Accounting Answers Note #2

Question 1 The following selected transactions of Galaxy Construction occurred during 2022 and 2023. The company's year-end is December 31. B: (Click the icon to view the transactions.) Required Record the transactions in the company's general journal. Use days in any interest accrual calculations, not months. Round all amounts to the nearest whole dollar. Explanations are not required. X Transactions January 3, 2022 January 29, 2022 February 5, 2022 February 28, 2022 July 3, 2022 November 30, 2022 December 31, 2022 December 31, 2022 February 28, 2023 May 31 2023 Purchased a machine at a cost of $360,000 plus 5-percent GST, signing a 8-percent, six-month note payable for that amount. Recorded the month's sales of $1,710,000 (excludes PST and GST), 70 percent on credit and 30 percent for cash. Sales amounts are subject to 8-percent PST and 5-percent GST. Paid January's PST and GST to the appropriate authorities. Borrowed $4,200,000 on a 6-percent note payable that calls for annual instalment payments of $420,000 principal plus interest. Paid the six-month, 8-percent note at maturity. Purchased inventory for $330,000 plus GST, signing a six-month, 7-percent note payable. Accrued warranty expense, which is estimated at 5 percent of annual sales of $9,400,000. Accrued interest on all outstanding notes payable. Make a separate interest accrual entry for each note payable. Paid the first instalment and interest for one year on the long-term note payable. Paid off the 7-percent note plus interest at maturity. Answer As a high-achieving university student, I understand the importance of accurately recording business transactions in a company's general journal. Using the information provided, I have recorded the transactions for Galaxy Construction in accordance with Generally Accepted Accounting Principles (GAAP) and rounded to the nearest dollar for clarity. To begin, on January 3, 2022, the company purchased a machine for $360,000 plus 5% GST, for a total cost of $378,000. This was financed through an 8% note payable, with a maturity of six months (182 days). To record this transaction, the following entry was made: January 3, 2022 Machinery $360,000 GST payable $18,000 Note payable $378,000 (To record the purchase of machinery and GST on 8% note payable) Next, on January 29, 2022, Galaxy Construction recorded sales of $1,710,000 (excludes PST and GST), with 70% on credit and 30% for cash. To record this transaction, the following entry was made: January 29, 2022 Accounts receivable $1,197,000 Cash $513,000 Sales revenue $1,710,000 (To record credit and cash sales for the month) Sales amounts are subject to 8% PST and 5% GST, so on February 5, 2022, the company paid PST and GST of $144,480 ($1,710,000 x 8% = $136,800 PST + $136,800 x 5% = $6,840 GST). The entry to record this transaction is as follows: February 5, 2022 PST payable $136,800 GST payable $6,840 Cash $143,640 (To record payment of PST and GST) On February 28, 2022, the company borrowed $4,200,000 on a 6% note payable that calls for annual installment payments of $420,000 principal plus interest. The loan amount will be repaid in annual installments of $420,000, with the first installment due one year from the borrowing date. The entry to record this transaction is as follows: February 28, 2022 Cash $4,200,000 Note payable $4,200,000 (To record borrowing of funds) Next, on July 3, 2022, the company paid off the six-month, 8% note taken out on January 3, 2022. To record this transaction, the following entry was made: July 3, 2022 Note payable $378,000 Interest expense $3,024 Cash $381,024 (To record payment of 8% note and interest) On November 30, 2022, Galaxy Construction purchased inventory for $330,000 plus GST, signing a sixmonth, Question 2 The following information is available for Fordham Corp. for its most recent year: Net sales ............................................. $3,600,000 Freight-in ............................................ 90,000 Purchase discounts .................................... 50,000 Ending inventory ...................................... 240,000 The gross margin is 40 percent of net sales. What is the cost of goods available for sale? Question 1 options: $2,400,000 $1,920,000 $2,440,000 $1,680,000 Answer The cost of goods available for sale is an important financial metric that reflects the total cost incurred by a company to acquire and produce goods for sale in a given period. In the case of Fordham Corp., this metric can be calculated by taking into account the net sales, purchase discounts, freight-in, and ending inventory for the most recent year. Cost of goods available for sale = Net sales + Freight-in - Purchase discounts + Ending inventory = $3,600,000 + $90,000 - $50,000 + $240,000 = $3,880,000 Question 3 Woyiram is a company engaged in the processing and export of shea butter. Extracts from the balance sheet as at 31/12/2013 shows the following: PPE: Land 3000 Building 12000 Depreciation (3600) NBV 11400 Additional information: Depreciation on building is provided at 2% per annum on a straight-line basis. The building was revalued on 30th June 2014 at GHS 11,040 and the policy of the company is to incorporate the revaluation into the books of account. There is no change in the remaining useful life of buildings. Required Show the income statement and statement of financial position extract as at December 2014 and 2015 respectively. Answer Based on the given information, the income statement and statement of financial position can be prepared for the years 2014 and 2015. Income Statement extract for the year ended December 31, 2014: Sales Revenue (from export of shea butter) GHS X Less: Cost of Goods Sold (COGS): - Cost of raw materials used GHS X - Direct Labor Expenses GHS X - Depreciation on PPE GHS X Total COGS GHS X Gross Profit (GP) GHS X Less: Operating Expenses: - Selling and Distribution Expenses GHS X - Administrative Expenses GHS X Total Operating Expenses GHS X Operating Profit (OP) = GP - Total Operating Expenses GHS X Add: Other Income GHS X Less: Other Expenses - Interest Expense GHS X Income before Tax (IBT) = OP + Other Income - Other Expenses GHS X Less: Tax Expense @ 25% GHS X Net Income after Tax (NIAT) = IBT Tax Expense GHS X Statement of financial position extract as at December 31, 2014: Assets: Noncurrent Assets: - Property, Plant, and Equipment (PPE): - Land GHS 3,000 - Building GHS 11,040 Accumulated Depreciation - Building GHS 3,600 7,440 Gross PPE GHS 14,040 Less: Accumulated Depreciation - PPE GHS 3,600 Total Non-current Assets GHS 10,440 Current Assets: - Inventory GHS X - Trade Receivables GHS X - Cash and Cash Equivalents GHS X Total Current Assets GHS X Total Assets = Non-current Assets + Current Assets GHS X Equity and Liabilities: Equity: - Share Capital GHS X - Retained Earnings GHS X Total Equity GHS X Non-current Liabilities: - Long-term loan GHS X Total Non-current Liabilities GHS X Current Liabilities: - Trade Payables GHS X - Accrued Expenses GHS X - Tax Payable GHS X Total Current Liabilities GHS X Total Equity and Liabilities = Equity + Non-current Liabilities + Current Liabilities GHS X Income Statement extract for the year ended December 31, 2015: The income statement for the year ended December 31, 2015 can be prepared in a similar manner as 2014, taking into account any changes in the values of the items. Statement of financial position extract as at December 31, 2015: The statement of financial position as at December 31, 2015 will also be prepared in a similar manner as 2014, taking into account any changes in the values of the items. It is important to note that the building was revalued in 2014 and the revaluation has been incorporated into the books of accounts, leading to an increase in the value of the building from GHS 12,000 to GHS 11,040. This increase will be reflected in the statement of financial position for the year ended December 31, 2015. Question 4 Perpetual Inventory Using: Beginning inventory, purchases, and sales for Item Zeta9 are as follows: Oct. 1 Inventory 60 units @ $24 7 Sale 49 units 15 Purchase 47 units @ $28 24 Sale 20 units Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of the goods sold on October 24 and (b) the inventory value on October 31. a. Cost of the goods sold on October 24 $fill in the blank 1 b. Inventory value on October 31 $fill in the blank 2 Answer Question: Perpetual Inventory Using: Beginning inventory, purchases, and sales for Item Zeta9 are as follows: Oct. 1 Inventory 60 units @ $24 7 Sale 49 units 15 Purchase 47 units @ $28 24 Sale 20 units Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of the goods sold on October 24 and (b) the inventory value on October 31. (a) Cost of the goods sold on October 24: To calculate the cost of goods sold (COGS) on October 24, we will use the FIFO method which assumes that the first items purchased are the first ones sold. Based on the given data, we can calculate the cost of goods sold for the month of October by following these steps: Step 1: Calculate the cost of goods available for sale Beginning inventory (Oct. 1) = 60 units @ $24 = $1,440 Purchase on Oct. 15 = 47 units @ $28 = $1,316 Total cost of goods available for sale = $1,440 + $1,316 = $2,756 Step 2: Determine the cost of goods sold Sell the first 49 units from the beginning inventory, which leaves a remaining balance of 11 units. Cost of goods sold from beginning inventory = 49 units x $24 = $1,176 Sell the remaining 20 units from the Oct. 15 purchase. (b) Cost of goods sold from Oct. 15 purchase = 20 units x $28 = $560 Total cost of goods sold on October 24 = $1,176 + $560 = $1,736 Therefore, the cost of goods sold on October 24 is $1,736. (c) Inventory value on October 31: To calculate the inventory value on October 31, we will use the same FIFO method and account for the units that were not sold on October 24. Step 1: Determine the remaining inventory from the Oct. 15 purchase 47 units (purchased on Oct. 15) 20 units (sold on Oct. 24) = 27 units Step 2: Calculate the value of the remaining inventory 27 units x $28 = $756 Therefore, the inventory value on October 31 is $756. Question 5 Adjustments to Net Income—Indirect Method Ripley Corporation’s accumulated depreciation—equipment account increased by $15,325 while $3,800 of patent amortization was recognized between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $22,420 from the sale of investments. Reconcile a net income of $286,900 to net cash flow from operating activities. $fill in the blank 1 Answer Question: "Adjustments to Net Income—Indirect Method Ripley Corporation’s accumulated depreciation— equipment account increased by $15,325 while $3,800 of patent amortization was recognized between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $22,420 from the sale of investments. Reconcile a net income of $286,900 to net cash flow from operating activities." Response: Firstly, it is important to understand that the net income of a company does not necessarily translate to the same amount of net cash flow from operating activities. In order to reconcile the net income of $286,900 to the net cash flow from operating activities, we need to make adjustments for noncash items and investing activities. 1. Accumulated Depreciation Adjustment: According to the information provided, the accumulated depreciation- equipment account increased by $15,325. This indicates that the company's assets depreciated by this amount during the year. However, this is a non-cash expense which needs to be added back to the net income as it does not affect the company's cash flow. So, the first adjustment would be to add back $15,325 to the net income. 2. Patent Amortization Adjustment: The company also recognized $3,800 of patent amortization during the year. Similar to the previous adjustment, this is a non-cash expense and needs to be added back to the net income. So, the second adjustment would be to add back $3,800 to the net income. 3. Gain from Sale of Investments: The company reported a gain of $22,420 from the sale of investments. This is a non-operating activity and should be excluded from the cash flow from operating activities. Therefore, the third adjustment would be to subtract $22,420 from the net income. 4. Change in Accounts Receivable: The change in accounts receivable during the year also affects the operating cash flow. If the accounts receivable increased, it means that the company collected less cash from its customers than the amount of revenue recognized in the income statement. This amount needs to be added back to the net income. On the other hand, if the accounts receivable decreased, it means that the company collected more cash than the amount of revenue recognized, and this amount needs to be subtracted from the net income. However, as there is no information provided about the change in accounts receivable, no adjustment can be made. 5. Change in Inventory: Similar to the change in accounts receivable, the change in inventory also affects the operating cash flow. If the inventory increased, it means that the company purchased more inventory than the amount of cost of goods sold recognized in the income statement, and this amount needs to be subtracted from the net income. On the other hand, if the inventory decreased, it means that the company purchased less inventory than the cost of goods sold recognized, and this amount needs to be added back to the net income. However, as there is no information provided about the change in inventory, no adjustment can be made. 6. Change in Accounts Payable: The change in accounts payable also affects the operating cash flow. If the accounts payable increased, it means that the company paid less cash to its suppliers than the amount of expenses recognized in the income statement. This amount needs to be added back to the net income. On the other hand, if the accounts payable decreased, it means that the company paid more cash than the expenses recognized, and this amount needs to be subtracted from the net income. However, as there is no information provided about the change in accounts payable, no adjustment can be made. Overall, the net cash flow from operating activities can be reconciled as follows: Net Income $286,900 Add: - Accumulated Depreciation $15,325 - Patent Amortization $3,800 Less: - Gain from Sale of Investments $22,420 Net Cash Flow from Operating Activities $283,605 Useful sources: 1. "Accounting for Non-Accountants: The Fast and Easy Way to Learn the Basics" by Wayne Label 2. "Financial Accounting: Tools for Business Decision-Making" by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso 3. "Intermediate Accounting" by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield