IAF Selected Exercises 7e 2023 2024

1
EXERCISES INTRODUCTION TO ACCOUNTING &

FINANCE
Overview exercises 2023-2024
Chapter 1: Accounting and the business environment [FINANCIAL CHAPTERS]
6th edition 7th edition
E1-26 (p 65) E-F:1-26 (p 57)
E1-29 (p 66) E-F:1-29 (p 58)
P1-42A (p 71) P-F:1-43A (p 63)
Chapter 2: Recording business transactions [FINANCIAL CHAPTERS]

E2-21 (p 122) E-F:2-21 (p 115)
E2-23 (p 123) E-F:2-23 (p 116)
P2-33A (p 131) P-F:2-33A (p 124)
Chapter 3: The adjusting process [FINANCIAL CHAPTERS]

S3-3 (p 184) S-F:3-3 (p 176)
P3-34A (p 196) P-F:3-34A (p 188)
Chapter 4: Completing the accounting cycle [FINANCIAL CHAPTERS]

S4-10 (p 245) S-F:4-10 (p 237)
E4-19 (p 249) E-F:4-20 (p 241)
E4-20 (p 250) E-F:4-21 (p 242)
Chapter 5: Merchandising operations [FINANCIAL CHAPTERS]

S5-6 (p 322) S-F:5-7 (p 316)
S5-10 (p 323) S-F:5-9 (p 317)
S5-8 (p 322) S-F:5-12 (p 317)
Chapter 6: Merchandise inventory [FINANCIAL CHAPTERS]

S6-4 (p 384) S-F:6-4 (p 379)
S6-5 (p 384) S-F:6-5 (p 379)
S6-6 (p 385) S-F:6-6 (p 380)
S6-7 (p 385) S-F:6-7 (p 380)
Chapter 11: Capital Investment Decisions [MANAGERIAL CHAPTERS]

S26-10 (p 634) S-M:11-10 (p 633)
S26-15 (p 635) S-M:11-15 (p 634)
E26-24 (p 637) E-M:11-24 (p 636)
E26-25 (p 638) E-M:11-25 (p 637)
E26-26 (p 638) E-M:11-26 (p 637)
Part of P26-30A (p 639) Part of P-M:11-30A (p 638)
© 2022 Pearson Education, Ltd. 2

THE FINANCIAL CHAPTERS
(Source: Horngren’s Financial & Managerial Accounting, The Financial Chapters. Global
Edition. Seventh Edition. ISBN 10: 1-292-41232-1; ISBN 13: 978-1-292-41232-0)
Chapter 1
Accounting and the Business Environment
p. 57 (theory on pp. 31-36)
E-F:1-26 Using the accounting equation to analyze business transactions
Learning Objective 4
Indicate the effects of the following business transactions on the accounting equation of Vivian’s Online
Video store. Transaction (a) is answered as a guide.
a. Received cash of $10,000 from issuance of common stock.
Answer: Increase asset (Cash); Increase equity (Common Stock)
b. Earned video rental revenue on account, $2,800.
c. Purchased office furniture on account, $300.
d. Received cash on account, $400.
e. Paid cash on account, $100.
f. Rented videos and received cash of $200.
g. Paid monthly office rent of $1,000.
h. Paid $100 cash to purchase office supplies.
SOLUTION
a. Increase asset (Cash); Increase equity (Common Stock)

b. Increase asset (Accounts Receivable); Increase equity (Rental Revenue)
c. Increase asset (Office Furniture); Increase liability (Accounts Payable)
d. Increase asset (Cash); Decrease asset (Accounts Receivable)
e. Decrease asset (Cash); Decrease liability (Accounts Payable)
f. Increase asset (Cash); Increase equity (Rental Revenue)
g. Decrease asset (Cash); Decrease equity (Rent Expense)
h. Decrease asset (Cash); Increase asset (Office Supplies).

E-F:1-29 Using the accounting equation to analyze business transactions
Ashley Stamper opened a medical practice. During July, the first month of operation, the business, titled Ashley Stamper, MD, experienced
the following events:
Jul. 6 Received a contribution of $68,000 from Stamper and opened a bank account in the name of A.
Stamper, MD. The corporation issued common stock to Stamper.
9 Paid $56,000 cash for land.
12 Purchased medical supplies for $1,500 on account.
15 Officially opened for business.
20 Paid cash expenses: employees’ salaries, $1,300; office rent, $1,500; utilities, $100.
31 Earned service revenue for the month, $13,000, receiving cash.
31 Paid $1,050 on account.
Analyze the effects of these events on the accounting equation of the medical practice of Ashley Stamper, MD, using the following format:

SOLUTION
ASSETS = LIABILITIES + EQUITY

Contributed
Capital + Retained Earnings
Medical Accounts Common Service Salaries Rent Utilities
Date Cash + Supplies + Land = Payable + Stock – Dividends + Revenue – Expense – Expense – Expense
July 6 +68,000 +68,000
Bal. $68,000 = + $68,000
9 –56,000 +56,000 =
Bal. $12,000 + $56,000 = + $68,000
12 + +1,500 = +1,500
Bal. $12,000 + $1,500 + $56,000 = $1,500 + $68,000
15
Bal. $12,000 + $1,500 + $56,000 = $1,500 + $68,000
20 –2,900 = –1,300 –1,500 –100
Bal. $ 9,100 + $1,500 + $56,000 = $1,500 + $68,000 – $1,300 – $1,500 – $100
31 +13,000 = +13,000
Bal. $22,100 + $1,500 + $56,000 = $1,500 + $68,000 + $13,000 – $1,300 – $1,500 – $100
31 –1,050 = –1,050
Bal. $21,050 + $1,500 + $56,000 = $ 450 + $68,000 + $13,000 – $1,300 – $1,500 – $100

P-F:1-43A Preparing financial statements
$
Presented here are the accounts of Hometown Décor Company for the year ended December 31, 2024.
Land $ 13,000 Common Stock $ 28,000
Notes Payable 33,000 Accounts Payable 14,000
Property Tax Expense 2,800 Accounts Receivable 800
Dividends 36,000 Advertising Expense 17,000
Rent Expense 14,000 Building 170,400
Salaries Expense 67,000 Cash 2,800
Salaries Payable 1,300 Equipment 17,000
Service Revenue 225,000 Insurance Expense 1,700
Office Supplies 8,000 Interest Expense 6,800
Retained Earnings, Dec. 31, 2023 56,000
Requirements
1. Prepare Hometown Décor Company’s income statement for the year ended December 31, 2024.
2. Prepare the statement of retained earnings for the year ended December 31, 2024.
3. Prepare the balance sheet as of December 31, 2024.

SOLUTION
Requirement 1
HOMETOWN DÉCOR COMPANY
Income Statement
Year Ended December 31, 2024
Revenue:
Service Revenue $ 225,000
Expenses:
Salaries Expense $ 67,000
Advertising Expense 17,000
Rent Expense 14,000
Interest Expense 6,800
Property Tax Expense 2,800
Insurance Expense 1,700
Total Expenses 109,300
Net Income $ 115,700
Requirement 2
Statement of Retained Earnings
Year Ended December 31, 2024
Retained Earnings, December 31, 2023 $ 56,000

Net income for the year 115,700
171,700
Dividends (36,000)
Retained Earnings, December 31, 2024 $ 135,700

Requirement 3
Balance Sheet
December 31, 2024
Assets Liabilities
Cash $ 2,800 Accounts Payable $ 14,000
Accounts Receivable 800 Notes Payable 33,000
Office Supplies 8,000 Salaries Payable 1,300
Land 13,000 Total Liabilities 48,300
Building 170,400
Equipment 17,000 Stockholders’ Equity
Common Stock 28,000
Retained Earnings 135,700
Total Stockholders’ Equity 163,700
Total Liabilities and Stockholders’
Total Assets $ 212,000 Equity $ 212,000

Chapter 2
Recording Business Transactions
p. 115 (theory on pp. 83-97)
E-F:2-21 Journalizing transactions from T-accounts
In December, the first five transactions of Abling’s Lawn Care Company have been posted to the T-accounts. Prepare the journal entries that
served as the sources for the five transactions. Include an explanation for each entry.

SOLUTION
Posting
Date Accounts and Explanation Ref. Debit Credit
1. Cash 57,000
Common Stock 57,000
Issued common stock in exchange for cash.
2. Office Supplies 800

Accounts Payable 800
Purchased office supplies on account.
3. Building 40,000
Cash 40,000
Purchased building for cash.
4. Cash 46,000
Notes Payable 46,000
Borrowed money signing a note payable.
5. Equipment 3,800
Cash 3,800
Purchased equipment for cash.

p. 116 (theory on pp. 98-99)
E-F:2-23 Preparing a trial balance from T-accounts
The T-accounts of McMahon Farm Equipment Repair follow as of May 31, 2024.
Prepare McMahon Farm Equipment Repair’s trial balance as of May 31, 2024.
SOLUTION
MCMAHON FARM EQUIPMENT REPAIR

Trial Balance
May 31, 2024
Account Title Balance

Debit Credit
Cash $ 9,020
Accounts Receivable 3,100
Land 14,000
Building 29,000
Equipment 16,000
Salaries Payable $ 3,400
Common Stock 47,000
Dividends 2,000
Service Revenue 5,300
Salaries Expense 6,300
Property Tax Expense 1,000
Advertising Expense 280
Total $ 80,700 $ 80,700

p. 124 (theory on pp. 99-100)
P-F:2-33A Correcting errors in a trial balance
The trial balance of Beautiful Tots Child Care does not balance.
The following errors are detected:

a. Cash is understated by $1,500.
b. A $4,100 debit to Accounts Receivable was posted as a credit.
c. A $1,400 purchase of office supplies on account was neither journalized nor posted.
d. Equipment was incorrectly transferred from the ledger as $91,500. It should have been transferred as
$83,000.
e. Salaries Expense is overstated by $700.
f. A $300 cash payment for advertising expense was neither journalized nor posted.
g. A $200 cash dividend was incorrectly journalized as $2,000.
h. Service Revenue was understated by $4,100.
i. A 12-month insurance policy was posted as a $1,900 credit to Prepaid Insurance. Cash was posted
correctly.
Prepare the corrected trial balance as of August 31, 2024. Journal entries are not required.

SOLUTION
BEAUTIFUL TOTS CHILD CARE

Trial Balance
August 31, 2024
Account Title Balance

Debit Credit
Cash $ 10,900
Office Supplies 2,400
Prepaid Insurance 4,100
Equipment 83,000
Accounts Payable $ 4,800
Common Stock 57,000
Dividends 3,200
Rent Expense 750
Advertising Expense 300
Total $ 123,250 $ 123,250
Explanations:
a. Increase Cash by $1,500.
b. Increase Accounts Receivable by $8,200 ($4,100 × 2).
c. Increase Office Supplies and Accounts Payable by $1,400 each.
d. Decrease Equipment by $8,500 ($91,500 − $83,000).
e. Decrease Salaries Expense by $700.
f. Advertising Expense should have a debit balance of $300. Decrease Cash by $300.
g. Dividends should decrease by $1,800 and Cash should increase by $1,800 ($2,000 − $200).
h. Service Revenue should increase by $4,100.
i. Prepaid Insurance should increase by $3,800 ($1,900 × 2).

Chapter 3
The Adjusting Process
p. 176 (theory on pp. 140-141)
S-F:3-3 Applying the revenue recognition principle
Movies Online sells subscriptions for $36 for 18 months. The company collects cash in advance and then
subscribers have access to unlimited movies each month.
Apply the revenue recognition principle to determine
a. when Movies Online should record revenue for this situation.
b. the amount of revenue Movies Online should record for eight months.
SOLUTION
a. Movies Online should record revenue when each performance obligation has been satisfied – i.e.
when the company provides access to the unlimited movies each month (not when the cash is
collected in advance). The company should record revenue monthly.
b. Movies Online should record $16 of revenue for eight months.
Calculations:
$36 collected in advance for 18 months / 18 months = $2 revenue earned per month
Thus,
$2 revenue per month × 8 months = $16 revenue earned for 8 months

p. 188 (theory on pp. 142-143 & 160-161)
P-F:3-34A Journalizing adjusting entries and identifying the impact on financial statements
Learning Objectives 3, 5
Griffin Fishing Charters has collected the following data for the December 31 adjusting entries:
a. The company received its electric bill on December 31 for $375 but will not pay it until January 5.
(Use the Utilities Payable account.)
b. Griffin purchased a three-month boat insurance policy on November 1 for $1,200. Griffin recorded a
debit to Prepaid Insurance.
c. As of December 31, Griffin had earned $3,000 of charter revenue that has not been recorded or
received.
d. Griffin’s fishing boat was purchased on January 1 at a cost of $33,500. Griffin expects to use the
boat for ten years and that it will have a residual value of $3,500. Determine annual depreciation
assuming the straight-line depreciation method is used.
e. On October 1, Griffin received $9,000 prepayment for a deep-sea fishing charter to take place in
December. As of December 31, Griffin has completed the charter.
Requirements
1. Journalize the adjusting entries needed on December 31 for Griffin Fishing Charters. Assume Griffin
records adjusting entries only at the end of the year.
2. If Griffin had not recorded the adjusting entries, indicate which specific category of accounts on the
financial statements would be misstated and if the misstatement is overstated or understated. Use the
following table as a guide.

SOLUTION
Requirement 1
Date Accounts and Explanation Debit Credit

a. Dec. 31 Utilities Expense 375
Utilities Payable 375
To accrue utilities expense.
b. Dec. 31 Insurance Expense 800*

Prepaid Insurance 800*
To record insurance expense.
c. Dec. 31 Accounts Receivable 3,000

To accrue service revenue.
d. Dec. 31 Depreciation Expense—Boat 3,000*

Accumulated Depreciation—Boat 3,000*
To record depreciation on boat.
e. Dec. 31 Unearned Revenue 9,000

To record service revenue earned that was collected in
advance.
* Calculations:
b:
$1,200 Insurance prepaid on November 1 for 3 months
 3 months
$ 400 Insurance expense per month
Thus,
$400 Insurance expense per month

× 2 months
$800 Insurance expense for November and December

P-F:3-34A, cont.
d:
Straight-line
= (Cost – Residual Value) / Useful Life in Years
depreciation per year
= ($33,500 – $3,500) / 10 years
= $30,000 / 10 years
= $3,000
Requirement 2
Specific Category Specific Category

Adjusting Over / Over /
of Accounts on the of Accounts on the
Entry Understated Understated
Balance Sheet Income Statement
a. Liability Understated Expense Understated
Equity Overstated
b. Asset Overstated Expense Understated
Equity Overstated
c. Asset Understated Revenue Understated
Equity Understated
d. Asset Overstated Expense Understated
Equity Overstated
e. Liability Overstated Revenue Understated
Equity Understated

Chapter 4
Completing the Accounting Cycle
p. 237 (theory on p. 211)
S-F:4-10 Journalizing closing entries
Brett Teddy Enterprises had the following accounts and normal balances listed on its December 31st
adjusted trial balance: Service Revenue, $21,900; Salaries Expense, $6,000; Rent Expense, $4,400;
Advertising Expense, $3,100; and Dividends, $6,900.
Journalize the closing entries for Teddy Enterprises.
SOLUTION

Dec. 31 Service Revenue 21,900
Income Summary 21,900
To close revenue.
31 Income Summary 13,500

Rent Expense 4,400
Advertising Expense 3,100
To close expenses.
31 Income Summary 8,400

To close Income Summary.
31 Retained Earnings 6,900

Dividends 6,900
To close dividends.

p. 241 (theory on pp. 209-210)
E-F:4-20 Preparing a worksheet
The unadjusted trial balance of Orange Home Cleaning Service at November 30, 2024, follows:
ORANGE HOME CLEANING SERVICE

Unadjusted Trial Balance
November 30, 2024
Balance
Accounts Title Debit Credit
Cash $ 4,650
Accounts Receivable 800
Prepaid Rent 1,200
Office Supplies 1,100
Furniture 40,500
Accumulated Depreciation – Furniture $ 2,000
Accounts Payable 1,750
Salaries Payable
Common Stock 7,600
Retained Earnings, November 1, 2024 35,500
Dividends 1,900
Utilities Expense 300
Rent Expense
Depreciation Expense – Furniture
Supplies Expense
Total 52,050 52,050
Additional information at November 30, 2024:

a. The unadjusted prepaid rent of $1,200 relates to rent period November 2024 through January 2025.
b. Office Supplies used, $950.
c. Accrued service revenue, $1,100.
d. The furniture’s expected useful life is five years with no residual value.
e. Accrued Salaries Expense, $1,650.
Requirements
1. Based on the unadjusted trial balance and the additional information provided, complete Orange
Home Cleaning Service’s worksheet for the month ended November 30, 2024.
2. How much was the net income for November?

E-F:4-20, cont.
SOLUTION
Requirement 1

Worksheet
November 30, 2024
Unadjusted Trial Adjusted Trial

Account Names Balance Adjustments Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash $ 4,650 $ 4,650 $ 4,650
Accounts Receivable 800 c. $ 1,100 1,900 1,900
Prepaid Rent 1,200 $ 400 a. 800 800
Office Supplies 1,100 950 b. 150 150
Furniture 40,500 40,500 40,500
Acc. Depr.—Furniture $ 2,000 675 d. $ 2,675 $ 2,675
Accounts Payable 1,750 1,750 1,750
Salaries Payable 1,650 e. 1,650 1,650
Common Stock 7,600 7,600 7,600
Retained Earnings, Nov. 1 35,500 35,500 35,500
Dividends 1,900 1,900 1,900
Service Revenue 5,200 1,100 c. 6,300 $6,300
Salary Expenses 1,600 e. 1,650 3,250 $ 3,250
Utilities Expense 300 300 300
Rent Expense a. 400 400 400
Depreciation Expense d. 675 675 675
Supplies Expense b. 950 950 950
Total $ 52,050 $ 52,050 $ 4,775 $ 4,775 $ 55,475 $ 55,475 $ 5,575 $ 6,300 $ 49,900 $ 49,175
Net Income 725 725
Total $ 6,300 $ 6,300 $ 49,900 $ 49,900

E-F:4-20, cont.
Requirement 2
Net income for November was $725.
Note: Exercise E-F:4-21 should be solved only after completing Exercise E-F:4-20.
p. 242 (theory on pp. 204-210)

E-F:4-21 Preparing financial statements from the completed worksheet
Use your answer from Exercise E-F:4-20 to prepare Orange Home Cleaning Service’s financial
statements.
Requirements
1. Complete the income statement for the month ended November 30, 2024.
2. Complete the statement of retained earnings for the month ended November 30, 2024.
3. Complete the classified balance sheet as of November 30, 2024. Use the report form.
SOLUTION
Requirement 1
Income Statement
Month Ended November 30, 2024
Revenues:
Service Revenue $ 6,300
Expenses:
Salaries Expense $ 3,250
Utilities Expense 300
Rent Expense 400
Depreciation Expense—Furniture 675
Supplies Expense 950
Total Expenses 5,575
Net Income $ 725
Requirement 2
Statement of Retained Earnings
Retained Earnings, November 1, 2024 $ 35,500

Net income for the month 725
36,225
Dividends (1,900)
Retained Earnings, November 30, 2024 $ 34,325

E-F:4-21, cont.
Requirement 3

Balance Sheet
Assets
Current Assets:
Cash $ 4,650
Prepaid Rent 800
Office Supplies 150
Total Current Assets $ 7,500
Property, Plant, and Equipment:
Furniture 40,500
Less: Accumulated Depreciation—Furniture (2,675)
Total Property, Plant, and Equipment 37,825
Total Assets $ 45,325
Liabilities
Current Liabilities:
Accounts Payable $ 1,750
Salaries Payable 1,650
Total Liabilities $ 3,400
Stockholders’ Equity
Common Stock 7,600
Total Stockholders’ Equity 41,925
Total Liabilities and Stockholders’ Equity $ 45,325

Chapter 5
Merchandising Operations
p. 316 (theory on pp. 269-282)
S-F:5-7 Journalizing purchase and sales transactions
Suppose Piranha.com sells 3,500 books on account for $17 each (cost of these books is $35,700) on
October 10 to The Textbook Store. Several books were slightly damaged in shipment, so Piranha.com
granted a sales allowance of $1,000 to The Textbook Store on October 13. On October 25, The
Textbook Store paid the balance due.
Requirements
1. Journalize The Textbook Store’s October transactions.
2. Journalize Piranha.com’s October transactions. The company estimates sales returns at the end of
each month.
SOLUTION
Requirement 1

Oct. 10 Merchandise Inventory (3,500 × $17) 59,500
Accounts Payable – Piranha.com 59,500
Oct. 13 Accounts Payable – Piranha.com 1,000

Merchandise Inventory 1,000
Oct. 25 Accounts Payable – Piranha.com 58,500

Bank 58,500

S-F:5-7, cont.
Requirement 2

Oct. 10 Accounts Receivable – The Textbook Store 59,500
Sales Revenue (3,500 × $17) 59,500
Cost of Goods Sold 35,700

Oct. 13 Refunds Payable 1,000

Accounts Receivable – The Textbook Store 1,000
Oct. 25 Bank 58,500

Accounts Receivable – The Textbook Store 58,500
($59,500 - $1,000)
p. 317 (theory on pp. 282-283)

S-F:5-9 Adjusting for inventory shrinkage
Jeana’s Furniture’s unadjusted Merchandise Inventory account at year-end is $69,000. The physical
count of inventory came up with a total of $67,600. Journalize the adjusting entry needed to account for
inventory shrinkage.
SOLUTION
Dec. 31 Cost of Goods Sold ($69,000 − $67,600) 1,400

p. 317 (theory on pp. 288-290)
S-F:5-12 Preparing a merchandiser’s income statement
Camilia Communications reported the following figures from its adjusted trial balance for its first year
of business, which ended on July 31, 2024:
Cash $ 2,900 Cost of Goods Sold $ 18,700
Selling Expenses 1,400 Equipment, net 9,500
Accounts Payable 4,300 Salaries Payable 1,200
Common Stock 4,365 Net Sales Revenue 28,450
Notes Payable, long-term 500 Accounts Receivable 3,200
Merchandise Inventory 1,000 Interest Expense 65
Administrative Expenses 3,300 Refunds payable 600
Estimated Returns Inventory 100 Sales Discounts 750
Forfeited
Prepare Camilia Communications’s multi-step income statement for the year ended July 31, 2024.
SOLUTION
CAMILIA COMMUNICATIONS
Income Statement
Year Ended July 31, 2024
Net Sales Revenue $ 28,450

Cost of Goods Sold 18,700
Gross Profit 9,750
Operating Expenses:
Selling Expenses $ 1,400
Administrative Expenses 3,300
Total Operating Expenses 4,700
Operating Income 5,050
Other Income and (Expenses):
Sales discounts forfeited 750
Interest Expense (65)
Total Other Income and (Expenses) 685
Net Income $ 5,735

Chapter 6
Merchandise Inventory
Use the following information to answer Short Exercises S-F:6-4 through S-F:6-6.
Summer BBQ uses a perpetual inventory system to record inventory. All purchases and sales of
merchandise inventory were on account. Company records indicate the following data for the month of
June, 2024:
June 1: Beginning merchandise inventory of 6 items at $32 per item
June 5: Purchase of 8 items at $36 per item
June 13: Sale of 10 items at $98 per item
June 23: Purchase of 14 items at $42 per item
June 30: Sale of 6 items at $98 per item
p. 379 (theory on p. 351-353)

S-F:6-4 Preparing a perpetual inventory record and journal entries—FIFO
Requirements
1. Prepare Summer BBQ’s perpetual inventory record assuming the company uses the FIFO
inventory costing method.
2. Journalize the transactions for the month of June 2024.

SOLUTION
Requirement 1
Perpetual Inventory Record: FIFO
Purchases Cost of Goods Sold Inventory on Hand

Unit Unit Unit
Date Quantity Cost Total Cost Quantity Cost Total Cost Quantity Cost Total Cost
June 1 6 units × $32 = $192
$192
5 8 units × $36 = $288 6 units × $32 = $192
$480
8 units × $36 = $288
13 6 units × $32 = $192
$336 $144
4 units × $36 = $144 4 units × $36 = $144
23 14 units × $42 = $588 4 units × $36 = $144
$732
14 units × $42 = $588
30 4 units × $36 = $144
$228 $504
2 units × $42 = $ 84 12 units × $42 = $504
Totals 22 units $876 16 units $564 12 units $504

S-F:6-4, cont.
Requirement 2
Date Accounts and Explanation Debit ($) Credit ($)

June 5 Merchandise Inventory 288
Purchased inventory on account.
13 Accounts Receivable 980 (a)

Sales Revenue 980 (a)
Sale on account.
Cost of Goods Sold 336 (b)

Merchandise Inventory 336 (b)
Recorded the cost of goods sold.
23 Merchandise Inventory 588

Account Payable 588
30 Account Receivable 588 (c)

Sales Revenue 588 (c)
Sale on account.
Cost of Goods Sold 228 (d)

Merchandise Inventory 228 (d)
Calculations:
(a)
Total sales revenue = Number of units sold x Sales price per unit
= 10 units x $98
= $980
(b)
Calculated in Requirement 1.
(c)
= 6 units x $98
= $588
(d)

p. 379 (theory on pp. 353-355)
S-F:6-5 Preparing a perpetual inventory record and journal entries—LIFO
Requirements
1. Prepare Summer BBQ’s perpetual inventory record assuming the company uses the LIFO inventory costing method.
SOLUTION
Requirement 1
Perpetual Inventory Record: LIFO

Unit Unit Unit
Date Quantity Cost Total Cost Quantity Cost Total Cost Quantity Cost Total Cost
June 1 6 units × $32 = $192
$192
5 8 units × $36 = $288 6 units × $32 = $192
$480
8 units × $36 = $288
13 2 units × $32 = $ 64 4 units × $32 = $128
$352 $128
8 units × $36 = $288
23 14 units × $42 = $588 4 units × $32 = $128
$716
14 units × $42 = $588
30 6 units × $42 = $252 4 units × $32 = $128
$252 $464
8 units × $42 = $336

S-F:6-5, cont.
Requirement 2


Sale on account.


Account Payable 588
30 Account Receivable 588(c)

Sale on account.

Calculations:
(a)
= 10 bicycles x $98
= $980
(b)
(c)
= 6 units x $98
= $588
(d)

p. 380 (theory on pp. 355-357)
S-F:6-6 Preparing a perpetual inventory record and journal entries—Weighted-average
Requirements
1. Prepare Summer BBQ’s perpetual inventory record assuming the company uses the weighted-average inventory costing method. (Round
cost of goods sold and inventory to the nearest dollar.)
SOLUTION
Requirement 1
Perpetual Inventory Record: Weighted-Average

Date Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost
June 1 6 units × $32 = $192
5 8 units × $36 = $288 14 units × $34.29 (a) = $480
13 10 units × $34.29 = $343 4 units × $34.29 = $137
23 14 units × $42 = $588 18 units × $40.28 (b) = $725
30 6 units × $40.28 = $242 12 units × $40.28 = $483
Calculations:
(a)
Weighted average cost per unit = Cost of goods available for sale / Number of units available
= ($192 + $288) / (6 units + 8 units)
= $480 / 14 units
= $34.39

(b)
Weighted average cost per unit = Cost of goods available for sale / Number of units available
= ($137 + $588) / (4 units + 14 units)
= $725 / 18 units
= $40.28
S-F:6-6, cont.
Requirement 2


Sale on account.


Account Payable 588
30 Account Receivable 588(c)

Sale on account.

Calculations:
(a)
Total sales revenue = Number of units sold × Sales price per unit
= 10 units × $98
= $980
(b)
(c)
Total sales revenue = Number of units sold × Sales price per unit
= 6 units × $98
= $588
(d)

Note: Short Exercises S-F:6-4, S-F:6-5, and S-F:6-6 must be completed before attempting Short
Exercise S-F:6-7.
p. 380 (theory on pp. 358-360)
S-F:6-7 Comparing Cost of Goods Sold under FIFO, LIFO, and Weighted-average
Refer to Short Exercises S-F:6-4 through S-F:6-6. After completing those exercises, answer the
following questions:
Requirements
1. Which inventory costing method produced the lowest gross profit? Why?
2. Which inventory costing method produced the highest gross profit? Why?
3. If costs had been declining instead of rising, which inventory costing method would have
produced the highest gross profit? Why?
SOLUTION
Requirement 1
The LIFO inventory costing method produced the lowest gross profit, as it had the highest cost of goods
sold.
Requirement 2
The FIFO inventory costing method produced the highest gross profit because it had the lowest cost of
goods sold.
Requirement 3
The LIFO inventory costing method would have produced the highest gross profit because this it had the
lowest cost of goods sold when costs were declining instead of rising.

THE MANAGERIAL CHAPTERS
(Source: Horngren’s Financial & Managerial Accounting, The Managerial Chapters. Global
Edition. Seventh Edition. ISBN 10: 1-292-41233-X; ISBN 13: 978-1-292-41233-7)
Chapter 11
Capital Investment Decisions
p. 633 (theory on pp. 607-608)
S-M:11-10 Determining present value
Your grandfather would like to share some of his fortune with you. He offers to give you money under
one of the following scenarios (you get to choose):
1. $7,250 per year at the end of each of the next eight years
2. $49,650 (lump sum) now
3. $98,650 (lump sum) eight years from now
Requirements
1. Calculate the present value of each scenario using an 8% discount rate. Which scenario yields the
highest present value? Round to nearest whole dollar.
2. Would your preference change if you used a 10% discount rate?
SOLUTION
Requirement 1
Scenario #1:
Amount of
Present value = × Annuity PV Factor for i = 8%, n = 8
each cash inflow
= $7,250 × 5.747
= $41,666 (rounded)
Scenario #2: Present value is $49,650 (the net cash inflow) because it would be
received now.
Scenario #3:
Present value = Cash inflow × PV Factor for i = 8%, n = 8
= $98,650 × 0.540
= $53,271 (rounded)

S-M:11-10, cont.
Requirement 1, con.
Present Value
Scenario (i = 8%, n = 8)
#1 $41,666 (rounded)
#2 $49,650
#3 $53,271 (rounded)
Scenario #3 yields the highest present value, thus is preferred.
Requirement 2
Scenario #1:
Amount of
Present value = × Annuity PV Factor for i = 10%, n = 8
each cash inflow
= $7,250 × 5.335
= $38,679 (rounded)
Scenario #2: Present value is $49,650 (the cash inflow) because it would be
received now.
Scenario #3:
Present value = Cash inflow × PV Factor for i = 10%, n = 8
= $98,650 × 0.467
= $46,070 (rounded)
Present Value
Scenario (i = 10%, n = 8)
#1 $38,679 (rounded)
#2 $49,650
#3 $46,070 (rounded)
If the discount rate is 10% (rather than 8%), Scenario #2 (rather than Scenario #3) is preferred because it
yields the highest present value.

p. 634 (theory on pp. 611-613)
S-M:11-15 Using NPV to make capital investment decisions
Hicks Company is considering an investment opportunity with the following expected net cash inflows:
Year 1, $235,000; Year 2, $195,000; Year 3, $125,000. The company uses a discount rate of 6%, and the
initial investment is $365,000. Calculate the NPV of the investment. Should the company invest in the
project? Why or why not?
SOLUTION
Net
PV Factor Present
Time Cash
(i = 6%) Value
Inflow
PV of each year’s net cash inflow
1 (n = 1) $ 235,000 0.943 $ 221,605
2 (n = 2) 195,000 0.890 173,550
3 (n = 3) 125,000 0.840 105,000
Total present value of net cash inflows 500,155
0 Initial investment (365,000)
Net present value of the investment $ 135,155
The investment’s net present value (NPV) is $135,155. Based on NPV, the company should invest in
the project because the NPV is positive.
Note: Decisions about which investments to pursue and which ones to delay or reject should not be
based on quantitative factors only. Qualitative factors should also be considered. A project that is
acceptable based on quantitative factors might be rejected after considering qualitative factors (and a
project that would be rejected based on quantitative factors might be accepted after considering
qualitative factors).

p. 636 (theory on pp. 613-615)
E-M:11-24 Using NPV to make capital investment decisions
Holmes Industries is deciding whether to automate one phase of its production process. The manufacturing
equipment has a six-year life and will cost $910,000. Projected net cash inflows are as follows:
Year 1 $ 262,000
Year 2 254,000
Year 3 222,000
Year 4 215,000
Year 5 200,000
Year 6 175,000
Requirements
1. Compute this project’s NPV using Holmes’s 14% hurdle rate. Should Holmes invest in the equipment?
2. Holmes could refurbish the equipment at the end of six years for $104,000. The refurbished equipment could be
used one more year, providing $77,000 of net cash inflows in year 7. Additionally, the refurbished equipment
would have a $55,000 residual value at the end of year 7. Should Holmes invest in the equipment and refurbish
it after six years? (Hint: In addition to your answer to Requirement 1, discount the additional cash outflow and
inflows back to the present value.)
SOLUTION
Requirement 1
Net
PV Factor Present
Time Cash
(i = 14%) Value
Inflow
1 (n = 1) $ 262,000 0.877 $ 229,774
2 (n = 2) 254,000 0.769 195,326
3 (n = 3) 222,000 0.675 149,850
4 (n = 4) 215,000 0.592 127,280
5 (n = 5) 200,000 0.519 103,800
6 (n = 6) 175,000 0.456 79,800
Total PV of net cash inflows 885,830
NPV of the equipment $ (24,170)
The net present value of the equipment is $(24,170). Based on net present value, Holmes should not
invest in the equipment because the net present value is negative.

E-M:11-24, cont.
Requirement 2
Net
PV Factor Present
Time Cash
(i = 14%) Value
Inflow (Outflow)
7 (n = 7) $ 77,000 0.400 $ 30,800
7 (n = 7) 55,000 0.4000 22,000
Total PV of net cash inflows 52,800
6 Cost to refurbish the equipment (n = 6) (104,000) 0.456 (47,424)
NPV of the refurbishment $ 5,376
Net present value Net present value Net present value

of the equipment with = of the equipment prior to + of the
refurbishment refurbishment refurbishment
= $(24,170) + $5,376
= $(18,794)
Based on net present value (NPV), Holmes should not invest in the equipment and refurbish it after six
years because the NPV of the equipment with refurbishment is negative $(18,794).

p. 637 (theory on pp. 615-616)
E-M:11-25 Using NPV and profitability index to make capital investment decisions
Use the NPV method to determine whether Hawkins Products should invest in the following projects:
• Project A: Costs $285,000 and offers seven annual net cash inflows of $55,000. Hawkins Products
requires an annual return of 14% on investments of this nature.
• Project B: Costs $395,000 and offers 10 annual net cash inflows of $77,000. Hawkins Products
demands an annual return of 12% on investments of this nature.
Requirements
1. What is the NPV of each project? Assume neither project has a residual value. Round to two decimal
places.
2. What is the maximum acceptable price to pay for each project?
3. What is the profitability index of each project? Round to two decimal places.
SOLUTION
Requirement 1
Annuity
Net PV Factor
Time
Cash (i = 14%, (i = 12%, Present
Inflow n = 7) n = 10) Value
Project A:
1 – 7 years PV of annuity $ 55,000 4.288 $ 235,840
NPV of the project $ (49,160)
Project B:
1 – 10 years PV of annuity $ 77,000 5.650 $ 435,050
NPV of the project $ 40,050

E-M:11-25, cont.
Requirement 2
The maximum acceptable price to pay is $235,840 for Project A and $435,050 for Project B (the total
present value of net cash inflows from each project, calculated in Requirement 1).
Requirement 3
Present value of
/ Initial investment = Profitability Index
Project net cash inflows
A $235,840 / $285,000 = 0.83 (rounded)
B $435,050 / $395,000 = 1.10 (rounded)
p. 637 (theory on pp. 616-619)

E-M:11-26 Using IRR to make capital investment decisions
Refer to the data regarding Hawkins Products in Exercise E-M:11-25. Compute the IRR of each project,
and use this information to identify the better investment.
SOLUTION
Project A:
Annuity PV Factor
= Initial investment / Amount of each net cash inflow
(i = ?%, n = 7)
= $285,000 / $55,000
= 5.182 (rounded)
Annuity PV Factor
(i = 8%,n = 7) (i = 9%,n = 7)
5.206 5.033

E-M:11-26, cont.
Because 5.182 is between 5.206 and 5.033, the IRR is between 8% and 9%.
Note: Using a business calculator or Microsoft Excel, the IRR is 8.14% (rounded).
Project B:
Annuity PV Factor
= Initial investment / Amount of each net cash inflow
(i = ?%, n = 10)
= $395,000 / $77,000
= 5.130
Annuity PV Factor
(i = 15%,n = 10) (i = 14%,n = 10)
5.019 5.216
Project A’s internal rate of return (IRR) is between 8% and 9%, which is less than the 14% required rate
of return on projects like A. Project B’s IRR is between 14% and 15%, which is greater than the 12%
required rate of return on projects like B. Thus, based on IRR, Project B is the better investment.

p. 638 (theory on pp. 598-619)
Part of P-M:11-30A Using NPV, IRR, and profitability index to make capital investment decisions
Splash Nation is considering purchasing a water park in Atlanta, Georgia, for $1,910,000. The new facility
will generate annual net cash inflows of $483,000 for eight years. Engineers estimate that the facility will
remain useful for eight years and have no residual value. The company uses straight-line depreciation, and
its stockholders demand an annual return of 10% on investments of this nature.
Requirements
1. Compute the NPV, the IRR, and the profitability index of this investment.
2. Recommend whether the company should invest in this project.
SOLUTION
Requirement 1
Net Annuity
Time Cash PV Factor Present
Inflow (i = 10%,n = 8) Value
1 – 8 years PV of annuity $ 483,000 5.335 $ 2,576,805
0 Initial investment (1,910,000)
NPV of the facility $ 666,805
Annuity PV
Initial Amount of each net cash
Factor = /
investment inflow
(i = ?%, n = 8)
= $1,910,000 / $483,000 = 3.954 (rounded)
Annuity PV Factor
(i = 18%,n = 8) (i = 20%,n = 8)
4.078 3.837
Present value of
Profitability Index = / Initial investment
net cash inflows
= $2,576,805 / $1,910,000 = 1.35 (rounded)

P-M:11-30A, cont.
Requirement 2
Based on the quantitative measures calculated in Requirement 1, the company should invest in the
project because the net present value is positive, the profitability index is greater than one, and the
internal rate of return is greater than the company’s required rate of return.

IAF Selected Exercises 7e 2023 2024

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

IAF Selected Exercises 7e 2023 2024

Uploaded by

Copyright:

Available Formats

1

EXERCISES INTRODUCTION TO ACCOUNTING &

Chapter 2: Recording business transactions [FINANCIAL CHAPTERS]

Chapter 3: The adjusting process [FINANCIAL CHAPTERS]

Chapter 4: Completing the accounting cycle [FINANCIAL CHAPTERS]

Chapter 5: Merchandising operations [FINANCIAL CHAPTERS]

Chapter 6: Merchandise inventory [FINANCIAL CHAPTERS]

Chapter 11: Capital Investment Decisions [MANAGERIAL CHAPTERS]

© 2022 Pearson Education, Ltd. 2

a. Increase asset (Cash); Increase equity (Common Stock)

© 2022 Pearson Education, Ltd. 3

© 2022 Pearson Education, Ltd. 4

ASSETS = LIABILITIES + EQUITY

© 2022 Pearson Education, Ltd. 5

© 2022 Pearson Education, Ltd. 6

Retained Earnings, December 31, 2023 $ 56,000

© 2022 Pearson Education, Ltd. 7

© 2022 Pearson Education, Ltd. 8

© 2022 Pearson Education, Ltd. 9

2. Office Supplies 800

© 2022 Pearson Education, Ltd. 10

MCMAHON FARM EQUIPMENT REPAIR

Account Title Balance

© 2022 Pearson Education, Ltd. 11

The following errors are detected:

© 2022 Pearson Education, Ltd. 12

BEAUTIFUL TOTS CHILD CARE

Account Title Balance

a. Increase Cash by $1,500.

b. Increase Accounts Receivable by $8,200 ($4,100 × 2).

c. Increase Office Supplies and Accounts Payable by $1,400 each.

d. Decrease Equipment by $8,500 ($91,500 − $83,000).

e. Decrease Salaries Expense by $700.

h. Service Revenue should increase by $4,100.

i. Prepaid Insurance should increase by $3,800 ($1,900 × 2).

© 2022 Pearson Education, Ltd. 13

$2 revenue per month × 8 months = $16 revenue earned for 8 months

© 2022 Pearson Education, Ltd. 14

© 2022 Pearson Education, Ltd. 15

Date Accounts and Explanation Debit Credit

b. Dec. 31 Insurance Expense 800*

c. Dec. 31 Accounts Receivable 3,000

d. Dec. 31 Depreciation Expense—Boat 3,000*

e. Dec. 31 Unearned Revenue 9,000

$400 Insurance expense per month

© 2022 Pearson Education, Ltd. 16

= ($33,500 – $3,500) / 10 years

Specific Category Specific Category

© 2022 Pearson Education, Ltd. 17

Date Accounts and Explanation Debit Credit

31 Income Summary 13,500

31 Income Summary 8,400

31 Retained Earnings 6,900

© 2022 Pearson Education, Ltd. 18

ORANGE HOME CLEANING SERVICE

Additional information at November 30, 2024:

© 2022 Pearson Education, Ltd. 19

ORANGE HOME CLEANING SERVICE

Unadjusted Trial Adjusted Trial

© 2022 Pearson Education, Ltd. 20

p. 242 (theory on pp. 204-210)

Retained Earnings, November 1, 2024 $ 35,500

© 2022 Pearson Education, Ltd. 21