Part 1 ebook “horngren’s accounting” has contents: accounting and the business environment, recording business transactions, the adjusting process, completing the accounting cycle, merchandising operations, merchandise inventory, accounting information systems, internal control and cash,… and other contents.
www.downloadslide.net GLOBAL EDITION Horngren’s Accounting TENTH EDITION Nobles • Mattison • Matsumura www.downloadslide.net HORNGREN’S ACCOUNTING TenTh ediTion Global Edition Tracie Nobles Texas State University–San Marcos Brenda Mattison Tri-County Technical College Ella Mae Matsumura University of Wisconsin–Madison Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo www.downloadslide.net Editor-in-Chief: Donna Battista Head of Learning Asset Acquisition: Laura Dent Acquisitions Editor: Lacey Vitetta Senior Acquisitions Editor, Global Editions: Steven Jackson Director of Editorial Services: Ashley Santora VP/Director of Development: Steve Deitmer Development Editor: Linda Harrison, Harrison Ridge Services Editorial Project Manager: Nicole Sam Editorial Assistants: Jane Avery and Lauren Zanedis Director of Marketing: Maggie Moylan Leen Marketing Manager: Alison Haskins Marketing Assistant: Kimberly Lovato Managing Editor, Production: Jeff Holcomb Senior Production Project Manager: Roberta Sherman Media Producer, Global Editions: M Vikram Kumar Project Editor, Global Editions: K.K Neelakantan Senior Production Manufacturing Controller, Global Editions: Trudy Kimber Permissions Project Manager: Jill Dougan Manufacturing Buyer: Carol Melville Senior Art Director: Anthony Gemmellaro Cover Design: Premedia Global Cover Photo: © mamanamsai/Shutterstock Editorial Media Project Manager: James Bateman Production Media Project Manager: John Cassar Full-Service Project Management and Composition: Integra Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate page within text or on pages 1797 and 1798 Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsonglobaleditions.com © Pearson Education Limited 2015 The rights of Tracie L Nobles, Brenda L Mattison and Ella Mae Matsumura to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Horngren’s Accounting, 10th edition, ISBN 978-0-13-311741-7, by Tracie L Nobles, Brenda l Mattison and Ella Mae Matsumura, published by Pearson Education © 2014 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 15 14 13 12 11 ISBN 10: 1-292-05651-7 ISBN 13: 978-1-292-05651-7 (Print) ISBN 13: 978-1-292-07473-3 (PDF) Typeset in Adobe Garamond Pro Regular, 11/13, Integra Printed and bound by Courier Kendallville in the United States www.downloadslide.net In memory of Charles T Horngren 1926–2011 Whose vast contributions to the teaching and learning of accounting impacted and will continue to impact generations of accounting students and professionals www.downloadslide.net About the Authors Tracie L Nobles, CPA, received her bachelor’s and master’s degrees in accounting from Texas A&M University She is currently a Senior Lecturer at Texas State University, San Marco, TX Previously she served as an Associate Professor of Accounting at Austin Community College and has served as department chair of the Accounting, Business, Computer Information Systems, and Marketing/ Management department at Aims Community College, Greeley, CO Professor Nobles has public accounting experience with Deloitte Tax LLP and Sample & Bailey, CPAs Professor Nobles is a recipient of the Texas Society of CPAs Outstanding Accounting Educator Award, NISOD Teaching Excellence Award and the Aims Community College Excellence in Teaching Award She is a member of the Teachers of Accounting at Two Year Colleges, the American Accounting Association, the American Institute of Certified Public Accountants, and the Texas State Society of Certified Public Accountants She is currently serving on the Board of Directors as secretary/webmaster of Teachers of Accounting at Two Year Colleges, as chair of the American Institute of Certified Public Accountants Pre-certification Executive Education committee, and as program chair for the Teaching, Learning and Curriculum section of the American Accounting Association In addition, Professor Nobles served on the Commission on Accounting Higher Education: Pathways to a Profession Tracie has spoken on such topics as using technology in the classroom, motivating non-business majors to learn accounting, and incorporating active learning in the classroom at numerous conferences In her spare time she enjoys spending time with her friends and family, and camping, fishing and quilting Brenda L Mattison has a bachelor’s degree in education and a master’s degree in accounting, both from Clemson University She is currently an Accounting Instructor at Tri-County Technical College in Pendleton, South Carolina Brenda previously served as Accounting Program Coordinator at TCTC and has prior experience teaching accounting at Robeson Community College, Lumberton, North Carolina; University of South Carolina–– Upstate, Spartanburg, South Carolina; and Rasmussen Business College, Eagan, Minnesota She also has accounting work experience in retail and manufacturing businesses Brenda is a member of Teachers of Accounting at Two Year Colleges and the American Accounting Association She is currently serving on the board of directors as Vice President of Registration of Teachers of Accounting at Two Year Colleges Brenda engages in the scholarship of teaching and learning (SOTL) While serving as Faculty Fellow at Tri-County Technical College, her research project was Using Applied Linguistics in Teaching Accounting, the Language of Business Brenda has presented her research findings Other presentations include using active learning and manipulatives, such as building blocks and poker chips, in teaching accounting concepts In her spare time, Brenda enjoys reading and spending time with her family, especially touring the United States in their motorhome She is also an active volunteer in the community, serving her church, local Girl Scouts, and other organizations Ella Mae Matsumura is a professor in the Department of Accounting and Information Systems in the School of Business at the University of Wisconsin– Madison, and is affiliated with the university’s Center for Quick Response Manufacturing She received an A.B in mathematics from the University of California, Berkeley, and M.Sc and Ph.D degrees from the University of British Columbia Matsumura has won two teaching excellence awards at the University of Wisconsin–Madison and was elected as a lifetime fellow of the university’s Teaching Academy, formed to promote effective teaching She is a member of the university team awarded an IBM Total Quality Management Partnership grant to develop curriculum for total quality management education Professor Matsumura was a co-winner of the 2010 Notable Contributions to Management Accounting Literature Award She has served in numerous leadership positions in the American Accounting Association (AAA) She was coeditor of Accounting Horizons and has chaired and served on numerous AAA committees She has been secretary–treasurer and president of the AAA’s Management Accounting Section Her past and current research articles focus on decision making, performance evaluation, compensation, supply chain relationships, and sustainability She coauthored a monograph on customer profitability analysis in credit unions www.downloadslide.net Brief Contents Chapter Accounting and the Business Environment 26 Chapter Recording Business Transactions 86 Chapter The Adjusting Process 156 Chapter Completing the Accounting Cycle 230 Chapter Merchandising Operations 300 Chapter Merchandise Inventory 386 Chapter Accounting Information Systems 452 Chapter Internal Control and Cash 516 Chapter Receivables 572 Chapter 10 Plant Assets, Natural Resources, and Intangibles 632 Chapter 11 Current Liabilities and Payroll 688 Chapter 12 Partnerships 734 Chapter 13 Corporations 798 Chapter 14 Long-Term Liabilities 862 Chapter 15 Investments 920 Chapter 16 The Statement of Cash Flows 956 Chapter 17 Financial Statement Analysis 1032 Chapter 18 Introduction to Managerial Accounting 1102 Chapter 19 Job Order Costing 1154 Chapter 20 Process Costing 1216 Chapter 21 Cost-Volume-Profit Analysis 1292 Chapter 22 Master Budgets 1368 Chapter 23 Flexible Budgets and Standard Cost Systems 1454 Chapter 24 Cost Allocation and Responsibility Accounting 1524 Chapter 25 Short-Term Business Decisions 1596 Chapter 26 Capital Investment Decisions 1658 AppENdIx A—2011 Green Mountain Coffee Roasters, Inc Annual Report 1721 AppENdIx B—Present Value Tables 1767 GlossAry 1771 INdEx 1781 pHoTo CrEdITs 1797 www.downloadslide.net Contents Chapter Accounting and the Business Environment 26 Why Is Accounting Important? 28 Decision Makers: The Users of Accounting Information The Accounting Profession 29 What Are the Organizations and Rules That Govern Accounting? 31 Governing Organizations 31 Generally Accepted Accounting Principles 31 The Economic Entity Assumption 32 The Cost Principle 32 The Going Concern Assumption 33 The Monetary Unit Assumption 33 International Financial Reporting Standards 33 Ethics in Accounting and Business 33 What Is the Accounting Equation? ■ Review 116 ■ Assess Your Progress ■ Critical Thinking What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? 158 What Concepts and Principles Apply to Accrual Basis Accounting? 160 36 Transaction Analysis for Smart Touch Learning 37 42 Income Statement 42 Statement of Owner’s Equity 43 Balance Sheet 44 Statement of Cash Flows 45 How Do You Use Financial Statements to Evaluate Business Performance? 47 Green Mountain Coffee Roasters, Inc Return on Assets (ROA) 47 47 50 ■ Assess Your Progress 160 What Are Adjusting Entries and How Do We Record Them? 162 Prepaid Expenses 163 Unearned Revenues 169 Accrued Expenses 170 Accrued Revenues 174 What Is the Purpose of the Adjusted Trial Balance and How Do We Prepare It? 178 What Is the Impact of Adjusting Entries on the Financial Statements? 180 How Could a Worksheet Help in Preparing Adjusting Entries and the Adjusted Trial Balance? 181 AppENdIx 3A: Alternative Treatment of Recording Prepaid Expenses and Unearned Revenues 184 57 79 What Is an Alternative Treatment of Recording Prepaid Expenses and Unearned Revenues? 184 Prepaid Expenses 184 Unearned Revenues 185 Chapter recording Business Transactions 86 ■ Review What Is an Account? ■ Assess Your Progress 88 Assets 88 Liabilities 89 Equity 90 Chart of Accounts 90 Ledger 91 What Is Double-Entry Accounting? How Do You Record Transactions? 187 ■ Critical Thinking 196 222 92 The T-Account 92 Increases and Decreases in the Accounts 92 Expanding the Rules of Debit and Credit 93 The Normal Balance of an Account 93 Determining the Balance of a T-Account 94 95 Source Documents—The Origin of the Transactions 95 Journalizing and Posting Transactions 96 The Ledger Accounts After Posting 107 The Four-Column Account: An Alternative to the T-Account 109 124 152 35 How Do You Prepare Financial Statements? 111 How Do You Use the Debt Ratio to Evaluate Business Performance? 113 The Time Period Concept 160 The Revenue Recognition Principle The Matching Principle 161 How Do You Analyze a Transaction? ■ Critical Thinking Preparing Financial Statements From the Trial Balance Correcting Trial Balance Errors 112 Chapter The Adjusting process 156 Assets 35 Liabilities 35 Equity 35 ■ Review 28 What Is the Trial Balance? 111 Chapter Completing the Accounting Cycle 230 How Do We Prepare Financial Statements? 232 Relationships Among the Financial Statements 233 How Could a Worksheet Help in Preparing Financial Statements? 237 Section 5—Income Statement 237 Section 6—Balance Sheet 237 Section 7—Determine Net Income or Net Loss 237 What Is the Closing Process, and How Do We Close the Accounts? 239 Closing Temporary Accounts—Net Income 241 Closing Temporary Accounts—Net Loss 243 www.downloadslide.net How Do We Prepare a Post-Closing Trial Balance? 245 What Is the Accounting Cycle? 247 How Do We Use the Current Ratio to Evaluate Business Performance? 248 ■ Review 377 Comprehensive Problem for Chapters 1–5 381 What Are the Accounting Principles and Controls That Relate to Merchandise Inventory? 388 254 ■ Assess Your Progress Accounting Principles 388 Control Over Merchandise Inventory 264 ■ Critical Thinking 292 Comprehensive Problem for Chapters 1–4 295 Comprehensive Problem for Chapters 1–4 297 389 How Are Merchandise Inventory Costs Determined Under a Perpetual Inventory System? 390 Specific Identification Method 392 First-In, First-Out (FIFO) Method 393 Last-In, First-Out (LIFO) Method 394 Weighted-Average Method 397 Chapter Merchandising operations 300 How Are Financial Statements Affected by Using Different Inventory Costing Methods? 399 What Are Merchandising Operations? 302 The Operating Cycle of a Merchandising Business 302 Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems 304 How Are Purchases of Merchandise Inventory Recorded in a Perpetual Inventory System? 305 Purchase of Merchandise Inventory 306 Purchase Discounts 307 Purchase Returns and Allowances 308 Transportation Costs 310 Cost of Inventory Purchased 311 How Are Sales of Merchandise Inventory Recorded in a Perpetual Inventory System? 312 Sale of Merchandise Inventory 312 Sales Discounts 314 Sales Returns and Allowances 315 Transportation Costs—Freight Out 316 Net Sales Revenue and Gross Profit 317 Income Statement 400 Balance Sheet 400 How Is Merchandise Inventory Valued When Using the Lower-of-Cost-or-Market Rule? 403 Computing the Lower-of-Cost-or-Market 403 Recording the Adjusting Journal Entry to Adjust Merchandise Inventory 403 What Are the Effects of Merchandise Inventory Errors on the Financial Statements? 405 How Do We Use Inventory Turnover and Days’ Sales in Inventory to Evaluate Business Performance? 408 Inventory Turnover 408 Days’ Sales in Inventory 408 AppENdIx 6A: Merchandise Inventory Costs Under a Periodic Inventory System 409 How Are Merchandise Inventory Costs Determined Under a Periodic Inventory System? 409 What Are the Adjusting and Closing Entries for a Merchandiser? 318 Adjusting Merchandise Inventory Based on a Physical Count 318 Closing the Accounts of a Merchandiser 319 Worksheet for a Merchandising Business—Perpetual Inventory System 319 How Are a Merchandiser’s Financial Statements Prepared? 322 Income Statement 322 Statement of Owner’s Equity and the Balance Sheet Chapter Merchandise Inventory 386 250 Accounting for Accrued Expenses 250 Accounting Without a Reversing Entry 251 Accounting With a Reversing Entry 252 ■ Review 348 ■ Critical Thinking AppENdIx 4A: Reversing Entries: An Optional Step 250 What Are Reversing Entries? 336 ■ Assess Your Progress First-In, First-Out (FIFO) Method 411 Last-In, First-Out (LIFO) Method 411 Weighted-Average Method 411 AppENdIx 6B: Estimating Ending Merchandise Inventory 413 How Can the Cost of Ending Merchandise Inventory Be Estimated? 413 324 Gross Profit Method 413 The Retail Method 414 How Do We Use the Gross Profit Percentage to Evaluate Business Performance? 324 ■ Review AppENdIx 5A: Accounting for Merchandise Inventory in a Periodic Inventory System 326 ■ Critical Thinking How Are Merchandise Inventory Transactions Recorded in a Periodic Inventory System? 326 Chapter Accounting Information systems 452 Purchase of Merchandise Inventory 326 Sale of Merchandise Inventory 328 Adjusting and Closing Entries 328 Preparing Financial Statements 331 416 ■ Assess Your Progress 425 445 What Is an Accounting Information System? 454 Effective Accounting Information Systems 454 Components of an Accounting Information System 455 Contents www.downloadslide.net How Are Sales and Cash Receipts Recorded in a Manual Accounting Information System? 457 Special Journals 458 Subsidiary Ledgers 458 The Sales Journal 459 The Cash Receipts Journal 462 What Are Common Types of Receivables and How Are Credit Sales Recorded? 574 How Are Purchases, Cash Payments, and Other Transactions Recorded in a Manual Accounting Information System? 466 The Purchases Journal 466 The Cash Payments Journal 468 The General Journal 471 Entry-Level Software 473 Enterprise Resource Planning (ERP) Systems QuickBooks® 473 Recording and Writing Off Uncollectible Accounts—Direct Write-Off Method 579 Recovery of Accounts Previously Written Off—Direct Write-Off Method 580 Limitations of the Direct Write-Off Method 580 473 478 ■ Assess Your Progress 484 How Are Uncollectibles Accounted for When Using the Allowance Method? 581 ■ Critical Thinking 510 Comprehensive Problem for Chapters 1–7 513 Recording Bad Debts Expense—Allowance Method 581 Writing Off Uncollectible Accounts—Allowance Method 582 Recovery of Accounts Previously Written Off—Allowance Method 583 Estimating and Recording Bad Debts Expense—Allowance Method 584 Comparison of Accounting for Uncollectibles 589 Chapter Internal Control and Cash 516 How Are Notes Receivable Accounted For? What Is Internal Control and How Can It Be Used to Protect a Company’s Assets? 518 Internal Control and the Sarbanes-Oxley Act 518 The Components of Internal Control 519 Internal Control Procedures 520 The Limitations of Internal Control—Costs and Benefits 523 What Are the Internal Control Procedures With Respect to Cast Receipts? 524 Cash Receipts Over the Counter Cash Receipts by Mail 524 524 What Are the Internal Control Procedures With Respect to Cash Payments? 525 How Can a Petty Cash Fund Be Used for Internal Control Purposes? 528 541 ■ Critical Thinking Contents 568 550 ■ Review 600 ■ Assess Your Progress 607 627 10 Land and Land Improvements 635 Buildings 636 Machinery and Equipment 636 Furniture and Fixtures 637 Lump-Sum Purchase 637 Capital and Revenue Expenditures 638 What Is Depreciation and How Is It Computed? 538 How Can the Cash Ratio Be Used to Evaluate Business Performance? 539 ■ Assess Your Progress Acid-Test (or Quick) Ratio 597 Accounts Receivable Turnover Ratio 598 Days’ Sales in Receivables 598 How Does a Business Measure the Cost of a Plant Asset? How Can the Bank Account Be Used as a Control Device? 532 ■ Review How Do We Use the Acid-Test Ratio, Accounts Receivable Turnover Ratio, and Days’ Sales in Receivables to Evaluate Business Performance? 596 Chapter plant Assets, Natural resources, and Intangibles 632 531 Signature Card 532 Deposit Ticket 532 Check 532 Bank Statement 533 Electronic Funds Transfer 534 Bank Reconciliation 534 Examining a Bank Reconciliation 537 Journalizing Transactions From the Bank Reconciliation 591 Indentifying Maturity Date 592 Computing Interest on a Note 593 Accruing Interest Revenue and Recording Honored Notes Receivable 593 Recording Dishonored Notes Receivable 596 ■ Critical Thinking Controls Over Payment by Check 525 Setting Up the Petty Cash Fund 528 Replenishing the Petty Cash Fund 529 Changing the Amount of the Petty Cash Fund Types of Receivables 574 Exercising Internal Control Over Receivables 575 Recording Sales on Credit 575 Recording Credit Card and Debit Card Sales 576 Factoring and Pledging Receivables 578 How Are Uncollectibles Accounted for When Using the Direct Write-Off Method? 579 How Are Transactions Recorded in a Computerized Accounting Information System? 473 ■ Review Chapter receivables 572 Factors in Computing Depreciation 640 Depreciation Methods 641 Partial-Year Depreciation 647 Changing Estimates of a Depreciable Asset Reporting Plant Assets 648 647 How Are Disposals of Plant Assets Recorded? Discarding Plant Assets 649 Selling Plant Assets 651 640 649 634 www.downloadslide.net How Are Natural Resources Accounted For? 656 How Are Intangible Assets Accounted For? 657 How Are Partnership Profits and Losses Allocated? Accounting for Intangibles 657 Specific Intangibles 657 Reporting of Intangible Assets 660 How Do We Use the Asset Turnover Ratio to Evaluate Business Performance? 661 How Is the Admission of a Partner Accounted For? AppENdIx 10A: Exchanging Plant Assets 662 Admission by Purchasing an Existing Partner’s Interest Admission by Contributing to the Partnership 750 How Are Exchanges of Plant Assets Accounted For? 662 Exchange of Plant Assets—Gain Situation 662 Exchange of Plant Assets—Loss Situation 663 ■ Review ■ Critical Thinking 671 Sales of Assets at a Gain 755 Sales of Assets at a Loss With Capital Deficiency 759 684 11 ■ Review Chapter Current liabilities and payroll 688 Accounts Payable 690 Sales Tax Payable 691 Unearned Revenues 691 Short-Term Notes Payable 692 Current Portion of Long-Term Notes Payable ■ Critical Thinking 13 What Is a Corporation? 693 694 Gross Pay and Net (Take-Home) Pay 695 Employee Payroll Withholding Deductions 695 Payroll Register 698 Journalizing Employee Payroll 699 Employer Payroll Taxes 699 Internal Control Over Payroll 701 Cash Dividends 809 Stock Dividends 812 Stock Splits 816 Cash Dividends, Stock Dividends, and Stock Splits Compared 817 705 706 710 ■ Critical Thinking 717 730 12 818 Treasury Stock Basics 818 Purchase of Treasury Stock 818 Sale of Treasury Stock 819 Retirement of Stock 822 Statement of Retained Earnings 823 Statement of Stockholders’ Equity 824 What Are the Characteristics and Types of Partnerships? Partnership Characteristics 736 Types of Partnerships 738 Other Forms of Business 739 The Start-up of a Partnership 741 Partnership Financial Statements 742 How Is Treasury Stock Accounted For? How Is Equity Reported for a Corporation? 823 Chapter partnerships 734 How Are Partnerships Organized? 807 How Are Dividends and Stock Splits Accounted For? 809 How Do We Use the Times-Interest-Earned Ratio to Evaluate Business Performance? 708 ■ Assess Your Progress 804 Issuing Common Stock at Par Value 804 Issuing Common Stock at Premium 805 Issuing Common Stock at a Discount 806 Issuing No-Par Common Stock 806 Issuing Stated Value Common Stock 807 Issuing Common Stock for Assets Other Than Cash Issuing Preferred Stock 808 703 How Are Contingent Liabilities Accounted For? 800 Characteristics of Corporations 800 Stockholders’ Equity Basics 801 How Is the Issuance of Stock Accounted For? How Are Current Liabilities That Must Be Estimated Accounted For? 702 Remote Contingent Liability 706 Reasonably Possible Contingent Liability Probable Contingent Liability 706 771 792 Chapter Corporations 798 How Do Companies Account for and Record Payroll? Bonus Plans 702 Vacation, Health, and Pension Benefits Warranties 703 763 ■ Assess Your Progress How Are Current Liabilities of Known Amounts Accounted For? 690 ■ Review 749 749 How Is the Withdrawal of a Partner Accounted For? 753 How Is the Liquidation of a Partnership Accounted For? 755 665 ■ Assess Your Progress 742 Allocation Based on a Stated Ratio 743 Allocation Based on Capital Balances 744 Allocation Based on Services, Capital Balances, and Stated Ratios 744 Partner Withdrawal of Cash and Other Assets 747 Statement of Partners’ Equity 748 741 736 How Do We Use Stockholders’ Equity Ratios to Evaluate Business Performance? 825 Earnings per Share 825 Price/Earnings Ratio 826 Rate of Return on Common Stock ■ Review 826 828 ■ Assess Your Progress ■ Critical Thinking 836 855 Contents www.downloadslide.net Corporations 847 E13-34 Computing rate of return on common stockholders’ equity Learning Objective Lofty Exploration Company reported these figures for 2014 and 2013: 2014 2013 $ 17,900,000 $ 19,100,000 Dec 31, 2014 Dec 31, 2013 $ 328,000,000 $ 318,000,000 Preferred Stock 2,400,000 2,400,000 Common Stock 178,000,000 171,000,000 Income statement—partial: Net Income Balance sheet—partial: Total Assets Retained Earnings Total Stockholders’ Equity 4,000,000 3,000,000 $ 184,400,000 $ 176,400,000 Compute rate of return on common stockholders’ equity for 2014 assuming no dividends were paid to preferred stockholders > problems Group A P13-35A Organizing a corporation and issuing stock Jay and Mike are opening a paint store There are no competing paint stores in the area They must decide how to organize the business They anticipate profits of $300,000 the first year, with the ability to sell franchises in the future Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow They feel the corporate form of operation will be best for the long term They seek your advice CHAPTER 13 Requirements What is the main advantage they gain by selecting a corporate form of business now? Would you recommend they initially issue preferred or common stock? Why? If they decide to issue $2 par common stock and anticipate an initial market price of $30 per share, how many shares will they need to issue to raise $1,800,000? Learning Objectives 1, www.downloadslide.net 848 chapter 13 Learning Objectives 1, 2, Common dividends $530,000 P13-36A Identifying sources of equity, stock issuance, and dividends Terrific Comfort Specialists, Inc reported the following stockholders’ equity on its balance sheet at June 30, 2014: Stockholders’ Equity Paid-In Capital: Preferred Stock—5%, ? Par Value; 650,000 shares authorized, 280,000 shares issued and outstanding $ 1,400,000 Common Stock—$1 Par Value; 5,000,000 shares authorized, 1,350,000 shares issued and outstanding 1,350,000 Paid-In Capital in Excess of Par—Common 2,400,000 Total Paid-In Capital 5,150,000 Retained Earnings Total Stockholders’ Equity 12,300,000 $ 17,450,000 Requirements Identify the different classes of stock that Terrific has outstanding What is the par value per share of Terrific’s preferred stock? Make two summary journal entries to record issuance of all the Terrific stock for cash Explanations are not required No preferred dividends are in arrears Journalize the declaration of a $600,000 dividend at June 30, 2014, and the payment of the dividend on July 20, 2014 Use separate Dividends Payable accounts for preferred and common stock An explanation is not required Learning Objectives 2, Total Stockholders’ Equity $504,000 P13-37A Journalizing stock issuance and cash dividends and preparing the stockholders’ equity section of the balance sheet B-Mobile Wireless needed additional capital to expand, so the business incorporated The charter from the state of Georgia authorizes B-Mobile to issue 70,000 shares of 5%, $100 par value cumulative preferred stock, and 110,000 shares of $2 par value common stock During the first month, B-Mobile completed the following transactions: CHAPTER 13 Oct Issued 19,000 shares of common stock for a building with a market value of $250,000 Issued 800 shares of preferred stock for $110 per share Issued 15,000 shares of common stock for cash of $90,000 10 Declared a $16,000 cash dividend for stockholders of record on Oct 20 Use a separate Dividends Payable account for preferred and common stock 25 Paid the cash dividend Requirements Record the transactions in the general journal Prepare the stockholders’ equity section of B-Mobile’s balance sheet at October 31, 2014 Assume B-Mobile’s net income for the month was $92,000 www.downloadslide.net Corporations 849 P13-38A Journalizing dividends and treasury stock transactions and preparing the stockholders’ equity section of the balance sheet Summerborn Manufacturing, Co completed the following transactions during 2014: Jan 16 Declared a cash dividend on the 5%, $100 par noncumulative preferred stock (900 shares outstanding) Declared a $0.30 per share dividend on the 80,000 shares of $6 par value common stock outstanding The date of record is January 31, and the payment date is February 15 Feb 15 Paid the cash dividends Jun 10 Split common stock 2-for-1 Jul 30 Declared a 50% stock dividend on the common stock The market value of the common stock was $9 per share Aug 15 Distributed the stock dividend Oct 26 Purchased 1,000 shares of treasury stock at $13 per share Nov Sold 500 shares of treasury stock for $15 per share 30 Learning Objectives 3, Nov Treasury Stock $6,500 CR Sold 300 shares of treasury stock for $8 per share Requirements Record the transactions in Summerborn’s general journal Prepare the Summerborn’s stockholders’ equity section of the balance sheet as of December 31, 2014 Assume that Summerborn was authorized to issue 2,000 shares of preferred stock and 400,000 shares of common stock Both preferred stock and common stock were issued at par The ending balance of retained earnings as of December 31, 2014, is $2,050,000 P13-39A Journalizing dividend and treasury stock transactions, preparing a statement of retained earnings, and preparing stockholders’ equity The balance sheet of Goldstein Management Consulting, Inc at December 31, 2013, reported the following stockholders’ equity: Learning Objectives 3, 4, Retained Earnings Dec 31 $225,905 Stockholders’ Equity Paid-In Capital: Common Stock—$10 Par Value; 200,000 shares authorized, 15,000 shares issued and outstanding $ 150,000 310,000 Total Paid-In Capital 460,000 Retained Earnings Total Stockholders’ Equity 162,000 $ 622,000 CHAPTER 13 Paid-In Capital in Excess of Par—Common www.downloadslide.net 850 chapter 13 During 2014, Goldstein completed the following selected transactions: Feb 15 Declared a 5% stock dividend on common stock The market value of Goldstein’s stock was $21 per share Distributed the stock dividend Jul 29 Purchased 2,300 shares of treasury stock at $21 per share Nov 27 Declared a $0.10 per share cash dividend on the common stock outstanding Requirements Record the transactions in the general journal Prepare a retained earnings statement for the year ended December 31, 2014 Assume Goldstein’s net income for the year was $81,000 Prepare the stockholders’ equity section of the balance sheet at December 31, 2014 Learning Objective P13-40A Computing earnings per share, price/earnings ratio, and rate of return on common stockholders’ equity Castillo Company reported these figures for 2014 and 2013: 2014 2013 $ 16,600 $ 20,000 Dec 31, 2014 Dec 31, 2013 $ 240,000 $ 255,000 $ 80,000 $ 80,000 Common Stock—$1 Par Value; 50,000 shares authorized, 30,000 shares issued and outstanding 30,000 30,000 Paid-In Capital in Excess of Par—Common 10,000 10,000 60,000 45,000 $ 180,000 $ 165,000 Income statement—partial: Net Income Balance sheet—partial: Total Assets Paid-In Capital: Preferred Stock—2%, $10 Par Value; 20,000 shares authorized, 8,000 shares issued and outstanding Retained Earnings CHAPTER 13 Total Stockholders’ Equity Requirements Compute Castillo Company’s earnings per share for 2014 Assume the company paid the minimum preferred dividend during 2014 Compute Castillo Company’s price/earnings ratio for 2014 Assume the company’s market price per share of common stock is $6 Compute Castillo Company’s rate of return on common stockholders’ equity for 2014 Assume the company paid the minimum preferred dividend during 2014 www.downloadslide.net Corporations 851 > problems Group B P13-41B Organizing a corporation and issuing stock Ben and Eric are opening a comic store There are no competing comic stores in the area They must decide how to organize the business They anticipate profits of $350,000 the first year, with the ability to sell franchises in the future Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow They feel the corporate form of operation will be best for the long term They seek your advice Learning Objectives 1, Requirements What is the main advantage they gain by selecting a corporate form of business now? Would you recommend they initially issue preferred or common stock? Why? If they decide to issue $1 par common stock and anticipate an initial market price of $80 per share, how many shares will they need to issue to raise $4,000,000? P13-42B Identifying sources of equity, stock issuance, and dividends Tree Comfort Specialists, Inc reported the following stockholders’ equity on its balance sheet at June 30, 2014: Learning Objectives 1, 2, Common Stock Dividend $228,000 Stockholders’ Equity Paid-In Capital: Preferred Stock—6%, ? Par Value; 675,000 shares authorized, 240,000 shares issued and outstanding $ 1,200,000 Common Stock—$1 Par Value; 9,000,000 shares authorized, 1,330,000 shares issued and outstanding 1,330,000 Paid-In Capital in Excess of Par—Common 2,600,000 Total Paid-In Capital 5,130,000 Retained Earnings Total Stockholders’ Equity 11,900,000 $ 17,030,000 CHAPTER 13 Requirements Identify the different classes of stock that Tree has outstanding What is the par value per share of Tree’s preferred stock? Make two summary journal entries to record issuance of all the Tree stock for cash Explanations are not required No preferred dividends are in arrears Journalize the declaration of a $300,000 dividend at June 30, 2014, and the payment of the dividend on July 20, 2014 Use separate Dividends Payable accounts for preferred and common stock An explanation is not required www.downloadslide.net 852 chapter 13 Learning Objectives 2, Total Stockholders’ equity $378,000 P13-43B Journalizing stock issuance and cash dividends and preparing the stockholders’ equity section of the balance sheet Cell Wireless needed additional capital to expand, so the business incorporated The charter from the state of Georgia authorizes Cell to issue 40,000 shares of 10%, $50 par value cumulative preferred stock, and 100,000 shares of $1 par value common stock During the first month, Cell completed the following transactions: Oct Issued 21,000 shares of common stock for a building with a market value of $240,000 Issued 600 shares of preferred stock for $80 per share Issued 11,000 shares of common stock for cash of $20,000 10 Declared a $12,000 cash dividend for stockholders of record on Oct 20 Use a separate Dividends Payable account for preferred and common stock 25 Paid the cash dividend Requirements Record the transactions in the general journal Prepare the stockholders’ equity section of Cell’s balance sheet at October 31, 2014 Assume Cell’s net income for the month was $82,000 Learning Objectives 3, nov Treasury Stock $15,000 CR P13-44B Journalizing dividends and treasury stock transactions and preparing the stockholders’ equity section of the balance sheet Dearborn Manufacturing, Co completed the following transactions during 2014: Jan 16 Declared a cash dividend on the 6%, $95 par noncumulative preferred stock (1,000 shares outstanding) Declared a $0.55 per share dividend on the 90,000 shares of $10 par value common stock outstanding The date of record is January 31, and the payment date is February 15 Feb 15 Paid the cash dividends Jun 10 Split common stock 2-for-1 Jul 30 Declared a 30% stock dividend on the common stock The market value of the common stock was $12 per share Aug 15 distributed the stock dividend oct 26 Purchased 3,000 shares of treasury stock at $10 per share nov Sold 1,500 shares of treasury stock for $11 per share CHAPTER 13 30 Sold 700 shares of treasury stock for $7 per share Requirements Record the transactions in Dearborn’s general journal Prepare the Dearborn’s stockholders’ equity section of the balance sheet as of December 31, 2014 Assume that Dearborn was authorized to issue 4,000 shares of preferred stock and 400,000 shares of common stock Both preferred stock and common stock were issued at par The ending balance of retained earnings as of December 31, 2014, is $2,020,000 www.downloadslide.net Corporations 853 P13-45B Journalizing dividend and treasury stock transactions, preparing a statement of retained earnings, and preparing stockholders’ equity The balance sheet of MacMillan Management Consulting, Inc at December 31, 2013, reported the following stockholders’ equity: Learning Objectives 3, 4, Retained Earnings Dec 31 $156,640 Stockholders’ Equity Paid-In Capital: Common Stock—$12 Par Value; 100,000 shares authorized, 20,000 shares issued and outstanding $ 240,000 Paid-In Capital in Excess of Par—Common 330,000 Total Paid-In Capital 570,000 Retained Earnings Total Stockholders’ Equity 159,000 $ 729,000 During 2014, MacMillan completed the following selected transactions: Feb 15 Declared a 15% stock dividend on common stock The market value of MacMillan’s stock was $26 per share Distributed the stock dividend Jul 29 Purchased 1,800 shares of treasury stock at $26 per share Nov 27 Declared a $0.30 per share cash dividend on the common stock outstanding Requirements Record the transactions in the general journal Prepare a retained earnings statement for the year ended December 31, 2014 Assume MacMillan’s net income for the year was $82,000 Prepare the stockholders’ equity section of the balance sheet at December 31, 2014 CHAPTER 13 www.downloadslide.net 854 chapter 13 Learning Objective P13-46B Computing earnings per share, price/earnings ratio, and rate of return on common stockholders’ equity Tucker Company reported these figures for 2014 and 2013: 2014 2013 $ 20,600 $ 30,000 Dec 31, 2014 Dec 31, 2013 $ 207,640 $ 208,000 Preferred Stock—2%, $8 Par Value; 18,000 shares authorized, 6,000 shares issued and outstanding $ 48,000 $ 48,000 Common Stock—$1 Par Value; 40,000 shares authorized, 25,000 shares issued and outstanding 25,000 25,000 Income statement—partial: Net Income Balance sheet—partial: Total Assets Paid-In Capital: Paid-In Capital in Excess of Par—Common Retained Earnings Total Stockholders’ Equity 15,000 15,000 59,640 40,000 $ 147,640 $ 128,000 Requirements Compute Tucker Company’s earnings per share for 2014 Assume the company paid the minimum preferred dividend during 2014 Compute Tucker Company’s price/earnings ratio for 2014 Assume the company’s market price per share of common stock is $6 Compute Tucker Company’s rate of return on common stockholders’ equity for 2014 Assume the company paid the minimum preferred dividend during 2014 CHAPTER 13 > Continuing problem P13-47 Sources of equity and journalizing stock issuance This problem continues the Davis Consulting situation from Problem P11-35 of Chapter 11 Assume that Davis Consulting is now a corporation instead of a sole proprietorship and has total stockholders’ equity of $18,165 which includes 100 shares of common stock and shares of preferred stock issued and outstanding Davis decides to raise additional capital for a planned business expansion by issuing 20,000 additional $1 par value common shares for $40,000 and by issuing 3,000, 6%, $80 par preferred shares at $100 per share Journalize the entry related to the issuances of both common and preferred shares www.downloadslide.net Corporations 855 CrITICAl THINKING > decision Cases Decision Case 13-1 Lena Kay and Kathy Lauder have a patent on a new line of cosmetics They need additional capital to market the products, and they plan to incorporate the business They are considering the capital structure for the corporation Their primary goal is to raise as much capital as possible without giving up control of the business Kay and Lauder plan to invest the patent (an intangible asset, which will be transferred to the company’s ownership in lieu of cash) in the company and receive 100,000 shares of the corporation’s common stock They have been offered $100,000 for the patent, which provides an indication of the fair market value of the patent The corporation’s plans for a charter include an authorization to issue 5,000 shares of preferred stock and 500,000 shares of $1 par common stock Kay and Lauder are uncertain about the most desirable features for the preferred stock Prior to incorporating, they are discussing their plans with two investment groups The corporation can obtain capital from outside investors under either of the following plans: Plan Group will invest $150,000 to acquire 1,500 shares of 6%, $100 par nonvoting, noncumulative preferred stock Plan Group will invest $100,000 to acquire 1,000 shares of $5, no-par preferred stock and $70,000 to acquire 70,000 shares of common stock Each preferred share receives 50 votes on matters that come before the common stockholders CHAPTER 13 Requirements Assume that the corporation has been chartered (approved) by the state Journalize the issuance of common stock to Kay and Lauder Explanations are not required Journalize the issuance of stock to the outsiders under both plans Explanations are not required Net income for the first year is $180,000 and total dividends are $30,000 Prepare the stockholders’ equity section of the corporation’s balance sheet under both plans Recommend one of the plans to Kay and Lauder Give your reasons www.downloadslide.net 856 chapter 13 Decision Case 13-2 Valley Mills Construction, Inc had the following stockholders’ equity on June 30, 2015: Common Stock—No Par Value; 200,000 shares authorized, 100,000 shares issued and outstanding Retained Earnings Total Stockholders’ Equity $ 250,000 190,000 $ 440,000 In the past, Valley Mills has paid an annual cash dividend of $0.25 per share Despite the large retained earnings balance, the board of directors wished to conserve cash for expansion The board delayed the payment of cash dividends and in July distributed a 10% stock dividend During August, the company’s cash position improved The board then declared and paid a cash dividend of $0.25 per share in September Suppose you owned 1,000 shares of Valley Mills common stock, acquired three years ago, prior to the 10% stock dividend The market price of the stock was $22 per share before any of these dividends Requirements What amount of cash dividends did you receive last year—before the stock dividend? What amount of cash dividends will you receive after the stock dividend? How does the stock dividend affect your proportionate ownership in Valley Mills Construction? Explain Immediately after the stock dividend was distributed, the market value of Valley Mills stock decreased from $22 per share to $20 per share Does this decrease represent a loss to you? Explain CHAPTER 13 > Ethical Issue 13-1 Note: This case is based on an actual situation Stan Sewell paid $50,000 for a franchise that entitled him to market software programs in the countries of the European Union Sewell intended to sell individual franchises for the major language groups of Western Europe—German, French, English, Spanish, and Italian Naturally, investors considering buying a franchise from Sewell asked to see the financial statements of his business Believing the value of the franchise to be $500,000, Sewell sought to capitalize his own franchise at $500,000 The law firm of St Charles & LaDue helped Sewell form a corporation chartered to issue 500,000 shares of common stock with par value of $1 per share Attorneys suggested the following chain of transactions: a Sewell’s cousin, Bob, borrows $500,000 from a bank and purchases the franchise from Sewell b Sewell pays the corporation $500,000 to acquire all its stock c The corporation buys the franchise from Cousin Bob d Cousin Bob repays the $500,000 loan to the bank In the final analysis, Cousin Bob is debt-free and out of the picture Sewell owns all the corporation’s stock, and the corporation owns the franchise The corporation’s balance sheet lists a franchise acquired at a cost of $500,000 This balance sheet is Sewell’s most valuable marketing tool www.downloadslide.net Corporations 857 Requirements What is unethical about this situation? Who can be harmed? How can they be harmed? What role does accounting play? > Fraud Case 13-1 Elaine Jackson just had a visit from her cousin Phil He wanted to apologize Last year he had regaled her with stories about a small company he had discovered that had just invented a high-tech converter to allow cars to run on water It was still all hush-hush The stock was trading for just one penny per share He had put all his savings into it, and he wanted to share the tip with her She purchased stock using $8,000 that she had been saving for two years Later, when her money was long gone, she realized she had been the victim of a classic “pump and dump” scheme whereby unscrupulous promoters bought up “penny stocks,” started a rumor about big profits, and when enough suckers bought in and the stock price shot up, the promoters bailed out and made a profit Phil had just gotten out of prison, and he felt terrible about what he had done Elaine had learned an expensive lesson Requirements Why were Phil’s actions considered to be fraudulent? Does the current market price of a share of stock give any indication of the value or success of a company? What sort of information should an investor look for before deciding to invest in stock of a company? > Financial statement Case 13-1 Use Starbucks Corporation’s financial statements to answer the following questions Visit www.pearsonglobaleditions.com/Horngren to view a link to Starbucks Corporation’s Fiscal 2011 Annual Report CHAPTER 13 Requirements Review the stockholders’ equity section of the balance sheet Did Starbucks have any preferred stock at October 2, 2011? Now review Note 11: Shareholders’ Equity Is Starbucks authorized to issue preferred stock? If so, how much? How much of Starbucks Corporation’s common stock was outstanding at October 2, 2011? How can you tell? Examine Starbucks Corporation’s consolidated statements of cash flows Did Starbucks pay any cash dividends during the year ending October 2, 2011? If so, how much? Show how Starbucks Corporation computed basic earnings per share of $1.66 for 2011 (Ignore diluted earnings per share.) www.downloadslide.net 858 chapter 13 > Team project 13-1 Obtain the annual reports (or annual report data) of five well-known companies You can get the reports either from the companies’ websites, from your college library, or by mailing a request directly to the company (allow two weeks for delivery) Or you can go online and search the SEC EDGAR database (www.sec.gov/edgar.shtml), which includes the financial reports of most well-known companies Requirements After selecting five companies, examine their income statements to search for the following items: a Net income or net loss b Earnings per share data Study the companies’ balance sheets to answer the following questions: a What classes of stock has each company issued? b Which item carries a larger balance—the Common Stock account or Paid-In Capital in Excess of Par (also labeled Additional Paid-In Capital)? c What percentage of each company’s total stockholders’ equity is made up of retained earnings? d Do any of the companies have treasury stock? If so, how many shares and how much is the cost? Examine each company’s statement of stockholders’ equity for evidence of the following: a Cash dividends b Stock dividends c Treasury stock purchases and sales As directed by your instructor, either write a report or present your findings to your class You may not be able to understand everything you find, but neither can the Wall Street analysts! You will be amazed at how much you have learned > Communication Activity 13-1 CHAPTER 13 In 75 words or fewer, explain the difference between stock dividends and stock splits Include the effect on stock values MyAccountingLab For a wealth of online resources, including exercises, problems, media, and immediate tutorial help, please visit MyAccountingLab www.downloadslide.net Corporations 859 Try It! Solutions e c a b d Date Accounts and Explanation Cash ($8 per share × 10,000 shares) Debit Credit 80,000 Common Stock—$1 Par Value ($1 per share × 10,000 shares) 10,000 Paid-In Capital in Excess of Par—Common ($7 per share × 10,000 shares) 70,000 Issued common stock at a premium Date Aug Accounts and Explanation Retained Earnings ($1.50 per share × 20,000 shares) Debit Credit 30,000 Dividends Payable—Common 30,000 Declared a cash dividend 31 Dividends Payable—Common 30,000 Cash 30,000 Payment of cash dividend Date Jan Accounts and Explanation Treasury Stock—Common ($8 per share × 2,000 shares) Debit Credit 16,000 Cash 16,000 Purchased treasury stock 30 Cash ($10 per share × 1,200 shares) 12,000 9,600 2,400 Sold treasury stock above cost CHAPTER 13 Treasury Stock—Common ($8 per share × 1,200 shares) Paid-In Capital From Treasury Stock Transactions ($2 per share × 1,200 shares) www.downloadslide.net 860 chapter 13 SJOSTROM, INC Statement of Retained Earnings Year Ended December 31, 2014 Retained Earnings, January 1, 2014 $ 300,000 Net income for the year 200,000 Dividends declared (140,000) 500,000 Retained Earnings, December 31, 2014 $ 360,000 CHAPTER 13 10 Earnings per share = (Net income – Preferred dividends) / Weighted average number of common shares outstanding = ($80,000 – $2,000) / [(10,000 shares + 14,000 shares) / 2] = $6.50 / share 11 Price/earnings ratio = Market price per share of common stock / Earnings per share = $40 per share / $6.50 per share = 6.15 12 Rate of return on stockholders’ equity = (Net income – Preferred dividends) / Average common stockholders’ equity = ($80,000 – $2,000) / [{($340,000 – $20,000) + ($310,000 – $20,000)} / 2] = 0.256 = 25.6% www.downloadslide.net Corporations 861 > Quick Check Answers b a c c c b d a b 10 c CHAPTER 13 ... the British Library 10 15 14 13 12 11 ISBN 10 : 1- 292-056 51- 7 ISBN 13 : 978 -1- 292-056 51- 7 (Print) ISBN 13 : 978 -1- 292-07473-3 (PDF) Typeset in Adobe Garamond Pro Regular, 11 /13 , Integra Printed... Companies Differ? 11 09 Service Companies 11 09 Merchandising Companies 11 09 Manufacturing Companies 11 10 How Are Costs Classified? 11 12 Direct and Indirect Costs 11 12 Product Costs 11 13 Prime and Conversion... Accounts 11 18 Calculating Unit Product Cost 11 19 How Is Managerial Accounting Used in Service and Merchandising Companies? 11 21 Calculating Cost per Service 11 21 Calculating Cost per Item 11 21 ■ Review