Acc Handout 8 with Solutions

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eACC 212 – Handout #8
XYZ, Inc. reports the following balances in its accounts on 5/1/09
DebitCredit
Cash$ 210,000
Account Receivable 90,000
Inventory 200,000
Account Payable100,000
Common Stock (100,000 shares $1 par)100,000
Paid in Capital in excess of par250,000
Retained Earnings 1/1/09 0
Net Sales Revenue250,000
Cost of Merchandise Sold 150,000
Expenses 50,000

Transactions for May:
1) Paid expenses of $10,000 on 5/1/09 (debit “expenses” even though individual expense accounts would be debited) 2) On 5/1/09 XYZ, Inc. purchased a 2-year 6% corporate bond at par with a face value of $100,000 (they will receive interest payments on October 31 & April 30) 3) On 5/3/09 XYZ declares a cash dividend of $0.03 per share (100,000 shares outstanding) 4) Paid $60,000 on 5/10/09 for inventory purchased on account in April 5) Sold $3,500 of inventory to a customer on account on 5/17/09; cost of merchandise sold is $2,000 6) Received $10,000 from a customer on 5/20/09. The sale was made on account in April 7) On 5/25/09 XYZ Inc. pays the cash dividend (refer to transaction 3) 8) Prepare the entry XYZ would make on 5/31/09 to accrue one month of interest on the bond they purchased on 5/1/09 (refer to transaction 2)

Prepare journal entries for transactions 1 - 8, update the balances in the accounts, and prepare financial statements

| | | | | | |
1| Various Expense| | | 10,000| |
| | Cash| | | | 10,000|
| | | | | | |
2| Investment in bonds| | 100,000| |
| | Cash| | | | 100,000|
| | | | | | |
3| Retained Earnings| | | 3,000| |
| | Dividends Payable| | | 3,000|
| | (100000*.03)| | | |
| | | | | | |
4| Accounts Payable| | | 60,000| |
| | Cash| | | | 60,000|
| | | | | | |
5| Accounts receivable| | 3,500| |
| | Sales| | | | 3,500|
| Cost of goods sold| | | 2,000| |
| | Inventory| | | 2,000|
| | | | | | |
6| Cash| | | | 10,000| |
| | Accounts Receivable| | 10,000|
| | | | | | |
7| Dividends Payable| | | 3,000| |
| | Cash| | | | 3,000|
| | | | | | |
8| Int. Receivable| | | 500| |
| | Interest Income| | | 500|
| | (100,000*.06*1/12)| | | | |

***NOTES:
1. Expense has a normal debit balance.
2. Corporations may make long-term investments in bonds issued by other corporations. If this is done the corporation must debit an investment account. 3. Dividends are recorded at declaration date, neither on record date nor payment date. Declaration date: date the company declares its issuing dividends Record date: date the company looks at its books to see who shareholders are entitled to receive dividend Payment date: date the company disburses the dividends to stockholders on record entitled to receive it 4. The original entry posted in April for inventory purchased on account was a debit to Inventory and a credit to accounts payable. It is debited to inventory account instead of purchases account (usually taught in basic accounting). This is because the company uses perpetual inventory system. The account balances above includes a cost of goods sold account which is used under perpetual inventory system only. 5. Listed below are common entries used to differentiate perpetual and periodic inventory systems. PERIODICPERPETUAL

a. To record purchasesPurchasesInventory
Accounts PayableAccounts Payable

b. To record salesAccounts ReceivableAccounts Receivable SalesSales
COGS
Inventory
6. The entry used to record the sale in April was a debit to Accounts receivable and a credit to sales (and, dr cogs, cr inventory). 7. A dividend payable account was set up in #3 because the dividend is still unpaid....
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