Problem 3 - 1

a) Expense can't be incurred until goods were delivered. Hence $25,000 will be expense for July, not for June.

b) Expense was incurred in June as the payment was for the work performed in that month.

c) Expense for June. The money was spent for purchasing these goods and were no use now. Hence this amount ha

d) Expense for June as the sale of goods has taken place in June itself.

e) It will be expense for June if the radio advertising has taken place in this accounting period (viz. June).

f) Not an expense for June. Only the assets were acquired. They are yet to go through the manufacturing process an

Problem 3 - 2

a) Sales 275,000 <== revenues

Less: Cost of goods sold 164,000
Gross profit 111,000
Expenses:
Rent expense 3,300
Salary expense 27,400
Other expenses 50,240
80,940 <== operating expenses
Operating profit (EBI 30,060
Less: interest expense 0 <== not provided. Assumed to be zero.
Profit before tax 30,060
Less: corporate tax expense 1,375
c) Net income (PAT) 28,685

b) expenses = operating expenses + interest expenses + taxes = 82,315

Problem 3 - 3

opening stock 27,000

add: purchases 78,000
Total stock 105,000
less: closing stock 31,000
Cost of goods sold 74,000

Problem 3 - 4

Sales 85,000
Less: Cost of goods sold 45,000
a1) Gross profit 40,000 <== answer for (a)
 Less: Selling and admin expenses 25,000
Operating profit (EBIT) 15,000
Less: interest expense 0
Profit before tax 15,000
Less: corporate tax expense 6,000
Net income (PAT) 9,000

a2) Gross margin (Gross profit margin) = Gross profit / Sales = 47.06%

a3) Profit margin (net profit margin) = net profit / sales = 10.59%

b) Some interpretations:
marginal tax rate is 40%
operating profits (the earnings potential) is 17.7% of its sales.
Company's gross margin is 47% of its sales.
It could contain its operating expenses at 29.3% of its sales.

Problem 3 - 5

a) It is an expenditure of $40,000. It will be expensed over next 5 years. The depreciation expense will be charged to

b) No change in income statement as land is not depreciated.

c) Inventory consumed upto December 31 only will be shown in this year's income statement. Hence, $3,500 will be c

d) The accounting year is same as calender year in this case. The $72 expenditure spans over two accounting years.

Problem 3 - 6
shown on the
balance sheet
Prepaid insurance dated Fire insurance expense
30,000 october 31, 2011 (say)
27,500 December 31, 2011 2,500
12,500 December 31, 2012 15,000
0 October 31, 2013 12,500

Problem 3 - 7
QED Electronics Company
Transactional analysis

Assets

Provision
Accounts for parts Repair
Tr. No. Date Descrption Cash Receivabl Bad debt Inventory Truck
Opening balances
 1) paid for repair truck -19000 19000
2) paid for parts bought -1600 1600
consumed the parts -1600
3) Revenue in cash 20500
Credit sales 12900
Provision for bad debt -645
4) Interest expense
5) wages paid in cash -8600
wages not paid
6) depletion in parts inv -2100
7) utilities bills paid -1500
8) Depreciation expense
9) selling expenses paid -1900
10) provision for income tax
Tax paid in this month -2600
11) Admin & misc. exp
-14700 12900 -645 -2100 19000

Problem 3 - 8
XYZ Company
Balance sheet as on _______

Assets Liabilities and OE

 Current assets $80,000 Current liabilities $50,000
Non-current assets (Bal. Fig.) $138,182 Long-term liabilities $40,000
Owners' equity ###
$218,182 ###

XYZ Company
Income Statement for the period ending _______

Saeles revenue $81,818

Less: Cost of goods sold $45,000
Gross Profit $36,818 45%
Less: operating expenses xxx
interest expenses xxx
corporate tax expense xxx
$28,636 <== plug figure
Net income (profit after tax) $8,182 10%

Problem 3 - 9

Sales in LC = 26,666,667 [LC 20,000,000 x (200 / 150)]

January cash in LC = 1,000,000 [LC 500,000 x (200 / 100)]

December cash in LC = 600,000 [LC 500,000 x (200 / 200)]

At year-end the company was more liquid in terms of nominal currency (LC 600,000 versus LC 500,000) but in term
or July, not for June.

now. Hence this amount has to be expensed in the month it were found to be obsolete.

riod (viz. June).

e manufacturing process and to be sold in order to be recognized as expense.

expense will be charged to income.

ent. Hence, $3,500 will be charged to income as cost of goods sold for this year. The remaining $3500 will be charged to next year's incom

over two accounting years. Hence the subscription expense for this will be $36 and the balance $36 will be shown as prepaid expense on t

shown on the
income statement for the
rance expense calender year ending

2011
2012
2013

Liabilities
Accumulated Admin &
Depreciation misc.
on repair Interest wages utilities bill income taxexpenses Revenues,
truck accrued payable payable payable payable Expenses
700
 -1600
20500
12900
-645
880 -880
-8600
1,400 -1,400
-2100
-700 -800
-2700 -2700
-1900
2800 -2800
-2600
4,700 -4,700
-2700 880 1400 0 200 4700 5275

QED Electronics Company

Income Statement for April, 20xx

Revenues: 33400
Cash sales 20500
Credit sales 12900
Less: Cost of goods sold -3700
Gross profit 29700
Less: Expenses
Selling expenses -1900
Admin & misc. expenses -4,700
Wages expense -10,000
Utilities expenses -800
provided for bad debts -645
Depreciation expense -2700
Operating expenses -20745
Operating profit 8955
Less: interest expense -880
Profit before tax 8075
Less: corporate tax expense -2800
Net income (Profit after tax) 5275

Current liabilities, EoY $50,000 Current ratio = 1.6

Owners' equity, BoY ###
Long-term debt, EoY $40,000
 Inventory, BoY $35,000 Gross margin = 45%
Purchases during the year $40,000 Net profit margin = 10%
Inventory, EoY $30,000
==> cost of goods sold = $45,000
==> sales = $81,818
==> Net profit = $8,182

rsus LC 500,000) but in terms of the purchasing power of its cash it was worse off (LC 1,000,000 versus LC 600,000).
e charged to next year's income.

shown as prepaid expense on the ending balance sheet of this accounting year. It will be expensed next year.
 AHM Chapter 3 Exercise 1
N. Klein & Company had the following transactions in June. Using the matching concept, decide which of these tran

(a) Received orders for goods with prices totalling $25,000; goods to be delivered in July.

(b) Paid office staff $9,750 for work performed in June.

(c) Products in inventory costing $1,725 were found to be obsolete.

(d) Sold goods with a cost of $25,000 in June.

(e) Paid $750 for radio advertising in June.

(f) Purchased additional inventory for $27,000.

pt, decide which of these transactions represented expenses for June.

Not an expense for June - not incurred.

Expense for June

Expense for June

Expense for June

Expense for June

Not an expense for June - asset acquired

 Income Statement

Revenues $275,000
Less: Cost of Goods Sold $164,000
Gross margin $111,000
Less: Operating expenses
Rent expense 3,300
Salaries expense 27,400
Other expenses 50,240 80,940
Operating profit $30,060
Less: interest expenses -
Profit before taxes $30,060
Less: tax expense 1,375
PAT $28,685
Beginning inventory $27,000
Purchases 78,000
Available for sale $105,000
Ending inventory (31,000)
Cost of goods sold $74,000
Worden corporation has the following information revenues and expenses for the year:
Revenues 85,000
Cost of goods sold 45,000
Selling and administration expen 25,000
Income taxes 6,000
Prepare the income statement of Worden Corporation in multi-step format. How much gross margin (gross profit) d

SOLUTION

Income Statement
Revenues $85,000
Less: Cost of Goods Sold $45,000
Gross margin $40,000 ===> Gross margin = 47%
Less: Operating expenses
Rent
Salaries
Other expenses 25,000
Operating profit $15,000 ===> Operating margin = 18%
Less: interest expenses -
Profit before taxes $15,000
Less: tax expense 6,000
$9,000 ===> Net profit margin = 11%

Marginal tax rate is 40%.

The company’s operating expenses were 82.3 percent of sales ($70,000 / $85,000) and its cost of goods sold was 5
The company’s gross margin was 47 percent of sales ($40,000 / $85,000).
gross margin (gross profit) did it made?

d its cost of goods sold was 53 percent of sales.

What expense items are the associated with the following transactions? What and how is the income statement affec
(a) Purchased equipment for $40,000 that has a useful life of five years.
(b) Purchased land for $135,000.
(c ) Purchased $7,000 worth of inventory on December 19. On December 27 sold one-half of the inventory for $6,00
On January 8, sold the remainder for $6,200. The company uses the calendar year for its fiscal year.
(d) On January 1, subscribed to a magazine for two years. The cost was $72.

Depreciation. Each year for the next 5 years depreciation will be charged to income.
No income statement charge. Land is not depreciated.
Cost of goods sold. $3,500 charged to current year’s income. $3,500 charged to next year’s income.
Subscription expense. $36 charged to current year. $36 charged to next year. Alternatively, $72 charged to current
s the income statement affected by each one?

alf of the inventory for $6,000.

or its fiscal year.

ear’s income.
vely, $72 charged to current year on grounds $72 is immaterial.
Problem 3-6
Asset value: Expenses
1-Oct-05 $30,000
31-Dec-05 26,250 1/10/05 - 31/12/05 $3,750
31-Dec-06 11,250 1/01/06 - 31/12/06 $15,000
31-Dec-07 0 1/01/07 - 31/12/07 $11,250 $15,000
$30,000

One month’s insurance charge = $30,000 / 24 months = $1,250 per month

QED Electronics Company had the following transactions during April 2015 while conducting its television and ster
(a) A new repair truck was purchased for $19,000.
(b) Parts with a cost of $1,600 were received and used during April.
(c) Service revenue for the month was $33,400, but only $20,500 was cash sales. Typically, only 95 percent of sales
(d) Interest expense on loans outstanding was $880.
(e) Wage cost for the month totalled $10,000; however, $1,400 of this had not yet been paid to the employees.
(f) Parts inventory from the beginning of the month was depleted by $2,100.
(g) Utility bills totalling $1,500 were paid. $700 of this amount was associated with March’s operations.
(h) Depreciation expense was $2,700.
(i) Selling expenses were $1,900.
(j) A provision for income taxes was established at $2,800 had been paid to the federal government.
(k) Administration and miscellaneous expenses were recorded at $4,700.
Required: Prepare a detailed income statement for April 2015.

QED ELECTRONICS COMPANY

Income Statement for the month of April, ----.

Sales 33,400
less Expenses:
Bad debts 645 645.00 12,900
Parts 3,700
Wages 10,000
Utilities 800
Depreciation 2,700
Selling 1,900
Administrative 4,700 24,445
8,955
Interest 880
Profit before taxes 8,075
Provision for taxes 2,800
Net income 5,275

Truck purchase has no income statement effect. It is an asset.

Sales are recorded as earned, not when cash is received. Bad debt provision of 5 percent related to sales on credit
Wages expense is recognized as incurred, not when paid.
March’s utility bill is an expense of March when the obligation was incurred.
Income tax provision relates to pretax income. Must be matched with related income.
ing its television and stereo repair business.

, only 95 percent of sales on account are realized.

d to the employees.

s operations.

elated to sales on credit ($33,400 - $20,500) must be recognized.

Your boss has given the following data about Nitsche Fabrics GMBH:
Current liabilities, ending balance € 50,000 Purchasing, during the perio
Owners’ equity, beginning balance 120,000 Inventory, ending balance
Long-term debt, ending balance 40,000 Inventory, beginning balanc
She has also provided the following ratio information:
Current ratio, ending 1.6
Profit margin 10%
Gross margin percentage 45%
Determine the amount of total assets, current assets, and noncurrent assets at the end of the period.

Income Statement Balance Sheet as on __________

Begin End
Sales ($45,000 / (1 - .45)) 81,818 Current Assets 80,000
Beginning inventory 35,000 Cash
Purchases 40,000 AR
Total available 75,000 invento 30,000 35000
Ending inventory 30,000 Other assets 138,182
Cost of goods sold 45,000 (bal. Fig.)
Gross margin 36,818 218,182
Less: operating expenses
Operating profit
Less: interest expenses
Profit before taxes
Less: tax expenses
Net profit 8,181.8
Purchasing, during the period € 40,000
nventory, ending balance 30,000
nventory, beginning balance 35,000

eet as on __________
Begin End Data given
Current liabilities 50,000 Gross profit margin 45%
LT liabilities 40,000 Net profit margin 10%
90,000 Current ratio = 1.60
Owners' equity:
Opening 120,000
+ NI 8,181.8 128,182
218,182
Sales LC = 26,666,667 [LC 20,000,000 x (200 / 150)]
January cash LC 1,000,000 [LC 500,000 x (200 / 100)]
December cash LC 600,000
At year-end the company was more liquid in terms of nominal currency (LC 600,000 versus LC 500,000) but in term
its cash it was worse off (LC 1,000,000 versus LC 600,000)
sus LC 500,000) but in terms of the purchasing power of