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3 Adjusting Chapter 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. 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. Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year. 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. 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. 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. 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. 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. 2. 3. 4. 5. 6. 7. 8. 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. McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 119 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. 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.) The accrued Wages Expense would be reported as part of Accrued Expenses on Apple's balance sheet. 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. (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. 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. 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.) 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). 11. 12. 13. 14. 15. 16. 17. 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. McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 120 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. 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. Unearned revenue is reported as a liability--usually a current liability. 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. 21. 22. 23. 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. 27. The five categories of noncurrent assets on Best Buy's balance sheet are: Property and equipment, Goodwill, Tradename, Long-term investments, and Other assets. 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. 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 ........................................................ 276 Retained Earnings............................................. 276 28. McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 121 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 a. Debit Credit Unearned Revenue Revenue Earned Wages Expense Wages Payable Accounts Receivable Revenue Earned Insurance Expense Prepaid Insurance Depreciation Expense Accumulated Depreciation Financial Statement Balance Sheet Income Statement Income Statement Balance Sheet Balance Sheet Income Statement Income Statement Balance Sheet Income Statement Balance Sheet b. Debit Credit c. Debit Credit d. Debit Credit e. Debit Credit Quick Study 3-3 (15 minutes) a. Insurance Expense ....................................................... Prepaid Insurance ................................................. To record 6-month insurance coverage expired. 1,200 1,200 1,700 1,700 b. Supplies Expense ......................................................... Supplies .................................................................. To record supplies used during the year. ($500 + $2,000 [supplies used] = $800) McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 122 Quick Study 3-4 (10 minutes) a. Depreciation Expense--Equipment ............................ Accumulated Depreciation--Equipment ............. To record depreciation expense for the year. ($20,000 - $2,000) / 5 years = $3,600 3,600 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 .................................................... To record salaries incurred but not yet paid. [The one student earns $100 x 4 days MR] 400 400 Quick Study 3-6 (15 minutes) a. Unearned Revenue........................................................ Legal Revenue ....................................................... To recognize revenue earned ($10,000 x 3/4). 7,500 7,500 1,200 1,200 b. Unearned Subscription Revenue ................................ Subscription Revenue ........................................... To recognize subscription revenue earned. [100 x ($24 / 12 month) x 6 months] Quick Study 3-7 (15 minutes) Adjusting entry 1. Accrue salaries expense 2. Adjust the Unearned Services Revenue account to recognize earned revenue 3. Record the earning of services revenue for which cash will be received the following period Debit e d g Credit c f f McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 123 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) ...................................................... Expenses (cash payments: $25,500 - $5,250 + $6,750) ...... Net income (cash-basis) ....................................................... Accrual Accounting Revenues (earned) ................................................................ Expenses (incurred) .............................................................. Net income (accrual-basis) .................................................... $37,000 27,000 $10,000 $45,000 25,500 $19,500 Quick Study 3-10 (15 minutes) The answer is 2. Explanation: Insurance premium error Understates expenses (and overstates assets) by .......... Accrued salaries error Understates expenses (and understates liabilities) by .... Combination of errors Understates expenses by ..................................................... Overstates assets by ............................................................. Understates liabilities by ...................................................... $1,600 1,000 $2,600 $1,600 $1,000 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 124 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 ......................................... Less dividends ........................................... Ending balance .......................................... $28,000 10,000 38,000 7,200 $30,800 Quick Study 3-12 (5 minutes) 1. 2. 3. 4. 5. 6. 7. 8. 9. (e) (h) (a) (g) (b) (c) (f) (d) (i) Analyzing transactions and events. Journalizing transactions and events. Posting the journal entries. Preparing the unadjusted trial balance. Journalizing and posting adjusting entries. Preparing the adjusted trial balance. Preparing the financial statements. Journalizing and posting closing entries. 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 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 125 Quick Study 3-14 (15 minutes) Dec. 31 Services Revenue ......................................... Income Summary .................................. To close the revenue account. 31 Income Summary ........................................ Wages Expense..................................... Rent Expense ........................................ To close the expense accounts. 31 Income Summary ........................................ Retained Earnings ................................ To close Income Summary. 31 Retained Earnings ....................................... Dividends .............................................. To close the dividends account. 13,000 13,000 10,000 8,400 1,600 3,000 3,000 800 800 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. McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 126 Quick Study 3-17 (10 minutes) Current assets Cash ............................................................ Accounts receivable .................................. Office supplies ........................................... Prepaid insurance ..................................... Total current assets .................................. Current liabilities Accounts payable ...................................... Unearned services revenue ...................... Total current liabilities .............................. Current ratio = $31,300 / $14,000 = 2.24 $ 7,000 18,000 2,800 3,500 $31,300 $11,000 3,000 $14,000 Quick Study 3-18 A (10 minutes) The answer is d. Quick Study 3-19B (10 minutes) a. b. c. B B B d. e. f. I B I McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 127 Quick Study 3-20B (20 minutes) CLAUDELL COMPANY Work Sheet Unadjusted Trial Balance Dr. Cr. Adjustments Dr. Cr. (a) 55,000 (c) (b) 700 900 (c) (a) 200 700 200 (b) 200 900 25,700 900 700 200 Adjusted Trial Balance Dr. Cr. 800 55,900 25,700 900 700 55,900 Income Statement Dr. Cr. Balance Sheet Dr. Cr. 800 Account Title Prepaid Rent ........................ 1,000 Services Revenue .............. Wages Expense.................. 25,000 Accounts Receivable........ Wages Payable ................... Rent Expense ...................... McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 128 Quick Study 3-21C (15 minutes) 2007 --Not required-12,000 12,000 Dec. 31 Accounts Receivable ................................... Management Fees Earned .................. To record accrued revenue. 2008 Jan. 1 Management Fees Earned ............................ Accounts Receivable ........................... To reverse accrued revenue. 12,000 12,000 26,700 26,700 16 Cash ............................................................... Management Fees Earned .................. To record collection of management fees. McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 129 EXERCISES Exercise 3-1 (25 minutes) a. Depreciation Expense--Equipment ................................. Accumulated Depreciation--Equipment ..................... To record depreciation expense for the year. 18,000 18,000 4,900 4,900 b. Insurance Expense ............................................................. Prepaid Insurance* ......................................................... To record insurance coverage that expired ($6,000 - $1,100). c. Office Supplies Expense .................................................... Office Supplies** .............................................................. To record office supplies used ($700 + $3,480 - $298). 3,882 3,882 10,000 10,000 d. Unearned Fee Revenue ...................................................... Fee Revenue .................................................................... To record earned portion of fee received in advance ($15,000 x 2/3). e. Insurance Expense ............................................................. Prepaid Insurance ........................................................... To record insurance coverage that expired. Wages Expense ................................................................... Wages Payable ................................................................ To record wages accrued but not yet paid. 5,800 5,800 3,200 3,200 f. Notes Prepaid Insurance* Bal. Bal. 6,000 ? End. Bal. 1,100 Used Office Supplies** Beg. Bal. 700 Purchase 3,480 ? End. Bal. 298 Used McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 130 Exercise 3-2 (30 minutes) a. Unearned Fee Revenue ...................................................... Fee Revenue .................................................................... To record earned portion of fee received in advance ($15,000 x 1/3). 5,000 5,000 b. Wages Expense ................................................................... Wages Payable ................................................................ To record wages accrued but not yet paid. 8,000 8,000 18,531 18,531 4,992 4,992 2,800 2,800 1,000 1,000 2,500 2,500 c. Depreciation Expense--Equipment ................................. Accumulated Depreciation--Equipment ..................... To record depreciation expense for the year. d. Office Supplies Expense .................................................... Office Supplies** .............................................................. To record office supplies used ($240 + $5,239 - $487). e. Insurance Expense ............................................................. Prepaid Insurance* .......................................................... To record insurance coverage expired ($4,000 - $1,200). f. Interest Receivable ......................................................... Interest Revenue ........................................................ To record interest earned but not yet received. g. Interest Expense ............................................................. Interest Payable ........................................................... To record interest incurred but not yet paid. Notes Prepaid Insurance* Beg. Bal. 4,000 ? End. Bal. 1,200 Used End. Bal. Beg. Bal. Purchase Office Supplies** 240 5,239 ? 487 Used McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 131 Exercise 3-3 (20 minutes) a. Adjusting entry 2008 Dec. 31 1,250 Wages Expense .............................................................. Wages Payable ........................................................... To record accrued wages for one day (5 workers x $250). 1,250 b. Payday entry 2009 Jan. 4 Wages Expense .............................................................. 3,750 Wages Payable ............................................................... 1,250 Cash ............................................................................ To record accrued and current wages Wages expense = 5 workers x 3 days x $250 Cash = 5 workers x 4 days x $250. 5,000 Exercise 3-4 (25 minutes) a. Apr. 30 Legal Fees Expense ............................................. Legal Fees Payable ....................................... To record accrued legal fees. 3,500 3,500 3,500 3,500 May 12 Legal Fees Payable .............................................. Cash ............................................................... To pay accrued legal fees. b. Apr. 30 Interest Expense ................................................... Interest Payable ............................................ To record accrued interest expense. 2,667 2,667 2,667 5,333 8,000 May 20 Interest Payable .................................................... Interest Expense ................................................... Cash ............................................................... To record payment of accrued and current interest expense ($8,000 2,667). McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 132 Exercise 3-4 (concluded) c. Apr. 30 Salaries Expense .................................................. Salaries Payable ........................................... To record accrued salaries ($10,000 x 2/5 week). 4,000 4,000 4,000 6,000 10,000 May 3 Salaries Payable ................................................... Salaries Expense .................................................. Cash ............................................................... 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 Dec. 31, 2007 ................... 7,000 Dec. 31, 2008 ................... 1,000 Dec. 31, 2009 ................... 0 0 0 0 Insurance Expense using Accrual Cash ** Basis Basis 2006 .................................. $ 5,000 $18,000 2007 .................................. 6,000 2008 .................................. 6,000 2009 .................................. 1,000 Total ................................. $18,000 0 0 0 $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 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 133 Exercise 3-6 (30 minutes) 1. 2008 Dec. 31 Services Revenue ....................................... Income Summary ................................. To close the revenue account. 44,000 44,000 33,100 3,000 22,000 2,500 3,400 2,200 10,900 10,900 7,000 7,000 31 Income Summary ....................................... Depreciation Expense--Equipment ..... Salaries Expense ................................. Insurance Expense .............................. Rent Expense ....................................... Supplies Expense ................................ To close the expense accounts. 31 Income Summary ........................................ Retained Earnings ................................ To close Income Summary. 31 Retained Earnings ....................................... Dividends .............................................. To close the dividends account. 2. CRUZ COMPANY Post-Closing Trial Balance December 31, 2008 Debit Cash .............................................................. Supplies ........................................................ Prepaid insurance ........................................ Equipment ..................................................... Accumulated depreciationEquipment ..... Common stock ............................................. Retained earnings*....................................... Totals ............................................................. *$17,600 + $10,900 - $7,000 = $21,500 Credit $19,000 13,000 3,000 24,000 $ 7,500 30,000 21,500 $59,000 $59,000 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 134 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 ................ Plus: Net income ..................................................... Less: Dividends ...................................................... Retained earnings, December 31, 2008 ................ $ 75,000 25,500 100,500 (20,000) $ 80,500 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 135 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 ......................................................... Equity Common stock ........................................................ Retained earnings* .................................................. Total liabilities and equity ...................................... *From Exercise 3-7 $ 12,000 4,000 16,000 53,000 69,000 100,000 80,500 $249,500 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 136 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. McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 137 Exercise 3-12 (15 minutes) Current Assets Case 1 Case 2 Case 3 Case 4 Case 5 $ 79,000 105,000 45,000 85,500 61,000 / / / / Current Liabilities / $ 32,000 76,000 49,000 81,600 100,000 = = = = = Current Ratio 2.47 1.38 0.92 1.05 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 3-13 A (25 minutes) a. Initial credit recorded in the Unearned Fees account: July 1 Cash ....................................................................... 3,000 Unearned Fees .............................................. Received fees for work to be done for Solana. 3,000 6 Cash ....................................................................... Unearned Fees .............................................. Received fees for work to be done for Haru. 7,500 7,500 3,000 3,000 8,500 8,500 7,500 7,500 12 Unearned Fees ...................................................... Fees Earned................................................... Completed work for Solana. 18 Cash ....................................................................... Unearned Fees .............................................. Received fees for work to be done for Jordan. 27 Unearned Fees ...................................................... Fees Earned................................................... Completed work for customer Haru. 31 No adjusting entries required. McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 138 Exercise 3-13 A continued b. Initial credit recorded in the Fees Earned account: July 1 Cash ....................................................................... Fees Earned................................................... Received fees for work to be done for Solana. 3,000 3,000 7,500 7,500 6 Cash ....................................................................... Fees Earned................................................... Received fees for work to be done for Haru. 12 18 No entry required. Cash ....................................................................... Fees Earned................................................... Received fees for work to be done for Jordan. 8,500 8,500 27 31 No entry required. Fees Earned .......................................................... Unearned Fees .............................................. Adjusted to reflect unearned fees for unfinished job for Jordan. 8,500 8,500 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.] McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 139 Exercise 3-14 A (30 minutes) a. Dec. 1 Supplies Expense ................................................. Cash ............................................................... Purchased supplies. 2,000 2,000 1,540 1,540 13,000 13,000 3,700 3,700 1,840 1,840 1,200 1,200 11,130 11,130 b. Dec. 2 Insurance Expense ............................................... Cash ............................................................... Paid insurance premiums. c. Dec. 15 Cash ....................................................................... Remodeling Fees Earned ............................. Received fees for work to be done. d. Dec. 28 Cash ....................................................................... Remodeling Fees Earned ............................. Received fees for work to be done. e. Dec. 31 Supplies ................................................................ Supplies Expense ......................................... Adjust expenses for unused supplies. f. Dec. 31 Prepaid Insurance ($1,540 - $340)....................... Insurance Expense ....................................... Adjust expenses for unexpired coverage. g. Dec. 31 Remodeling Fees Earned ................................... Unearned Remodeling Fees ........................ Adjusted revenues for unfinished projects ($13,000 + 3,700 - $5,570). McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 140 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. Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Balance Sheet Dr. Cr. Account Title Cash................................................................16,000 Accounts receivable..................................34,000 Office supplies............................................. 5,000 Trucks............................................................ 350,000 Accum. depreciation--Trucks.............. Land................................................................ 160,000 Accounts payable...................................... Interest payable........................................... Long-term notes payable........................ Common stock........................................... Retained earnings...................................... Dividends......................................................34,000 Delivery fees earned.................................. Depreciation expense--Trucks............40,000 Salaries expense ........................................ 110,000 Office supplies expense...........................15,000 Interest expense.......................................... 5,000 Repairs expense--Trucks......................10,000 Totals.............................................................. 779,000 Net income ................................................... Totals.............................................................. 16,000 34,000 (c) 80,000 24,000 5,000 100,000 105,000 202,000 34,000 263,000 (a) (c) (b) ______ 779,000 40,000 3,000 1,000 _____ 44,000 _____ 44,000 80,000 110,000 18,000 6,000 10,000 820,000 ______ 820,000 263,000 80,000 110,000 18,000 6,000 10,000 224,000 39,000 263,000 ______ 263,000 ______ 256,000 263,000 (b) 1,000 (a) 3,000 40,000 160,000 24,000 6,000 100,000 105,000 202,000 2,000 350,000 120,000 16,000 34,000 2,000 350,000 120,000 160,000 24,000 6,000 100,000 105,000 202,000 34,000 ______ ______ 596,000 557,000 ______ 39,000 596,000 596,000 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 141 Exercise 3-15B (Continued) 2. Closing entries Delivery Fees Earned ......................................... Income Summary ........................................ To close the revenue accounts. 263,000 263,000 224,000 80,000 110,000 18,000 6,000 10,000 39,000 39,000 34,000 34,000 Income Summary ............................................... Depreciation Expense--Trucks ................. Salaries Expense ........................................ Office Supplies Expense ............................ Interest Expense ......................................... Repairs Expense--Trucks ......................... To close the expense accounts. Income Summary ............................................... Retained Earnings ...................................... To close Income Summary. Retained Earnings .............................................. Dividends .................................................... To close the dividends account. Retained Earnings on the balance sheet Retained earnings, beginning balance............. Add: Net income ................................................ .............................................................................. Less: Dividends .................................................. Retained earnings, ending balance .................. $202,000 39,000 241,000 (34,000) $207,000 McGraw-Hill Companies, 2008 142 Solutions Manual, Chapter 3 Exercise 3-16C (30 minutes) 1. Adjusting entries Oct. 31 Rent Expense ......................................................... Rent Payable .................................................. To record accrued rent expense. 2,800 2,800 850 850 31 Rent Receivable ..................................................... Rent Earned .................................................... To record accrued rent income. 2. Subsequent entries without reversing entries Nov. 5 Rent Payable .......................................................... Rent Expense ......................................................... Cash ................................................................ To record payment of 2 months' rent. 2,800 2,800 5,600 1,700 850 850 8 Cash ........................................................................ Rent Receivable ............................................. Rent Earned .................................................... To record collection of 2 months' rent. 3. Subsequent entries with reversing entries Nov. 1 Rent Payable .......................................................... Rent Expense ................................................. To reverse accrual of rent expense. 2,800 2,800 850 850 5,600 5,600 1,700 1,700 1 Rent Earned ........................................................... Rent Receivable ............................................. To reverse accrual of rent income. 5 Rent Expense ......................................................... Cash ................................................................ To record payment of 2 months' rent. 8 Cash ........................................................................ Rent Earned .................................................... To record collection of 2 months' rent. McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 143 Exercise 3-17C (10 minutes) Reversing entries are appropriate for accounting adjustments (a) and (e) Sept. 1 Service Fees Earned .................................... Accounts Receivable ............................ To reverse accrued revenues. 6,000 6,000 3,400 3,400 1 Salaries Payable ........................................... Salaries Expense .................................. To reverse accrued salaries. McGraw-Hill Companies, 2008 144 Solutions Manual, Chapter 3 PROBLEM SET A Problem 3-1A (35 minutes) Part 1 Adjustment (a) Dec. 31 Office Supplies Expense ................................ 14,846 Office Supplies ......................................... To record cost of supplies used ($4,000 + $13,400 - $2,554). 14,846 Adjustment (b) 31 Insurance Expense .......................................... 11,440 Prepaid Insurance .................................... 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 2008 Cost $ 7,200 3,240 1,000 $11,440 11,440 Adjustment (c) 31 Salaries Expense (2 days x $1,960) ............... Salaries Payable ...................................... To record accrued but unpaid wages. 3,920 3,920 Adjustment (d) 31 Depreciation Expense--Building ................... 30,500 Accumulated Depreciation--Building ... To record annual depreciation expense [($960,000 - $45,000) / 30 years = $30,500] 30,500 Adjustment (e) 31 Rent Receivable ............................................ Rent Earned ........................................... To record earned but unpaid Dec. rent. 3,000 3,000 Adjustment (f) 31 Unearned Rent .............................................. Rent Earned ........................................... To record the amount of rent earned for November and December (2 x $2,800). McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 145 5,600 5,600 Problem 3-1A (Continued) Part 2 Cash Payment for (c) Jan. 6 Salaries Payable ........................................... Salaries Expense* ........................................ Cash ....................................................... To record payment of accrued and current salaries. *(3 days x $1,960) 3,920 5,880 9,800 15 Cash Payment for (e) Cash ............................................................... Rent Receivable .................................... Earned Rent ........................................... To record past due rent for two months. 6,000 3,000 3,000 McGraw-Hill Companies, 2008 146 Solutions Manual, Chapter 3 Problem 3-2A (90 minutes) Parts 1 and 2 Cash 34,000 Equipment 80,000 Unadj. Bal. Unadj. Bal. Accounts Receivable 0 (f) 7,500 Adj. Bal. 7,500 Unadj. Bal. Accumulated Depreciation-- Equipment Unadj. Bal. 15,000 (c) 13,200 Adj. Bal. 28,200 Accounts Payable Bal. Unadj. Bal. Adj. Bal. Teaching Supplies 8,000 (b) 2,800 26,000 5,200 Salaries Payable Unadj. Bal. Prepaid Insurance Unadj. Bal. 12,000 (a) Adj. Bal. 9,600 Prepaid Rent 3,000 (h) 0 (g) Adj. Bal. 0 400 400 2,400 Unearned Training Fees Unadj. Bal. 12,500 7,500 (e) 3,000 5,000 Adj. Bal. Unadj. Bal. Adj. Bal. Common Stock Bal. 80,000 Bal. Professional Library 35,000 Retained Earnings Bal. 10,000 Accumulated Depreciation-- Professional Library Unadj. Bal. 10,000 (d) 7,200 Adj. Bal. 17,200 Bal. Dividends 50,000 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 147 Problem 3-2A (Continued) Tuition Fees Earned Unadj. Bal. 123,900 Unadj. Bal. (f) Adj. Bal. 7,500 131,400 (h) Adj. Bal. Rent Expense 33,000 3,000 36,000 Training Fees Earned Unadj. Bal. 40,000 (e) Adj. Bal. 5,000 45,000 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 Depreciation Expense-- Equipment Unadj. Bal. 0 (c) 13,200 Adj. Bal. 13,200 Salaries Expense Unadj. Bal. 50,000 (g) 400 Adj. Bal. 50,400 Insurance Expense Unadj. Bal. 0 (a) 2,400 Adj. Bal. 2,400 Bal. Advertising Expense 6,000 Bal. Utilities Expense 6,400 McGraw-Hill Companies, 2008 148 Solutions Manual, Chapter 3 Problem 3-2A (Continued) Part 2 Adjustment (a) Dec. 31 Insurance Expense ...................................................... 2,400 Prepaid Insurance .................................................. To record the insurance expired. 2,400 Adjustment (b) 31 Teaching Supplies Expense ....................................... 5,200 Teaching Supplies ................................................. To record supplies used ($8,000 - $2,800). 5,200 Adjustment (c) 31 Depreciation Expense--Equipment ........................... 13,200 Accumulated Depreciation--Equipment .................... To record equipment depreciation. 13,200 Adjustment (d) 31 Depreciation Expense--Profess. Library .................. 7,200 Accumul. Depreciation--Profess. Library ................ To record professional library depreciation. 7,200 Adjustment (e) 31 Unearned Training Fees .............................................. 5,000 Training Fees Earned ............................................ To record 2 months' training fees earned that were collected in advance. 5,000 Adjustment (f) 31 Accounts Receivable ................................................... 7,500 Tuition Fees Earned............................................... To record tuition earned ($3,000 x 2 1/2 months). 7,500 Adjustment (g) 31 Salaries Expense ......................................................... 400 Salaries Payable..................................................... To record accrued salaries (2 days x $100 x 2 employees). 400 Adjustment (h) 31 Rent Expense ............................................................... 3,000 Prepaid Rent ........................................................... To record expiration of prepaid rent. 3,000 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 149 Problem 3-2A (Continued) Part 3 WELLS TECHNICAL INSTITUTE Adjusted Trial Balance December 31, 2008 Debit Credit 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 $ 17,200 28,200 26,000 400 7,500 80,000 10,000 131,400 45,000 . $345,700 McGraw-Hill Companies, 2008 150 Solutions Manual, Chapter 3 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 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 151 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 McGraw-Hill Companies, 2008 152 Solutions Manual, Chapter 3 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 ........... Add: Net income .................................... Less: Dividends ....................................... Retained earnings, Dec. 31, 2008 ........... $20,000 30,750 50,750 (16,000) $34,750 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 153 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 .................................................... 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 $14,000 1,300 2,050 $17,350 50,000 (5,000) 45,000 $62,350 McGraw-Hill Companies, 2008 154 Solutions Manual, Chapter 3 Problem 3-3A (Continued) Parts 2 and 3 LING REPAIRS For Year Ended December 31, 2008 No. Account Title Adjusted Trial Balance Dr. Cr. Closing Entries Dr. Cr. Post-Closing Trial Balance Dr. Cr. 101 Cash................................................... 14,000 124 Office supplies................................ 128 Prepaid insurance ........................ 14,000 1,300 2,050 50,000 5,000 14,000 600 13,000 20,000 (4) 16,000 (3) (4) 1,300 2,050 167 Equipment ....................................... 50,000 168 Accumulated depreciation-- 5,000 14,000 600 13,000 30,750 16,000 5,000 37,500 800 10,600 3,600 2,700 ______ 67,350 34,750 Equipment ..................................... 201 Accounts payable ......................... 210 Wages payable............................... 307 Common stock............................ 318 Retained earnings....................... 319 Dividends ....................................... 401 Repair fees earned..................... 612 Depreciation expense-- 16,000 90,950 (1) 5,000 37,500 800 10,600 3,600 2,700 _______ (2) _______ (3) 90,950 (2) (2) (2) (2) (2) (2) Equipment ................................... 623 Wages expense........................... 637 Insurance expense ..................... 640 Rent expense................................ 650 Office supplies expense............ 690 Utilities expense........................... 901 Income summary........................ 60,200 (1) 90,950 30,750 _______ ______ 197,900 197,900 67,350 Totals ............................................... 143,550 143,550 Closing entries (all dated December 31, 2008) (1) Repair Fees Earned ...................................... Income Summary .................................. To close the revenue account. 90,950 90,950 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 155 Problem 3-3A (Continued) (2) Income Summary ................................................. Depreciation Expense, Equipment .............. Wages Expense............................................. Insurance Expense ....................................... Rent Expense ................................................ Office Supplies Expense .............................. Utilities Expense ........................................... To close the expense accounts. Income Summary ................................................. Retained Earnings ........................................ To close the Income Summary account. Retained Earnings ................................................ Dividends ....................................................... To close the dividends account. 60,200 5,000 37,500 800 10,600 3,600 2,700 30,750 30,750 16,000 16,000 (3) (4) 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) McGraw-Hill Companies, 2008 156 Solutions Manual, Chapter 3 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 Owner invested in the business. 30,000 20,000 50,000 1,800 1,800 1,000 1,000 2,400 2,400 1,600 1,600 8,000 8,000 1,600 1,600 350 350 750 750 1,500 1,500 2 Rent Expense ................................................ 640 Cash ....................................................... 101 Paid one month's rent. 3 Office Supplies ............................................. 124 Cash ....................................................... 101 Acquired office supplies. 10 Prepaid Insurance ........................................ 128 Cash ....................................................... 101 Paid 12 months' premium in advance. 14 Salaries Expense .......................................... 622 Cash ....................................................... 101 Paid two weeks' salaries. 24 Cash ............................................................... 101 Commissions Earned ........................... 405 Collected commissions from airlines. 28 Salaries Expense .......................................... 622 Cash ....................................................... 101 Paid two weeks' salaries. 29 Repairs Expense .......................................... 684 Cash ....................................................... 101 Repaired the computer. 30 Telephone Expense ...................................... 688 Cash ....................................................... 101 Paid the telephone bill. 30 Dividends ...................................................... 319 Cash ....................................................... 101 Paid cash for dividends. McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 157 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 Cash .......................................................... Accounts receivable ................................ Office supplies ......................................... Prepaid insurance .................................... Computer equipment ............................... Accumulated depreciation-- .................. Computer equipment .............................. Salaries payable ....................................... Common stock ......................................... Retained earnings .................................... Dividends .................................................. Commissions earned .............................. Depreciation expense-- Computer equipment .............................. Salaries expense ...................................... Insurance expense .................................. Rent expense............................................ Office supplies expense .......................... Repairs expense ...................................... Telephone expense ................................. Totals ........................................................ Debit $27,000 0 1,000 2,400 20,000 $ 0 0 50,000 0 8,000 0 3,200 0 1,800 0 350 750 $58,000 Credit 1,500 $58,000 McGraw-Hill Companies, 2008 158 Solutions Manual, Chapter 3 Problem 3-4A (Continued) Part 4 Adjusting entries (a) Apr 30 Insurance Expense ............................................... 637 Prepaid Insurance .......................................... 128 To record expired insurance ($2,400/12 x 2/3). 133 133 400 400 500 500 420 420 1,750 1,750 (b) 30 Office Supplies Expense ...................................... 650 Office Supplies ............................................... 124 To record cost of supplies used ($1,000 - $600). (c) 30 Depreciation Exp--Computer Equipment ........... 612 Accumulated Depreciation-- Computer Equipment ................................. 168 To record depreciation. (d) 30 Salaries Expense ................................................... 622 Salaries Payable ............................................ 209 To record accrued salaries. (e) 30 Accounts Receivable ............................................ 106 Commissions Earned .................................... 405 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 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 159 Problem 3-4A (Continued) Part 5--continued ADVENTURE TRAVEL Statement of Retained Earnings For Month Ended April 30, 2008 Retained earnings, April 1, 2008 .................................... Plus: Net income ............................................................ Less: Dividends ............................................................... Retained earnings, April 30, 2008 .................................. $ 0 2,197 2,197 (1,500) $ 697 ADVENTURE TRAVEL Balance Sheet April 30, 2008 Assets Cash .................................................................................. Accounts receivable ....................................................... Office supplies ................................................................. Prepaid insurance ........................................................... Computer equipment ...................................................... $20,000 Accumulated depreciationComputer equipment ....... (500) Total assets ...................................................................... Liabilities Salaries payable .............................................................. Equity Common stock ................................................................ Retained earnings ........................................................... Total liabilities and equity .............................................. $27,000 1,750 600 2,267 19,500 $51,117 $ 420 50,000 697 $51,117 McGraw-Hill Companies, 2008 160 Solutions Manual, Chapter 3 Problem 3-4A (Continued) Part 6 Closing entries April 30 Commissions Earned ................................... 405 Income Summary .................................. 901 To close the revenue account. 9,750 9,750 7,553 500 3,620 133 1,800 400 350 750 2,197 2,197 1,500 1,500 30 Income Summary ......................................... 901 Depreciation ExpComputer Equip .... 612 Salaries Expense .................................. 622 Insurance Expense ............................... 637 Rent Expense ........................................ 640 Office Supplies Expense ...................... 650 Repairs Expense ................................... 684 Telephone Expense .............................. 688 To close the expense accounts. 30 Income Summary ......................................... 901 Retained Earnings ................................ 318 To close the Income Summary account. 30 Retained Earnings ........................................ 318 Dividends ............................................... 319 To close the dividends account. Part 7 ADVENTURE TRAVEL Post-Closing Trial Balance April 30, 2008 Debit Credit 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 ........................................................ $51,617 500 420 50,000 697 $51,617 $ McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 161 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 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 Acct. No. 106 Credit Balance 1,750 Acct. No. 124 Credit Balance 1,000 400 600 Acct. No. 128 Credit Balance 2,400 133 2,267 Acct. No. 167 Credit Balance 20,000 8,000 Explanation Adjusting Explanation Adjusting Explanation Adjusting Explanation Accounts Receivable PR Debit 1,750 Office Supplies PR Debit 1,000 Prepaid Insurance PR Debit 2,400 Computer Equipment PR Debit 20,000 Accumulated DepreciationComputer 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 McGraw-Hill Companies, 2008 162 Solutions Manual, Chapter 3 Problem 3-4A (Continued) Date April 1 Date April 30 30 Date April 30 30 Date April 24 30 30 Date April 30 30 Date April 14 28 30 30 Date April 30 30 Explanation Common Stock PR Retained Earnings PR Debit Acct. No. 307 Credit Balance 50,000 50,000 Acct. No. 318 Credit Balance 2,197 2,197 697 Acct. No. 319 Credit Balance 1,500 1,500 0 Acct. No. 405 Credit Balance 8,000 8,000 1,750 9,750 0 Acct. No. 612 Credit Balance 500 500 0 Acct. No. 622 Credit Balance 1,600 3,200 3,620 3,620 0 Acct. No. 637 Credit Balance 133 133 0 Acct. No. 640 Explanation Closing Closing Explanation Closing Explanation Adjusting Closing Debit 1,500 Dividends PR Debit 1,500 Commissions Earned PR Debit 9,750 Depreciation ExpenseComputer Equipment Explanation PR Debit Adjusting 500 Closing Explanation Salaries Expense PR Debit 1,600 1,600 420 Adjusting Closing Explanation Adjusting Closing Insurance Expense PR Debit 133 Rent Expense Date April 2 April 30 Date April 30 30 Explanation Closing PR Debit 1,800 Credit Balance 1,800 1,800 0 Office Supplies Expense Explanation PR Debit Adjusting 400 Closing Acct. No. 650 Credit Balance 400 400 0 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 163 Problem 3-4A (Concluded) Repairs Expense PR Acct. No. 684 Credit Balance 350 350 0 Acct. No. 688 Credit Balance 750 750 0 Acct. No. 901 Credit Balance 9,750 9,750 2,197 0 Date April 29 30 Explanation Closing Debit 350 Date April 30 30 Date April 30 30 30 Explanation Closing Explanation Closing Closing Closing Telephone Expense PR Debit 750 Income Summary PR Debit 7,553 2,197 Problem 3-5A (15 minutes) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. A C A A A A E F Z C 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. G E C C C E B Z E A McGraw-Hill Companies, 2008 164 Solutions Manual, Chapter 3 Problem 3-6AA (40 minutes) Part 1 Assume prepaid expenses are recorded as assets and unearned revenues as liabilities. Nov. 1 Prepaid Advertising ....................................... Cash .......................................................... Paid for future advertising. 1,800 1,800 2,460 2,460 3,600 3,600 3,000 3,000 7,950 7,950 600 600 410 410 2,100 2,100 1,000 1,000 3,300 3,300 1 Prepaid Insurance ........................................... Cash .......................................................... Paid insurance for one year. 30 Cash .................................................................. Unearned Service Fees ........................... Received fees in advance. Dec. 1 Prepaid Consulting Fees ............................... Cash .......................................................... Paid for future consulting. 15 Cash .................................................................. Unearned Service Fees ........................... Received fees in advance. 31 Advertising Expense ....................................... Prepaid Advertising ................................ To adjust prepaid advertising ($1,800 - $1,200). 31 Insurance Expense .......................................... Prepaid Insurance .................................... To adjust prepaid insurance ($2,460 x 2/12). 31 Unearned Service Fees .................................. Service Fees Earned ................................ To adjust unearned service fees ($3,600 - $1,500). 31 Consulting Fees Expense .............................. Prepaid Consulting Fees ......................... To adjust prepaid consulting fees ($3,000 x 1/3). 31 Unearned Service Fees ................................... Service Fees Earned ................................ To adjust unearned service fees. McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 165 Problem 3-6AA (Continued) Part 2 Assume prepaid expenses are recorded as expenses and unearned revenues as revenues. Nov. 1 Advertising Expense ....................................... Cash .......................................................... Paid for future advertising. 1,800 1,800 2,460 2,460 3,600 3,600 3,000 3,000 7,950 7,950 1,200 1,200 2,050 2,050 1 Insurance Expense .......................................... Cash .......................................................... Paid insurance for one year. 30 Cash .................................................................. Service Fees Earned ................................ Received fees in advance. Dec. 1 Consulting Fees Expense ............................... Cash .......................................................... Paid for future consulting. 15 Cash .................................................................. Service Fees Earned ................................ Received fees in advance. 31 Prepaid Advertising ........................................ Advertising Expense ............................... To adjust for prepaid advertising. 31 Prepaid Insurance ........................................... Insurance Expense .................................. To adjust for prepaid insurance ($2,460 x 10/12). 31 Service Fees Earned ....................................... Unearned Service Fees ........................... To adjust for unearned service fees. 1,500 1,500 2,000 2,000 31 Prepaid Consulting Fees ................................ Consulting Fees Expense ....................... To adjust for prepaid consulting fees ($3,000 x 2/3). 31 Service Fees Earned ....................................... Unearned Service Fees ........................... To adjust for unearned service fees ($7,950 - $3,300). 4,650 4,650 McGraw-Hill Companies, 2008 166 Solutions Manual, Chapter 3 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 .............................. Insurance expense for two months ..................................... Prepaid insurance as of December 31 ................................ Consulting fees expense (1/3 of total paid) ........................ Prepaid consulting fees ........................................................ Service fees earned for two months ($2,100 + $3,300) ...... Unearned service fees at 12/31 ($1,500 + $4,650) .............. 1,200 410 2,050 1,000 2,000 5,400 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. McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 167 Problem 3-7A (90 minutes) Part 1 ACE CONSTRUCTION CO. Work Sheet For Year Ended June 30, 2008 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.................................................. (c) 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.............................................................. (e) (h) (b) (f) (a) (g) Adjustments Dr. Cr. (a) (b) Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Balance Sheet Dr. Cr. 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 6,600 3,800 18,500 3,300 3,400 132,000 34,650 7,450 250 500 1,800 1,000 25,000 40,000 48,660 33,000 132,100 132,100 8,400 48,660 3,000 3,800 12,500 6,600 8,800 2,910 6,540 101,210 30,890 132,100 18,500 3,300 3,400 132,000 34,650 7,450 250 500 1,800 1,000 25,000 40,000 48,660 33,000 (c) (d) (h) (f) (e) (g) 8,400 650 250 500 1,800 1,000 8,400 1,800 250 3,800 500 6,600 1,000 650 23,000 _____ 23,000 ______ (d) 278,810 8,400 48,660 3,000 3,800 12,500 6,600 8,800 2,910 6,540 291,410 ______ 291,410 ______ 132,100 ______ 132,100 ______ ______ 190,200 159,310 ______ 30,890 190,200 190,200 McGraw-Hill Companies, 2008 168 Solutions Manual, Chapter 3 Problem 3-7A (Continued) Part 2. (a) Adjusting entries (all dated June 30, 2008) Supplies Expense .............................................. 6,600 Supplies ...................................................... To record consumption of supplies. Insurance Expense ............................................ 3,800 Prepaid Insurance ...................................... To record expiration of insurance. Depreciation Expense--Equipment................. 8,400 Accumulated Depreciation--Equipment ...... To record depreciation. Utilities Expense ................................................ Accounts Payable ...................................... To record accrued utilities costs. 650 650 6,600 (b) 3,800 (c) 8,400 (d) (e) Wages Expense ................................................. 1,800 Wages Payable ........................................... To record accrued wages. Rent Expense ..................................................... Rent Payable .............................................. To record remainder of annual rent. 500 1,800 (f) 500 (g) Property Taxes Expense ................................... 1,000 Property Taxes Payable ............................ To record additional property taxes. Interest Expense ................................................ Interest Payable ......................................... To record prior month's interest expense. 250 1,000 (h) 250 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 169 Problem 3-7A (Continued) Closing entries (all dated June 30, 2008) (1) Construction Fees Earned ........................... 132,100 Income Summary .................................. To close the revenue account. Income Summary ......................................... 101,210 Depreciation ExpenseEquipment ...... Wages Expense..................................... Interest Expense ................................... Insurance Expense ............................... Rent Expense ........................................ Supplies Expense ................................. Property Taxes Expense ...................... Repairs Expense ................................... Utilities Expense ................................... To close the expense accounts. Income Summary ......................................... Retained Earnings ................................ To close the Income Summary account. Retained Earnings ........................................ Dividends ............................................... To close the dividends account. 30,890 30,890 33,000 33,000 132,100 (2) 8,400 48,660 3,000 3,800 12,500 6,600 8,800 2,910 6,540 (3) (4) McGraw-Hill Companies, 2008 170 Solutions Manual, Chapter 3 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 .................... Add: Net income ............................................... Less: Dividends ................................................. Retained earnings, June 30, 2008 .................... $ 48,660 30,890 79,550 (33,000) $ 46,550 McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 171 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 ............................................................. 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 $ 18,500 3,300 3,400 $ 25,200 132,000 (34,650) 97,350 $122,550 McGraw-Hill Companies, 2008 172 Solutions Manual, Chapter 3 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. McGraw-Hill Companies, 2008 Solutions Manual, Chapter 3 173 ... View Full Document

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