(Solution Manual) Accounting What the Numbers Mean

Marshall,McManus,Viele, 12

Business

Solution Manual

12th Edition

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Author(s): Marshall, McManus, Viele

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1-1 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education . CHAPTER 1 Accounting —Present and Past CHAPTER OUTLINE: I. What Is Accounting? A. Definition B. Uses of Accounting Information C. Classifications 1. Financial Accounting 2. Managerial Accounting / Cost Accounting 3. Auditing — Public Accounting 4. Internal Auditing 5. Governmental and Not -for-Profit Accounting 6. Income Tax Accounting II. How Has Accounting Developed? A. Early History B. The Accounting Profession in the United States C. Financial Accounting Standard Setting at the Present Time 1. Financial Accounting Standards Board 2. Standards are Evolving D. Standards for Other Types of Accounting 1. Managerial Accounting / Cost Accounting 2. Auditing 3. Governmental and Not -for-Profit Accounting 4. Income Tax Acco unting E. International Accounting Standards F. Ethics and the Accounting Profession III. The Conceptual Framework A. Context B. Summary of Concepts Statement No. 8, Chapter 1 — The Objective of General Purpose Financial R eporting C. Objectives of Financial Reporting for Nonbusiness Organizations IV. Plan of the Book Instructor’s Manual / Solutions Manual 1-2 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education . TEACHING/LEARNING OBJECTIVES: Principal: 1. To present a definition of accounting. 2. To identify and describe different classifications of accounting. 3. To emphasize that financial accounting standards are not a “fixed code of rules,” but are established in response to user needs and business d evelopments. Accountants need to apply professional judgment in the application of accounting principles. 4. To emphasize the role and sources of ethics for the accounting profession. Supporting: 5. To summarize how accounting has evolved over time. 6. To identify sources of standards for other types of accounting and to contrast these with financial accounting standards. 7. To introduce the issues associated with the development of international accounting standards. 8. To describe the context o f the FASB Conceptual Framework project. 9. To summarize Concepts Statement No. 8, Chapter 1 — The Objective of General Purpose Financial Rep orting. 10. To relate the objectives of financial reporting for nonbusiness organizations to those of business e nterprises. TEACHING OBSERVATIONS/ASSIGNMENT SUGGESTIONS: 1. Students should be put on notice about the jargon of accounting, the use of synonymous terms, the importance of the context within which a term is used, and the need for precision in the use of terminology. The first example of jargon is the term entity . 2. When discussing "Auditing — Public Accounting," have students find the auditors' opini on in the Campbell Soup Company 2017 Annual Report (see page 75 of the Appendix). Emphasize that a "clean opinion" is not a "clean bill of health." 3. Discuss the Summary of Concepts Statement No. 8, Chapter 1 — The Objective of Financial Reporting, in detail . Instructor’s Manual / Solutions Manual 1-3 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education . 4. Assign Exercise 1 -1. Encourage students to experiment with web sites that are of interest. In addition, or as an alternative to having students request their own annual reports, distribute reports that have been obtained by the instructor. 5. Use Exercise 1 -5 to generate discussion about the importance of ethical standards in general and independence (in both appearance and fact) in particular. Follow u p with a brief look at Exercise 1 -7 concerning audit independence standards. SOLUTIONS: E1.3. This exercise provides an opportunity to gauge where the students are in terms of their prior background in accounting, be it practical or educational, and to clear up some of the common misconceptions (i.e., to explain that accounting goes beyond the “how to” aspects of bookkeeping and involves the use of judgment). E1.4. This exercise provides an opportun ity to align student and instructor expectations. For first -time instructors in this course, or for those having a diverse student group, you will get a glimpse at the common perceptions students have concernin g the course content, level of difficulty, and methods of presentation, testing/evaluation, and grading. E1.5. The pr incipal factors Jim Sandrolini must consider are his competence and independence. Is he competent to prepare financial statements for a company that operates in a different industry tha n the one in which he works? A ccepting a contingent fee arrangement would normally cause an impairment of his independence b ecause he would directly benefit if the loan were to be approved. Instructor’s Manual / Solutions Manual 1-4 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education . E1.6. Suggested discussion strategy: Q: Why does a business have value ? A: It provides the owners an opportunity to earn a profi t, an opportunity for personal fulfillment from being in charge, and an opportunity to provide a product or service that is useful to others. Q: How can this value be measured? A: Financial information will have the most to do with evaluating the firm’s profitability, and the financial statements include this information. Q: How is an asking price for the sale of a business established? A: The asking price should be a function of the profit, resources, and obligations related to the business as shown in the financial statements. Note : This exercise also provides an opportunity to point out some of the basic limitations of the data provided by the accounting process (e.g., historical cost information — how useful are past earnings results in predicting future earnings and cash flows?). Be careful not to get too carried away with details. Let the students lead this discussion. E1.7. Answers will vary depending on the search engines used by students to locate the requested information. E1.8. Answers will vary depending on the company selected. Note that requirement d provides an opportunity to discuss some of the financial statement terms that are introduced in Chapter 2, for those instructors wishing to get a head start. Instructor’s Manual / Solutions Manual 2-1 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. CHAPTER 2 Financial Statements and Accounting Concepts/Principles CHAPTER OUTLINE: I. Financial Statements A. From Transactions to Financial Statements B. Financial Statements Illustrated 1. Explanations and Definitions a. Balance Sheet b. Income Statement c. Statement of Changes in Stockholder s' Equity d. Statement of Cash Flows 2. Comparative Statements in Subsequent Years 3. Illustration of Financial Statement Relationships II. Accounting Concepts and Principles A. Schematic Model of Concepts and Principles B. Concepts/Principles Related to the Entire Model C. Concepts/Principles Related to Transactions D. Concepts/Principles Related to Bookkeeping Procedures and the Accounting Process E. Concepts/Principles Related to Financial Statements F. Limitations of Financial Statements III. The Corporation’s Annual Report Instructor’s Manual / Solutions Manual 2-2 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. TEACHING/LEARNING OBJECTIVES: Princi pal: 1. To illustrate the four principal financial statements and their basic form. 2. To introduce students to the terminology of financial statements. 3. To present the accounting equation. 4. To explain several of the concepts of financial accou nting and financial statement presentation. Supporting: 5. To explain that financial statements are the product of financial accounting and that the statements represent a historical summary of transactions. 6. To explain some of the limitations of f inancial statements. 7. To illustrate that the financial statements are included in the corporation’s annual report. 8. To introduce and explain several business procedures and their terminology. TEACHING OBSERVATIONS: 1. This is the keystone chapter of the text, and the material presented here becomes a foundation for all subsequen t financial accounting topics. The ins tructor must resist trying to teach the entire course from this one chapter! Instead, try to help students sort out the key ideas that must be learned now from those that they should be acquainted with, but that will really be learned when s ubsequent mate rial is covered. Items to be learned now include: a. What a transaction is. b. The name of each financial statement and what it shows. c. The accounting equation. d. Financial statement relationships. e. Limitations of financial statements. 2. A significant amount of time should be spent illustrating and explaining the purpose and content —by account c ategory (asset, liability, stockholder s' equity, revenue, expense) —of each financial statement, and how the financial statements tie together. Some instructors may wish to discuss gains and losses at this point, but the key is to keep it as simple as possible! Instructor’s Manual / Solutions Manual 2-3 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. 3. It is recommended that the following models be emphasized: a. Balance Sheet: Assets = Liabilities + Stockholder s' Equity Beginning of Period $ $ $ Changes During Period +/- +/- +/- End of Period $ $ $ b. Income Statement: Revenues - Expenses = Net Income c. Statement of Changes in Stockhold ers’ Equity: Beginning Balance of Stockhold ers' Equity + Stockholder s' Investment + Net Income - Dividends = Ending Balance of Stockhold ers' Equity (As with the discussion of gains and losses, some instructors may wish to acknowledge “other” sources of changes in stockhold ers’ equity such as treasury stock, accumulated other comprehensive income, prior period adjustments, etc. This is a function of i nstructor preference and the extent to which students have been previously exposed to real world financial statements. An early dose of “reality” can be refreshing for graduate students, but might be distracting to a younger, less experienced audience.) 4. It is helpful to spend time with the concepts and principles model, explaining what each concept/principle means and showing how it relates to the "Transactions to Financial Statements" process. 5. It is appropriate to emphasize the limitations of fi nancial statements now, because they can create a mindset that helps students understand more specific accounting principles when they are covered later. 6. The Business In Practice boxes are designed to enhance student understanding by removing some jar gon and explanation from the flow of the text material, while providing a context for that material. These provide good class discussion topics. 7. You may wish to encourage students to self-study this material by using the PowerPoint presentations avai lable on the website. Instructor’s Manual / Solutions Manual 2-4 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. ASSIGNMENT OVERVIEW: This chapter provides a wide variety of assignments to choose from —ranging from the basic association -type mini-exercises and exercises, to the more challenging, analytical -type problems. Be careful not to ove r-assign or under -assign homework from this chapter. NO. LEARNING OBJECTIVES DIFFICULTY & TIME ESTIMATE OTHER COMMENTS M2.1. 2, 3 Easy, 3 -5 min. Similar to E2.9. -E2.14. M2.2. 2, 3 Easy, 3 -5 min. See M2.1 . Good in -class demo exercise. M2.3. 2, 3 Med., 7 -10 min. Challenging mini -exercise. Requires clear -cut understanding of income statement relationships. Encourage use of Exhibit 2 -2 as a solution model. M2.4. 2, 3 Med., 7 -10 min. See M2.3. Good way to review and reinforce the structure of the income statement in class. M2.5. 2, 4 Easy, 2 -3 min. Basic identification of asset accounts. M2.6. 2, 4 Easy, 2 -3 min. Basic identification of income statement accounts. E2.7 . 2, 4 Easy, 3 -5 min. Simple account identification exercise. E2.8 . 2, 4 Easy, 3 -5 min. See E2.7 . E2.9 . 2, 3 Med., 5 -8 min. Reinforces the balance sheet equation, and stresses the distinction between PIC and RE. E2.10 . 2, 3 Med., 5 -8 min. See E2.9 . Good homework assignment. E2.11 . 2, 3 Easy, 3 -5 min. “RE is affected only by net income (loss) and dividends.” This is a bit of a fiction, but it works effectively in the Chapter 2. Other effects on retained earnings (i.e., stock dividends, certain treasury stock transactions, and prior period adjustments) are not discussed until Chapter 8. E2.12 . 2, 3 Easy, 3 -5 min. See E2.11 . Good homework assignment. E2.13 . 2, 3 Med., 5 -10 min. The worksheet format is used to help students understand financial statement relationships. Exp lain that “net assets” = A-L = SE. E2.14 . 2, 3 Med., 5 -10 min. See E2.13 . Good in -class demonstration exercise. P2.15 . 2, 3, 6 Med., 7 -10 min. Most instructors omit this problem. Can be used to illustrate the sale of assets at gains/losses, and to emphasize the difference between cash and stockhold ers’ equity. P2.16 . 2, 3, 6 Med., 10 -12 min. See P2.15 . P2.17 . 2, 3, 4 Med., 15 -20 min. Straight -forward problem emphasizing financial statement relationships. Students respond well. P2.18. 2, 3, 4 Med., 15 -20 min. See P2.17 . P2.19 . 2, 3, 4 Med., 20 -25 min. Similar to P2.15. , P2.16 ., but requires the preparation of financial statements. Good for in -class demonstration. P2.20 . 2, 3, 4 Med., 20 -25 min. Excel problem. See P2.19 . Good homework assignment. P2.21 . 2, 3 Med., 5 -8 min. Can use later as a Chapter 4 assignment. P2.22 . 2, 3, 6 Med. -Hard, 15 -20. Group learning problem. Good in -class demonstration problem. P2.23 . 2, 3, 5 Med., 7 -10 min. Stress the importance of the historical cost principle. P2.24 . 2, 3, 5, 6 Med., 10 -12 min. Group learning problem. See P2.23 . P2.25 . 2, 4 Med., 10 -12 min. Group learning problem. Emphasizes the structure of the income statement. P2.26 . 2, 4 Med., 10 -12 min. Explain why “Other I ncome , net” is excluded from operating income . C2.27 . 2, 4, 6, 7 Med., 15 -20 min. Excellent conceptual case, but be sure to relate student responses back to the terminology introduced in the chapter. Instructor’s Manual / Solutions Manual 2-5 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. SOLUTIONS: M2.1. A = L + SE Beginning : $96,000 = $54 ,000 + ? Changes: = +16,000 net income (increase to retained earnings) -4,000 dividends (decrease to retained earnings) Ending: = + ? . Solution approach: Begi nning stockholders’ equity = $96 ,000 - $54,000 = $42,000. Net income increases retained earnings and dividends decrease retained earnings. Retained earnings are part of stockholders’ equity, so assuming no other changes occurred during the year, e nding stockholders’ equity = $42,000 + $16,000 - $4,000 = $54,000. M2.2. SE Beginning: $246 ,000 Changes: +30,000 common stock issued at par value (increase to paid -in capital) +36,000 net income (increase to retained earnings) -9,000 dividends (decrease to retained earnings) Ending: ? . Solution approach: No information is given about assets or liabilities, so the focus is entirely on stockholders’ equity. Beginning stockholders’ equity +/ - changes during the year = ending stockholders’ equity. $246,000 + $3 0,000 + $36,000 - $9,000 = $303 ,000. M2.3 . Net sales ....... ........... ........... ........... ........... ........... ........... $250 ,000 Cost of goods sold ... ........... ........... ........... ........... ........... ? .= 150 ,000 Gross profit .. ........... ........... ........... ........... ........... ........... $100,000 Selling, general , and administrative expenses ......... ........... 44,000 Income from operations ....... ........... ........... ........... ........... ? = 56,000 Interest expense ....... ........... ........... ........... ........... ........... ? .= 6,000 Income b efore taxes . ........... ........... ........... ........... ........... $ ? = 50,000 Incom e tax expense . ........... ........... ........... ........... ........... 10,000 Net income ... ........... ........... ........... ........... ........... ........... $ 40,000 Solution approach: Set up an income statement using the structure and format as shown in Exhibit 2 -2, then solve for missing amounts. One possible c alculation sequence: (1) $250,000 - $100,000 = $150 ,000 cost of goods sold. (2) $10 0,000 - $44,000 = $56,000 income from operations. (3) $40,000 + $10,000 = $50,000 income before taxes. (4) $56,000 - $50,000 = $6,000 interest expense Instructor’s Manual / Solutions Manual 2-6 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. M2.4. Net sales ....... ........... ........... ........... ........... ........... ........... $ ? = 300,000 (4) Cost of goods sold ... ........... ........... ........... ........... ........... 120,000 . Gross profit .. ........... ........... ........... ........... ........... ........... $ ? = 180,000 (3) Selling, gener al, and administrative expenses ......... ........... 66,000 Income from operations ....... ........... ........... ........... ........... 114,000 Interest expense ....... ........... ........... ........... ........... ........... 18,000. Income before taxes . ........... ........... ........... ........... ........... $ ? = 96 ,000 (1) Income tax expense . ........... ........... ........... ........... ........... 24,000 Net income ... ........... ........... ........... ........... ........... ........... $ ? . = 72,000 (2) Solution approach: Set up an income statement using the structure and format as shown in Exhibit 2 -2, then solve for missing amounts. Calculation sequence: (1) $114,000 - $18,000 = $96,000 income before taxes. (2) $96 ,000 - $24,000 = $72,000 net income. (3) $114,000 + $66 ,000 = $180,000 gross profit. (4) $18 0,000 + $12 0,000 = $300,000 net sales . An alternative calculation sequence would have been to solve for gross profit and net sales first, and to then solve for income before taxes and net income. M2.5. Common stock and retained earnings are stockholders’ equity accounts; cost of goods sold and interest expense are expenses; sales is a revenue account; long -term debt and accounts payable are liabilities. The assets listed are: land, merchandise inventory, equipment, acco unts receivable, supplies, cash, and buildings. M2.6. Sales and service revenues are revenues accounts on the income statement; income tax expense, cost of goods sold, and rent expense are expenses on the income statement. Land, equipment, accounts receivable, supplies, buildings, and cash are assets on the balance sheet; accumulated depreciation is a contra -asset on the balance sheet; notes payable is a liability on the balance sheet; and common stock is a stockholders’ equity account on the balance sheet. E2.7 . Financial Instructor’s Manual / Solutions Manual 2-7 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. Category Statement(s) Cash…………………………………………… A BS Accounts payable…………….……………….. L BS Common stock………………………………… SE BS Depreciation expense………………………….. E IS Net sales……………………………………….. R IS Income tax expense……………………………. E IS Short -term investments………………………... A BS Gain on sale of land……………………………. G IS Retained earnings……………………………… SE BS Dividends payable…………………………….. L BS Accounts receivable…………………………… A BS Short -term debt………………………………… L BS E2.8 . Category Financial Statement(s) Accumulated depreciation……………………... A BS Long -term debt………………………………… L BS Equipment……………………………………… A BS Loss on sale of investments ………….. ………... LS IS Net income……………………………………… SE* IS Merchandise inventory………………………… A BS Other accrued liabilities………………………… L BS Dividends paid…………………………………. SE Neither** Cost of goods sold……………………………… E IS Additional paid -in capital………………………. SE BS Interest income…………………………………. R IS Selling expenses……………………………….. E IS * Although net income appears as a caption on the income statement, it represents an increase to retained earnings, which is a stockholders’ equity account . ** Trick question! “Dividends paid” appears only on the Statement of Changes in Stockhold ers’ Equity. Dividends p aid are distributions of earnings that reduce retained earnings on the balance sheet. Dividends paid are not expenses, and thus do not appear on the income statement. E2.9 . Use the accounting equation to solve for the missing information : Instructor’s Manual / Solutions Manual 2-8 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. Firm A: A = L + PIC + ( Beg. RE + NI - DIV = End. RE) $210,000 = $108,000 + $37,000 + ( $39,000 + ? - $25,000 = ? ) In this case, the ending balance of retained earnings must be determined first: $210,000 = $108,000 + $37 ,000 + End. RE Retained earnings, 12/31/19 = $65,000 Once the ending balance of retained earnings is known, net income can be determined: $39,000 + NI – $25,000 = $65 ,000 Net income for 2019 = $51,000 Firm B: A = L + PIC + ( Beg. RE + NI - DIV = End. RE ) $270,000 = $72 ,000 + ? + ( ? + $41,000 - $9,000 = $155 ,000 ) $270,000 = $72,000 + PIC + $155 ,000 Paid-in capit al, 12/31/19 = $43,000 Beg. RE + $41,000 - $9,000 = $155 ,000 Retained earnings, 1/1/19 = $123 ,000 Firm C: A = L + PIC + ( Beg. RE + NI - DIV = End. RE ) $162,000 = ? + $20,000 + ( $21 ,000 + $56,000 - $32,000 = ? ) In this case, the ending balance of retained earnings must be determined first: $21,000 + $56,000 - $32,000 = End. RE Retained earnings, 12/31/19 = $45,000 Once the ending balance of retained earnings is known, liabilities can be determined: $162,000 = L + $20,000 + $45 ,000 Total liabilities, 12/31/19 = $97,000 E2.10. Use the accounting equation to solve for the missing information : Firm A: Instructor’s Manual / Solutions Manual 2-9 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. A = L + PIC + ( Beg. RE + NI - DIV = End. RE ) $ ? = $16 0,000 + $110 ,000 + ($100,000 + 136 ,000 - $24,000 = ? ) In this case, the ending balance of retained earnings must be determined first: $100,000 + $136,000 - $24,000 = End. RE Retained earnings, 12/31/19 = $212 ,000 Once the ending balance of retained earnings is known, total assets can be determined: A = $160,000 + $110,000 + $212 ,000 Total assets, 12/31/19 = $482 ,000 Firm B: A = L + PIC + ( Beg. RE + NI - DIV = End. RE ) $870 ,000 = ? + $118 ,000 + ( $248,000 + $220,000 - ? = $372 ,000 ) $870,000 = L + $118,000 + $372 ,000 Total liabilities, 12/31/19 = $380,000 $248,000 + $22 0,000 - DIV = $372 ,000 Dividen ds declared and paid during 2019 = $96,000 Firm C: A = L + PIC + ( Beg. RE + NI - DIV = End. RE ) $310,000 = $150,000 + $90,000 + ( ? + $50 ,000 - $32,000 = ? ) In this case, the ending balance of retained earnings must be determined first: $310,000 = $1 50,000 + $90 ,000 + End. RE Retained e arnings, 12/31/19 = $70,000 Once the ending balance of retained earnings is known, the beginning balance of retained earnings can be determined: Beg. RE + $50,000 - $32,000 = $70 ,000 Retained earnings, 1/1/19 = $52,000 E2.11 . Prepare the retained earnings portion of a statement of changes in stockhold ers' equity for the year ended Dec ember 31, 2019 : Retained Earnings, December 31, 2018 ………………………………… $ 623,6 00 Instructor’s Manual / Solutions Manual 2-10 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. Less: Net loss for the year ended December 31, 2019 ………………….. (9,4 00) Less: Div idends declared and paid in 2019 …..…………………………. (37,0 00) Retained Ear nings, December 31, 2019 ………………………………… $577,2 00 E2.12 . Retained Earnings, December 31, 2018 ……………………………….… ? Add: Net income for the ye ar ended December 31, 2019 ……………….. 67,8 00 Less: Div idends declared and paid in 2019 …..………………………….. (13,500) Retained Earnings, December 31, 2019 ……………… …………………. $630,9 00 Solving the model, retained earnings at December 31, 20 18 was $576,6 00. E2.13 . SE . A = L + PIC + RE Beginning: $37,200 = $21 ,000 + $ 0 + $16,2 00 Changes : ? = -3,600 + 0 + 9 ,000 (net income) ? (dividends) Ending: ? = ? + 0 + $18,000 Solution approach: (Remember that net assets = Assets - Liabilities = Stockhold ers’ equity = PIC + RE ). Since paid -in capital did not change during the year, assume that the beginning and ending balances are $0. Thus, beg inning retained earnings = $37,200 - $21,000 = $16,2 00, and ending retained earnings = ne t assets at the end of the year = $18,000. By looking at the RE column, it can be seen that dividends must have been $7,200. Also by looking at the liabilities column, it can be seen that ending liabilities are $17,4 00, and therefore ending assets must b e $35,4 00. Thus, total assets decreased by $1,800 during the year ($37,2 00 - $35,4 00), which is equal to the net decrease on the right - hand side of the balance sheet ( -$3,600 liabilities + $9 ,000 net income - $7,200 dividends = $1,8 00 net decrease in assets). E2.14 . SE . A = L + PIC + RE Beginning: ? = $16 0,000 + $15,000 + ? Changes: +33,000 = -9,000 + ? + ? (net income or loss) -12,000 (dividends) Instructor’s Manual / Solutions Manual 2-11 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. Ending: ? = ? + $ 96,000 + ? ($215 ,000 total S E) Solution approach: Ending retained ear nings = $215 ,000 t otal stockholders’ equity - $96,000 paid -in capital = $119 ,000. Ending liab ilities = $16 0,000 beginning liabilities - $9,000 decrease = $151 ,000. Thus, ending assets = $151,000 liabilities + $215 ,000 stockhold ers’ equity = $366 ,000. Beginning assets = $366,000 ending assets - $33,000 increase = $333 ,000. Beginning retained earnings = $333,000 as sets - $160,000 liabilities - $15,000 paid -in capital = $158 ,000. Once the beginning and ending retained earnings balances are known, the net income or loss for the year can be determined as follows: Retain ed earnings, beginning . ........... ........... ........... ........... ........... $158 ,000 Less: Net i ncome or loss for the year ........... ........... ........... ........... ? Less: Dividends declared and paid during the year ... ........... ........... (12,000) Retained earnings, ending ...... ........... ........... ........... ........... ........... $119 ,000 Solving the model, the net loss of the year = $(27 ,000). P2.15 . Set up the accounting equation and show the effects of the transactions described. Since total assets must equal total liabilities and stockholders’ equity, the unadjusted stockhold ers’ equity can be calculated by subtracting liabilities from the total of the assets given. A = L + SE Accounts Plant & Stockholde rs’ Cash + Receivable + Inventory + Equipment = Liabilit ies + Equity Data given $ 45,600 + 228,400 + 122,800 + 530,000 = 611,2 00 + 315,6 00 Collection of account s receivable +216,98 0 -228,4 00 -11,42 0 Inventory liquidation +98,24 0 -122,8 00 -24,56 0 Sale of plant & equipment +380,000 -530,000 -150,000 Payment of liabilities -611,2 00 -611,2 00 0 Balance $ 129,62 0 0 0 0 0 $ 129,62 0 *The effe cts of these transactions on stockhold ers’ equity represent losses from the sale (or collection) of the non -cash assets. P2.16. The solution approach is similar to that shown in Problem 2 -15. Gains or losses a. Instructor’s Manual / Solutions Manual 2-12 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. can be calculated for the sale (or collection) of each of Kimber Co.’s non -cash assets, as follows: Cash received upon Gain (loss) recorded and sale or collection of asset effect on Stockholders’ Equity Acco unts receivable . . . . $90,000 * 8 0% = $ 72,00 0 $90,000 * 2 0% = $(18,00 0) Merchandise inventory . . $150,000 * 7 0% = 105,00 0 $150, 000 * 3 0% = (45,000 ) Build ings & Equipment . . BV^ + $6 0,000 = 340,000 Amount above BV = 60,000 Land. . . . . . . . . . . . . . . . . Appraised amount = 85,000 $85,000 - $50,000 = 35,000 Total cash received $602,0 00 Net gain $ 32,00 0 ^ $400,000 - $120,000 accumul ated depreciation = $280 ,000 book value of buildings & equipment. The $602,0 00 cash received from the liquidation of non -cash assets would be added to the beginning cash balance of $30,000, and $632 ,000 is the amount of cash available to pay the claims of creditors and stockholders. Liabilities would be paid first (including the amounts that are not shown on the balance sheet), and the balance would be paid to the stockholders: Total cash availabl e ... ........... ........... ........... ........... ........... $632 ,000 Accounts payable ...... ........... ........... ........... ........... ........... $ 80,000 Notes payable ........... ........... ........... ........... ........... ........... 110,000 Wages payable (not show n on balance sheet) ........... ........... 5,000 Interest payable (not sho wn on balance sheet) .......... ........... 10,000 Long -term debt .......... ........... ........... ........... ........... ........... 130,0 00 (335,000) Total cash available to stockholders .......... ........... ........... $297 ,000 The total cash available to stockholders upon liquidation can be verified, as follows: Total stockholders’ equity ( unadjusted , from balance sheet) ........... $280,0 00 Add: Gain on sale of build ings & equipment ........... ........... ........... 60,000 Add: Gain on sale of land ...... ........... ........... ........... ........... ........... 35,000 Less: Loss on collection of accounts receivable ....... ........... ........... (18,00 0) Less: Loss on liquidation of merchan dise inventory . ........... ........... (45,00 0) Less: Unrecorded w ages expense ...... ........... ........... ........... ........... (5,000) Less: Unrecorded interest expense .... ........... ........... ........... ........... (10,0 00) Total stockholders’ equity, as adjusted ...... ........... ........... ........... $297 ,000 A summary reconciliation is as follows: Total stockholders’ equity ( unadjusted , from balance sheet) ........... $280,0 00 Add: Net gain from liquidation of all assets (see calculations above) …. 32,0 00 Less: Unrecorded liabilities for wages and interest………………… (15,0 00) Total stockholders’ equity, as adjusted ...... ........... ........... ........... $297 ,000 P2.16. (continued) Instructor’s Manual / Solutions Manual 2-13 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. b. As shown in the schedule in part a), total stockholders’ equity on the balance sheet had not been adjusted for the gains and losses from the sale (or collection) of the non-cash assets; nor was it adjusted for the effects of the expense/liability accruals for wages and interest. P2.17. Cash .. ........... ........... ........... ........... ........... ........... ........... ........... $ 27,000 Accounts receivable .. ........... ........... ........... ........... ........... ........... 99,000 Supplies ........ ........... ........... ........... ........... ........... ........... ........... 18,000 Merchandise inventory .......... ........... ........... ........... ........... ........... 93,000 Total current assets .... ........... ........... ........... ........... ........... ........... $237 ,000 Acco unts payable ..... ........... ........... ........... ........... ........... ........... $ 69,000 Long-term debt .......... ........... ........... ........... ........... ........... ........... 120,000 Common stock .......... ........... ........... ........... ........... ........... ........... 30,000 Retain ed earnings ...... ........... ........... ........... ........... ........... ........... 177,000 Total liabilities and stockholders’ equity ..... ........... ........... ........... $396 ,000 Net Sales ........ ........... ........... ........... ........... ........... ........... ........... $420,000 Cost of goods sold ..... ........... ........... ........... ........... ........... ........... (270,000 ) Gross profit ... ........... ........... ........... ........... ........... ........... ........... $150,000 Service revenue ......... ........... ........... ........... ........... ........... ........... 60,000 Depreci ation expense ........... ........... ........... ........... ........... ........... (36,000) Supplies expense ....... ........... ........... ........... ........... ........... ........... (42,000) Earnings from operati ons (operating income) ........... ........... ........... $132 ,000 Earnings from operations (operating income) ........... ........... ........... $132 ,000 Interest expense ......... ........... ........... ........... ........... ........... ........... (12,000) Earnin gs before taxes ........... ........... ........... ........... ........... ........... $120,000 Income tax expense ... ........... ........... ........... ........... ........... ........... (36,000) Net income .... ........... ........... ........... ........... ........... ........... ........... $ 84 ,000 $36,000 income tax expense / $12 0,000 earnings before taxes = 30% average tax rate Retained earnings, Ja nuary 1, 2019 .. ........... ........... ........... ........... ? Net inco me for the year ......... ........... ........... ........... ........... ........... $ 84 ,000 Dividends declared and paid during the year ........... ........... ........... (48,000) Retained earnings, December 31, 2019 ........ ........... ........... ........... $177 ,000 Solving the model, the beginning retained earnings balance must have been $141 ,000, because the account balance increased by $36 ,000 during the year to an ending balance of $177 ,000. a. b. c. d. e. f. P2.18 . Cash ... ........... ........... ........... ........... ........... ........... ........... ........... $ 20,000 a. Instructor’s Manual / Solutions Manual 2-14 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. b. c. d. e. f. Accounts receivable .. ........... ........... ........... ........... ........... ........... 28,000 Merc handise inventory .......... ........... ........... ........... ........... ........... 106,000 Total current assets .... ........... ........... ........... ........... ........... ........... $ 154,000 Less: Accounts payable * ...... ........... ........... ........... ........... ........... (13,000) Current assets less current liabilities . ........... ........... ........... ........... $ 141,0 00 * No other current liabilities are included in the problem. Total current assets .... ........... ........... ........... ........... ........... ........... $ 154,000 Land ... ........... ........... ........... ........... ........... ........... ........... ........... 19,000 Equipment ..... ........... ........... ........... ........... ........... ........... ........... 10,000 Accumulated depreciation ..... ........... ........... ........... ........... ........... (3,000) Total assets .... ........... ........... ........... ........... ........... ........... ........... $ 180,000 Net Sales ........ ........... ........... ........... ........... ........... ........... ........... $ 31 0,000 Cost of goods sold ..... ........... ........... ........... ........... ........... ........... (220,000) Gross profit ... ........... ........... ........... ........... ........... ........... ........... $ 90,000 Rent expense . ........... ........... ........... ........... ........... ........... ........... (9,000) Depreciation expense ........... ........... ........... ........... ........... ........... (1,500) Earnings from operations (operating income) ........... ........... ........... $ 79,5 00 Earnings from operations (operating income) ........... ........... ........... $ 79,5 00 Interest expense ......... ........... ........... ........... ........... ........... ........... (4,500) Earning before taxes .. ........... ........... ........... ........... ........... ........... $ 75 ,000 Income tax expense ... ........... ........... ........... ........... ........... ........... (30,000) Net income .... ........... ........... ........... ........... ........... ........... ........... $ 45 ,000 $30,000 income tax expe nse / $75 ,000 earnings before taxes = 40% average tax rate Retained earnings, January 1, 2019 ... ........... ........... ........... ........... ? Net inc ome for the year ......... ........... ........... ........... ........... ........... $ 45 ,000 Dividends declared and paid during the year ........... ........... ........... (32,000) Retained earnings, December 31, 2 019 ........ ........... ........... ........... $122,0 00 Solving the model, the beginning retained earnings balance must have been $109,0 00, because the a ccount balance increased by $13 ,000 during the year to an ending balance of $122,0 00. Instructor’s Manual / Solutions Manual 2-15 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. P2.19 . a. BREANNA, INC. Income Statement For the Year Ended December 31, 2019 Net Sales ........ ........... ........... ........... ........... ........... ........... ........... $800,000 Cost of goods sold ..... ........... ........... ........... ........... ........... ........... (512,000) Gross profit ... ........... ........... ........... ........... ........... ........... ........... $288 ,000 Selling, general, and administrative expenses .......... ........... ........... (136,000) Earnings from operations (o perating income) ........... ........... ........... $152 ,000 Interest expens e ......... ........... ........... ........... ........... ........... ........... (24,000) Earnings before taxes ........... ........... ........... ........... ........... ........... $128 ,000 Income tax expense ... ........... ........... ........... ........... ........... ........... (32,000) Net income .... ........... ........... ........... ........... ........... ........... ........... $ 96 ,000 BREANNA, INC. Statement of Changes in Stockholder s’ Equity For the Year Ended December 31, 2019 Paid -in capital: Commo n stoc k ......... ........... ........... ........... ........... ........... $360,000 Retained earnings: Beginning balance ..... ........... ........... ........... ........... ........... $ 92,000 Net in come for the year ........ ........... ........... ........... ........... 96,000 Less: Dividends declared and paid during the year .. ........... (48,000) Ending balance ......... ........... ........... ........... ........... ........... 140,000 Total stockholders’ equity ..... ........... ........... ........... ........... $500 ,000 BREANNA, INC. Balance Sheet December 31, 2019 Assets: Cash .. ........... ........... ........... ........... ........... ........... ........... $260 ,000 Accounts r eceivable .. ........... ........... ........... ........... ........... 40,000 Merchandise inventory .......... ........... ........... ........... ........... 148,000 Total current asset s .... ........... ........... ........... ........... ........... $448 ,000 Equipment ..... ........... ........... ........... ........... ........... ........... 480,000 Less: Accumulated depreciation ....... ........... ........... ........... (208,000) 272,000 Total assets .... ........... ........... ........... ........... ........... ........... $720,000 Liabilities: Accounts pa yable ...... ........... ........... ........... ........... ........... $ 60 ,000 Long -term debt .......... ........... ........... ........... ........... ........... 160,000 Total liabilitie s .......... ........... ........... ........... ........... ........... $220 ,000 Stockhold ers’ Equity: Common stock ......... ........... ........... ........... ........... ........... $360,000 Retained earnings ..... ........... ........... ........... ........... ........... 140,000 Total stockholders’ equity ..... ........... ........... ........... ........... $500 ,000 Total liabilities and stockholders’ equity ...... ........... ........... $720,000 Instructor’s Manual / Solutions Manual 2-16 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. P2.19 . b. c. d. e. (continued) $32,000 income tax expense / $128 ,000 earnings before taxes = 25% average tax rate. $24,000 interest expense / $16 0,000 long -term debt = 15% interest rate. This assumes that the year -end balance of long -term debt is representative of the average long-term debt account balance throughout the year. $360,000 common stock / 36 ,000 shares = $10 per share pa r value. $48,000 dividends declared and paid / $96 ,000 net income = 50% . This assumes that the board of directors has a policy to pay dividends in proportion to earnings. P2.20 . a. SHAE, INC. Income Statement For the Yea r Ended December 31, 2019 Net Sales ........ ........... ........... ........... ........... ........... ........... ........... $300,000 Cost of goods sold ...... ........... ........... ........... ........... ........... ........... (180,000) Gross profit .... ........... ........... ........... ........... ........... ........... ........... $120,000 Selling, general, and administrative expenses .......... ........... ........... (24,000) Earnings from operations (operating income) ........... ........... ........... $ 96 ,000 Interest expense .......... ........... ........... ........... ........... ........... ........... (16,000) Earning s before taxes . ........... ........... ........... ........... ........... ........... $ 80,000 Income tax expense .... ........... ........... ........... ........... ........... ........... (28,000) Net income ..... ........... ........... ........... ........... ........... ........... ........... $ 52 ,000 SHAE, INC. Statement of Changes in Stockhold ers’ Equity For the Year Ended December 31, 2019 Paid -in capital: Common stock .......... ........... ........... ........... ........... ........... $ 70,000 Retained earnings: Beginning balance ...... ........... ........... ........... ........... ........... $ 43 ,000 Net income for the year ........ ........... ........... ........... ........... 52,000 Less: Dividends declared and paid during the year ... ........... (13,000) Ending balance .......... ........... ........... ........... ........... ........... 82,000 Total stockholders’ equity ..... ........... ........... ........... ........... $152 ,000 P2.20 . (continued) Instructor’s Manual / Solutions Manual 2-17 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. a. SHAE, INC. Balance Sheet December 31, 2019 Assets: Cash .. ........... ........... ........... ........... ........... ........... ........... $ 64 ,000 Acco unts receivable .. ........... ........... ........... ........... ........... 40,000 Merchandise inventory .......... ........... ........... ........... ........... 88,000 Total current assets .... ........... ........... ........... ........... ........... $192 ,000 Buildings an d equipment ....... ........... ........... ........... ........... 168,000 Less: Accumulated depreciation ........ ........... ........... ........... (72,000) 96,000 Total assets ..... ........... ........... ........... ........... ........... ........... $288 ,000 Liabilities: Accounts payable ....... ........... ........... ........... ........... ........... $ 30,000 Accrued liabilities ...... ........... ........... ........... ........... ........... 6,000 Notes payable (long term) ...... ........... ........... ........... ........... 100,000 Total liabilities ........... ........... ........... ........... ........... ........... $136 ,000 Stockhold ers’ Equity: Common stock .......... ........... ........... ........... ........... ........... $ 70,000 Retained earnings ...... ........... ........... ........... ........... ........... 82,000 Total stockholders’ equity ..... ........... ........... ........... ........... $152 ,000 Total liabilities and stockho lders’ equity ....... ........... ........... $288 ,000 b. c. d. e. $28,000 income tax expense / $8 0,000 earnings before taxes = 35% average tax rate. $16,000 interest expense / $1 00,000 notes payable (long -term) = 16% interest rate. This assumes that the year -end balance of long -term debt is representative of the average long-term debt account balance throughout the year. If large amounts of cash had been borrowed near the end of the year, then the interest rate charged on long -term debt would be greater than 16% because the average debt outstandi ng would have been less than $1 00,000. Likewise, if large repayments of long -term debt had occurred near year-end, then the interest rate was less than 16% because the average outstanding long-term debt would have been greater than $1 00,000. $70,000 common stock / 14 ,000 shares = $5 per share par value. $13,000 di vidends declared and paid / $52 ,000 net income = 25%. This assumes that the board of directors has a policy to pay dividends in proportion to earnings. P2.21 . Stockholders’ Instructor’s Manual / Solutions Manual 2-18 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. a. Assets = Liabilities + Equity Borrowed cash on a bank loan + + NE Paid an account payable - - NE Sold common stock + NE + Purchased merchandise inventory on account + + NE Declared and paid dividends - NE - Collected an account receivable NE NE NE Sold inventory on account at a profit + NE + Paid operating expenses in cash - NE - Repaid principal and interest on a bank loan - - - b. c. d. e. f. g. h. i. P2.22 . a. Stockhold er’s Assets = Liabilitie s + Equity August 1, 201 9 totals ....... ............. .............. .............. ............. $700,000 $500,000 $20 0,000 Augu st 3, borrowed $50 ,000 in cash from the bank ………….. + 50,000 + 50,000 0 New totals………………………………………………… $750,000 $550,000 $22 0,000 August 7, bought merchandise inventory valued at $75,000 on account ........ ............. .............. .............. ……….. +75,000 +75,000 0 New totals .... ............. ............. .............. .............. ............. $825 ,000 $625 ,000 $200,000 August 10, paid $25 ,000 cash operating expenses ...... ............. –25,000 0 –25,000 New totals .... ............. ............. .............. .............. ............. $800,000 $625 ,000 $175 ,000 August 14, received $12 0,000 in cash from sales ...... ............. +120,000 +120,000 of merchandise that had cost $72,000 ........ .............. ............. –72,000 0 – 72,000 New totals .... ............. ............. .............. .............. ............. $848,000 $625,000 $223 ,000 August 17, paid $60 ,000 owed on accounts payable….. ........... –60,000 –60,000 0 New totals .... ............. ............. .............. .............. ............. $788,000 $565,000 $223 ,000 August 21, collected $ 44,000 of accounts receivable…. ........... 0 0 0 New totals ..... ............. ............. .............. .............. ............. $788,000 $565,000 $223, 000 August 24, repaid $10,000 to the bank, plus $1,0 00 interest ..... –31,000 –30,000 –1,000 New totals ..... ............. ............. .............. .............. ............. $757 ,000 $535,000 $222 ,000 August 29, paid Rudy Gandolfi a $15,000 cash dividend ........ – 15,000 0 –15,000 August 31, 2019 totals ..... ............. .............. .............. ............. $742 ,000 = $535 ,000 + $207 ,000 b. c. Total revenues were $12 0,000 (from s ales) and total expenses were $98,0 00 (which included $72 ,000 of cost of goods sold, $25,000 of operating expenses, and $1,0 00 of interest expen se). Thus, net income was $22,0 00 ($ 120,000 - $98,0 00). Alternative calculation: Stockh older’s equity increased by $7 ,000 during the month of August (see answer to part c) , even though a $15 ,000 cash dividend was dec lared and paid to Rudy Gandolfi . Since there were no capital stock transactions during the month, net income was $22,000. ($20 0,000 begi nning stockholder’s equity, p lus $22,000 net income, minus $15 ,000 dividends, equals $207 ,000 ending stockhold er’s equity.) August 1 August 31 Net Change Total assets .... ........... ........... ........... $700,000 $742,000 $42,0 00 Total liabilitie s .......... ........... ........... 500,000 535,000 35 ,000 Total sto ckholder’s equity ..... ........... 200,000 207,000 7,000 P2.22 . (continued) Instructor’s Manual / Solutions Manual 2-19 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. d. e. Rudy Gandolfi ’s stockhold er’s equity increased by $48, 000 as a result of the sale on August 14th ($120,000 revenue - $72,000 cost of goods sold). His stockhold er’s equity decreased by $25 ,000 for the operating expenses rec orded on August 10th, by $1,0 00 for the interest expense rec orded on August 24th, and by $15 ,000 for the cash dividend recorded on Augus t 29th. In other words, his stockhold er’s equity was increased by revenues, and it was decreased by expenses and dividends. Interest is an expense because it represents a necessary payment to others (i.e., creditors) for the use of their money —thus, it is a “cost” of doing business. Dividends are instead a distribution of profits to the owners /stockh olders of the firm and thus represent a partial liquidation of the firm. A dividend is not an expense because it represents a profit distribution; it is not a “cost” of doing business. f. g. When money is borrowed from the bank, an asset (cash) is increased and a liability (notes payable) is also increased by an equal amount. Net income is increased only when revenue has been earned —and money borrowed from the bank represents a liability that must be repaid, not revenue that has been earned. Paying off accounts payable decreases an asset (cash) and decreases a liability (accounts payable) by an equal amount. Collecting an account receivable increases an asset (cash) and decreases another asset (accounts receivable) by equal amounts. In both case s, only balance sheet accounts are involved . Net income is increased by revenues and decreased by expenses. The expense associated with a cash payment of an account payable would have been recorded in an earlier transaction (when the expense was incurred and the account payable was established); by the same logic, the revenue associated with the collection of an account receivable would have been recorded in an earlier transaction (when the revenue was earned and the account receivable was established). P2.23 . a. b. c. d. e. Amounts shown in the balance sheet below reflect the following use of the data given: An asset should have a "probable future economic benefit"; therefore the accounts receivable are stated at the amount expected to be collected from customers. Assets are reported at original cost, not current "worth." Depreciation in accounting reflects the spreading of the cost of an asset over its estimated useful life. Assets are reported at original cost, not at an assessed or appraised value. The amount of the note payable is calculated using th e accounting equation, A = L + S E. Total assets ca n be determined based on it ems (a), (b), and (c); total stockhold ers' equity is known after considering item (e); and the note payable is the difference between total liabilities and the accounts payable. The retained earnings account balance represents the difference between cumulative net income and cumulative dividends. P2.23 . (continued) Instructor’s Manual / Solutions Manual 2-20 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. Assets: Liabilities and Stockhold ers’ Equity: Cash ...... ............... ............... .............. $ 3,500 Note payable ................... ............... $ 12,000 Accounts receiv able ............... .............. 17,000 Accounts payable ............ ............... 16,000 Land ....... ............... ............... .............. 55,000 Total liabilities ............ ............... $ 28,000 Automobile ............ ............... .............. $90,000 Common stock ................ ............... 40,000 Less: Accumulated depreciation ........... (30,000) 60,000 Retained earnings ........... ............... 67,500 Total stockholders’ equity ........... 107,500 Total as sets…………………………… $135,5 00 Total liab.and stockholders’ equity.. $135,5 00 P2.24 . EPSICO, INC. Balance Sheets December 31, 2019 and 2018 (Amounts in thousands ) Assets 2019 2018 Liabilities 2019 2018 Current assets: Current liabilities: Cash ....... ............... ............... $ 456 $ 36 0 Note payable ....... .............. .............. ... $ 588 $ 480 Accounts receivable ............... 1,512 1,440 Accounts payable ……. …… …………. 1,476 1,320 Inventory ............... ............... 2,892 2,760 Total current liabilities .... ………. … $2,064 $1,800 Total current assets ............. $4,860 $4,56 0 Long -term debt ... .............. ……. … … $ 72 0 $ 960 Land ....... ............... ............... $ 30 0 $ 30 0 Stockhold ers’ Equity Equipment .............. ............... 4,680 4,500 Common stock .... .............. …… … … $2,400 $2,400 Less: Accum. depreciat ion… (2,16 0) (1,92 0) Retained earnings …… …… …… …… 2,496 2,280 Total land & equipment ...... $2,820 $2,88 0 Total stockholders’ equity. … …. … $4,896 $4,68 0 Total assets ............ ............... $7,68 0 $7,44 0 Total liabilities & stockholder s’ equity . $7,680 $7,440 Solution approach: 1. Retained earnings, 12/31/18 ......... ........... ........... ........... ........... ........... $2,28 0 Net income for 2019 (given) ........ ........... ........... ........... ........... ........... 312 Dividends f or 2019 (given) .......... ........... ........... ........... ........... ........... (96) Retained earnings, 12/31/19 ........ ........... ........... ........... ........... ........... $2,496 2. Cash at 12/31/19 is $96 more than at 12/31/18 . 3. Cost of equipment at 12/31/19 is $18 0 more than the balance at 12/31/18 . 4. Land balance at 12/31/19 is the same as at 12/31/18 . Fair market value is irrelevant. 5. Calculate total current assets, total land and equipment, and total assets. 6. Total assets can then be us ed for total liabilities and stockhold ers’ equity. 7. Total stockhold ers’ equity is calcu lated and added to total current liabilities. This amount is subtracte d from total liabilities and stockhold ers’ equity to determine long-term debt. P2.25 . 2017 2016 Instructor’s Manual / Solutions Manual 2-21 Copyright ©2020 by McGraw -Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw -Hill Education. For the years end ed November 26 and 27 , respectively: Net revenues…………………..................... ................. $4,904,030 $4,552,739 Cost of goods sold......……………….... ....................... 2,341,301 2,223,727 Gross profit…………………….................................... 2,562,729 2,329,012 Selling, general and administrative expenses................ 2,095,560 1,866,805 * Operating income ……….……...….............................. 467,169 462,207 Interest expense , and other expenses and losses, net ...... 118,388 ** 54,947 ** Income before income taxes……...... ..................……… 348,781 407,260 Income tax exp ense……….. ....……............................... 64,22 5 116,051 Net income…………………..............................……… $ 284,556 $ 291,209 * Includes $312 of net restructuring charges, so 2016 selling, general and administrative expenses exclusive of these charges = $ 1,866,493 ($1,866,805 - $312 ). This is the amount most directly comparable to the S,G&A expenses calculated for 2017 of $2,095,560 . ** Includes the following items: Interest expense………………………………………. $ 68,603 $ 73,170 Loss on early extinguishment of debt………………… 22,793 --- Other (income) expense………………………………. 26,992 (18,223 ) 118,388 54,947 As at November 30 and 24 , respectively: Total assets……............................................ ................... $3,354,692 $2,987,096 Total liabilities...……...................... .............................… 2,525,269 2,395,975 Total stockholders' equity ................................. ................ 829,423 *** 591,121 *** *** Includes temporary equity of $127,0 35 in 2017 and $79,346 in 2016. P2.26 . 2017 2016 a.