HAPTER C 4
Accrual Accounting Concepts
Study Objectives
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Explain the revenue recognition principle and the matching principle. Differentiate between the cash basis and the accrual basis of accounting. Explain why adjusting entries are needed, and identify the major types of adjusting entries. Prepare adjusting entries for deferrals. Prepare adjusting entries for accruals. Describe the nature and purpose of the adjusted trial balance. Explain the purpose of closing entries. Describe the required steps in the accounting cycle. Understand the causes of differences between net income and cash provided by operating activities. Describe the purpose and the basic form of a worksheet.
Summary of Questions by Study Objectives and Blooms Taxonomy
Ite m 1. 2. 3. 4. 5. 6. 7. 8. 1. 2. 3. 1. 1. 2. SO BT Item SO BT Item SO BT Item SO BT Item SO BT
1 1 1 1 3 3 3 4 2, 9 3 3 4 1 1
C K C AP C C C K C C AN AP C K C AP
9. 10. 11. 12. 13. 14. 15.
4 4 4 4 1 1 5
C C K K C AN C
16. 17. 18. 19. 20. 21. 22.
Questions 5 K 5 AN 5 AP 4, 5 K 4, 5 K 5 C 5 C
23. 24. 25. 26. 27. 28. 29.
6 2 6 7 7 7 7
C C C K C C K
30. 31. 32. 33. 34. 35. 36.
7 K 8 K 8K 8 C 8 C 10* K 10* K
4. 5. 6. 2. 5. 6. 7. 8.
3. 1 4. 2, 4, 5, 9
Brief Exercises 4 AP 7. 4 AP 10. 6 4 AP 8. 5 AP 11. 6 4 AP 9. 6 AN 12. 6 Do It! Review Exercises 5 AP 3. 6 C 4. 7 Exercises 2, 9 AP 9. 4, 5 AP 13. 1, 4, 5, 6 2, 4, 10. 4, 5 AP 14. 7 AP 5, 9 2, 3, 9 C 11. 4, 5 AP 15. 4, 5, 6 3, 4, 12. 1, 4, 5, 16. 4, 5, 5 AN 6 AP 6
AP AP K AP
13. 14. 15.
7 7 8
K AP K
17. AN AP AN AP 18.
6 7
AP AP
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-1
Summary of Questions by Study Objectives and Blooms Taxonomy (Continued )
1. 2. 2, 4, 9 4, 5, 6 2, 4, 9 4, 5, 6 AP 3. 4. AP AP 3. 4. AP 4, 5, 6, 7 4, 5, 6, 7 4, 5, 6, 7 4, 5, 6, 7 Problems: Set A 5. 4, 5 AP AP 6. AP Problems: Set B 5. 4, 5 AP AP 6. AP 4, 5 AN 7. 4, 5, 6 8. 4, 5, 6, 7, 8 AP 4, 5 AN 7. 4, 5, 6 8. 4, 5, 6, 7, 8 AP
AP
1. 2.
AP
4-2
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
ASSIGNMENT CHARACTERIST ICS TABLE
Proble m Numbe r 1A Description Difficult y Level Time Allotted ( min.) Record transactions on accrual basis; convert revenue to cash receipts. Prepare adjusting entries, post to ledger accounts, and prepare an adjusted trial balance. Prepare adjusting entries, adjusted trial balance, and financial statements. Prepare adjusting entries and financial statements; identify accounts to be closed. Prepare adjusting entries. Prepare adjusting entries and a corrected income statement. Journalize transactions and follow through accounting cycle to preparation of financial statements. Complete all steps in accounting cycle. Record transactions on accrual basis; convert revenue to cash receipts. Prepare adjusting entries, post to ledger accounts, and prepare adjusted trial balance. Prepare adjusting entries, adjusted trial balance, and financial statements. Prepare adjusting entries and financial statements; identify accounts to be closed. Prepare adjusting entries. Prepare adjusting entries and a corrected income statement. Journalize transactions and follow through accounting cycle to preparation of financial statements. Complete all steps in accounting cycle. Simple 2030
2A 3A 4A 5A 6A 7A 8A 1B 2B
Simple Simple Moderate Moderate Moderate Moderate Moderate Simple Simple
4050 5060 4050 3040 3040 6070 7080 2030 4050
3B
Simple
5060
4B 5B 6B 7B 8B
Moderate Moderate Moderate Moderate Moderate
4050 3040 3040 6070 7080
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-3
A NSWERS TO QUESTIONS
1. (a) Under t he t im e period assumption, an accountant is required to determ ine t he effect of each accounting t ransaction on specific accounting periods. (b) An accounting t ime period t hat is one year in length is referred to as a fiscal y ear. 2. The t wo generally accepted accounting principles t hat pertain to adjust ing t he accounts are: The revenue recognit ion principle, which states t hat revenue should be recognized in t he t ime period in which it is earned. The m atching principle which states t hat efforts (expenses) be m atched wit h accomplishments (revenues) t hat t hey helped generate. The law firm should recognize t he revenue in April. The revenue recognition principle states t hat revenue should be recognized in t he accounting period in which it is earned. Expenses of $4,500 should be deducted from t he revenues in April. Under t he m atching p rinciple efforts (expenses) should be m atched wit h accomplishments (revenues). No, adjust ing entries are required by t he revenue recognition and m atching principles. The financial inform at ion in a t rial balance m ay not be up-to-date because: (1) Some events are not journalized daily because it is not useful or efficient to do so. (2) The expirat ion of some costs occurs wit h t he passage of t ime rat her t han as a r esult of r ecurring daily t ransactions. (3) Some item s m ay be unrecorded because t he t ransaction data are not known. The t wo categories of adjust ing entries are deferrals and accruals. Deferrals consist of r evenues and expenses paid before they are earned or incurred. Accruals consist of revenues and expenses earned or incurred prior to payment. In a prepaid expense adjust ing entry, expenses are debited and assets are credited. No. Depreciat ion is t he process of allocating t he cost of an asset to expense over it s useful l ife. Depreciation results in t he presentation of t he book value of t he asset, not it s m arket value. Depreciation expense is an expense account whose norm al balance is a debit. This account shows t he cost t hat has expired during t he current accounting period. Accumulated d epreciation is a contra asset account whose norm al balance is a credit. The balance in t his account is t he depreciation t hat has been recognized from t he date of acquisit ion to t he b alance sheet date. Equipment.................................................................................... Less: Accum ulated Depreciation..................................................... $15,000 9 ,000
3. 4. 5. 6.
7.
8. 9.
10.
11.
$6,000
12. 13.
4-4
In an unearned revenue adjust ing entry, liabilit ies are debited and revenues are credited. The sale of a t hree-year m aintenance contract on December 29, 2009 will have no effect on
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
the 2009 income statement but receipt of $100,000 on December 29, 2009 will increase an asset, cash, and a liability, unearned revenue. As Computer Technologies provides service to its customer during 2010, 2011, and 2012, the liability will decrease and revenue will be recognized. Accrual accounting rules require that revenue be recognized as it is earned rather than when cash is received.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-5
Questions Chapter 4 (Continued) 14. This promotion plan sounds like a bad idea for two reasons. (1) GAAP requires that the sale of a gift card be recorded as unearned revenue (a liability) rather than sales revenue. Revenue recognition is delayed until the gift card is used or expires. Mickeys plan will not help the company meet its target revenue unless customers use the cards by year-end. (2) Selling a $50 card for $40 will probably not help the company meet its target net income. Although this promotion may result in additional sales revenue as the cards are used, the income resulting from the cards will be much less than usual since they eliminate $10 of normal gross profit. 15. 16. 17. Asset and revenue. An asset is debited and revenue is credited. Expense and liability. An expense is debited and a liability is credited. Net income was understated $300 because prior to adjustment revenues are understated by $800 and expenses are understated by $500. The difference in this case is $300 ($800 $500). The entry is: Jan. 9 Salaries Payable..................................................................... Salaries Expense..................................................................... Cash.............................................................................. (a) Accrued revenues. (b) Unearned revenues. (c) Accrued expenses. (a) Salaries Payable. (b) Accumulated Depreciation. (c) Interest Expense. 1,100 4,900 6,000
18.
19.
(d) Accrued expenses or prepaid expenses. (e) Prepaid expenses. (f) Accrued revenues or unearned revenues. (d) Supplies Expense. (e) Service Revenue. (f) Service Revenue.
20.
21.
Disagree. An adjusting entry affects only one balance sheet account and one income statement account. Tootsie Roll reports Accounts Receivable. This suggests that it records revenue when it has delivered goods, even though it hasnt received payment. If it used a cash basis it wouldnt record revenue until cash was received, and it would therefore not establish receivables. Financial statements can be prepared from an adjusted trial balance because the balances of all accounts have been adjusted to show the effects of all financial events that have occurred during the accounting period. (a) Information presented on an accrual basis is useful because it reveals important information about the relationship between efforts and results. This information is useful in predicting future results. Trends in revenues and expenses are thus more meaningful. (b) Information presented on a cash basis is useful for predicting the future
22.
23.
24.
4-6
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
availability of cash. Cash basis financial statements provide useful information about a companys sources and uses of cash. 25. The amount shown in the adjusted trial balance column for an account equals the account balance in the ledger after adjusting entries have been journalized and posted.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-7
Questions Chapter 4 (Continued) 26. (1) (2) (3) (4) (Dr) Individual revenue accounts and (Cr) Income Summary. (Dr) Income Summary and (Cr) Individual expense accounts. (Dr) Income Summary and (Cr) Retained Earnings (for net income). (Dr) Retained Earnings and (Cr) Dividends.
27. Financial information is used by managers to direct and evaluate a companys performance. The sooner such information is made available; the sooner changes can be made to get a company back on track. A virtual close speeds up the reporting process and allows managers to react much faster to changing economic conditions. 28. Income Summary is a temporary account that is used in the closing process. The account is debited for expenses and credited for revenues. The difference, either net income or net loss, is then closed to Retained Earnings. 29. The post-closing trial balance contains only balance sheet accounts. Its purpose is to prove the equality of the permanent account balances that are carried forward into the next accounting period. 30. The accounts that will not appear in the post-closing trial balance are: Depreciation Expense; Dividends; and Service Revenue. 31. The steps that involve journalizing are (1) journalize the transactions, (2) journalize the adjusting entries, and (3) journalize the closing entries. 32. The three trial balances are the (1) trial balance, (2) adjusted trial balance, and (3) postclosing trial balance. 33. Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. Such action is undertaken to help a company meet target financial numbers. Quality of earnings indicates the level of full and transparent information that a company provides to users of financial statements. 34. Examples of ways a company can manage earnings include the following. Use of one-time items to prop up earnings numbers. A company may decide to sell property that has appreciated in value in order to record a gain on the sale. Such a gain will increase the current years net income but future income will probably not include a similar increase. Inflating revenue in the short-run to the detriment of the long-run. A company may implement changes in its promotion activities near the end of an accounting period to boost year-end revenues. Offering a special rebate or a twoforone package is likely to increase sales for the time the promotion runs but usually results in lower sales in subsequent periods. Savvy customers may even postpone purchases until special deals are available. Recording improper adjusting entries. Some adjusting entries require estimates and judgment to properly recognize revenue and match expenses. By recognizing revenue sooner and delaying the recognition of expenses, earnings can be overstated in early periods and understated in subsequent periods. This type of management is most prevalent with multi-year contracts and prepaid expenses.
4-8
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
*35. The worksheet is a working paper designed to make it easier to prepare adjusting entries and financial statements. *36. The columns of the worksheet from left to right are two columns each for the trial balance, adjustments, adjusted trial balance, income statement, and balance sheet.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-9
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 4-1 Cash (a) (b) (c) (d) (e) (f) $100 0 0 +800 2,500 0 Net Income $0 40 +1,300 0 0 600
BRIEF EXERCISE 4-2 (a) Prepaid Insuranceto recognize insurance expired during the period. (b) Depreciation Expenseto account for the allocation of the cost of an asset to expense during its useful life. (c) Unearned Service Revenueto account for unearned revenue t hat has been earned during the period. (d) Interest Payableto recognize interest accrued but unpaid on notes payable. BRIEF EXERCISE 4-3 Ite m (a) (1) Type of Adjustment Prepaid Expenses (2) Accounts Before Adjustment Assets Overstated Expenses Understated Assets Understated Revenues Understated
(b)
Accrued Revenues
4-10
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
(c) (d)
Accrued Expenses Unearned Revenues
Expenses Understated Liabilities Understated Liabilities Overstated Revenues Understated
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-11
BRIEF EXERCISE 4-4 Dec. 31 Advertising Supplies Expense.................... Advertising Supplies............................. 7,400 7,400
Advertising Supplies 8,800 12/31 12/31 Bal. 1,400 7,400
Advertising Supplies Expense 12/31 7,400
BRIEF EXERCISE 4-5 Dec. 31 Depreciation Expense................................... Accumulated Depreciation Equipment ............................................ 2,200 2,200
Depreciation Expense 12/31 2,200
Accumulated Depreciation Equipment 12/31 2,200
Balance Sheet: Equipment ................................................................. $22,000 Less: Accumulated Depreciation ........................ 2,200 BRIEF EXERCISE 4-6 J uly 1 Dec. 31 Prepaid Insurance......................................... Cash........................................................... Insurance Expense ($10,800 X 6/24)........... Prepaid Insurance.................................. 10,800 2,700
$19,800
10,800 2,700
Prepaid Insurance 7/1 10,800 12/31 2,700 12/31 Bal. 8,100
Insurance Expense 12/31 2,700
4-12
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 4-7 J uly 1 Dec. 31 Cash................................................................... Unearned Insurance Revenue............. Unearned Insurance Revenue.................... Insurance Revenue ($10,800 X 6/24)... 10,800 2,700 10,800 2,700
Unearned Insurance Revenue 12/31 2,700 7/1 10,800 12/31 Bal. 8,100 BRIEF EXERCISE 4-8 (a) Dec. 31 (b) (c) 31 31
Insurance Revenue 12/31 2,700
Interest Expense..................................... Interest Payable.............................. Accounts Receivable.............................. Service Revenue.............................. Salaries Expense..................................... Salaries Payable..............................
300 1,400 780
300 1,400 780
BRIEF EXERCISE 4-9
Account (a) Accounts Receivable (1) Type of Adjustment Accrued Revenues Prepaid Expenses Not required Prepaid Expenses Depreciation Expense (2) Related Account Service Revenue
(b ) (c) (d ) (e)
Prepaid Insurance Equipment Accum. Depreciation Equipment Notes Payable
Insurance Expense
Not required
4-13
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
(f) (g)
Interest Payable Unearned Service Revenue
Accrued Expenses Unearned Revenues
Interest Expense Service Revenue
4-14
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 4-10 ROSE CORPORATION Income Statement For the Year Ended December 31, 2010 Revenues Service revenue.................................................... Expenses Salaries expense................................................... Rent expense......................................................... Insurance expense............................................... Supplies expense.................................................. Depreciation expense......................................... Total expenses.............................................. Net income.....................................................................
$32,000 $13,000 3,500 1,800 1,200 1,000
20,500 $11,500
BRIEF EXERCISE 4-11 ROSE CORPORATION Retained Earnings Statement For the Year Ended December 31, 2010 Retained earnings, J anuary 1...................................................... Add: Net income............................................................................ Less: Dividends ............................................................................... Retained earnings, December 31................................................ $17,200 10,000 27,200 6,000 $21,200
BRIEF EXERCISE 4-12
Account (a) (b) (c) (d) (e) (f) (g) Accumulated D epreciation Depreciation Expense Retained Earnings Dividends Service Revenue Supplies Balance Sheet Income Statement Retained Earnings Statement and Balance Sheet Retained Earnings Statement Income Statement Balance Sheet
4-15
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
Accounts Payable
Balance Sheet
4-16
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 4-13 The accounts that will appear in the post-closing trial balance are: Accumulated Depreciation Retained Earnings Supplies Accounts Payable BRIEF EXERCISE 4-14 (a) J uly 31 Closing Entries Green Fees Revenue.............................. Income Summary ............................ (To close revenue account) Income Summary ................................... Salaries Expense............................. Maintenance Tax Expense............ Income Tax Expense...................... (To close expense accounts) Income Summary ................................... Retained Earnings .......................... (To close net income to retained earnings) Retained Earnings ................................. Dividends .......................................... (To close dividends to retained earnings) 16,000
16,000
11,900
8,400 2,500 1,000
4,100
4,100
1,000
1,000
(b) Retained Earnings 1,00 20,000 4,100 7/31 Bal.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
0
4-17
23,100
4-18
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 4-15 The proper sequencing of the required steps in the accounting cycle is as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. (c) (e) (i) (d) (h) (b) (g) (f) (a) Analyze business transactions. J ournalize the transactions. Post to ledger accounts. Prepare a trial balance. J ournalize and post adjusting entries. Prepare an adjusted trial balance. Prepare financial statements. J ournalize and post closing entries. Prepare a post-closing trial balance.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-19
SOLUTIONS TO DO IT! REVIEW EXERCISES DO IT! 4-1 1. Insurance Expense....................................................... Prepaid Insurance................................................. (To record insurance expired) Office Supplies Expense............................................. Office Supplies....................................................... (To record supplies used) Depreciation Expense................................................. Accumulated DepreciationOff. Equip .......... (To record monthly depreciation) Unearned Revenue...................................................... Service Revenue.................................................... (To record revenue for services provided) 300 300
2.
1,600
1,600
3.
500
500
4.
4,000
4,000
DO IT! 4-2 1. Salaries Expense.......................................................... Salaries Payable..................................................... (To record accrued salaries) Interest Expense........................................................... Interest Payable..................................................... (To record accrued interest) Accounts Receivable .................................................. Service Revenue.................................................... (To record revenue for service provided) 1,100 1,100
2.
200
200
3.
1,600
1,600
DO IT! 4-3 Income statement: Service Revenue, Utilities Expense Balance sheet: Accounts Receivable, Accumulated Depreciation, Notes Payable, Common Stock.
4-20
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
DO IT! 4-4 Dec. 31 Income Summary .................................................... 29,000 Retained Earnings ........................................... 29,000 (To close net income to retained earnings) Dec. 31 Retained Earnings .................................................. 22,000 Dividends ........................................................... 22,000 (To close dividends to retained earnings)
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-21
SOLUTIONS TO EXERCISES
EXERCISE 4-1 (a) Since the sales effort is not complete until the flight actually occurs, revenue should not be recognized until December. Southwest Airlines should recognize the revenue in December w hen the customer has been provided with the flight. (b) If Ultimate Electronics is reasonably certain of collection, revenue should be recognized at the time of sale. If the company has concerns over the collectibility of the accounts receivable, revenue should not be recognized u ntil the time that collection is r easonably assured. (c) Revenue should be recognized on a per game basis over the season from April through October. (d) Interest revenue should be accrued and recognized by RBC evenly over t he term of the loan. (e) Revenue should be recognized when the sweater is shipped to t he customer in September provided there is reasonable assurance of collectibility. EXERCISE 4-2 (a) (b) (c) (d) (e) (f) (g) (h) 8. 1. 7. 3. 6. 4. 2. 5. Going concern assumption. Economic entity assumption. Full disclosure principle. Monetary unit assumption. Materiality. Time period assumption. Matching principle. Cost principle.
EXERCISE 4-3 (a) (b) (c) (d) (e)
4-22
Revenue recognition principle. Time period assumption. No violation. Going concern assumption. Cost principle or conservatism.
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
(f)
Economic entity assumption.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-23
EXERCISE 4-4 $ 33,640 + 3,400 Cash basis earnings. Accounts receivable arise from sales that have been made, thus revenue must be recognized for balance outstanding at the end of the current year. 2,800 + 1,300 Accounts receivable collected in current year, for sales made in previous year must be deducted from earnings. Supplies on hand at year end should be set up as an asset rather than expensed, this increases earnings. Supplies on hand at the end of the previous year should 1,160 be expensed this year, this decreases earnings. 2,000 Wages owing at the end of the current year should be accrued, thus reducing earnings. Wages owed at the end of the previous year should not be + 2,400 deducted from the current years earnings, thus increasing earnings. 1,400 Other unpaid amounts owed at the end of the current year should be accrued, thus reducing earnings. Other unpaid amounts owed at the end of the previous + 1,600 $ 34,980 year should not be deducted from the current years earnings, thus increasing earnings. Accrual basis earnings.
EXERCISE 4-5 (a)
4-24
Cash
Accrual
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
Basis Service Revenue Operating Expenses Insurance Expense Net Income $22,000 13,000 2,600 $6,400
Basis $28,000 15,500 $12,500
(b) The accrual basis of accounting provides more useful information for decision makers because it recognizes revenues when earned and expenses when incurred.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-25
EXERCISE 4-6 (a) BOULDER COMPANY Income Statement For the Six Months Ended April 30, 2010 Revenues Repair services ($32,150 + $350).................. Expenses Income tax expense........................................ $10,000 Wages expense ($2,600 + $420)..................... 3,020 Rent expense ($1,225 $175)........................ 1,050 Utilities expense.............................................. 970 Depreciation expense [($9,200 5) X 6/12] 920 Advertising expense....................................... 375 Total expenses.......................................... Net income............................................................... (b) BOULDER COMPANY Balance Sheet April 30, 2010 Assets
$32,500
16,335 $16,165
Current Assets Cash................................................................ Accounts receivable.................................... Prepaid rent.................................................. Total current assets............................. Property, plant, and equipment Equipment ..................................................... Less: Accumulated depreciation ............. Total assets...........................................................
$27,780 350 175 9,200 920
$28,305 8,280 $36,585
Liabilities and Stockholders Equity Current Liabilities Wages payable.............................................. Stockholders equity Common stock.............................................. $20,000 Retained earnings....................................... 16,165 Total stockholders equity ........... Total liabilities and stockholders equity ....................................................
4-26
$
420
36,165 $36,585
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
EXERCISE 4-7 (a) Event 180-day financing for large customers Cash Accounting Revenue is recorded as cash is received. Accrual Accounting Revenue is recorded as it is earned. FunPlay records revenue (and a receivable) as soon as goods are shipped but may wait up to 180 days to receive cash. Payment to suppliers upon delivery of goods Cost of goods is recorded as an expense as soon as goods are delivered. Cost of goods is recorded as an asset until goods are shipped to customers. Cost of goods is recorded as an expense when goods are shipped to customers. Prepayment for 2 years of insurance coverage Insurance expense is Prepayment is recorded recorded as soon as payment is made. as an asset and recognized as an expense as time passes. One months salaries owed at year-end No salary expense is Salary expense is recorded until wages recorded as employees are paid. perform work. Amounts owed at year-end would
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-27
be recorded as a liability. Proper accrual accounting would require adjusting entries for prepaid insurance and accrued wages.
4-28
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
EXERCISE 4-7 (Continued) (b) Accrual accounting rules require that revenue be recognized as it is earned and expenses be matched with the revenue they help produce. Receipt or payment of cash does not influence the calculation of net income. FunPlay has made many sales during the year and thus shipped large amounts of goods with the result being positive net income. Since FunPlay has allowed its largest customers to take up to 180 days to pay, but was forced to pay cash for all purchases, it is likely that the company has very little cash at year-end. New companies frequently experience cash shortages because they extend credit to attract customers but are unable to receive credit from their suppliers. As time passes, the cash supply should increase as payments on accounts receivable come in and offset current purchases. EXERCISE 4-8 Ite m (a) (1) Type of Adjustment Accrued Revenues Prepaid Expenses Accrued Expenses Unearned Revenues Accrued Expenses (2) Accounts Before Adjustment Assets Understated Revenues Understated Assets Overstated Expenses Understated Expenses Understated Liabilities Understated Liabilities Overstated Revenues Understated Expenses Understated Liabilities Understated
4-29
(b) (c) (d) (e)
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
(f)
Prepaid Expenses
Assets Overstated Expenses Understated
4-30
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
EXERCISE 4-9 1. Mar. 31 Depreciation Expense ($280 X 3)............. Accumulated Depreciation Equipment ......................................... 31 31 31 31 Unearned Rent Revenue........................... Rent Revenue ($10,200 X 1/2)............ Interest Expense.......................................... Interest Payable................................... Supplies Expense......................................... Supplies ($3,000 $850)...................... 840 840 5,100 440 2,150 5,100 440 2,150
2. 3. 4. 5.
Insurance Expense ($400 X 3)................... 1,200 Prepaid Insurance............................... 1,200
EXERCISE 4-10 1. 2. 3. J an. 31 31 31 Accounts Receivable................................... Service Revenue.................................. Utilities Expense.......................................... Utilities Payable.................................. Depreciation Expense................................ Accumulated Depreciation Dental Equipment ............................ Interest Expense.......................................... Interest Payable................................... Insurance Expense ($24,000 12)............ Prepaid Insurance............................... Supplies Expense ($1,750 $550)............. Supplies.................................................. 680 520 400 400 500 2,000 1,200 500 2,000 1,200 680 520
31 4. 5. 31 31
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-31
EXERCISE 4-11 1. Oct. 31 Advertising Supplies Expense................. Advertising Supplies ($2,500 $500).................................... Insurance Expense...................................... Prepaid Insurance............................... Depreciation Expense................................ Accumulated Depreciation Office Equipment ............................. Unearned Service Revenue...................... Service Revenue.................................. Accounts Receivable................................... Service Revenue.................................. Interest Expense.......................................... Interest Payable................................... Salaries Expense.......................................... Salaries Payable................................... 2,000 2,000 100 50 50 800 200 70 1,400 800 200 70 1,400 100
2. 3.
31 31
4. 5. 6. 7.
31 31 31 31
EXERCISE 4-12 MARX CO. Income Statement For the Month Ended J uly 31, 2010 Revenues Service revenue ($5,500 + $700)........................... Expenses Wages expense ($2,300 + $300)............................. Utilities expense...................................................... Supplies expense ($900 $200)............................ Insurance expense.................................................. Depreciation expense............................................ Total expenses.................................................
4-32
$6,200 $2,600 800 700 350 150
4,600
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
Net income........................................................................ EXERCISE 4-13 Answer (a) Supplies balance = $1,000 Computation Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1)
$1,600
$ 950) 700) (650) $1,000)
(b) Total premium = $6,240
Total premium = Monthly premium X 12; $520 X 12 = $6,240
Purchase date = May 1, 2009 Purchase date:On J an. 31, there are 3 months coverage remaining ($520 X 3). Thus, the purchase date was 9 months earlier on May 1, 2009. (c) Salaries payable = $1,900 Cash paid Salaries payable (1/31/10) Less: Salaries expense Salaries payable (12/31/09) (d) Service revenue = $950 Service revenue Unearned revenue (1/31/10) $2,500 1,200 3,700 1,800 $1,900
$2,000 750 2,750 Cash received in J an. 1,800 Unearned revenue (12/31/09) $ 950
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-33
EXERCISE 4-14 J an. 31 Service Revenue.......................................... Income Summary ........................................ Income Summary ................................................ Salaries Expense......................................... Supplies Expense........................................ Insurance Expense..................................... Retained Earnings .............................................. Income Summary ........................................ 2,000 2,000
31
3,270
1,800 950 520 1,270
31
1,270
EXERCISE 4-15 (a) J uly 10 14 15 20 Supplies......................................................... Cash......................................................... Cash................................................................ Service Revenue.................................. Salaries Expense.......................................... Cash......................................................... Cash................................................................ Unearned Service Revenue............... Supplies Expense......................................... Supplies.................................................. Accounts Receivable................................... Service Revenue.................................. Salaries Expense.......................................... Salaries Payable................................... Unearned Service Revenue...................... Service Revenue.................................. 200 4,100 1,200 600
200 4,100 1,200 600
(b) J uly 31 31 31 31
750 500 1,200 900
750 500 1,200 900
4-34
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
EXERCISE 4-16 Aug. 31 31 31 31 Accounts Receivable.......................................... Service Revenue.......................................... Office Supplies Expense................................... Office Supplies............................................. Insurance Expense............................................. Prepaid Insurance...................................... Depreciation Expense....................................... Accumulated DepreciationOffice Equipment ................................................. Salaries Expense................................................. Salaries Payable.......................................... Unearned Rent Revenue................................... Rent Revenue............................................... 600 2,000 1,500 1,200 1,200 1,100 900 1,100 900 600 2,000 1,500
31 31
EXERCISE 4-17 IVY COMPANY Income Statement For the Year Ended August 31, 2010 Revenues Service revenue.................................................... Rent revenue......................................................... Total revenues.............................................. Expenses Salaries expense................................................... Rent expense......................................................... Office supplies expense...................................... Insurance expense............................................... Depreciation expense......................................... Total expenses.............................................. Net income.....................................................................
$34,600 14,100 $18,100 12,000 2,000 1,500 1,200
$48,700
34,800 $13,900
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-35
EXERCISE 4-17 (Continued) IVY COMPANY Retained Earnings Statement For the Year Ended August 31, 2010 Retained earnings, September 1, 2009....................................... Add: Net income............................................................................ Less: Dividends ............................................................................... Retained earnings, August 31, 2010............................................ $5,600 13,900 19,500 2,800 $16,700
IVY COMPANY Balance Sheet August 31, 2010 Assets
Current Assets Cash.......................................................................... Accounts receivable............................................. Office supplies....................................................... Prepaid insurance................................................ Total current assets...................................... Office equipment ................................................... Less: Accum. depreciationoffice equipment Total assets.....................................................
$10,900 9,400 500 2,500 $16,000 4,800
$23,300 11,200 $34,500
Liabilities and Stockholders Equity Current Liabilities Accounts payable.................................................. $ 5,800 Salaries payable.................................................... 1,100 Unearned rent revenue....................................... 900 Total current liabilities ............................... Stockholders equity Common stock........................................................ 10,000 Retained earnings................................................. 16,700 Total stockholders equity ....................... Total liabilities and stockholders equity $34,500
4-36
$ 7,800
26,700
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
EXERCISE 4-18 Aug. 31 Service Revenue............................................. Rent Revenue.................................................. Income Summary ................................... Income Summary ........................................... Salaries Expense.................................... Rent Expense........................................... Office Supplies Expense....................... Insurance Expense................................. Depreciation Expense........................... Income Summary ........................................... Retained Earnings ................................. Retained Earnings ......................................... Dividends ................................................. 34,600 14,100 34,800
48,700 18,100 12,000 2,000 1,500 1,200 13,900 2,800
31
31 31
13,900 2,800
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-37
SOLUTIONS TO PROBLEMS
PROBLEM 4-1A (a) 1. 2. 3. Cash ....................................................................... Accounts Receivable ................................... Unearned Ticket Revenue ............................... Ticket Revenue ............................................. Cash ....................................................................... Unearned Ticket Revenue ......................... Unearned Ticket Revenue ($44,000 $20,000) ........................................... Ticket Revenue ............................................. 4. 5. (b) 11,000 11,000 26,000 26,000 44,000 44,000 24,000 24,000
Accounts Receivable ......................................... 153,000 Dues Revenue ................................................ 153,000 Cash ....................................................................... 135,000 Accounts Receivable ($153,000 $18,000 ) 135,000
Cash received with respect to fees and dues 1. 3. 5. Collection of 2009 dues Sale of tickets Collection of 2010 dues $ 11,000 44,000 135,000 $190,000 2010 Bal. 20,000
Accounts Receivable 2009 Bal. 11,000 4. 153,000 1. 5. 2010 Bal. 18,000 Unearned Ticket Revenue 2009 Bal. 26,000 2. 26,000 3. 44,000 3. 24,000
4-38
11,000 135,000
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
Dues Revenue 4. 153,000 153,000 Ticket Revenue 2. 26,000 3. 24,000 2010 Bal.
2010 Bal. 50,000 Cash 1. 11,000 3. 44,000 5. 135,000 2010 Bal. 190,000
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-39
P ROBLEM 4-2A
(a) Date 1. 2010 June 30 30 Account Titles Supplies Expense .................................. Supplies ($2,000 $980) ................ Utilities Expense ................................... Utilities Payable ............................ Insurance Expense ............................... Prepaid Insurance ($2,640 12 months) .................. Unearned Service Revenue ................ Service Revenue ............................ Salaries Expense ................................... Salaries Payable ............................ Depreciation Expense .......................... Accumulated Depreciation Office Equipment ....................... Accounts Receivable ............................ Service Revenue ............................ Debit 1,020 1,020 180 180 220 220 3,900 3,900 1,250 1,250 250 250 3,500 3,500 Credit
2.
3.
30
4.
30
5.
30
6.
30
7.
30
(b) Cash 6/30 Bal. 6,850
4-40
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
Accounts Receivable 6/30 Bal. 7,000 6/30 3,500 6/30 Bal. 10,500 Prepaid Insurance
6/30 Bal. 2,640 6/30 6/30 Bal. 2,420 Supplies 6/30 Bal. 2,000 6/30 6/30 Bal. 980
220
1,020
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-41
PROBLEM 4-2A (Continued) Office Equipment 6/30 Bal. 15,000 Service Revenue 6/30 Bal. 8,000 6/30 3,900 6/30 3,500
Accumulated Depreciation Office Equipment 6/30 250 6/30 Bal. 250
Accounts Payable 6/30 Bal. 4,540
Utilities Payable 6/30 180 6/30 Bal. 180
Salaries Payable 6/30 1,250 6/30 Bal. 1,250
Unearned Service Revenue 6/30 3,900 6/30 Bal. 5,200 6/30 Bal. 1,300
Common Stock 6/30 Bal. 21,750
4-42
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
6/30 Bal. 15,400 Salaries Expense 6/30 Bal. 4,000 6/30 1,250 6/30 Bal. 5,250
6/30 Bal. 220
6/30
Utilities Expense 180
6/30 Bal. 180 Rent Expense 6/30 Bal. 2,000 6/30 Depreciation Expense 6/30 250 6/30 Bal. 250
Supplies Expense 1,020
6/30 Bal. 1,020
Insurance Expense 6/30 220
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-43
PROBLEM 4-2A (Continued) (c) WAEGELEIN CONSULTING Adjusted Trial Balance J une 30, 2010 Debit Cash...................................................................... Accounts Receivable........................................ Prepaid Insurance............................................ Supplies............................................................... Office Equipment .............................................. Accumulated DepreciationOffice Equipment ...................................................... Accounts Payable............................................. Utilities Payable............................................... Salaries Payable................................................ Unearned Service Revenue............................ Common Stock................................................... Service Revenue............................................... Salaries Expense............................................... Rent Expense..................................................... Depreciation Expense..................................... Insurance Expense........................................... Utilities Expense............................................... Supplies Expense.............................................. $6,850 10,500 2,420 980 15,000 $ 250 4,540 180 1,250 1,300 21,750 15,400 Credit
5,250 2,000 250 220 180 1,02 0 $44,67 0
$44,67 0
4-44
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
P ROBLEM 4-3A
(a) 1. May 31
Insurance Expense ................................ Prepaid Insurance ......................... Supplies Expense ................................... Supplies ($2,600 $1,050) ............. Depreciation ExpenseLodge ($3,600 X 1/12) ...................................... Accumulated Depreciation Lodge ............................................. Depreciation ExpenseFurniture ($3,000 X 1/12) ...................................... Accumulated Depreciation Furniture ...................................... Interest Expense .................................... Interest Payable [($36,000 X 7%) X 1/12] ............... Unearned Rent Revenue ..................... Rent Revenue ................................. Salaries Expense .................................... Salaries Payable .............................
300 1,550
300 1,550
2.
31
3.
31
300 300 250 250 210 210 2,500 2,500 750 750
31
4.
31
5.
31
6.
31
(b) Cash 5/31 Bal. 2,500
Supplies 5/31 Bal. 2,600 5/31 5/31 Bal. 1,050
1,550
P repaid Insurance 5/31 Bal. 1,800 5/31 5/31 Bal. 1,500
300
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-45
Land
5/31 Bal. 15,000
4-46
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-3A (Continued) Lodge 5/31 Bal. 70,000
Interest Payable 5/31 210 5/31 Bal. 210 Mortgage Payable 5/31 Bal. 36,000
Accumulated Depreciation Lodge 5/31 300 5/31 Bal. 300
Common Stock Furniture 5/31 Bal. 16,800 5/31 Bal. 60,000
Accumulated Depreciation Furniture 5/31 250 5/31 Bal. 250
Rent Revenue 5/31 Bal. 9,000 5/31 2,500 5/31 Bal. 11,500
Accounts Payable 5/31 Bal. 4,700
Salaries Expense 5/31 Bal. 3,000 5/31 750 5/31 Bal. 3,750
Unearned Rent Revenue 5/31 2,500 5/31 Bal. 3,300 5/31 Bal. 800
Utilities Expense 5/31 Bal. 800
Salaries Payable 5/31 750 5/31 Bal. 750
Advertising Expense 5/31 Bal. 500
Interest Expense
4-47
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
5/31
210
5/31 Bal. 210
Insurance Expense 5/31 300 5/31 Bal. 300
4-48
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-3A (Continued) Supplies Expense 1,550
5/31
5/31 Bal. 1,550
Depreciation LodgeLodge 5/31 300 5/31 Bal. 300
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-49
Depreciation Expense Furniture
5/31 5/31 Bal.
250 250
(c)
OLATHE HOTEL Adjusted Trial Balance May 31, 2010 Debit Cash.................................................................. Prepaid Insurance........................................ Supplies........................................................... Land ................................................................. Lodge................................................................ Accumulated DepreciationLodge......... Furniture ........................................................ Accumulated DepreciationFurniture .. Accounts Payable.......................................... Unearned Rent Revenue............................. Salaries Payable............................................ Interest Payable............................................ Mortgage Payable......................................... Common Stock............................................... Rent Revenue................................................. Salaries Expense........................................... Utilities Expense........................................... Advertising Expense.................................... Interest Expense........................................... Insurance Expense....................................... Supplies Expense.......................................... Depreciation ExpenseLodge.................. Depreciation ExpenseFurniture ........... $2,500 1,500 1,050 15,000 70,000 16,800 Credit
$ 300 250 4,700 800 750 210 36,000 60,000 11,500
3,750 800 500 210 300 1,550 300 25 0 $114,51 0
$114,51 0
4-50
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-3A (Continued) (d) OLATHE HOTEL Income Statement For the Month Ended May 31, 2010 Revenues Rent revenue.................................................. Expenses Salaries expense............................................ Supplies expense........................................... Utilities expense............................................ Advertising expense..................................... Insurance expense........................................ Depreciation expenselodge..................... Depreciation expensefurniture .............. Interest expense............................................. Total expenses........................................ Net income..............................................................
$11,500 $3,750 1,550 800 500 300 300 250 210
7,660 $ 3,840
OLATHE HOTEL Retained Earnings Statement For the Month Ended May 31, 2010 Retained earnings, May 1................................... Add: Net income.................................................. Retained earnings, May 31................................. $ 0 3,840 $3,840
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-51
PROBLEM 4-3A (Continued) OLATHE HOTEL Balance Sheet May 31, 2010 Assets $ 2,500 1,050 1,500 15,000 69,700 16,550 101,250 $106,300
Current Assets Cash............................................... Supplies........................................ Prepaid insurance..................... Total current assets.......... Property, plant, and equipment Land ............................................... Lodge............................................. Less: Accumulated deprec...... Furniture ..................................... Less: Accumulated deprec...... Total assets..........................
$
5,050
$70,000 300 16,800 250
Liabilities and Stockholders Equity Current Liabilities Accounts payable........................................... $ 4,700 Unearned rent revenue................................ 800 Salaries payable............................................. 750 Interest payable............................................. 210 Total current liabilities ........................ Long-term Liabilities Mortgage payable.......................................... Total liabilities ....................................... Stockholders equity Common stock................................................ 60,000 Retained earnings ......................................... 3,840 Total stockholders equity ............ Total liabilities and stockholders equity ..................................................... (e) The following accounts would be closed:
Rent Revenue, Advertising Expense,
4-52
$
6,460
36,000 $ 42,460
63,840 $106,300
Salaries Interest
Expense, Utilities Expense, Insurance
Expense, Expense,
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
Supplies Expense, Depreciation ExpenseLodge, Depreciation ExpenseFurniture.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-53
P ROBLEM 4-4A
(a) Sept. 30 30 30 30 30 30 30
Accounts Receivable ................................... Dues Revenue ....................................... Rent Expense ................................................ Prepaid Rent ......................................... Supplies Expense ......................................... Supplies .................................................. Depreciation Expense ................................ Accum. DepreciationEquipment .. Interest Expense .......................................... Interest Payable ................................... Unearned Rent Revenue ........................... Rent Revenue ....................................... Salaries Expense .......................................... Salaries Payable ................................... FOUR OAKS GOLF INC. Income Statement For the Quarter Ended September 30, 2010
600 600 900 900 840 840 350 350 50 200 200 600 600 50
(b)
Revenues Dues revenue .................................................. Rent revenue .................................................. Total revenues ........................................ Expenses Salaries expense ............................................ Rent expense ................................................... Supplies expense ........................................... Utilities expense ............................................ Depreciation expense ................................... Interest expense ............................................. Total expenses........................................
4-54
$14,400 600 $15,000 9,400 1,800 840 510 350 50 12,950
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
Net income..............................................................
$ 2,050
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-55
PROBLEM 4-4A (Continued) FOUR OAKS GOLF INC. Retained Earnings Statement For the Quarter Ended September 30, 2010 Retained earnings, J uly 1, 2010............................................. Add: Net income....................................................................... Less: Dividends ......................................................................... Retained earnings, September 30, 2010............................... FOUR OAKS GOLF INC. Balance Sheet September 30, 2010 Assets $ 0 2,050 2,050 600 $1,450
Current Assets Cash................................................................. Accounts receivable.................................... Supplies.......................................................... Prepaid rent.................................................. Total current assets............................. Property, Plant and Equipment Equipment ..................................................... Less: Accumulated depreciation equipment .......................................... Total assets............................................
$ 6,700 1,000 360 900 15,000 350
$ 8,960
14,650 $23,610
Liabilities and Stockholders Equity Current Liabilities Notes payable................................................ $ 5,000 Accounts payable......................................... 1,710 Unearned rent revenue.............................. 800 Salaries payable........................................... 600 Interest payable........................................... 50 Total current liabilities ...................... Stockholders equity Common stock.............................................. 14,000 Retained earnings........................................ 1,450 Total stockholders equity ..............
4-56
$8,160
15,450
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
Total liabilities and stockholders equity ...................................................
$23,610
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-57
PROBLEM 4-4A (Continued) (c) The following accounts would be closed: Dues Revenue, Rent Revenue, Salaries Expense, Rent Expense, Utilities Expense, Depreciation Expense, Supplies Expense, Interest Expense, Dividends. (d) Interest of 12% per year equals a monthly rate of 1%; monthly interest is $50 ($5,000 X 1%). Since total interest expense is $50, the note has been outstanding one month.
4-58
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
P ROBLEM 4-5A
1.
Dec. 31
Insurance Expense ...................................... Prepaid Insurance ............................... [($9,600 3) = $3,200 [ ($7,200 2) = 3,600 $6,800 ] Unearned Subscription Revenue ............ Subscription Revenue ........................ [Oct. 280 X $30 X 3/12 =......$2,100 [ Nov. 300 X $30 X 2/12 =......1,500 [ Dec. 400 X $30 X 1/12 =......1,000 $4,600 ] Interest Expense .......................................... Interest Payable ($40,000 X 7% X 3/12) .........................
6,800 6,800
2.
Dec. 31
4,600 4,600
3.
Dec. 31
700 700
4.
Dec. 31
Salaries Expense .......................................... Salaries Payable ................................... [5 X $600 X 3/5 = $1,800 [ 3 X $700 X 3/5 = 1,260 $3,060 ]
3,060 3,060
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-59
PROBLEM 4-6A
(a) 1. J une 2. 3.
30 Travel Court Rental Revenue..... Unearned Rental Revenue. 30 Supplies Expense........................... Supplies ($8,200 $1,800).... 30 Insurance Expense ($14,400 X 3/12)............................. Prepaid Insurance............... 30 Advertising Expense...................... Repairs Expense............................. Utilities Expense............................ Accounts Payable................. 30 Wages Expense ($300 X 2)............. Wages Payable....................... 30 Interest Expense ($12,000 X 8% X 2/12)................... Interest Payable .................. 30 Income Tax Expense...................... Income Tax Payable.............
55,000 6,400
55,000 6,400
3,600 110 4,450 215 600
3,600
4.
4,775 600
5. 6.
160 13,400
160 13,400
7.
4-60
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-6A (Continued) (b) HAPPY CAMPER TRAVEL COURT Income Statement For the Quarter Ended J une 30, 2010 Revenues Travel court rental revenues ($216,000 $55,000) $161,000 Expenses Wages expense ($80,500 + $600)......................... $81,100 Income tax expense.............................................. 13,400 Repairs expense ($4,000 + $4,450)..................... 8,450 Supplies expense.................................................. 6,400 Advertising expense ($3,800 + $110)................. 3,910 Insurance expense............................................... 3,600 Depreciation expense.......................................... 2,700 Utilities expense ($900 + $215).......................... 1,115 Interest expense.................................................... 160 Total expenses....................................................... 120,835 Net income.............................................................. $ 40,165 (c) The generally accepted accounting principles pertaining to the income statement not recognized by Kristen were the revenue recognition principle and the matching principle. The revenue recognition principle states that revenue is recognized when it is earned. The cash payments of $55,000 for summer rentals have not been earned and, therefore, should not be reported as income for the quarter ended J une 30. The matching principle dictates that efforts (expenses) be matched with accomplishments (revenue) whenever it is reasonable and practi cable to do so. This means that the expenses should include amounts incurred in J une but not paid until J uly, and any other costs related to the operations of the business during the period AprilJ une. The difference in reported expenses was $28,935 ($120,835 $91,900). The overstatement of revenues ($55,000) plus the under-statement of expenses ($28,935) equals the difference in
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-61
reported income of $83,935 ($124,100 $40,165).
4-62
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
P ROBLEM 4-7A
(a), (c) & (e) 11/30 Cash 11/1 Bal. 2,790 11/8 11/10 1,500 11/20 11/12 1,700 11/22 11/29 550 11/25 11/30 Bal. 1,370 1,220 2,500 450 1,000 250 11/30 Bal. 750
Accounts Receivable 11/1 Bal. 2,910 11/10 1,500 11/27 900 11/30 Bal. 2,310
Supplies 11/1 Bal. 1,120 11/30 11/17 1,300 11/30 Bal. 1,100
1,320
Store Equipment 11/1 Bal. 10,000 11/15 4,000 11/30 Bal. 14,000
Accumulated Depreciation 11/1 Bal. 500
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-63
11/8 Accounts Payable 11/20 2,500 11/1 Bal. 2,300 11/15 4,000 11/17 1,300 11/30 Bal. 5,100 Unearned Service Revenue 300 11/1 Bal. 400 11/29 550 11/30 Bal. 650
620 11/1 Bal. 620 11/30 480 11/30 Bal. 480
Common Stock 11/1 Bal. 10,000 11/30 Bal. 10,000
11/30
Retained Earnings 11/1 Bal. 3,000 11/30 Bal. 3,000
Salaries Payable
4-64
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-7A (Continued) Service Revenue 11/12 11/27 11/30
1,700 900 300
11/30 Bal. 2,900
Depreciation Expense 11/30 250 11/30 Bal. 250
Supplies Expense 11/30 1,320 11/30 Bal. 1,320
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-65
Salaries Expense 11/8 600 11/25 1,000 11/30 480 11/30 Bal. 2,080
11/22
Rent Expense 450
11/30 Bal. 450
4-66
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-7A (Continued) (b) Date Nov. 8 Account Titles General J ournal Debit Credit Salaries Payable............................................. 620 Salaries Expense............................................ 600 Cash........................................................... Cash................................................................... 1,500 Accounts Receivable.............................. Cash................................................................... 1,700 Service Revenue..................................... Store Equipment ............................................ 4,000 Accounts Payable................................... Supplies............................................................ 1,300 Accounts Payable................................... Accounts Payable........................................... 2,500 Cash........................................................... Rent Expense................................................... 450 Cash........................................................... Salaries Expense............................................ 1,000 Cash........................................................... Accounts Receivable...................................... 900 Service Revenue..................................... Cash................................................................... 550 Unearned Service Revenue..................
4-67
1,220
10
1,500
12
1,700
15
4,000
17
1,300
20
2,500
22
450
25
1,000
27
900
29
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
550
4-68
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-7A (Continued) (d) & (f) MONTANA EQUIPMENT REPAIR Trial Balances November 30, 2010 Before Adjustment Dr. Cash............................................ Receivable.............. Accounts Supplies..................................... Store Equipment ..................... Accumulated Depreciation ... Accounts Payable.................... Unearned Service Revenue.. Salaries Payable...................... Common Stock......................... Retained Earnings .................. Service Revenue...................... Salaries Expense..................... Rent Expense............................ Supplies Expense.................... Depreciation Expense............ $1,370 2,310 2,420 14,000 Cr. After Adjustment Dr. $1,370 2,310 1,100 14,000 Cr.
$ 500 5,100 950 10,000 3,000 2,600
1,600 450
$22,15 0
$22,15 0
2,080 450 1,320 250 $22,88 0
$ 750 5,100 650 480 10,000 3,000 2,900
$22,88 0
(e)
Nov. 30
1. Supplies Expense.......................................... 1,320 Supplies ($2,420 $1,100).................... 2. Salaries Expense........................................... Salaries Payable.................................... 3. Depreciation Expense................................. Accum. Depr.Store Equipment ...... 480
1,320
30
480
30
250
250
4-69
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
30
4. Unearned Service Revenue........................ Service Revenue....................................
300
300
4-70
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-7A (Continued) (g) MONTANA EQUIPMENT REPAIR Income Statement For the Month Ended November 30, 2010 Revenues Service revenue............................................. Expenses Salaries expense............................................ Supplies expense........................................... Rent expense................................................... Depreciation expense................................... Total expenses........................................ Net loss.....................................................................
($2,900) $2,080 1,320 450 250
4,100) ($1,200)
MONTANA EQUIPMENT REPAIR Retained Earnings Statement For the Month Ended November 30, 2010 Retained earnings, November 1........................ Less: Net loss......................................................... Retained earnings, November 30...................... $3,000 1,200 $1,800
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-71
PROBLEM 4-7A (Continued)
MONTANA EQUIPMENT REPAIR Balance Sheet November 30, 2010 Assets
Current assets Cash..................................................................... $ 1,370 Accounts receivable......................................... 2,310 Supplies.............................................................. 1,100 Total current assets................................. Property, plant and equipment Store equipment ............................................... 14,000 Less: Accumulated depreciationstore equipment .............................................. 750 Total assets................................................. Liabilities and Stockholders Equity Current liabilities Accounts payable............................................. $ 5,100 Unearned service revenue............................. 650 Salaries payable................................................ 480 Total current liabilities ........................... Stockholders equity Common stock................................................... 10,000 Retained earnings............................................ 1,800 Total stockholders equity ................. Total liabilities and stockholders equity ........................................................
$ 4,780
13,250 $18,030
$ 6,230
11,800 $18,030
4-72
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-8A
(a) Date J uly 1 1 Account Titles
General J ournal Debit Credit 11,000 Cash..................................................................... 11,000 Common Stock.......................................... Equipment ......................................................... 9,000 Cash............................................................. Accounts Payable..................................... Cleaning Supplies............................................ 900 Accounts Payable..................................... Prepaid Insurance........................................... 1,800 Cash............................................................. Accounts Receivable....................................... 3,200 Service Revenue....................................... Accounts Payable............................................ 1,500 Cash............................................................. Salaries Expense.............................................. 2,000 Cash............................................................. Cash..................................................................... 1,400 Accounts Receivable............................... Accounts Receivable....................................... 2,500 Service Revenue.......................................
2,000 7,000
3
900
5
1,800
12
3,200
18
1,500
20
2,000
21
1,400
25
2,500
4-73
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
31
Gas & Oil Expense........................................... 260 Cash............................................................. Dividends ........................................................... 600 Cash.............................................................
260
31
600
4-74
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-8A (Continued) (b), (e) & (h) Cash 7/1 11,000 7/1 7/21 1,400 7/5 7/18 7/20 7/31 7/31 7/31 Bal. 4,240 Accumulated Depreciation Equipment 2,000 1,800 1,500 2,000 260 600 7/18 7/31 250 7/31 Bal. 250
Accounts Payable 1,500 7/1 7,000 7/3 900 7/31 Bal. 6,400 Salaries Payable 7/31 400 7/31 Bal. 400
Accounts Receivable 7/12 3,200 7/21 1,400 7/25 2,500 7/31 1,700 7/31 Bal. 6,000
Cleaning Supplies 7/3 900 7/31 540 7/31 Bal. 360
Common Stock 7/1 11,000 7/31 Bal. 11,000
Prepaid Insurance 7/5 1,800 7/31 150 7/31 Bal. 1,650
7/31
Retained Earnings 600 7/31 3,800 7/31 Bal. 3,200
7/1
Equipment 9,000 7/31
7/31 Bal. 9,000
Dividends 600 7/31
600
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-75
7/31 7/31
Income Summary 3,600 7/31 7,400 3,800 7/31 Bal. 0
7/31
Service Revenue 7,400 7/12 7/25 7/31
3,200 2,500 1,700
7/31 Bal. 0
4-76
Copyright 2009 John Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-8A (Continued) Gas & Oil Expense 7/31 260 7/31 7/31 Bal. 0 260
Cleaning Supplies Expense 7/31 540 7/31 540 7/31 Bal. 0
Depreciation Expense 7/31 250 7/31 250 7/31 Bal. 0 Insurance Expense 7/31 150 7/31 150 7/31 Bal. 0
Salaries Expense 7/20 2,000 7/31 2,400 7/31 400 7/31 Bal. 0
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-77
PROBLEM 4-8A (Continued) (c) & (f) CARDINAL WINDOW WASHING INC. Trial Balance J uly 31, 2010 Before Adjustment Debit Cash.................................................... Accounts Receivable...................... Cleaning Supplies........................... Prepaid Insurance.......................... Equipment ........................................ Accumulated Depreciation Equipment ..................................... Accounts Payable............................ Salaries Payable.............................. Common Stock................................. Dividends .......................................... Service Revenue.............................. Salaries Expense............................. Gas & Oil Expense.......................... Depreciation Expense.................... Insurance Expense......................... Cleaning Supplies Expense.......... $4,240 4,300 900 1,800 9,000 Credit After Adjustment Debit $4,240 6,000 360 1,650 9,000 Credit
250 $6,400 $6,400 40 11,000 0 600 600 11,000 5,700 2,000 2,400 7,400 260 260 250 150 540 $25,45 $23,10 $23,10 0 0 0 $25,45 0
4-78
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-8A (Continued) (d) Date 1. J uly 31 2. 31 General J ournal Account Titles Accounts Receivable..................................... Service Revenue....................................... Depreciation Expense................................... Accumulated Depreciation Equipment ........................................................ Insurance Expense ($1,800 X 1/12)............. Prepaid Insurance................................... Cleaning Supplies Expense ($900 $360). Cleaning Supplies.................................... Salaries Expense............................................ Salaries Payable.......................................
Debi t 1,70 0 250
Credit 1,700
250
3.
31
150 540 400
150
4.
31
540
5.
31
400
(g)
CARDINAL WINDOW WASHING INC. Income Statement For the Month Ended J uly 31, 2010 Revenues Service revenue............................................... Expenses Salaries expense.............................................. Cleaning supplies expense........................... Gas & oil expense............................................ Depreciation expense.................................... Insurance expense.......................................... Total expenses.......................................... Net income................................................................
$7,400 $2,400 540 260 250 150
3,600 $3,800
4-79
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-80
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-8A (Continued) (g) CARDINAL WINDOW WASHING INC. Retained Earnings Statement For the Month Ended J uly 31, 2010 Retained earnings, J uly 1................................... Add: Net income.................................................. Less: Dividends .................................................... Retained earnings, J uly 31................................ $ 0 3,800 3,800 600 $3,200
CARDINAL WINDOW WASHING INC. Balance Sheet J uly 31, 2010 Assets
Current assets Cash................................................................... Accounts receivable...................................... Cleaning supplies.......................................... Prepaid insurance......................................... Total current assets.............................. Property, plant, and equipment Equipment ....................................................... Less: Accumulated depreciation .............. Total assets..............................................
$ 4,240 6,000 360 1,650 9,000 250
$12,250 8,750 $21,000
Liabilities and Stockholders Equity Current liabilities Accounts payable........................................... $ 6,400 Salaries payable............................................. 400 Total current liabilities ........................ Stockholders equity Common stock................................................ 11,000 Retained earnings......................................... 3,200 Total stockholders equity .............. Total liabilities and stockholders equity ....................................................
$ 6,800
14,200 $21,000
4-81
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-82
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-8A (Continued) (h) Date J uly 31 31 General J ournal Account Titles and Explanation Service Revenue........................................... Income Summary ................................. Income Summary ......................................... Salaries Expense.................................. Depreciation Expense......................... Insurance Expense.............................. Cleaning Supplies Expense............... Gas & Oil Expense............................... Income Summary ......................................... Retained Earnings ............................... Retained Earnings ....................................... Dividends ...............................................
Debit 7,400
Credit 7,400
3,600
2,400 250 150 540 260
31
3,800 3,800 600 600
31
(i)
CARDINAL WINDOW WASHING INC. Post-Closing Trial Balance J uly 31, 2010 Debit Cash...................................................................... Accounts Receivable........................................ Cleaning Supplies............................................. Prepaid Insurance............................................ Equipment .......................................................... Accumulated DepreciationEquipment .... Accounts Payable............................................. Salaries Payable................................................ Common Stock................................................... Retained Earnings ............................................ $4,240 6,000 360 1,650 9,000 Credit
$ 250 6,400 400 11,000 3,20
4-83
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
$21,25 0
0 $21,25 0
4-84
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-1B (a)
1. Cash......................................................................... Accounts Receivable..................................... 2. Unearned Fees Revenue.................................... Fees Revenue.................................................. 3. Cash......................................................................... Unearned Fees Revenue.............................. Unearned Fees Revenue ($40,000 $17,000)... Fees Revenue..................................................
6,000 18,000 40,000 23,000
6,000 18,000 40,000 23,000
4. Accounts Receivable........................................... 121,000 Fees Revenue ($162,000 $18,000 $23,000).................... 121,000 5. Cash......................................................................... 101,000 Accounts Receivable ($121,000 $20,000) 101,000 (b) Cash received with respect to fees: 1. Collection of accounts receivable.............. 3. Gift certificates ............................................... 5. Partial collection of fees receivable.......... T-accounts (not required) Accounts Receivable Bal. 6,000 4. Bal. 121,000 1. 5. 20,000 Fees Revenue 2. 18,000 3. 23,000 4. 121,000 Bal. 162,000
4-85
$6,000 40,000 101,000 $147,000
6,000 101,000
Unearned Fees Revenue Bal. 18,000 2. 18,000 3. 40,000 3. 23,000 Bal. Cash 6,000 40,000 101,000 147,000 17,000
1. 3. 5. Bal.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-2B (a) Date 2010 1. May 31 2. 31 Account Titles Supplies Expense..................................... Supplies.............................................. Travel Expense......................................... Travel Payable.................................. Insurance Expense.................................. Prepaid Insurance ($3,600 36 months)..................... Unearned Service Revenue................... Service Revenue ($4,000 $1,500). Salaries Expense...................................... Salaries Payable [(3/5 X $600) X 2 employees]....... Depreciation Expense............................ Accumulated Depreciation Office Furniture ........................... Accounts Receivable............................... Service Revenue............................... Debit 500 500 260 260 100 100 2,500 2,500 720 720 200 200 2,400 2,400 Credit
3.
31
4.
31
5.
31
6.
31
7.
31
(b) Cash 5/31 Bal. 7,500 5/31 Bal. 3,000 5/31 2,400 5/31 Bal. 5,400
Accounts Receivable
4-86
Prepaid Insurance
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
5/31 Bal. 3,600 5/31 5/31 Bal. 3,500
100
Supplies 5/31 Bal. 2,500 5/31 5/31 Bal. 2,000
500
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-87
PROBLEM 4-2B (Continued) Office Furniture 5/31 Bal. 12,000 Accumulated Depreciation Office Furniture 5/31 200 5/31 Bal. 200 Accounts Payable 5/31 Bal. 3,500 Rent Expense 5/31 Bal. 1,500 5/31 Bal. 7,500 5/31 2,500 5/31 2,400 5/31 Bal. 12,400 Salaries Expense 5/31 Bal. 4,000 5/31 720 5/31 Bal. 4,720
Travel Payable 5/31 260 5/31 Bal. 260 Depreciation Expense 5/31 200 5/31 Bal. 200 Salaries Payable 5/31 720 5/31 Bal. 720 Insurance Expense 5/31 100 5/31 Bal. 100 Unearned Service Revenue 5/31 2,500 5/31 Bal. 4,000 5/31 Bal. 1,500 5/31
Travel Expense 260
5/31 Bal. 260 Common Stock 5/31 Bal. 19,100 5/31 Service Revenue
4-88
Supplies Expense 500
5/31 Bal. 500
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-89
PROBLEM 4-2B (Continued) (c) GOREN CONSULTING Adjusted Trial Balance May 31, 2010
Debit Cash...................................................................... Accounts Receivable........................................ Prepaid Insurance............................................ Supplies............................................................... Office Furniture ................................................ Accumulated DepreciationOffice Furniture ......................................................... Accounts Payable............................................. Travel Payable................................................... Salaries Payable................................................ Unearned Service Revenue............................ Common Stock................................................... Service Revenue............................................... Salaries Expense............................................... Rent Expense..................................................... Depreciation Expense..................................... Insurance Expense........................................... Travel Expense.................................................. Supplies Expense.............................................. $7,500 5,400 3,500 2,000 12,000
Credit
4,720 1,500 200 100 260 50 0 $37,68 0
$ 200 3,500 260 720 1,500 19,100 12,400
$37,68 0
4-90
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
P ROBLEM 4-3B
(a) 1. Aug. 31
Insurance Expense ($450 X 3) ............ Prepaid Insurance ........................ Supplies Expense ($4,300 $700) ...... Supplies ........................................... Depreciation ExpenseCottages ($4,400 X 1/4) ....................................... Accum. Depr.Cottages .............. Depreciation ExpenseFurniture ($4,000 X 1/4) ....................................... Accum. Depr.Furniture ........... Unearned Rent Revenue ..................... Rent Revenue ................................. Salaries Expense ................................... Salaries Payable ............................ Accounts Receivable ............................ Rent Revenue ................................. Interest Expense ................................... Interest Payable [($120,000 X 8%) X 1/12] .............
1,350 1,350 3,600 3,600
2.
31
3.
31
1,100 1,100
31
1,000 1,000 5,000 5,000 600 1,200 1,200 800 800 600
4.
31
5.
31
6.
31
7.
31
(b) Cash 8/31 Bal. 24,600 8/31 Bal. 1,200 P repaid Insurance 8/31 Bal. 5,400 8/31 1,350 8/31 Bal. 4,050
Accounts Receivable 8/31 1,200
Supplies
4-91
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
8/31 Bal. 4,300 8/31
3,600
8/31 Bal.
700
4-92
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-3B (Continued) Land
8/31 Bal. 40,000
Salaries Payable 8/31 600 8/31 Bal. 600 Interest Payable 8/31 800 8/31 Bal. 800
Cottages 8/31 Bal. 132,000 Accumulated Depreciation Cottages 8/31 1,100 8/31 Bal. 1,100
Mortgage Payable 8/31 Bal. 120,000 Common Stock 8/31 Bal. 100,000
8/31 Bal. 36,000
Furniture
Accumulated Depreciation Furniture 8/31 1,000 8/31 Bal. 1,000
Dividends 8/31 Bal. 5,000
Accounts Payable 8/31 Bal. 6,500 Rent Revenue 8/31 Bal. 80,000 8/31 5,000 8/31 1,200 8/31 Bal.
4-93
Unearned Rent Revenue 8/31 5,000 8/31 Bal. 6,800 8/31 Bal. 1,800
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
86,200
Utilities Expense 8/31 Bal. 9,400
Salaries Expense 8/31 Bal. 53,000 8/31 600 8/31 Bal. 53,600
Repair Expense 8/31 Bal. 3,600
4-94
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-3B (Continued) Insurance Expense 8/31 1,350 8/31 Bal. 1,350 Depreciation Expense Furniture 8/31 1,000 8/31 Bal. 1,000
8/31
Supplies Expense 3,600 8/31
8/31 Bal. 3,600
Interest Expense 800 800
8/31 Bal. Depreciation Expense Cottages 8/31 1,100 8/31 Bal. 1,100
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-95
PROBLEM 4-3B (Continued) (c) FLINT HILLS RESORT Adjusted Trial Balance August 31, 2010 Debit Cash.................................................................. Accounts Receivable.................................... Prepaid Insurance........................................ Supplies........................................................... Land ................................................................. Cottages........................................................... Accumulated DepreciationCottages.... Furniture ........................................................ Accumulated DepreciationFurniture .. Accounts Payable.......................................... Unearned Rent Revenue............................. Salaries Payable............................................ Interest Payable............................................ Mortgage Payable......................................... Common Stock............................................... Dividends ........................................................ Rent Revenue................................................. Salaries Expense........................................... Utilities Expense........................................... Repair Expense............................................. Insurance Expense....................................... Supplies Expense.......................................... Depreciation ExpenseCottages............. Depreciation ExpenseFurniture ........... Interest Expense........................................... $ 24,600 1,200 4,050 700 40,000 132,000 36,000 Credit
$1,100 1,000 6,500 1,800 600 800 120,000 100,000 86,200
5,000 53,600 9,400 3,600 1,350 3,600 1,100 1,000 80 0 $318,00 0
$318,00 0
4-96
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-3B (Continued) (d) FLINT HILLS RESORT Income Statement For the Three Months Ended August 31, 2010 Revenues Rent revenue................................................. Expenses Salaries expense........................................... Utilities expense........................................... Repair expense............................................. Supplies expense.......................................... Insurance expense....................................... Depreciation expensecottages.............. Depreciation expensefurniture ............ Interest expense........................................... Total expenses....................................... Net income.............................................................
$86,200 $53,600 9,400 3,600 3,600 1,350 1,100 1,000 800
74,450 $11,750
FLINT HILLS RESORT Retained Earnings Statement For the Three Months Ended August 31, 2010 Retained earnings, J une 1................................ Add: Net income................................................ Less: Dividends ................................................... Retained earnings, August 31.......................... $ 0 11,750 11,750 5,000 $ 6,750
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-97
PROBLEM 4-3B (Continued) FLINT HILLS RESORT Balance Sheet August 31, 2010 Assets
Current assets Cash........................................... Accounts receivable.............. Supplies.................................... Prepaid insurance................. Total current assets........ Property, plant, and equipment Land .......................................... Cottages................................... $132,000 Less: Accum. depreciation .. 1,100 Furniture ................................. 36,000 Less: Accum. depreciation .. 1,000 Total assets........................
$24,600 1,200 700 4,050 40,000 130,900 35,000
$ 30,550
205,900 $236,450
Liabilities and Stockholders Equity Current liabilities Accounts payable....................................... $ 6,500 Unearned rent revenue............................ 1,800 Interest payable......................................... 800 Salaries payable......................................... 600 Total current liabilities ..................... Long-term liabilities Mortgage payable...................................... Total liabilities ..................................... Stockholders equity Common stock............................................ 100,000 Retained earnings ..................................... 6,750 Total stockholders equity ........... Total liabilities and stockholders equity ..................................................
$
9,700
120,000 129,700
106,750 $236,450
4-98
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-3B (Continued) (e) The following accounts would be closed:
Rent Expense, Insurance Furniture, Revenue, Salaries Expense, Utilities Expense, Repair Supplies Expense, Depreciation ExpenseCottages, Expense, Interest Expense, Depreciation Expense Dividends.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-99
P ROBLEM 4-4B
(a) Dec. 31 31 31 31 31 31 31
Accounts Receivable .................................. Advertising Revenue .......................... Art Supplies Expense ................................. Art Supplies .......................................... Insurance Expense ..................................... Prepaid Insurance .............................. Depreciation Expense ................................ Accumulated Depreciation ............... Interest Expense .......................................... Interest Payable .................................. Unearned Advertising Revenue .............. Advertising Revenue .......................... Salaries Expense ......................................... Salaries Payable ..................................
3,500 3,500 1,900 1,900 1,560 1,560 5,000 5,000 320 320 900 900 1,300 1,300
(b)
LONGLY ADVERT IS I NG AGENCY Income Statement For the Year Ended December 31, 2010 Revenues Advertising revenue ..................................... Expenses Salaries expense ............................................ Depreciation expense ................................... Rent expense ................................................... Art supplies expense ..................................... Insurance expense ........................................ Interest expense ............................................. Total expenses........................................ Net income ..............................................................
$62,000 $10,300 5,000 4,350 1,900 1,560 320 23,430 $38,570
4-100Copyright 2009 John
Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-4B (Continued) LONGLY ADVERTISING AGENCY Retained Earnings Statement For the Year Ended December 31, 2010 Retained earnings, J anuary 1.......................... Add: Net income................................................ Less: Dividends ................................................... Retained earnings, December 31.................... LONGLY ADVERTISING AGENCY Balance Sheet December 31, 2010 Assets $5,500 38,570 44,070 10,000 $34,070
Current assets Cash................................................................... Accounts receivable...................................... Art supplies..................................................... Prepaid insurance......................................... Total current assets......................... Property, plant, and equipment Printing equipment ...................................... Less: Accumulated depreciation printing equipment ........................... Total assets........................................
$11,000 19,500 6,500 1,790 $60,000 30,000
$38,790
30,000 $68,790
Liabilities and Stockholders Equity Current liabilities Notes payable................................................. $ 8,000 Accounts payable........................................... 2,000 Unearned advertising revenue.................. 3,100 Salaries payable............................................. 1,300 Interest payable............................................. 320 Total current liabilities .................. Stockholders equity Common stock................................................ 20,000 Retained earnings ......................................... 34,070 Total stockholders equity ..........
$14,720
54,070
4-101
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
Total liabilities and stockholders equity ...............................................
$68,790
4-102Copyright 2009 John
Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-4B (Continued) (c) Advertising Revenue, Salaries Expense, Depreciation Expense, Rent Expense, Art Supplies Expense, Insurance Expense, Interest Expense, Dividends. (d) Interest is $53.33 per month or .67% of the note payable ($53.33 $8,000). .67% X 12 = 8% interest per year. (e) Salaries Expense, $10,300, less Salaries Payable 12/31/10, $1,300 = $9,000. Total payments, $10,500 $9,000 = $1,500 Salaries Payable 12/31/09.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-103
P ROBLEM 4-5B
1.
Dec. 31
Salaries Expense ..................................... Salaries Payable .............................. (6 X $800 X 3/5 = $2,880) (2 X $600 X 3/5 = $ 720) Unearned Rent Revenue ....................... Rent Revenue ................................... (5 X $4,000 X 2 = $40,000 ) ( 4 X $7,500 X 1 = 30,000 ) Total rent earned ........ $70,000 ) Advertising Expense .............................. Prepaid Advertising ....................... (A650 $500 per month for 8 months = $4,000 ) ( B974 $400 per month for 4 months = 1,600 ) $5,600 ) Interest Expense ..................................... Interest Payable ($80,000 X 7% X 3/12) ....................
3,600
3,600
2.
31
70,000 70,000
3.
31
5,600
5,600
4.
31
1,400 1,400
4-104Copyright 2009 John
Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
P ROBLEM 4-6B
(a) 1. March 31 Travel Service Revenue ........................ 20,000 Unearned Travel Service Revenue 20,000 2. 31 Supplies Expense .................................... Supplies ($2,900 $800) ................... Insurance Expense ($1,200 X 1/12) ...... Prepaid Insurance ............................ Utilities Expense ..................................... Utilities Payable ................................ Salaries Expense ($75 X 2 X 3) ............. Salaries Payable ................................ Interest Expense (10,000 X 8% X 3/12) .............................. Interest Payable ................................ 2,100 2,100 100 100 210 210 450 450 200
3.
31
4.
31
5.
31
6.
31
200
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-105
PROBLEM 4-6B (Continued) (b) WYANDO T TE TRAVEL AGENCY Income Statement For the Quarter Ended March 31, 2010 Revenues Travel service revenue ($50,000 $20,000)..... Expenses Salaries expense ($9,000 + $450)....................... Advertising expense............................................ Supplies expense.................................................. Income tax expense.............................................. Utilities expense ($400 + $210).......................... Depreciation expense.......................................... Interest expense.................................................... Insurance expense............................................... Total expenses................................................ Net income.................................................................
$30,000 $9,450 2,600 2,100 1,500 610 400 200 100
16,960 $13,040
(c) The generally accepted accounting principles that Ron did not recognize when he prepared the income statement were the revenue recognition principle and the matching principle. The revenue recognition principle states that revenue is recognized when it is earned. The advance payments of $20,000 for future cruises have not been earned and, therefore, should not be reported in income for the quarter ended March 31. The matching principle dictates that efforts (expenses) be matched with accomplishments (revenue) whenever it is reasonable and practicable to do so. This means that the expenses should include amounts incurred in March but not paid until April, and any other costs related to the operations of the business during the period J anuary March. The difference in reported expenses was $3,060 ($16,960 $13,900). The overstatement of revenues ($20,000) plus the understatement of expenses ($3,060) equals the difference in reported income of $23,060 ($36,100 $13,040).
4-106Copyright 2009 John
Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
P ROBLEM 4-7B
(a), (c) & (e) Cash 9/1 Bal. 4,880 9/8 9/10 1,500 9/20 9/12 3,400 9/22 9/29 650 9/25 9/30 Bal. 3,230
1,100 4,500 400 1,200
Accounts Receivable 9/1 Bal. 3,820 9/10 1,500 9/27 1,850 9/30 Bal. 4,170
Supplies 9/1 Bal. 800 9/30 9/17 2,000 9/30 Bal. 1,800
1,000
Store Equipment 9/1 Bal. 15,000 9/15 3,000 9/30 Bal. 18,000
Accumulated Depreciation 9/1 Bal. 1,600 9/30 200 9/30 Bal. 1,800
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-107
9/20
Accounts Payable 4,500 9/1 Bal. 3,100 9/15 3,000 9/17 2,000 9/30 Bal. 3,600
9/8
Salaries Payable 700 9/1 Bal. 700 9/30 400 9/30 Bal. 400
Common Stock Unearned Service Revenue 250 9/1 Bal. 400 9/29 650 9/30 Bal. 800 9/1 Bal. 10,000 9/30 Bal. 10,000
9/30
Retained Earnings 9/1 Bal. 8,700 9/30 Bal. 8,700
4-108Copyright 2009 John
Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-7B (Continued) Service Revenue 9/12 3,400 9/27 1,850 9/30 250 9/30 Bal. 5,500
Depreciation Expense 9/30 200 9/30 Bal. 200
9/30
Supplies Expense 1,000
9/30 Bal. 1,000
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-109
Salaries Expense 9/8 400 9/25 1,200 9/30 400 9/30 Bal. 2,000
9/22
Rent Expense 400
9/30 Bal. 400
4-110Copyright 2009 John
Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-7B (Continued) (b) Date Sept. 8 Account Titles General J ournal Debit Credit Salaries Payable............................................... 700 Salaries Expense.............................................. 400 Cash............................................................. Cash..................................................................... 1,500 Accounts Receivable............................... Cash..................................................................... 3,400 Service Revenue....................................... Store Equipment .............................................. 3,000 Accounts Payable..................................... Supplies.............................................................. 2,000 Accounts Payable..................................... Accounts Payable............................................ 4,500 Cash............................................................. Rent Expense.................................................... 400 Cash............................................................. Salaries Expense.............................................. 1,200 Cash............................................................. Accounts Receivable....................................... 1,850 Service Revenue....................................... Cash..................................................................... 650 Unearned Service Revenue...................
4-111
1,100
10
1,500
12
3,400
15
3,000
17
2,000
20
4,500
22
400
25
1,200
27
1,850
29
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
650
4-112Copyright 2009 John
Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-7B (Continued) (d) & (f) PI T TSBURG EQUIPMENT REPAIR Trial Balances September 30, 2010 Before Adjustment Dr. Cash............................................ Accounts Receivable.............. Supplies..................................... Store Equipment ..................... Accumulated Depreciation ... Accounts Payable.................... Unearned Service Revenue.. Salaries Payable...................... Common Stock......................... Retained Earnings .................. Service Revenue...................... Depreciation Expense............ Supplies Expense.................... Salaries Expense..................... Rent Expense............................ $3,230 4,170 2,800 18,000 Cr. After Adjustment Dr. $3,230 4,170 1,800 18,000 Cr.
$1,600 3,600 1,050 10,000 8,700 5,250
1,600 40 0 $30,20 0
$30,20 0
200 1,000 2,000 40 0 $30,80 0
$ 1,800 3,600 800 400 10,000 8,700 5,500
$30,80 0
(e) 1. Sept.30 2. 3. 4. 30 30 30
Supplies Expense................................... 1,000 Supplies ($2,800 $1,800)............. Salaries Expense.................................... Salaries Payable............................. Depreciation Expense.......................... Accumulated Depreciation ......... Unearned Service Revenue................. 400 200 250
1,000 400 200
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-113
Service Revenue............................
250
4-114Copyright 2009 John
Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-7B (Continued) (g) PI T TSBURG EQUIPMENT REPAIR Income Statement For the Month Ended September 30, 2010 Revenues Service revenue................................................. Expenses Salaries expense............................................... Supplies expense.............................................. Rent expense...................................................... Depreciation expense...................................... Total expenses........................................... Net income.................................................................
$5,500 $2,000 1,000 400 200
3,600 $1,900
PI T TSBURG EQUIPMENT REPAIR Retained Earnings Statement For the Month Ended September 30, 2010 Retained earnings, September 1............................................ $ 8,700 Add: Net income....................................................................... 1,900 Retained earnings, September 30......................................... $10,600
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-115
PROBLEM 4-7B (Continued)
PI T TSBURG EQUIPMENT REPAIR Balance Sheet September 30, 2010 Assets
Current assets Cash..................................................................... Accounts receivable........................................ Supplies.............................................................. Total current assets................................. Store equipment ............................................... Less: Accumulated depreciationstore equipment .................................................. Total assets................................................
$ 3,230 4,170 1,800 $18,000 1,800
$ 9,200 16,200 $25,400
Liabilities and Stockholders Equity Current liabilities Accounts payable.............................................. $ 3,600 Unearned service revenue............................. 800 Salaries payable................................................ 400 Total current liabilities ........................... $ 4,800 Stockholders equity Common stock................................................... 10,000 Retained earnings............................................ 10,600 Total stockholders equity ................... 20,600 Total liabilities and stockholders equity $25,400
4-116Copyright 2009 John
Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
P ROBLEM 4-8B
(a) General Journal Date Mar. 1 1 Account Titles Debit Credit 15,000 Cash ..................................................................... 15,000 Common Stock .......................................... Equipment ......................................................... 8,000 Cash ............................................................. Accounts Payable ..................................... Cleaning Supplies ............................................ 1,200 Accounts Payable ..................................... Prepaid Insurance ........................................... 2,400 Cash ............................................................. Accounts Receivable ....................................... 3,700 Service Revenue ....................................... Accounts Payable ............................................ 2,000 Cash ............................................................. Salaries Expense .............................................. 1,750 Cash ............................................................. Cash ..................................................................... 1,600 Accounts Receivable ............................... Accounts Receivable ....................................... 4,200 Service Revenue .......................................
3,000 5,000
3
1,200
5
2,400
14
3,700
18
2,000
20
1,750
21
1,600
28
4,200
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-117
31
Gas & Oil Expense........................................... 350 Cash............................................................. Dividends ........................................................... 900 Cash.............................................................
350
31
900
4-118Copyright 2009 John
Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-8B (Continued) (b), (e) & (h) Cash 3/1 15,000 3/1 3/21 1,600 3/5 3/18 3/20 3/31 3/31 3/31 Bal. 6,200 3,000 2,400 2,000 1,750 350 900 Accumulated Depreciation Equipment 3/31 250 3/31 Bal. 250
3/18 Accounts Receivable 3/14 3,700 3/21 1,600 3/28 4,200 3/31 600 3/31 Bal. 6,900
Accounts Payable 2,000 3/1 5,000 3/3 1,200 3/31 Bal. 4,200 Salaries Payable 3/31 830 3/31 Bal. 830
Cleaning Supplies 3/3 1,200 3/31 920 3/31 Bal. 280
Common Stock 3/1 15,000 3/31 Bal. 15,000
3/5
Prepaid Insurance 2,400 3/31
200 3/31
3/31 Bal. 2,200
Retained Earnings 900 3/31 4,200 3/31 Bal. 3,300
3/1
Equipment 8,000 3/31
3/31 Bal. 8,000
Dividends 900 3/31
900
3/31 Bal. 0
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-119
3/31 3/31
Income Summary 4,300 3/31 8,500 4,200 3/31 Bal. 0
3/31
Service Revenue 8,500 3/14 3,700 3/28 4,200 3/31 600 3/31 Bal. 0
4-120Copyright 2009 John
Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-8B (Continued) Gas & Oil Expense 350 3/31 3/31 Bal.
3/31
350 0
Cleaning Supplies Expense 3/31 920 3/31 920 3/31 Bal. 0 Depreciation Expense 3/31 250 3/31 250 3/31 Bal. 0 Insurance Expense 3/31 200 3/31 200 3/31 Bal. 0 Salaries Expense 3/20 1,750 3/31 2,580 3/31 830 3/31 Bal. 0
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-121
(c) & (f)
KWICK CLEANERS Trial Balance March 31, 2010 Before Adjustment Debit Credit After Adjustment Debit Credit $ 6,200 6,900 280 2,200 8,000 $ 250 4,200 83 0 15,000 900 8,500 350 2,580 250 200 920 $28,78 0 $28,78 0
Cash.................................................... Accounts Receivable...................... Cleaning Supplies........................... Prepaid Insurance.......................... Equipment ........................................ Accumulated Depreciation ........... Accounts Payable............................ Salaries Payable.............................. Common Stock................................. Dividends .......................................... Service Revenue.............................. Gas & Oil Expense.......................... Salaries Expense............................. Depreciation Expense.................... Insurance Expense......................... Cleaning Supplies Expense..........
$ 6,200 6,300 1,200 2,400 8,000
$ 4,200 15,000 7,900
900 350 1,750
$27,10 0
$27,10 0
4-122 Copyright 2009 John
Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-8B (Continued) (d) Date 1. March 31 2. 31 General J ournal Account Titles Accounts Receivable.......................... Service Revenue.......................... Depreciation Expense........................ Accumulated Depreciation ....... Insurance Expense............................. Prepaid Insurance ($2,400 12)............................... Cleaning Supplies Expense.............. Cleaning Supplies ($1,200 $280)........................... Salaries Expense................................. Salaries Payable..........................
Debit 600
Credit 600
250 250 200 200 920 920 830 830
3.
31
4.
31
5.
31
(g)
KWICK CLEANERS Income Statement For the Month Ended March 31, 2010 Revenues Service revenue............................................... Expenses Salaries expense.............................................. Cleaning supplies expense........................... Gas & oil expense............................................ Depreciation expense.................................... Insurance expense.......................................... Total expenses.......................................... Net income................................................................
$8,500 $2,580 920 350 250 200
4,300 $4,200
4-123
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-124 Copyright 2009 John
Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-8B (Continued) KWICK CLEANERS Retained Earnings Statement For the Month Ended March 31, 2010 Retained earnings, March 1................................ Add: Net income................................................... Less: Dividends ..................................................... Retained earnings, March 31............................. $ 0 4,200 4,200 900 $3,300
KWICK CLEANERS Balance Sheet March 31, 2010 Assets
Current assets Cash................................................................... Accounts receivable...................................... Cleaning supplies.......................................... Prepaid insurance......................................... Total current assets.............................. Property, plant, and equipment Equipment ....................................................... Less: Accumulated depreciation .............. Total assets..............................................
$6,200 6,900 280 2,200 8,000 250
$15,580 7,750 $23,330
Liabilities and Stockholders Equity Current liabilities Accounts payable........................................... $ 4,200 Salaries payable............................................. 830 Total current liabilities ........................ Stockholders equity Common stock................................................ 15,000 Retained earnings......................................... 3,300 Total stockholders equity ............... Total liabilities and stockholders equity ....................................................
$ 5,030
18,300 $23,330
4-125
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-126 Copyright 2009 John
Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
PROBLEM 4-8B (Continued) (h) Date Mar. 31 31 General J ournal Account Titles and Explanation
Debit
Credit 8,500
Service Revenue............................................... 8,500 Income Summary ..................................... Income Summary ............................................. 4,300 Salaries Expense...................................... Depreciation Expense............................. Insurance Expense.................................. Cleaning Supplies Expense................... Gas & Oil Expense................................... Income Summary ............................................. 4,200 Retained Earnings ................................... Retained Earnings ........................................... 900 Dividends ...................................................
2,580 250 200 920 350
31
4,200
31
900
(i)
KWICK CLEANERS Post-Closing Trial Balance March 31, 2010 Debit Cash..................................................................... Accounts Receivable........................................ Cleaning Supplies............................................ Prepaid Insurance........................................... Equipment .......................................................... Accumulated DepreciationEquipment ... Accounts Payable............................................. Salaries Payable............................................... Common Stock.................................................. Retained Earnings ........................................... $ 6,200 6,900 280 2,200 8,000 Credit
$ 250 4,200 830 15,000
4-127
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
$23,58 0
3,30 0 $23,58 0
4-128 Copyright 2009 John
Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
BYP 4-1
FINANCIAL REPORTI NG PROBLEM
(a) Items that may result in adjusting entries for prepayments are: a. b. c. Prepaid expenses. Accumulated depreciation. Deferred income taxes.
(b) Accrual adjusting entries are often made for other income (i.e., i nterest ) a nd provision for income taxes, as well as interest expense on bank loans and bonds. (c) Depreciation expense was $15,859,000 in 2007 and $15,816,000 in 2006 . Accumulated depreciation was reported in the balance sheet as a deduction from total Property, Plant, and Equipment, a t cost. (d) The statement of cash flows (at the bottom) reports income t axes paid in 2007 of $11,343,000. The income statement reports income tax expense of $25,542,000. Income taxes payable is reported under current liabilities i n the consolidated balance sheet.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-129
BYP 4-2
COMPARATIVE ANALYSIS PROBLEM
Accounts that provide evidence of the use of accrual accounting are:
Balance Sheet (a) Hershey Foods 1. 2. 3. 4. Accounts receivabletrade P repaid expenses Accrued income taxes Accrued liabilities 1. 2. 3. 4. Sales Insurance (or supplies) expense Income tax expense Miscellaneous expense Income Statement
(b) Tootsie Roll 1. 2. 3. 4. 5. P repaid expenses Accumulated depreciation Accounts receivable trade Accrued liabilities I ncome taxes payable 1. 2. 3. 4. 5. Insurance (or supplies) expense Depreciation expense Sales Miscellaneous expense Income tax expense
4-130 Copyright 2009 John
Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
BYP 4-3
RESEARCH CASE
(a) Under so-called cookie-jar accounting companies will over accrue for an expense, reducing current period income. In a f uture period they will reverse part of the previous accrual, thus r educing the expense and increasing income in the future period. T he article suggests that one motivation for using cookie-jar accounting is to smooth net income. That is, if income is extremely high this period, by increasing an accrued expense in t he current period you can reduce current period income, and t herefore make it a little easier to report strong income in the next period. (b) I f a com pany provides unaudited financia l st atements, it m eans t hat t hey have not been exam ined by independent cert ified public a ccountants. I t also means t hat t he financial statements have not r eceived an expression of an opinion from t he independent a ccount ing saying t hat t hey were p repared in accordance w it h g enerally accepted account ing pr inciples. As a consequence, f inancia l st atement users should be re luct ant t o re ly ve ry heavily o n Beazers unaudit ed financial st atements. (c) As pa rt of t he agreement t hat Beazer w ould have signed w hen it i ssued b onds to borrow money, it agreed to provide audited f inancial statements t o bondholders w it hin a specified num ber of d ays of it s year-end. In t he event t hat it does not m eet t his deadline, it w ill have violated i t s agreement, and t he bondholders can dem and full payment. T h is could create a cash cr isis for Beazer, since it w ould be u nlike ly t hat it w ould have enough ava ilable cash on hand t o r epay a ll of t he bondholders.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-131
BYP 4-4
INTERPRETING FINANCIAL STATEMENTS
LASER RECORDING SYSTEMS (a) Laser Recording is handling legal expense via an accrued expense adjustment. This is explained by the fact that accrued professional services increased during the year. Each of the three adjustments is an accrued expense adjustment. Since this type of adjustment increases expenses, net income is decreased by each adjustment. In recording accrued interest, Laser Recording debited Interest Expense and credited Interest Payable.
(b)
(c)
4-132 Copyright 2009 John
Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
BYP 4-5
FINANCIAL ANALYSIS ON THE WEB
(a) The SEC was created by Congress after the stock market crash of 1929. The SEC was created to restore investor confidence in our capital markets by providing more structure and government oversight. (b) Division of Corporation Finance.The Division of Corporation Finance oversees corporate disclosure of important information to the investing public. Corporations are required to comply with regulations per taining to disclosure that must be made when stock is initially sold and then on a continuing and periodic basis. The Divisions staff routinely reviews the disclosure documents filed by companies. The staff also provides companies with assistance interpreting the Commissions rules and recommends to the Commission new rules for adoption. Division of Trading and Markets.The Division of Trading and Markets establishes and maintains standards for fair, orderly, and efficient markets . It does this primarily by regulating the major securities market partici pants: broker-dealer firms; selfregulatory organizations (SROs), which include the stock exchanges and the National Association of Securities Dealers (NASD), Municipal Securities Rulemaking Board (MSRB), and clearing agencies (SROs that help facilitate trade settlement); transfer agents (parties that maintain records of stock and bond owners); and securities information processors. (A selfregulatory organization is a member organization that creates and enforces rules for its members based on the federal securities laws. SROs, which are overseen by the SEC, are the front line in regulating broker-dealers.) Division of Investment Management.The Division of Investment Man agement oversees and regulates the $15 trillion investment management industry and administers the securities laws affecting investment companies (including mutual funds) and investment advisers. In apply ing the federal securities laws to this industry, the Division works to improve disclosure and minimize risk for investors without imposing undue costs on regulated entities.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-133
Division
of
Enforcement.The
Division
of
Enforcement
investigates possible violations of securities laws, recommends Commission action when appropriate, either in a federal court or before an administrative on behalf law of judge, the and negotiates settlements Commission.
4-134 Copyright 2009 John
Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
BYP 4-5 (Continued) While the SEC has civil enforcement authority only, it works closely with various criminal law enforcement agencies throughout the country to develop and bring criminal cases when the misconduct warrants more severe action. (c) The Chief Accountant is the principal adviser to the Commission on accounting and auditing matters. The Office of the Chief Accountant also works closely with domestic and international private-sector accounting and auditing standards-setting bodies (e.g., the Financial Accounting Standards Board, the International Accounting Standards Board, the American Institute of Certified Public Accountants, and the Public Company Accounting Oversight Board), consults with Registrants, auditors, and other Commission staff regarding the application of accounting standards and financial disclosure requirements, and assists in addressing problems that may warrant enforcement actions.
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-135
BYP 4-6
GROUP DECISION CASE
(a)
GRAND VALLEY PARK Income Statement For the Quarter Ended March 31, 2010 Revenues Rental revenues ($89,000 $21,000) ......... Expenses Wages expense [$27,600 + ($290 X 3)] ...... Advertising expense ($4,200 + $110) ........ Supplies expense ($5,200 $1,800) ........... Repairs expense ($2,800 + $380) ............... Insurance expense ($7,200 X 3/12) ............ Utilities expense ($900 + $240) .................. Depreciation expense ................................. Interest expense ($20,000 X 8% X 3/12) .... Total expenses....................................... Net income .............................................................
$68,000 $28,470 4,310 3,400 3,180 1,800 1,140 800 400 43,500 $24,500
(b) The generally accepted accounting principles pertaining to the i ncome statement that were not recognized by Janet were the revenue recognition p rinciple a nd the m atching principle . The r evenue recognition principle states that revenue is recognized w hen it is earned. The revenue of $21,000 for summer rentals has not been earned and, therefore, should not be reported in i ncome for the quarter ended March 31. The match ing principle d ictates that efforts (expenses) be matched with accom plishments (revenues) whenever it is reasonable and practicable to do so. This means that the expenses should include amounts i ncurred in March but not paid until April. The difference in expenses was $7,200 ($43,500 $36,300). The overstatement of r evenues ($21,000) plus the understatement of expenses ($7,200) equals the difference in reported income of $28,200 ($52,700 $24,500).
4-136 Copyright 2009 John
Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
BYP 4-7
COMMUN I CAT IO N ACTIVI TY
(a) Accrual basis accounting records the events that change an entitys financial statements in the periods in which the events occur, rather than i n the periods in which the entity receives or p ays cash. Information p resented on an accrual basis is useful because it reveals relationships t hat are likely to be important in p redicting future results. Conversely, under cash basis accounting, revenue is recorded only when cash is received, and a n expense is recognized only when cash is paid. As a result, the cash basis of accounting often results in misleading financial statements. (b) Politicians might desire a cash basis accounting system over an accrual basis system because if an accrual accounting system is used, it could mean that billions in government liabilities p resently unrecorded would have to be reported in the federal budget immediately. Curren tl y, the federal government is facing a huge budget deficit. The recognition of these additional liabilities would make the deficit even worse. This is not what politicians would like to see and be held responsible for. (c) Dear Senator, It is my understanding, after having taken a beginning course in accoun t ing principles, that the federal government uses a cash basis system rather than an accrual basis accounting system. I am shocked at such a practice! There must be billions of dollars of liabili ties hidden in many contracts that have not been recorded because they havent been paid yet. I realize that the deficit would dramatically increase if we were to implement an accrual system, but in all fairness, we citizens should be given a more accurate picture of what our government is up to. Sincerely, CONCERNED STUDENT
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-137
BYP 4-8
ETHICS CASE
(a) The stakeholders in this situation are: (b) 1. Terry Holton, controller. The president of Diamond Company. Diamond Company stockholders and potential stockholders. It is unethical for the president to place pressure on Terry to m is state net income by requesting her to prepare incorrect adjusting entries. It is customary for adjusting entries to be dated as of the balance sheet date although the entries are prepared at a later date. Terry did nothing unethical by dating the adjusting entries December 31.
2.
(c) Terry can accrue revenues and defer expenses through the p repara tion of adjusting entries and be ethical so long as the entries reflect economic reality. Intentionally misrepresenting the companys financial condition and its results of operations is u nethical (it is also illegal).
4-138 Copyright 2009 John
Wiley & Sons, Inc. Kim mel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
BYP 4-9
ALL ABOUT YOU ACTIVITY
The following is a personal balance sheet using the classified presentation. Note that the earnings from the part-time job as well as the tuition costs are not listed since neither of those items is an asset, liability, or equity item. Assets Current assets Cash................................................................... Money market account................................. Certificate of deposit..................................... Accounts receivable from brother ............. Total current assets............................... Property, plant, and equipment Automobile....................................................... Video and stereo equipment ........................ Home computer ............................................... Total assets............................................... Liabilities and Owners Equity Current liabilities Current portion of automobile loan.......... Current portion of credit card payable.... Total current liabilities ........................ Long-term liabilities Student loan.................................................... Automobile loan.............................................. Credit card payable....................................... Total long-term liabilities ..................... Total liabilities .................................. Equity M. Y. Own, Capital ($15,350 $12,300)....... Total liabilities and equity ............... $1,500 150 $1,200 1,800 3,000 300
$ 6,300
7,000 1,250 800
9,050 $15,350
$ 1,650
5,000 4,000 1,650
10,650 12,300 3,050 $15,350
Copyright 2009 John Wiley & Sons, Inc. Kim m el, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-139