Posted: April 24th, 2016

Prepare revised income statements and balance sheets for Planter Stores?

For each item, indicate if the event should be recorded. Identify one or more source documents generated from the event;
which source document would be used to record the event when it produces more than one source document; and identify the
information that is most useful in recoding the event in the accounts.

Record (Y/N) Documents Required
aT T

bT T

cT T

dT T

eT T

fT T

gT T

hT T
s generated from the event;
urce document; and identify the
EXERCISE 4-26: REVENUE RECOGNITION, CASH AND ACCRUAL BASIS

Hathaway Health Club sold three-year memberships at a reduced rate during its
opening promotion. It sold 1,000 three-year nonrefundable memberships for
$366 each. The club expects to sell 100 additional three-year memberships for
$900 each over each of the next two years. Membership fees are paid when
Year 1 Year 2 Year 3
Sales 366000 90000 90000
Equipment* 100000 0 0
Salaries and wages 50000 50000 50000
Advertising 5000 5000 5000
Rent and utilities 36000 36000 36000
Net income (loss) 175000 -1000 -1000
as purchased at the beginning of Year 1 for $100,000 and is expected to last for three years and then be worth $1,000.
Required:
1. Convert the income statements for each of the three years to the accrual basis.
2. Describe how the revenue recognition principle applies. Do you believe that
the cash-basis or the accrual-basis income statements are more useful to
management? To investors? Why?

1. Accrual Basis Income Statement

HATHAWAY HEALTH CLUB
INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31
Year 1 Year 2 Year 3
Sales C C C
Expenses:
Depreciation C F F
Salaries and wages F F F
Advertising F F F
Rent and utilities F F F
Total expenses
C C C
Net income (loss) C C C

2. Rationale

T
PROBLEM 5-2: CALCULATION OF GROSS PROFIT RATIO FOR WAL-MART AND TARGET

The following information was summarized from the consolidated
statements of income of Wal-Mart Stores, Inc. and Subsidiaries for
the years ended January 31, 2011 and 2010, and the consolidated
statements of operations of Target Corporation for the years ended
January 29, 2011, and January 30, 2010. (For each company, years
FY2010 FY2009
(in Millions) Sales* Cost of Sales Sales* Cost of Sales
Wal-Mart $418,952 $315,287 $405,132 $304,444
65,786 45,725 63,435 44,062
Target
* Described as net sales by Wal-Mart.

Required:
1. Calculate the gross profit ratios for Wal-Mart and Target for 2010 and 2009.
2. Which company appears to be performing better? What factors
might cause the difference in the gross profit ratios of the two
companies? What other information should you consider to
determine how these companies are performing in this regard?

1 Gross profit ratios (dollar amounts in millions):

Step 1:
Gross Profit Formula T
Gross Profit Ratio Formula
T

Step 2:
FY2010 FY2009
WALMART
Sales F F
Cost of Sales F F
Gross Profit C C
Gross Profit Ratio C C

FY2010 FY2009
TARGET
Sales F F
Cost of Sales F F
Gross Profit C C
Gross Profit Ratio C C

2 Rationale:

T
General Instructions
1. The following worksheet may be used to complete the exercise/problem.
You may need to refer to your textbook for additional information.
2. The blue cells are for data entry. Enter text in the T cells, figures in the F cells, calculation in C cells

P5-4A

The following condensed income statements and balance sheets are available for Planter Stores for a two-year period.
(All amounts are stated in thousands of dollars.)

Income Statements FY2012 FY2011
Revenues $ 35,982 $ 26,890
Cost of goods sold 12,594 9,912
Gross profit $ 23,388 $ 16,978
Operating expenses 13,488 10,578
Net income $ 9,900 $ 6,400

Balance Sheets December 31, 2012 December 31, 2011
Cash $ 9,400 $ 4,100
Inventory 4,500 5,400
Other current assets 1,600 1,250
Long-term assets, net 24,500 24,600
Total assets $ 40,000 $ 35,350

Current liabilities 9,380 10,600
Capital stock 18,000 18,000
Retained earnings 12,620 6,750
Total liabilities and stockholders’ equity
$ 40,000 $ 35,350

Before releasing the 2012 annual report, Planter’s controller learns that the inventory of one of the stores
(amounting to $500,000) was counted twice in the December 31, 2011, inventory. The inventory
was correctly counted in the December 31, 2012 inventory.

Required
1. Prepare revised income statements and balance sheets for Planter Stores for each of
the two years. Ignore the effect of income taxes.