Problem 1-3

The missing numbers are:

Year 1
Gross Margin
Tax Expense

$ 9,000
1,200

Year 2
Sales
Profit before taxes

$11,968
2,547

Year 3
Cost of Goods Sold
Other expenses

$2,886
6,296

Other accounting equations such as the following are also illustrated by this problem:
Gross margin = Sales Cost of goods sold
Profit before taxes = Gross margin Other expenses
Net Income = Profit before taxes Tax Expense
In order to estimate Year 4, the key ratios to compute are:

Sales
Gross Margin
Profit before taxes
Net Income
Tax rate

Year 1
100.0 %
75.0
23.3
14.0
40.0

Year 2
100.0 %
75.0
21.3
12.8
40.0

Year 3
100.0 %
75.0
20.5
12.2
40.0

Year 4
Sales
Cost of goods sold
Gross margin (75% of sales)
Other expense
Profit before taxes (21.7% of sales)
Tax expense
Net Income

$10,000
2,500
$ 7,500
5,330
$ 2,170
870
$ 1,300

The basic accounting equation used is: Net income = Revenues - Expenses

Average
100.0 %
75.0 %
21.7 %
13.0%
40.0

Problem 2-2
J.L. GREGORY COMPANY
BALANCE SHEET, JUNE 30, ----.
Assets
Cash .................................................$ .89,000
Marketable securities ..................... ... 379,000
Accounts receivable ...........................505,000
Inventories ..513,000
Current assets .............................. 1,486,000
Land ...................................................230,000
Buildings .........................................1,120,000
Accumulated depreciation ................(538,000)
Equipment...........................................761,000
Accumulated depreciation ................(386,000)
Investments 320,000

Total assets.................................... $2,993,000

Liabilities
Accounts payable ........................$ 241,000
Taxes payable ............................... 125,000
Accrued expenses .... .................... 107,000
Current liability ............................... 473,000
Notes payable ................................ 200,000
Bonds payable ............................... 700,000
Total liabilities .............................. 1,373,000
Owners Equity
Capital stock .................................1,000,000
Retained earnings .................. ....... 620,000
Total liabilities
and owners equity .................... $2,993,000

Notes payable are usually debt instruments longer than one year, but in the absence of any
details it is
acceptable considering notes payable as a current liability.

Problem 3-1
N. Klein & Company had the following transactions in June. Using the matching concept, decide
which of these transactions represented expenses for June.
a.
b.
c.
d.
e.
f.

Received orders for goods with prices totaling $25,000.00; Goods to bedelivered in July.
Paid Office staff $9,750.00 for work performed in June.
Products in Inventory costing $1,725 were found to be obsolete.
Sold goods with a cost of $25,000.00 in June.
Paid $750.00 for radio and advertising in June.
Purchased additional Inventory for $27,000.00.

Answer:

Transactions b, c, d, e

Problem 4-3
a.

1) Dr. Inventory ...............................................................................................................................................................

$1,300
Cr. Accounts payable .............................................................................................................................................
$1,300

2) Dr. Wages Expense .....................................................................................................................................................

$730

Cr. Cash ..................................................................................................................................................................

$730

3) Dr. Cash ......................................................................................................................................................................

$1,940
Cr. Sales .................................................................................................................................................................
$1,940

4) Dr. Accounts Receivable ............................................................................................................................................

$1,810
Cr. Sales .................................................................................................................................................................
$1,810

5) Dr. Overhead and Other Expenses ..............................................................................................................................

$900
Cr. Cash ..................................................................................................................................................................
$900

6) Dr. Cash ......................................................................................................................................................................

$1,510
Cr. Accounts Receivable ........................................................................................................................................
$1,510

7) Dr. Accounts Payable..................................................................................................................................................

$1,720
Cr. Cash ..................................................................................................................................................................
$1,720

8) Dr. Cash ......................................................................................................................................................................

$650
Cr. Deferred Revenue .............................................................................................................................................
$650

9) Dr. Cash ......................................................................................................................................................................

$200
Cr. Note Payable.....................................................................................................................................................
$200

10) Dr. Cost of Goods Sold ...............................................................................................................................................

$1,280
Cr. Inventory ..........................................................................................................................................................
$1,280

+ Beginning inventory ..............................................................................................................................................

$1,730
Additions ...............................................................................................................................................................
1,300
Total available .......................................................................................................................................................
$3,030
Ending inventory ...................................................................................................................................................
1,750
Cost of goods sold .................................................................................................................................................
$1,280

11) Dr. Depreciation Expense ...........................................................................................................................................

$300
Cr. Accumulated Depreciation.......................................................................................................................
$300
b.
(1)

Accounts Payable
$1,720
$3,070
1,300 (1)

(4)

Accumulated Depreciation

Accounts Receivable
$2,160
1,510 (6)
1,810

Allowance for Doubtful Accounts

$2,800
300 (11)

$70

Cash
(3)
(1)
(8)
(9)

$1,440
1,940
1,510
650
200

Fixed Assets (cost)

$ 730 (2)
900 (5)
1,720 (7)

$6,200

Inventories
(1)

$1,730
1,300

Notes Payable

$1,280 (10)

$600
200 (9)

Owners Equity
(2) Wages
(5) Overhead
(10) COGS
(11) Depreciation

$
730
900
1,280
300

Deferred Revenue
$4,990

$650 (8)

1,940 Sales (3)

1,810 Sales (4)

See above
d.
LUFT CORPORATION
Balance Sheet

Assets
Liabilities
Cash ......................................................................................................................................................................................
$2,390
Accounts payable .............................................................................
$2,650
Accounts receivable (net) .....................................................................................................................................................
2,390
Deferred revenue..............................................................................
650
Inventories ............................................................................................................................................................................
1,750
Current liabilities .........................................................................
3,300
Current assets ...................................................................................................................................................................
$6,530
Notes payable ..............................................................................
800
Total liabilities.............................................................................
4,100
Fixed assets ...........................................................................................................................................................................
$6,200
Owners equity
Accumulated depreciation ....................................................................................................................................................
(3,100)
Owners equity .................................................................................
5,530
Total liabilities
Total assets .......................................................................................................................................................................
$9,630
and owners equity ......................................................................
$9,630

e.

LUFT CORPORATION
Income Statement
Sales ....................................................................................................................................................
$3,750
Cost of goods sold...............................................................................................................................
1,280
Gross margin .......................................................................................................................................
2,470
Wages .................................................................................................................................................
730
Overhead .............................................................................................................................................
900
Depreciation ........................................................................................................................................
300
Net income ..........................................................................................................................................
$ 540