Questions, Exercises, and Problems 97

e. LBJ purchases insurance on its headquarters building on September 1, Year 3, for the
next 12 months beginning on that date. It pays the $360,000 insurance premium in cash.
f. On November 16, Year 3, LBJ issues 40,000 shares of common stock with a par value
of $1 for $26 per share. LBJ uses the cash proceeds to repay accounts payable.
25. Journal entries, adjusting entries, income statement and balance sheet preparation. The bal-
ance sheet of Rybowiak’s Building Supplies on June 30, Year 12, appears nearby.

RYBOWIAK’S BUILDING SUPPLIES

Balance Sheet
June 30, Year 12

Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,200
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,250
Merchandise Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,150
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000
Equipment—At Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $210,000
Less Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (84,000)
Equipment—Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $126,000
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $266,000
Liabilities and Shareholders’ Equity
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,100
Note Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Salaries Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,350
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,650
Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $226,650
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $266,000

The following transactions occurred during the month of July.

(1) Sold merchandise on account for a total selling price of $85,000.
(2) Purchased merchandise inventory on account from various suppliers for $46,300.
(3) Paid rent for the month of July of $11,750.
(4) Paid salaries to employees during July of $20,600.
(5) Collected accounts receivable of $34,150.
(6) Paid accounts payable of $38,950.
Information affecting adjusting entries at the end of July is as follows:
(7) The firm paid the premium on a one-year insurance policy on March 1, Year 12, with
coverage beginning on that date. This is the only insurance policy in force on June 30,
Year 12.
(8) The firm depreciates its equipment over a 10-year life. Estimated salvage value of the
equipment is negligible.
(9) Employees earned salaries of $1,600 during the last two days of July but were not
paid. These are the only unpaid salaries at the end of July.
(10) The note payable is a 90-day, 6% note issued on June 30, Year 12.
(11) Merchandise inventory on hand on July 31, Year 12, totals $77,950. The cost of
goods sold for July equals merchandise inventory on June 30, Year 12, plus purchases
of merchandise during July minus merchandise inventory on July 31, Year 12.
a. Prepare journal entries to reflect the transactions and other events during July. The
firm classifies expenses by their nature (that is, insurance, depreciation). Revenues and
expenses should appear in the Retained Earnings account but with an indication of the

Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
98 Chapter 3 Basics of Record Keeping and Financial Statement Preparation: Income Statement

specific revenue or expense account debited or credited. Be sure to indicate whether each
entry increases or decreases assets, liabilities, or shareholders’ equity.
b. Enter the amounts from the June 30, Year 12, balance sheet and the effects of the 11
items above in T-accounts.
c. Prepare an income statement for the month of July. Ignore income taxes.
d. Enter closing entries in the T-accounts from part b.
e. Prepare a comparative balance sheet as of June 30, and July 31, Year 12.
26. Preparing the income statement and balance sheet using the accrual basis. Bob Hansen
opens a retail store on January 1, 2013. Hansen invests $50,000 for all of the common
stock of the firm. The store borrows $40,000 from a local bank. The store must repay the
loan with interest for both 2013 and 2014 on December 31, 2014. The interest rate is 10%
per year. The store purchases a building for $60,000 cash. The building has a 30-year life,
zero estimated salvage value, and is to be depreciated using the straight-line method. The
store purchases $125,000 of merchandise on account during 2013 and pays $97,400 of the
amount by the end of 2013. A physical inventory taken on December 31, 2013, indicates
$15,400 of merchandise is still on hand.
During 2013, the store makes cash sales to customers totaling $52,900 and sales on
account totaling $116,100. Of the sales on account, the store collects $54,800 by Decem-
ber 31, 2013. The store incurs and pays other costs as follows: salaries, $34,200; utilities,
$2,600. It has unpaid bills at the end of 2013 as follows: salaries, $2,400; utilities, $180. The
firm is subject to an income tax rate of 40%. Income taxes for 2013 are payable on March
15, 2014. Assume that Hansen applies U.S. GAAP, and reports in U.S. dollars.
a. Prepare an income statement for Hansen Retail Store for 2013, assuming the accrual
basis of accounting and revenue recognition at the time of sale. Show supporting com-
putations for each revenue and expense.
b. Prepare a balance sheet for Hansen Retail Store as of December 31, 2013. Show sup-
porting computations for each balance sheet item.
27. Analysis of transactions and preparation of the income statement and balance sheet. Refer
to the information for Regaldo Department Stores as of January 31, Year 8, in Chapter
2, Problem 2.15. Regaldo Department Stores opened for business on February 1, Year 8.
Transactions and events during February Year 8 were as follows.
(1) February 1: Purchased display counters and computer equipment for $90,000. The
firm borrowed $90,000 from a local bank to finance the purchases. The bank loan
bears interest at a rate of 12% each year and is repayable with interest on February 1,
Year 9.
(2) During February: Purchased merchandise on account totaling $217,900.
(3) During February: Sold merchandise costing $162,400 to various customers for
$62,900 cash and $194,600 on account.
(4) During February: Paid to employees compensation totaling $32,400 for services ren-
dered during the month.
(5) During February: Paid utility (electric, water, gas) bills totaling $2,700 for services
received during February Year 8.
(6) During February: Collected $84,600 from customers for sales on account (see transac-
tion (3) above).
(7) During February: Paid invoices from suppliers of merchandise (see transaction (2)
above) with an original purchase price of $210,000 in time to receive a 2% discount
for prompt payment and $29,000 to other suppliers after the discount period had
elapsed. The firm treats discounts taken as a reduction in the acquisition cost of
merchandise.
(8) February 28: Compensation that employees earned during the last several days in
February and that the firm will pay early in March Year 8 totaled $6,700.
(9) February 28: Utility services that the firm used during February and that the firm will
not pay until March Year 8 totaled $800.

Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.