A.New Printing Press: 1, 2, 3, 4, 6

Exercise 7–1

a.New printing press: 1, 2, 3, 4, 6

b.Secondhand printing press: 7, 8, 10, 12

Exercise 7–2

a.Yes. All expenditures incurred for the purpose of making the land suitable for its intended use should increase the land account.

b.No. Land is not depreciated.

Exercise 7–3

Initial cost of land ($25,000 + $100,000)...... $125,000

Plus: Legal fees...... $1,750

Delinquent taxes...... 7,500

Demolition of building...... 5,500 14,750

$139,750

Less: Salvage of materials...... 1,500

Cost of land...... $138,250

Exercise 7–4

a.No. The $575,000 represents the original cost of the equipment. Its replacement cost, which may be more or less than $575,000, is not reported in the financial statements.

b.No. The $217,500 is the accumulation of the past depreciation charges on the equipment. The recognition of depreciation expense has no relationship to the cash account or accumulation of cash funds.

Exercise 7–6

$11,750 [($112,000 – $18,000)/8]

Exercise 7–7

First Year...... Second Year

a.10% of $154,000 = $15,400 10% of $154,000 = $15,400

b.20% of $154,000 = $30,800 20% of $123,200* = $24,640

*$154,000 – $30,800

Exercise 7–8

a.12 1/2% of ($70,000 – $5,200) = $8,100

b.First year: 25% of $70,000 = $17,500

Second year: 25% of ($70,000 – $17,500) = $13,125

Exercise 7–9

a.First year: 9/12  [($64,000 – $5,200)/6] = $7,350

Second year: ($64,000 – $5,200)/6 = $9,800

b.First year: 9/12  33 1/3% of $64,000 = $16,000

Second year: 33 1/3% of ($64,000 – $16,000) = $16,000

Exercise 7–11

a.$30,000,000/50,000,000 tons = $0.60 depletion per ton

7,500,000  $0.60 = $4,500,000 depletion expense

Exercise 7–13

a.Cost of equipment...... $117,500

Accumulated depreciation at December 31, 2004

(4 years at $13,750* per year)...... 55,000

Book value at December 31, 2004...... $ 62,500

*($117,500 – $7,500)/8 = $13,750

Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
Acc. Dep.—Equipment / 6,875 / Dep. Exp. - Equip / 6,875 / –6,875
Net
Effect / –6,875 / –6,875 / 6,875 / –6,875
Retained Earnings
(Net Income)

Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
Cash / 53,500 / Loss on Disposal of Equip. / 2,125 / –2,125
Acc. Dep.—Equip. / –61,875
Equipment / –117,500
Net
Effect / –2,125 / –2,125 / 2,125 / –2,125
Retained Earnings
(Net Income)

Exercise 7–14

a.2002 depreciation expense: $16,750 [($71,500 – $4,500)/4]

2003 depreciation expense: $16,750

2004 depreciation expense: $16,750

b.$21,250 ($71,500 – $50,250)

Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
Cash / 18,000 / Loss on Disposal of Equip. / 3,250 / –3,250
Acc Dep.—Equip / –50,250
Equipment / 71,500
Net
Effect / –3,250 / –3,250 / 3,250 / –3,250
Retained Earnings
(Net Income)

Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
Cash / 23,000 / Gain on Disposal of Equip / 1,750 / 1,750
Acc Dep.—Equip / –50,250
Equipment / 71,500
Net Effect / 1,750 / 1,750 / 1,750 / 1,750
Retained Earnings
(Net Income)

Exercise 7–16

Capital expenditures:

Additional component: 6, 7, 9

Replacement component: 1, 2, 4, 8, 10

Revenue expenditures: 3, 5

Exercise 7–19

a.($675,000/18) + ($45,000/15) = $40,500 total patent expense

Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
Patents / –40,500 / Amort. Exp.—Patents / 40,500 / –40,500
Net Effect / –40,500 / –40,500 / 40,500 / –40,500
Retained Earnings
(Net Income)

Exercise 7–20

a. $8,000,000. The goodwill is not amortized; thus, the book value of goodwill has remained unchanged since originally recognized on January 1, 2002.

Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
12/31 / Goodwill / 5,500,000 / Loss from Impaired Goodwill / 5,500,000 / –5,500,000
Net Effect / –5,500,000 / –5,500,000 / 5,500,000 / –5,500,000
Retained Earnings
(Net Income)

Exercise 8–1

Current liabilities:

Federal income taxes payable...... $ 56,000*

Advances on magazine subscriptions...... 162,000†

Total current liabilities...... $218,000

*$160,000  0.35

†4,800  $45  = $162,000

The nine months of unfilled subscriptions represent a current liability because Net World received payment prior to providing the magazines.

Exercise 8–2

Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
Notes Payable / 20,000
Accts Payable / –20,000
Net Effect / 0
Retained Earnings
(Net Income)

Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
Cash / –20,300 / Notes Payable / –20,000 / Interest Expense / 300 / –300
Net Effect / –20,300 / –20,000 / –300 / 300 / –300
Retained Earnings
(Net Income)

Interest Computation: $20,000  0.09  60/360 = $300

Exercise 8–5

a.$18,000 (0.03  $600,000)

b. Product Warranty Payable and Parts Inventory

Exercise 8–6

a. = Estimated warranty expense as a percentage of sales

= 0.77%

Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
Product Warranty Pay. / 226,000,000 / Product Warranty Exp. / 226,000,000 / –226,000,000
Net Effect / –226,000,000 / 226,000,000 / –226,000,000
Retained Earnings
(Net Income)

Exercise 8–8

A liability was not recorded for this contingent liability. The note would have clearly identified any liability accruals due to a contingency. The reason no liability was accrued is that eBAY, Inc., believes the claim is without merit. Therefore, the probability of a contingent loss is only “possible” rather than “probable.” Only “probable” contingencies must be estimated (if possible) and recorded. The litigation is disclosed, however, because it apparently represents a significant risk to eBAY’s operations.

Exercise 8–11

a.Social security tax ($700,000  0.075)...... $52,500

State unemployment (0.043  $15,000)...... 645

Federal unemployment (0.008  $15,000)...... 120

$53,265

Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
FICA Tax Pay. / 52,500 / Payroll Tax Exp. / 53,265 / –53,265
FUTA Tax Payable / 120
SUTA Tax Payable / 645
Net Effect / 53,265 / –53,265 / 53,265 / –53,265
Retained Earnings
(Net Income)

Exercise 8–14

The bonds were selling at a premium. This is indicated by the selling price of 101 1/8, which is stated as a percentage of face amount and is more than par (100%). The market rate of interest for similar quality bonds was lower than 7% on April 5, 2002, and this is why the bonds are selling at a premium.

Exercise 8–15

Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
4/1 / Cash / 12,000,000 / Bonds Payable / 12,000,000
Net Effect / 12,000,000 / 12,000,000 / 0
Retained Earnings
(Net Income)
Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
10/1 / Cash / –540,000 / Interest Exp. / 540,000 / –540,000
Net Effect / –540,000 / –540,000 / 540,000 / –540,000
Retained Earnings
(Net Income)
Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
4/1 / Cash / –12,000,000 / Bonds Pay. / –12,000,000
Net Effect / –12,000,000 / –12,000,000 / 0
Retained Earnings
(Net Income)

Exercise 8–16

Class1st Year2nd Year3rd Year4th Year5th Year

Preferred — $2.00 $2.00 $2.00 $2.00

Common —— 0.20* 0.64† 0.80‡

*$50,000/250,000

†$160,000/250,000

‡$200,000/250,000

Exercise 8–17

Class1st Year2nd Year3rd Year4th Year5th Year

Preferred — $0.50 $4.00* $1.50 $1.50

Common — — 0.80 3.30 1.20

TotalDividends per Share

*Third-year dividends:DividendsPreferred

Arrears dividend, preferred...... $25,000$2.50

Current dividend, preferred...... 15,000 1.50

Total...... $40,000 $4.00

Exercise 8–18 a.

Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
3/10 / Cash / 900,000 / Common Stock / 600,000
Paid-In Capital in Excess of Par—Common Stock / 300,000
Net Effect / 900,000 / 900,000
Retained Earnings
(Net Income)
Trans.
Date / Balance Sheet / Income Statement
Assets / Liabilities / Stockholders' Equity / Revenue / Expense / Net Income
8/9 / Cash / 525,000 / Preferred Stock / 500,000
Paid-In Capital in Excess of Par—Preferred Stock / 25,000
Net Effect / 525,000 / 525,000
Retained Earnings
(Net Income)

b. $1,425,000 ($900,000 + $525,000)

Exercise 8–21

a.90,000 shares (30,000  3)

b.$40 per share ($120/3)

Exercise 8–22

Stockholders’

AssetsLiabilitiesEquity

a.Declaring a stock dividend000

b.Issuing stock certificates for

the stock dividend declared

in (a)000

c.Declaring a cash dividend0+–

d.Paying the cash dividend

declared in (c)––0

e.Authorizing and issuing stock

certificates in a stock split000

Exercise 9–1

MURRY CABINET CO.

Comparative Income Statement

For the Years Ended December 31, 2004 and 2003

20042003

AmountPercentAmount Percent

Sales...... $770,000 100%$700,000 100%

Cost of goods sold...... 415,800 54 350,000 50

Gross profit...... $354,200 46% $350,000 50%

Selling expenses...... $138,600 18% $140,000 20%

Administrative expenses.....84,700 11 105,000 15

Total operating expenses....$223,300 29% $245,000 35%

Income from operations.....$130,900 17% $105,000 15%

Income tax expense...... 53,900 749,000 7

Net income...... $77,000 10%$56,000 8%

b.The vertical analysis indicates that the cost of goods sold as a percentage of sales increased by 4 percentage points (50% – 54%) between 2003 and 2004. However, the selling expenses and administrative expenses improved by 6 percentage points. Thus, the net income as a percent of sales improved by 2 percentage points.

Exercise 9–3

KEYSTONE PUBLISHING COMPANY

Common-Size Income Statement

For the Year Ended December 31, 2003

KeystonePublishing

PublishingIndustry

CompanyAverage

AmountPercent

Sales...... $2,450,000 101.0% 101.0%

Sales returns and allowances...... 24,500 1.0 1.0

Net sales...... $2,425,500 100.0% 100.0%

Cost of goods sold...... 850,000 35.0 40.0

Gross profit...... $1,575,500 65.0% 60.0%

Selling expenses...... $970,000 40.0% 39.0%

Administrative expenses...... 280,000 11.5 10.5

Total operating expenses...... $1,250,000 51.5% 49.5%

Operating income...... $325,500 13.5%* 10.5%

Other income...... 30,000 1.2 1.2

$355,500 14.7% 11.7%

Other expense...... 40,000 1.6 1.7

Income before income tax...... $315,500 13.1%* 10.0%

Income tax expense...... 97,000 4.0 4.0

Net income...... $218,500 9.1%* 6.0%

*Rounded to next highest tenth of a percent.

b.The cost of goods sold is 5 percentage points lower than the industry average, but the selling expenses and administrative expenses are 2 percentage points higher than the industry average. The combined impact is for net income as a percentage of sales to be 3 percentage points better than the industry average. Apparently, the company is managing the cost of publishing books better than the industry but has slightly higher selling and administrative expenses relative to the industry. The cause of the higher selling and administrative expenses as a percentage of sales, relative to the industry, can be investigated further.

Exercise 9–4

ATLAS FITNESS EQUIPMENT COMPANY

Comparative Balance Sheet

December 31, 2004 and 2003

20042003

AmountPercentAmount Percent

Current assets...... $180,000 32.73%$150,00029.13%

Property, plant, and equipment.340,000 61.82330,00064.08

Intangible assets...... 30,000 5.4535,000 6.79*

Total assets...... $550,000 100.00% $515,000 100.00%

Current liabilities...... $120,000 21.82%$125,00024.27%

Long-term liabilities...... 175,000 31.82150,00029.13

Common stock...... 50,000 9.09 40,0007.77

Retained earnings...... 205,000 37.27 200,000 38.83

Total liabilities and

stockholders’ equity...... $550,000 100.00% $515,000 100.00%

*Rounded to next lowest hundredth of a percent.

Exercise 9–5

a.NEON FLASHLIGHT COMPANY

Comparative Income Statement

For the Years Ended December 31, 2004 and 2003

20042003 Increase (Decrease)

AmountAmountAmountPercent

Sales...... $400,000$460,000 $(60,000) (13.04)%

Cost of goods sold...... 170,000200,000 (30,000) (15.00)%

Gross profit...... $230,000$260,000 $(30,000) (11.54)%

Selling expenses...... $70,000$60,000 $ 10,000 16.67%

Administrative expenses.....50,00040,000 10,000 25.00%

Total operating expenses....$120,000$100,000 $ 20,000 20.00%

Income before income tax....$110,000$160,000 $(50,000) (31.25)%

Income tax expense...... 28,00040,000 (12,000) (30.00)%

Net income...... $82,000$120,000 $(38,000) (31.67)%

b.The net income for Neon Flashlight Company decreased by approximately 32% from 2003 to 2004. This decrease was the combined result of a decrease in sales of 13.04% and higher expenses. The cost of goods sold decreased at a faster rate than the decrease in sales, thus causing gross profit to decrease less than the decrease in sales. In addition, selling and administrative expenses increased between 2003 and 2004.

Exercise 9–7

a.(1)Current ratio =

Current year: = 0.55 Preceding year: = 1.47

(2)Acid-test ratio =

Current year: = 0.36 Preceding year: = 1.18

The liquidity of PepsiCo has declined significantly over this time period. Both the current and acid-test ratios have declined by more than half from the preceding year. A review of the current assets and liabilities reveals that cash and marketable securities have dropped significantly while short-term borrowings were made during the current year. The combined effect reduced PepsiCo’s liquidity position. During this time period, PepsiCo was acquiring bottlers. This investment required cash and short-term borrowings, which placed a temporary squeeze on liquidity.

Exercise 9–9

a.(1)Accounts receivable turnover:

Current year: = 7.0Preceding year: = 6.0

(2)Number of days' sales in receivables:

Current year: = 56.0 days

Preceding year: = 66.0 days

*$3,973 = $1,450,000/365 days

†$3,562 = $1,300,000/365 days

b.The collection of accounts receivable has improved. This can be seen in both the increase in accounts receivable turnover and the reduction in the collection period. The credit terms require payment in 60 days. In the previous period, the collection period exceeded these terms. However, the company apparently became more aggressive in collecting accounts receivable or more restrictive in granting credit to customers. Thus, in the current period the collection period is within the credit terms of the company.

Exercise 9–11

a.(1)Inventory turnover:

Current year: = 6.0

Preceding year: = 8.0

(2)Number of days' sales in inventory:

Current year: = 65.37 days

Preceding year: = 47.15 days

*$5,507 = $2,010,000365 days

†6,575 = $2,400,000 ÷ 365 days

b.The inventory position of the business has deteriorated. The inventory turnover has decreased while the number of days’ sales in inventory has increased. The sales volume has declined while the inventory levels have increased, thus resulting in the deteriorating inventory position.

Exercise 9–12

a.(1)Inventory turnover:

Dell: = 75.7

Gateway: = 24.1

(2)Number of days' sales in inventory:

Dell: = 4.0 days

Gateway: = 8.3 days

*$70.3 = $25,661/365 days

†$14.4 = $5,241/365 days

b.Dell has a much higher inventory turnover ratio than does Gateway (75.7 vs. 24.1), or a 3:1 ratio. Likewise, Dell has nearly half the number of days’ sales in inventory (4.0 days vs. 8.3), or a 2:1 superiority ratio. However, we can conclude that Gateway’s is making significant advances on Dell since the superiority ratio for the number of day’s sales of inventory using the ending inventory balance is less than for the inventory turnover (using average inventory balances).

These significant differences are a result of Dell’s make-to-order operating strategy. Dell has successfully developed a manufacturing process that is able to fill a customer order quickly. As a result, Dell does not need to prebuild computers for inventory. Gateway, in contrast, prebuilds computers to be sold in its retail channel and for some of its telephone and internet sales. In this industry, there is great obsolescence risk in holding computers in inventory. New technology can make an inventory of computers difficult to sell; therefore, inventory is costly and risky. Dell’s operating strategy is considered revolutionary and is now being adopted by many both in and out of the computer industry. Indeed, at the time of this writing, Gateway and Hewlett-Packard are changing their practices to mirror those of Dell. As a side note, Apple Computer employs similar manufacturing techniques as does Dell and, thus, also enjoys excellent inventory efficiency.

Exercise 9–17

= 3.22 times

b.Number of times preferred dividends were earned:

= 12 times

c.Earnings per share on common stock:

= $2.20

d.Price-earnings ratio:

= 20

e.Dividends per share of common stock:

= $0.88

f.Dividend yield:

= 2%

Exercise 4–25

a. 2001:24.1% ($2,577/$10,674)

2.7% ($289/$10,674)

2000:24.8% ($2,215/$8,937)

6.0% ($534/$8,937)

b. Gross profit as a percentage of net sales decreased slightly during 2001 from 24.8% in 2000 to 24.1% in 2001. However, operating profit as a percentage of net sales decreased significantly during 2001 from 6.0% in 2000 to 2.7% in 2001. This decrease warrants further investigation to determine its underlying causes.

Exercise 6–21

a.2001:7.2 [$9,430,422/[($1,383,550 + $1,237,804)/2])

2000:7.8 [$9,407,949/[($1,237,804 + $1,163,915)/2])

b. The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 7.8 to 7.2, an unfavorable trend. Before reaching a more definitive conclusion, both ratios should be compared with those of past years, industry averages, and similar firms.

Exercise 6–23

a.Gateway 2000: 37.0 ($5,921,651,000/$160,227,500)

American Greetings: 2.9 ($757,080,000/$261,247,000)

b.Lower. Although American Greetings’ business is seasonal in nature, with most of its revenue generated during the major holidays, much of its nonholiday inventory could turn over very slowly. Gateway, on the other hand, turns its inventory over very fast because it maintains a low inventory, which allows it to respond quickly to customer needs. Additionally, Gateway’s computer products can quickly become obsolete, so it cannot risk building large inventories.

Exercise 6–24

Inventory turnover =

Albertson’s, = 7.69

Kroger, = 8.95

Safeway, = 9.08

b. The inventory turnover ratios are consistent. Albertson’s has somewhat more inventory than do Safeway and Kroger. Albertson’s has nearly 1.39 turns less of inventory than does Safeway.

Exercise 8–25

a.Current year:

Number of times interest charges earned: 2.0 =

Preceding year:

Number of times interest charges earned: 5.7 =

b.The number of times interest charges earned has declined from 5.7 to 2.0 in the current year. This would potentially cause concern among debtholders.

Exercise 8–26

Total liabilities to total assets =

Jan. 28, 2001: = 26.71%

Jan. 30, 2000: = 54.50%

Problem 9–4

1.Working capital: $1,999,000 – $600,000 = $1,399,000

Calculated

RatioNumeratorDenominatorValue

2...... Current ratio$1,999,000 $600,000 3.3

3.....Acid-test ratio$1,473,000 $600,000 2.5

4. Accounts receivable

...... turnover$6,100,000 ($350,000 + $365,000)/2 17.1

5. Number of days' sales

.....in receivables$350,000 ($6,100,000/365) 20.9

6.Inventory turnover$2,800,000 ($500,000 + $480,000)/2 5.7

7. Number of days' sales

...... in inventory$500,000 ($2,800,000/365) 65.2

8. Fixed assets to long-

.....term liabilities$3,100,000 $1,800,000 1.7

9.Liabilities to stock-

....holders' equity$2,400,000 $3,399,000 0.7

Number of times

interest charges

earned...... $733,000 + $157,000$157,000 5.7

11.Number of times

preferred dividends

...... earned$503,000 $48,000 10.5

12. Ratio of net sales to

...... assets$6,100,000 ($5,099,000 + $3,864,000)/2 1.4

13. Rate earned on total

...... assets$503,000 + $157,000 ($5,799,000 + $4,364,000)/2 13.0%

14. Rate earned on stock-

....holders' equity$503,000 ($3,399,000 + $2,964,000)/2 15.8%

15..Rate earned on

....common stock-

....holders' equity($503,000 – $48,000) ($2,799,000 + $2,464,000)/2 17.3%

16. Earnings per share

..on common stock($503,000 – $48,000) 150,000 $3.03

17. Price-earnings ratio$80.00 $3.03 26.4

18. Dividends per share

..of common stock$120,000 150,000 $0.80

19....Dividend yield$0.80 $80.00 1.0%