Problem 1

Revenue is normally recognized when the delivery of goods or services has occurred, there is persuasive evidence of an arrangement for the customer payment, the price is fixed or determinable, and collection is reasonably assured. The amount recorded is the cash-equivalent sales price. The following transactions occurred in one month. For each transaction, determine if revenue is to be recognized in that month. If so, indicate the revenue account title and amount. If not, explain why.

(a)    A fitness center receives a total of $22,000 for new membership fees.  The memberships are activated the next fiscal year.  Answer from the fitness center's standpoint.

(b)   On the first day of the month, a bank lends $10,000 to a company; the note principal and $1,200 annual interest are due in one year.  Answer from the bank's standpoint.

(c)    A company sells a truck with a list, or "sticker" price of $32,000 for $28,150 cash.

(d)   A company pre-orders $4,000 worth of produce from a store. The terms require payment in full within 30 days of delivery.  Answer from the store's standpoint.

(e)   The store completes the goods descripted in (d) and delivers the order to the company.  Answer from the store's standpoint.

(f)     The store receives payment from the company for the events described in (d) and (e).  Answer from the store's standpoint.

(g)    A customer purchases airline tickets for $800 cash to travel the following year.  Answer from the airlines' standpoint.

(h)   A company issues $12 million in new common stock.

(i)      A vendor receives $32,000 cash for four theater productions.

(j)     The vendor showcases the first production referred to in (i).

(k)    A contracting company signs a contract with a customer for the construction of a new building worth $1.2 million.  At the signing, the company receives a check for $100,000 as a deposit on the future construction.  Answer from the company's standpoint.

(l)      A customer orders and receives 10 items from a company; the customer promises to pay $4,400 within the year.  Answer from the company's standpoint.

(m) A store sells a $600 television to a customer who charges the sale on his store credit card.  Answer from the store's standpoint. 

Problem 2

Suppose a company has provided the following information.

(a)    Cash sales totaled $180,000

(b)   Credit sales totaled $330,000

(c)     Interest income was $2,550

(d)    A $8,000 loss from the sale of equipment occurred

(e)    Interest expense was $18,900

(f)     Cost of goods sold was $280,000

(g)     Rent expense was $32,000

(h)    Salaries expense was $49,000

(i)      Other operating expenses totaled $56,600

Compute the company's operating income.

Problem 3

During the first month of operations for a new corporation, the following transactions are made.

Write a brief explanation of each transaction. Compute the ending balance in each account and prepare an income statement and classified balance sheet.

(a)    Cash = +$48,000, Contributed Capital = +$48,000

(b)   Cash = -$12,000, Supplies = +$12,000

(c)    Cash = -$4,000, Inventory +$19,000, Accounts payable = +$15,000

(d)   Cash = +$8,300, Accounts Receivable = +$2,700, Inventory -$2,220, Sales Revenue = +$11,000, Cost of Sales = +$2,220

(e)   Accounts Payable = +$1,420, Utilities Expense = +1,420

(f)     Cash = -$2,400, Wages Expense = +$2,400

(g)    Cash = -$1,110,  Prepaid Expenses = +$8,000, Rent Expense +$310

(h)   Cash = +$3,300, Unearned Revenue = +$2,080, Sales Revenue = +$1,220

Problem 4

In an annual report, the following activities were inferred.

(a)    Purchased supplies; paid part in cash and the rest on account

(b)   Purchased additional investments

(c)    Incurred operating costs in company-owned facilities; paid part in cash and the rest on account

(d)   Sold products to customers for cash

(e)   Used supplies

(f)     Paid cash dividends

(g)    Sold franchises, receiving part in cash and the rest in notes due from franchises

(h)   Paid interest on debt incurred and due during the period

For each transaction, indicate the effect on each account in the balance sheet and income statement. Use + for increase and ­- for decrease. Write NE if there is no effect. Then indicate if each transaction would be reported on the statement of cash flows. Use O for operating activities, F for financing activities, and NE if the transaction would not be included on the statement. Use the table below as a guide.