Chapter Six Questions
1. Give four examples of items included in a company's cash account.
Cash includes currency, coins, deposits in bank
checking accounts, and deposits in bank savings accounts.
2. What is a cash equivalent?
A cash equivalent is a low risk investment that can
be converted into known amounts of cash within 90 days. Two common cash
equivalents are certificates of deposit and treasury bills.
3. What benefit is provided by a line of credit?
A line of credit allows a company to borrow funds
immediately whenever a need arises, as long as the company does not exceed its
credit limit. Lines of credit are usually established well in advance of the
time cash will be needed.
4. What term is used to identify the cost of borrowing money?
The cost of borrowing money is called interest
expense.
5. What term is used to identify the "cost" of obtaining resources from owners?
Dividends are the "cost" of obtaining
resources from owners.
6. Why are dividends not reported on the income statement?
Dividends are the responsibility of the board of
directors, not management. Since the income statement reports on the results of
management operations, dividends are not reported on the income statement.
Dividends are reported on the statement of retained earnings as a reduction of
retained earnings.
7. List three ways in which a company can access the cash it has in a bank checking account.
A company can access cash it has in a bank by (1)
withdrawing it, (2) writing checks, and (3) using electronic funds transfers.
8. Why is the customer deposits account a liability in a bank's accounting system?
When a bank receives a deposit from a customer, the
bank increases its cash asset and increases its customer deposits liability.
The customer deposits liability represents the dollar amount of cash the bank
owes to the customer. To the bank, cash received is a resource, while the
source of the resource is the customer deposit.
9. What is a bank statement?
A bank statement is a monthly report sent by a bank
to a checking account customer. The report summarizes all the activity in the
customer's checking account for the month. For example, the bank statement will
show all the customer's deposits and all checks processed by the bank. The bank
statement is useful for preparing a bank reconciliation.
10. Define the term subsidiary ledger and give an example of one.
A subsidiary ledger contains records relating to one
general ledger account. The general ledger contains the detailed activity of
all accounts used in a company's accounting system. An example of a subsidiary
ledger is the customer deposits subsidiary ledger maintained by a bank. It is
this customer deposits subsidiary ledger that provides the detailed information
reported in the bank statement.
11. How does a subsidiary ledger compare to a general ledger?
A subsidiary ledger contains records relating to one
general ledger account. The general ledger contains the detailed activity of
all accounts used in a company's accounting system. The total dollar amount of
all records in the subsidiary ledger equals the dollar amount reported in one
general ledger account. For example, the total of all individual accounts in a
bank's customer deposits subsidiary ledger equals the dollar amount in the
customer deposits account in the bank's general ledger.
12. What is the purpose of preparing a bank reconciliation?
A bank reconciliation is one way a company helps
control its cash. It involves comparing information in the company's cash
records (checkbook, general ledger) with information in the bank statement.
Results of a bank reconciliation include a determination of the dollar amount
of cash available for management to use and the amount of cash to report in the
company's balance sheet.
13. Define the term outstanding deposits.
Outstanding deposits are deposits recorded in a
company's checkbook but not added to the company's account in the bank's
customer deposits subsidiary ledger. Deposits are usually outstanding because
it takes a bank some time to process a deposit.
14. Define the term outstanding checks.
Outstanding checks are checks recorded in a
company's checkbook but not subtracted from the company's account in the bank's
customer deposits subsidiary ledger. Checks are usually outstanding because it
takes time for the checks to reach the bank and it then takes the bank some
time to process them.
15. What are certificates of deposit and why are they attractive to companies?
Certificates of deposit are investment securities
issued by banks. They may be for various lengths of time and they pay interest.
Those certificates of deposit with lives of less than 90 days are considered
cash equivalents. Certificates of deposit are attractive because they pay
higher interest than checking or savings accounts and they are relatively safe
investments.
16. What are treasury bills and why are they attractive to companies?
Treasury bills are securities issued by the U.S.
Treasury. They may be for various lengths of time and they pay interest. Those
treasury bills with lives of less than 90 days are considered cash equivalents.
Treasury bills are attractive because they pay higher interest than checking or
savings accounts and they are very safe investments.
17. List the three major asset classes reported on a classified balance sheet.
Current assets
Property, plant, and equipment
Other assets
18. Name two expenses that do not appear as operating expenses on a classified income statement.
Interest expense (reported in other revenues and
expenses) and income taxes expense (reported in a separate category).
Chapter Six Exercises
Exercise 6.1: Interest Expense
On June 16, the Hanson Company borrowed $15,000 from its bank by signing a 90-day, 12% note. The loan and interest are to be paid to the bank on September 13.
1. Determine the dollar amount of interest that the Hanson Company must pay to the bank on September 13.
Interest = principal x rate x time
Interest = $15,000 x .12 x 90/365 = $443.84
2. Determine the total dollar amount of cash that the Hanson Company must pay
to the bank on September 13.
The Hanson Company must pay the bank the $15,000
principal plus the $443.84 interest for a total of $15, 443.84.
3. Determine the Hanson Company's interest expense for the loan during each of
the following months: June, July, August, and September.
June’s interest expense = $15,000 x .12 x 15/365 = $73.97.
July’s interest expense = $15,000 x .12 x 31/365 = $152.88.
August’s interest expense = $15,000 x .12 x 31/365 = $152.88.
September’s interest expense = $15,000 x .12 x
13/365 = $64.11.
4. Prepare the journal entry required to record the Hanson Company's interest
cost for June. Before you prepare the journal entry, determine the
transaction's effects on the company's resources and sources of resources.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
|
|
+ $73.97 |
|
|
+ |
- $73.97 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
June 30 |
Interest Expense |
|
73.97 |
|
|
|
Interest Payable |
|
|
73.97 |
|
|
June interest expense |
|
|
|
5. Assume that the Hanson Company invested the $15,000 of borrowed cash in resources
that grew to $15,750 on September 13. Calculate the dollar amount by which the
company's resources increased or decreased after the company repaid the loan.
$306.16: resources increased by $15,750 (the
resources after the investment) - $15,443.84 (cash paid to the bank) = $306.16.
Exercise 6.2: Cash from Customers
The Penniman Company engaged in the following transactions with its customers in July.
July 3: provided services to customers and received $900.
July 7: received $400 from customers serviced in June.
July 11: provided services to customers and received $1,100.
July 14: provided services to customers who agreed to pay $700 by August 14.
July 18: received $600 from customers serviced in June.
July 22: provided services to customers and received $800.
July 26: provided services to customers who agreed to pay $1,000 by August 26.
July 31: received $500 from customers for services to be provided to them in August.
1. Determine the total cash the Penniman Company received from its customers
in July.
|
July 3 |
revenue |
$900 |
|
July 7 |
accounts receivable collection |
$400 |
|
July 11 |
revenue |
$1,100 |
|
July 18 |
accounts receivable collection |
$600 |
|
July 22 |
revenue |
$800 |
|
July 31 |
unearned fees revenue |
$500 |
|
Total cash received |
|
$4,300 |
2. Calculate the Penniman Company's fees revenue for July.
|
July 3 |
revenue, cash |
$900 |
|
July 11 |
revenue, cash |
$1,100 |
|
July 14 |
revenue, accounts receivable |
$700 |
|
July 22 |
revenue, cash |
$800 |
|
July 26 |
revenue, accounts receivable |
$1,000 |
|
Total revenue |
|
$4,500 |
3. Determine the total effect on the Penniman Company's resources and sources
of resources resulting from its July cash transactions.
|
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
7/3 |
+ $900 |
= |
|
|
|
|
+ $900 |
|
|
|
|
|
|
|
|
|
|
7/7 |
+ $400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/11 |
+ $1,100 |
= |
|
|
|
|
+ $1,100 |
|
|
|
|
|
|
|
|
|
|
7/14 |
+ $700 |
= |
|
|
|
|
+ $700 |
|
|
|
|
|
|
|
|
|
|
7/18 |
+ $600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/22 |
+ $800 |
= |
|
|
|
|
+ $800 |
|
|
|
|
|
|
|
|
|
|
7/26 |
+ $1,000 |
= |
|
|
|
|
+ $1,000 |
|
|
|
|
|
|
|
|
|
|
7/31 |
+ $500 |
= |
+ $500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
+ $5,000 |
= |
$500 |
+ |
$0 |
+ |
$4,500 |
Exercise 6.3: Dividends
It is a policy of the directors of the Souza Corporation to pay dividends of 20 percent of each year's net income. The dividends are declared on the following March 15 and paid on March 25 each year. For the 12 months ended December 31, the Souza Corporation reported net income of $5,600,000.
1. Determine the dividends to be declared and paid on the $5,600,000 net income.
Dividends = $5,600,000 (net income) x .20 =
$1,120,000.
2. Determine the total effect on the Souza Corporation's resources and sources
of resources resulting from its dividends transactions.
Resources and sources of resources are each reduced
by $1,120,000.
|
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
3/15 |
|
|
+ $1,120,000 |
|
|
+ |
- $1,120,000 |
|
|
|
|
|
|
|
|
|
|
3/25 |
- $1,120,000 |
= |
- $1,120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/31 |
|
|
|
|
|
|
- $1,120,000 |
|
|
|
|
|
|
|
|
|
|
Totals |
- $1,120,000 |
= |
$0 |
+ |
$0 |
+ |
- $1,120,000 |
3. Prepare the company's dividends journal entries required on March 15, March
25, and March 31, assuming the company makes closing entries each month.
|
Date |
Description |
Post. |
Debits |
Credits |
|
Mar. 15 |
Dividends |
|
1,120,000 |
|
|
|
Dividends Payable |
|
|
1,120,000 |
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
25 |
Dividends Payable |
|
1,120,000 |
|
|
|
Cash |
|
|
1,120,000 |
|
|
Dividends paid |
|
|
|
|
|
|
|
|
|
|
June 30 |
Retained earnings |
|
1,120,000 |
|
|
|
Dividends |
|
|
1,120,000 |
|
|
Close dividends account |
|
|
|
Exercise 6.4: Cash Payments
The Lamarre Company engaged in the following transactions in August.
August 2: paid a total of $600 for insurance to protect the company for August and September.
August 6: paid $350 to a supplier for supplies purchased in July.
August 10: paid $700 to rent office space for August.
August 14: paid $800 to employees for work done in the first two weeks of August.
August 20: paid $500 to purchase additional supplies.
August 24: paid $150 for August utilities used up.
August 28: paid $850 to employees for work done in the last two weeks of August.
August 31: paid $225 for August's income taxes.
August 31: a total of $400 of supplies were used in August.
August 31: employee wages of $75 for the last two days in August were recorded but not paid.
1. Determine the total cash the Lamarre Company paid out in August.
|
August 2 |
insurance for August & Sept. |
$600 |
|
August 6 |
accounts payable payment |
$350 |
|
August 10 |
rent for August |
$700 |
|
August 14 |
wages expense |
$800 |
|
August 20 |
supplies purchase |
$500 |
|
August 24 |
utilities expense |
$150 |
|
August 28 |
wages expense |
$850 |
|
August 31 |
income taxes expense |
$225 |
|
Total cash payments |
|
$4,175 |
2. Calculate the Lamarre Company's total expenses for August.
|
August 2 or 31 |
insurance for August |
$300 |
|
August 10 or 31 |
rent for August |
$700 |
|
August 14 |
wages expense |
$800 |
|
August 24 |
utilities expense |
$150 |
|
August 28 |
wages expense |
$850 |
|
August 31 |
income taxes expense |
$225 |
|
August 31 |
supplies expense |
$400 |
|
August 31 |
wages expense |
$75 |
|
Total expenses |
|
$3,500 |
3. Determine the total effect on the Lamarre Company's resources and sources of
resources resulting from its August cash transactions.
|
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
8/2 |
+ $600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/6 |
- $350 |
= |
- $350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/10 |
+ $700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/14 |
- $800 |
= |
|
|
|
|
- $800 |
|
|
|
|
|
|
|
|
|
|
8/20 |
+ $500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/24 |
- $150 |
= |
|
|
|
|
- $150 |
|
|
|
|
|
|
|
|
|
|
8/28 |
- $850 |
= |
|
|
|
|
- $850 |
|
|
|
|
|
|
|
|
|
|
8/31 |
- $225 |
= |
|
|
|
|
- $225 |
|
|
|
|
|
|
|
|
|
|
8/31 |
- $400 |
= |
|
|
|
|
- $400 |
|
|
|
|
|
|
|
|
|
|
8/31 |
|
|
+ $75 |
|
|
+ |
- $75 |
|
|
|
|
|
|
|
|
|
|
Insurance |
- $300 |
= |
|
|
|
+ |
- $300 |
|
|
|
|
|
|
|
|
|
|
Rent |
- $700 |
= |
|
|
|
+ |
- $700 |
|
|
|
|
|
|
|
|
|
|
Totals |
- $3,775 |
= |
- $275 |
+ |
$0 |
+ |
- $3,500 |
Exercise 6.5: Outstanding Deposits
The Hutcheson Corporation made the following deposits to its checking account during February: Feb. 2 $301, Feb. 4 $153, Feb. 6 $205, Feb. 9 $657, Feb. 11 $259, Feb. 13 $125, Feb. 16 $322, Feb. 18 $104, Feb. 20 $276, Feb. 23 $508, Feb. 25 $175, and Feb. 27 $425. The company's January 31 bank reconciliation showed an outstanding deposit of $622. The company's February 28 bank statement reported that the following deposits were processed by the bank: Feb. 2 $622 and $301, Feb. 5 $153, Feb. 6 $205, Feb. 9 $657, Feb. 12 $259, Feb. 13 $125, Feb. 16 $322, Feb. 19 $104, Feb. 20 $276, Feb. 23 $508, and Feb. 24 $175.
1. Determine the total dollar amount of deposits reported in the Hutcheson Corporation's checkbook during February.
$3,510: $301 (2/2) + $153 (2/4) + $205 (2/6) + $657
(2/8) + $259 (2/11) + $125 (2/13) + $322 (2/16) + $104 (2/18) + $276 (2/20) +
$508 (2/23) + $175 (2/25) + $425 (2/27).
2. Determine the total dollar amount of deposits reported in the Hutcheson
Corporation's bank account in February.
$3,707: $622 (2/2) + $301 (2/2) + $153 (2/5) + $205
(2/6) + $657 (2/9) + $259 (2/12) + $125 (2/13) + $322 (2/16) + $104 (2/19) +
$276 (2/20) + $508 (2/23) + $175 (2/24).
3. Determine the total dollar amount of the Hutcheson Corporation's outstanding
deposits on February 28.
$425 (Feb. 27 deposit).
Proof of February 28 outstanding deposits:
|
Maximum deposits per bank: |
|
|
January 31 outstanding deposits |
$622 |
|
February deposits per checkbook |
$3,510 |
|
Subtotal |
$4,132 |
|
Less: February deposits per bank |
$3,707 |
|
February 28 outstanding deposits |
$425 |
Exercise 6.6: Outstanding Checks
The Tomm Corporation wrote and recorded the following checks during February: No. 845 $225, No. 846 $523, No. 847 $135, No. 848 $784, No. 849 $164, No. 850 $328, No. 851 $722, No. 852 $255, No. 853 $387, No. 854 $233, No. 855 $421, No. 856 $682, No. 857 $274, and No. 858 $586. The company's January 31 bank reconciliation showed four outstanding checks: No. 836 $497, No. 842 $264, No. 843 $521, and No. 844 $763. The company's February 28 bank statement reported that the following checks were processed by the bank: No. 836 $497, No. 842 $264, No. 845 $225, No. 846 $523, No. 848 $784, No. 849 $164, No. 850 $328, No. 851 $722, No. 853 $387, No. 854 $233, No. 855 $421, and No. 856 $682.
1. Determine the total dollar amount of checks reported in the Tomm Corporation's checkbook during February.
$5,719: $225 (#845) + $523 (#846) + $135 (#847) +
$784 (#848) + $164 (#849) + $328 (#850) + $722 (#851) + $255 (#852) + $387
(#853) + $233 (#854) + $421 (#855) + $682 (#856) + $274 (#857) + $586 (#858).
2. Determine the total dollar amount of checks reported in the Tomm
Corporation's bank account in February.
$5,230: $497 (#836) + $264 (#842) + $225 (#845) +
$523 (#846) + $784 (#848) + $164 (#849) + $328 (#850) + $722 (#851) + $387
(#853) + $233 (#854) + $421 (#855) + $682 (#856).
3. Determine the total dollar amount of the Tomm Corporation's outstanding
checks on February 28.
|
Check No. |
Amount |
|
843 |
$521 |
|
844 |
$763 |
|
847 |
$135 |
|
852 |
$255 |
|
857 |
$274 |
|
858 |
$586 |
|
Total |
$2,534 |
Proof of February 28 outstanding checks:
|
Maximum checks processed by bank: |
|
|
January 31 outstanding checks |
$2,045 |
|
February checks written per checkbook |
$5,719 |
|
Subtotal |
$7,764 |
|
Less: February checks processed by bank |
$5,230 |
|
February 28 outstanding checks |
$2,534 |
Exercise 6.7: Bank Reconciliation
The Catton Corporation's November 30 bank statement showed a balance of $6,778 after a $15 bank service charge. The company's checkbook balance on November 30 was $4,985. On November 30, the company's outstanding deposits were $3,618 and its outstanding checks were $5,426.
Prepare the Catton Corporation's November 30 bank reconciliation.
|
Balance per bank statement, Nov. 30 |
$6,778 |
|
Add: Outstanding deposits |
3,618 |
|
|
$10,396 |
|
Deduct: Outstanding checks |
5,426 |
|
Adjusted bank balance, Nov. 30 |
$4,970 |
|
|
|
|
Balance per checkbook, Nov. 30 |
$4,985 |
|
Deduct: bank service charge |
15 |
|
Adjusted checkbook balance, Nov. 30 |
$4,970 |
Exercise 6.8: Classified Income Statement
The following information was obtained from the Green Corporation’s June 30 adjusted trial balance: accounts payable = $7,500, accounts receivable = $12,500, bonds payable = $24,000, buildings = $80,000, cash = $6,000, common stock = $22,000, fees revenue = $98,000, income taxes expense = $14,000, insurance expense = $5,500, interest expense = $1,000, rent expense = $12,000, salaries expense = $33,000, supplies expense = $4,000, utilities expense = $3,500.
Prepare the Green Corporation’s classified income statement for the period
ended June 30.
|
Green Corporation |
||
|
Fees Revenue |
|
$98,000 |
|
Operating Expenses |
|
|
|
Insurance Expense |
$5,500 |
|
|
Rent Expense |
12,000 |
|
|
Salaries Expense |
33,000 |
|
|
Supplies Expense |
4,000 |
|
|
Utilities Expense |
3,500 |
58,000 |
|
Operating Income |
|
$40,000 |
|
Other Revenues and (Expenses) |
|
($1,000) |
|
Income Before Taxes |
|
$39,000 |
|
Income Taxes Expense |
|
14,000 |
|
Net Income |
|
$25,000 |
Exercise 6.9: Classified Balance Sheet
The following information was obtained from the Green Corporation’s June 30 post-closing trial balance: accounts payable = $37,500, accounts receivable = $12,500, bonds payable, 4-years = $24,000, buildings = $78,000, cash = $8,000, common stock = $52,000, equipment = $23,000, fees revenue = $0, income taxes expense = $0, income taxes payable = $4,000, merchandise inventory = $27,500, land = $5,000, prepaid insurance = $2,600, prepaid rent = $1,000, rent expense = $0, retained earnings = $57,000, supplies expense = $0, trucks = $18,000, utilities expense = $0, wages expense = $0, wages payable = $1,100.
Prepare the Green Corporation’s classified balance sheet as of June 30.
|
Green Corporation |
||
|
Assets |
|
|
|
Current Assets |
|
|
|
Cash |
$8,000 |
|
|
Accounts Receivable |
12,500 |
|
|
Merchandise Inventory |
27,500 |
|
|
Prepaid Insurance |
2,600 |
|
|
Prepaid Rent |
1,000 |
|
|
Total Current Assets |
|
$51,600 |
|
Property, Plant, and Equipment |
|
|
|
Land |
$5,000 |
|
|
Buildings |
78,000 |
|
|
Equipment |
23,000 |
|
|
Trucks |
18,000 |
|
|
Total Property, Plant, and Equipment |
|
124,000 |
|
Total Assets |
|
$175,600 |
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
Current Liabilities |
|
|
|
Accounts Payable |
$37,500 |
|
|
Income Taxes Payable |
4,000 |
|
|
Wages Payable |
1,100 |
|
|
Total Current Liabilities |
|
$42,600 |
|
Long-term Liabilities |
|
|
|
Bonds Payable, 4-years |
|
24,000 |
|
Total Liabilities |
|
$66,600 |
|
Stockholders’ Equity |
|
|
|
Common Stock |
$52,000 |
|
|
Retained Earnings |
57,000 |
|
|
Total Stockholders’ Equity |
|
109,000 |
|
Total Liabilities and Stockholders’ Equity |
|
$175,600 |