following the accounts is a series of transactions. For each transaction, indicate the account(s) that should be debited and credited by entering the appropriate account number(s) to the right of each transaction. If no journal entry is needed, write none after the transaction. The first transaction is given as an example. Account No. Account Title Account No. Account Title 1 Accounts payable 8 Rent expense 2 Accounts receivable 9 Supplies expense 3 Cash 10 Supplies 4 Contributed capital 11 Unearned revenue 5 Equipment 12 Wages expense 6 Interest revenue 13 Wages payable 7 Prepaid rent Transactions Debit Credit a. Example: Incurred wages expense; paid cash. 12 3 b. Collected cash on account. c. Used up supplies (cash register tapes, etc.) this period. d. Sold gift certificates to customers; none redeemed this period. e. Purchased equipment, paying part in cash and charging the balance on account. f. Paid cash to suppliers on account. g. Issued additional stock for cash. h. Paid rent to landlords for next month's use of mall space. i. Earned and received cash for interest on investments.
Transaction a. b. c. d. e. f. g. h. Debit 12 3 9 3 5 1 3 7 Credit 3 2 10 11 1, 3 3 4 3

i.

8. Chapter 13- PB13-1, PB13-1 Analyzing Financial Statements Using Ratios and Percentage Changes The comparative financial statements prepared at December 31, 2004, for Soon Company showed the following summarized data: Increase (Decrease) 2004 over 2003 2004 2003 Amount Percentage Income Statement Sales revenue* $222,000 $185,000 Cost of goods sold 127,650 111,000 Gross profit 94,350 74,000 Operating expenses 39,600 33,730 Interest expense 4,000 3,270 Income before income taxes 50,750 37,000 Income tax expense (30%) 15,225 11,100 Net income $ 35,525 $ 25,900 Balance Sheet Cash $ 40,000 $ 38,000 Accounts receivable (net) 18,500 16,000 Inventory 25,000 22,000 Property and equipment (net) 127,000 119,000 Total assets $210,500 $195,000 Accounts payable $ 27,000 $ 25,000 Income taxes payable 3,000 2,800 Note payable, long-term 75,500 92,200 Total liabilities 105,500 120,000 Capital stock (par $1) 25,000 25,000 Retained earnings 80,000 50,000 Total liabilities and stockholders' equity $210,500 $195,000 *One-half of all sales are on credit. During 2004, cash dividends amounting to $5,525 were declared and paid. Required:

1. Complete the two final columns shown beside each item in Soon Company's comparative financial statements. Increase (Decrease) 2004 over 2003 Amount Percent Income statement: Sales revenue Cost of goods sold Gross profit Operating expenses Interest expense Income before income taxes Income tax expense Net income Balance sheet: Cash Accounts receivable (net) Inventory Property & equipment (net) Total Assets Accounts payable Income taxes payable Note payable, long-term Total liabilities Capital stock ($1 par) Retained earnings Total liabilities & stockholders' equity $ 37,000 16,650 20,350 5,870 730 13,750 4,125 $ 9,625 20.00% 15.00% 27.50% 17.40% 22.32% 37.16% 37.16% 37.16%

$ 2,000 2,500 3,000 8,000 $ 15,500 $ 2,000 200 (16,700) (14,500) 0 30,000 $ 15,500

5.26% 15.63% 13.64% 6.72% 7.95% 8.00% 7.14% -18.11% -12.08% 0.00% 60.00% 7.95%

2. Does anything significant jump out at you from the year-over-year analyses? Looking at the year-over-year analyses, 2004 appears to have been a successful year for Soon Company. The percentage increase in sales (20%) was greater than that for cost of goods sold (15%) and operating expenses (17.4%). The combined result of these changes was a significant increase in net income (37%), which contributed to the 60% increase in retained earnings.

9. Chapter 6 PB6-1, Preparing a Bank Reconciliation and Journal Entries, and Reporting Cash The bookkeeper at Tony Company has asked you to prepare a bank reconciliation as of February 28, 2006. The February 28, 2006, bank statement and the February T-account for cash showed the following (summarized): Bank Statement Checks Deposits Other Balance Balance, February 1, 2006 $52,600 Deposits during February $30,650 83,250 Interest earned $150 83,400 Checks cleared during February $49,200 34,200 NSF checks-S. H. Schaffer 320 33,880 Bank service charges 40 33,840 Balance, February 28, 2006 33,840 Cash (A) Feb. 1 Balance 49,400 Feb. Checks written 50,400 Feb. Deposits 38,450 Tony Company's bank reconciliation at the end of January 2006, showed outstanding checks of $3,200. No deposits were in transit at the end of January, but a deposit was in transit at the end of February. Required: 1. Prepare a bank reconciliation for February. TONY COMPANY Bank Reconciliation February 28, 2006
Bank Statement Ending balance per bank statement Additions: Deposit in transit* Company's Books Ending balance per Cash account Additions: Interest earned Deductions: Bank service charges NSF check S. H. Schaffer

$33,840

$37,450

7,800 41,640

150 37,600 $ 40 320 360

Deductions: Outstanding checks** 4,400

Up-to-date cash balance

$37,240 Up-to-date cash balance

$37,240

*$38,450 30,650 = $7,800. **$50,400 49,200 + 3,200= $4,400 2. Prepare any journal entries required as a result of the bank reconciliation. Why are they necessary? (1) dr. Cash (+A) cr. Interest revenue (+R,+SE) Interest earned. dr. Accounts receivable (S. H. Schaffer) (+A) cr. Cash (-A) Customer's check returned; insufficient funds. dr. Other expenses (+E,-SE) cr. Cash (-A) Bank service charges deducted from bank statement. 150 150

(2)

320 320

(3)

40 40

These entries are necessary because the bank has appropriately recorded these changes in its accounts, but Tony Company hasnt yet recorded them in its accounts. The Cash account (and the other accounts in the entries) must be updated before adjusted financial statements can be prepared. 3. After the reconciliation journal entries are posted, what balance will be reflected in the Cash account in the ledger?4. If the company also has $50 on hand, which is recorded in a different account called Cash on Hand, what total amount of cash should be reported on the balance sheet at the end of February? Balance in Cash account Req. 4 Balance Sheet (February 28, 2006): Current Assets: Cash ($37,240 + $50) $37,290 10. Chapter 6- PB6-2 Identifying Outstanding Checks and Deposits in Transit and Preparing a Bank Reconciliation and Journal Entries. The September 2007 bank statement for Terrick Company and the cash T-account for September 2007 follow: $37,240

Bank Statement Date Checks Deposits Other Balance Sept.1 $75,900 2 $620; 550 $25,000 99,730 4 2,000; 200 97,530 6 1,500; 870; 21,000 74,160 11 300; 1,500; 600 14,000 85,760 13 650; 600; 6,550 77,960 17 10,000; 9,000 58,960 23 90; 500 27,000 85,370 26 700; 3,220 81,450 28 8,000; 8,200 65,250 29 730; 3,200 17,000 NSF* $500 77,820 30 400; 4,400 Interest earned 60 Service charge 40 73,040 *NSF check from B. Frank, a customer. Cash (A) Sept. 1 Balance 98,780 Checks written during September: Deposits 730 8,000 3,220 Sept. 11 14,000 21,000 200 550 23 27,000 600 3,680 4,400 29 17,000 700 650 9,000 30 21,000 6,550 3,200 600 560 500 840 2,000 8,200 10,000 90 300 400 870 1,500 The August 2007 bank reconciliation showed the following: up-to-date cash balance at August 30, $98,780; deposits in transit on August 31, $25,000; and outstanding checks on August 31, $620 $1,500 $2,120. Required: 1. Identify and list the deposits in transit at the end of September.
Comparison of deposits listed in the Cash account with deposits listed on the bank statement reveals a $21,000 deposit in transit on September 30.

2. Identify and list the outstanding checks at the end of September.

Comparison of the checks cleared on the bank statement with (a) outstanding checks from August, and (b) checks written in September reveals three outstanding checks at the end of September ($560 + $3,680 + $840 = $5,080).

3. Prepare a bank reconciliation for September.

TERRICK COMPANY Bank Reconciliation September 30, 2007 Bank Statement Company's Books Ending balance per bank Ending balance per Cash statement $73,040 account $89,440 Additions: Deposits in transit Deductions: Outstanding checks Up-to-date cash balance 5,080 $88,960 21,000 94,040 Deductions: NSFB. Frank Bank service charges Up-to-date cash balance Additions: Interest earned

60 89,500

500 40 $88,960

4. Give any journal entries that the company should make as a result of the bank reconciliation. Why are they necessary?
(1) dr. Cash (+A) cr. Interest revenue (+R,+SE) Interest earned. dr. Other expenses (+E,-SE) cr. Cash (-A) Service charges deducted from bank balance. dr. Accounts receivable, B. Frank (+A) cr. Cash (-A) Customer's check returned; insufficient funds. 60 60

(2)

40 40

(3)

500 500

These entries are necessary because the bank has appropriately recorded these changes in its accounts, but Terrick Company hasnt yet recorded them in its accounts. The Cash account (and the other accounts in the entries) must be updated before adjusted financial statements can be prepared.

5. After the reconciliation journal entries are posted, what balance will be reflected in the Cash account in the ledger?
Balance in Cash account $88,960

6. If the company also has $200 on hand, which is recorded in a different account called Cash on Hand, what total amount of cash should be reported on the September 30, 2007, balance sheet?
Current Assets: Cash ($88,960 + $200) $89,160