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ACCOUNTG 221 Lecture Notes - Lecture 2: Retained Earnings, Historical Cost, Calendar Year

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School
UMASS-Amherst
Department
Accounting
Course
ACCOUNTG 221
Professor
Catherine West Lowry

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Document Summary

Under equity you have the permanent account common stock and retained earnings. Under retained earning are temporary accounts called- revenue, expenses and. Historical cost concept: requires that most assets be reported at the amount paid for them (their historical cost) regardless of increases in market value. Reliability concept- information is reliable if it can be independently verified. Appraised values are opinions and vary from appraiser to appraiser. Memorize page 22 in the book: matching concept. Expenses to the revenue the same year it happened: net loss. Expenses are higher than revenue: accounting period. Balance sheet: (cid:862)as of(cid:863) is differe(cid:374)t tha(cid:374) (cid:862)for the (cid:455)ear e(cid:374)di(cid:374)g(cid:863)

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Related Questions

2.
A. Prepare a multiple-step income statement for the year endedDecember 31, 2016, concluding with earnings per share. In computingearnings per share, assume that the average number of common sharesoutstanding was 100,000 and preferred dividends were $100,000.(Round earnings per share to the nearest cent.)
• Refer to the Chart of Accounts for exact wording of accounttitles.
•

Refer to the Labels and Amount Descriptions for exact wording oftext entries.

B. Prepare a retained earnings statement for the year endedDecember 31, 2016.
• Refer to the Chart of Accounts for exact wording of accounttitles.
• Refer to the Labels and Amount Descriptions for exact wordingof text entries.
• You will need to enter the word “Less” or “Add” asnecessary.
C. Prepare a balance sheet in report form as of December 31, 2016.You are not required to present the details of Preferred and CommonStock (i.e., number of shares authorized, issued and outstanding).
• Refer to the Chart of Accounts for exact wording of accounttitles.
• Refer to the Labels and Amount Descriptions for exact wordingof text entries.
• “Less” , “Deduct”, “Add” and colons will appearautomatically.
• Available-for-sale investments should be reported as a singleasset on the balance sheet, regardless of how many accounts existin the ledger for such assets.
• Recall that current assets are to be reported in order ofliquidity. Available-for-sale investments are considered to be moreliquid that accounts receivable.
• Report fixed assets and paid-in capital accounts inaccount-number order.
• Omit the description of bonds and stocks (i.e., percentagerates, due date, number of shares, etc.)
• Enter all amounts as positive numbers, with one exception: Ifan unrealized loss has occurred, it must be reported as a negativeamount on the balance sheet.
Labels

In CengageNOW, a Label is a text entry that does not have anamount associated with it.
Current assets
Current liabilities
December 31, 2016
For the Year Ended December 31, 2016
Intangible assets
Investments
Less dividends
Long-term liabilities
Operating expenses
Other income and expenses
Paid-in capital
Add dividends
Property, plant, and equipment
Amount Descriptions

In CengageNOW, an Amount Description is a text entry other thanan Account that has an amount associated with it.
Available-for-sale investments
Decrease in retained earnings
Excess of issue price over par
Gross profit
Income before income tax
Income from operations
Increase in retained earnings
Miscellaneous selling expense
Net income
Net loss
Retained earnings, January 1, 2016
Retained earnings, December 31, 2016
Sales commissions
Sales salaries expense
Store supplies expense
Total administrative expenses
Total assets
Total (before treasury stock)
Total current assets
Total current liabilities
Total liabilities
Total liabilities and stockholders’ equity
Total long-term liabilities
Total investments
Total operating expenses
Total paid-in capital
Total property, plant, and equipment
Total selling expenses
Total stockholders’ equity
Unamortized premium

Unamortized discount

Income Statement data:
Advertising expense $ 150,000
Cost of merchandise sold 3,700,000
Delivery expense 30,000
Depreciation expense-office buildings and equipment 30,000
Depreciation expense-store buildings and equipment 100,000
Dividend revenue 4,500
Gain on sale of investments 4,980
Income from Pinkberry Co. investment 76,800
Income tax expense 140,500
Interest expense 21,000
Interest revenue 2,720
Miscellaneous administrative expense 7,500
Miscellaneous selling expense 14,000
Office rent expense 50,000
Office salaries expense 170,000
Office supplies expense 10,000
Sales 5,254,000
Sales commissions 185,000
Sales salaries expense 385,000
Store supplies expense 21,000

Retained earnings and balance sheet data:
Accounts payable $ 194,300
Accounts receivable 545,000
Accumulated depreciation—office buildings and equipment 1,580,000
Accumulated depreciation—store buildings and equipment 4,126,000
Allowance for doubtful accounts 8,450
Available-for-sale investments (at cost) 260,130
Bonds payable, 5%, due 2024 500,000
Cash 246,000
Common stock, $20 par
(400,000 shares authorized; 100,000 shares issued, 94,600outstanding) 2,000,000
Dividends:
Cash dividends for common stock 155,120
Cash dividends for preferred stock 100,000
Goodwill 500,000
Income tax payable 44,000
Interest receivable 1,125
Investment in Pinkberry Co. stock (equity method) 1,009,300
Investment in Dream Inc. bonds (long term) 90,000
Merchandise inventory (December 31, 2016),
at lower of cost (FIFO) or market 778,000
Office buildings and equipment 4,320,000
Paid-in capital from sale of treasury stock 13,000
Excess of issue price over par:
-Common 886,800
-Preferred 150,000
Preferred 5% stock, $80 par
(30,000 shares authorized; 20,000 shares issued) 1,600,000
Premium on bonds payable 19,000
Prepaid expenses 27,400
Retained earnings, January 1, 2016 9,319,725
Store buildings and equipment 12,560,000
Treasury stock
(5,400 shares of common stock at cost of $33 per share) 178,200
Unrealized gain (loss) on available-for-sale investments (6,500)
Valuation allowance for available-for-sale investments (6,500)

none

X

Chart of Accounts

CHART OF ACCOUNTS
Equinox Products Inc.
General Ledger
ASSETS
110 Cash
121 Accounts Receivable
122 Allowance for Doubtful Accounts
131 Merchandise Inventory
132 Interest Receivable
133 Prepaid Expenses
141 Investments-Solstice Corp.
142 Investment in Pinkberry Co. Stock
143 Investment in Dream Inc. Bonds
144 Valuation Allowance for Available-for-Sale Investments
181 Store Buildings and Equipment
182 Accumulated Depreciation-Store Buildings and Equipment
183 Office Buildings and Equipment
184 Accumulated Depreciation-Office Buildings and Equipment
191 Goodwill
LIABILITIES
211 Accounts Payable
221 Income Tax Payable
225 Cash Dividends Payable
251 Bonds Payable
252 Discount on Bonds Payable
253 Premium on Bonds Payable
EQUITY
311 Preferred Stock
312 Paid-in Capital in Excess of Par-Preferred Stock
321 Common Stock
322 Paid-in Capital in Excess of Par-Common Stock
331 Retained Earnings
341 Cash Dividends
351 Treasury Stock
352 Paid-in Capital from Sale of Treasury Stock
361 Unrealized Gain (Loss) on Available-for-Sale Investments
REVENUE
410 Sales
611 Dividend Revenue
621 Interest Revenue
631 Income from Pinkberry Co.
641 Gain on Sale of Investments
EXPENSES
511 Cost of Merchandise Sold
512 Bad Debt Expense
520 Sales Salaries Expense
521 Sales Commissions
522 Office Salaries Expense
531 Advertising Expense
532 Delivery Expense
537 Store Supplies Expense
538 Office Supplies Expense
539 Office Rent Expense
541 Income Tax Expense
551 Depreciation Expense-Store Equipment
552 Depreciation Expense-Office Equipment
591 Miscellaneous Selling Expense
592 Miscellaneous Administrative Expense
710 Interest Expense
731 Loss on Sale of Investments

none

X

Labels and Amount Descriptions

Labels

In CengageNOW, a Label is a text entry that does not have anamount associated with it.
Current assets
Current liabilities
December 31, 2016
For the Year Ended December 31, 2016
Intangible assets
Investments
Less dividends
Long-term liabilities
Operating expenses
Other income and expenses
Paid-in capital
Add dividends
Property, plant, and equipment
Amount Descriptions

In CengageNOW, an Amount Description is a text entry other thanan Account that has an amount associated with it.
Available-for-sale investments
Decrease in retained earnings
Excess of issue price over par
Gross profit
Income before income tax
Income from operations
Increase in retained earnings
Miscellaneous selling expense
Net income
Net loss
Retained earnings, January 1, 2016
Retained earnings, December 31, 2016
Sales commissions
Sales salaries expense
Store supplies expense
Total administrative expenses
Total assets
Total (before treasury stock)
Total current assets
Total current liabilities
Total liabilities
Total liabilities and stockholders’ equity
Total long-term liabilities
Total investments
Total operating expenses
Total paid-in capital
Total property, plant, and equipment
Total selling expenses
Total stockholders’ equity
Unamortized premium
Unamortized discount

You have obtained the following information:

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR TO 31 DECEMBER

20X8

20X7

Note

Draft ($m)

Actual ($m)

Revenue

(1)

645.5

606.5

Other income

(2)

15.6

14.4

Changes in inventories

3.8

(16.4)

Cost of materials

(334.1)

(286.8)

Employee benefits expense

(91.0)

(83.9)

Depreciation

(3)

(29.8)

(23.6)

Other expenses

(4)

(116.3)

(100.6)

Interest income, net

(5)

12.3

(20.9)

Profit before tax

106.0

130.5

Income tax expense

(44.4)

(47.7)

Profit for the year

61.6

82.8

STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER

20X8

20X7

Note

Draft ($m)

Actual ($m)

Assets

Non-current assets

Intangible assets

(6)

47.8

40.5

Property, plant and equipment

(7)

124.5

102.5

172.3

143.0

Current assets

Inventories

(8)

30.3

27.9

Trade receivables

73.1

50.3

Cash and cash equivalents

111.4

86.0

Total assets

387.1

307.2

Equity and liabilities

Equity

5.8

5.8

Share capital

15.3

15.3

Share premium

112.1

80.1

Retained earnings

133.2

101.2

Non-current liabilities

Provisions

(9)

160.1

121.4

Current liabilities

Trade payables

33.5

31.8

Tax

50.4

44.3

Other liabilities

9.9

8.5

Total equity and liabilities

387.1

307.2

Notes

(1) Revenue from business activities:

Revenue from business activities

20X8 ($M)

20X7 ($M)

Vehicles

588.0

526.0

Parts and accessories

39.6

36.8

Other

17.9

43.7

645.5

606.5

Other income includes gains on the disposals of tangible assets and income from the reversal of provisions.

Average number of employees:

20X8 (Draft)

20X7 (Actual)

Wage earners

484

499

Salaried employees

483

477

Apprentices and trainees

36

37

1,003

1,013

Other expenses include costs for warranties, administration and distribution, maintenance and insurance.

Interest income, net:

20X8 (Draft ($m)

20X7 (Actual $m)

Interest and similar income

16.8

25.1

Interest and similar expenses

(4.5)

(4.2)

12.3

20.9

Intangible assets include development costs, also franchises and industrial rights and licenses. During the year, $12.7 million (20X7 - $6.3 million) was spent on developing a new sports model, the Fox.

Property, plant and equipment:

Land and Buildings

Equipment

Assets under construction

Total

$m

$m

$m

$m

Cost

1 January 20X8

61.8

212.1

19.0

292.9

Additions

5.0

28.9

9.4

43.3

Disposals

0.0

(4.5)

0.0

(4.5)

Reclassification

3.0

8.9

(11.9)

0.0

31 December 20X8

69.8

245.4

16.5

331.7

Depreciation

Current year

1.9

18.4

0.0

20.3

Accumulated

28.7

178.5

0.0

207.2

Net book value

31 December 20X8

41.1

66.9

16.5

124.5

31 December 20X7

34.9

48.6

19.0

102.5

(8) Inventories comprise:

20X8 (Draft $m)

20X7 (Draft $m)

Raw materials, consumables and supplies

8.3

7.3

Work-in-progress

6.8

4.8

Finished goods

15.2

15.8

30.3

27.9

(9) Provisions mainly cover manufacturing warranty, product liability and litigation risks. Also, provisions have been established for deferred maintenance and IT reorganization.

The following additional information is available:

(i) Pavia has achieved record sales in 20X8 with the delivery of 10,153 vehicles (20X7 – 7,642 vehicles).

(ii) Although some sales are direct to individual customers the majority are ordered through dealers who take new vehicles on consignment.

(iii) Since 1 January 20X8 Pavia has offered 0% finance for three years on new vehicle sales in its most competitive markets.

(iv) The launch of the Fox has been postponed from late 20X8 to early 20X9 as internal trials have revealed that the doors are not sufficiently secure at high speeds.

(v) A car part required for the Cipeta model is bought-in exclusively from an overseas manufacturer. Deliveries of supplies have been unpredictable in 20X7 causing disruption to the Cipeta model assembly schedules.

1. Evaluate how you might use analytical procedures to provide audit evidence and reduce the level of detailed substantive procedures.

N.B these are pointers are for this question:

Analytical Procedures - Examples: o Receivables - Receivables - Compare gross margin % with previous years (by product line). (Possible misstatement – Over/understatement of sales and accounts receivable). This analytics will reduce the detailed substantive procedure because we have identified that there may be a possible over/understatement of sales so now we need to perform additional audit procedures on sales/revenue. For example by selecting a sample of invoices generated throughout the year and comparing to the General Ledger to ensure completeness and accuracy. Note: Use the information in the case to calculate the analytical procedures you have identified. Also, explain how the analytical procedures will provide audit evidence and help to reduce the level of detailed substantive procedures.