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ACC201 Week 4 P7-26 P7-27 P7-28 P8-18 P8-23

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Problems: 7-26, 7-27, 7-28.
Problems: 8-18, 8-23.

ACC201 Week 4 P7-26 P7-27 P7-28 P8-18 P8-23

Problem 7- 26 Accounting for short- term debt and sales tax— two accounting cycles.


The following transactions apply to Artesia Co. for 2012, its first year of operations.
1. Received $40,000 cash from the issue of a short-term note with a 5 percent interest rate and
a one-year maturity. The note was issued on April 1, 2012
2. Received $120,000 cash plus applicable sales tax from performing services. The services are
subject to a sales tax rate of 6 percent.
3. Paid $72,000 cash for other operating expenses during the year.
4. Paid the sales tax due on $100,000 of the service revenue for the year. Sales tax on the
balance of the revenue is not due until 2013.
5. Recognized the accrued interest at December 31, 2012.
The following transactions apply to Artesia Co. for 2013.
1. Paid the balance of the sales tax due for 2012.
2. Received $145,000 cash plus applicable sales tax from performing services. The services are
subject to a sales tax rate of 6 percent.
3. Repaid the principal of the note and applicable interest on April 1, 2013.
4. Paid $85,000 of other operating expenses during the year.
5. Paid the sales tax due on $120,000 of the service revenue. The sales tax on the balance of the
revenue is not due until 2014.

Required
a. Organize the transaction data in accounts under an accounting equation.
b. Prepare an income statement, a statement of changes in stockholders’ equity, a balance
sheet, and a statement of cash fl ow for 2012 and 2013.

Problem 7- 27 Effect of accrued interest on financial statements

Norman Co. borrowed $15,000 from the local bank on April 1, 2012, when the company was
started. The note had an 8 percent annual interest rate and a one-year term to maturity. Norman
Co. recognized $42,000 of revenue on account in 2012 and $56,000 of revenue on account in
2013. Cash collections from accounts receivable were $38,000 in 2012 and $58,000 in 2013.
Norman Co. paid $26,000 of salaries expense in 2012 and $32,000 of salaries expense in 2013.
Norman Co. paid the loan and interest at the maturity date.

Required
a. Organize the information in accounts under an accounting equation.
b. What amount of net cash fl ow from operating activities would be reported on the 2012 cash
fl ow statement?
c. What amount of interest expense would be reported on the 2012 income statement?
d. What amount of total liabilities would be reported on the December 31, 2012, balance sheet?
e. What amount of retained earnings would be reported on the December 31, 2012, balance
sheet?
f. What amount of cash flow from financing activities would be reported on the 2012 statement
of cash flows?
g. What amount of interest expense would be reported on the 2013 income statement?
h. What amount of cash flows from operating activities would be reported on the 2013 cash
fl ow statement?
i. What amount of assets would be reported on the December 31, 2013, balance sheet?

Problem 7- 28 Current liabilities

The following selected transactions were taken from the books of Caledonia Company for 2012.

The following selected transactions were taken from the books of Caledonia Company for 2012.
1. On March 1, 2012, borrowed $50,000 cash from the local bank. The note had a 6 percent
interest rate and was due on September 1, 2012.
2. Cash sales for the year amounted to $225,000 plus sales tax at the rate of 7 percent.
3. Caledonia provides a 90-day warranty on the merchandise sold. The warranty expense is
estimated to be 2 percent of sales.
4. Paid the sales tax to the state sales tax agency on $190,000 of the sales.
5. Paid the note due on September 1 and the related interest.
6. On October 1, 2012, borrowed $40,000 cash from the local bank. The note had a 7 percent
interest rate and a one-year term to maturity.
7. Paid $3,600 in warranty repairs.
8. A customer has filed a lawsuit against Caledonia for $100,000 for breach of contract. The
company attorney does not believe the suit has merit.

Required
a. Answer the following questions:
(1) What amount of cash did Caledonia pay for interest during the year?
(2) What amount of interest expense is reported on Caledonia’s income statement for the year?
(3) What is the amount of warranty expense for the year?
b. Prepare the current liabilities section of the balance sheet at December 31, 2012.
c. Show the effect of these transactions on the financial statements using a horizontal statements
model like the one shown here. Use a 1 to indicate increase, a 2 for decrease, and NA
for not affected. In the Cash Flow column, indicate whether the item is an operating activity
(OA), investing activity (IA), or financing activity (FA). The first transaction is recorded as
an example.

Problem 8-18 Recording and reporting stock transactions and cash dividends across two accounting cycles


Davis Corporation was authorized to issue 100,000 shares of $10 par common stock and 50,000
shares of $50 par, 6 percent, cumulative preferred stock. Davis Corporation completed the following
transactions during its first two years of operation.

2012
Jan. 2 Issued 5,000 shares of $10 par common stock for $28 per share.
15 Issued 1,000 shares of $50 par preferred stock for $70 per share
Feb. 14 Issued 15,000 shares of $10 par common stock for $30 per share.
Dec. 31 During the year, earned $170,000 of cash service revenue and paid $110,000 of cash
operating expenses.
31 Declared the cash dividend on outstanding shares of preferred stock for 2012. The
dividend will be paid on January 31 to stockholders of record on January 15, 2013.

2013
Jan. 31 Paid the cash dividend declared on December 31, 2012.
Mar. 1 Issued 2,000 shares of $50 par preferred stock for $58 per share.
June 1 Purchased 500 shares of common stock as treasury stock at $43 per share.
Dec. 31 During the year, earned $210,000 of cash service revenue and paid $175,000 of cash
operating expenses.
31 Declared the dividend on the preferred stock and a $0.60 per share dividend on the
common stock.

Required
a. Organize the transaction data in accounts under an accounting equation.
b. Prepare the stockholders’ equity section of the balance sheet at December 31, 2012.
c. Prepare the balance sheet at December 31, 2013.

Problem 8-23 Different forms of business organization

Shawn Bates was working to establish a business enterprise with four of his wealthy friends. Each
of the five individuals would receive a 20 percent ownership interest in the company. A primary
goal of establishing the enterprise was to minimize the amount of income taxes paid. Assume
that the five investors are taxed at the rate of 15% on dividend income and 30% on all other income
and that the corporate tax rate is 30 percent. Also assume that the new company is expected
to earn $400,000 of cash income before taxes during its first year of operation. All
earnings are expected to be immediately distributed to the owners.

Required
Calculate the amount of after-tax cash flow available to each investor if the business is established
as a partnership versus a corporation. Write a memo explaining the advantages and disadvantages
of these two forms of business organization. Explain why a limited liability company
may be a better choice than either a partnership or a corporation.

Chapter 7 
Complete the following problems from Chapter 7 and submit to your instructor. These problems will be graded for accuracy. Problems: 7-26, 7-27, 7-28.

Chapters 8
Complete the following problems from Chapter 8 and submit to your instructor. These problems will be graded for accuracy. Problems: 8-18, 8-23.

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