CHAPTER 3

THE ACCOUNTING INFORMATION SYSTEM

AND MEASUREMENT ISSUES

ASSIGNMENT CLASSIFICATION TABLE

Brief
Topics Exercises Exercises Problems

1. Transaction identification, accounting equation 1, 2, 3 1 12

and recording process

2. Trial balance and financial statements 2, 3 ,7 4, 5, 15

3. Adjusting entries and error corrections 4, 5, 6, 7, 8 3, 4, 5, 6, 7, 2, 3, 4, 7, 8,

8, 9, 10 9, 10, 11, 12

4. Comprehensive accounting cycle 1, 6

5. Inventory and cost of goods sold 9 12 9, 10

6. Alternative treatment & adjustments 4, 5 4

7. Closing 10 9, 11 5, 8

8. Reversing entries 8 8, 9, 10 9, 10

9. Ownership structure effect on financial 6, 14

statements
 ASSIGNMENT CLASSIFICATION TABLE (CONTINUED)

Topics Brief Exercises Exercises Problems

10. Valuation techniques for financial statement 11, 12, 13, 14, 15, 13, 14, 15, 13
elements 16, 17, 18, 19, 20 24, 25

11. *Work sheets 2, 16, 17, 13, 14, 15

18

12. *Present value concepts 21, 22, 23, 24, 25, 19, 20, 21, 16
26, 27, 28, 29, 30, 22, 23, 24,
31, 32, 33, 34, 35 25

*This topic is dealt with in Appendix 3A or 3B in the Chapter

ASSIGNMENT CHARACTERISTICS TABLE

Level of Time
Item Description Difficulty (minutes)

E3-1 Transaction analysis–service company. Simple 15-20

E3-2 Unadjusted to adjusted trial balance. Simple 15-20
Transactions of a corporation including Moderate 20-25
E3-3
investment and dividend.
E3-4 Alternative treatment of prepayments. Moderate 20-25
E3-5 Adjusting entries. Simple 5-10
E3-6 Adjusting entries. Moderate 15-20
E3-7 Adjusting entries. Moderate 25-30
*E3-8 Prepare adjusting and reversing entries. Moderate 15-20
*E3-9 Closing and reversing entries. Simple 15-20
*E3-10 Adjusting and reversing entries. Moderate 15-20
E3-11 Closing entries. Moderate 10-15
E3-12 Find missing amounts–periodic. Moderate 20-25
E3-13 Discounted cash flow models Moderate 15-20
E3-14 Fair value principle under IFRS 13 Moderate 15-20
E3-15 Fair value estimate Moderate 10-15
*E3-16 Completing work sheet. Simple 10-15
*E3-17 Work sheet preparation. Moderate 15-20
Work sheet and statement of financial Moderate 20-25
E3-18
position presentation.
*E3-19 Unknown rate Simple 10-15
*E3-20 Evaluation of purchase options Simple 15-20
*E3-21 Analysis of alternatives Moderate 15-20
*E3-22 Computation of bond liability Moderate 15-20
*E3-23 Computation of amount of rentals Moderate 15-20
*E3-24 Expected cash flows Simple 15-20
*E3-25 Expected cash flows and present value Simple 10-15

*This topic is dealt with in Appendix 3A and 3B to the Chapter.

ASSIGNMENT CHARACTERISTICS TABLE
(CONTINUED)

Level of Time
Item Description Difficulty (minutes)
P3-1 Transactions, financial statements– Moderate 35-40
service company.
P3-2 Adjusting entries and financial Moderate 35-40
statements.
P3-3 Prepare adjusting entries. Moderate 25-30
P3-4 Financial statements, adjusting and Moderate 40-50
closing entries.
P3-5 Adjusting entries. Moderate 15-20
P3-6 Adjusting entries, adjusted trial balance Moderate 40-50
and financial statements.
P3-7 Adjusting entries. Moderate 25-30
P3-8 Adjusting and closing. Moderate 40-50
P3-9 Adjusting and reversing entries. Complex 30-35
P3-10 Adjusting and reversing entries. Moderate 30-35
P3-11 Correction of errors and trial balance. Moderate 30-35
P3-12 Alternative treatment recording Moderate 15-20
prepayments.
P3-13 Analysis of business problems
*P3-14 Prepare financial statements and closing Moderate 35-40
entries.
*P3-15 Worksheet and financial statements Moderate 40-50
P3-16 Analysis of lease vs. purchase
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 3-1

1. (a) Temporary, (b) Revenue
2. (a) Temporary, (b) Loss
3. (a) Temporary, (b) Shareholders’ equity
4. (a) Permanent, (b) Liability
5. (a) Permanent, (b) Asset
6. (a) Temporary, (b) Expense
7. (a) Permanent, (b) Shareholders’ equity
8. (a) Permanent, (b) Contra-asset
9. (a) Permanent, (b) Asset
10. (a) Permanent, (b) Shareholders’ equity
11. (a) Permanent, (b) Asset
12. (a) Temporary, (b) Gain or Loss

BRIEF EXERCISE 3-2

1. (a) Assets decrease by $200, Liabilities decrease by $200
(b) Assets decrease by $200, Liabilities decrease by $200
2. (a) Assets increase by $250, Shareholders’ equity
increases by $250
(b) Assets increase by $250, Gains increase by $250
3. (a) Assets increase by $100, Shareholders’ equity
increases by $100
(b) Assets increase by $100, Revenues increase by $100
4. (a) Assets increase by $1,000 (+$1,500-$500), Liabilities
increase by $1,000
(b) Assets increase by $1,000 (+$1,500-$500), Liabilities
increase by $1,000
5. (a) Assets increase by $150, Shareholders’ equity
increases by $150
(b) Assets increase by $150, Other Comprehensive
Income increases by $150
6. (a) Assets decrease by $2,000, Liabilities decrease by
$2,000
(b) Assets decrease by $2,000, Liabilities decrease by
$2,000
BRIEF EXERCISE 3-3

Aug. 2 Cash 12,000

Equipment 2,500
Common Shares 14,500

7 Supplies 600
Accounts Payable 600

12 Cash 1,300
Accounts Receivable 670
Service Revenue 1,970

15 Rent Expense 600

Cash 600

19 Supplies Expense 330

Supplies 330
($600 - $270)
BRIEF EXERCISE 3-4

Treat expenditure as asset:

Aug. 1 Prepaid Expenses 12,600
Cash 12,600

Dec. 31 Operating Expenses 2,625

Prepaid Expenses 2,625
($12,600 x 5/24)

Treat expenditure as expense:

Aug. 1 Operating Expenses 12,600
Cash 12,600

Dec. 31 Prepaid Expenses 9,975

Operating Expenses 9,975
($12,600 x 19/24)

BRIEF EXERCISE 3-5

Treat cash receipt as liability:

Sept. 1 Cash 12,000
Unearned Rent Revenue 12,000

Dec. 31 Unearned Rent Revenue 8,000

Rent Revenue 8,000
($12,000 x 4/6)

Treat cash receipt as revenue:

Sept. 1 Cash 12,000
Rent Revenue 12,000

Dec. 31 Rent Revenue 4,000

Unearned Rent Revenue 4,000
($12,000 x 2/6)
BRIEF EXERCISE 3-6

Dec. 31 Interest Expense 600

Interest Payable 600
(20,000 X 12% X 3/12)

June 1 Notes Payable 20,000

Interest Payable 600
Interest Expense 1,000
Cash 21,600
(20,000 x 12% x 5/12)

BRIEF EXERCISE 3-7

The formula to calculate the amount of depreciation for the

year using straight-line depreciation is:

(Cost less residual value) divided by useful life X pro-rated

period used in the fiscal year. Note that the monthly salary of
the groundskeeper and the estimated annual fuel cost are
irrelevant for the calculation of depreciation as they are
expenses and not considered part of the asset.

= Cost of mower and accessories - zero X 6

Useful life 12

= $ 9,600 X 6
8 12
= $ 600
BRIEF EXERCISE 3-8

(a) Salaries and Wages Payable 2,700

Salaries and Wages Expense 2,700

(b) Salaries and Wages Expense 5,000

Cash 5,000

(c) Salaries and Wages Payable 2,700

Salaries and Wages Expense 2,300
Cash 5,000

BRIEF EXERCISE 3-9

Beginning inventory $ 76,000

Purchases $486,000
Less: Purchase returns and
allowances $5,800
Purchase discounts 5,000 10,800
Net purchases 475,200
Add: Freight-in 16,200
Cost of goods purchased 491,400
Cost of goods available for sale 567,400
Ending inventory 69,500
Cost of goods sold $497,900
BRIEF EXERCISE 3-10
Sales Revenue 928,900
Interest Income 17,500
Income Summary 946,400

Income Summary 590,300

Cost of Goods Sold 406,200
Operating Expenses 129,000
Income Tax Expense 55,100

Income Summary 356,100

Retained Earnings 356,100

Retained Earnings 15,900

Dividends 15,900

BRIEF EXERCISE 3-11

ELEMENT BASIS OF MEASUREMENT
MEASUREMENT CATEGORIZATION
Building Depreciated cost Hybrid measure –
unless impaired cost-based in
general but
impairment requires
current value
measures
Manufacturing Lower of cost and Hybrid measure –
inventory net realizable value cost-based in
general but
assessment of NRV
requires current
value measures
Biological Fair value less Current value
assets (estimated) costs to measure
sell
Bonds payable Amortized cost Cost-based measure
BRIEF EXERCISE 3-12
The two common types of valuation techniques/models are:
1. Market models: These techniques use prices and other
information generated from market transactions involving
identical or similar transactions. An example is the
earnings multiples model. Under this example, an
investment in a privately owned company may be valued
using publicly available earnings numbers for similar
companies as well as multiples that are generated by
comparing publicly available earnings numbers with share
prices.

2. Income models: These techniques convert future amounts

(such as future cash flows to be generated by an asset) to
current amounts. Examples include discounted cash flows
and options pricing models. Both of these use present
value concepts.

BRIEF EXERCISE 3-13

Present value techniques for measuring assets:
1. Non-current notes receivable at unfairly low or zero
interest rate receivable
2. Investments in bonds at amortized cost where the
contractual and market rates are different
3. Assets acquired using financing structured as
capital/finance leases
4. Impairment of PPE when estimating value in use
5. Assets acquired under deferred payment contracts

Present value techniques for measuring liabilities:

1. Bonds payable when the contractual and market rates are
different
2. Capital lease obligations
3. Non-current notes payable at unfairly low or zero interest
rate payable
4. Pension liabilities and obligations
5. Asset retirement obligations
(Note to instructor – there may be additional items)
BRIEF EXERCISE 3-14

The two approaches that are generally accepted using the

discounted cash flow model are:

1. Traditional approach: The discount rate reflects all risks in

the cash flows but the cash flows are assumed to be
certain. This is sometimes referred to as the “discount
rate adjustment technique.”
2. Expected cash flow approach: A risk-free discount rate is
used to discount cash flows that have been adjusted for
uncertainty. This is sometimes referred to as the
“expected present value technique.”

BRIEF EXERCISE 3-15

The $1,000 face value of the bond is not used to record the
liability. The inputs or variables used in the measurement of
the initial recording of the bond payable include:
1. The amounts of future cash flows of the principal, in this
case of $1,000 ten years from today and the annuity of
annual interest payments of $40 ($1,000 x 4%) for ten
years.
2. The time value of money is dictated by what the market
expects from lending money to the business. In this case
the market rate is 5%.
3. Any uncertainty or risk associated with the ability of the
business to meet its future payment obligations under the
bond contract.

I would recommend using the traditional approach to account

for the discounted cash flows. Under the traditional approach,
the cash flows are assumed to be certain. This approach is a
better match to the formal contract required to issue bonds.
BRIEF EXERCISE 3-16

Scenario 1: Cash flows are fairly certain

When the cash flows are fairly certain, the traditional approach
works well. Under this approach, the stream of cash flows is
discounted at a rate that reflects the riskiness of the cash
flows. Therefore, the 6% rate would be used. The present value
would be determined as follows:
PV of an annuity for 5 years at 6% = $421.24*
*using the PV factor of 4.21236 for an ordinary annuity at 6%

Scenario 2: Cash flows are uncertain

When the projected cash flows are uncertain in timing or
amount, the expected cash flow method works best. Under
this approach, a risk-free rate is used to discount cash flows,
which have been adjusted for associated uncertainties. This
approach is more flexible when the cash flows vary over the
term. The present value would be determined as follows:
PV of [(25% X $75) + (75% X $100)] at 3% in five years
PV of $93.75 at 3% in five years = $80.87 **
** using PV factor of .86261

BRIEF EXERCISE 3-17

For the impairment test, use the tables for single payments to
determine the present value of the future cash flows at the
discount rate of 10%:

Year 1 ($35,000 × 0.90909) = $ 31,818.15

Year 2 ($45,000 × 0.82645) = 37,190.25
Year 3 ($55,000 × 0.75132) = 41,322.60
Present value of future cash flows $110,331.00
*BRIEF EXERCISE 3-18

To determine the present value of the future cash inflows from

selling the use of the technology, use the annuity tables for a
discount rate of 9% and a time period of 15 years.

Using tables:
Present value of the payments
$18,000 X 8.06069 $145,092.42

Using a financial calculator:

Yields -
PV ?
$145,092.39
I 9%
N 15
PMT $18,000
FV $0
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

BRIEF EXERCISE 3-19
How the item could be/is used:
The highest and best use concept values the asset based on
the highest value that the market would place on the asset
considering all possible uses that are physically possible,
legally permissible, and financially feasible. The company
must consider the highest and best use in the market
regardless of how it is actually using the building.

The market:
This measurement would consider the value based on the
market that the entity normally buys and sells in, referred to as
the principal market. This is usually also the most
advantageous market.

The valuation technique/model:

Because of the nature of the property, the transactions of
purchase and sale are infrequent. Consequently, this affects
the liquidity of the asset being measured. In this case, the
income stream coming from rental revenue would be a strong
basis for the determination of the market value of the building.
This method would be an income model.

BRIEF EXERCISE 3-20

Investment 1—Level 3. Level 3 is the least reliable level since
much judgment is needed based on the best information
available. This often includes management judgments about
how the markets would value the asset.
Investment 2—Level 1. Level 1 inputs provide the most reliable
fair values because these inputs are based on quoted prices in
an active market for the exact same item.

Investment 3—Level 2. Level 2 considers evaluating similar

assets or liabilities in active markets or using observable
inputs such as interest rates or exchange rates.
*BRIEF EXERCISE 3-21

(a) $5.00 ($100 × 5%)

(b) $60.00 ($500 × 6% × 2 periods)
(c) $61.80 ($500 × 6%) + ($530 × 6%)
*BRIEF EXERCISE 3-22

1) Using formulas:

Formula for the single payment:

In applying this formula to calculate the present value (PV), the
future value (FV) of $500,000, the interest (discount) rate (i) of 4%,
and the number of periods (n) of 5 are used as follows:

PV = $500,000 ÷ (1 + 4%)5
= $500,000 ÷ 1.045
= $410,963.55

2) Using tables:
Present value of the single payment:
$500,000 X .82193 $410,965.00

3) Using a financial calculator:

PV ? Yields $ (410,963.55)
I 4%
N 5
PMT $0
FV $500,000
Type 0

4) Using Excel: =PV(rate,nper,pmt,fv,type)

*BRIEF EXERCISE 3-23

1) Using tables:
Present value = Future amount × Present value of 1 Factor
$3,152 = $10,000 × Present value of 1 Factor
Present value of 1 Factor = $3,152 ÷ $10,000
Present value of 1 Factor = 0.31520
The closest PV factor for 15 periods is 0.31524, which is found
in the 8% column. As this factor is almost exactly equal to
0.31520, this means Kerry Dahl will earn an 8% return.

2) Using a financial calculator:

PV $ (3,152)
I ?% Yields 8.001 %
N 15
PMT 0
FV $ 10,000
Type 0

3) Using Excel: =RATE(nper,pmt,pv,fv,type)

*BRIEF EXERCISE 3-24
 1) Using tables:
Present value of the annuity collections:
payments:
$25,000 X 9.71225 $242,806.25

2) Using a financial calculator:

PV ? Yields $ 242,806.22
I 6%
N 15
PMT $ 25,000
FV 0
Type 0

3) Using Excel: =PV(rate,nper,pmt,fv,type)

*BRIEF EXERCISE 3-25

Annual Number
Interes of Frequency (n) Number of (i) Discount
t Rate Years of Payment Periods Rate
1. 8% 3 Quarterly 3 × 4 = 12 8% ÷ 4 = 2%
Semi-
2. 5% 4 annually 4×2=8 5% ÷ 2 = 2.5%
3. 7% 5 Annually 5 7%
4. 4% 3 Quarterly 3 × 4 = 12 4% ÷ 4 = 1%
Semi-
5. 6% 6 annually 6 × 2 = 12 6% ÷ 2 = 3%
6. 6% 15 Monthly 15 × 12 = 180 6% ÷ 12 = 0.5%
*BRIEF EXERCISE 3-26

PV of 1 PV of an Annuity of 1
(Table PV-1) (Table PV-2)
(a) n = 4, i = 4½% .83875 3.587925
(b) n = 6, i = 6½ % .68565 4.84193

Interpolation calculation:
(a)
n = 4, i = 4% factor .85480 3.62990
n = 4, i = 5% factor .82270 3.54595
Sum of two factors 1.67750 7.17585
Average of two factors ÷2 ÷2
n = 4, i = 4.5% factor .83875 3.587925

(b)
n = 6, i = 6% factor .70496 4.91732
n = 6, i = 7% factor .66634 4.76654
Sum of two factors 1.37130 9.68386
Average of two factors ÷2 ÷2
n = 6, i = 6.5% factor .68565 4.84193
*BRIEF EXERCISE 3-27

1) Using tables:
Present value of the principal
$100,000 X .61027 $61,027.00
Present value of the interest payments
$2,750 X 15.58916 42,870.19
Issue price $103,897.19
2) Using a financial calculator:
PV ? Yields $ 103,897.29
I 2.5%
N 20
PMT $ (2,750)
FV $ (100,000)
Type 0

*BRIEF EXERCISE 3-28

1) Using tables:
Present value of the principal
$100,000 X .55386 $55,386.00
Present value of the interest payments
$5,500 X 14.87747 40,913.04
Issue price $96,281.04
2) Using a financial calculator:
PV ? Yields $ 96,280.63
I 3%
N 20
PMT $ (2,750)
FV $ (100,000)
Type 0

3) Using Excel: =PV(rate,nper,pmt,fv,type)

*BRIEF EXERCISE 3-29

1) Using Tables:
Present value of the principal
$50,000 X .70496 $35,248.00
Present value of the interest payments
$4,000 X 4.91732 19,669.28
Issue price $54,917.28

2) Using a financial calculator:

PV ? Yields $ 54,917.32
I 6%
N 6
PMT $ (4,000)
FV $ (50,000)
Type 0

3) Using Excel: =PV(rate,nper,pmt,fv,type)

*BRIEF EXERCISE 3-30

1) Using tables:
Present value of the instalment payments:
$112,825 X 9.38507 $1,058,870.52

2) Using a financial calculator:

PV ? Yields $ 1,058,870.95
I 4%
N 12
PMT $ (112,825)
FV 0
Type 0

3) Using Excel: =PV(rate,nper,pmt,fv,type)

*BRIEF EXERCISE 3-31

1) Using a financial calculator:
PV ? Yields $ 17,807.29
I 4%
N 5
PMT $ (4,000)
FV 0
Type 0

2) Using Excel: =PV(rate,nper,pmt,fv,type)

Payments total ($4,000 x 5) $20,000.00

Present value of note (principal) 17,807.29
Amount of interest in payments $ 2,192.71
*BRIEF EXERCISE 3-32

1) Using tables:
Amount of annuity payments:
$30,000 ÷ 3.99271 $7,513.69

2) Using a financial calculator:

PV $ 30,000.00
I 8%
N 5
PMT $? Yields $(7,513.69)
FV $0
Type 0

3) Using Excel: =PMT(rate,nper,pv,fv,type)

*BRIEF EXERCISE 3-33

1) Using tables:

The present value of an annuity stream of $6,000 per year, for

5 years at 8% is: $6,000 × 3.99271 = $23,956.26
If the price of the car you would like to purchase is $30,000,
then you need to receive a $6,043.74 trade in value for your
existing vehicle.

2) Using a financial calculator:

PV $ ? Yields $23,956.26
I/Y 8%
N 5
PMT $(6,000)
FV $0
Type 0

3) Using Excel: =PMT(rate,nper,pv,fv,type)

*BRIEF EXERCISE 3-34

For the first option:

1) Using a financial calculator:

PV $ ? Yields $39,927.10
I/Y 8%
N 5
PMT $(10,000)
FV $0
Type 0

2) Using Excel: =PMT(rate,nper,pv,fv,type)

For the second option:

1) Using a financial calculator:
You need to calculate the present value of the single payment
of $46,000 two years after purchasing the equipment.

PV $ ? Yields $39,437.59
I/Y 8%
N 2
PMT 0
FV $(46,000)
Type 0

2) Using Excel: =PMT(rate,nper,pv,fv,type)

Therefore, option 2 is the less expensive financing option.

*BRIEF EXERCISE 3-35

For the first option:

1) Using a financial calculator:

PV $ ? Yields $37,907.87
I/Y 10%
N 5
PMT $(10,000)
FV $0
Type 0

2) Using Excel: =PMT(rate,nper,pv,fv,type)

For the second option:

1) Using a financial calculator:
You need to calculate the present value of the single payment
of $46,000 two years after purchasing the equipment.

PV $ ? Yields $38,016.53
I/Y 10%
N 2
PMT 0
FV $(46,000)
Type 0

2) Using Excel: =PMT(rate,nper,pv,fv,type)

Therefore, option 1 is the less expensive financing option.

SOLUTIONS TO EXERCISES

EXERCISE 3-1 (15-20 minutes)

Apr. 2 Cash 15,000

Equipment 10,000
Owner’s Capital 25,000

2 No entry—not a transaction.

3 Supplies 1,200
Accounts Payable 1,200

7 Rent Expense 750

Cash 750

11 Accounts Receivable 1,500

Service Revenue 1,500

12 Cash 4,200
Unearned Revenue 4,200

17 Cash 2,900
Service Revenue 2,900

21 Insurance Expense 180

Cash 180

30 Salaries and Wages Expense 1,920

Cash 1,920

30 Supplies Expense 220

Supplies 220

30 Equipment 4,100
Owner’s Capital 4,100
EXERCISE 3-2 (15-20 minutes)
Mis-Match Inc.
Work Sheet
July 31, 2017
Adjusted Trial
Trial Balance Adjustments Balance
Account Titles Dr. Cr. Dr. Cr. Dr. Cr.
Cash $2,870 $1,320 $2,125 $2,065
Accounts Receivable 3,231 3,890 1,320 5,801
Office Supplies 800 400 725 475
Equipment 3,800 500 4,300
Accounts Payable $2,666 2,125 400 500 1,160 $2,601
Salaries and Wages Payable 670 670
Dividends Payable 575 575
Unearned Revenue 1,200 825 375
Common Shares 6,000 6,000
Retained Earnings 2,795 2,795
Dividends 575 575
Service Revenue 2,380 825 3,890 7,095
Salaries and Wages Expense 3,400 670 4,070
Office Expense 940 1,160 2,100
Office Supplies Expense 725 725
Totals $15,041 $ 15,041 $12,190 $12,190 $20,111 $20,111
EXERCISE 3-3 (20-25 minutes)

(a)
Mar. 1 Cash....................................................... 80,000
Common Shares............................... 80,000

3 Prepaid Rent.......................................... 2,500

Land....................................................... 20,000
Buildings................................................ 32,000
Equipment............................................. 16,000
Cash................................................... 70,500

5 Advertising Expense............................ 6,800

Cash................................................... 6,800

6 Prepaid Insurance................................. 2,400

Cash................................................... 2,400

10 Equipment............................................. 5,500
Accounts Payable............................ 5,500

18 Accounts Receivable............................ 3,700

Service Revenue............................... 3,700

25 Dividends............................................... 1,500
Cash................................................... 1,500
30 Salaries and Wages Expense............... 1,900
Cash................................................... 1,900
30 Prepaid Rent.......................................... 2,500
...................................................Cash 2,500
31 Cash....................................................... 750
Unearned Revenue........................... 750
EXERCISE 3-3 (CONTINUED)
(b) Woods should record the following adjusting entries before
preparing financial statements for the month of March:

1. Depreciation expense related to the buildings, equipment, and

golf equipment.
2. Insurance expense related to the one-year insurance policy paid
for on March 6.
3. Bad debt expense related to the accounts receivable.
4. Rent expense for the month of March.

EXERCISE 3-4 (20-25 minutes)

(a) Jan. 2 Cash 11,100

Service Revenue 11,100

2 Insurance Expense 3,600

Cash 3,600

10 Supplies Expense 5,700

Cash 5,700

(b) Jan. 31 Prepaid Insurance 3,300

Insurance Expense 3,300
($3,600 X 11/12 months)

31 Supplies 2,800
Supplies Expense 2,800

31 Service Revenue 7,600

Unearned Revenue 7,600
($11,100 - $3,500)
EXERCISE 3-4 (CONTINUED)
(a), (b) and (c)

Insurance Expense Supplies Expense

Jan. 2 3,600 Jan. 31 3,300 Jan. 10 5,700 Jan. 31 2,800

Bal. 300 Bal. 2,900

Cash Service Revenue

Jan.2 11,100 Jan. 2 3,600 Jan. 31 7,600 Jan. 2 11,100
Jan. 10 5,700
Bal. 1,800 Bal. 3,500

Prepaid Insurance Supplies

Jan.31 3,300 Jan. 31 2,800

Unearned Revenue
Jan.31 7,600

(d) Sugarland’s January 31 financial statements would be the same if

Sugarland records prepayments by debiting an asset and
crediting a liability when amounts are paid or received in cash,
instead of debiting an expense and crediting revenue when
amounts are paid or received in cash. This is because under both
methods, prior to preparation of financial statements, adjusting
entries would be recorded to adjust accounts to their correct
balance on January 31.
EXERCISE 3-5 (5-10 minutes)

Aug. 31 Salaries and Wages Expense............... 1,900

Salaries and Wages Payable........... 1,900

31 Utilities Expense................................... 600

Accounts Payable............................ 600

31 Interest Expense................................... 200

Interest Payable................................ 200
($30,000 X 8% X 1/12)

31 Telephone Expense.............................. 117

Accounts Payable............................ 117
EXERCISE 3-6 (15-20 minutes)

(a)
1. Depreciation Expense 1,050
Accumulated Depreciation–
Equipment 1,050
($350 X 3)

2. Unearned Rent Revenue 4,650

Rent Revenue 4,650
($9,300 / 2)

3. Interest Expense 300

Interest Payable 300

4. Supplies Expense 1,850

Supplies 1,850
($2,800 – $950)

5. Insurance Expense 900

Prepaid Insurance 900
($300 X 3)

6. FV-OCI Investments 20,000

Unrealized Gain or Loss - OCI 20,000
($170,000 - $150,000)

(b) Based on interest expense of $300 for the quarter ended March
31, interest is $100 per month or 0.5% of the notes payable. 0.5%
X 12 months = 6% interest per year.
 EXERCISE 3-7 (25-30 minutes)

(a) 1. Insurance Expense ($3,500 x 3/41/2) 2,6251

,750
Prepaid Insurance 2,625
1,750
(To allocate prepaid rent, 3 months
expired, 1 remains prepaid at 8/31)

2. Supplies Expense ($1,800 – $650) 1,150

Supplies 1,150

3. Depreciation Expense 1,278

Accumulated Depreciation—
Buildings 1,278
($142,000 – $14,200 = $127,800;
$127,800 / 25 = $5,112 per
year; $5,112 x 3/12 = $1,278)

Depreciation Expense 360

Accumulated Depreciation—
Equipment 360
($16,000 – $1,600 = $14,400;
$14,400 / 10 = $1,440;
$1,440 x 3/12 = $360)

.4.(i) 4.4.(i) Rent Revenue 8,000

Unearned Rent Revenue 8,000
(ii) Unearned Rent Revenue 2,300
Rent Revenue 2,300

5. Salaries and Wages Expense 375

Salaries and Wages Payable 375

6. Accounts Receivable 800

Rent Revenue 800
7. Interest Expense 1,540
Interest Payable 1,540
[($77,000 x 8%) x 3/12]
EXERCISE 3-7 (CONTINUED)
HANNA RESORT LIMITED
Adjusted Trial Balance
August 31, 2017

Debit Credit
Cash $ 6,700
Accounts Receivable 800
Prepaid Insurance ($3,500 – $2,6251,750) 81,750
Supplies ($1,800 – $1,150) 650
Land 20,000
Buildings 142,000
Accumulated Depreciation—Buildings
($20,448 + $1,278) $ 21,726
Equipment 16,000
Accumulated Depreciation—Equipment
($4,320 + $360) 4,680
Accounts Payable 4,800
Unearned Rent Revenue ($4,600 + $8,000 10,300
– $2,300)
Salaries and Wages Payable 375
Interest Payable 1,540
Notes Payable 77,000
Common Shares 81,000
Retained Earnings 4,680
Dividends 5,000
Rent Revenue ($68,002 - $8,000 + $2,300 63,102
+ $800)
Salaries and Wages Expense ($43,200 + 43,575
$375)
Utilities Expense 7,720
Insurance Expense ($12,250 + 14,87500
$2,6251,750) 0
Repairs and Maintenance Expense 3,600
Supplies Expense 1,150
Depreciation Expense ($1,278 + $360) 1,638
Interest Expense ($3,080 + $1,540) 4,620 ________
 $269,203 $269,203
EXERCISE 3-8 (15-20 minutes)

(a) 1. Depreciation Expense 3,400

Accumulated Depr.—Equipment 3,400

2. Property Tax Expense 2,525

Property Tax Payable 2,525

3. Salaries and Wages Expense 3,900

Salaries and Wages Payable 3,900

4. Service Revenue 5,500

Unearned Revenue 5,500

5. Interest Expense 200

Interest Payable 200

(b) Property Tax Payable 2,525

Property Tax Expense 2,525

Salaries and Wages Payable 3,900

Salaries and Wages Expense 3,900

Unearned Revenue 5,500

Service Revenue 5,500

Interest Payable 200

Interest Expense 200
EXERCISE 3-9 (15-20 minutes)

(a) Dec. 31 Service Revenue 110,000

Income Summary 110,000

31 Income Summary 12,800

Interest Expense 12,800

(b) Jan. 1 Service Revenue 9,700

Accounts Receivable 9,700

1 Interest Payable 6,400

Interest Expense 6,400
(c) & (e)
Accounts Receivable
Dec. 31 Balance 9,700 Jan. 1 Reversing 9,700

Service Revenue
Dec. 31 Closing 110,000 Dec. 31 Balance 110,000
Jan. 1 Reversing 9,700 Jan. 10 9,700

Interest Payable
Jan. 1 Reversing 6,400 Dec. 31 Balance 6,400

Interest Expense
Dec. 31 Balance 12,800 Dec. 31 Closing 12,800
Jan. 15 6,400 Jan. 1 Reversing 6,400

(d) (1) Jan. 10 Cash 9,700

Service Revenue 9,700
(2) Jan. 15 Interest Expense 6,400
Cash 6,400
EXERCISE 3-10 (15-20 minutes)

(a) Adjusting Entries:

1. Rent Expense 3,600
Prepaid Rent 3,600
($7,200 / 6 X 3)

2. Services Revenue 2,400

Unearned Revenue 2,400

3. Prepaid Expenses 4,250

Operating Expenses 4,250
($6,000 / 24 X 17)

4. Interest Expense 1,270

Interest Payable 1,270

(b) Reversing Entries:

1. No reversing entry required.

2. No reversing entry required.

3. No reversing entry required.

4. Interest Payable 1,270

Interest Expense 1,270
EXERCISE 3-11 (10-15 minutes)

Sales Revenue 390,000

Investment Income ……………………….. 3,000
Cost of Goods Sold 222,700
Sales Returns and Allowances 2,000
Sales Discounts 5,000
Administrative Expenses 31,000
Income Tax Expense 30,000
Income Summary 102,300

(or)

Sales Revenue 390,000

Investment Income ……………………….. 3,000
Income Summary 393,000

Income Summary 290,700

Cost of Goods Sold 222,700
Sales Returns and Allowances 2,000
Sales Discounts 5,000
Administrative Expenses 31,000
Income Tax Expense 30,000

Income Summary 102,300

Retained Earnings 102,300

Accumulated Other Comprehensive

Income ……………………………………… 1,500
Unrealized Gain or Loss-OCI 1,500

Retained Earnings 18,000

Dividends 18,000
EXERCISE 3-12 (20-25 minutes)

(a) Sales revenue $98,000

*Sales returns and allowances (24,000)
Net sales $74,000

(b) Beginning inventory $21,000

Purchases 63,000
Purchase returns and allowances (6,000)
Cost of goods available for sale 78,000
*Ending inventory (14,000)
Cost of goods sold $64,000

(c) *Sales revenue $106,000

Sales returns and allowances (5,000)
Net sales revenue $101,000

(d) *Beginning inventory $ 25,000

Purchases 105,000
Purchase returns and allowances (10,000)
Cost of goods available for sale 120,000
Ending inventory (48,000)
Cost of goods sold $ 72,000

(e) Beginning inventory $ 44,000

*Purchases 108,000
Purchase returns and allowances (8,000)
Cost of goods available for sale 144,000
Ending inventory (30,000)
Cost of goods sold (from (f) below) $114,000

(f) Net sales revenue $132,000

*Cost of goods sold (114,000)
Gross profit $ 18,000
EXERCISE 3-12 (CONTINUED)

(g) Sales revenue $120,000

Sales returns and allowances (9,000)
*Net sales revenue $111,000

(h) Beginning inventory $ 24,000

Purchases 90,000
*Purchase returns and allowances (14,000)
Cost of goods available for sale 100,000
Ending inventory (28,000)
Cost of goods sold $ 72,000

(i) Net sales revenue (from above) $111,000

Cost of goods sold (from above) (72,000)
*Gross profit $39,000
EXERCISE 3-13 (20 – 25 minutes)
(a) Hoda must consider the following three items:
- The amount of cash flows that are expected from the
investment. Dividends have been received in the past, but
management would have to consider if those dividends are
expected to continue and in what amount.
- The timing of the cash flows. Since cash flows will need to be
discounted to a present value, it is relevant to consider when
the cash is expected to be received.
- The risk involved in the cash flows. Hoda will need to
consider the discount rate to be used in calculating the
present value and whether that discount rate needs to be a
risk-adjusted rate, or if the cash flows will be adjusted for risk
of uncertainty
Hoda will also need to consider for how long the shares are
intended to be held, and the purpose for this investment. Is the
purpose just to collect dividends, or does Huda intend to derive
some other economic benefit from this company? Does Huda have
the ability to exert some influence with their 25% ownership?

(b) Under the traditional approach, cash flows are discounted using
the risk adjusted rate:
Annual cash expected = 80,000 x PV factor of annuity, 5 years,
6%
= 80,000 x 4.21236 = 336,989
Plus the sale proceeds expected at the end of year 5:
1,000,000 x PV factor of lump sum, 5 years, 6%
= 1,000,000 x .74726 = 747,260
The fair value is the sum of the two amounts:
= 336,989 + 747,260 = $1,084,249
EXERCISE 3-13 (CONTINUED)

(c) Under the expected cash flow approach, cash flows are adjusted
for risk and are discounted at the risk free rate, since the cash
flows already incorporate risk expected.
In this case, there is an 80% chance dividends of $80,000 will be
received and a 20% chance they will be $50,000.
The probability weighted annual cash flow is:
80,000 x 80% = 64,000
50,000 x 20% = 10,000
74,000

Discounting the cash flows:

Annual cash flow = 74,000 x PV factor of annuity, 5 years, 4%
= 74,000 x 4.45182 = 329,435
Plus the sale proceeds expected at the end of year 5:
1,000,000 x PV factor of lump sum, 5 years, 4%
= 1,000,000 x .82193 = 821,930
The fair value is the sum of the two amounts:
= 329,435 + 821,930 = $1,151,365

(d) The expected cash flow approach is best since the cash flows are
uncertain.
EXERCISE 3-14 (20-25 minutes)

(a) At a minimum, an entity must determine

 the particular asset being measured (its condition, specific
nature, location, etc.)
 whether the assets will be valued by the market as a group or on
a stand-alone basis – the highest and best use that is legally,
physically, and financially possible will be used
 availability of data, valuation technique to use, use of
observable inputs

(b)There are three levels in the fair value hierarchy

level 1 inputs provide the most reliable fair values

Level 1
because these inputs are based on quoted prices in an
active market for identical items
level 2 is the next most reliable and considers evaluating
Level 2
similar assets or liabilities in active markets or using
observable inputs such as interest rates or exchange
rates.
level 3 is the least reliable level since much judgement is
Level 3
needed based on the best information available. This
often includes unobservable inputs and management
judgements about how the markets would value the
asset.
EXERCISE 3-14 (CONTINUED)

(c)

Land – Level 1– Markets for land and real estate in general

standalone may not be very liquid nor necessarily transparent.
Also there would be little if any evidence regarding
sales of an identical piece of land. Therefore it is
likely that no level 1 inputs are available.
Level 2 – quoted market prices for similar
properties in the area could be obtained. It would
depend on whether or not the real estate market
was experiencing sufficient volume. Sufficient
volume to form a “normal market” would result in
better information.
Level 3 – management assumptions about how the
market would value the land. In all likelihood, the
company would have to rely on level 3 inputs to
value the land, given the uniqueness of real estate
in general.
EXERCISE 3-14 (c) (CONTINUED)

Building – Level 1– quoted market prices do not likely exist for the
standalone building. The market may publish statistics such as
price per square footage, however these would likely
be an aggregation of all buildings in the area and as
such would not necessarily reflect market prices for
this particular building. It is unlikely that level 1 inputs
would exist for the building.
Level 2 – see above comments. The prices per square
foot may qualify as level 2 inputs (e.g. similar assets)
as long as the market was active and there were
sufficient transactions.
Level 3 – management assumptions about cash flows
that could be generated from the use of the building at
discount rates.

Equipment – Level 1 – perhaps a market price exists for used

standalone equipment although if the equipment were older, it may
be difficult to obtain the price for identical equipment.
Level 2 – perhaps a market price exists for similar used
equipment. Markets for used equipment often exist.
Level 3 – management assumptions about cash flows
that could be generated from the use of the equipment
at discount rates.

Overall Level 1 – unlikely to be an active market for the exact

manufacturi facility given its uniqueness.
ng plant
Level 2 – perhaps a market multiple or price/earnings
ratio exists for similar lines of business.
Level 3 – management assumptions about cash flows
that could be generated from the use of the facility as a
whole at discount rates.
EXERCISE 3-15 (10-15 minutes)

(a) This exercise determines the present value of an ordinary

annuity or expected cash flows as a fair value estimate.

Cash flow Probability Expected

Estimate X Assessment = Cash Flow
$ 380,000 20% $ 76,000
630,000 50% 315,000
750,000 30% 225,000
$616,000

Expected Cash Flow X PV Factor, n = 8, I = 8% Present Value

$616,000 X 5.74664 = $3,539,930

The fair value estimate of the trade name exceeds the carrying
value; thus, no impairment is recorded.

(b) This fair value is based on unobservable inputs—Killroy’s own

data on the expected future cash flows associated with the trade
name. This fair value estimate is considered Level 3.
 *EXERCISE 3-16 (10-15 minutes)

Adjusted Trial
Accounts Balance Income Statement Balance Sheet
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 9,000 9,000
Inventory 80,000 80,000
Accounts Payable 26,000 26,000
Sales Revenue 480,000 480,000
Sales Returns and
Allowances 10,000 10,000
Sales Discounts 5,000 5,000
Cost of Goods Sold 290,000 290,000
Salaries and Wages
Expense 62,000 62,000
Interest Income 12,000 12,000
 Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*EXERCISE 3-17 (15-20 minutes)

AIRBOURNE TRAVEL INC.
Work Sheet
For the Month Ended March 31, 2017
Account Titles Trial Balance Adjustments Adj. Trial Balance Income Stat. Balance Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 1,800 1,800 1,800
Accounts Receivable 2,600 2,600 2,600
Supplies 600 (a) 80 520 520
Equipment 6,000 6,000 6,000
Accumulated Depr. -
Equipment 400 (b) 100 500 500
Accounts Payable 1,100 1,100 1,100
Unearned Revenue 500 (c) 400 100 100
Common Shares 6,400 6,400 6,400
Retained Earnings 600 600 600
Sales Revenue 2,600 (c) 400 3,000 3,000
Salaries and Wages
Expense 500 (d) 850 1,350 1,350
Miscellaneous Exp. 100 100 100
Totals 11,600 11,600
Supplies Expense (a) 80 80 80
Depreciation Expense (b) 100 100 100
Salaries and Wages
Payable (d) 850 850 850
Totals 1,430 1,430 12,550 12,550 1,630 3,000 10,920 9,550
Net Income 1,370 1,370
Totals 3,000 3,000 10,920 10,920
Key: (a) Record supplies expense
(b) Record depreciation expense
(c) Record ticket revenue earned
(d) Accrue salaries
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*EXERCISE 3-18 (20-25 minutes)

NORTH BAY CORPORATION
Work Sheet (Partial)
For the Year Ended December 31, 2017

Adjusted Trial Statement of Statement of

Balance Comprehensive Financial Position
Income
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash 117,600 117,600
FV-NI Investments 42,150 42,150
Accounts
receivable 56,720 56,720
Prepaid rent 11,000 11,000
FV-OCI Investments 33,990 33,990
Equipment 219,000 219,000
Accumulated 81,00
depreciation - 0 81,000
equipment
Accounts payable 54,470 54,470
Interest payable 4,800 4,800
Notes payable 60,000 60,000
(current)
Common shares 100,000 100,000
Retained earnings 133,440 133,440
Service revenue 211,190 211,190
Salaries and Wages 73,090 73,090
expense
Rent expense 66,000 66,000
Depreciation 27, 27,
expense 000 000
Bad debt expense 5,250 5,250
Interest expense 5,100 5,100
Investment income 5,800 5,800
Unrealized gain or ______
loss-OCI _ 6,200 6,200
Totals 656,900 656,900 176,440 223,190 480,460 433,710
Net Income and
OCI 46,750 ______ ______ 46,750
Totals 223,190 223,190 480,460 480,460
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*EXERCISE 3-18 (CONTINUED)

NORTH BAY CORPORATION

Statement of Financial Position
December 31, 2017

Assets
Current Assets
Cash $117,600
FV-NI investments 42,150
Accounts receivable 56,720
Prepaid rent 11,000
Total current assets 227,470
FV-OCI investments 33,990
Property, plant, and equipment
Equipment $219,000
Less: accumulated depreciation (81,000) 138,000
Total assets $399,460

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable $ 54,470
Interest payable 4,800
Notes payable 60,000
Total current liabilities 119,270
Shareholders’ equity
Common shares 100,000
Retained earnings 173,990*
Accumulated OCI 6,200
Total shareholders’ equity 280,190
Total liabilities and shareholders’ equity $399,460

*Beg. Balance + Net Income = Ending Balance

$133,440 + $40,550 = $173,990
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*EXERCISE 3-19 (10-15 minutes)

The rate of interest is determined by dividing the future value by

the present value and then finding the factor in the FVF table
with n = 2 that approximates that number:

$123,210 = $100,000 (FVF2, i%)

$123,210 ÷ $100,000 = (FVF2, i%)
1.2321 = (FVF2, i%)—reading across the n = 2 row reveals that
i = 11%.

Using a financial calculator:

PV $ 100,000
I ?% Yields 11.0 %
N 2
PMT 0
FV $ (123,210)
Type 0

Excel formula =RATE(nper,pmt,pv,fv,type)

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*EXERCISE 3-20 (15–20 minutes)

(a) Total interest = Total payments – Amount owed today

$162,745 (10 X $16,274.53) – $100,000 = $62,745.

(b) Sosa should borrow from the bank, since the 9% rate is
lower than the manufacturer’s 10% rate determined below.

PV–OA10, i% = $100,000 ÷ $16,274.53

= 6.14457— Inspection of the 10 period row
reveals a rate of 10%.

Using a financial calculator:

PV ? Yields $ 99,999.94
I 10%
N 10
PMT $ (16,274.53)
FV 0
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*EXERCISE 3-21 (15–20 minutes)

Building A—PV = $600,000.

Building B—
Rent X (PV of annuity due of 25 periods at 12%) = PV
$69,000 X 8.78432 = PV
$606,118 = PV

Using a financial calculator:

PV ? Yields $ 606,117.79
I 12%
N 25
PMT $ (69,000)
FV 0
Type 1

Using Excel: =PV(rate,nper,pmt,fv,type)

Building C—
Rent X (PV of ordinary annuity of 25 periods at 12%) = PV
$7,000 X 7.84314 = PV
$54,902 = PV

Cash purchase price $650,000

PV of rental income – 54,902
Net present value $595,098
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*EXERCISE 3-21 (CONTINUED)

Using a financial calculator:

PV ? Yields $ (54,901.97)
I 12%
N 25
PMT $ 7,000
FV 0
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Answer: Lease Building C since the present value of its net cost
is the smallest. Where the difference between
alternatives is relatively small, it is also important to
consider qualitative factors.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*EXERCISE 3-22 (15–20 minutes)

Time diagram:
1 Viavélo Inc.
PV =? i = 5%
PV–OA =?
Principal
$2,000,000
interest
$110,000 $110,000 $110,000 $110,000 $110,000 $100,000

0 1 2 3 28 29 30
n = 30

Formula for the interest payments:

PV–OA = R (PVF–OAn, i)
PV–OA = $110,000 (PVF–OA30, 5%)
PV–OA = $110,000 (15.37245)
PV–OA = $1,690,970

Formula for the principal:

PV = FV (PVFn, i)
PV = $2,000,000 (PVF30, 5%)
PV = $2,000,000 (0.23138)
PV = $462,760

The selling price of the bonds = $1,690,970 + $462,760 =

$2,153,730.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*EXERCISE 3-22 (CONTINUED)

Using a financial calculator:

PV ? Yields $ 2,153,724.51
I 5%
N 30
PMT $ (110,000)
FV $(2,000,000)
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*EXERCISE 3-23 (15–20 minutes)

Time diagram:
i = 11%
R R R
PV–OA = $365,755 ? ? ?

0 1 24 25
n = 25

Formula: PV–OA = R (PV–OAn, i)

$365,755 = R (PVF–OA25, 11%)
$365,755 = R (8.42174)
R = $365,755 ÷ 8.42174
R = $43,430

Using a financial calculator:

PV $ (365,755)
I 11%
N 25
PMT $ ? Yields $43,429.84
FV $0
Type 0

Excel formula =PMT(rate,nper,pv,fv,type)

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

EXERCISE 3-24 (15–20 minutes)

Expected
Cash Flow Probability Cash
Estimate X Assessment = Flow
(a) $ 4,800 20% $ 960
6,300 50% 3,150
7,500 30% 2,250
Total Expected Value $ 6,360

(b) $ 5,400 30% $ 1,620

7,200 50% 3,600
8,400 20% 1,680
Total Expected Value $ 6,900

(c) $(1,000) 10% $ (100)

3,000 80% 2,400
5,000 10% 500
Total Expected Value $ 2,800

*EXERCISE 3-25 (10–15 minutes)

Estimated
Cash Probability Expected
Outflow X Assessment = Cash Flow
$200 10% $ 20
450 30% 135
600 50% 300
750 10% 75
$ 530

Present Value = Expected Cash Flow X PV Factor, n = 2, I =

6%

Present Value = $530 X .89 = $472

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

TIME AND PURPOSE OF PROBLEMS

Problem 3-1 (Time 35-40 minutes)

Purpose—to provide an opportunity for the student to post daily transactions to a

“T” account ledger, take a trial balance, prepare an income statement, a balance
sheet and a statement of owner’s equity, close the ledger, and take a post-
closing trial balance. The problem deals with routine transactions of a
professional service firm and provides a good integration of the accounting
process.

Problem 3-2 (Time 35-40 minutes)

Purpose—the provide an opportunity for the student to derive adjusting journal

entries from an unadjusted and adjusted trial balance, followed by the
preparation of an income statement, a statement of retained earnings and a
balance sheet.

Problem 3-3 (Time 25-30 minutes)

Purpose—to provide an opportunity for the student to prepare and discuss

adjusting entries. The adjusting entries are fairly complex in nature.

Problem 3-4 (Time 40-50 minutes)

Purpose—to provide the opportunity for the student to prepare a multiple-step

income statement, a statement of retained earnings, and a classified balance
sheet. Also, adjusting and closing entries must be prepared.

Problem 3-5 (Time 15-20 minutes)

Purpose—to provide the student with an opportunity to determine what adjusting

entries need to be prepared for specific accounts listed in a partial trial balance.
The student is also required to determine the amounts of certain revenue and
expense items to be reported in the income statement.

Problem 3-6 (Time 25-30 minutes)

Purpose—to provide the student with an opportunity to prepare year-end

adjusting entries from a trial balance and related information presented. The
problem also requires the student to prepare an income statement, a balance
sheet, and a statement of retained earnings. Following the preparation of the
statements, the student is required to explain any differences that would appear
had the business operated as a proprietorship.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

TIME AND PURPOSE OF PROBLEMS (CONTINUED)

Problem 3-7 (Time 20-25 minutes)

Purpose—to provide an opportunity for the student to prepare adjusting entries.

Problem 3-8 (Time 30-40 minutes)

Purpose—to provide an opportunity for the student to prepare adjusting and

closing entries. The student is also required to post the entries to “T” account
ledger, and take a pre-closing adjusted trial balance. This problem presents basic
adjustments including a number of accruals and deferrals. It provides the student
with an integrated flow of the year-end accounting process.

Problem 3-9 (Time 30-35 minutes)

Purpose—to provide an opportunity for the student to determine what adjusting

entries need to be made to specific accounts listed in a trial balance. The student
is also required to determine which adjusting journal entries could be reversed.

Problem 3-10 (Time 30-35 minutes)

Purpose—to provide an opportunity for the student to determine what adjusting

entries need to be made to specific accounts listed in a trial balance. The student
is also required to determine which adjusting journal entries could be reversed.

Problem 3-11 (Time 30-35 minutes)

Purpose—to provide an opportunity for the student to analyze errors and prepare
the necessary correcting entries for several errors in the original recording of
transactions. The student must first document the incorrect entry that was made,
the entry that should have been made and conclude with the correcting entry.
The student is also required to arrive at a corrected trial balance.

Problem 3-12 (Time 15-20 minutes)

Purpose—to provide an opportunity for the student to deal with the alternative
method of recording prepayments when recording cash receipts and
disbursements. The student must adapt the adjustment process at the end of the
year to deal with this alternative method. This is a short question.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

TIME AND PURPOSE OF PROBLEMS (CONTINUED)

Problem 3-13 (Time 25-30 minutes)

Purpose—to provide an opportunity for the student to prepare analysis

concerning financing choices of leasing versus purchasing, apply present value
concepts to recording the proper amount for purchases of assets and calculating
the true cost of failing to take purchase discounts.

Problem 3-14 (Time 35-40 minutes)

Purpose—to provide an opportunity for the student to prepare a statement of

comprehensive income, statement of changes in equity, and a statement of
financial position. In addition, closing entries must be made and a post-closing
trial balance prepared. Following the preparation of the statements, the student is
required to explain any differences that would appear had the business been 1)
following ASPE and 2) been operated as a partnership.

Problem 3-15 (Time 30-40 minutes)

Purpose—to provide an opportunity for the student to complete a work sheet and
then prepare a multi-step income statement, statement of retained earnings, and
a classified balance sheet.

Problem 3-16 (Time 25-30 minutes)

Purpose—to provide an opportunity for the student to prepare analysis

concerning financing choices of lease versus purchase.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

SOLUTIONS TO PROBLEMS
PROBLEM 3-1

(a) (Explanations are omitted)

Cash

Equipment

Sep.
1

32,000
Sept.
4

1,300

Sep.
2

12,500

3,560

900
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

Bal
30

12,500

20

2,100

10

680

18

6,300

Owner’s Capital
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

19

2,000

Sep.
1

32,000

30

1,400

Sep.
30

2,000

30

7,727

30
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

85

Bal.
30

37,727

30
Bal
24,995
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

Accounts Receivable

Sep.
14

4,740
Sep.
20

2,100

25

2,780

Accounts Payable

Bal.
30

5,420
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

Sep.
18

6,300
Sep.
2

12,500

Bal.
30

6,200

Prepaid Rent

Sept.
4
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

1,300
Sept.
30

650

Bal
30
650

Supplies

Service Revenue

Sep.
5

900
Sep.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

30

330

Sep.
30

11,080
Sep.
8

3,560

Bal.
30

570

14

4,740

25

2,780
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

Sep 30

11,080

11,080

Miscellaneous Expense

Accumulated Depreciation - Equipment

Sep.
10

680
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

Sep.
30

208

30

85
Sep. 30
765

Bal
30

765

765
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

Salaries and Wages Expense

Sep.
30

1,400
Sep.
30

1,400

Supplies Expense

Sep.
30

330
Sep.
30

330
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-1 (CONTINUED)

(a) (continued)
Depreciation Expense

Income Summary
Sep.
30

208
Sep.
30

208

Sep.
30

650
Sep.
30

11,080

30

765
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

30

1,400

30

330

30

208
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

30
Inc.
7,727

11,080

11,080

Rent Expense
Sep. 30

650

Sep. 30
Bal

650
Sep. 30 Bal
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

650

Owner’s Drawings
Sep. 19 2,000 Sep. 30 2,000

(b) EMILY CAIN, D.D.S.

Adjusted Trial Balance
September 30

Debit Credit
Cash $24,995
Accounts Receivable 5,420
Supplies 570
Prepaid Rent 650
Equipment 12,500
Accumulated Depreciation – Equipment $208
Accounts Payable 6,200
Owner’s Capital 32,000
Owner’s Drawings 2,000
Service Revenue 11,080
Rent Expense 650
Miscellaneous Expense 765
Salaries and Wages Expense 1,400
Supplies Expense 330
Depreciation Expense 208 _____
$49,488 $49,488

PROBLEM 3-1 (CONTINUED)

(c) EMILY CAIN, D.D.S.

Income Statement
For the Month of September
Service revenue $11,080
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

Expenses:
Rent expense $ 650
Supplies expense 330
Salaries and Wages expense 1,400
Depreciation expense 208
Miscellaneous expense 765
Total expenses 3,353
Net income $7,727

EMILY CAIN, D.D.S.

Balance Sheet
As of September 30
Assets Liabilities
Cash $24,995 Accounts payable $6,200
Accounts receivable 5,420
Supplies 570
Prepaid rent 650 Owner’s Equity
Equipment 12,500 Owner’s Capital 37,727
Accum. Depreciation - Total liabilities and
Equipment (208) owner’s equity $43,927
Total assets $43,927

EMILY CAIN, D.D.S.

Statement of Owner’s Equity
For the Month of September
Owner’s Capital September 1 $ 0
Add: Investment by owner 32,000
Net income for September 7,727
39,727
Deduct: Withdrawal by owner 2,000
Owner’s Capital September 30 $37,727
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-1 (CONTINUED)

(d) EMILY CAIN, D.D.S.

Post-closing Trial Balance
September 30

Debit Credit
Cash $24,995
Accounts Receivable 5,420
Supplies 570
Prepaid Rent 650
Equipment 12,500
Accumulated Depreciation – Equipment
$208
Accounts Payable 6,200
Owner’s Capital ______ 37,727
Totals $44,135 $44,135
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-2

(a) Dec. 31 Accounts Receivable...........................................................................

3,500
Service Revenue..........................................................................
3,500

31 Unearned Revenue.............................................................................
1,400
Service Revenue..........................................................................
1,400

31 Supplies Expense................................................................................
5,400
Supplies.......................................................................................
5,400

31 Depreciation Expense.........................................................................
5,000
Accumulated Depreciation—
Equipment.................................................................................
5,000

31 Interest Expense.................................................................................
150
Interest Payable...........................................................................
150

31 Insurance Expense..............................................................................
850
Prepaid Insurance........................................................................
850

31 Salaries and Wages Expense.............................................................

1,300
Salaries and Wages Payable.......................................................
1,300

(b) MASON ADVERTISING AGENCY INC.

Income Statement
For the Year Ended December 31, 2017
Revenues
Service revenue............................................................. $63,500
Expenses
Salaries and wages expense.........................................
$11,300
Insurance expense.........................................................
850
Interest expense.............................................................
500
Depreciation expense....................................................
5,000
Supplies expense...........................................................
5,400
Rent expense.................................................................
4,000
Total expenses.........................................................27,050
Net income...........................................................................
$36,450
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-2 (CONTINUED)

(b) (continued)
MASON ADVERTISING AGENCY INC.
Statement of Retained Earnings
For the Year Ended December 31, 2017
Retained earnings, January 1 $ 3,500
Add: Net income 36,450
Retained earnings, December 31 $39,950

MASON ADVERTISING AGENCY INC.

Balance Sheet
December 31, 2017
Assets
Cash................................................................................$11,000
Accounts receivable........................................................ 23,500
Supplies.......................................................................... 3,000
Prepaid insurance........................................................... 2,500
Equipment.......................................................................
$60,000
Less: Accumulated depreciation—
equipment.......................................................................
33,000 27,000
Total assets..............................................................$67,000

Liabilities and Shareholders’ Equity

Liabilities
Notes payable.................................................................
$ 5,000
Accounts payable............................................................
5,000
Unearned revenue..........................................................
5,600
Salaries and wages payable........................................... 1,300
Interest payable...............................................................
150
Total liabilities............................................................$17,050
Shareholders’ equity
Common shares..............................................................
$10,000
Retained earnings...........................................................
39,950 49,950
Total liabilities and shareholders’ equity $67,000
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-2 (CONTINUED)

(c) 1. Interest expense for three months was $150 the Note
payable balance is $5,000. Therefore, interest per month is
1% ($5,000 ÷ $50). 1% X 12 = 12% interest per year.
2. Salaries and Wages Expense, $11,300 less Salaries and
Wages Payable 12/31/17, $1,300 = $10,000. Total
Payments, $12,500 – $10,000 = $2,500 Salaries and Wages
Payable 12/31/16.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-3

(a)

1. Dec. 31 Salaries and Wages Expense 3,360

Salaries and Wages Payable 3,360
(5 X $1,200 X 2/5) = $2,400
(3 X $800 X 2/5) = 960
Total accrued salaries $3,360

2. 31 Unearned Rent Revenue 82,200

Rent Revenue 82,200
(5 X $4,100 X 2) = $41,000
(4 X $10,300 X 1) = 41,200
Total rent earned $82,200

3. 31 Advertising Expense 5,925

Prepaid Advertising 5,925
(A650 – $600 per month
for 8 months) = $4,800
(B974 – $375 per month
for 3 months) = 1,125
Total adv. expense $5,925

4. 31 Interest Expense 4,200

Interest Payable 4,200
($80,000 X 9% X 7/12)

(b) Excluding the effects of the adjusting entries, net income is

understated by $68,715 ($82,200 – $3,360 – $5,925 – $4,200). In
addition, without the adjustments, Rolling Resort’s current assets
and current liabilities are overstated. Potential investors should be
willing to wait for financial statements that include year-end
adjusting entries in order to base their investment decision on
more relevant and faithfully representative financial statements.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-4

(a) SECOND HAND ALMOST NEW DEPARTMENT STORE INC.

Income Statement
For the Year Ended December 31, 2017

Sales revenue
Sales $718,000
Less: Sales returns and allowances 8,000
Net sales revenue 710,000
Cost of goods sold 412,700
Gross profit 297,300
Operating expenses
Selling expenses
Sales salaries and wages expense $76,000
Sales commission expense 14,500
Depreciation expense—equipment 13,300
Utilities expense 6,600
($11,000 x 60%)
Insurance expense 4,320
($7,200 x 60%)
Total selling expenses $114,720
Administrative expenses
Office salaries and wages expense 32,000
Depreciation expense—buildings 10,400
Property tax expense 4,800
Utilities expense 4,400
($11,000 x 40%)
Insurance expense 2,880
($7,200 x 40%)
Total administrative expenses 54,480
Total operating expenses 169,200
Income from operations 128,100
Other revenues and gains
Interest income 4,000
Other expenses and losses
Interest expense (11,000) (7,000)
Net income $121,100
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-4 (CONTINUED)

(a) (continued)

SECOND HAND ALMOST NEW DEPARTMENT STORE INC.

Statement of Retained Earnings
For the Year Ended December 31, 2017

Retained Earnings, January 1 $16,600

Add: Net income 121,100
137,700
Less: Dividends 28,000
Retained Earnings, December 31 $109,700

SECOND HAND ALMOST NEW DEPARTMENT STORE INC.

Balance Sheet
December 31, 2017

Assets
Current assets
Cash $ 68,000
Accounts receivable 95,300
Inventory 75,000
Prepaid insurance 2,400
Total current assets 240,700
Property, plant, and equipment
Buildings $190,000
Less: Accumulated depreciation
—buildings 52,500 $137,500
Equipment 110,000
Less: Accumulated
depreciation—equipment 42,900 67,100 204,600
Total assets $445,300
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-4 (CONTINUED)

(a) (continued)

SECOND HAND ALMOST NEW DEPARTMENT STORE INC.

Balance Sheet (CONTINUED)
December 31, 2017

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable......................................................$ 79,300
Mortgage payable due next year............................... 20,000
Property tax payable.................................................. 4,800
Sales commissions payable...................................... 3,500
Interest payable.......................................................... 8,000
Total current liabilities....................................... 115,600
Long-term liabilities
Mortgage payable...................................................... 60,000
Total liabilities................................................... 175,600
Shareholders’ equity
Common Shares........................................................
$160,000
Retained Earnings.....................................................
109,700 269,700
Total liabilities and $445,30
shareholders’ equity.................................. 0
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-4 (CONTINUED)

(b) Depreciation Expense 10,400

Accumulated Depreciation—
Buildings 10,400

Depreciation Expense 13,300

Accumulated Depreciation—
Equipment 13,300

Insurance Expense 7,200

Prepaid Insurance 7,200

Interest Expense 8,000

Interest Payable 8,000

Property Tax Expense 4,800

Property Tax Payable 4,800

Sales Commission Expense 3,500

Sales Commissions Payable 3,500
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-4 (CONTINUED)

(c) Sales 718,000

Interest Income 4,000
Income Summary 722,000

Income Summary 600,900

Sales Returns and Allowances 8,000
Cost of Goods Sold 412,700
Salaries and Wages Expense 108,000
Sales Commission Expense 14,500
Property Tax Expense 4,800
Utilities Expense 11,000
Depreciation Expense 23,700
Insurance Expense 7,200
Interest Expense 11,000

Income Summary 121,100

Retained Earnings 121,100

Retained Earnings 28,000

Dividends 28,000
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-5

(a) -1-
Depreciation Expense 57,500
Accumulated Depreciation – 57,5
Equipment 00
(($960,000–$40,000) X 1/16)

-2-
Interest Expense 3,669
Interest Payable 3,669
($186,000 X 10% X 72/365)

-3-
Sales Revenue 50,000
Unearned Revenue 50,000

-4-
Prepaid Advertising 1,100
Advertising Expense 1,100

-5-
Salaries and Wages Expense 11,800
Salaries and Wages Payable 11,800

(b) 1. Interest expense, $12,669 ($9,000 + $3,669).

2. Sales revenue, $700,000 ($750,000 – $50,000).
3. Advertising expense, $60,900 ($62,000 – $1,100).
4. Salaries and wages expense, $91,800 ($80,000 +
$11,800).
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-6

(a) -1-
Service Revenue 6,900
Unearned Revenue 6,900

-2-
Accounts Receivable 7,300
Service Revenue 7,300

-3-
Bad Debt Expense 6,300
Allowance for Doubtful Accounts 6,300

-4-
Prepaid Insurance 6,000
Insurance Expense 6,000

-5-
Depreciation Expense...........................................................................
7,000
Accum. Depreciation —Equipment................................................
7,000
($85,000-15,000)/10
-6-
Interest Expense...................................................................................
71
Interest Payable.............................................................................
71
($7,200 X 12% X 30/365)

-7-
Prepaid Rent.........................................................................................
750
Rent Expense................................................................................
750

-8-
Salaries and Wages Expense 2,598
Salaries and Wages Payable 2,598

-9-
Dividends 80,000
Dividends Payable 80,000
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-6 (CONTINUED)

(b) MUSTANG ROVERS CONSULTING LIMITED

Adjusted Trial Balance
December 31, 2017

Dr. Cr.
Cash...........................................................................
$83,700
Accounts receivable................................................... 88,400
Allowance for doubtful accounts................................ $7,050
Supplies......................................................................
1,960
Prepaid insurance...................................................... 6,000
Prepaid rent................................................................. 750
Equipment ..................................................................
85,000
Accumulated depreciation—equipment 13,250
Unearned revenue ..................................................... 6,900
Interest payable........................................................... 71
Salaries and wages payable...................................... 2,598
Dividends payable...................................................... 80,000
Notes payable ............................................................ 7,200
Common shares......................................................... 35,010
Retained earnings...................................................... 161,100
Dividends....................................................................
80,000
Service revenue.......................................................... 100,400
Salaries and wages expense..................................... 31,098
Utilities expense......................................................... 1,080
Rent expense............................................................. 9,000
Insurance expense..................................................... 12,500
Bad debt expense...................................................... 6,300
Depreciation expense................................................ 7,000
Miscellaneous expense..............................................720
Interest expense......................................................... 71 _______
$413,579 $413,579
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-6 (CONTINUED)

(c) MUSTANG ROVERS CONSULTING LIMITED

Income Statement
For the Year Ended December 31, 2017

Service Revenue................................................................ $100,400

Expenses:
Salaries and wages expense.....................................
$31,098
Utilities expense........................................................
1,080
Rent expense............................................................
9,000
Insurance expense....................................................
12,500
Bad debt expense......................................................
6,300
Depreciation expense................................................
7,000
Miscellaneous expense............................................. 720
Interest expense........................................................
71
Total expenses.................................................. 67,769
Net income $32,631
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-6 (CONTINUED)

(c) (continued)

MUSTANG ROVERS CONSULTING LIMITED

Balance Sheet
December 31, 2017

Assets
Current assets
Cash............................................................................ $83,700
Accounts receivable.....................................................
$88,400
Less: Allowance for
doubtful accounts...........................................(7,050) 81,350
Supplies....................................................................... 1,960
Prepaid insurance........................................................ 6,000
Prepaid rent................................................................. 750
Total current assets............................................... 173,760
Equipment....................................................................
85,000
Less: Accumulated depreciation.................................. (13,250) 71,750
Total assets $245,510

Liabilities and Shareholders’ Equity

Current liabilities
Unearned revenue...................................................... $ 6,900
Interest payable.......................................................... 71
Salaries and wages payable....................................... 2,598
Dividends payable....................................................... 80,000
Notes payable............................................................. 7,200
Total liabilities....................................................... 96,769
Shareholders’ equity
Common shares.............................................................. 35,010
Retained earnings............................................................ 113,731
Total liabilities and shareholders’ equity $245,510
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-6 (CONTINUED)

(c) (continued)

MUSTANG ROVERS CONSULTING LIMITED

Statement of Retained Earnings
For the Year Ended December 31, 2017

Retained Earnings, January 1 $161,100

Add: Net income 32,631
193,731
Less: Dividends 80,000
Retained Earnings, December 31 $113,731

(d) The major differences in the financial statements of the

proprietorship and a corporation have to do with the equity
accounts. In the case of corporations, there is a minimum of two
shareholders’ equity accounts for the balance sheet: Common
Shares and Retained Earnings. In the case of a proprietorship
the equity of the business would be in a single account using the
owner’s name followed by the word Capital.
Another significant difference has to do with income taxes.
Proprietorships do not have income tax expense. The income of
the business is taxed in the hands of the owner, the proprietor.
Corporations distribute earnings to the shareholders in the form
of dividends. Owners of a proprietorship reduce their investment
in the business with Drawings. The account name would be the
name of the owner, followed the word Drawings.
Instead of presenting a statement of retained earnings, the
corresponding statement in a proprietorship would be titled
Statement of Owner’s Equity.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-7

-1-
Prepaid Advertising 335
Advertising Expense 335

-2-
Interest Expense 250
Interest Payable 250
($15,000 X 10% X 2/12)

-3-
Salaries and Wages Expense 2,480
Salaries and Wages Payable 2,480

-4-
Interest Receivable 500
Interest Income 500

-5-
Bad Debt Expense 1,560
Allowance for Doubtful Accounts 1,560

-6-
Supplies 110
Office Expense 110

-7-
Rent Expense 1,000
Rent Payable 1,000

-8-
Insurance Expense 195
Prepaid Insurance 195
($1,170 X 2/12)
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-7 (CONTINUED)

-9-
Property Tax Expense 1,670
Property Tax Payable 1,670

-10-
Interest Receivable 75
Interest Income 75
($6,000 X 15% X 1/12)

-11-
Unearned Rent Revenue 860
Rent Revenue 860
($2,580 X 2/6)

-12-
Rent Expense 5,533
Prepaid Rent Expense 5,533
($8,300 X 4/6)

-13-
Utilities Expense 510
Utilities Payable 510

-14-
Depreciation Expense 1,400
Accum. Depreciation—Equipment 1,400
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-8

(a), (b), (d)

Cash Rent Receivable
Bal. 115,000 Adj. 4,000

Accounts Receivable Prepaid Insurance

Bal. 63,000 Bal. 12,000 Adj. 5,300
Bal. 6,700

Allowance for Doubtful Accts. Land

Bal. 9,000 Bal. 350,000
Adj. 6,120
Bal. 15,120

Buildings Equipment
Bal. 600,000 Bal. 300,000

Accum. Depr. - Buildings Accum. Depr. - Equipment

Bal. 40,000 Bal. 120,000
Adj. 20,000 Adj. 18,000
Bal. 60,000 Bal. 138,000

Unearned Revenue Salaries and Wages Payable

Adj. 9,900 Adj. 3,600

Common Shares Retained Earnings

Bal. 880,000 Bal. 152,000
Cl. 180,080
Bal. 332,080

Sales Revenue
Adj. 9,900 Bal. 413,000
Close 403,100 ______
413,000 413,000

Rent Revenue
Close 48,000 Bal. 44,000
_____ Adj. 4,000
48,000 48,000
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-8 (CONTINUED)

(a), (b), (d) (continued)

Bad Debt Expense Utilities Expense

Adj. 6,120 Close 6,120 Bal. 74,000 Close 74,000

Repairs and Maintenance Expense Insurance Expense

Bal. 54,000 Close 54,000 Adj. 5,300 Close 5,300

Salaries and Wages Expense

Bal. 90,000 Close 93,600
Adj. 3,600 _____
93,600 93,600

Depreciation Expense
Adj. 20,000 Close 38,000
Adj. 18,000
38,000

Income Summary
Exp. 271,020 Rev. 451,100
Cl. 180,080 ______
451,100 451,100
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-8 (CONTINUED)

(b) -1-
Depreciation Expense 20,000
Accumulated Depreciation— 20,0
Buildings 00
(1/30 X $600,000)

-2-
Depreciation Expense 18,000
Accumulated Depreciation— 18,00
Equipment 0
10% X ($300,000-$120,000)

-3-
Insurance Expense 5,300
Prepaid Insurance 5,300

-4-
Rent Receivable 4,000
Rent Revenue 4,000
(1/11 X $44,000)

-5-
Bad Debt Expense 6,120
Allowance for Doubtful Accounts 6,120
(24% X $63,000 = $15,120 less existing
balance of $9,000)

-6-
Salaries and Wages Expense 3,600
Salaries and Wages Payable 3,600

-7-
Sales Revenue 9,900
Unearned Revenue 9,900
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-8 (CONTINUED)

(c) MASTERS GOLF CLUB, INC.

Adjusted Trial Balance
December 31

Dr. Cr.
Cash............................................................................
$115,000
Accounts Receivable................................................... 63,000
Allowance for Doubtful Accounts................................ $15,120
Rent Receivable..........................................................4,000
Prepaid Insurance.......................................................6,700
Land............................................................................
350,000
Buildings......................................................................
600,000
Accumulated Depreciation—Buildings........................ 60,000
Equipment...................................................................
300,000
Accumulated Depreciation—Equipment..................... 138,000
Salaries and Wages Payable...................................... 3,600
Unearned Revenue..................................................... 9,900
Common Shares......................................................... 880,000
Retained Earnings....................................................... 152,000
Sales Revenue ........................................................... 403,100
Rent Revenue............................................................. 48,000
Utilities Expense.......................................................... 74,000
Bad Debt Expense......................................................6,120
Salaries and Wages Expense..................................... 93,600
Repairs and Maintenance Expense............................ 54,000
Depreciation Expense................................................. 38,000
Insurance Expense.....................................................
_ 5,300 _ _______
$1,709,720 $1,709,720
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-8 (CONTINUED)

(d) -Dec. 31-

Sales Revenue 403,100
Rent Revenue 48,000
Income Summary 451,100

-31-
Income Summary 271,020
Utilities Expense 74,000
Bad Debt Expense 6,120
Salaries and Wages Expense 93,600
Repairs and Maintenance Expense 54,000
Depreciation Expense 38,000
Insurance Expense 5,300

-31-
Income Summary 180,080
Retained Earnings 180,080
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-9

(a)
1. Prepaid Advertising 4,500
Advertising Expense 4,500
($1,500 X 3)

2. Depreciation Expense 6,200

Accumulated Depreciation
– Buildings 6,200
(($124,000 - $30,000) / 20 years)

3. Insurance Expense 2,200

Prepaid Insurance 2,200
($2,640 X 9/12) + ($1,980 / 3 X 4/12)

4. Rent Revenue 3,600

Unearned Rent Revenue 3,600
($7,200 X 6/12)

5. Allowance for Doubtful Accounts 2,700

Accounts Receivable 2,700

Bad Debts Expense 3,212

Allowance for Doubtful Accounts 3,212
[4% X ($103,000 - $2,700)] – ($3,500 –
$2,700)

6. Advances to Employees 600

Salaries and Wages Expense 600

7. Interest Expense 2,100

Interest Payable 2,100
($180,000 X 7% X 2/12)

8. Depreciation Expense 2,800

Accumulated Depreciation–Equipment 2,80
0
($33,600 / 12 years)
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-9 (CONTINUED)

(a) (continued)
9. Interest Receivable 1,500
Interest Income 1,500
($40,000 X 9% X 5/12)

10. Cost of Goods Sold 67,100

Inventory (ending) 90,000
Purchase Discounts 900
Purchases 98,000
Inventory (beginning) 60,000

(b) Reverse entries: 1, 4, 7 and 9

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-10

(a)
1. Rent Revenue 8,500
Unearned Rent Revenue 8,500
($10,200 X 10/12)

2. Sales Revenue 1,000

Accounts Receivable 1,000

Bad Debt Expense 3,135

Allowance for Doubtful Accounts 3,135
7% X ($56,500 - $1,000) – $750

3. Cost of Goods Sold 152,100

Inventory (ending) 77,000
Purchase Discounts 2,400
Purchases 170,000
Freight-in 3,500
Inventory (beginning) 58,000

4. Insurance Expense 1,17067

5
Prepaid Insurance 1,17067
5
[($1,320 X 9/24) + ($1,620 X 4/36)]

5. Depreciation Expense 9,700

Accumulated Depreciation -
Equipment 9,700
($90,000 X 10%) + ($14,000 X 5%)

6. Interest Expense 1,375

Interest Payable 1,375
($50,000 X 11% X 3/12)

7. Interest Receivable 900

Interest Income 900
($18,000 X 12% X 5/12)
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-10 (CONTINUED)

(a) (continued)

8. Rent Expense 7,700

Prepaid Rent 7,700
($13,200 X 7/12)

9. FV-NI Investments 800

Investment Income 800
($9,400 – $8,600)

10. Unrealized Gain or Loss-OCI 1,500

FV-OCI Investments 1,500
$14,000 - ($25 X 500)

(b) Reverse entries: 1, 6, and 7

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-11

(a) (1) Incorrect entry:

1. Cash 570
Accounts Receivable 570

2. Supplies 900
Accounts Payable 900

3. Utilities Expense 30
Cash 30

4. Salaries and Wages Expense 1,800

Cash 1,800

5. Equipment 90
Cash 90

(2) Correct entry:

1. Cash 750
Accounts Receivable 750

2. Equipment 900
Accounts Payable 900

3. Advertising Expense 30
Cash 30

4. Salaries and Wages Expense 1,200

Salaries and Wages Payable 600
Cash 1,800

5. Repairs and Maintenance Expense 90

Cash 90

(3) Correcting entry:

1. Cash 180
Accounts Receivable 180
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-11 (CONTINUED)

(a) (continued)

(3) Correcting entry (continued):

2. Equipment 900
Supplies 900
3. Advertising Expense 30
Utilities Expense 30
4. Salaries and Wages Payable 600
Salaries and Wages Expense 600
5. Repairs and Maintenance Expense 90
Equipment 90
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-11 (CONTINUED)

An alternate presentation of part (a) follows:
(a)
1.1 Cash.................................................................. 570
Accounts Receivable................................... 570
1.2 Cash ................................................................. 750
Accounts Receivable................................... 750
1.3 Cash.................................................................. 180
Accounts Receivable................................... 180

2.1 Supplies............................................................. 900

Accounts Payable....................................... 900
2.2 Equipment......................................................... 900
Accounts Payable....................................... 900
2.3 Equipment......................................................... 900
Supplies...................................................... 900

3.1 Utilities Expense................................................ 30

............................................................Cash
30
3.2 Advertising Expense.......................................... 30
Cash............................................................ 30
3.3 Advertising Expense.......................................... 30
Utilities Expense.......................................... 30

4.1 Salaries and Wages Expense........................... 1,800

Cash............................................................ 1,800
4.2 Salaries and Wages Expense........................... 1,200
Salaries and Wages Payable............................ 600
Cash............................................................ 1,800
4.3 Salaries and Wages Payable............................ 600
Salaries and Wages Expense..................... 600

5.1 Equipment......................................................... 90
Cash............................................................ 90
5.2 Repairs and Maintenance Expense................... 90
Cash............................................................ 90
5.3 Repairs and Maintenance Expense................... 90
Equipment................................................... 90
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-11 (CONTINUED)

(b) DOWNTOWN TV REPAIR LTD.

Trial Balance
March 31, 2017
Debit Credit
Cash ($7,200 + $180) $ 7,380
Accounts Receivable ($3,500 - $180) 3,320
Supplies ($900 - $900) 0
Equipment ($15,000 + $900 – $90) 15,810
Accumulated Depreciation—Equipment $3,000
Accounts Payable 5,950
Salaries and Wages Payable ($600 - $600) 0
Unearned Revenue 1,500
Common Shares 10,000
Retained Earnings 4,160
Service Revenue 8,000
Salaries and Wages Expense ($3,600 - $600) 3,000
Advertising Expense ($800 + $30) 830
Utilities Expense ($310 - $30) 280
Depreciation Expense 700
Repairs and Maintenance Expense
($1,200 + $90) 1,290 ______
$32,610 $32,610
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-12

(a)
1. Jan. 1 Supplies..............................................................................................
4,100
Cash............................................................................................
4,100

Dec. 31 Supplies Expense...............................................................................

2,200
Office Supplies............................................................................
2,200

2. Aug. 1 Prepaid Insurance..............................................................................

6,000
Cash............................................................................................
6,000

Dec. 31 Insurance Expense.............................................................................

2,500
Prepaid Insurance.......................................................................
2,500
($6,000 X 5/12 = $2,500)

3. Nov.15 Cash...................................................................................................
1,200
Service Revenue.........................................................................
1,200

Dec. 31 Service Revenue................................................................................

400
Unearned Revenue.....................................................................
400
($1,200 X 1/3 = $400)

4. Dec. 1 Cash...................................................................................................
1,100
Rent Revenue.............................................................................
1,100

Dec. 31 Rent Revenue....................................................................................

550
Unearned Rent Revenue............ 550
($1,100 / 2 = $550)
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-12 (CONTINUED)

(b) It is possible to initially record prepayments as assets in some

divisions or departments of a business, while recording them as
expenses in others. Management could do this intentionally.
This might also be done as a result of management’s decision
to allow staff to continue the practices under which they were
originally trained. For example, recording of prepayments might
be different among divisions or departments of a business in
order to accommodate certain corporate cultures following
mergers, or simply to avoid staff errors from changes in
practices. The adjustment process at the end of the accounting
period accommodates for the differences in practices and
ensures the proper reporting of balances at the end of each of
the accounting periods, irrespective of the differences in the
original recording entries.

The GAAP foundational concept of comparability (consistency)

does not apply to methods of recording prepayments since the
same financial results are achieved on the company’s financial
statements. Comparability (consistency) is required for
accounting policies, and methods of accounting for
prepayments are not accounting policies.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-13

(a) Time diagram for the first ten payments:

i = 10%; n = 10; R = $800,000; PV of AD =??

$800,000 $800,000 $800,000 $800,000 $800,000 $800,000 $800,000

0 1 2 3 7 8 9 10

Formula for the first ten payments:

PV of AD = R (PVF – ADn, i)
PV of AD = $800,000 (PVF – AD10, 10%)
PV of AD = $800,000 (6.75902)
PV of AD = $5,407,216

Formula for the last ten payments:

PV of OA = R (PVF – OAn, i)
PV of OA = $400,000 (PVF – OA19 – 9, 10%)
PV of OA = $400,000 (8.36492 – 5.75902)
PV of OA = $400,000 (2.6059)
PV of OA = $1,042,360

Note: The present value of an ordinary annuity is used here, not

the present value of an annuity due.

The total cost for leasing the facilities is:

$5,407,216 + $1,042,360 = $6,449,576.

OR
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-13 (CONTINUED)

Time diagram for the last ten payments:

i = 10%; n = 10; R = $400,000: PV =?

$400,000 $400,000 $400,000

0 1 2 9 10 17 18
19

FVF (PVFn, i) R (PVF – OAn, i)

Formulas for the last ten payments:
(i) Present value of the last ten payments:

PV of OA = R (PVF – OAn, i)
PV of OA = $400,000 (PVF – OA10, 10%)
PV of OA = $400,000 (6.14457)
PV of OA = $2,457,828

(ii) Present value of the last ten payments at the beginning of

current year:

PV = FV (PVFn, i)
PV = $2,457,828 (PVF9, 10%)
PV = $2,457,828 (.42410)
PV = $1,042,365*

*$5 difference due to rounding.

Cost for leasing the facilities $5,407,216 + $1,042,365 = $6,449,581

Since the present value of the cost for leasing the facilities,
$6,449,581, is less than the cost for purchasing the facilities,
$7,200,000, McDowell Enterprises should lease the facilities.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-13 (CONTINUED)

(b) Time diagram:

i = 11%; n = 9; R = $15,000; PV of OA =?

$15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000

0 1 2 3 6 7 8 9

Formula:
PV of OA = R (PVF – OAn, i)
PV of OA = $15,000 (PVF – OA9, 11%)
PV of OA = $15,000 (5.53705)
PV of OA = $83,056
The fair value of the note under IFRS 13 is $83,056.

(c) Time diagram:

Amount paid =
$792,000

0 10 30
Amount paid =
$800,000

Cash discount = $800,000 (1%) = $8,000

Net payment = $800,000 – $8,000 = $792,000
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-13 (CONTINUED)

(c) (continued)

If the company decides not to take the cash discount, then the
company can use the $792,000 for an additional 20 days. The
implied interest rate for postponing the payment can be
calculated as follows:

(i) Implied interest for the period from the end of discount
period to the due date:

Cash discount lost if not paid within the discount period

Net payment being postponed

= $8,000/$792,000
= 0.010101

(ii) Convert the implied interest rate to annual basis:

Daily interest = 0.010101/20 = 0.00051

Annual interest = 0.000505 X 365 = 18.43%

Since McDowell’s cost of funds, 10%, is less than the implied

interest rate for cash discount, 18.43%, it should continue the
policy of taking the cash discount.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*PROBLEM 3-14

(a) CANNED HEAT LIMITED

Statement of Comprehensive Income
For the Year Ended December 31, 2017

Revenues
Service revenue......................................................... $142,000
Expenses
Repairs and maintenance expense........................... $ 13,200
Depreciation expense................................................38,800
Insurance expense.................................................... 8,800
Salaries and wages expense..................................... 106,600
Utilities expense........................................................
3,500
Total expenses................................................... 170,900
Net loss............................................................................... $(28,900)
Other comprehensive income 6,800
Comprehensive income (loss) $(22,100)

CANNED HEAT LIMITED

Statement of Changes in Equity
For the Year Ended December 31, 2017

Total Common Comprehensive Retained AOCI

Shares Income Earnings
Beginning, Jan. $116,000 $56,000 $60,000 $0
1, 2017
Common shares 24,000 24,000
issued
Net income (28,900) $(28,900) (28,900)
(loss) for 2017
OCI for 2017 6,800 6,800 6,800
Comprehensive
Income (loss) (22,100)
Ending, Dec. 31, $117,900 $80,000 $31,100 $6,800
2017
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*PROBLEM 3-14 (CONTINUED)

(a) (continued)
CANNED HEAT LIMITED
Statement of Financial Position
December 31, 2017

Assets
Current assets
Cash.......................................................................... $ 18,000
Accounts receivable.................................................. 42,000
Prepaid insurance...................................................... 1,800
Total current assets........................................... 61,800
FV-OCI Investments 25,500
Property, plant, and equipment
Equipment.................................................................
$98,000
Less: Accumulated depreciation................................ 28,600 69,400
Total assets....................................................... $156,700

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable...................................................... $31,600
Salaries and wages payable...................................... 7,200
Total current liabilities........................................ 38,800
Shareholders’ equity
Common shares........................................................
$80,000
Retained earnings.....................................................
31,100
Accumulated other comprehensive
income ......................................................................
6,800 117,900
Total liabilities and shareholders’ equity $156,700
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*PROBLEM 3-14 (CONTINUED)

(b) General Journal

Date Account Titles and Explanation Ref. Debit Credit

Dec. 31 Service Revenue 400 142,000

Income Summary 350* 142,000

31 Income Summary 350* 170,900

Repairs and
Maintenance Expense 622 13,200
Depreciation Expense 711 38,800
Insurance Expense 722 8,800
Salaries and Wages
Expense 726 106,600
Utilities Expense 732 3,500

31 Retained Earnings 306 28,900

Income Summary 350* 28,900

31 Unrealized Gain or Loss-OCI 801 6,800

Accumulated other
Comprehensive Income 310* 6,800

*Account numbers assumed

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*PROBLEM 3-14 (CONTINUED)

(b) (continued)
CANNED HEAT LIMITED
Post-Closing Trial Balance
December 31, 2017

Debit Credit
Cash $ 18,000
Accounts Receivable 42,000
Prepaid Insurance 1,800
FV-OCI Investments 25,500
Equipment 98,000
Accumulated Depreciation -
Equipment $ 28,600
Accounts Payable 31,600
Salaries and Wages Payable 7,200
Common Shares 80,000
Retained Earnings 31,100
Accumulated Other Comprehensive
Income _______ ___6,800
$185,300 $185,300

(c) Had Canned Heat been following ASPE, there would be some
changes to the financial statements outlined in part (a). ASPE
does not include Other Comprehensive Income related
accounts. So, there would be no FV-OCI Investments, no
Unrealized Gain or Loss-OCI and no Accumulated Other
Comprehensive Income. Consequently, there would be an
Income Statement, rather than a Statement of Comprehensive
Income. In addition, there would be a Statement of Retained
Earnings rather than a Statement of Changes in Equity.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*PROBLEM 3-14 (CONTINUED)

(d) Besides the changes described in (c) above if Canned Heat

was operating as a partnership, there would be major
differences
in the financial statements relating to the equity accounts.
In the case of corporations, there is a minimum of two
shareholders’ equity accounts for the balance sheet: Common
Shares and Retained Earnings. In the case of a partnership the
equity of the business would be maintained via an equity
account for each partner, using the partner’s name followed by
the word Capital.

Another major difference has to do with income taxes.

Partnerships do not have income tax expense. The income of
the business is taxed in the hands of the owners, the partners.

Corporations distribute earnings to the shareholders in the form

of dividends. Owners of a partnership reduce their investment
in the business with Drawings. The account name would be the
name of the partner, followed the word Drawings.

Instead of presenting a statement of retained earnings (ASPE),

the corresponding statement in a partnership would be titled
Statement of Partners’ Equity.
 Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*PROBLEM 3-15
(a)
SLUM DOG FASHION CENTRE INC.
Work Sheet
For the Year Ended November 30, 2017
Adjusted Trial
Account Titles Trial Balance Adjustments Balance Income Statement Balance Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 29,200 29,200 29,200
Accounts Receivable 82,000 82,000 82,000
Inventory 105,000 105,000 105,000
Supplies 8,600 (1) 5,500 3,100 3,100
Equipment 225,000 225,000 225,000
Accumulated Depr.-
Equipment 86,000 (2a) 40,000 126,000 126,000
Trucks 128,000 128,000 128,000
Accumulated Depr.
Trucks 39,000 (2b) 30,000 69,000 69,000
Notes Payable 85,000 85,000 85,000
Accounts Payable 78,500 78,500 78,500
Common Shares 300,000 300,000 300,000
Retained Earnings 38,000 38,000 38,000
Sales Revenue 950,200 950,200 950,200
Sales Returns and
Allowances 24,200 24,200 24,200
Cost of Goods Sold 611,500 611,500 611,500
 Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*PROBLEM 3-15 (CONTINUED)

(a) (continued)

Account Titles Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Salaries and Wages
Expense 150,000 150,000 150,000
Advertising Expense 46,400 46,400 46,400
Utilities Expense 24,000 24,000 24,000
Repairs and Maint.
Expense 32,100 32,100 32,100
Delivery Expense 46,700 46,700 46,700
Rent Expense 64,000 64,000 64,000
Totals 1,576,700 1,576,700
Supplies Expense (1) 5,500 5,500 5,500
Depreciation Expense (2a) 40,000 40,000 40,000
(2b) 30,000 30,000 30,000
Interest Expense (3) 9,000 9,000 9,000
Interest Payable (3) 9,000 9,000 9,000
Totals 84,500 84,500 1,655,700 1,655,7001,083,400 950,200 572,300 705,500
Net Loss 133,200 133,200
Totals 1,083,4001,083,400 705,500 705,500
Key:

1) Store supplies used (2b) Depreciation expense for trucks

(2a) Depreciation expense for equipment (3) Accrued interest payable
 Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*PROBLEM 3-15 (CONTINUED)

(b) SLUM DOG FASHION CENTRE INC.

Income Statement
For the Year Ended November 30, 2017
Sales revenue
Sales......................................................................................... $950,200
Less: Sales returns and allowances........................................ 24,200
Net sales revenue .............................................................................. 926,000
Cost of goods sold.............................................................................. 611,500
Gross profit.......................................................................................... 314,500
Operating expenses
Selling expenses
Salaries and wages expense........................................
$90,000
($150,000 x 60%)
Advertising expense......................................................
46,400
Rent expense................................................................
57,600
($64,000 x 90%)
Delivery expense...........................................................
46,700
Utilities expense............................................................
21,600
($24,000 x 90%)
Depreciation expense....................................................
70,000
Supplies expense..........................................................
5,500
Total selling expenses........................................... $337,800
Administrative expenses
Salaries and wages expense........................................
60,000
($150,000 x 40%)
Repairs and maintenance
expense …………………...............................................
32,100
Rent expense................................................................
6,400
($64,000 x 10%)
Utilities expense............................................................
2,400
($24,000 x 10%)
Total admin. expenses.......................................... 100,90
0
Total operating expenses.................................................................... 438,700
Loss from operations........................................................................... 124,200
Other expenses and losses
Interest expense....................................................................... 9,000
Net loss............................................................................................... $133,200
1
No taxes are payable as the company is in a loss position. Taxes recoverable
(and/or a deferred tax debit) are assumed to be zero. These topics are addressed
further in Chapter 18 (Volume 2).
 Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

*PROBLEM 3-15 (CONTINUED)

(b) (continued)
SLUM DOG FASHION CENTRE INC.
Statement of Retained Earnings (Deficit)
For the Year Ended November 30, 2017

Retained Earnings, December 1, 2016 $38,000

Less: Net loss 133,200
Deficit, November 30, 2017 ($95,200)

SLUM DOG FASHION CENTRE INC.

Balance Sheet
November 30, 2017
Assets
Current assets
Cash $ 29,200
Accounts receivable 82,000
Inventory 105,000
Supplies 3,100
Total current assets 219,300
Property, plant, and equipment
Equipment $225,000
Accumulated depreciation— 126,00 $99,00
equipment 0 0
Trucks 128,000
Accumulated depreciation — trucks 59,00
69,000 0 158,000
Total assets $377,300

Liabilities and Shareholders’ Equity

Current liabilities
Current portion of notes payable.............................................. $ 35,000
Accounts payable..................................................................... 78,500
Interest payable........................................................................ 9,000
Total current liabilities.................................................... 122,500
Long-term liabilities
Notes payable, net of current portion....................................... 50,000
Total liabilities................................................................ 172,500
Shareholders’ equity
Common Shares......................................................................
$300,000
Deficit (95,200) 204,800
Total liabilities and shareholders’ equity.................................. $377,300
 Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-16

1. Purchase:
Time diagrams:
Instalments

i = 10%; n = 5; R = $350,000; PV of OA =?

$350,000 $350,000 $350,000 $350,000 $350,000

0 1 2 3 4 5

Property taxes and other costs

i = 10%; n = 12; R = $56,000; PV of OA =?

$56,000 $56,000 $56,000 $56,000 $56,000 $56,000

0 1 2 9 10 11 12

Insurance

i = 10%; n = 12; R = $27,000; PV of OA =?

$27,000 $27,000 $27,000 $27,000 $27,000 $27,000

0 1 2 9 10 11 12
 Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-16 (CONTINUED)

1. (continued)
Salvage Value

i = 10%; n = 12; FV = $500,000; PV =?

FV = $500,000

0 1 2 9 10 11 12

Formula for instalments:

PV of OA = R (PVF – OAn, i)
PV of OA = $350,000 (PVF – OA5, 10%)
PV of OA = $350,000 (3.79079)
PV of OA = $1,326,777

Formula for property taxes and other costs:

PV of OA = R (PVF – OAn, i)
PV of OA = $56,000 (PVF – OA12, 10%)
PV of OA = $56,000 (6.81369)
PV of OA = $381,567
Formula for insurance:
PV of AD = R (PVF – ADn, i)
PV of AD = $27,000 (PVF – AD12, 10%)
PV of AD = $27,000 (7.49506)
PV of AD = $202,367

Formula for salvage value:

PV = FV (PVFn, i)
PV = $500,000 (PVF12, 10%)
PV = $500,000 (0.31863)
PV = $159,315
 Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-16 (Continued)

1. (continued)

Present value of net purchase costs:

Down payment......................................................... $ 400,000
Instalments............................................................... 1,326,777
Property taxes and other costs................................ 381,567
Insurance................................................................. 202,367
Total costs................................................................ $2,310,711
Less: Salvage value................................................ 159,315
Net costs.................................................................. $2,151,396

2. Lease.
Time diagrams:
Lease payments

i = 10%; n = 12; R = $270,000; PV of AD =?

$270,000 $270,000 $270,000 $270,000 $270,000

0 1 2 10 11 12

Interest lost on the deposit

i = 10%; n = 12; R = $10,000; PV of OA =?

$10,000 $10,000 $10,000 $10,000 $10,000

0 1 2 10 11 12
 Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

PROBLEM 3-16 (CONTINUED)

2. (continued)

Formula for lease payments:

PV of AD = R (PVF – ADn, i)
PV of AD = $270,000 (PVF – AD12, 10%)
PV of AD = $270,000 (7.49506)
PV of AD = $2,023,666

Formula for interest lost on the deposit:

Interest lost on the deposit per year = $100,000 (10%) = $10,000

PV of OA = R (PVF – OAn, i)
PV of OA = $10,000 (PVF – OA12, 10%)
PV of OA = $10,000 (6.81369)
PV of OA = $68,137*

Cost for leasing the facilities = $2,023,666 + $68,137 = $2,091,803

Dunn Inc. should lease the facilities because the present value of
the costs for leasing the facilities, $2,091,803, is less than the
present value of the costs for purchasing the facilities, $2,151,396.

Where the difference in cost is small between alternatives,

particularly over a long period of time, other qualitative factors
should also be considered.

*OR: $100,000 – ($100,000 X .31863 [PV12, 10%]) = $68,137

 Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

RESEARCH AND ANALYSIS

RA 3-1 BROOKFIELD ASSET MANAGEMENT INC.

The Financial Statements of Brookfield Asset Management Inc. for the year ended
December 31, 2014 (see Appendix 5B) have been reviewed. All numbers are in
millions of Canadian dollars.

a. The total assets were $129,480 and $112,745 at December 31, 2014 and
December 31, 2013, respectively.
b. Cash and cash equivalents were $3,160 at December 31, 2014.
c. Revenues reported in 2014 were $18,364 and in 2013 were $20,093.
d. Net income reported in 2014 ($5,209) increased by 35.5% over 2013’s net
income ($3,844). On the other hand, 2014 revenues ($18,364) fell by 8.6%
from those reported in 2013 ($20,093). These two items moved in opposite
directions, contrary to what a reader might expect. The increase in net income
in spite of falling revenues is attributed largely to increases in fair values
recognized in 2014 of $3,674, as compared to only $663 in 2013. We are told
that the company’s investment properties are accounted for at fair value [see
Note 2 (h) (i)] and Note 25 indicates that the change in fair values of the
investment properties accounts for the majority of the total fair value changes
in 2014.
e. Using the Financial Statements and Notes, it is likely that the following types
of adjusting entries would have been made:
1. Accruals of amounts in accounts receivable. See Notes 2 (o) (i) and 7
(a). Some receivables have been adjusted to recognize the unrealized
mark-to-market gains at year end, and others related to contract work
would have been accrued based on what was earned up to the
reporting date. In addition, Note 2 (k) indicates that accounts
receivable are measured after acquisition at amortized cost using the
effective interest method. This would require year-end adjusting
entries, as would the adjustment required to bring the allowance for
uncollectability up-to-date at year end.
2. Recognition of unexpired expenses as prepaid expenses, and the
recognition of expired prepaid costs as expenses. See Note 7.
3. Impairment of inventories. Note 8 indicates that various inventories
have been impaired during the year. It is likely a year-end adjusting
entry would have been made to recognize this.
4. An adjusting entry would be required to recognize income tax expense
and income taxes currently payable, as well as for the deferred portion
of income tax expense and the adjustment of the deferred income tax
asset and liability accounts.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

RA 3-1 BROOKFIELD ASSET MANAGEMENT INC. (CONTINUED)

e. (continued)
5. Depreciation of property, plant and equipment. Adjustments would be
made to recognize depreciation expense and additions to the
accumulated depreciation.
6. Accrual of accounts payable and other liabilities at year end.
7. Accrual of interest payable and interest expense on the company’s
long-term debt such as its Corporate Borrowings and Non-Recourse
Borrowings
8. Many other examples would also be appropriate.
f. The Consolidated Statement of Changes in Equity reports all the changes in
retained earnings during the year:
Retained earnings, January 1, 2014 $7,159
Net income reported for 2014 3,110
Shareholder distributions (i.e., dividends)
- On common shares ( 388)
- On preferred shares ( 154)
From issuances (net) of common and preferred shares ( 69)
From amounts related to share-based compensation ( 7)
From ownership changes within the entity 51
Retained earnings, December 31, 2014 $9,702
g. Brookfield’s management is responsible for the “integrity, consistency,
objectivity and reliability” of the consolidated financial statements and other
financial information in its Annual Report (see the report of “Management’s
Responsibility for the Financial Statements” provided with the financial
statements as part of the Company’s Annual Report). In order to do this,
management, at the highest levels, takes responsibility for seeing that
policies, procedures and internal control systems are put in place and
maintained in order to provide assurance that the information produced is
relevant and reliable and that the company’s assets are protected.
Management also ensures that the company’s operations are subject to
internal audits on a regular basis.

One of management’s key responsibilities related to financial reporting, in

general, is for the system of internal controls that is put in place to ensure that
the information systems are working effectively to produce reliable reports
prepared in accordance with generally accepted accounting principles (IFRS).
In fact, top management must report and sign statements to the effect that it
has carried out this responsibility and that the systems are working as they
should. In addition, the Auditor must audit the internal control system and
report to the Board of Directors and shareholders whether, in its opinion,
effective internal control systems are in place.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

RA 3-1 BROOKFIELD ASSET MANAGEMENT INC. (CONTINUED)

g. (continued)

Note also that the Auditor makes it clear in the audit report that while it is its
responsibility to audit and express an opinion on the consolidated financial
statements, the preparation and fair presentation of the financial statements
themselves is management’s responsibility. Management is responsible for
the choice of accounting policies within IFRS parameters as well as the
internal control systems that help ensure that the statements are free of
material errors.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

RA 3-2 FINANCIAL STATEMENT DATES

(a) (b) (b) (d) (d)

Industry and Company Average
Year-End Release Number by
Date Date of Days Industry

3
1 BANKS 3
Toronto Dominion 31-Oct-14 3-Dec-14 33
Royal Bank of Canada 31-Oct-14 2-Dec-14 32
Bank of Nova Scotia 31-Oct-14 5-Dec-14 35
Bank of Montreal 31-Oct-14 2-Dec-14 32
Canadian Imperial Bank of
Commerce 31-Oct-14 3-Dec-14 33

4
2 INSURANCE 9
Manulife Financial Corporation 31-Dec-14 19-Feb-15 50
Great-West Lifeco Inc. 31-Dec-14 12-Feb-15 43
Sun Life Assurance Company
of Canada 31-Dec-14 11-Feb-15 42
Canada Life Financial
Corporation 31-Dec-14 12-Feb-15 43
Fairfax Financial Holdings Ltd. 31-Dec-14 6-Mar-15 65

5
3 REAL ESTATE 9
Brookfield Property Partners
LLP 31-Dec-14 16-Mar-15 75
Brookfield Office Properties
Inc. 31-Dec-14 6-Mar-15 65
RioCan Real Estate
Investment Trust 31-Dec-14 12-Feb-15 43
Chartwell Retirement
Residences 31-Dec-14 26-Feb-15 57
Cominar Real Estate
Investment Trust 31-Dec-14 23-Feb-15 54

5
4 GAS/ELECTRICAL UTILITIES 6
HydroOne Inc 31-Dec-14 11-Feb-15 42
Fortis Inc. 31-Dec-14 18-Feb-15 49
Ontario Power Generation Inc. 31-Dec-14 13-Mar-15 72
Westcoast Energy Inc. 31-Dec-14 6-Mar-15 65
Canadian Utilities Limited 31-Dec-14 19-Feb-15 50
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

RA 3-2 FINANCIAL STATEMENT DATES (CONTINUED)

(c) Refer to table above. All of the companies in insurance, real estate and
gas and electrical utilities have December 31 year-ends. The banks have
an October 31 year-end because they are regulated by the Office of the
Superintendent for Financial Institutions and the Bank Act which stipulate
an October 31 year-end. Insurance companies are regulated by the
Insurance Act of Canada but there is no prescribed year-end date.

(d) Refer to table above. The time frames are shortest and closest among the
banking companies, probably due to the regulatory environment of the
banking industry. The time frames are quite spread out for the other
industries and each group appears to have one outlier that pushes the
average up. The real estate industry seems to have the longest time to
issue although the utilities are fairly close.

(e) A CEO’s duty is to serve the interests of shareholders over his or her own
interests. The CEO of this company is not fulfilling his duty in this case,
and is trying to capitalize on his insider information to the detriment of the
shareholders of the company. As the ethical accountant, in this scenario
you have a responsibility to ensure that the financial statements are
released once they have been finalized, and not to delay release so that
insiders can sell their stock options in anticipation of a fall in stock price.
This would ensure timeliness of financial information for shareholders.
Further, you should discuss the issue of insider trading with the CEO to
ensure he is aware that such behaviour is not acceptable legally or
ethically. If the CEO insists on delaying release of the financial
statements, the behaviour of the CEO should be reported to the Board of
Directors.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

RA 3-3 ERP

An Enterprise Resource Planning (ERP) software system is an integrated

real-time computer system that uses a single database with integrated
modules for such areas of operations as accounting, human resources,
logistics, production, capital asset management, and treasury functions. Full
use of such a system offers the potential for a fully integrated system
response to various transactions ranging from customer orders to supplier
purchases to new staff hires. When the use of such systems is combined
with web-based software and executive decision support software, it becomes
a powerful and progressive operational and management tool.

ERP systems have gained attention recently because they represent a big
stride forward in allowing companies to operate as an integrated whole as
opposed to each functional area of a company operating somewhat
independently and often causing goal incongruence in the process. Earlier
systems often consisted of each functional area using a stand-alone system
which may have worked well for that particular function but did not necessarily
encourage focus on the overall picture. It was difficult and time consuming to
coordinate and process activities that involved more than one sub-system and
reports generated out of each system for the same activities often did not
directly or easily tie into each other. The fact that each system often operated
on its own database also meant that data was often duplicated by being
stored in more than one system. This not only resulted in unnecessarily large
amounts of data but also resulted in problems with respect to data integrity. A
piece of data that got updated in one system might not be updated in another
system resulting in inconsistent results and reports. The common database
used in ERP’s allows more flexible reporting as all functions can design and
use reports that fit their needs while using many of the same data elements.

Companies find ERPs so useful because they have allowed operating,

recording, processing and reporting functions to become more streamlined,
saving personnel time and effort and resulting in higher quality, more efficient
reporting. They often result in reduced inventory levels, shorter lead times for
customers, and other operational advantages.

As discussed above, the pros of ERP systems include better integration of

related functions, lower data requirements, better data integrity, and more
flexible and higher quality reporting.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

RA 3-3 ERP (CONTINUED)

The cons of ERP systems include high cost, both in terms of initial installation
and implementation and ongoing support and maintenance. There is a
requirement for more highly trained staff and for more cross training among
staff with respect to related functional areas. The results from an integrated
system are only as good as the inputs and thus it is critical that the various
functional areas come to some agreement with respect to issues of data
definitions, policies and procedures surrounding updating common data
elements, etc. This can be a time consuming and difficult process, and
requires the commitment and involvement of top management in order to be
successful. One of the problems with ERP systems is that the integration is
often not as smooth and flawless as one would hope. These systems can be
extremely complex and the integration issues alone can be overwhelming to
deal with. Another con is that although the single database is a positive thing
in most contexts, it can be a negative in the sense that “all the eggs are in
one basket.” If there is a problem with the database in an ERP system, it
affects all functional areas, rather than being isolated to one area as in the
case when each function is operating with a separate system.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

RA 3-4 – XBRL

XBRL stands for eXtensible Business Reporting Language which is a form of

electronic communication that is used and recognized internationally. Being
an open standard, the data can be transferred easily to most software and
hardware systems. Rather than presenting financial statements and
information in text form (the form we are familiar with in pdf files), XBRL
provides an identifying tag for each unique piece of information. This allows
the information to be easily stored, analyzed, processed and exchanged,
assisting users with comparative analyses between companies, or with the
development of trends of historical data from the same company. The move
to XBRL from former pdf reporting has been compared to moving from film
photography to digital photography, or from paper maps to digital maps
([Link]).

The advantages are the following:

 For preparers - It is more efficient to prepare the reports, and the
information is more accurate. Using XRBL eliminates the manual re-entering
of information into a different reporting format.
 Investors can use the information in this format to more quickly analyze
and compare across companies and with the same company over time in
determining trends. It is a more useable format than pdf files for corporate
reports, again eliminating the re-keying of information.
 The XRBL language is an open language allowing it to be easily and
freely adopted around the world. It can handle different foreign languages
and accounting standards.
 It can easily be used for other types of reporting including: earnings
press releases and corporate tax returns, for example.

The disadvantages of using XRBL are as follows:

 There will be upfront costs to implement this change for preparers and
training is required.
 The tagging process is not error free since the user must determine
(judgmentally in some cases) how the financial item will be tagged and
mapped. Initially this could result in a misrepresentation of data, errors and a
lack of comparability.
 Preparers may have to customize tags if the nature of the financial
data is unique and does not fit within the standard conventions. This will
make it more complex and less comparable across companies.

XBRL is in use around the world: in North America; Australia; India; China;
Japan; and in parts of Central and South America; Europe (including the UK);
Africa; Middle East; and South-east Asia.

RA 3-4 XBRL (CONTINUED)

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

In the United States, the most widespread use of XBRL is due to the
requirements of the Securities Exchange Commission (SEC). The SEC, the
US securities regulator, requires listed companies and those with other listed
securities, including mutual funds, to file XBRL tagged financial statements to
their EDGAR system (EDGAR is similar to the SEDAR system in Canada). As
well as using this standardized data for compliance with regulations and as an
analytical tool to detect anomalies in the data filed, the SEC makes the
information available to investment analysts, data vendors and research firms.
In addition, the Federal Financial Institutions Examination Council (FFIEC)
requires US banks to provide regular reports in XBRL. These are used
extensively by bank regulators in that country. Another major use of XBRL
reporting is for Standard Business Reporting (SBR) increasingly required by
government bodies and for income tax regimes.

The Netherlands and Australia are leaders in using XBRL for SBR systems;
and in the UK, XBRL is required for tax filing as well as securities regulation.

While there was early interest in using XBRL in Canada, it now lags
internationally in requiring its use. There is no requirement for Canadian
companies to file XBRL financial reports with securities regulators or for
standardized business reporting by the government.
 Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition

LEGAL NOTICE

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The material provided herein may not be downloaded, reproduced, stored in a

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of John Wiley & Sons Canada, Ltd.

MMXVI xi F21