Assignment:
1. Identifying Accrual Basis Revenues:
For following transactions of ZZZ Bowling Inc. in July, determine if revenue is recognized in July and indicate the amount. Otherwise, explain why revenue is NOT recognized in July:
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Activity
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Revenue recognized in July?
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Amount or explain why not recognized
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Company collected $12,000 from customers for services related to games played in July.
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Company billed a customer for $250 for a party held at the bowling center on July 31st. Bill is to be paid in August.
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The bowling leagues gave the company advance payments of $1,500 for the fall season that starts in September.
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Company received $1,000 from credit sales made in June.
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2.Identifying Accrual Basis Expenses:
The following transactions are July activities of Bill's Bowling Inc., which operates bowling centers. If an expense is recognized in July, indicate the amount. If not recognized, explain why.
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Activity
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Expense recognized in July?
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Amount or explain why not recognized
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Bill's paid $1,500 to plumbers for repairing a broken pipe in the restrooms.
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Bill's paid $2,000 for the June electricity bill and received the July bill for $2,500, which will be paid in August.
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Bill's paid $5,475 to employees for work in July.
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3.From a Trial Balance to Financial Statements:
From the following accounts from ERI Corp as of December 31, create an I/S, Statement of Retained Earnings and a B/S:
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Account Name
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Debits
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Credits
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Cash
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$59,750
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Accounts Receivable
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3,300
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Prepaid Insurance
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4,700
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Equipment
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64,600
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Land
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23,000
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Accounts Payable
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$29,230
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Unearned Revenue
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1,500
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Notes Payable (long-term)
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74,000
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Common Stock
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5,000
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beginning Retained Earnings as of Jan 1
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14,500
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Dividends
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0
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Service Revenue
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35,700
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Salaries and Wages Expense
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3,900
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Repairs and Maintenance Expense
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410
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Office Expenses
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270
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Totals
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$159,930
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$159,930
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ERI Corp.
Income Statement
For the Year Ended December 31
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Revenues:
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Service Revenue
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Total Revenues
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Expenses:
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Salaries and Wages Expense
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Repairs and Maintenance Expense
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Office Expenses
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Total Expenses
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Net Income
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ERI Corp.
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Statement of Retained Earnings
For the Year Ended December 31
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Retained Earnings, Jan. 1
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Add: Net Income
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Subtract: Dividends
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Retained Earnings, Dec. 31
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ERI Corp.
Balance Sheet
At December 31
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Assets
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Current Assets
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Cash
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Accounts Receivable
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Prepaid Insurance
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Total Current Assets
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Equipment
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Land
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Total Assets
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Liabilities
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Current Liabilities
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Accounts Payable
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Unearned Revenue
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Total Current Liabilities
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Notes Payable (long-term)
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Total Liabilities
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Stockholders' Equity
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Common Stock
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Retained Earnings
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Total Stockholders' Equity
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Total Liabilities and Stockholders' Equity
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4.Net Profit Margin:
Calculate the net profit margins for the following two companies and comment on them:
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Net Income
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Total Assets
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Total Liabilities
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Total Revenues
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Expedia
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$280
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7,090
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4,800
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4,030
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Priceline
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1,420
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6,570
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2,670
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5,260
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5.Net Profit Margins in years t and t-1:
Compute the net profit margin of this year and compare that with last year's net profit margin of 15%.
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Total assets
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$100,000
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Total liabilities
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60,000
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Common stock
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10,000
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Dividends
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5,000
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Expenses
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80,000
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Retained earnings (beginning of year)
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15,000
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Helpful Tip: Debit and credit still confuse many students. Just think of debit and credit as left and right. Luckily, credit has an "R" for right. In an income statement, you see revenues and expenses. Luckily again, revenue has an "R" for right.
A recap of B/S: Asset items show on the left side of the B/S, hence increase in asset item is recorded on the left, i.e., the debit. Decrease in asset will be on the right hand side. Liability and equity items are credit items, and increase of L or SE shows up on the right. Again, decrease in L or SE item will show up on the left side.
The whole income statement (I/S) boils down to one item in the B/S, Retained earnings. Remember Revenues minus expenses equal to net income, and net income - dividends = retained earnings. IOW, all the revenues and expenses of a firm in an accounting period (like a month, quarter or a year) is summarized in one number (=net income), which is the change in Retained earnings item in the B/S at the end of the period.
Journal entries and T-accounts work about the same way for income statement items.
Example (1), ABC Corp makes a cash sale of $500.
1. You know cash and revenue are account titles here. Cash is asset, and its increase is a "left" side item.
2. Revenue is credit, and its increase is written on the right side of journal and T-account.
Result in the Journal
Cash 500
Revenue 500
Result in T-accounts
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Cash
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Revenue
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500 |
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| 500
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Example (2), ABC Corp receives cash $500 before its delivery.
1. Cash is asset, and its increase is a "left" side item.
2. Since product is not delivered yet, ABC doesn't recognize revenue yet. Instead, we use a title called "Unearned revenue," which is a liability of ABC. Increase in liability will be on the right side of journal and T-account.
Result in the Journal
Cash 500
Unearned Revenue 500
Result in T-accounts
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Cash
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Unearned revenue
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500 |
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| 500
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When the product is actually delivered, this is what happens:
Unearned Revenue 500
Revenue 500
Result in T-accounts
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Unearned revenue
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Revenue
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500 |
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500
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| 500
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