Financial Accounting ch 3

Chapter 3 Adjusting Accounts and Preparing Financial Statements QUESTIONS 1.

The cash basis of accounting reports revenues when cash is received while the accrual basis reports revenues when they are earned. The cash basis reports expenses when cash is paid while the accrual basis reports expenses when they are incurred and matched with revenues they generated.

2.

The accrual basis of accounting generally provides a better indication of company performance and financial condition than does the cash basis. Also, the accrual basis increases the comparability of financial statements from one period to the next. Thus, business decision makers generally prefer the accrual basis.

3.

Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year.

4.

A prepaid expense is an item paid for in advance of receiving its benefits. As such, it is reported as an asset on the balance sheet.

5.

Long-term tangible plant assets such as equipment, buildings, and machinery lead to adjustments for depreciation. Generally, land is the only long-term tangible plant asset that does not require depreciation.

6.

The Accumulated Depreciation contra account is used for depreciation. It provides financial statement users with additional information about the relative age of the assets. Without the contra account information, the reader would not be able to tell whether the assets are new or in need of replacement.

7.

Unearned revenue refers to cash received in advance of providing products and services. Another name for an unearned revenue is deferred revenue. It is reported as a liability on the balance sheet.

8.

An accrued revenue is revenue that is earned but is not yet received in cash (and/or other assets) and the customer has not been billed prior to the end of the period. Therefore, end-of-period adjustments are made to record accrued revenue. Examples are interest income that has been earned but not collected and revenues from services performed that are neither collected nor billed.

9.A If prepaid expenses are initially recorded with debits to expense accounts, then the prepaid expenses asset accounts are debited in the adjusting entries.

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119

10.

For Best Buy, all of the accounts under the category of Property and Equipment (except for Land), require adjusting entries. The expense related to the depreciation expense account would be understated on the income statement if Best Buy fails to adjust these asset accounts. If the adjusting entries are not made, net income would be overstated. Note: Students might also correctly identify accounts receivable, goodwill, and tradename as needing adjustment.

11.

Circuit City must make adjusting entries to Prepaid expenses and other current assets; Deferred income taxes; Accrued expenses and other current liabilities; Accrued income taxes; and possibly other assets and liabilities such as Receivables for bad debts. (It is also possible that Circuit City would need to adjust Goodwill and Other intangible assets.)

12.

The accrued Wages Expense would be reported as part of “Accrued Expenses” on Apple’s balance sheet.

13.

Closing entries at the end of the current period prepare the revenues (and gains), expenses (and losses), and dividends accounts for the next period by giving them zero balances. Closing entries also update the retained earnings account for the events of the year just finished. Closing entries do not affect the asset and liability accounts.

14.

(i) Closing entries prepare the temporary accounts—revenue and expense (and gain and loss) accounts and dividends—for the next period by giving them zero balances. (ii) Closing entries also update the retained earnings account for the events of the period just completed.

15.

The four-step closing entry process is: (i) close the revenue (and gain) accounts to the Income Summary account, (ii) close the expense (and loss) accounts to the Income Summary account, (iii) close the Income Summary account to the Retained Earnings account, and (iv) close the Dividends account to the Retained Earnings account.

16.

The Income Summary account is used to summarize the period’s revenues and expenses. As a result, it temporarily has a balance equal to the net income (or net loss) for the period. (Instructor note: Closing can be accomplished without the Income Summary account by closing revenue and expense accounts directly to the retained earnings account.)

17.

Yes, an error would have occurred because a post-closing trial balance should only include permanent accounts, and Depreciation Expense is a temporary account that should have been closed. If an expense appears on the post-closing trial balance, the amounts of net income, total assets, and total equity are all in error (overstated).

18.B A work sheet can be used to collect and organize data for preparing (i) adjusting entries, (ii) closing entries, and (iii) financial statements. A work sheet can also be used for what if analysis, for help with audit adjustments, and for preparing interim financial statements. 19.B The adjustments in the Adjustments columns of a work sheet are identified by letter to link the debits with the credits to ensure that the entries are complete and in balance (debits = credits) and for reference purposes (audit trail). The letters can also be used to identify the reasons for the entries and help simplify preparation of the actual adjusting journal entries.

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Financial and Managerial Accounting, 2nd Edition

20.

A company’s operating cycle is the normal time between paying cash for merchandise inventory or for employee salaries in providing customer services and the receipt of cash from customers in exchange for those products or services.

21.

Assets on a typical classified balance sheet include current assets and noncurrent assets—where noncurrent assets usually include long-term investments, plant assets, and intangible assets. Liabilities are typically classified as current and noncurrent. Note that the terms short-term and long-term are sometimes used for current and noncurrent.

22.

Unearned revenue is reported as a liability—usually a current liability.

23.

Plant assets (also called property, plant and equipment or long-lived assets) are tangible long-lived assets used to produce or sell goods or services.

24.C Reversing entries simplify subsequent entries for accrued expenses and accrued revenues by eliminating the need to record the removal of the accrued liability or accrued receivable when the accrual is settled. 25.C The following reversing entry could be made as of the first day of the next accounting period, after the post-closing trial balance is completed and financial statements are prepared. Salaries Payable.........................................................

500

Salaries Expense .................................................................

500

26.

The five categories of noncurrent assets on Best Buy’s balance sheet are: Property and equipment, Goodwill, Tradename, Long-term investments, and Other assets.

27.

Circuit City has six current liability accounts: Accounts payable, Accrued expenses and other current liabilities, Accrued income taxes, Deferred income taxes, Current installments of long-term debt, and Liabilities of discontinued operations.

28.

The closing entry recorded on September 25, 2004, to transfer the company’s net income to its Retained Earnings account would likely have been (in millions): Income Summary......................................................... Retained Earnings.............................................

276 276


121

QUICK STUDIES Quick Study 3-1 (10 minutes) a. b. c. d. e.

UR AE AR PE PE

Unearned revenue Accrued expenses Accrued revenue Prepaid expenses Prepaid expenses (Depreciation)

Quick Study 3-2 (15 minutes) Accounts Debited and Credited

Financial Statement

a. Debit Credit

Unearned Revenue Revenue Earned

Balance Sheet Income Statement

b. Debit Credit

Wages Expense Wages Payable

Income Statement Balance Sheet

c. Debit Credit

Accounts Receivable Revenue Earned

Balance Sheet Income Statement

d. Debit Credit

Insurance Expense Prepaid Insurance


e. Debit Credit

Depreciation Expense Accumulated Depreciation


Quick Study 3-3 (15 minutes) a. Insurance Expense....................................................... Prepaid Insurance.................................................

1,200 1,200

To record 6-month insurance coverage expired.

b. Supplies Expense......................................................... Supplies..................................................................

1,700 1,700

To record supplies used during the year. ($500 + $2,000 – [supplies used] = $800)



Quick Study 3-4 (10 minutes) a. Depreciation Expense—Equipment............................ Accumulated Depreciation—Equipment.............

3,600 3,600

To record depreciation expense for the year. ($20,000 - $2,000) / 5 years = $3,600

b. No depreciation adjustment is made for land as it is expected to last indefinitely. Quick Study 3-5 (10 minutes) Salaries Expense........................................................... Salaries Payable....................................................

400 400

To record salaries incurred but not yet paid. [The one student earns $100 x 4 days M–R]

Quick Study 3-6 (15 minutes) a. Unearned Revenue........................................................ Legal Revenue.......................................................

7,500 7,500

To recognize revenue earned ($10,000 x 3/4).

b. Unearned Subscription Revenue................................ Subscription Revenue...........................................

1,200 1,200

To recognize subscription revenue earned. [100 x ($24 / 12 month) x 6 months]

Quick Study 3-7 (15 minutes) Adjusting entry

Debit

Credit

1. Accrue salaries expense

e

c

2. Adjust the Unearned Services Revenue account to recognize earned revenue

d

f

3. Record the earning of services revenue for which cash will be received the following period

g

f


123

Quick Study 3-8 (10 minutes) The answer is b. Explanation: The debit balance in Prepaid Insurance was reduced by $400, implying a $400 debit to Insurance Expense. The credit balance in Interest Payable increased by $800, implying an $800 debit to Interest Expense. Quick Study 3-9 (20 minutes) Cash Accounting Revenues (cash receipts)....................................................... $37,000 Expenses (cash payments: $25,500 - $5,250 + $6,750)....... 27,000 Net income (cash-basis) ........................................................ $10,000 Accrual Accounting Revenues (earned) ................................................................. $45,000 Expenses (incurred) ............................................................... 25,500 Net income (accrual-basis).................................................... $19,500

Quick Study 3-10 (15 minutes) The answer is 2. Explanation: Insurance premium error Understates expenses (and overstates assets) by...........

$1,600

Accrued salaries error Understates expenses (and understates liabilities) by....

1,000

Combination of errors Understates expenses by..................................................... Overstates assets by............................................................. Understates liabilities by......................................................

$2,600 $1,600 $1,000



Quick Study 3-11 (20 minutes) Income Summary balance after closing revenues and expenses: Revenues: $45,000 + $6,000............................ Expenses: $29,000 + $9,000 + $3,000............. Credit balance (equal to net income)..............

= = =

$51,000 - 41,000 $10,000

Cr. Dr. Cr.

Retained Earnings balance after all closing entries: Beginning balance..................................... Plus net income..........................................

$28,000 10,000 38,000 7,200 $30,800

Less dividends........................................... Ending balance........................................... Quick Study 3-12 (5 minutes) 1. (e)

Analyzing transactions and events.

2. (h)

Journalizing transactions and events.

3. (a)

Posting the journal entries.

4. (g)

Preparing the unadjusted trial balance.

5. (b)

Journalizing and posting adjusting entries.

6. (c)

Preparing the adjusted trial balance.

7. (f)

Preparing the financial statements.

8. (d)

Journalizing and posting closing entries.

9. (i)

Preparing the post-closing trial balance.

Quick Study 3-13 (10 minutes) 1. 2.

B F

3. 4.

A D

5. 6.

E C

7. 8.

E A


125

Quick Study 3-14 (15 minutes) Dec. 31 Services Revenue......................................... Income Summary.................................. To close the revenue account.

13,000

31 Income Summary......................................... Wages Expense..................................... Rent Expense......................................... To close the expense accounts.

10,000

31 Income Summary......................................... Retained Earnings................................. To close Income Summary.

3,000

31 Retained Earnings....................................... Dividends .............................................. To close the dividends account.

800

13,000

8,400 1,600

3,000

800

Quick Study 3-15 (5 minutes) The only account from QS 3-15 that would appear in a post-closing trial balance is Retained Earnings.

Quick Study 3-16 (10 minutes) Profit margin = $48,152 / $425,000 = 11.3% Interpretation: For every one dollar that Sidone Company records as revenue, it earns 11.3 cents in net income. Sidone’s 11.3% is markedly lower than its competitors’ average profit margin of 15%. Accordingly, Sidone should focus on improving its profit margin to at least be competitive.



Quick Study 3-17 (10 minutes) Current assets Cash Accounts receivable.................................. Office supplies........................................... Prepaid insurance...................................... Total current assets...................................

$ 7,000 18,000 2,800 3,500 $31,300

Current liabilities Accounts payable...................................... Unearned services revenue...................... Total current liabilities...............................

$11,000 3,000 $14,000

Current ratio = $31,300 / $14,000 = 2.24

Quick Study 3-18A (10 minutes) The answer is d. Quick Study 3-19B (10 minutes) a. b. c.

B B B

d. e. f.

I B I


127

Quick Study 3-20B (20 minutes) CLAUDELL COMPANY Work Sheet Account Title

Unadjusted Trial Balance Dr. Cr.

Adjustments Dr. Cr.

Prepaid Rent.................. 1,000 Services Revenue..........

Adjusted Trial Balance Dr. Cr.

55,00 0

(a)

200

(b)

900

800

(c)

700

25,70 0

Accounts Receivable......

(b)

900

900

Rent Expense................

(c) (a)

200

700

55,900 25,70 0 900

700 200

Balance Sheet Dr. Cr. 800

55,90 0

Wages Expense............. 25,00 0

Wages Payable..............

Income Statement Dr. Cr.

700 200



Quick Study 3-21C (15 minutes) 2007

--Not required--

Dec. 31 Accounts Receivable ................................... Management Fees Earned ...................

12,000 12,000

To record accrued revenue.

2008 Jan. 1 Management Fees Earned ............................ Accounts Receivable ...........................

12,000 12,000

To reverse accrued revenue.

16 Cash ............................................................... Management Fees Earned ...................

26,700 26,700

To record collection of management fees.


129

EXERCISES Exercise 3-1 (25 minutes) a.

Depreciation Expense—Equipment................................. Accumulated Depreciation—Equipment..................... To record depreciation expense for the year.

18,000

b. Insurance Expense............................................................ Prepaid Insurance*........................................................ To record insurance coverage that expired ($6,000 - $1,100).

4,900

c.

Office Supplies Expense.................................................. Office Supplies**............................................................ To record office supplies used ($700 + $3,480 - $298).

3,882

d. Unearned Fee Revenue..................................................... Fee Revenue.................................................................. To record earned portion of fee received in advance ($15,000 x 2/3).

10,000

e.

f.

18,000

4,900

3,882

10,000

Insurance Expense............................................................ Prepaid Insurance......................................................... To record insurance coverage that expired.

5,800

Wages Expense................................................................. Wages Payable.............................................................. To record wages accrued but not yet paid.

3,200

5,800

3,200

Notes Prepaid Insurance* Bal. Bal. 6,000 ? End. Bal.

1,100

Used

Office Supplies** Beg. Bal. 700 Purchase 3,480 ? End. Bal. 298

Used



Exercise 3-2 (30 minutes) a.

Unearned Fee Revenue..................................................... Fee Revenue..................................................................

5,000 5,000

To record earned portion of fee received in advance ($15,000 x 1/3).

b. Wages Expense................................................................. Wages Payable..............................................................

8,000 8,000

To record wages accrued but not yet paid.

c.

Depreciation Expense—Equipment................................. Accumulated Depreciation—Equipment.....................

18,531 18,531

To record depreciation expense for the year.

d. Office Supplies Expense.................................................. Office Supplies**............................................................

4,992 4,992

To record office supplies used ($240 + $5,239 - $487).

e.

Insurance Expense............................................................ Prepaid Insurance*........................................................

2,800 2,800

To record insurance coverage expired ($4,000 - $1,200).

f.

Interest Receivable.......................................................... Interest Revenue.........................................................

1,000 1,000

To record interest earned but not yet received.

g. Interest Expense.............................................................. Interest Payable...........................................................

2,500 2,500

To record interest incurred but not yet paid. Notes Beg. Bal.

Prepaid Insurance* 4,000 ?

End. Bal.

1,200

Beg. Bal. Purchase Used End. Bal.

Office Supplies** 240 5,239 ? 487

Used


131

Exercise 3-3 (20 minutes) a. Adjusting entry 2008 Dec. 31

1,250 Wages Expense.............................................................. Wages Payable...........................................................

1,250

To record accrued wages for one day (5 workers x $250).

b. Payday entry 2009 Jan. 4

Wages Expense.............................................................. 3,750 Wages Payable............................................................... 1,250 Cash.............................................................................

5,000

To record accrued and current wages Wages expense = 5 workers x 3 days x $250 Cash = 5 workers x 4 days x $250.

Exercise 3-4 (25 minutes) a. Apr. 30 Legal Fees Expense............................................. Legal Fees Payable.......................................

3,500 3,500

To record accrued legal fees.

May 12 Legal Fees Payable.............................................. Cash...............................................................

3,500 3,500

To pay accrued legal fees.

b. Apr. 30 Interest Expense................................................... Interest Payable............................................

2,667 2,667

To record accrued interest expense.

May 20 Interest Payable.................................................... Interest Expense................................................... Cash...............................................................

2,667 5,333 8,000

To record payment of accrued and current interest expense ($8,000 – 2,667).



Exercise 3-4 (concluded) c. Apr. 30 Salaries Expense.................................................. Salaries Payable...........................................

4,000 4,000

To record accrued salaries ($10,000 x 2/5 week).

May 3

Salaries Payable................................................... Salaries Expense.................................................. Cash...............................................................

4,000 6,000 10,000

To record payment of accrued and current salaries ($10,000 x 3/5 week).

Exercise 3-5 (20 minutes) Balance Sheet Insurance Asset using Accrual Cash * Basis Basis Dec. 31, 2006.................... $13,000 $0

Insurance Expense using Accrual Cash ** Basis Basis 2006................................... $ 5,000 $18,000

Dec. 31, 2007.................... 7,000

0

2007................................... 6,000

0

Dec. 31, 2008.................... 1,000

0

2008................................... 6,000

0

Dec. 31, 2009.................... 0

0

2009................................... 1,000

0

Total................................... $18,000

$18,000

EXPLANATIONS *

Accrual asset balance equals months left in the policy x $500 per month (monthly cost is computed as $18,000 / 36 months). Months Left Balance 12/31/2006. . . 26 $13,000 12/31/2007. . . 14 7,000 12/31/2008. . . 2 1,000 12/31/2009. . . 0 0 **

Accrual insurance expense equals months covered in the year x $500 per month. Months Covered Expense 2006................................... 10 $ 5,000 2007................................... 12 6,000 2008................................... 12 6,000 2009................................... 2 1,000 $18,000


133

Exercise 3-6 (30 minutes) 1. 2008

Dec. 31 Services Revenue ....................................... Income Summary .................................

44,000 44,000

To close the revenue account.

31 Income Summary ........................................ Depreciation Expense--Equipment...... Salaries Expense .................................. Insurance Expense ............................... Rent Expense ........................................ Supplies Expense .................................

33,100 3,000 22,000 2,500 3,400 2,200

To close the expense accounts.

31 Income Summary......................................... Retained Earnings.................................

10,900 10,900

To close Income Summary.

31 Retained Earnings....................................... Dividends ..............................................

7,000 7,000

To close the dividends account.

2. CRUZ COMPANY Post-Closing Trial Balance December 31, 2008 Debit Cash............................................................... Supplies......................................................... Prepaid insurance......................................... Equipment..................................................... Accumulated depreciation–Equipment...... Common stock.............................................. Retained earnings*....................................... Totals..............................................................

Credit

$19,000 13,000 3,000 24,000

$59,000

$ 7,500 30,000 21,500 $59,000

*$17,600 + $10,900 - $7,000 = $21,500



Exercise 3-7 (20 minutes) WILSON TRUCKING COMPANY Income Statement For Year Ended December 31, 2008 Trucking fees earned.............................................. Expenses Depreciation expense—Trucks........................... $23,500 Salaries expense.................................................. 61,000 Office supplies expense...................................... 8,000 Repairs expense—Trucks.................................... 12,000 Total expenses...................................................... Net income...............................................................

$130,000

104,500 $ 25,500

WILSON TRUCKING COMPANY Statement of Retained Earnings For Year Ended December 31, 2008 Retained earnings, December 31, 2007................

$ 75,000

Plus: Net income.....................................................

25,500

Less: Dividends......................................................

100,500 (20,000)

Retained earnings, December 31, 2008................

$ 80,500


135

Exercise 3-8 (20 minutes) WILSON TRUCKING COMPANY Balance Sheet December 31, 2008 Assets Current assets Cash........................................................................ $ 8,000 Accounts receivable.............................................. 17,500 Office supplies....................................................... 3,000 Total current assets............................................... 28,500 Plant assets Trucks...................................................................... $172,000 Accumulated depreciation-Trucks....................... (36,000) 136,000 Land......................................................................... 85,000 Total plant assets................................................... 221,000 Total assets............................................................... $249,500 Liabilities Current liabilities Accounts payable.................................................. Interest payable...................................................... Total current liabilities........................................... Long-term notes payable........................................ Total liabilities..........................................................

$ 12,000 4,000 16,000 53,000 69,000

Equity Common stock......................................................... Retained earnings*................................................... Total liabilities and equity.......................................

100,000 80,500 $249,500

*From Exercise 3-7



Exercise 3-9 (10 minutes) Note: Net income and revenues are from Exercise 3-7

Profit margin = $25,500 / $130,000 = 19.6% Interpretation: Wilson Trucking Company’s profit margin exceeds the industry average of 15%, so they are performing better than competitors on this dimension. Wilson’s profit margin implies that they earn 19.6 cents for each dollar of sales recorded compared to the industry average of only 15 cents for each dollar of sales recorded. Exercise 3-10 (15 minutes) Note: Current asset and current liability totals are from Exercise 3-8

Current ratio =

Current assets Current liabilities

=

$28,500 $16,000

= 1.78

Interpretation: The company’s current ratio of 1.78 exceeds the industry average of 1.5. This ratio implies that the company is in a slightly better liquidity position than its competitors. Moreover, if we review the makeup of the current ratio, we see that current assets consist primarily of cash and accounts receivable. The existence of these more liquid assets is a positive attribute for liquidity purposes. Exercise 3-11 (10 minutes) a. b. c. d. e.

$ 4,390 / $ 97,644 / $111,385 / $ 65,234 / $ 80,158 /

$ 44,830 $ 398,954 $ 257,082 $1,458,999 $ 435,925

= 9.8% = 24.5% = 43.3% = 4.5% = 18.4%

Analysis and Interpretation: Company c has the highest profitability according to the profit margin ratio. Company c’s profit margin indicates that it earns 43.3 cents in net income for each one dollar of net sales recorded.


137

Exercise 3-12 (15 minutes) Current Assets

Current Liabilities

Current Ratio

Case 1

$ 79,000

/ $ 32,000

=

2.47

Case 2

105,000

/

76,000

=

1.38

Case 3

45,000

/

49,000

=

0.92

Case 4

85,500

/

81,600

=

1.05

Case 5

61,000

/

100,000

=

0.61

Analysis: Company 1 is in the strongest liquidity position. It has about $2.47 of current assets for each $1 of current liabilities. The only potential concern for Company 1 is that it may be carrying too much in current assets that could be better spent on more productive assets (note that its remaining competitors’ current ratios range from 1.39 to 0.61).

Exercise 3-13A (25 minutes) a. Initial credit recorded in the Unearned Fees account: July 1 Cash....................................................................... 3,000 Unearned Fees..............................................

3,000

Received fees for work to be done for Solana.

6

Cash....................................................................... Unearned Fees..............................................

7,500 7,500

Received fees for work to be done for Haru.

12

Unearned Fees...................................................... Fees Earned...................................................

3,000 3,000

Completed work for Solana.

18

Cash....................................................................... Unearned Fees..............................................

8,500 8,500

Received fees for work to be done for Jordan.

27

Unearned Fees...................................................... Fees Earned...................................................

7,500 7,500

Completed work for customer Haru.

31

No adjusting entries required.



Exercise 3-13A –continued b. Initial credit recorded in the Fees Earned account: July 1 Cash....................................................................... Fees Earned...................................................

3,000 3,000

Received fees for work to be done for Solana.

6

Cash....................................................................... Fees Earned...................................................

7,500 7,500

Received fees for work to be done for Haru.

12

No entry required.

18

Cash....................................................................... Fees Earned...................................................

8,500 8,500

Received fees for work to be done for Jordan.

27

No entry required.

31

Fees Earned.......................................................... Unearned Fees..............................................

8,500 8,500

Adjusted to reflect unearned fees for unfinished job for Jordan.

c. Under the first method (and using entries from a) Unearned Fees = $3,000 + $7,500 - $3,000 + $8,500 - $7,500 = $8,500 Fees Earned = $3,000 + $7,500 = $10,500 Under the second method (and using entries from b)

Unearned Fees = $8,500 Fees Earned = $3,000 + $7,500 + $8,500 - $8,500 = $10,500 [Note: Both procedures yield identical results in the financial statements.]


139

Exercise 3-14A (30 minutes) a. Dec. 1 Supplies Expense................................................. Cash...............................................................

2,000 2,000

Purchased supplies.

b. Dec. 2 Insurance Expense............................................... Cash...............................................................

1,540 1,540

Paid insurance premiums.

c. Dec. 15 Cash....................................................................... Remodeling Fees Earned.............................

13,000 13,000

Received fees for work to be done.

d. Dec. 28 Cash....................................................................... Remodeling Fees Earned.............................

3,700 3,700

Received fees for work to be done.

e. Dec. 31 Supplies................................................................ Supplies Expense.........................................

1,840 1,840

Adjust expenses for unused supplies.

f. Dec. 31 Prepaid Insurance ($1,540 - $340)...................... Insurance Expense.......................................

1,200 1,200

Adjust expenses for unexpired coverage.

g. Dec. 31 Remodeling Fees Earned ................................... Unearned Remodeling Fees........................

11,130 11,130

Adjusted revenues for unfinished projects ($13,000 + 3,700 - $5,570).



Exercise 3-15B (30 minutes) Part 1. DYLAN DELIVERY COMPANY Work Sheet For Year Ended December 31, 2008 Unadjusted Trial Balance Dr. Cr.

Adjustments Dr. Cr.

Account Title Cash...........................................16,000 Accounts receivable.......................34,000 Office supplies.............................. 5,000

(c)

3,000

Trucks......................................... 350,000 Accum. depreciation—Trucks..........

80,000

(a)


Balance Sheet Dr. Cr.

16,000

16,000

34,000

34,000

2,000

2,000

350,000

350,000

40,000

Land........................................... 160,000


120,000

120,000

160,000

Accounts payable..........................

24,000

Interest payable.............................

5,000

Long-term notes payable................

160,000 24,000

24,000

6,000

6,000

100,000

100,000

100,000

Common stock.............................

105,000

105,000

105,000

Retained earnings..........................

202,000

202,000

202,000

(b )

1,000

Dividends.....................................34,000 Delivery fees earned.......................

34,000 263,000

Depreciation expense—Trucks........40,000

34,000 263,000

(a)

40,000

Salaries expense........................... 110,000

263,000

80,000

80,000

110,000

110,000

Office supplies expense..................15,000

(c)

3,000

18,000

18,000

Interest expense............................ 5,000

(b )

1,000

6,000

6,000

Repairs expense—Trucks...............10,000

______

_____

_____

10,000

______

Totals.......................................... 779,000

779,000

44,000

44,000

820,000

820,000

Net income...................................

10,000

______

______ ______

224,000 263,000

596,000 557,000

39,000

______

______

39,000


141

Totals..........................................

263,000 256,000

596,000 596,000



Exercise 3-15B (Continued) 2.

Closing entries Delivery Fees Earned.......................................... 263,000 Income Summary.........................................

263,000

To close the revenue accounts.

Income Summary................................................ 224,000 Depreciation Expense—Trucks.................. Salaries Expense......................................... Office Supplies Expense............................. Interest Expense.......................................... Repairs Expense—Trucks..........................

80,000 110,000 18,000 6,000 10,000


Income Summary................................................ Retained Earnings.......................................

39,000 39,000

To close Income Summary.

Retained Earnings............................................... Dividends ....................................................

34,000 34,000


Retained Earnings on the balance sheet Retained earnings, beginning balance............

$202,000

Add: Net income.................................................

39,000

..............................................................................

241,000

Less: Dividends..........................................

(34,000)

Retained earnings, ending balance...................

$207,000


143

Exercise 3-16C (30 minutes) 1. Adjusting entries Oct. 31 Rent Expense......................................................... Rent Payable...................................................

2,800 2,800

To record accrued rent expense.

31 Rent Receivable..................................................... Rent Earned....................................................

850 850

To record accrued rent income.

2. Subsequent entries without reversing entries Nov. 5 Rent Payable.......................................................... Rent Expense......................................................... Cash................................................................

2,800 2,800 5,600

To record payment of 2 months’ rent.

8 Cash........................................................................ Rent Receivable............................................. Rent Earned....................................................

1,700 850 850

To record collection of 2 months’ rent.

3. Subsequent entries with reversing entries Nov. 1 Rent Payable.......................................................... Rent Expense.................................................

2,800 2,800

To reverse accrual of rent expense.

1 Rent Earned........................................................... Rent Receivable.............................................

850 850

To reverse accrual of rent income.

5 Rent Expense......................................................... Cash................................................................

5,600 5,600

To record payment of 2 months’ rent.

8 Cash........................................................................ Rent Earned....................................................

1,700 1,700

To record collection of 2 months’ rent.



Exercise 3-17C (10 minutes) Reversing entries are appropriate for accounting adjustments (a) and (e) Sept. 1 Service Fees Earned..................................... Accounts Receivable............................

6,000 6,000

To reverse accrued revenues.

1 Salaries Payable........................................... Salaries Expense...................................

3,400 3,400

To reverse accrued salaries.


145

PROBLEM SET A Problem 3-1A (35 minutes) Part 1 Adjustment (a) Dec. 31 Office Supplies Expense................................ 14,846 Office Supplies.........................................

14,846

To record cost of supplies used ($4,000 + $13,400 - $2,554).

Adjustment (b) 31 Insurance Expense.......................................... 11,440 Prepaid Insurance....................................

11,440

To record annual insurance coverage cost. Policy A B C Total

Cost per Month $600 ($14,400/24 mo.) 360 ($12,960/36 mo.) 200 ($ 2,400 /12 mo.)

Months Active in 2008 12 9 5

Adjustment (c) 31 Salaries Expense (2 days x $1,960)............... Salaries Payable......................................

2008 Cost $ 7,200 3,240 1,000 $11,440

3,920 3,920

To record accrued but unpaid wages.

Adjustment (d) 31 Depreciation Expense—Building................... 30,500 Accumulated Depreciation—Building. . .

30,500

To record annual depreciation expense [($960,000 - $45,000) / 30 years = $30,500]

Adjustment (e) 31 Rent Receivable............................................ Rent Earned...........................................

3,000 3,000

To record earned but unpaid Dec. rent.

Adjustment (f) 31 Unearned Rent.............................................. Rent Earned...........................................

5,600 5,600

To record the amount of rent earned for November and December (2 x $2,800). ©McGraw-Hill Companies, 2007 146


Problem 3-1A (Continued) Part 2 Cash Payment for (c) Jan. 6

Salaries Payable........................................... Salaries Expense*......................................... Cash........................................................

3,920 5,880 9,800

To record payment of accrued and current salaries. *(3 days x $1,960)

15

Cash Payment for (e) Cash............................................................... 6,000 Rent Receivable..................................... .................................................................Rent Earned

3,000

3,000 To record past due rent for two months.


147

Problem 3-2A (90 minutes) Parts 1 and 2 Unadj. Bal.

Cash 34,000

Unadj. Bal.

Accumulated Depreciation— Equipment Unadj. Bal. 15,000 (c) 13,200 Adj. Bal. 28,200

Accounts Receivable 0 (f) 7,500 Adj. Bal. 7,500 Unadj. Bal.

Unadj. Bal. Adj. Bal.

Teaching Supplies 8,000 (b) 2,800

Equipment 80,000

Accounts Payable Bal.

Salaries Payable Unadj. Bal.


Prepaid Insurance 12,000 (a) 9,600

(g) Adj. Bal.


Unearned Training Fees (e)

12,500

5,000 Adj. Bal.

7,500

3,000 Common Stock Bal.

Bal.

0 400 400

2,400 Unadj. Bal.

Prepaid Rent 3,000 (h) 0

26,000

5,200

Professional Library 35,000

Retained Earnings Bal.

Accumulated Depreciation— Professional Library Unadj. Bal. 10,000 (d) 7,200 Adj. Bal. 17,200

80,000

Bal.

10,000

Dividends 50,000



Problem 3-2A (Continued) Tuition Fees Earned Unadj. Bal.

(f) Adj. Bal.

123,900 7,500 131,400

Training Fees Earned Unadj. Bal.

(e) Adj. Bal.

40,000 5,000 45,000

Unadj. Bal.

(h) Adj. Bal.

Rent Expense 33,000 3,000 36,000

Teaching Supplies Expense 0 (b) 5,200 Adj. Bal. 5,200 Unadj. Bal.

Depreciation Expense— Professional Library Unadj. Bal. 0 (d) 7,200 Adj. Bal. 7,200

Bal.

Advertising Expense 6,000

Depreciation Expense— Equipment Unadj. Bal. 0 (c) 13,200 Adj. Bal. 13,200

Bal.

Utilities Expense 6,400

Salaries Expense Unadj. Bal. 50,000 (g) 400 Adj. Bal. 50,400

Unadj. Bal.

(a) Adj. Bal.

Insurance Expense 0 2,400 2,400


149

Problem 3-2A (Continued)

Part 2 Adjustment (a) Dec. 31 Insurance Expense....................................................... 2,400 Prepaid Insurance..................................................

2,400

To record the insurance expired.

Adjustment (b) 31 Teaching Supplies Expense........................................ 5,200 Teaching Supplies..................................................

5,200

To record supplies used ($8,000 - $2,800).

Adjustment (c) 31 Depreciation Expense—Equipment........................... 13,200 Accumulated Depreciation—Equipment..................... To record equipment depreciation.

Adjustment (d) 31 Depreciation Expense—Profess. Library................... 7,200 Accumul. Depreciation—Profess. Library................

13,200

7,200

To record professional library depreciation.

Adjustment (e) 31 Unearned Training Fees............................................... 5,000 Training Fees Earned.............................................

5,000

To record 2 months’ training fees earned that were collected in advance.

Adjustment (f) 31 Accounts Receivable................................................... 7,500 Tuition Fees Earned...............................................

7,500

To record tuition earned ($3,000 x 2 1/2 months).

Adjustment (g) 31 Salaries Expense.......................................................... 400 Salaries Payable.....................................................

400

To record accrued salaries (2 days x $100 x 2 employees).

Adjustment (h) 31 Rent Expense................................................................ 3,000 Prepaid Rent...........................................................

3,000

To record expiration of prepaid rent.



Problem 3-2A (Continued) Part 3 WELLS TECHNICAL INSTITUTE Adjusted Trial Balance December 31, 2008 Debit

Cash.......................................................................... $ 34,000 Accounts receivable................................................ 7,500 Teaching supplies ................................................... 2,800 Prepaid insurance.................................................... 9,600 Prepaid rent.............................................................. 0 Professional library................................................. 35,000 Accumulated depreciation—Professional library.... Equipment................................................................ 80,000 Accumulated depreciation—Equipment................ Accounts payable.................................................... Salaries payable....................................................... Unearned training fees............................................ Common stock......................................................... Retained earnings.................................................... Dividends.................................................................. 50,000 Tuition fees earned.................................................. Training fees earned................................................ Depreciation expense—Professional library........ 7,200 Depreciation expense—Equipment....................... 13,200 Salaries expense ..................................................... 50,400 Insurance expense.................................................. 2,400 Rent expense............................................................ 36,000 Teaching supplies expense.................................... 5,200 Advertising expense................................................ 6,000 Utilities expense....................................................... 6,400 Totals......................................................................... $345,700

Credit

$ 17,200 28,200 26,000 400 7,500 80,000 10,000 131,400 45,000

. $345,700


151

Problem 3-2A (Continued) Part 4 WELLS TECHNICAL INSTITUTE Income Statement For Year Ended December 31, 2008 Revenues Tuition fees earned............................................. $131,400 Training fees earned.......................................... 45,000 Total revenues.................................................... Expenses Depreciation expense—Professional library... 7,200 Depreciation expense—Equipment.................. 13,200 Salaries expense................................................ 50,400 Insurance expense............................................. 2,400 Rent expense...................................................... 36,000 Teaching supplies expense............................... 5,200 Advertising expense.......................................... 6,000 Utilities expense................................................. 6,400 Total expenses.................................................... Net income............................................................

$176,400

126,800 $ 49,600

WELLS TECHNICAL INSTITUTE Statement of Retained Earnings For Year Ended December 31, 2008 Retained earnings, December 31, 2007.............. Plus: Net income.................................................. ................................................................................ Less: Dividends.................................................... Retained earnings, December 31, 2008..............

$ 10,000 49,600 59,600 50,000 $ 9,600



Problem 3-2A (Concluded) WELLS TECHNICAL INSTITUTE Balance Sheet December 31, 2008 Assets Cash................................................................................. Accounts receivable...................................................... Teaching supplies.......................................................... Prepaid insurance.......................................................... Professional library........................................................ $35,000 Accumulated depreciation—Professional library....... (17,200) Equipment....................................................................... 80,000 Accumulated depreciation—Equipment...................... (28,200) Total assets..................................................................... Liabilities Accounts payable........................................................... Salaries payable............................................................. Unearned training fees.................................................. Total liabilities................................................................. Equity Common stock............................................................... Retained earnings.......................................................... Total liabilities and equity..............................................

$ 34,000 7,500 2,800 9,600 17,800 51,800 $123,500 $ 26,000 400 7,500 33,900 80,000 9,600 $123,500


153

Problem 3-3A (90 minutes) Part 1 LING REPAIRS Income Statement For Year Ended December 31, 2008 Repair fees earned................................... Expenses Depreciation expense—Equipment..... Wages expense...................................... Insurance expense................................ Rent expense.......................................... Office supplies expense........................ Utilities expense..................................... Total expenses...................................... Net income................................................

$90,950 $ 5,000 37,500 800 10,600 3,600 2,700 60,200 $30,750

LING REPAIRS Statement of Retained Earnings For Year Ended December 31, 2008 Retained earnings, Dec. 31, 2007...........

$20,000

Add: Net income ....................................

30,750 50,750

Less: Dividends.......................................

(16,000)

Retained earnings, Dec. 31, 2008...........

$34,750



Problem 3-3A (Continued) LING REPAIRS Balance Sheet December 31, 2008 Assets Current assets Cash.............................................................. Office supplies............................................. Prepaid insurance........................................ Total current assets..................................... Plant assets Equipment..................................................... Accumulated depreciation—Equipment.... Total assets.....................................................

$14,000 1,300 2,050 $17,350 50,000 (5,000)

45,000 $62,350

Liabilities Current liabilities Accounts payable........................................ Wages payable............................................. Total current liabilities................................. Equity Retained earnings.......................................... Common stock............................................... Total liabilities and equity.............................

$14,000 600 14,600 34,750 13,000 $62,350


155

Problem 3-3A (Continued) Parts 2 and 3 LING REPAIRS For Year Ended December 31, 2008 No.

Account Title


Post-Closing Trial Balance Dr. Cr.

Closing Entries Dr. Cr.

101 Cash...................................

14,000

14,000

124 Office supplies......................

1,300

1,300

128 Prepaid insurance .................

2,050

2,050

167 Equipment...........................

50,000

50,000

168 Accumulated depreciation

5,000

5,000

201 Accounts payable.................

14,000

14,000

210 Wages payable.....................

600

600

307 Common stock...................

13,000

13,000

318 Retained earnings................

20,000 (4)

— Equipment.........................

16,000 (3)

30,750

(4)

16,000

5,000

(2)

5,000

623 Wages expense...................

37,500

(2)

37,500

637 Insurance expense...............

800

(2)

800

640 Rent expense......................

10,600

(2)

10,600

650 Office supplies expense........

3,600

(2)

3,600

690 Utilities expense..................

2,700

(2)

2,700

319 Dividends...........................

16,000

401 Repair fees earned.............. 612 Depreciation expense—

Equipment........................

90,950 (1)

901 Income summary................

(2)

_______ Totals................................. 143,550

_______ (3) 143,550

34,750

90,950

60,20 (1) 90,950 0 30,750 _______ ______ 197,900

197,900

67,350

______ 67,350

Closing entries (all dated December 31, 2008) (1)

Repair Fees Earned...................................... Income Summary.................................. To close the revenue account.

90,950 90,950



Problem 3-3A (Continued) (2)

(3)

(4)

Income Summary................................................. Depreciation Expense, Equipment.............. Wages Expense............................................. Insurance Expense....................................... Rent Expense................................................ Office Supplies Expense.............................. Utilities Expense........................................... To close the expense accounts.

60,200

Income Summary................................................. Retained Earnings........................................ To close the Income Summary account.

30,750

Retained Earnings................................................ Dividends....................................................... To close the dividends account.

16,000

5,000 37,500 800 10,600 3,600 2,700

30,750

16,000

Part 4 (a) If none of the $800 insurance expense had expired, the income statement would not report any insurance expense and net income would be increased by $800. (b) If there were no earned and unpaid wages (meaning Wages Payable equals zero), wages expense would be $600 less and net income would be $600 more. Financial Statement Changes The income statement would reflect the following:  Net income would be increased by $800 + $600 = $1,400. (a) & (b) The balance sheet would reflect the following:  Prepaid insurance and total assets would be increased by $800. (a)  There would be no wages payable. (b)  Total current liabilities would be $600 less. (b)  Total equity would be increased by $1,400. (a) & (b)  Total liabilities would be decreased by $600. (b)


157

Problem 3-4A (90 minutes) INSTRUCTOR NOTE: Ledger accounts are shown at the end of Part 7 as they would appear after all entries are posted.

Part 2 — Transactions for April April 1 Cash...............................................................101 Computer Equipment...................................167 Common Stock......................................307

30,000 20,000 50,000

Owner invested in the business.

2 Rent Expense................................................640 Cash........................................................101

1,800 1,800

Paid one month’s rent.

3 Office Supplies..............................................124 Cash........................................................101

1,000 1,000

Acquired office supplies.

10 Prepaid Insurance.........................................128 Cash........................................................101

2,400 2,400

Paid 12 months’ premium in advance.

14 Salaries Expense..........................................622 Cash........................................................101

1,600 1,600

Paid two weeks’ salaries.

24 Cash...............................................................101 Commissions Earned............................405

8,000 8,000

Collected commissions from airlines.

28 Salaries Expense..........................................622 Cash........................................................101

1,600 1,600

Paid two weeks’ salaries.

29 Repairs Expense...........................................684 Cash........................................................101

350 350

Repaired the computer.

30 Telephone Expense......................................688 Cash........................................................101

750 750

Paid the telephone bill.

30 Dividends.......................................................319 Cash........................................................101

1,500 1,500

Paid cash for dividends.



Problem 3-4A (Continued) Part 3 ADVENTURE TRAVEL Unadjusted Trial Balance April 30, 2008 No. 101 106 124 128 167 168 209 307 318 319 405 612 622 637 640 650 684 688

Account Title Debit Cash.......................................................... $27,000 Accounts receivable................................ 0 Office supplies......................................... 1,000 Prepaid insurance.................................... 2,400 Computer equipment............................... 20,000 Accumulated depreciation—.................. Computer equipment.............................. Salaries payable....................................... Common stock......................................... Retained earnings.................................... Dividends.................................................. 1,500 Commissions earned.............................. Depreciation expense— Computer equipment.............................. 0 Salaries expense...................................... 3,200 Insurance expense.................................. 0 Rent expense............................................ 1,800 Office supplies expense.......................... 0 Repairs expense...................................... 350 Telephone expense.................................. 750 Totals......................................................... $58,000

Credit

$

0 0 50,000 0 8,000

$58,000


159

Problem 3-4A (Continued) Part 4 Adjusting entries (a) Apr

30 Insurance Expense............................................... 637

133

Prepaid Insurance.......................................... 128

133

To record expired insurance ($2,400/12 x 2/3). (b)

30 Office Supplies Expense....................................... 650 Office Supplies............................................... 124

400 400

To record cost of supplies used ($1,000 - $600). (c)

30 Depreciation Exp—Computer Equipment........... 612 Accumulated Depreciation— Computer Equipment .................................. 168

500 500

To record depreciation. (d)

30 Salaries Expense................................................... 622 Salaries Payable............................................. 209

420 420

To record accrued salaries. (e)

30 Accounts Receivable............................................ 106 Commissions Earned.................................... 405

1,750 1,750

To record accrued commissions.

Part 5 ADVENTURE TRAVEL Income Statement For Month Ended April 30, 2008 Commissions earned.................................................. Expenses Depreciation expense—Computer equipment........ Salaries expense........................................................ Insurance expense.................................................... Rent expense.............................................................. Office supplies expense............................................ Repairs expense........................................................ Telephone expense.................................................... Total expenses........................................................... Net income....................................................................

$9,750 $ 500 3,620 133 1,800 400 350 750 7,553 $2,197



Problem 3-4A (Continued) Part 5—continued ADVENTURE TRAVEL Statement of Retained Earnings For Month Ended April 30, 2008 Retained earnings, April 1, 2008....................................

$

0

Plus: Net income............................................................

2,197 2,197

Less: Dividends...............................................................

(1,500)

Retained earnings, April 30, 2008..................................

$

697

ADVENTURE TRAVEL Balance Sheet April 30, 2008 Assets Cash.................................................................................. Accounts receivable........................................................ Office supplies................................................................. Prepaid insurance........................................................... Computer equipment...................................................... $20,000 Accumulated depreciation–Computer equipment....... (500) Total assets......................................................................

$27,000 1,750 600 2,267 19,500 $51,117

Liabilities Salaries payable..............................................................

$

Equity Common stock................................................................. Retained earnings........................................................... Total liabilities and equity...............................................

50,000 697 $51,117

420


161

Problem 3-4A (Continued) Part 6 Closing entries April 30 Commissions Earned...................................405 Income Summary..................................901

9,750 9,750


30 Income Summary..........................................901 Depreciation Exp–Computer Equip.....612 Salaries Expense...................................622 Insurance Expense................................637 Rent Expense.........................................640 Office Supplies Expense......................650 Repairs Expense...................................684 Telephone Expense...............................688

7,553 500 3,620 133 1,800 400 350 750


30 Income Summary..........................................901 Retained Earnings.................................318

2,197 2,197

To close the Income Summary account.

30 Retained Earnings........................................318 Dividends...............................................319

1,500 1,500


Part 7 ADVENTURE TRAVEL Post-Closing Trial Balance April 30, 2008 Debit

Cash.......................................................... $27,000 Accounts receivable................................ 1,750 Office supplies......................................... 600 Prepaid insurance.................................... 2,267 Computer equipment............................... 20,000 Accumulated depreciation– Computer equipment............................. Salaries payable....................................... Common stock......................................... Retained earnings.................................... Totals......................................................... $51,617

Credit

$

500 420 50,000 697 $51,617



Problem 3-4A (Continued) Part 7—continued Ledger as of April 30 Cash Date April 1 2 3 10 14 24 28 29 30 30 Date April 30 Date April 3 30 Date April 10 30 Date April 1 Date April 30 Date April 30

Explanation

PR

Debit 30,000

8,000

Explanation Adjusting Explanation

Accounts Receivable PR Debit 1,750 Office Supplies PR

Explanation

Debit 1,000

Debit 2,400

Acct. No. 128 Credit Balance 2,400 133 2,267

Adjusting Explanation

Computer Equipment PR

Acct. No. 106 Credit Balance 1,750 Acct. No. 124 Credit Balance 1,000 400 600

Adjusting Prepaid Insurance PR

Acct. No. 101 Credit Balance 30,000 1,800 28,200 1,000 27,200 2,400 24,800 1,600 23,200 31,200 1,600 29,600 350 29,250 750 28,500 1,500 27,000

Debit 20,000

Acct. No. 167 Credit Balance 20,000

Accumulated Depreciation–Computer Equipment Acct. No. 168 Explanation PR Debit Credit Balance Adjusting 500 500 Explanation Adjusting

Salaries Payable PR

Debit

Acct. No. 209 Credit Balance 420 420


163

Problem 3-4A (Continued) Date April 1 Date April 30 30

Explanation

Explanation Closing Closing

Common Stock PR Retained Earnings PR

Debit

Debit 1,500

Dividends Date April 30 30 Date April 24 30 30 Date April 30 30 Date April 14 28 30 30 Date April 30 30

Explanation

PR

Debit 1,500

Closing

Acct. No. 319 Credit Balance 1,500 1,500 0

9,750

Depreciation Expense–Computer Equipment Explanation PR Debit Adjusting 500 Closing

Acct. No. 612 Credit Balance 500 500 0

Adjusting Closing

Explanation

Salaries Expense PR

Adjusting Closing Explanation Adjusting Closing

Insurance Expense PR

Debit

Debit 1,600 1,600 420

Acct. No. 622 Credit Balance 1,600 3,200 3,620 3,620 0

Debit 133


Rent Expense

Date

Explanation

April 2 April 30

Closing

Date April 30 30



Explanation

Commissions Earned PR

Acct. No. 307 Credit Balance 50,000 50,000

Acct. No. 640

PR

Debit

Credit Balance

1,800 1,800

Office Supplies Expense Explanation PR Debit Adjusting 400 Closing

1,800 0




Problem 3-4A (Concluded) Date April 29 30

Date April 30 30 Date April 30 30 30

Repairs Expense PR

Explanation

Debit 350


Debit 750


Closing

Explanation

Telephone Expense PR

Closing Explanation Closing Closing Closing

Income Summary PR

Debit 7,553 2,197

Acct. No. 901 Credit Balance 9,750 9,750 2,197 0

Problem 3-5A (15 minutes) 1.

A

11.

G

2.

C

12.

E

3.

A

13.

C

4.

A

14.

C

5.

A

15.

C

6.

A

16.

E

7.

E

17.

B

8.

F

18.

Z

9.

Z

19.

E

10.

C

20.

A


165

Problem 3-6AA (40 minutes) Part 1 Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.

Nov. 1 Prepaid Advertising ........................................ Cash..........................................................

1,800 1,800

Paid for future advertising.

1 Prepaid Insurance........................................... Cash..........................................................

2,460 2,460

Paid insurance for one year.

30 Cash.................................................................. Unearned Service Fees...........................

3,600 3,600

Received fees in advance.

Dec. 1 Prepaid Consulting Fees ............................... Cash..........................................................

3,000 3,000

Paid for future consulting.

15 Cash.................................................................. Unearned Service Fees...........................

7,950 7,950


31 Advertising Expense....................................... Prepaid Advertising ................................

600 600

To adjust prepaid advertising ($1,800 - $1,200).

31 Insurance Expense.......................................... Prepaid Insurance....................................

410 410

To adjust prepaid insurance ($2,460 x 2/12).

31 Unearned Service Fees .................................. Service Fees Earned................................

2,100 2,100

To adjust unearned service fees ($3,600 - $1,500).

31 Consulting Fees Expense .............................. Prepaid Consulting Fees.........................

1,000 1,000

To adjust prepaid consulting fees ($3,000 x 1/3).

31 Unearned Service Fees................................... Service Fees Earned................................

3,300 3,300

To adjust unearned service fees.



Problem 3-6AA (Continued) Part 2 Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.

Nov. 1

Advertising Expense....................................... Cash..........................................................

1,800 1,800


1

Insurance Expense.......................................... Cash..........................................................

2,460 2,460


30

Cash.................................................................. Service Fees Earned................................

3,600 3,600


Dec. 1

Consulting Fees Expense............................... Cash..........................................................

3,000 3,000

Paid for future consulting.

15

Cash.................................................................. Service Fees Earned................................

7,950 7,950


31

Prepaid Advertising......................................... Advertising Expense...............................

1,200 1,200

To adjust for prepaid advertising.

31

Prepaid Insurance........................................... Insurance Expense..................................

2,050 2,050

To adjust for prepaid insurance ($2,460 x 10/12).

31

Service Fees Earned....................................... Unearned Service Fees...........................

1,500 1,500

To adjust for unearned service fees.

31

Prepaid Consulting Fees................................ Consulting Fees Expense.......................

2,000 2,000

To adjust for prepaid consulting fees ($3,000 x 2/3).

31

Service Fees Earned....................................... Unearned Service Fees...........................

4,650 4,650

To adjust for unearned service fees ($7,950 - $3,300). ©McGraw-Hill Companies, 2007 Solutions Manual, Chapter 3

167

Problem 3-6AA (Concluded) Part 3 There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following: Advertising expense for two months................................... $ 600 Prepaid advertising as of December 31...............................

1,200

Insurance expense for two months.....................................

410

Prepaid insurance as of December 31.................................

2,050

Consulting fees expense (1/3 of total paid).........................

1,000

Prepaid consulting fees........................................................

2,000

Service fees earned for two months ($2,100 + $3,300)......

5,400

Unearned service fees at 12/31 ($1,500 + $4,650)...............

6,150

When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.



Problem 3-7A (90 minutes) Part 1 ACE CONSTRUCTION CO. Work Sheet For Year Ended June 30, 2008 No. 101 126 128 167 168 201 203 208 210 213 251 307 318 319 401 612 623 633 637 640 652 683 684 690

Unadjusted Trial Balance Account Title Dr. Cr. Cash........................................... 18,500 Supplies....................................... 9,900 Prepaid insurance.......................... 7,200 Equipment................................... 132,000 Accumulated depreciation— Equipment.................................. 26,250 Accounts payable.......................... 6,800 Interest payable............................. Rent payable................................. Wages payable.............................. Property taxes payable................... Long-term notes payable................ 25,000 Common stock............................. 40,000 Retained earnings.......................... 48,660 Dividends..................................... 33,000 Construction fees earned................ 132,100 Depreciation expense— Equipment.................................. Wages expense............................. 46,860 Interest expense............................ 2,750 Insurance expense......................... Rent expense................................ 12,000 Supplies expense.......................... Property taxes expense.................. 7,800 Repairs expense............................ 2,910 Utilities expense............................ 5,890 Totals.......................................... 278,810 Net income................................... Totals..........................................

Adjustments Dr. Cr.

6,600 3,800

(c) (d) (h) (f) (e) (g)

8,400 650 250 500 1,800 1,000



18,500 3,300 3,400 132,000

18,500 3,300 3,400 132,000 34,650 7,450 250 500 1,800 1,000 25,000 40,000 48,660

34,650 7,450 250 500 1,800 1,000 25,000 40,000 48,660

33,000

33,000 132,100

(c) (e) (h) (b) (f) (a) (g)

______ 278,810

(a) (b)


(d)

8,400 1,800 250 3,800 500 6,600 1,000 650 23,000

_____ 23,000

8,400 48,660 3,000 3,800 12,500 6,600 8,800 2,910 6,540 291,410

______ 291,410

132,100 8,400 48,660 3,000 3,800 12,500 6,600 8,800 2,910 6,540 101,210 30,890 132,100

______ 132,100 ______ 132,100

______ ______ 190,200 159,310 ______ 30,890 190,200 190,200


169



Problem 3-7A (Continued) Part 2.

Adjusting entries (all dated June 30, 2008)

(a)

Supplies Expense.............................................. 6,600 Supplies...................................................... To record consumption of supplies.

6,600

Insurance Expense............................................ 3,800 Prepaid Insurance...................................... To record expiration of insurance.

3,800

Depreciation Expense—Equipment................. 8,400 Accumulated Depreciation—Equipment....... To record depreciation.

8,400

(b)

(c)

(d)

(e)

(f)

(g)

(h)

Utilities Expense................................................ Accounts Payable...................................... To record accrued utilities costs.

650 650

Wages Expense.................................................. 1,800 Wages Payable........................................... To record accrued wages. Rent Expense..................................................... Rent Payable............................................... To record remainder of annual rent.

500 500

Property Taxes Expense................................... 1,000 Property Taxes Payable............................. To record additional property taxes. Interest Expense................................................ Interest Payable.......................................... To record prior month’s interest expense.

1,800

1,000

250 250


171

Problem 3-7A (Continued) Closing entries (all dated June 30, 2008) (1)

(2)

(3)

(4)

Construction Fees Earned........................... 132,100 Income Summary.................................. To close the revenue account.

132,100

Income Summary.......................................... 101,210 Depreciation Expense–Equipment...... Wages Expense..................................... Interest Expense.................................... Insurance Expense................................ Rent Expense......................................... Supplies Expense.................................. Property Taxes Expense....................... Repairs Expense................................... Utilities Expense.................................... To close the expense accounts.

8,400 48,660 3,000 3,800 12,500 6,600 8,800 2,910 6,540

Income Summary.......................................... Retained Earnings................................. To close the Income Summary account.

30,890 30,890

Retained Earnings........................................ Dividends............................................... To close the dividends account.

33,000 33,000



Problem 3-7A (Continued) Part 3 ACE CONSTRUCTION CO. Income Statement For Year Ended June 30, 2008 Construction fees earned................................. Expenses Depreciation expense—Equipment............... Wages expense................................................ Interest expense.............................................. Insurance expense.......................................... Rent expense.................................................... Supplies expense............................................ Property taxes expense.................................. Repairs expense.............................................. Utilities expense............................................... Total expenses................................................. Net income..........................................................

$132,100 $ 8,400 48,660 3,000 3,800 12,500 6,600 8,800 2,910 6,540 101,210 $ 30,890

ACE CONSTRUCTION CO. Statement of Retained Earnings For Year Ended June 30, 2008 Retained earnings, June 30, 2007....................

$ 48,660

Add: Net income...............................................

30,890 79,550

Less: Dividends.................................................

(33,000)

Retained earnings, June 30, 2008....................

$ 46,550


173

Problem 3-7A (Continued) ACE CONSTRUCTION CO. Balance Sheet June 30, 2008 Assets Current assets Cash....................................................................... Supplies................................................................. Prepaid insurance................................................. Total current assets.............................................. Plant assets Equipment............................................................. Accumulated depreciation—Equipment............ Total assets.............................................................

$ 18,500 3,300 3,400 $ 25,200 132,000 (34,650)

97,350 $122,550

Liabilities Current liabilities Accounts payable................................................. Interest payable.................................................... Rent payable......................................................... Wages payable...................................................... Property taxes payable........................................ Current portion of long-term note payable........ Total current liabilities.......................................... Noncurrent liabilities Long-term note payable (less current portion).. Total liabilities......................................................... Equity Common stock........................................................ Retained earnings................................................... Total liabilities and equity......................................

$ 7,450 250 500 1,800 1,000 5,000 $ 16,000 20,000 36,000 40,000 46,550 $122,550



Problem 3-7A (Continued) Part 4 (a) This error enters the wrong amount in the correct accounts. The ending balance of the Supplies account should be $3,300, but the entry reduces Supplies by $3,300. Because its unadjusted balance was $9,900, the adjusted balance will be $6,600 ($9,900 - $3,300), which is $3,300 greater than the correct $3,300 balance. In addition, the Supplies Expense account balance will be only $3,300 instead of $6,600. The adjusted trial balance columns in the work sheet will be equal, but the error will cause the work sheet’s net income to be overstated by $3,300 because of the understatement of the expense. In addition, the balance sheet columns will include the overstated balance for the Supplies account. This error is not likely to be detected as a result of completing the work sheet. If it is not, the income statement will overstate net income by $3,300, and the balance sheet will overstate the cost of the supplies available and the retained earnings by $3,300. (b) This error inserts a credit in the adjusted trial balance when a debit should have been inserted. As a result, the trial balance will not balance (the credit column will be greater than the debit column by $37,000), and the error will be tracked down and corrected before going on with the next step in the work sheet. Because the error will be detected and corrected before preparing the financial statements, the statements will not be affected.


175

PROBLEM SET B Problem 3-1B (30 minutes) Part 1 Adjustment (a) Oct. 31 Office Supplies Expense........................................ Office Supplies................................................

4,370 4,370

To record cost of supplies used ($600 + $4,570 - $800).

31

Adjustment (b) Insurance Expense................................................. Prepaid Insurance...........................................

4,730 4,730

To record annual insurance coverage cost. Policy A B C Total

31

Cost per Month $250 ($6,000/24 mo.) 200 ($7,200/36 mo.) 110 ($1,320/12 mo.)

Months Active in 2008 12 7 3

2008 Expense $3,000 1,400 330 $4,730

Adjustment (c) Salaries Expense.................................................... Salaries Payable..............................................

1,000 1,000

To record accrued but unpaid wages (1 day x $1,000).

31

Adjustment (d) Depreciation Expense—Building.......................... Accumulated Depreciation—Building...........

5,400 5,400

To record annual depreciation ($175,000 - $40,000) / 25 years = $5,400.



Problem 3-1B (Concluded) Adjustment (e) Oct. 31 Rent Receivable...................................................... Rent Earned.....................................................

1,000 1,000

To record earned but unpaid Oct. rent.

31

Adjustment (f) Unearned Rent........................................................ Rent Earned.....................................................

1,450 1,450

To record rent earned for September and October (2 x $725).

Part 2 Cash Payment for (c) Nov. 7 Salaries Payable..................................................... Salaries Expense*................................................... Cash..................................................................

1,000 4,000 5,000

To record payment of accrued and current salaries. *(4 days x $1,000)

Cash Payment for (e) 15

Cash......................................................................... Rent Receivable............................................... Rent Earned.....................................................

2,000 1,000 1,000

To record past due rent for two months.


177

Problem 3-2B (90 minutes) Parts 1 and 2 Cash 60,000

Bal.

Accounts Payable Bal.

Accounts Receivable Unadj. Bal. 0 (f) 5,750 Adj. Bal. 5,750 Teaching Supplies Unadj. Bal. 70,000 (b) Adj. Bal. 20,000


Prepaid Insurance 19,000 (a) 9,500

11,200

Salaries Payable Unadj. Bal.

(g) Adj. Bal.

0 450 450

Unearned Training Fees Unadj. Bal.

50,000

(e)

28,600

28,600 Adj. Bal.

0

Common Stock Bal.

30,000

9,500 Retained Earnings


Bal.

Prepaid Rent 3,800 (h) 0

Bal.

41,500

3,800

Professional Library 12,000

Bal.

Dividends 20,000

Accumulated Depreciation— Professional Library Unadj. Bal. 2,500 (d) 2,400 Adj. Bal. 4,900

Bal.

Equipment 40,000 Accumulated Depreciation— Equipment Unadj. Bal. 20,000 (c) 5,000 Adj. Bal. 25,000



Problem 3-2B (Continued) Parts 1 and 2 Tuition Fees Earned Unadj. Bal.

(f) Adj. Bal.

129,200 5,750 134,950

Bal.

Advertising Expense 19,000

Bal.

Utilities Expense 13,400

Training Fees Earned Unadj. Bal.

(e) Adj. Bal.

68,000 28,600 96,600

Depreciation Expense— Professional Library Unadj. Bal. 0 (d) 2,400 Adj. Bal. 2,400 Depreciation Expense— Equipment Unadj. Bal. 0 (c) 5,000 Adj. Bal. 5,000

Unadj. Bal.

(g) Adj. Bal.

Unadj. Bal.

(a) Adj. Bal.

Unadj. Bal.

(h) Adj. Bal.

Salaries Expense 44,200 450 44,650 Insurance Expense 0 9,500 9,500 Rent Expense 29,600 3,800 33,400

Teaching Supplies Expense Unadj. Bal. 0 (b) 50,000 Adj. Bal. 50,000


179

Problem 3-2B (Continued) Part 2 Adjustment (a) Dec. 31 Insurance Expense................................................ Prepaid Insurance..........................................

9,500 9,500

To record the insurance expired.

Adjustment (b) 31 Teaching Supplies Expense................................. 50,000 Teaching Supplies..........................................

50,000

To record the cost of supplies used ($70,000 - $20,000).

Adjustment (c) 31 Depreciation Expense—Equipment..................... Accumulated Depreciation—Equipment.....

5,000 5,000

To record equipment depreciation.

Adjustment (d) 31 Depreciation Expense—Professional Library.... Accumulated Depreciation— Professional Library.............................

2,400 2,400

To record professional library depreciation.

Adjustment (e) 31 Unearned Training Fees........................................ 28,600 Training Fees Earned.....................................

28,600

To record training fees earned that were collected in advance.

Adjustment (f) 31 Accounts Receivable............................................ Tuition Fees Earned.......................................

5,750 5,750

To record tuition earned ($2,300 x 2 1/2 mo).

Adjustment (g) 31 Salaries Expense................................................... Salaries Payable.............................................

450 450

To accrue salaries expense (3 days x $150).

Adjustment (h) 31 Rent Expense ........................................................ Prepaid Rent...................................................

3,800 3,800



To record expiration of prepaid rent.


181

Problem 3-2B (Continued) Part 3 AUGUSTUS INSTITUTE Adjusted Trial Balance December 31, 2008 Debit

Cash............................................................................... $ 60,000 Accounts receivable...................................................... 5,750 Teaching supplies.......................................................... 20,000 Prepaid insurance.......................................................... 9,500 Prepaid rent................................................................... 0 Professional library........................................................ 12,000 Accumulated depreciation—Professional library........... Equipment..................................................................... 40,000 Accumulated depreciation—Equipment........................ Accounts payable.......................................................... Salaries payable............................................................. Unearned training fees................................................... Common stock.............................................................. Retained earnings.......................................................... Dividends....................................................................... 20,000 Tuition fees earned......................................................... Training fees earned....................................................... Depreciation expense—Professional library.................. 2,400 Depreciation expense—Equipment............................... 5,000 Salaries expense............................................................ 44,650 Insurance expense......................................................... 9,500 Rent expense................................................................. 33,400 Teaching supplies expense............................................ 50,000 Advertising expense...................................................... 19,000 Utilities expense............................................................. 13,400 Totals............................................................................. $344,600

Credit

$ 4,900 25,000 11,200 450 0 30,000 41,500 134,950 96,600

. $344,600



Problem 3-2B (Continued) Part 4 AUGUSTUS INSTITUTE Income Statement For Year Ended December 31, 2008 Revenues Tuition fees earned.................................................... $134,950 Training fees earned.................................................. 96,600 Total revenues............................................................ Expenses Depreciation expense—Professional library.......... 2,400 Depreciation expense—Equipment......................... 5,000 Salaries expense........................................................ 44,650 Insurance expense.................................................... 9,500 Rent expense.............................................................. 33,400 Teaching supplies expense...................................... 50,000 Advertising expense.................................................. 19,000 Utilities expense......................................................... 13,400 Total expenses........................................................... Net income....................................................................

$231,550

177,350 $ 54,200

AUGUSTUS INSTITUTE Statement of Retained Earnings For Year Ended December 31, 2008 Retained earnings, December 31, 2007..................... Plus: Net income.......................................................... Less: Dividends........................................................... Retained earnings, December 31, 2008.....................

$41,500 54,200 95,700 20,000 $75,700


183

Problem 3-2B (Concluded) AUGUSTUS INSTITUTE Balance Sheet December 31, 2008 Assets Cash.............................................................................. Accounts receivable.................................................... Teaching supplies........................................................ Prepaid insurance........................................................ Professional library..................................................... $12,000 Accumulated depreciation—Professional library........... (4,900) Equipment.................................................................... 40,000 Accumulated depreciation—Equipment...................... (25,000) Total assets.................................................................. Liabilities Accounts payable........................................................ Salaries payable........................................................... Total liabilities.............................................................. Equity Common stock............................................................. Retained earnings........................................................ Total liabilities and equity...........................................

$ 60,000 5,750 20,000 9,500 7,100 15,000 $117,350

$ 11,200 450 11,650 30,000 75,700 $117,350



Problem 3-3B (90 minutes) Part 1 SANTO COMPANY Income Statement For Year Ended December 31, 2008 Repair fees earned..................................... Expenses Depreciation expense—Equipment........ Wages expense......................................... Insurance expense................................... Rent expense............................................ Store supplies expense........................... Utilities expense....................................... Total expenses.......................................... Net income..................................................

$54,700 $ 2,000 26,400 600 3,600 1,200 1,960 35,760 $18,940

SANTO COMPANY Statement of Retained Earnings For Year Ended December 31, 2008 Retained earnings, December 31, 2007....

$25,650

Add: Net income........................................

18,940 44,590

Less: Dividends..........................................

(15,000)

Retained earnings, December 31, 2008....

$29,590


185

Problem 3-3B (Continued) SANTO COMPANY Balance Sheet December 31, 2008 Assets Current assets Cash........................................................... $14,450 Store supplies........................................... 5,140 Prepaid insurance.................................... 1,200 Total current assets................................. Plant assets Equipment................................................. 31,000 Accumulated depreciation, equipment. . (8,000) Total assets.................................................

$20,790

23,000 $43,790

Liabilities Current liabilities Accounts payable..................................... Wages payable.......................................... Total current liabilities............................. Equity Common stock........................................... Retained earnings...................................... Total liabilities and equity..........................

$ 1,500 2,700 4,200 10,000 29,590 $43,790



Problem 3-3B (Continued) Parts 2 and 3 SANTO COMPANY For Year Ended December 31, 2008

No.


Account Title

Post-Closing Trial Balance Dr. Cr.

Closing Entries Dr. Cr.

101

Cash................................ 14,450

14,450

125

Store supplies.................... 5,140

5,140

128

Prepaid insurance.............. 1,200

1,200

167

Equipment........................ 31,000

31,000

168

Accumulated depreciation—Equipment..............

8,000

8,000

201

Accounts payable..............

1,500

1,500

210

Wages payable..................

2,700

2,700

307

Common stock..................

10,000

10,000

318

Retained earnings..............

25,650 (4)

319

Dividends......................... 15,000

401

Repair fees earned..............

612

15,000 (3)

18,940

(4)

15,000

Depreciation expense— 2,000 Equipment......................

(2)

2,000

623

Wages expense................. 26,400

(2)

26,400

637

Insurance expense.............

600

(2)

600

640

Rent expense.................... 3,600

(2)

3,600

651

Store supplies expense....... 1,200

(2)

1,200

690

Utilities expense................. 1,960

(2)

1,960

901

Income summary...............

35,760 (1) 18,940

54,700 ______

54,700 (1)

______ Totals...............................102,550

(2)

______ (3) 102,550

29,590

54,700

124,400

_____

_____

124,400 51,790

51,790


187

Problem 3-3B (Continued) Part 3 Closing entries (all dated December 31, 2008) (1)

Repair Fees Earned.............................................. Income Summary..........................................

54,700 54,700


(2)

Income Summary................................................. Depreciation Expense, Equipment.............. Wages Expense............................................. Insurance Expense....................................... Rent Expense................................................ Store Supplies Expense............................... Utilities Expense...........................................

35,760 2,000 26,400 600 3,600 1,200 1,960


(3)

Income Summary................................................. Retained Earnings........................................

18,940 18,940


(4)

Retained Earnings................................................ Dividends.......................................................

15,000 15,000


Part 4 (a) If none of the $600 insurance expense had expired, the income statement would not report any insurance expense and net income would be increased by $600. (b) If there were no earned and unpaid wages (meaning Wages Payable equals zero), wages expense would be $2,700 less. Financial Statement Changes The income statement would reflect the following  Net income would be increased by $600 + $2,700 = $3,300. (a) & (b) The balance sheet would reflect the following  Prepaid insurance and total assets would be increased by $600. (a)  There would not be any wages payable. (b)  Total liabilities would be decreased by $2,700. b)  Total equity would be increased by $3,300. (a) & (b) ©McGraw-Hill Companies, 2007 188


Problem 3-4B (90 minutes) INSTRUCTOR NOTE: Ledger accounts are shown at the end of Part 7 as they would appear after all entries are posted.

Part 2 Transactions for July July 1 Cash...............................................................101 30,000 Buildings........................................................173 150,000 Common Stock......................................307

180,000

Owner invested in the business.

2 Rent Expense................................................640 Cash........................................................101

2,000 2,000

Paid one month’s rent.

5 Office Supplies..............................................124 Cash........................................................101

2,400 2,400

Acquired office supplies.

10

Prepaid Insurance.........................................128 Cash........................................................101

7,200 7,200

Paid 12 months’ premium in advance.

14

Salaries Expense..........................................622 Cash........................................................101

1,000 1,000

Paid two weeks’ salary.

24

Cash...............................................................101 Storage Fees Earned.............................401

9,800 9,800

Collected fees from customers.

28

Salaries Expense..........................................622 Cash........................................................101

1,000 1,000

Paid two weeks’ salary.

29

Repairs Expense...........................................684 Cash........................................................101

950 950

Repaired the roof.

30

Telephone Expense......................................688 Cash........................................................101

400 400

Paid the telephone bill.

31

Dividends.......................................................319 Cash........................................................101

2,000 2,000



189

Problem 3-4B (Continued) Part 3 SAFE STORAGE CO. Unadjusted Trial Balance July 31, 2008 No.

Account Title

Debit

Credit

101 Cash................................................................... $ 22,850 106 Accounts receivable.........................................

0

124 Office supplies..................................................

2,400

128 Prepaid insurance............................................

7,200

173 Buildings........................................................... 150,000 174 Accumulated depreciation–Buildings............

$

0

209 Salaries payable............................................... 307 Common stock..................................................

180,000

318 Retained earnings............................................

0

319 Dividends..........................................................

2,000

401 Storage fees earned.........................................

9,800

606 Depreciation expense–Buildings....................

0

622 Salaries expense..............................................

2,000

637 Insurance expense...........................................

0

640 Rent expense....................................................

2,000

650 Office supplies expense..................................

0

684 Repairs expense...............................................

950

688 Telephone expense...........................................

400

Totals................................................................. $189,800

$189,800



Problem 3-4B (Continued) Part 4 Adjusting entries July 31 Insurance Expense.......................................637 Prepaid Insurance.................................128

400 400

To record expired insurance (2/3 x 600 per month).

31 Office Supplies Expense..............................650 Office Supplies......................................124

875 875

To record the cost of consumed supplies ($2,400 - $1,525).

31 Depreciation Expense—Buildings..............606 Accum. Depreciation—Buildings.........174

1,500 1,500

To record depreciation.

31 Salaries Expense..........................................622 Salaries Payable....................................209

100 100

To record accrued salaries.

31 Accounts Receivable....................................106 Storage Fees Earned.............................401

1,150 1,150

To record accrued storage fees.

Part 5 SAFE STORAGE CO. Income Statement For Month Ended July 31, 2008 Storage fees earned................................... Expenses Depreciation expense–Buildings............ $1,500 Salaries expense...................................... 2,100 Insurance expense................................... 400 Rent expense............................................ 2,000 Office supplies expense.......................... 875 Repairs expense....................................... 950 Telephone expense.................................. 400 Total expenses.......................................... Net income..................................................

$10,950

8,225 $ 2,725


191

Problem 3-4B (Continued) Problem 5-1B (Continued) SAFE STORAGE CO. Statement of Retained Earnings For Month Ended July 31, 2008 Retained earnings, July 1, 2008................

$

0

Add: Net income........................................

2,725 2,725

Less: Dividends..........................................

(2,000)

Retained earnings, July 31, 2008..............

SAFE STORAGE CO. Balance Sheet July 31, 2008 Assets Cash............................................................. Accounts receivable.................................. Office supplies............................................ Prepaid insurance...................................... Buildings..................................................... $150,000 Accumulated depreciation--Buildings..... (1,500) Total assets.................................................

$

725

$ 22,850 1,150 1,525 6,800 148,500 $180,825

Liabilities Salaries payable.........................................

$

Equity Common stock........................................... Retained earnings...................................... Total liabilities and equity..........................

180,000 725 $180,825

100



Problem 3-4B (Continued) Part 6 Closing entries July 31

Storage Fees Earned.................................401 10,950 Income Summary..................................901

10,950


31

Income Summary.......................................901 Depreciation Exp—Buildings...............606 Salaries Expense...................................622 Insurance Expense................................637 Rent Expense.........................................640 Office Supplies Expense......................650 Repairs Expense...................................684 Telephone Expense...............................688

8,225 1,500 2,100 400 2,000 875 950 400


31

Income Summary.......................................901 Retained Earnings.................................318

2,725 2,725

To close the Income Summary.

31

Retained Earnings......................................318 Dividends...............................................319

2,000 2,000


Part 7 SAFE STORAGE CO. Post-Closing Trial Balance July 31, 2008 Debit Cash............................................................. $ 22,850 Accounts receivable..................................

1,150

Office supplies............................................

1,525

Prepaid insurance......................................

6,800

Credit

Buildings..................................................... 150,000 Accumulated depreciation–Buildings......

$

1,500

Salaries payable.........................................

100

Common stock...........................................

180,000

Retained earnings......................................

725 ©McGraw-Hill Companies, 2007

Solutions Manual, Chapter 3

193

Totals........................................................... $182,325

$182,325



Problem 3-4B (Continued)

Date July 1 2 5 10 14 24 28 29 30 31 Date July 31 Date July 5 31 Date July 10 31

Explanation

Ledger as of July 31 Cash PR Debit 30,000

9,800

Accounts Receivable Explanation PR Debit Adjusting 1,150 Explanation

Office Supplies PR

Explanation

Debit 2,400

Debit 7,200


Adjusting Buildings

Date July 1 Date July 31 Date July 31

Explanation

PR

Acct. No. 106 Credit Balance 1,150 Acct. No. 124 Credit Balance 2,400 875 1,525

Adjusting Prepaid Insurance PR

Acct. No. 101 Credit Balance 30,000 2,000 28,000 2,400 25,600 7,200 18,400 1,000 17,400 27,200 1,000 26,200 950 25,250 400 24,850 2,000 22,850

Debit 150,000


Accumulated Depreciation—Buildings Acct. No. 174 Explanation PR Debit Credit Balance Adjusting 1,500 1,500 Explanation Adjusting

Salaries Payable PR

Debit



195

Problem 3-4B (Continued) Date July 1 Date July 31 31

Explanation

Explanation Closing Closing

Common Stock PR

Acct. No. 307 Debit Credit Balance 180,000 180,000

Retained Earnings PR


Debit 2,000

Dividends Date July 31 31

Explanation

PR

Debit 2,000

Closing

Date July 24 31 31

Adjusting Closing

10,950

Acct.No. 401 Credit Balance 9,800 9,800 1,150 10,950 0

Date July 31 31

Depreciation Expense—Buildings Explanation PR Debit Adjusting 1,500 Closing


Date July 14 28 31 31 Date July 31 31 Date July 2 31

Explanation

Explanation

Storage Fees Earned PR Debit


Salaries Expense PR

Adjusting Closing Explanation Adjusting Closing Explanation Closing

Insurance Expense PR

Rent Expense PR

Debit 1,000 1,000 100


Debit 400


Debit 2,000




Problem 3-4B (Concluded) Date July 31 31 Date July 29 31 Date July 30 31 Date July 31 31 31

Office Supplies Expense Explanation PR Debit Adjusting 875 Closing Repairs Expense PR

Explanation

Debit 950


Debit 400


Closing Explanation

Telephone Expense PR

Closing Explanation Closing Closing Closing

Income Summary PR


Debit 8,225 2,725


Problem 3-5B (15 minutes) 1.

Z

11.

A

2.

A

12.

E

3.

B

13.

E

4.

G

14.

A

5.

C

15.

A

6.

F

16.

E

7.

D

17.

Z

8.

E

18.

A

9.

C

19.

C

10.

C

20.

Z


197

Problem 3-6BA (40 minutes) Part 1 Method that records prepaid expenses and unearned revenues in balance sheet accounts

Apr. 1

Prepaid Consulting Fees..................................... 2,450 Cash...............................................................

2,450

Paid for future consulting services.

1

Prepaid Insurance................................................ 3,600 Cash...............................................................

3,600


30

Cash....................................................................... 8,500 Unearned Service Fees................................

8,500


May 1

Prepaid Advertising.............................................. 4,450 Cash...............................................................

4,450


23

Cash ..................................................................... 10,450 Unearned Service Fees...............................

10,450


31

Consulting Fees Expense.................................... 2,000 Prepaid Consulting Fees..............................

2,000

To adjust prepaid consulting fees.

31

Insurance Expense............................................... Prepaid Insurance.........................................

600 600

To adjust prepaid insurance ($3,600 x 2/12).

31

Unearned Service Fees ....................................... 3,900 Service Fees Earned.....................................

3,900

To adjust unearned service fees ($8,500 - $4,600).

31

Advertising Expense............................................ 2,400 Prepaid Advertising......................................

2,400

To adjust prepaid advertising ($4,450 - $2,050).

31

Unearned Service Fees........................................ 5,500 Service Fees Earned.....................................

5,500

To adjust unearned service fees.



Problem 3-6BA (Continued) Part 2 Method that records prepaid expenses and unearned revenues in income statement accounts:

Apr. 1

Consulting Fees Expense.................................. Cash..............................................................

2,450 2,450

Paid for future consulting services.

1

Insurance Expense............................................. Cash..............................................................

3,600 3,600


30

Cash..................................................................... Service Fees Earned...................................

8,500 8,500


May 1

Advertising Expense........................................... Cash..............................................................

4,450 4,450


23

Cash..................................................................... 10,450 Service Fees Earned...................................

10,450


31

Prepaid Consulting Fees.................................... Consulting Fees Expense...........................

450 450

To adjust for prepaid consulting fees ($2,450 - $2,000).

31

Prepaid Insurance .............................................. Insurance Expense......................................

3,000 3,000

To adjust for prepaid insurance ($3,600 x 10/12).

31

Service Fees Earned........................................... Unearned Service Fees ..............................

4,600 4,600

To adjust for unearned service fees.

31

Prepaid Advertising............................................ Advertising Expense...................................

2,050 2,050

To adjust for prepaid advertising.

31

Service Fees Earned........................................... Unearned Service Fees ..............................

4,950 4,950

To adjust for unearned service fees ($10,450 - $5,500).


199

Problem 3-6BA (Concluded) Part 3 There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following: Prepaid consulting fees as of May 31....................................

$ 450

Consulting fees expense for two months..............................

2,000

Insurance expense for two months........................................

600

Prepaid insurance as of May 31..............................................

3,000

Unearned service fees as of May 31 ($4,600 + $4,950).........

9,550

Service fees earned for two months ($3,900 + $5,500).........

9,400

Prepaid advertising as of May 31...........................................

2,050

Advertising expense for two months.....................................

2,400

When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.



Problem 3-7B (90 minutes) Part 1 POWER DEMOLITION COMPANY Work Sheet For Year Ended April 30, 2008 No. 101 126 128 167 168 201 203 208 210 213 251 307 318 319 401 612 623 633 637 640 652 683 684 690

Unadjusted Trial Balance Account Title Dr. Cr. Cash........................................... 7,000 Supplies....................................... 16,000 Prepaid insurance.......................... 12,600 Equipment................................... 200,000 Accumulated depreciation— 14,000 Equipment.................................. Accounts payable.......................... 6,800 Interest payable............................. Rent payable................................. Wages payable.............................. Property taxes payable................... Long-term notes payable................ 30,000 Common stock............................. 40,000 Retained earnings.......................... 46,900 Dividends..................................... 12,000 Demolition fees earned................... 187,000 Depreciation expense— Equipment.................................. Wages expense............................. 41,400 Interest expense............................ 3,300 Insurance expense......................... Rent expense................................ 13,200 Supplies expense.......................... Property taxes expense.................. 9,700 Repairs expense............................ 4,700 Utilities expense............................ 4,800 ______ Totals.......................................... 324,700 324,700 Net income................................... Totals..........................................

Adjustments Dr. Cr.



7,000 7,900 2,000 200,000

7,000 7,900 2,000 200,000

(a) (b)

8,100 10,600

(c)

7,000

21,000

21,000

(d) (h) (f) (e) (g)

800 300 3,000 2,000 550

7,600 300 3,000 2,000 550 30,000 40,000 46,900

7,600 300 3,000 2,000 550 30,000 40,000 46,900

12,000 (c) (e) (h) (b) (f) (a) (g)

7,000 2,000 300 10,600 3,000 8,100 550

(d)

800 32,350


______ 32,350

12,000 187,000

187,000

7,000 43,400 3,600 10,600 16,200 8,100 10,250 4,700 5,600 ______ 338,350 338,350

7,000 43,400 3,600 10,600 16,200 8,100 10,250 4,700 5,600 ______ 109,450 187,000 77,550 ______ 187,000 187,000

______ ______ 228,900 151,350 ______ 77,550 228,900 228,900


201

Problem 3-7B (Continued) Part 2.

Adjusting entries (all on April 30, 2008)

(a)

Supplies Expense............................................. 8,100 Supplies..................................................... To record consumption of supplies.

8,100

Insurance Expense........................................... 10,600 Prepaid Insurance..................................... To record expiration of insurance.

10,600

Depreciation Expense—Equipment................ 7,000 Accumulated Depreciation–Equipment. . To record depreciation.

7,000

(b)

(c)

(d)

(e)

(f)

(g)

(h)

Utilities Expense............................................... Accounts Payable..................................... To record accrued utilities costs.

800 800

Wages Expense................................................ 2,000 Wages Payable.......................................... To record accrued wages.

2,000

Rent Expense.................................................... 3,000 Rent Payable.............................................. To record remainder of annual rent.

3,000

Property Taxes Expense.................................. Property Taxes Payable............................ To record additional property taxes.

550

Interest Expense (1% x $30,000)..................... Interest Payable......................................... To record April’s interest expense.

300

550

300



Problem 3-7B (Continued) Closing entries (all on April 30, 2008): (1)

(2)

(3)

(4)

Demolition Fees Earned............................... 187,000 Income Summary.................................. To close the revenue account.

187,000

Income Summary.......................................... 109,450 Depreciation Expense–Equipment...... Wages Expense..................................... Interest Expense.................................... Insurance Expense................................ Rent Expense......................................... Supplies Expense.................................. Property Taxes Expense....................... Repairs Expense................................... Utilities Expense.................................... To close the expense accounts.

7,000 43,400 3,600 10,600 16,200 8,100 10,250 4,700 5,600

Income Summary.......................................... Retained Earnings................................. To close the Income Summary account.

77,550 77,550

Retained Earnings........................................ Dividends............................................... To close the dividends account.

12,000 12,000


203

Problem 3-7B (Continued) Part 3 POWER DEMOLITION COMPANY Income Statement For Year Ended April 30, 2008 Demolition fees earned..................................... Expenses Depreciation expense–Equipment................. $ 7,000 Wages expense................................................ 43,400 Interest expense.............................................. 3,600 Insurance expense.......................................... 10,600 Rent expense.................................................... 16,200 Supplies expense............................................ 8,100 Property taxes expense.................................. 10,250 Repairs expense.............................................. 4,700 Utilities expense............................................... 5,600 Total expenses................................................. Net income..........................................................

$187,000

109,450 $ 77,550

POWER DEMOLITION COMPANY Statement of Retained Earnings For Year Ended April 30, 2008 Retained earnings, April 30, 2007..................... Add: Net income............................................... Less: Dividends................................................. Retained earnings, April 30, 2008.....................

$ 46,900 77,550 124,450 (12,000) $112,450



Problem 3-7B (Continued) POWER DEMOLITION COMPANY Balance Sheet April 30, 2008 Assets Current assets Cash..................................................................... $ 7,000 Supplies.............................................................. 7,900 Prepaid insurance.............................................. 2,000 Total current assets........................................... $ 16,900 Plant assets Equipment........................................................... 200,000 Accumulated depreciation–Equipment............ (21,000) 179,000 Total assets........................................................... $195,900 Liabilities Current liabilities Accounts payable............................................... $ 7,600 Interest payable.................................................. 300 Rent payable....................................................... 3,000 Wages payable.................................................... 2,000 Property taxes payable...................................... 550 Current portion of long-term note payable...... 10,000 Total current liabilities....................................... Long-term liabilities Long-term note payable (less current portion) Total liabilities....................................................... Equity Common stock..................................................... Retained earnings................................................ Total liabilities and equity....................................

$ 23,450 20,000 43,450 40,000 112,450 $195,900


205

Problem 3-7B (Continued) Part 4 (a) This error enters the wrong amount in the correct accounts. The ending balance of the Prepaid Insurance account should be $2,000, but the erroneous entry reduces that account by $2,000. Because its unadjusted balance was $12,600, the adjusted balance will now be $10,600 ($12,600 - $2,000), which is $8,600 greater than the correct $2,000 balance. In addition, the Insurance Expense account balance will be only $2,000 instead of the correct amount of $10,600. The adjusted trial balance columns in the work sheet will be equal, but the error will cause the work sheet’s net income to be overstated by $8,600 because of the understatement of expense. In addition, the balance sheet columns will include the overstated balance for the Prepaid Insurance account. This error is not likely to be detected as a result of completing the work sheet. If it is not, the income statement will overstate net income by $8,600, and the balance sheet will overstate the cost of the unexpired insurance and total equity by $8,600. (b) This error inserts a debit in the balance sheet columns instead of the income statement columns. In the unlikely event that this error is not immediately detected, it will cause the work sheet measure of net income to be overstated because the total debits will incorrectly omit the $4,700 expense for repairs. In all likelihood, the error will be discovered in the process of drafting the balance sheet because the accountant will realize that repairs expense is not an asset. If it is detected and corrected, the financial statements will be unaffected. However, if the repairs expense is erroneously included on the balance sheet, the reported net income will be overstated by $4,700. On the balance sheet, a nonexistent asset will be erroneously reported for the repairs expense and total equity will be overstated by $4,700.



SERIAL PROBLEM

— SP 3

Serial Problem, Success Systems (180 minutes) — Part 1

Journal entries Dec. 2

Advertising Expense..................................655 Cash.....................................................101

1,200 1,200

Paid share of mall advertising costs.

3

Repairs Expense–Computer.....................684 Cash.....................................................101

500 500

Repaired the computer.

4

Cash.............................................................101 Accounts Receivable..........................106

7,000 7,000

Collected accounts receivable.

10

Wages Expense..........................................623 Cash.....................................................101

900 900

Paid employee for part-time work.

14

Cash.............................................................101 Unearned Computer Services Revenue...236

2,500 2,500

Received advance on work to be performed.

15

Computer Supplies....................................126 Accounts Payable...............................201

2,100 2,100

Purchased supplies on credit.

16 20

No entry recorded in the journal. Cash.............................................................101 Computer Services Revenue.............403

3,620 3,620

Collected cash revenue from customer.

28

Cash.............................................................101 Accounts Receivable..........................106

3,000 3,000

Collected accounts receivable.

29

Mileage Expense........................................676 Cash.....................................................101

256 256

Reimbursed Lopez for mileage.

31

Dividends....................................................319 Cash.....................................................101

2,000 2,000



207

Serial Problem — SP 3 (Continued) Part 2 Adjusting entries Dec. 31 Computer Supplies Expense .........................652 Computer Supplies .................................126

4,675 4,675

Adjustment for supplies used (supplies balance less cost of supplies available).

31 Insurance Expense .........................................637 Prepaid Insurance ...................................128

600 600

Adjustment for expired insurance (1/4 of original prepaid amount).

31 Wages Expense ..............................................623 Wages Payable ........................................210

600 600

Adjustment for accrued wages.

31 Depreciation Expense–Computer Equip.......613 Accumulated Depreciation— Computer Equipment...........................168

1,250 1,250

Adjustment for computer equipment depreciation: Cost......................................................... $25,000 Predicted life........................................... 5 years Annual depreciation (cost/life).............. $5,000 Expense for three months..................... $1,250

31 Depreciation Expense—Office Equip............612 Accumulated Depreciation— Office Equipment ..................................164

625 625

Adjustment for office equipment depreciation: Cost.......................................................... Predicted life............................................ Annual depreciation (cost/life)............... Expense for three months.......................

$10,000 4 years $2,500 $625

31 Rent Expense ..................................................640 Prepaid Rent ............................................131

2,625 2,625

Adjustment for expired rent (3/4 of original prepaid amount).



Serial Problem — SP 3 (Continued) Part 3 SUCCESS SYSTEMS Adjusted Trial Balance December 31, 2007 Debit Cash ............................................................................ $ 80,260 Accounts receivable .................................................. 5,800 Computer supplies .................................................... 775 Prepaid insurance ..................................................... 1,800 Prepaid rent ................................................................ 875 Office equipment ....................................................... 10,000 Accumulated depreciation—Office equipment....... Computer equipment ................................................ 25,000 Accumulated depreciation—Computer equipment. Accounts payable ...................................................... Wages payable ........................................................... Unearned computer services revenue .................... Common stock............................................................ Retained earnings...................................................... Dividends.................................................................... 8,500 Computer services revenue ..................................... Depreciation expense—Office equipment .............. 625 Depreciation expense—Computer equipment........ 1,250 Wages expense .......................................................... 4,650 Insurance expense .................................................... 600 Rent expense ............................................................. 2,625 Computer supplies expense .................................... 4,675 Advertising expense.................................................. 2,990 Mileage expense ........................................................ 1,120 Miscellaneous expenses .......................................... 300 Repairs expense—Computer ................................... 1,400 Totals........................................................................... $153,245

Credit

$

625

1,250 2,100 600 2,500 110,000 0 36,170

_______ $153,245


209

Serial Problem — SP 3 (Continued) Part 4 SUCCESS SYSTEMS Income Statement For Three Months Ended December 31, 2007 Revenue Computer services revenue....................................... Expenses Depreciation expense—Office equipment................ Depreciation expense—Computer equipment......... Wages expense........................................................... Insurance expense...................................................... Rent expense............................................................... Computer supplies expense...................................... Advertising expense................................................... Mileage expense......................................................... Miscellaneous expenses............................................ Repairs expense—Computer..................................... Total expenses............................................................ Net income.....................................................................

$36,170 $ 625 1,250 4,650 600 2,625 4,675 2,990 1,120 300 1,400 20,235 $15,935

SUCCESS SYSTEMS Statement of Retained Earnings For Three Months Ended December 31, 2007 Retained earnings, October 1, 2007............................ Plus: Net income.......................................................... Less: Dividends............................................................ Retained earnings, December 31, 2007......................

$ 0 15,935 15,935 8,500 $ 7,435



Serial Problem — SP 3 (Continued) Part 4—continued SUCCESS SYSTEMS Balance Sheet December 31, 2007 Assets Cash ................................................................................ Accounts receivable ..................................................... Computer supplies ........................................................ Prepaid insurance ......................................................... Prepaid rent ................................................................... Office equipment ........................................................... $10,000 Accumulated depreciation–Office equipment............. (625) Computer equipment..................................................... 25,000 Accumulated depreciation–Computer equipment...... (1,250) Total assets..................................................................... Liabilities Accounts payable........................................................... Wages payable................................................................ Unearned computer services revenue......................... Total liabilities................................................................. Equity Common stock............................................................... Retained earnings.......................................................... Total liabilities and equity..............................................

$ 80,260 5,800 775 1,800 875 9,375 23,750 $122,635 $

2,100 600 2,500 5,200

110,000 7,435 $122,635


211

Serial Problem — SP 3 (Continued) Part 5 Closing entries 2007

Dec. 31 Computer Services Revenue .......................... 403 Income Summary...................................... 901

36,170 36,170


31 Income Summary.............................................. 901 Depreciation Exp–Office Equipment....... 612 Depreciation Exp–Computer Equipment... 613 Wages Expense ........................................ 623 Insurance Expense .................................. 637 Rent Expense ........................................... 640 Computer Supplies Expense .................. 652 Advertising Expense ................................ 655 Mileage Expense ...................................... 676 Miscellaneous Expenses ......................... 677 Repairs Expense—Computer ................. 684

20,235 625 1,250 4,650 600 2,625 4,675 2,990 1,120 300 1,400


31

Income Summary.............................................. 901 Retained Earnings..................................... 318

15,935 15,935


31

Retained Earnings............................................ 318 Dividends................................................... 319

8,500 8,500


Note: All accounts with numbers that start with the digits 1 or 2 (the permanent accounts) are unaffected by the closing process.



Serial Problem — SP 3 (Concluded) Part 6 SUCCESS SYSTEMS Post-Closing Trial Balance December 31, 2007 Debit

Credit

Cash............................................................................... $ 80,260 Accounts receivable..................................................... 5,800 Computer supplies........................................................ 775 Prepaid insurance......................................................... 1,800 Prepaid rent................................................................... 875 Office equipment........................................................... 10,000 Accumulated depreciation—Office equipment.......... $ 625 Computer equipment.................................................... 25,000 Accumulated depreciation—Computer equipment... 1,250 Accounts payable......................................................... 2,100 Wages payable.............................................................. 600 Unearned computer services revenue........................ 2,500 Common stock.............................................................. 110,000 Retained earnings......................................................... 7,435 Totals.............................................................................. $124,510 $124,510


213

Serial Problem — SP 3 (Continued) [Note: The ledger includes all entries from the prior three months. The Working Papers shorten the solution by showing the balances of the accounts as of November 30, 2007.]

General Ledger

Cash Date Oct.

Nov.

Dec.

Explanation 1 2 5 8 15 17 20 22 31 31 1 2 5 18 22 28 30 30 2 3 4 10 14 20 28 29 31

PR

Debit 75,000

6,200 1,950

3,600 5,000

7,000 2,500 3,620 3,000

Acct. No. 101 Credit Balance 75,000 3,500 71,500 2,400 69,100 1,600 67,500 73,700 900 72,800 1,790 71,010 72,960 1,050 71,910 4,000 67,910 384 67,526 71,126 1,750 69,376 74,376 300 74,076 480 73,596 2,100 71,496 2,500 68,996 1,200 67,796 500 67,296 74,296 900 73,396 75,896 79,516 82,516 256 82,260 2,000 80,260



Serial Problem — SP 3 (Continued) Date Oct.

Nov. Dec.

Date Oct. Nov. Dec.

Date Oct. Dec.

Date Oct. Dec.

Date Oct.

Date Dec.

6 12 15 22 28 8 18 24 4 28

Accounts Receivable Explanation PR Debit 6,200 1,950 7,300 6,500 7,000

Computer Supplies Explanation PR 3 5 15 31 Prepaid Insurance Explanation PR 5 31 Prepaid Rent Explanation PR 2 31 Office Equipment Explanation PR 1

Acct. No. 106 Credit Balance 6,200 8,150 6,200 1,950 1,950 0 7,300 13,800 5,000 8,800 15,800 7,000 8,800 3,000 5,800

Debit 1,600 1,750 2,100


Debit 2,400


Debit 3,500


Debit 10,000


Accumulated Depreciation—Office Equipment Acct. No. 164 Explanation PR Debit Credit Balance 31 625 625


215

Serial Problem — SP 3 (Continued) Date Oct.

Date Dec.

Date Oct. Dec.

Date Dec.

Date Dec.

Date Oct.

Date Dec.

Date Oct. Nov. Dec.

1

Computer Equipment Explanation PR Debit 25,000


Accumulated Depreciation—Computer Equipment Acct. No. 168 Explanation PR Debit Credit Balance 31 1,250 1,250 Accounts Payable Explanation PR Debit 3 8 15

1,600

Explanation

Wages Payable PR

Debit

31


Unearned Computer Services Revenue Explanation PR Debit


Common Stock Explanation PR


14

Debit

1 Retained Earnings Explanation PR Debit 31 31

8,500

Explanation 31 30 31 31

Acct. No. 201 Credit Balance 1,600 1,600 0 2,100 2,100

Closing

Dividends PR

Debit 4,000 2,500 2,000

Acct. No. 318 Credit Balance 15,935 15,935 7,435 Acct. No. 319 Credit Balance 4,000 6,500 8,500 8,500 0



Serial Problem — SP 3 (Continued) Date Oct. Nov. Dec.

Date Dec.

Date Dec.

Date Oct. Nov. Dec.

Date Dec.

Date Dec.

Computer Services Revenue Explanation PR Debit

Acct. No. 403 Credit Balance 6,200 6,200 1,950 8,150 7,300 15,450 3,600 19,050 6,500 25,550 7,000 32,550 3,620 36,170 0

6 12 28 2 8 24 20 31

Closing

31 31

Depreciation Expense—Office Equipment Acct. No. 612 Explanation PR Debit Credit Balance 625 625 Closing 625 0

36,170

Depreciation Expense—Computer Equipment Acct. No. 613 Explanation PR Debit Credit Balance 31 1,250 1,250 31 Closing 1,250 0 Wages Expense Explanation PR 31 30 10 31 31

Debit 1,050 2,100 900 600

Closing

Acct. No. 623 Credit Balance 1,050 3,150 4,050 4,650 4,650 0

31 31

Insurance Expense Explanation PR Debit 600 Closing


Explanation 31 31

Closing

Rent Expense PR

Debit 2,625



217

Serial Problem — SP 3 (Continued) Date Dec.

Date Oct. Dec.

Date Nov. Dec.

Date Nov. Dec.

Date Oct. Dec.

Date Dec.

31 31

Computer Supplies Expense Explanation PR Debit 4,675 Closing


20 2 31

Advertising Expense Explanation PR Debit 1,790 1,200 Closing


Mileage Expense Explanation PR 1 28 29 31

Debit 384 480 256

Closing

Acct. No. 676 Credit Balance 384 864 1,120 1,120 0

22 31

Miscellaneous Expense Explanation PR Debit 300 Closing


17 3 31

Repairs Expense—Computer Explanation PR Debit 900 500 Closing

Acct. No. 684 Credit Balance 900 1,400 1,400 0

31 31 31

Income Summary Explanation PR Debit Closing Closing 20,235 Closing 15,935




Reporting in Action

— BTN 3-1

1. The revenue recognition principle requires that revenue be recorded when earned, not before and not after. Most companies earn revenue when they provide services and products to customers. 2. Best Buy provides information on revenue recognition in footnote 1 entitled “Summary of Significant Accounting Policies.” A revenue recognition policy is stated for the sale of merchandise, service, gift cards, and extended service contracts.  Merchandise revenue is recognized when the customer takes possession of the merchandise.  Service revenue is recognized “at the time the service is provided, the sales price is fixed or determinable, and collectibility is reasonably assured.”  Gift card revenue is deferred until the customer redeems the card.  Extended service contracts are sold on behalf of an unrelated third party. Some jurisdictions do not deem Best Buy to be the guarantor, and those commissions are recognized at the date of sale. For those jurisdictions where Best Buy is considered to be obligated under the contract, commissions are earned evenly over the course of the contract. 3. For fiscal year-end February 26, 2005, the profit margin is: $984,000,000 / $27,433,000,000 = 0.036 = 3.6% For fiscal year-end February 28, 2004, the profit margin is: $705,000,000 / $24,548,000,000 = 0.029 = 2.9% 4. The total revenues that would be credited to Income Summary as step 1 in the closing entry process must be computed. Best Buy’s sales revenue for the fiscal year-ended February 26, 2005, is $27,433,000,000, its interest income is $1,000,000, and it has a gain on the disposal of discontinued operations of $50,000,000. Thus, its total revenue that is closed to Income Summary is $27,484,000,000.


219

Reporting in Action

— BTN 3-1 (continued)

5. The total expenses that would be debited to Income Summary as step 2 in the closing entry process must be computed. Best Buy’s total expenses for the fiscal year ended February 26, 2005, are: Cost of goods sold........................................................ $20,938,000,000 Selling, general and administrative.............................. 5,053,000,000 Income tax expense....................................................... 509,000,000 Total expenses............................................................... $26,500,000,000 6. The balance of Income Summary before it is closed as of February 26, 2005, equals the net income for Best Buy of $984,000,000. 7. Solution depends on the financial statements accessed.



Comparative Analysis

— BTN 3-2

1. Best Buy Current year, profit margin = $984,000 / $27,433,000 Prior year, profit margin = $705,000 / $24,548,000

= 3.6% = 2.9%

Circuit City Current year, profit margin = $ 61,658 / $10,472,364 Prior year, profit margin = $(89,269) / $9,857,057

= 0.6% =- 0.9%

2. Best Buy is more successful on the basis of profit margin. In the current year, Best Buy earned an average of 3.6 cents on each dollar while Circuit City earned only 0.6 cents on each dollar. 3. Best Buy’s current ratios Current year......... $6,903,000 / $4,959,000 = 1.39 Prior year.............. $5,724,000 / $4,501,000 = 1.27 Circuit City’s current ratios Current year......... $2,685,715 / $1,263,846 = 2.13 Prior year.............. $2,919,061 / $1,138,198 = 2.56 4. In both years, Circuit City has the higher current ratio (2.13 vs. 1.39 for this year; 2.56 vs. 1.27 in the prior year), suggesting a better ability to pay short-term obligations. Overall, neither company is in immediate danger of failing to make payment on short-term obligations. 5

Best Buy’s current ratio improved, moving from 1.27 to 1.39. Circuit City’s current ratio declined from 2.56 to 2.13.

6. Circuit City’s current ratio is above the industry average for both years, and Best Buy’s is below the industry average for both years. However, neither company appears at risk of failing to pay its current creditors.


221

Ethics Challenge

— BTN 3-3

1. There are several courses of action that Tamira could have taken. Two possibilities follow: a. She could have consulted with the president and told him that finalized financial statements would not be ready by the time of the meeting. She could explain that delay in financial statement preparation is a normal event given the need to wait for final information to prepare accurate adjustments. Possibly the meeting could be rescheduled or Tamira could have asked how the president preferred her to proceed. b. The estimation decision was not a bad choice in itself. But she should have informed the president. Tamira probably should have used less optimistic estimates instead of recording expenses on the low side. Users of financial statements usually prefer knowing worst-case scenarios over best-case outcomes. Use of estimates gets the financial statements closer to their final form than ignoring the adjustments completely. 2.

Students may offer one of the above alternatives or another response they may think of given the situation. Try to generate a discussion of ethical concerns and the impact of her decisions on the well-being of users (such as the bankers and the investors in the banks).



Communicating in Practice TO: FROM: DATE: SUBJECT:

— BTN 3-4

_____________________ _____________________ ______________________ CLARIFICATIONS—OBJECTIVE OF THE CLOSING PROCESS

[Note: The following is a sample of what the memorandum’s contents might include.]

When we speak of “closing the books” or the closing process we are not talking about ending or closing the business nor doing anything that reflects this thinking in the financial statements. Let me use an analogy to explain the concept of the closing process and then you will see the distinction more clearly. Scoreboards are used to temporarily hold information that will allow us to determine who won or lost in an athletic game or event. When the athletic event is over the result of the game is permanently recorded elsewhere-probably in the team’s record book. If the scoreboard was not cleared before the start of a new game the scores from the second game would be combined with scores from the first game. As a result, the scoreboard would reflect data or scores that were not relevant to either game. You can see that the scoreboard must be zeroed out to prepare it for accumulating data to determine the outcome of the next game. The revenue and expense accounts temporarily hold the information to determine if the owner(s) won or lost in the game of business. Each fiscal period should be viewed as a separate game. After the data in these accounts has allowed us to determine if the owner(s) won or lost, in other words, the net income or loss, these accounts must be cleared to accumulate data for the next game or period. We record the score of the game of business, or the net income or loss, in the permanent recordbook or the capital account. A win or net income increases capital and a loss or net loss decreases capital. I hope this memo clarifies the objective of the closing process. [Note: The memorandum need not discuss the income summary account since the assignment requires explaining the concept, not the procedure.]


223

Taking It to the Net

— BTN 3-5

1. The Gap’s main brands (stores) are The Gap, Old Navy, and Banana Republic. 2. The Gap’s fiscal year-end is January 29, 2005. It appears that The Gap’s fiscal year-end is late January or early February. 3. Net sales for the year ended January 29, 2005 are $16,267,000,000. 4. Net income for the year ended January 29, 2005 is $1,150,000,000. 5. Profit margin = $1,150,000,000 / $16,267,000,000 = 7.1% 6. The company probably chose a year-end at the end of January or early February to have it be consistent with their natural year. For many retailers, the highest amount of sales is in November and December.

Taking It to the Net

— BTN 3-6

1. The Motley Fool states that a benchmark of 1.5 is generally regarded as sufficient to meet near-term operating needs. 2. One should always check a company’s current ratio (as well as any other ratio) against its main competitors in a given industry. 3. A current ratio that is too high can suggest that a company is hoarding assets instead of using them to effectively grow the business—this is an inefficient use of resources that can potentially impair long-term returns.



Teamwork in Action

— BTN 3-7

Note that there is no specific solution to this activity. Nevertheless, the presentation of each expert team should reflect the following summary points:

Type

Before Adjusting Balance Sheet Income Statement Account Account

Prepaid expenses

Asset overstated

Expense understated

Unearned revenues

Liability overstated

Revenue understated

Accrued Expenses

Liability understated Expense understated

Accrued Revenues

Asset understated

Adjusting Entry

Revenue understated

Dr. Expense Cr. Asset* Dr. Liability Cr. Revenue Dr. Expense Cr. Liability Dr. Asset Cr. Revenue

* For depreciation, one would Credit the Accumulated Depreciation contra account.

Some implementation notes: This activity allows all students to be actively involved in the learning process. Encourage students to take the opportunity to ask questions in the small group environment the learning team provides. Encourage the better students to serve as experts on unearned revenues. The instructor’s observation of and reactions to expert teams’ development of presentation material as well as the delivery to learning teams will have a significant impact on the effectiveness of this activity.

BusinessWeek Activity

— BTN 3-8

1. Estimates are to allow companies to make sure revenues and expenses are recorded in the proper time periods. For instance, a company must estimate a plant asset’s useful life in order to calculate depreciation. 2. Companies can use these estimates to manipulate revenues, expense, and income. In the depreciation example, the longer the useful life estimated, the smaller the depreciation expanse for a period (and the higher the income will be). The shorter the useful life estimated, the higher the depreciation expense for a period (and the lower the net income will be).


225

BusinessWeek Activity — BTN 3-8 (concluded) 3. The five ways suggested by the article are: a. Estimate sales – An example is a company that estimates future sales discounts. The higher the discounts estimated, the lower the net sales (and the lower the income). The lower the discounts estimated, the higher the net sales (and the higher the net income). b. Predict bad debts – Companies can change the estimate of amounts they reasonably expect to collect from customers, thereby manipulating revenues and expenses. c. Forecast unusual gains or losses – A company may choose which accounting period to report big and unusual gains or expenses. d. Adjust inventory – Companies can estimate that their inventories must be written down (and a loss recorded). In a future year, when the inventory is sold, no further loss is needed. e. Massage cash – Companies can improve cash flow from operating activities. An example is to sell receivables to a financing company. This is accounted for as an operating activity. 4. The article suggests the following solutions: a. The FASB should turn its attention to making the form and presentation of financial information cleaner and more consistent. b. The cash flow statement should define more clearly what constitutes an operating, investing, and financing item. c. Companies should report their statements and cash flow for the same periods. In addition, companies should report cumulative earnings and cash flows for the previous four quarters along with annual data. d. Auditors should be on increased alert, knowing that investors are interested.

Entrepreneurial Decision

— BTN 3-9

1. a. To record cash collection in advance of the sale of the computer Cash..................................................................... 3,000 Unearned revenue..........................................

3,000

b. To record the shipment of the computer to the customer Unearned revenue............................................... 3,000 Revenue earned.............................................

3,000



Entrepreneurial Decision — BTN 3-9 (concluded) 2. Not carrying inventory allows Aguila and Gonzalez to save the costs of carrying the inventory – such as warehousing costs, insurance, and losses. Saving these costs can increase income. In addition, not having any uncollectible accounts increases income as well. By increasing income, profit margin should be increased as well. 3. By carrying inventories, Alienware can provide their computers to customers more quickly. This might increase sales as their reputation for quick delivery becomes known. On the other hand, carrying inventory has some risk. The most important for a company like Alienware is that of obsolescence. Computer hardware is constantly changing, and by carrying no inventory, Aguila and Gonzalez can be flexible in the products they offer.

Hitting the Road

— BTN 3-10

There is no formal solution to this field activity. The instructor may wish to tally students’ findings to show results across companies as to use of work sheets, software preferences, and time it takes to prepare finalized annual financial statements.

Global Decision

— BTN 3-11

1. Dixons titles its sales revenue account “Turnover.” Its Note 1.3 reports that revenue for merchandise is recognized at the point of sale or upon delivery to the customer. Revenue from extended warranties and service contracts is recognized over the life of the agreement. 2. Profit margin = ₤243,600,000 / ₤6,458,000,000 = 3.8% 3. Current ratio This year: ₤2,303,900,000 / ₤1,565,800,000 = 1.47 Last year: ₤2,220,400,000 / ₤1,679,000,000 = 1.32


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Financial Accounting ch 3

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