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Copy of Chap004 1.doc
Copy_of_Chap004_1.doc
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Copy of Chap004 1.doc-Chapter 04 - Adjustments, Fi...
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Copy of Chap004 1.doc-Chapter 04 - ...
Copy_of_Chap004_1.doc-Chapter 04 - Adjustments, Financial Statements,
Page 72
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–7. (continued)
Req. 3
(a)
Shares outstanding:
1,000 shares
(given) – no change all year.
(b)
Interest expense: $20 thousand x .10 = $2 thousand
.
(c)
Ending balance in retained earnings:
Unadjusted balance, $(3,000) + Net income, $15,000 = $12,000
.
(d) Average income tax rate: $5,000 income tax expense ÷ ($103,000 revenues -
$83,000 total expenses) = 25%.
(e)
Rent Receivable -- report on the balance sheet as an asset
(probably current).
Unearned Rent Revenue -- report on the balance sheet as a liability
probably
(current) for future occupancy "owed''.
(f)
Net income of $15,000 was computed on the basis of
accrual
accounting
concepts.
Revenue is recognized when earned and expenses recorded when
incurred regardless of the timing of the respective cash flows.
Cash inflows, in
addition to certain revenues, were from numerous sources such as the issuance of
capital stock, borrowing, and revenue collected in advance.
Similarly, cash
outflows were, in addition to certain expenses, due to numerous transactions such
as the purchase of operational and other assets, prepaid insurance, and dividends
to stockholders.
(g)
EPS: $15,000 ÷ 1,000 shares (per (a) above) =$15.00 per share
.
(h)
Selling price per share:
$30,000 contributed capital ÷ 1,000 shares = $30 per
share
.
(i)
The prepaid insurance account reflected a $2,000 balance before the adjustment
(decrease) of $1,000.
Therefore, it appears that the policy premium was paid on
January 1, 2011, and it was prepaid for two years (2011 and 2012).
Other
possibilities might be (a) a 12-month policy purchased on July 1, 2011, or (b) a 2-
month policy purchased on December 1, 2011.
In any case, one-half of the
premium has expired.
(j)
Net profit margin: $15,000 net income ÷ $103,000 revenues = 0.146
(14.6%
).
4-72
Page 73
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–8.
Req. 1
CRYSTAL’S DAY SPA AND SALON, INC.
Income Statement
For the Year Ended December 31, 2012
Items
Cash
Basis Per
Crystal’s
Statement
Explanation of Changes
Corrected
Basis
Revenues:
Spa fees
$1,215,000
See * below.
$1,102,000
Expenses:
Office rent
130,000
Exclude rent for Jan. 2013 ($130,000 ÷ 13)
(g)
120,000
Utilities
43,600
No change
43,600
Telephone
12,200
See ** below.
11,800
Salaries
562,000
Add December 2012 salary ($18,000 ÷ 12) (e)
563,500
Supplies
31,900
See *** below.
29,825
Miscellaneous
12,400
No change
12,400
Depreciation
0
Given for 2012 (c)
20,500
Total
expenses
792,100
801,625
Net income
$
422,900
$
300,375
*
Cash collected for spa fees
$1,215,000
Fees earned in prior years (a)
-142,000
Fees earned in 2012 but not yet collected (b)
+ 29,000
Fees earned in 2012
$1,102,000
**
$12,200 telephone paid + $1,400 December 2012 telephone bill - $1,800
December 2011 bill paid in 2012 = $11,800
***
Supplies (d)
Beg.
3,125
Purchases
31,900
29,825
Used
End.
5,200
4-73
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