03 Chapter Adjusting Accounts and Preparing Financial Statements
Chapter 3
Adjusting Accounts and Preparing Financial Statements
QUESTIONS
1. The cash basis of accounting reports revenues when cash is received, while the accrual basis reports revenues when they are earned. The cash basis reports expenses when cash is paid, while the accrual basis reports expenses when they are incurred and matched with revenues they generated. The accrual basis of accounting generally provides a better indication of company performance and financial condition than does the cash basis. Also, the accrual basis increases the comparability of financial statements from one period to the next. Thus, business decision makers generally prefer the accrual basis. Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year. A prepaid expense is an item paid for in advance of receiving its benefits. As such, it is reported as an asset on the balance sheet. Long-term tangible plant assets such as equipment, buildings, and machinery lead to adjustments for depreciation. Generally, land is the only long-term tangible plant asset that does not require depreciation. The Accumulated Depreciation contra account is used for depreciation. It provides financial statement users with additional information about the relative age of the assets. Without the contra account information, the reader would not be able to tell whether the assets are new or in need of replacement. Unearned revenue refers to cash received in advance of providing products and services. Another name for an unearned revenue is deferred revenue. It is reported as a liability on the balance sheet. An accrued revenue is revenue that is earned but is not yet received in cash (and/ or other assets) and the customer has not been billed prior to the end of the period. Therefore, end-of-period adjustments are made to record accrued revenue. Examples are interest income that has been earned but not collected and revenues from services performed that are neither collected nor billed.
2.
3. 4. 5.
6.
7.
8.
9.A If prepaid expenses are initially recorded with debits to expense accounts, then the prepaid expenses asset accounts are debited in the adjusting entries.
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10.
For Best Buy, all of the accounts under the category of Property and Equipment (except for Land), require adjusting entries. The expense related to the depreciation expense account would be understated on the income statement if Best Buy fails to adjust these asset accounts. If the adjusting entries are not made, net income would be overstated. Note: Students might also correctly identify accounts receivable, goodwill, and tradename as needing adjustment. Circuit City must make adjusting entries to Prepaid expenses and other current assets; Deferred income taxes; Accrued expenses and other current liabilities; Accrued income taxes; and possibly other assets and liabilities. (It is also possible that Circuit City would need to adjust Goodwill and Other intangible assets.) The accrued wages would be reported as part of the liability Accrued Expenses on Apples balance sheet. Closing entries at the end of the current period prepare the revenues (and gains), expenses (and losses), and dividends accounts for the next period by giving them zero balances. Closing entries also update the retained earnings account for the events of the year just finished. Closing entries do not affect the asset and liability accounts. gain and loss) accounts and dividendsfor the next period by giving them zero balances. (ii) Closing entries also update the retained earnings account for the events of the period just completed.
11.
12. 13.
14. (i) Closing entries prepare the temporary accountsrevenue and expense (and
15.
The four-step closing entry process is: (i) close the revenue (and gain) accounts to the Income Summary account, (ii) close the expense (and loss) accounts to the Income Summary account, (iii) close the Income Summary account to the Retained Earnings account, and (iv) close the Dividends account to the Retained Earnings account. expenses. As a result, it temporarily has a balance equal to the net income (or net loss) for the period. (Instructor note: Closing can be accomplished without the Income Summary account by closing revenue and expense accounts directly to the Retained Earnings account.)
16. The Income Summary account is used to summarize the periods revenues and
17.
Yes, an error would have occurred because a post-closing trial balance should only include permanent accounts, and Depreciation Expense is a temporary account that should have been closed. If an expense appears on the post-closing trial balance, the amounts of net income, total assets, and total equity are all in error (overstated).
18.B A work sheet can be used to collect and organize data for preparing (i) adjusting entries, (ii) closing entries, and (iii) financial statements. A work sheet can also be used for what if analysis, for help with audit adjustments, and for preparing interim financial statements. 19.B The adjustments in the Adjustments columns of a work sheet are identified by letter to link the debits with the credits to ensure that the entries are complete and in balance (debits = credits) and for reference purposes (audit trail). The letters can also be used to identify the reasons for the entries and help simplify preparation of the actual adjusting journal entries.
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20.
A companys operating cycle is the normal time between paying cash for merchandise inventory or for employee salaries in providing customer services and the receipt of cash from customers in exchange for those products or services. Assets on a typical classified balance sheet include current assets and noncurrent assetswhere noncurrent assets usually include long-term investments, plant assets, and intangible assets. Liabilities are typically classified as current and noncurrent. Note that the terms short-term and longterm are sometimes used for current and noncurrent. Unearned revenue is reported as a liabilityusually a current liability. Plant assets (also called property, plant and equipment or long-lived assets) are tangible long-lived assets used to produce or sell goods or services. The five categories of noncurrent assets on Best Buys balance sheet are: Property and equipment, Goodwill, Tradenames, Long-term investments, and Other assets. Circuit Citys current assets are: Cash and cash equivalents, Short-term investments, Accounts receivable, Merchandise inventory, Deferred income taxes, Income tax receivable, and Prepaid expenses and other current assets. RadioShack has 4 current liability accounts: Short-term debt, including current maturities of long-term debt; Accounts payable, Accrued expenses and other current liabilities, and Income taxes payable. The closing entry recorded on September 30, 2006, to transfer the companys net income to its Retained Earnings account would likely have been (in millions): Income Summary......................................................... 1,989 Retained Earnings............................................. 1,989
21.
22. 23. 24.
25.
26.
27.
28.C Reversing entries simplify subsequent entries for accrued expenses and accrued revenues by eliminating the need to record the removal of the accrued liability or accrued receivable when the accrual is settled. 29.C The following reversing entry could be made as of the first day of the next accounting period, after the post-closing trial balance is completed and financial statements are prepared. Salaries Payable......................................................... Salaries Expense ................................................................. 500 500
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
QUICK STUDIES
Quick Study 3-1 (20 minutes) a. Cash Accounting Revenues (cash receipts)....................................................... $52,000 Expenses (cash payments: $37,500 - $6,000 + $3,250)....... 34,750 Net income (cash basis) ........................................................ $17,250 b. Accrual Accounting Revenues (earned) ................................................................. $60,000 Expenses (incurred) ............................................................... 37,500 Net income (accrual basis).................................................... $22,500 Quick Study 3-2 (10 minutes) a. b. c. d. e. AE PE UR PE AR Accrued expenses Prepaid expenses Unearned revenue Prepaid expenses (Depreciation) Accrued revenue
Quick Study 3-3 (15 minutes) Accounts Debited and Credited a. Debit Credit b. Debit Credit c. Debit Credit d. Debit Credit e. Debit Unearned Revenue Revenue Earned Wages Expense Wages Payable Accounts Receivable Revenue Earned Insurance Expense Prepaid Insurance Depreciation Expense Financial Statement Balance Sheet Income Statement Income Statement Balance Sheet Balance Sheet Income Statement Income Statement Balance Sheet Income Statement
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Credit
Accumulated Depreciation
Balance Sheet
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Quick Study 3-4 (15 minutes) a. Insurance Expense....................................................... Prepaid Insurance.................................................
To record 6-month insurance coverage expired.
3,000 3,000 4,150 4,150
b. Supplies Expense......................................................... Supplies..................................................................
To record supplies used during the year. ($900 + $4,000 [supplies used] = $750)
Quick Study 3-5 (10 minutes) a. Depreciation ExpenseEquipment............................ Accumulated DepreciationEquipment.............
To record depreciation expense for the year. ($45,000 - $3,000) / 5 years = $8,400
8,400 8,400
b. No depreciation adjustment is made for land as it is expected to last indefinitely. Quick Study 3-6 (10 minutes) Salaries Expense........................................................... Salaries Payable....................................................
To record salaries incurred but not yet paid. [The one student earns $100 x 4 days (MondayThursday)]
400 400
Quick Study 3-7 (15 minutes) a. Unearned Revenue........................................................ Legal Revenue.......................................................
To recognize revenue earned ($30,000 x 3/4).
22,500 22,500 1,400 1,400
b. Unearned Subscription Revenue................................ Subscription Revenue...........................................
To recognize subscription revenue earned. [100 x ($24 / 12 month) x 7 months]
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Quick Study 3-8 (15 minutes) Adjusting entry 1. Accrue salaries expense 2. Adjust the Unearned Services Revenue account to recognize earned revenue 3. Record the earning of services revenue for which cash will be received the following period Debit e a b Credit g f f
Quick Study 3-9 (10 minutes) The answer is a. Explanation: The debit balance in Prepaid Insurance was reduced by $400, implying a $400 debit to Insurance Expense. The credit balance in Interest Payable increased by $800, implying an $800 debit to Interest Expense.
Quick Study 3-10 (20 minutes) Income Summary balance after closing revenues and expenses: Revenues: $42,000 + $8,000............................ Expenses: $31,000 + $11,000 + $5,000........... Credit balance (equal to net income).............. = = = $50,000 - 47,000 $ 3,000 Cr. Dr. Cr.
Retained Earnings balance after all closing entries: Beginning balance..................................... Plus net income.......................................... Less dividends........................................... Ending balance........................................... $35,000 3,000 38,000 9,200 $28,800
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Quick Study 3-11 (15 minutes) The answer is 2. Explanation: Insurance premium error Understates expenses (and overstates assets) by........... Accrued salaries error Understates expenses (and understates liabilities) by.... Combination of errors Understates expenses by................................................... Overstates assets by.......................................................... Understates liabilities by.................................................... Quick Study 3-12 (5 minutes) 1. (e) 2. (h) 3. (a) 4. (g) 5. (b) 6. (c) 7. (f) 8. (d) 9. (i) Analyzing transactions and events. Journalizing transactions and events. Posting the journal entries. Preparing the unadjusted trial balance. Journalizing and posting adjusting entries. Preparing the adjusted trial balance. Preparing the financial statements. Journalizing and posting closing entries. Preparing the post-closing trial balance.
$1,600 1,000 $2,600 $1,600 $1,000
Quick Study 3-13 (10 minutes) 1. 2. E C 3. 4. E A 5. 6. B F 7. 8. A D
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Quick Study 3-14 (15 minutes) Dec. 31 Services Revenue......................................... Income Summary.................................. To close the revenue account. 31 Income Summary......................................... Wages Expense..................................... Rent Expense......................................... To close the expense accounts. 31 Income Summary......................................... Retained Earnings................................. To close Income Summary. 31 Retained Earnings....................................... Dividends .............................................. To close the dividends account. Quick Study 3-15 (5 minutes) The only account from QS 3-14 that would appear in a post-closing trial balance is Retained Earnings. 40,000 40,000 21,000 15,000 6,000 19,000 19,000 1,200 1,200
Quick Study 3-16 (10 minutes) Profit margin = $78,750 / $630,000 = 12.5% Interpretation: For every one dollar that Miller Company records as revenue, it earns 12.5 cents in net income. Millers 12.5% is markedly lower than its competitors average profit margin of 15%. Accordingly, Miller should focus on improving its profit margin to at least be competitive.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Quick Study 3-17 (10 minutes) Current assets Cash Accounts receivable.............................. Office supplies....................................... Prepaid insurance................................. Total current assets.............................. Current liabilities Accounts payable.................................. Unearned services revenue.................. Total current liabilities.......................... Current ratio = $31,300 / $14,000 = 2.24 $ 7,000 18,000 2,800 3,500 $31,300 $11,000 3,000 $14,000
Quick Study 3-18A (10 minutes) The answer is c.
Quick Study 3-19B (10 minutes) a. b. c. I B I d. e. f. B B B
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Quick Study 3-20B (20 minutes) EDGARDO COMPANY Work Sheet Unadjusted Trial Balance Dr. Cr. 4,000 65,00 0 30,00 0 (c) (b) 750 950 (c) (a) 800 750 800 Adjustments Dr. Cr. (a) (b) 800 950 30,75 0 950 750 800 Adjusted Trial Balance Dr. Cr. 3,200 65,95 0 30,75 0 950 750 65,950 Income Statement Dr. Cr. Balance Sheet Dr. Cr. 3,200
Account Title Prepaid Rent............... Services Revenue....... Wages Expense.......... Accounts Receivable... Wages Payable........... Rent Expense.............
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Quick Study 3-21C (15 minutes) 2008 --Not required-24,000 24,000
Dec. 31 Accounts Receivable ................................... Management Fees Earned ...................
To record accrued revenue.
2009 Jan. 1 Management Fees Earned ............................ Accounts Receivable ...........................
To reverse accrued revenue.
24,000 24,000 37,500 37,500
16 Cash ............................................................... Management Fees Earned ...................
To record collection of management fees.
EXERCISES
Exercise 3-1 (30 minutes)
a. Unearned Fee Revenue.................................................. Fee Revenue............................................................
To record earned portion of fee received in advance ($15,000 x 1/3).
5,000 5,000
b. Wages Expense.............................................................. Wages Payable........................................................
To record wages accrued but not yet paid.
7,500 7,500 17,251 17,251 5,682 5,682 2,700 2,700
c.
Depreciation ExpenseEquipment.............................. Accumulated DepreciationEquipment...............
To record depreciation expense for the year.
d. Supplies Expense.......................................................... Supplies**.................................................................
To record supplies used ($240 + $6,102 - $660).
e.
Insurance Expense........................................................ Prepaid Insurance*..................................................
To record insurance coverage expired ($4,000 - $1,300).
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
f.
Interest Receivable....................................................... Interest Revenue.....................................................
To record interest earned but not yet received.
1,400 1,400 2,000 2,000
g. Interest Expense........................................................... Interest Payable.....................................................
To record interest incurred but not yet paid.
Notes Beg. Bal. End. Bal. Prepaid Insurance* 4,000 ? 1,300 Used End. Bal. 660 Beg. Bal. Purchase
Supplies** 240 6,102 ? Used
Exercise 3-2 (25 minutes)
a. Depreciation ExpenseEquipment.............................. Accumulated DepreciationEquipment............... To record depreciation expense for the year. 16,000 16,000 5,360 5,360
b. Insurance Expense........................................................ Prepaid Insurance*.................................................. To record insurance coverage that expired ($6,000 - $640). c. Supplies Expense.......................................................... Supplies**................................................................. To record supplies used ($325 + $3,480 - $383).
3,422 3,422
d. Unearned Fee Revenue.................................................. Fee Revenue............................................................ To record earned portion of fee received in advance ($15,000 x 1/5). e. Insurance Expense........................................................ Prepaid Insurance................................................... To record insurance coverage that expired. Wages Expense.............................................................. Wages Payable........................................................ To record wages accrued but not yet paid.
3,000 3,000
6,160 6,160 2,700 2,700
f.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Notes Prepaid Insurance* Bal. Bal. 6,000 ? End. Bal. 640 Used End. Bal. 383 Beg. Bal. Purchase Supplies** 325 3,480 ? Used
Exercise 3-3 (25 minutes) a. Apr. 30 Legal Fees Expense............................................. Legal Fees Payable.......................................
To record accrued legal fees.
4,500 4,500 4,500 4,500
May 12 Legal Fees Payable.............................................. Cash...............................................................
To pay accrued legal fees.
b. Apr. 30 Interest Expense................................................... Interest Payable............................................
To record accrued interest expense.
1,900 1,900 1,900 3,800 5,700
May 20 Interest Payable.................................................... Interest Expense................................................... Cash...............................................................
To record payment of accrued and current interest expense ($5,700 1,900).
c. Apr. 30 Salaries Expense.................................................. Salaries Payable...........................................
To record accrued salaries ($12,000 x 2/5 week).
4,800 4,800 4,800 7,200 12,000
May 3
Salaries Payable................................................... Salaries Expense.................................................. Cash...............................................................
To record payment of accrued and current salaries ($12,000 x 3/5 week).
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Exercise 3-4 (20 minutes) a. Adjusting entry
2009 Dec. 31
Wages Expense................................................ Wages Payable...........................................
To record accrued wages for one day (5 workers x $165).
825
825
b. Payday entry
2010 Jan. 4
Wages Expense................................................ Wages Payable.................................................. Cash............................................................
To record accrued and current wages Wages expense = 5 workers x 3 days x $165 Cash = 5 workers x 4 days x $165.
2,475 825 3,300
Exercise 3-5 (20 minutes)
Balance Sheet Insurance Asset using Accrual Cash * Basis Basis
Dec. 31, 2007. Dec. 31, 2008. Dec. 31, 2009. Dec. 31, 2010. $14,450 9,350 4,250 0 $0 0 0 0
Insurance Expense using Accrual Cash ** Basis Basis
2007......... 2008......... 2009......... 2010......... Total........ $ 850 5,100 5,100 4,250 $15,300 $15,300 0 0 0 $15,300
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
EXPLANATIONS
*
Accrual asset balance equals months left in the policy x $425 per month (monthly cost is computed as $15,300 / 36 months). Months Left Balance 12/31/2007. . . 34 $14,450 12/31/2008. . . 22 9,350 12/31/2009. . . 10 4,250 12/31/2010. . . 0 0
**
Accrual insurance expense equals months covered in the year x $425 per month. Months Covered Expense 2007.......... 2 $ 850 2008.......... 12 5,100 2009.......... 12 5,100 2010.......... 10 4,250 $15,300
Exercise 3-6 (30 minutes) 1.
2009
Dec. 31 Services Revenue ....................................... Income Summary .................................
To close the revenue account.
37,200 37,200 28,968 2,000 21,687 1,562 2,492 1,227 8,232 8,232 6,000 6,000
31 Income Summary ........................................ Depreciation Expense--Equipment...... Salaries Expense .................................. Insurance Expense ............................... Rent Expense ........................................ Supplies Expense .................................
To close the expense accounts.
31 Income Summary......................................... Retained Earnings.................................
To close Income Summary.
31 Retained Earnings....................................... Dividends ..............................................
To close the dividends account.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
2. FERRARA COMPANY Post-Closing Trial Balance December 31, 2009 Debit Cash............................................................... Supplies......................................................... Prepaid insurance......................................... Equipment..................................................... Accumulated depreciationEquipment...... Common stock.............................................. Retained earnings*....................................... Totals.............................................................
*$30,000 + $8,232 - $6,000 = $32,232
Credit
$18,000 13,900 2,000 23,000 $ 6,500 18,168 32,232 $56,900
$56,900
Exercise 3-7 (20 minutes) RESOURCE TRUCKING COMPANY Income Statement For Year Ended December 31, 2009 Trucking fees earned.............................................. Expenses Depreciation expenseTrucks........................... $20,727 Salaries expense.................................................. 56,749 Office supplies expense...................................... 6,655 Repairs expenseTrucks................................... 10,406 Total expenses..................................................... Net income............................................................... $121,000
94,537 $ 26,463
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
RESOURCE TRUCKING COMPANY Statement of Retained Earnings For Year Ended December 31, 2009 Retained earnings, December 31, 2008................ Plus: Net income..................................................... Less: Dividends...................................................... Retained earnings, December 31, 2009................ Exercise 3-8 (20 minutes) RESOURCE TRUCKING COMPANY Balance Sheet December 31, 2009 Assets Current assets Cash........................................................................ $ 5,800 Accounts receivable.............................................. 17,500 Office supplies....................................................... 3,000 Total current assets............................................... 26,300 Plant assets Trucks..................................................................... $156,000 Accumulated depreciation-Trucks....................... (32,136) 123,864 Land......................................................................... 85,000 Total plant assets................................................... 208,864 Total assets.............................................................. $235,164 Liabilities Current liabilities Accounts payable.................................................. Interest payable...................................................... Total current liabilities........................................... Long-term notes payable........................................ Total liabilities.......................................................... $ 9,800 4,000 13,800 53,000 66,800 $ 75,000 26,463 101,463 (20,000) $ 81,463
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Equity Common stock......................................................... Retained earnings*................................................... Total liabilities and equity....................................... *From Exercise 3-7 Exercise 3-9 (10 minutes)
Note: Net income and revenues are from Exercise 3-7
86,901 81,463 $235,164
Profit margin = $26,463 / $121,000 = 21.9% Interpretation: Resource Trucking Companys profit margin exceeds the industry average of 15%, so they are performing better than competitors on this dimension. Resources profit margin implies that they earn 21.9 cents for each dollar of sales recorded compared to the industry average of only 15 cents for each dollar of sales recorded. Exercise 3-10 (15 minutes)
Note: Current asset and current liability totals are from Exercise 3-8
Current ratio =
Current assets Current liabilities
=
$26,300 $13,800
= 1.9
Interpretation: The companys current ratio of 1.9 exceeds the industry average of 1.5. This ratio implies that the company is in a better liquidity position than its competitors. Moreover, if we review the makeup of the current ratio, we see that current assets consist primarily of cash and accounts receivable. The existence of these more liquid assets is a positive attribute for liquidity purposes.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Exercise 3-11 (10 minutes) a. b. c. d. e. $ 6,038 / $100,886 / $106,882 / $ 67,139 / $ 84,778 / $ 52,970 $ 471,433 $ 301,929 $1,721,525 $ 513,808 = 11.4% = 21.4% = 35.4% = 3.9% = 16.5%
Analysis and Interpretation: Company c has the highest profitability according to the profit margin ratio. Company cs profit margin indicates that it earns 35.4 cents in net income for each one dollar of net sales recorded. Exercise 3-12 (15 minutes) Current Assets Case 1 Case 2 Case 3 Case 4 Case 5 $ 76,000 101,080 42,863 82,308 58,444 / / / / Current Liabilities / $ 26,666 64,251 41,204 69,256 84,738 = = = = = Current Ratio 2.85 1.57 1.04 1.19 0.69
Analysis: Company 1 is in the strongest liquidity position. It has about $2.85 of current assets for each $1 of current liabilities. The only potential concern for Company 1 is that it may be carrying too much in current assets that could be better spent on more productive assets (note that its remaining competitors current ratios range from 1.57 to 0.69).
Exercise 3-13A (25 minutes) a. Initial credit recorded in the Unearned Fees account: July 1 Cash....................................................................... 2,800 Unearned Fees..............................................
Received fees for work to be done for Solana.
2,800
6
Cash....................................................................... Unearned Fees..............................................
Received fees for work to be done for Haru.
8,100 8,100
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
12
Unearned Fees...................................................... Fees Earned...................................................
Completed work for Solana.
2,800 2,800 7,300 7,300 8,100 8,100
18
Cash....................................................................... Unearned Fees..............................................
Received fees for work to be done for Jordan.
27
Unearned Fees...................................................... Fees Earned...................................................
Completed work for customer Haru.
31 No adjusting entries required. Exercise 3-13A continued b. Initial credit recorded in the Fees Earned account: July 1 Cash....................................................................... Fees Earned...................................................
Received fees for work to be done for Solana.
2,800 2,800 8,100 8,100
6
Cash....................................................................... Fees Earned...................................................
Received fees for work to be done for Haru.
12 18
No entry required. Cash....................................................................... Fees Earned...................................................
Received fees for work to be done for Jordan.
7,300 7,300
27 31
No entry required. Fees Earned.......................................................... Unearned Fees..............................................
Adjusted to reflect unearned fees for unfinished job for Jordan.
7,300 7,300
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
c. Under the first method (and using entries from a) Unearned Fees = $2,800 + $8,100 - $2,800 + $7,300 - $8,100 = $7,300 Fees Earned = $2,800 + $8,100 = $10,900
Under the second method (and using entries from b)
Unearned Fees = $7,300 Fees Earned = $2,800 + $8,100 + $7,300 - $7,300 = $10,900
[Note: Both procedures yield identical results in the financial statements.]
Exercise 3-14A (30 minutes) a. Dec. 1 Supplies Expense................................................. Cash...............................................................
Purchased supplies.
2,000 2,000 1,540 1,540 13,000 13,000 3,700 3,700 1,840 1,840 1,200 1,200 7,430 7,430
b. Dec. 2 Insurance Expense............................................... Cash...............................................................
Paid insurance premiums.
c. Dec. 15 Cash....................................................................... Remodeling Fees Earned.............................
Received fees for work to be done.
d. Dec. 28 Cash....................................................................... Remodeling Fees Earned.............................
Received fees for work to be done.
e. Dec. 31 Supplies................................................................ Supplies Expense.........................................
Adjust expenses for unused supplies.
f. Dec. 31 Prepaid Insurance ($1,540 - $340)...................... Insurance Expense.......................................
Adjust expenses for unexpired coverage.
g. Dec. 31 Remodeling Fees Earned ................................... Unearned Remodeling Fees........................
Adjusted revenues for unearned fees ($13,000 - 5,570).
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Exercise 3-15B (30 minutes) Part 1.
SANTAGA DELIVERY COMPANY Work Sheet For Year Ended December 31, 2009 Account Title Cash..................................... Accounts receivable................ Office supplies........................ Trucks.................................. Accum. depreciationTrucks... Land..................................... Accounts payable................... Interest payable...................... Long-term notes payable.......... Common stock...................... Retained earnings................... Dividends.............................. Delivery fees earned................ Depreciation expenseTrucks. Salaries expense..................... Office supplies expense........... Interest expense..................... Repairs expenseTrucks........ Totals................................... Net income............................ Unadjusted Trial Balance Dr. Cr. Adjustments Dr. Cr. Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Balance Sheet Dr. Cr.
15,000 33,000 4,000 340,000 112,000 150,000 23,550 6,000 104,000 100,000 172,770 38,000 274,350 48,000 128,670 14,000 6,000 16,000 792,670 ______ 792,670 (c) (b ) 3,500 2,000 _____ 21,500 _____ 21,500 (a) 16,000 (b ) 2,000 (a) 16,000 (c) 3,500
15,000 33,000 500 340,000 128,000 150,000 23,550 8,000 104,000 100,000 172,770 38,000 274,350 64,000 128,670 17,500 8,000 16,000 810,670 ______ 810,670 64,000 128,670 17,500 8,000 16,000 40,180 ______ ______ 274,350
15,000 33,000 500 340,000 128,000 150,000 23,550 8,000 104,000 100,000 172,770 38,000
______ ______ 576,500 536,320 ______ 40,180
234,170 274,350
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Chapter 03 Adjusting Accounts and Preparing Financial Statements Totals...................................
274,350 274,350
576,500 576,500
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Exercise 3-15B (Continued) Part 2. Closing entries Delivery Fees Earned.......................................... 274,350 Income Summary.........................................
To close the revenue account.
274,350
Income Summary................................................ 234,170 Depreciation ExpenseTrucks.................. Salaries Expense......................................... Office Supplies Expense............................. Interest Expense.......................................... Repairs ExpenseTrucks..........................
To close the expense accounts.
64,000 128,670 17,500 8,000 16,000
Income Summary................................................ Retained Earnings.......................................
To close Income Summary.
40,180 40,180 38,000 38,000
Retained Earnings............................................... Dividends ....................................................
To close the dividends account.
Retained Earnings on the balance sheet Retained earnings, beginning balance............ Add: Net income................................................. .............................................................................. Less: Dividends.......................................... Retained earnings, ending balance................... Exercise 3-16C (30 minutes) 1. Adjusting entries Oct. 31 Rent Expense......................................................... Rent Payable...................................................
To record accrued rent expense.
$172,770 40,180 212,950 (38,000) $174,950
3,300 3,300 1,050 1,050
31 Rent Receivable..................................................... Rent Earned....................................................
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
To record accrued rent income.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
2. Subsequent entries without reversing entries Nov. 5 Rent Payable.......................................................... Rent Expense......................................................... Cash................................................................
To record payment of 2 months rent.
3,300 3,300 6,600 2,100 1,050 1,050
8 Cash........................................................................ Rent Receivable............................................. Rent Earned....................................................
To record collection of 2 months rent.
3. Subsequent entries with reversing entries Nov. 1 Rent Payable.......................................................... Rent Expense.................................................
To reverse accrual of rent expense.
3,300 3,300 1,050 1,050 6,600 6,600 2,100 2,100
1 Rent Earned........................................................... Rent Receivable.............................................
To reverse accrual of rent income.
5 Rent Expense......................................................... Cash................................................................
To record payment of 2 months rent.
8 Cash........................................................................ Rent Earned....................................................
To record collection of 2 months rent.
Exercise 3-17C (10 minutes) Reversing entries are appropriate for accounting adjustments (a) and (e) Sept. 1 Service Fees Earned..................................... Accounts Receivable............................
To reverse accrued revenues.
4,500 4,500 2,700 2,700
1 Salaries Payable........................................... Salaries Expense...................................
To reverse accrued salaries.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
PROBLEM SET A
Problem 3-1A (35 minutes) Part 1 Adjustment (a) Dec. 31 Office Supplies Expense................................ 12,325 Office Supplies.........................................
To record cost of supplies used ($2,900 + $11,977 - $2,552).
12,325
Adjustment (b) 31 Insurance Expense.......................................... 12,280 Prepaid Insurance....................................
To record annual insurance coverage cost.
Policy A B C Total Cost per Month $485 ($11,640/24 mo.) 290 ($10,440/36 mo.) 770 ($ 9,240 /12 mo.) Months Active in 2009 12 9 5 2009 Cost $ 5,820 2,610 3,850 $12,280
12,280
Adjustment (c) 31 Salaries Expense (2 days x $1,830)............... Salaries Payable......................................
To record accrued but unpaid wages.
3,660 3,660
Adjustment (d) 31 Depreciation ExpenseBuilding................... 18,875 Accumulated DepreciationBuilding. . .
To record annual depreciation expense [($800,000 - $45,000) / 40 years = $18,875]
18,875
Adjustment (e) 31 Rent Receivable............................................ Rent Earned...........................................
To record earned but unpaid Dec. rent.
3,000 3,000
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Adjustment (f) 31 Unearned Rent.............................................. Rent Earned...........................................
To record the amount of rent earned for November and December (2 x $2,718).
5,436 5,436
Problem 3-1A (Continued) Part 2 Cash Payment for (c) Jan. 6 Salaries Payable........................................... Salaries Expense*......................................... Cash........................................................
To record payment of accrued and current salaries. *(3 days x $1,830)
3,660 5,490 9,150
15 3,000
Cash Payment for (e) Cash............................................................... 6,000 Rent Receivable..................................... .................................................................Rent Earned
To record past due rent for two months.
3,000
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-2A (90 minutes) Parts 1 and 2
Bal.
Cash 28,064
Bal.
Equipment 75,800 Accumulated Depreciation Equipment Unadj. Bal. 15,000 (c) 10,000 Adj. Bal. 25,000 Accounts Payable
Bal.
Accounts Receivable Unadj. Bal. 0 (f) 6,250 Adj. Bal. 6,250
Unadj. Bal. Adj. Bal.
Teaching Supplies 11,000 (b) 2,000
39,500
9,000 Salaries Payable
Unadj. Bal.
Prepaid Insurance Unadj. Bal. 16,000 (a) Adj. Bal. 13,000 Prepaid Rent 2,178 (h) 0
(g)
Adj. Bal.
0 480 480
3,000 Unearned Training Fees
Unadj. Bal.
12,500 7,500
(e) 2,178
5,000
Adj. Bal.
Unadj. Bal. Adj. Bal.
Common Stock
Bal.
11,000
Bal.
Professional Library 33,000
Retained Earnings
Bal.
60,000
Accumulated Depreciation Professional Library Unadj. Bal. 10,000 (d) 5,000 Adj. Bal. 15,000
Bal.
Dividends 44,000
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-2A (Continued)
Tuition Fees Earned
Unadj. Bal.
(f)
Adj. Bal.
111,000 6,250 117,250
Unadj. Bal.
(h)
Adj. Bal.
Rent Expense 23,958 2,178 26,136
Training Fees Earned
Unadj. Bal.
(e)
Adj. Bal.
41,000 5,000 46,000
Teaching Supplies Expense 0 (b) 9,000 Adj. Bal. 9,000
Unadj. Bal.
Depreciation Expense Professional Library Unadj. Bal. 0 (d) 5,000 Adj. Bal. 5,000 Depreciation Expense Equipment Unadj. Bal. 0 (c) 10,000 Adj. Bal. 10,000
Unadj. Bal.
Bal.
Advertising Expense 8,000
Bal.
Utilities Expense 6,000
(g)
Adj. Bal.
Salaries Expense 52,000 480 52,480 Insurance Expense 0 3,000 3,000
Unadj. Bal.
(a)
Adj. Bal.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-2A (Continued) Part 2 Adjustment (a) Dec. 31 Insurance Expense......................................... Prepaid Insurance.....................................
To record the insurance expired.
3,000 3,000
Adjustment (b) 31 Teaching Supplies Expense.......................... Teaching Supplies....................................
To record supplies used ($11,000 - $2,000).
9,000 9,000
Adjustment (c) 31 Depreciation ExpenseEquipment..............
Accumulated DepreciationEquipment...... To record equipment depreciation.
10,000 10,000
Adjustment (d) 31 Depreciation ExpenseProfess. Library..... Accumul. DepreciationProfess. Library...
To record professional library depreciation.
5,000 5,000
Adjustment (e) 31 Unearned Training Fees................................. Training Fees Earned...............................
To record 2 months training fees earned that were collected in advance.
5,000 5,000
Adjustment (f) 31 Accounts Receivable...................................... Tuition Fees Earned.................................
To record tuition earned ($2,500 x 2 1/2 months).
6,250 6,250
Adjustment (g) 31 Salaries Expense............................................ Salaries Payable.......................................
To record accrued salaries (2 days x $120 x 2 employees).
480 480
Adjustment (h) 31 Rent Expense.................................................. Prepaid Rent..............................................
2,178 2,178
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
To record expiration of prepaid rent.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-2A (Continued) Part 3 WELLS TEACHING INSTITUTE Adjusted Trial Balance December 31, 2009
Debit Credit
Cash......................................................................... Accounts receivable.............................................. Teaching supplies ................................................. Prepaid insurance.................................................. Prepaid rent............................................................ Professional library................................................ Accumulated depreciationProfessional library. . Equipment............................................................... Accumulated depreciationEquipment.............. Accounts payable................................................... Salaries payable..................................................... Unearned training fees.......................................... Common stock....................................................... Retained earnings.................................................. Dividends................................................................ Tuition fees earned................................................ Training fees earned.............................................. Depreciation expenseProfessional library....... Depreciation expenseEquipment...................... Salaries expense ................................................... Insurance expense................................................. Rent expense.......................................................... Teaching supplies expense................................... Advertising expense.............................................. Utilities expense..................................................... Totals.......................................................................
$ 28,064 6,250 2,000 13,000 0 33,000 $ 15,000 75,800 25,000 39,500 480 7,500 11,000 60,000 44,000 117,250 46,000 5,000 10,000 52,480 3,000 26,136 9,000 8,000 6,000 $321,730
. $321,730
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-2A (Continued) Part 4 WELLS TEACHING INSTITUTE Income Statement For Year Ended December 31, 2009 Revenues Tuition fees earned............................................ $117,250 Training fees earned.......................................... 46,000 Total revenues.................................................... Expenses Depreciation expenseProfessional library... 5,000 Depreciation expenseEquipment.................. 10,000 Salaries expense................................................ 52,480 Insurance expense............................................. 3,000 Rent expense...................................................... 26,136 Teaching supplies expense............................... 9,000 Advertising expense.......................................... 8,000 Utilities expense................................................. 6,000 Total expenses................................................... Net income............................................................
$163,250
119,616 $ 43,634
WELLS TEACHING INSTITUTE Statement of Retained Earnings For Year Ended December 31, 2009 Retained earnings, December 31, 2008.............. Plus: Net income.................................................. Less: Dividends.................................................... Retained earnings, December 31, 2009.............. $ 60,000 43,634 103,634 44,000 $ 59,634
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-2A (Concluded) WELLS TEACHING INSTITUTE Balance Sheet December 31, 2009 Assets Cash................................................................................. Accounts receivable...................................................... Teaching supplies.......................................................... Prepaid insurance.......................................................... Professional library........................................................ $33,000 Accumulated depreciationProfessional library....... (15,000) Equipment....................................................................... 75,800 Accumulated depreciationEquipment...................... (25,000) Total assets..................................................................... $ 28,064 6,250 2,000 13,000 18,000 50,800 $118,114
Liabilities Accounts payable........................................................... Salaries payable............................................................. Unearned training fees.................................................. Total liabilities................................................................ Equity Common stock............................................................... Retained earnings.......................................................... Total liabilities and equity.............................................
$ 39,500 480 7,500 47,480 11,000 59,634 $118,114
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-3A (90 minutes) Part 1 MAYTAGG REPAIRS Income Statement For Year Ended December 31, 2009 Repair fees earned................................... Expenses Depreciation expenseEquipment..... Wages expense...................................... Insurance expense................................ Rent expense.......................................... Office supplies expense........................ Utilities expense.................................... Total expenses...................................... Net income................................................ $91,150 $ 7,000 38,000 1,600 11,400 5,600 3,400 67,000 $24,150
MAYTAGG REPAIRS Statement of Retained Earnings For Year Ended December 31, 2009 Retained earnings, Dec. 31, 2008........... Add: Net income .................................... Less: Dividends....................................... Retained earnings, Dec. 31, 2009........... $21,600 24,150 45,750 (16,500) $29,250
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-3A (Continued) MAYTAGG REPAIRS Balance Sheet December 31, 2009 Assets Current assets Cash.............................................................. Office supplies............................................. Prepaid insurance........................................ Total current assets..................................... Plant assets Equipment..................................................... Accumulated depreciationEquipment.... Total assets.................................................... Liabilities Current liabilities Accounts payable........................................ Wages payable............................................. Total current liabilities................................. Equity Retained earnings.......................................... Common stock............................................... Total liabilities and equity............................. $19,000 700 19,700 $13,000 2,000 2,150 $17,150 53,000 (8,000)
45,000 $62,150
29,250 13,200 $62,150
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-3A (Continued) Parts 2 and 3 MAYTAGG REPAIRS For Year Ended December 31, 2009
No.
101 124 128 167
Account Title Cash............................. Office supplies............... Prepaid insurance ..........
Adjusted Trial Balance Dr. Cr.
Closing Entries Dr. Cr.
.
Post-Closing Trial Balance Dr. Cr.
13,000 2,000 2,150 8,000 19,000 700 13,200 21,600 (4) 16,500 91,150 (1) 7,000 38,000 1,600 11,400 5,600 3,400
(2) _______ _______ (3)
13,000 2,000 2,150 53,000 8,000 19,000 700 13,200 16,500 (3)
(4)
Equipment..................... 53,000 168 Accumulated depreciation Equipment....................
201 210 307 318 319 401 612 623 637 640 650 690 901
Accounts payable........... Wages payable............... Common stock.............. Retained earnings.......... Dividends...................... Repair fees earned......... Depreciation expense Equipment................... Wages expense............. Insurance expense......... Rent expense................. Office supplies expense. . Utilities expense............. Income summary........... Totals...........................
24,150 16,500 7,000 38,000 1,600 11,400 5,600 3,400
29,250
91,150
(2) (2) (2) (2) (2) (2)
67,000 (1) 91,150 24,150 _______ ______ 198,800 198,80 70,150 0
______ 70,150
153,65 0
153,650
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Closing entries (all dated December 31, 2009) (1) Repair Fees Earned...................................... Income Summary.................................. To close the revenue account. Problem 3-3A (Continued) (2) 91,150 91,150
Income Summary................................................. Depreciation Expense, Equipment.............. Wages Expense............................................. Insurance Expense....................................... Rent Expense................................................ Office Supplies Expense.............................. Utilities Expense........................................... To close the expense accounts. Income Summary................................................. Retained Earnings........................................ To close the Income Summary account. Retained Earnings................................................ Dividends....................................................... To close the dividends account.
67,000 7,000 38,000 1,600 11,400 5,600 3,400 24,150 24,150 16,500 16,500
(3)
(4)
Part 4 (a) If none of the $1,600 insurance expense had expired, the income statement would not report any insurance expense and net income would be increased by $1,600. (b) If there were no earned and unpaid wages (meaning Wages Payable equals zero), wages expense would be $700 less and net income would be $700 more.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Financial Statement Changes The income statement would reflect the following: Net income would be increased by $1,600 + $700 = $2,300. (a) & (b) The balance sheet would reflect the following: Prepaid insurance and total assets would be increased by $1,600. (a) There would be no wages payable. (b) Total current liabilities would be $700 less. (b) Total equity would be increased by $2,300. (a) & (b) Total liabilities would be decreased by $700. (b) Problem 3-4A (90 minutes)
INSTRUCTOR NOTE: Ledger accounts are shown at the end of Part 7 as they would appear after all entries are posted.
Part 2 Transactions for April April 1 Cash...............................................................101 Computer Equipment...................................167 Common Stock......................................307
Owner invested in the business.
32,000 26,000 58,000 1,300 1,300 2,500 2,500 2,500 2,500 2,300 2,300 16,000 16,000
2 Rent Expense................................................640 Cash........................................................101
Paid one months rent.
3 Office Supplies..............................................124 Cash........................................................101
Acquired office supplies.
10 Prepaid Insurance.........................................128 Cash........................................................101
Paid 12 months premium in advance.
14 Salaries Expense..........................................622 Cash........................................................101
Paid two weeks salaries.
24 Cash...............................................................101 Commissions Earned............................405
Collected commissions from airlines.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
28 Salaries Expense..........................................622 Cash........................................................101
Paid two weeks salaries.
2,500 2,500 750 750 550 550 1,200 1,200
29 Repairs Expense...........................................684 Cash........................................................101
Repaired the computer.
30 Telephone Expense......................................688 Cash........................................................101
Paid the telephone bill.
30 Dividends.......................................................319 Cash........................................................101
Paid cash for dividends.
Problem 3-4A (Continued) Part 3 ADVENTURE TRAVEL Unadjusted Trial Balance April 30, 2009 No. 101 106 124 128 167 168 209 307 318 319 405 612 Account Title Cash.......................................................... Accounts receivable................................ Office supplies......................................... Prepaid insurance.................................... Computer equipment............................... Accumulated depreciation Computer equipment............................. Salaries payable....................................... Common stock......................................... Retained earnings.................................... Dividends.................................................. Commissions earned.............................. Depreciation expense Computer equipment............................. 0 1,200 16,000 Debit $34,400 0 2,500 2,500 26,000 $ 0 0 58,000 0 Credit
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
622 637 640 650 684 688
Salaries expense...................................... Insurance expense.................................. Rent expense............................................ Office supplies expense.......................... Repairs expense...................................... Telephone expense.................................
4,800 0 1,300 0 750 550 $74,000
Totals........................................................ $74,000 Problem 3-4A (Continued) Part 4 Adjusting entries
(a) Apr
30 Insurance Expense.............................................. 637
139 139 1,800 1,800 500 500 720 720 3,050 3,050
Prepaid Insurance....................................... 128
To record expired insurance ($2,500/12 x 2/3).
(b)
30 Office Supplies Expense..................................... 650 Office Supplies............................................ 124
To record cost of supplies used ($2,500 - $700).
(c)
30 Depreciation ExpComputer Equipment......... 612 Accumulated Depreciation Computer Equipment ............................... 168
To record depreciation.
(d)
30 Salaries Expense................................................. 622 Salaries Payable.......................................... 209
To record accrued salaries.
(e)
30 Accounts Receivable........................................... 106 Commissions Earned.................................. 405
To record accrued commissions.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Part 5 ADVENTURE TRAVEL Income Statement For Month Ended April 30, 2009 Commissions earned.................................................. Expenses Depreciation expenseComputer equipment........ Salaries expense........................................................ Insurance expense.................................................... Rent expense.............................................................. Office supplies expense............................................ Repairs expense........................................................ Telephone expense................................................... Total expenses........................................................... Net income.................................................................... Problem 3-4A (Continued) Part 5continued ADVENTURE TRAVEL Statement of Retained Earnings For Month Ended April 30, 2009 Retained earnings, April 1, 2009.................................... Plus: Net income............................................................ Less: Dividends............................................................... Retained earnings, April 30, 2009.................................. $ 0 8,491 8,491 (1,200) $ 7,291
$19,050 $ 500 5,520 139 1,300 1,800 750 550 10,559 $ 8,491
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
ADVENTURE TRAVEL Balance Sheet April 30, 2009 Assets Cash.................................................................................. Accounts receivable........................................................ Office supplies................................................................. Prepaid insurance........................................................... Computer equipment...................................................... $26,000 Accumulated depreciationComputer equipment....... (500) Total assets...................................................................... Liabilities Salaries payable.............................................................. Equity Common stock................................................................. Retained earnings........................................................... Total liabilities and equity............................................... Problem 3-4A (Continued) Part 6 Closing entries April 30 Commissions Earned...................................405 Income Summary..................................901
To close the revenue account.
$34,400 3,050 700 2,361 25,500 $66,011
$
720
58,000 7,291 $66,011
19,050 19,050 10,559 500 5,520 139 1,300 1,800 750 550
30 Income Summary..........................................901 Depreciation ExpComputer Equip.....612 Salaries Expense...................................622 Insurance Expense................................637 Rent Expense.........................................640 Office Supplies Expense......................650 Repairs Expense...................................684 Telephone Expense...............................688
To close the expense accounts.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
30 Income Summary..........................................901 Retained Earnings.................................318
To close the Income Summary account.
8,491 8,491 1,200 1,200
30 Retained Earnings........................................318 Dividends...............................................319
To close the dividends account.
Part 7 ADVENTURE TRAVEL Post-Closing Trial Balance April 30, 2009
Debit Credit
Cash.......................................................... $34,400 Accounts receivable................................ 3,050 Office supplies......................................... 700 Prepaid insurance.................................... 2,361 Computer equipment............................... 26,000 Accumulated depreciation Computer equipment............................. Salaries payable....................................... Common stock......................................... Retained earnings.................................... Totals........................................................ $66,511
$
500 720 58,000 7,291 $66,511
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-4A (Continued) Part 7continued Ledger as of April 30
Cash Date April 1 2 3 10 14 24 28 29 30 30 Date April 30 Date April 3 30 Date April 10 30 Date April 1 Date April 30 Explanation PR Debit 32,000 Acct. No. 101 Credit Balance 32,000 1,300 30,700 2,500 28,200 2,500 25,700 2,300 23,400 39,400 2,500 36,900 750 36,150 550 35,600 1,200 34,400 Acct. No. 106 Credit Balance 3,050 Acct. No. 124 Credit Balance 2,500 1,800 700 Acct. No. 128 Credit Balance 2,500 139 2,361 Acct. No. 167 Credit Balance 26,000
16,000
Explanation Adjusting Explanation Adjusting Explanation Adjusting Explanation
Accounts Receivable PR Debit 3,050 Office Supplies PR Debit 2,500
Prepaid Insurance PR
Debit 2,500
Computer Equipment PR
Debit 26,000
Accumulated DepreciationComputer Equipment Acct. No. 168 Explanation PR Debit Credit Balance Adjusting 500 500 Salaries Payable Acct. No. 209
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Date April 30
Explanation Adjusting
PR
Debit
Credit Balance 720 720 Acct. No. 307 Credit Balance 58,000 58,000 Acct. No. 318 Credit Balance 8,491 8,491 7,291 Acct. No. 319 Credit Balance 1,200 1,200 0 Acct. No. 405 Credit Balance 16,000 16,000 3,050 19,050 0 Acct. No. 612 Credit Balance 500 500 0 Acct. No. 622 Credit Balance 2,300 4,800 5,520 5,520 0 Acct. No. 637 Credit Balance 139 139 0 Acct. No. 640
Problem 3-4A (Continued)
Date April 1 Date April 30 30 Date April 30 30 Date April 24 30 30 Date April 30 30 Date April 14 28 30 30 Date April 30 30 Explanation Common Stock PR Retained Earnings PR Debit
Explanation Closing Closing Explanation Closing Explanation Adjusting Closing
Debit 1,200
Dividends PR Debit 1,200
Commissions Earned PR
Debit 19,050
Depreciation ExpenseComputer Equipment Explanation PR Debit Adjusting 500 Closing Explanation Adjusting Closing Explanation Adjusting Closing Insurance Expense PR Salaries Expense PR Debit 2,300 2,500 720
Debit 139
Rent Expense
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Date
April 2 April 30 Date April 30 30
Explanation
Closing Explanation Adjusting Closing
PR
Debit
1,300
Credit Balance
1,300 1,300 0
Office Supplies Expense PR Debit 1,800
Acct. No. 650 Credit Balance 1,800 1,800 0
Problem 3-4A (Concluded)
Date April 29 30 Explanation Closing Telephone Expense PR Repairs Expense PR Debit 750 Acct. No. 684 Credit Balance 750 750 0 Acct. No. 688 Credit Balance 550 550 0 Acct. No. 901 Credit Balance 19,050 19,050 8,491 0
Date April 30 30 Date April 30 30 30
Explanation Closing Explanation Closing Closing Closing
Debit 550
Income Summary PR
Debit 10,559 8,491
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-5A (15 minutes)
1. 2. 3. 4. 5. 6. 7. 8. 9. A E Z B E C C C E 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. C C F E A A A A C A
10. G Problem 3-6AA (40 minutes) Part 1
Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.
Nov. 1 Prepaid Advertising ....................................... Cash..........................................................
Paid for future advertising.
2,000 2,000 2,466 2,466 4,200 4,200 2,400 2,400 7,250 7,250
1 Prepaid Insurance........................................... Cash..........................................................
Paid insurance for one year.
30 Cash.................................................................. Unearned Service Fees...........................
Received fees in advance.
Dec. 1 Prepaid Consulting Fees ............................... Cash..........................................................
Paid for future consulting.
15 Cash.................................................................. Unearned Service Fees...........................
Received fees in advance.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
31 Advertising Expense....................................... Prepaid Advertising ................................
To adjust prepaid advertising ($2,000 - $1,300).
700 700 411 411 2,600 2,600 800 800 4,350 4,350
31 Insurance Expense.......................................... Prepaid Insurance....................................
To adjust prepaid insurance ($2,466 x 2/12).
31 Unearned Service Fees .................................. Service Fees Earned................................
To adjust unearned service fees ($4,200 - $1,600).
31 Consulting Fees Expense .............................. Prepaid Consulting Fees.........................
To adjust prepaid consulting fees ($2,400 x 1/3).
31 Unearned Service Fees................................... Service Fees Earned................................
To adjust unearned service fees.
Problem 3-6AA (Continued) Part 2
Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.
Nov. 1
Advertising Expense....................................... Cash..........................................................
Paid for future advertising.
2,000 2,000 2,466 2,466 4,200 4,200 2,400 2,400 7,250 7,250
1
Insurance Expense.......................................... Cash..........................................................
Paid insurance for one year.
30
Cash.................................................................. Service Fees Earned................................
Received fees in advance.
Dec. 1
Consulting Fees Expense............................... Cash..........................................................
Paid for future consulting.
15
Cash.................................................................. Service Fees Earned................................
Received fees in advance.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
31
Prepaid Advertising........................................ Advertising Expense...............................
To adjust for prepaid advertising.
1,300 1,300 2,055 2,055
31
Prepaid Insurance........................................... Insurance Expense..................................
To adjust for prepaid insurance ($2,466 x 10/12).
31
Service Fees Earned....................................... Unearned Service Fees...........................
To adjust for unearned service fees.
1,600 1,600 1,600 1,600
31
Prepaid Consulting Fees................................ Consulting Fees Expense.......................
To adjust for prepaid consulting fees ($2,400 x 2/3).
31
Service Fees Earned....................................... Unearned Service Fees...........................
To adjust for unearned service fees ($7,250 - $4,350).
2,900 2,900
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-6AA (Concluded) Part 3 There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following: Advertising expense for two months................................... Prepaid advertising as of December 31............................... Insurance expense for two months..................................... Prepaid insurance as of December 31................................. Consulting fees expense (1/3 of total paid)......................... Prepaid consulting fees........................................................ Service fees earned for two months ($2,600 + $4,350)...... Unearned service fees at 12/31 ($1,600 + $2,900)............... $ 700 1,300 411 2,055 800 1,600 6,950 4,500
When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-7A (90 minutes) Part 1
ACE CONSTRUCTION CO. Work Sheet For Year Ended June 30, 2009 No. 101 126 128 167 168 Account Title Cash................................. 19,500 Supplies............................ 9,500 Prepaid insurance............... 5,000 Equipment......................... 152,160 Accumulated depreciation Equipment........................ Accounts payable............... Interest payable................... Rent payable...................... Wages payable................... Property taxes payable......... Long-term notes payable...... Common stock................... Retained earnings............... Dividends.......................... Construction fees earned...... Depreciation expense Equipment........................ Wages expense.................. Interest expense.................. Insurance expense.............. Rent expense..................... Supplies expense................ Property taxes expense........ Unadjusted Trial Balance Dr. Cr. Adjustments Dr. Cr. (a) (b) Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Balance Sheet Dr. Cr.
6,080 3,150 9,000 580 300 200 1,200 1,000
19,500 3,420 1,850 152,160 36,000 6,380 300 200 1,200 1,000 30,000 46,000 40,760 32,000
19,500 3,420 1,850 152,160 36,00 0 6,380 300 200 1,200 1,000 30,00 0 46,00 0 40,76 0 32,000 143,000 143,000 9,000 49,200 3,600 3,150 13,200 6,080 5,500
27,000 5,800
(c) (d) (h) (f) (e) (g)
201 203 208 210 213 251 307 318 319 401 612 623 633 637 640 652 683
30,000 46,000 40,760 32,000 143,000
(c)
48,000 3,300 13,000 4,500
(e) (h) (b) (f) (a) (g)
9,000 1,200 300 3,150 200 6,080 1,000
9,000 49,200 3,600 3,150 13,200 6,080 5,500
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Chapter 03 Adjusting Accounts and Preparing Financial Statements 684 690 Repairs expense................. Utilities expense..................
2,600 3,000
______
(d)
Totals................................ 292,560 292,560 Net income......................... Totals................................
58 0 21,51 0
_____
2,600 3,580
______
2,600 3,580
______
______ ______
21,51 304,840 304,840 0
95,910 143,000 208,930 161,84 0 47,09 ______ ______ 47,090 0 143,000 143,000 208,930 208,930 0 0
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-7A (Continued) Part 2. (a) Adjusting entries (all dated June 30, 2009) Supplies Expense.............................................. 6,080 Supplies...................................................... To record consumption of supplies. Insurance Expense............................................ 3,150 Prepaid Insurance...................................... To record expiration of insurance. Depreciation ExpenseEquipment................. 9,000 Accumulated DepreciationEquipment....... To record depreciation. Utilities Expense................................................ Accounts Payable...................................... To record accrued utilities costs. 580 580 6,080
(b)
3,150
(c)
9,000
(d)
(e)
Wages Expense.................................................. 1,200 Wages Payable........................................... To record accrued wages. Rent Expense..................................................... Rent Payable............................................... To record remainder of annual rent. 200
1,200
(f)
200
(g)
Property Taxes Expense................................... 1,000 Property Taxes Payable............................. To record additional property taxes. 300
1,000
(h)
Interest Expense................................................ Interest Payable.......................................... To record prior months interest expense. Problem 3-7A (Continued) Closing entries (all dated June 30, 2009) (1)
300
Construction Fees Earned........................... 143,000 Income Summary.................................. To close the revenue account.
143,000
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
(2)
Income Summary.......................................... Depreciation ExpenseEquipment...... Wages Expense..................................... Interest Expense.................................... Insurance Expense................................ Rent Expense......................................... Supplies Expense.................................. Property Taxes Expense....................... Repairs Expense................................... Utilities Expense.................................... To close the expense accounts. Income Summary.......................................... Retained Earnings................................. To close the Income Summary account.
95,910 9,000 49,200 3,600 3,150 13,200 6,080 5,500 2,600 47,090 3,580 47,090 32,000 32,000
(3)
(4)
Retained Earnings........................................ Dividends............................................... To close the dividends account. Problem 3-7A (Continued) Part 3 ACE CONSTRUCTION CO. Income Statement For Year Ended June 30, 2009 Construction fees earned................................. Expenses Depreciation expenseEquipment............... Wages expense................................................ Interest expense.............................................. Insurance expense.......................................... Rent expense.................................................... Supplies expense............................................ Property taxes expense.................................. Repairs expense.............................................. Utilities expense.............................................. Total expenses................................................. Net income..........................................................
$143,000 $ 9,000 49,200 3,600 3,150 13,200 6,080 5,500 2,600 3,580 95,910 $ 47,090
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
ACE CONSTRUCTION CO. Statement of Retained Earnings For Year Ended June 30, 2009 Retained earnings, June 30, 2008.................... Add: Net income............................................... Less: Dividends................................................. Retained earnings, June 30, 2009.................... Problem 3-7A (Continued) ACE CONSTRUCTION CO. Balance Sheet June 30, 2009 Assets Current assets Cash......................................................................... Supplies................................................................... Prepaid insurance.................................................. Total current assets............................................... Plant assets Equipment............................................................... Accumulated depreciationEquipment.............. Total assets............................................................... Liabilities Current liabilities Accounts payable................................................... Interest payable...................................................... Rent payable........................................................... Wages payable....................................................... Property taxes payable.......................................... Current portion of long-term note payable.......... Total current liabilities...........................................
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$ 40,760 47,090 87,850 (32,000) $ 55,850
$ 19,500 3,420 1,850 $ 24,770 152,160 (36,000)
116,160 $140,930
$ 6,380 300 200 1,200 1,000 6,000 $ 15,080
Chapter 03 Adjusting Accounts and Preparing Financial Statements
Noncurrent liabilities Long-term note payable (less current portion). . . Total liabilities.......................................................... Equity Common stock......................................................... Retained earnings.................................................... Total liabilities and equity........................................ Problem 3-7A (Continued) Part 4
24,000 39,080 46,000 55,850 $140,930
(a) This error enters the wrong amount in the correct accounts. The ending balance of the Supplies account should be $3,420, but the entry reduces Supplies by $3,420. Because its unadjusted balance was $9,500, the adjusted balance will be $6,080 ($9,500 - $3,420), which is $2,660 greater than the correct $3,420 balance. In addition, the Supplies Expense account balance will be only $3,420 instead of $6,080. The adjusted trial balance columns in the work sheet will be equal, but the error will cause the work sheets net income to be overstated by $2,660 because of the understatement of the expense. In addition, the balance sheet columns will include the overstated balance for the Supplies account. This error is not likely to be detected as a result of completing the work sheet. If it is not, the income statement will overstate net income by $2,660, and the balance sheet will overstate the cost of the supplies available and the retained earnings by $2,660. (b) This error inserts a credit in the adjusted trial balance when a debit should have been inserted. As a result, the trial balance will not balance (the credit column will be greater than the debit column by $39,000), and the error will be tracked down and corrected before going on with the next step in the work sheet. Because the error will be detected and corrected before preparing the financial statements, the statements will not be affected.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
PROBLEM SET B
Problem 3-1B (30 minutes) Part 1 Adjustment (a) Oct. 31 Office Supplies Expense........................................ 16,787 Office Supplies................................................
To record cost of supplies used ($3,950 + $16,313 - $3,476).
16,787
31
Adjustment (b) Insurance Expense................................................. Prepaid Insurance...........................................
To record annual insurance coverage cost.
Policy A B C Total Cost per Month $451 ($10,824/24 mo.) 265 ($9,540/ 36 mo.) 702 ($8,424/ 12 mo.) Months Active in 2009 12 7 3
9,373 9,373
2009 Expense $5,412 1,855 2,106 $9,373
31
Adjustment (c) Salaries Expense.................................................... Salaries Payable..............................................
To record accrued but unpaid wages (2 days x $2,610).
5,220 5,220
31
Adjustment (d) Depreciation ExpenseBuilding.......................... 21,800 Accumulated DepreciationBuilding...........
To record annual depreciation ($695,000 - $41,000) / 30 years = $21,800.
21,800
Problem 3-1B (Concluded) Adjustment (e) Oct. 31 Rent Receivable...................................................... Rent Earned.....................................................
To record earned but unpaid Oct. rent.
3,200 3,200
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
31
Adjustment (f) Unearned Rent........................................................ Rent Earned.....................................................
To record rent earned for September and October (2 x $2,899).
5,798 5,798
Part 2 Cash Payment for (c) Nov. 6 Salaries Payable..................................................... Salaries Expense*................................................... Cash..................................................................
To record payment of accrued and current salaries. *(3 days x $2,610)
5,220 7,830 13,050
Cash Payment for (e) 15 Cash......................................................................... Rent Receivable............................................... Rent Earned.....................................................
To record past due rent for two months.
6,400 3,200 3,200
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Problem 3-2B (90 minutes) Parts 1 and 2
Bal.
Cash 27,000
Accounts Payable
Bal.
35,600
Accounts Receivable 0 (f) 9,750 Adj. Bal. 9,750
Unadj. Bal. Unadj. Bal. Adj. Bal.
Salaries Payable
Unadj. Bal.
(g)
Adj. Bal.
0 340 340
Teaching Supplies 10,000 (b) 3,000 Prepaid Insurance 16,000 (a) 13,000 Prepaid Rent 2,073 (h) 0
Unearned Training Fees
Unadj. Bal.
13,000 7,800
7,000
(e)
5,200
Adj. Bal.
Common Stock
Bal.
Unadj. Bal. Adj. Bal.
10,000
3,000 Retained Earnings
Bal.
56,000
Unadj. Bal. Adj. Bal.
2,073 Dividends 41,000
Bal.
Professional Library 31,000 Accumulated Depreciation Professional Library Unadj. Bal. 9,000 (d) 6,000 Adj. Bal. 15,000
Bal.
Bal.
Equipment 72,719 Accumulated Depreciation Equipment Unadj. Bal. 17,000 (c) 17,000 Adj. Bal. 34,000
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-2B (Continued) Parts 1 and 2
Tuition Fees Earned
Unadj. Bal.
(f)
Adj. Bal.
106,000 9,750 115,750
Bal.
Advertising Expense 7,000
Training Fees Earned
Unadj. Bal.
(e)
Adj. Bal.
39,000 5,200 44,200
Bal.
Utilities Expense 6,000
Depreciation Expense Professional Library Unadj. Bal. 0 (d) 6,000 Adj. Bal. 6,000 Depreciation Expense Equipment Unadj. Bal. 0 (c) 17,000 Adj. Bal. 17,000 Salaries Expense 50,000 340 50,340 Insurance Expense 0 3,000 3,000 Rent Expense 22,808 2,073 24,881
Unadj. Bal.
(g)
Adj. Bal.
Unadj. Bal.
(a)
Adj. Bal.
Unadj. Bal.
(h)
Adj. Bal.
Teaching Supplies Expense Unadj. Bal. 0 (b) 7,000 Adj. Bal. 7,000
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-2B (Continued) Part 2 Adjustment (a) Dec. 31 Insurance Expense................................................ Prepaid Insurance..........................................
To record the insurance expired.
3,000 3,000
Adjustment (b) 31 Teaching Supplies Expense................................. Teaching Supplies.........................................
To record the cost of supplies used ($10,000 - $3,000).
7,000 7,000
Adjustment (c) 31 Depreciation ExpenseEquipment..................... 17,000 Accumulated DepreciationEquipment.....
To record equipment depreciation.
17,000
Adjustment (d) 31 Depreciation ExpenseProfessional Library.... Accumulated Depreciation Professional Library.............................
To record professional library depreciation.
6,000 6,000
Adjustment (e) 31 Unearned Training Fees........................................ Training Fees Earned.....................................
To record training fees earned that were collected in advance ($2,600 x 2).
5,200 5,200
Adjustment (f) 31 Accounts Receivable............................................ Tuition Fees Earned.......................................
To record tuition earned ($3,900 x 2 1/2 mo).
9,750 9,750
Adjustment (g) 31 Salaries Expense................................................... Salaries Payable.............................................
To accrue salaries expense (2 days x $170).
340 340
Adjustment (h) 31 Rent Expense ........................................................
2,073
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Prepaid Rent...................................................
To record expiration of prepaid rent.
2,073
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-2B (Continued) Part 3 AUGUSTUS INSTITUTE Adjusted Trial Balance December 31, 2009
Debit Credit
Cash............................................................................ Accounts receivable.................................................... Teaching supplies....................................................... Prepaid insurance....................................................... Prepaid rent................................................................. Professional library..................................................... Accumulated depreciationProfessional library........ Equipment................................................................... Accumulated depreciationEquipment..................... Accounts payable....................................................... Salaries payable.......................................................... Unearned training fees................................................ Common stock............................................................ Retained earnings....................................................... Dividends.................................................................... Tuition fees earned...................................................... Training fees earned.................................................... Depreciation expenseProfessional library............... Depreciation expenseEquipment............................. Salaries expense......................................................... Insurance expense...................................................... Rent expense.............................................................. Teaching supplies expense......................................... Advertising expense................................................... Utilities expense.......................................................... Totals..........................................................................
$ 27,000 9,750 3,000 13,000 0 31,000 $ 15,000 72,719 34,000 35,600 340 7,800 10,000 56,000 41,000 115,750 44,200 6,000 17,000 50,340 3,000 24,881 7,000 7,000 6,000 $318,690
. $318,690
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-2B (Continued) Part 4 AUGUSTUS INSTITUTE Income Statement For Year Ended December 31, 2009 Revenues Tuition fees earned.................................................... $115,750 Training fees earned.................................................. 44,200 Total revenues............................................................ Expenses Depreciation expenseProfessional library.......... 6,000 Depreciation expenseEquipment......................... 17,000 Salaries expense........................................................ 50,340 Insurance expense.................................................... 3,000 Rent expense.............................................................. 24,881 Teaching supplies expense...................................... 7,000 Advertising expense.................................................. 7,000 Utilities expense........................................................ 6,000 Total expenses........................................................... Net income....................................................................
$159,950
121,221 $ 38,729
AUGUSTUS INSTITUTE Statement of Retained Earnings For Year Ended December 31, 2009 Retained earnings, December 31, 2008..................... Plus: Net income.......................................................... Less: Dividends........................................................... Retained earnings, December 31, 2009..................... $56,000 38,729 94,729 41,000 $53,729
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-2B (Concluded) AUGUSTUS INSTITUTE Balance Sheet December 31, 2009 Assets Cash.............................................................................. Accounts receivable.................................................... Teaching supplies....................................................... Prepaid insurance........................................................ Professional library..................................................... $31,000 Accumulated depreciationProfessional library........... (15,000) Equipment.................................................................... 72,719 Accumulated depreciationEquipment...................... (34,000) Total assets.................................................................. Liabilities Accounts payable........................................................ Salaries payable........................................................... Unearned training fees................................................ Total liabilities.............................................................. Equity Common stock............................................................. Retained earnings........................................................ Total liabilities and equity........................................... $ 27,000 9,750 3,000 13,000 16,000 38,719 $107,469
$ 35,600 340 7,800 43,740 10,000 53,729 $107,469
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-3B (90 minutes) Part 1 GOLDSMITH COMPANY Income Statement For Year Ended December 31, 2009 Repair fees earned..................................... Expenses Depreciation expenseEquipment........ Wages expense........................................ Insurance expense................................... Rent expense............................................ Store supplies expense........................... Utilities expense....................................... Total expenses......................................... Net income.................................................. $91,500 $ 8,500 41,500 1,000 11,400 4,400 3,000 69,800 $21,700
GOLDSMITH COMPANY Statement of Retained Earnings For Year Ended December 31, 2009 Retained earnings, December 31, 2008.... Add: Net income........................................ Less: Dividends.......................................... Retained earnings, December 31, 2009.... $20,200 21,700 41,900 (16,500) $25,400
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-3B (Continued) GOLDSMITH COMPANY Balance Sheet December 31, 2009 Assets Current assets Cash........................................................... $10,300 Store supplies........................................... 1,400 Prepaid insurance.................................... 2,200 Total current assets................................. Plant assets Equipment................................................. 52,000 Accumulated depreciation, equipment. . (9,000) Total assets................................................. Liabilities Current liabilities Accounts payable..................................... Wages payable......................................... Total current liabilities............................. Equity Common stock........................................... Retained earnings...................................... Total liabilities and equity......................... $17,000 1,300 18,300 13,200 25,400 $56,900
$13,900
43,000 $56,900
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-3B (Continued) Parts 2 and 3
GOLDSMITH COMPANY For Year Ended December 31, 2009
Adjusted Trial Balance Dr. Cr. Closing Entries Dr. Cr. . Post-Closing Trial Balance Dr. Cr.
No. 101 125 128 167 168 201 210 307 318 319 401 612 623 637 640 651 690 901
Account Title Cash............................ Store supplies............... Prepaid insurance.......... Equipment................... Accumulated depreciationEquipment.......... Accounts payable.......... Wages payable............. Common stock............. Retained earnings.......... Dividends..................... Repair fees earned......... Depreciation expense Equipment.................. Wages expense............ Insurance expense........ Rent expense................ Store supplies expense. . Utilities expense............ Income summary..........
10,300 1,400 2,200 52,000 9,000 17,000 1,300 13,200 20,200 (4) 16,500 91,500 (1) 8,500 41,500 1,000 11,400 4,400 3,000
(2)
10,300 1,400 2,200 52,000 9,000 17,000 1,300 13,200 16,500 (3)
(4)
21,700 16,500 8,500 41,500 1,000 11,400 4,400 3,000 91,500 ______ _____
25,400
91,500
(2) (2) (2) (2) (2) (2)
______
Totals..........................
______ (3) 152,200
69,800 (1) 21,700 199,500
_____ 65,900
152,200
199,500 65,900
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-3B (Continued) Part 3 Closing entries (all dated December 31, 2009) (1) Repair Fees Earned.............................................. Income Summary..........................................
To close the revenue account.
91,500 91,500 69,800 8,500 41,500 1,000 11,400 4,400 3,000 21,700 21,700 16,500 16,500
(2)
Income Summary................................................. Depreciation Expense, Equipment.............. Wages Expense............................................. Insurance Expense....................................... Rent Expense................................................ Store Supplies Expense............................... Utilities Expense...........................................
To close the expense accounts.
(3)
Income Summary................................................. Retained Earnings........................................
To close the Income Summary account.
(4)
Retained Earnings................................................ Dividends.......................................................
To close the dividends account.
Part 4 (a) If none of the $1,000 insurance expense had expired, the income statement would not report any insurance expense and net income would be increased by $1,000. (b) If there were no earned and unpaid wages (meaning Wages Payable equals zero), wages expense would be $1,300 less. Financial Statement Changes The income statement would reflect the following Net income would be increased by $1,000 + $1,300 = $2,300. (a) & (b) The balance sheet would reflect the following Prepaid insurance and total assets would be increased by $1,000. (a) There would not be any wages payable. (b) Total liabilities would be decreased by $1,300. b) Total equity would be increased by $2,300. (a) & (b)
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Problem 3-4B (90 minutes)
INSTRUCTOR NOTE: Ledger accounts are shown at the end of Part 7 as they would appear after all entries are posted.
Part 2 Transactions for July July 1 Cash...............................................................101 Buildings........................................................173 Common Stock......................................307
Owner invested in the business.
28,000 20,000 48,000 1,700 1,700 2,500 2,500 3,000 3,000 1,700 1,700 11,000 11,000 1,700 1,700 700 700 600 600 900 900
2 Rent Expense................................................640 Cash........................................................101
Paid one months rent.
5 Office Supplies..............................................124 Cash........................................................101
Acquired office supplies.
10
Prepaid Insurance.........................................128 Cash........................................................101
Paid 12 months premium in advance.
14
Salaries Expense..........................................622 Cash........................................................101
Paid two weeks salary.
24
Cash...............................................................101 Storage Fees Earned.............................401
Collected fees from customers.
28
Salaries Expense..........................................622 Cash........................................................101
Paid two weeks salary.
29
Repairs Expense...........................................684 Cash........................................................101
Repaired the roof.
30
Telephone Expense......................................688 Cash........................................................101
Paid the telephone bill.
31
Dividends.......................................................319 Cash........................................................101
Paid cash for dividends.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-4B (Continued) Part 3 SAFE STORAGE Unadjusted Trial Balance July 31, 2009
No. Account Title Debit Credit
101 Cash................................................................... $ 26,200 106 Accounts receivable......................................... 124 Office supplies.................................................. 128 Prepaid insurance............................................ 173 Buildings........................................................... 174 Accumulated depreciationBuildings............ 209 Salaries payable............................................... 307 Common stock.................................................. 318 Retained earnings............................................ 319 Dividends.......................................................... 401 Storage fees earned......................................... 606 Depreciation expenseBuildings.................... 622 Salaries expense.............................................. 637 Insurance expense........................................... 640 Rent expense.................................................... 650 Office supplies expense.................................. 684 Repairs expense............................................... 688 Telephone expense.......................................... 0 3,400 0 1,700 0 700 600 $ 59,000 900 11,000 0 2,500 3,000 20,000 $ 0 0 48,000 0
Totals................................................................. $ 59,000
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-4B (Continued) Part 4 Adjusting entries July 31 Insurance Expense.......................................637 Prepaid Insurance.................................128
To record expired insurance ($3,000/12 x 2/3).
167 167
31 Office Supplies Expense..............................650 Office Supplies......................................124
To record the cost of consumed supplies ($2,500 - $1,200).
1,300 1,300
31 Depreciation ExpenseBuildings..............606 Accum. DepreciationBuildings.........174
To record depreciation.
500 500 120 120 2,550 2,550
31 Salaries Expense..........................................622 Salaries Payable....................................209
To record accrued salaries.
31 Accounts Receivable....................................106 Storage Fees Earned.............................401
To record accrued storage fees.
Part 5 SAFE STORAGE Income Statement For Month Ended July 31, 2009 Storage fees earned................................... Expenses Depreciation expenseBuildings............ $ 500 Salaries expense...................................... 3,520 Insurance expense................................... 167 Rent expense............................................ 1,700 Office supplies expense.......................... 1,300 Repairs expense....................................... 700 Telephone expense.................................. 600 Total expenses......................................... Net income..................................................
$13,550
8,487 $ 5,063
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-4B (Continued) Problem 5-1B (Continued) SAFE STORAGE Statement of Retained Earnings For Month Ended July 31, 2009 Retained earnings, July 1, 2009................ Add: Net income........................................ Less: Dividends.......................................... Retained earnings, July 31, 2009.............. $ 0 5,063 5,063 (900) $4,163
SAFE STORAGE Balance Sheet July 31, 2009 Assets Cash............................................................. Accounts receivable.................................. Office supplies............................................ Prepaid insurance...................................... Buildings..................................................... $20,000 Accumulated depreciation--Buildings..... (500) Total assets................................................. Liabilities Salaries payable......................................... Equity Common stock........................................... Retained earnings...................................... Total liabilities and equity.........................
$26,200 2,550 1,200 2,833 19,500 $52,283 $ 120
48,000 4,163 $52,283
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Problem 3-4B (Continued) Part 6 Closing entries July 31 Storage Fees Earned.................................401 13,550 Income Summary..................................901
To close the revenue account.
13,550
31
Income Summary.......................................901 Depreciation ExpBuildings...............606 Salaries Expense...................................622 Insurance Expense................................637 Rent Expense.........................................640 Office Supplies Expense......................650 Repairs Expense...................................684 Telephone Expense...............................688
To close the expense accounts.
8,487 500 3,520 167 1,700 1,300 700 600 5,063 5,063 900 900
31
Income Summary.......................................901 Retained Earnings.................................318
To close the Income Summary.
31
Retained Earnings......................................318 Dividends...............................................319
To close the dividends account.
Part 7 SAFE STORAGE Post-Closing Trial Balance July 31, 2009 Debit Cash............................................................. $26,200 Accounts receivable.................................. Office supplies............................................ Prepaid insurance...................................... Buildings..................................................... Accumulated depreciationBuildings...... Salaries payable......................................... Common stock........................................... Retained earnings......................................
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Credit
2,550 1,200 2,833 20,000 $ 500 120 48,000 4,163
Chapter 03 Adjusting Accounts and Preparing Financial Statements
Totals........................................................... $52,783
$52,783
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Problem 3-4B (Continued) Ledger as of July 31 Cash PR Debit 28,000
Date July 1 2 5 10 14 24 28 29 30 31 Date July 31 Date July 5 31 Date July 10 31 Date July 1 Date July 31 Date July 31
Explanation
11,000
Acct. No. 101 Credit Balance 28,000 1,700 26,300 2,500 23,800 3,000 20,800 1,700 19,100 30,100 1,700 28,400 700 27,700 600 27,100 900 26,200 Acct. No. 106 Credit Balance 2,550 Acct. No. 124 Credit Balance 2,500 1,300 1,200 Acct. No. 128 Credit Balance 3,000 167 2,833 Acct. No. 173 Credit Balance 20,000
Explanation Adjusting Explanation Adjusting Explanation Adjusting
Accounts Receivable PR Debit 2,550 Office Supplies PR Debit 2,500
Prepaid Insurance PR
Debit 3,000
Buildings Explanation PR Debit 20,000
Accumulated DepreciationBuildings Acct. No. 174 Explanation PR Debit Credit Balance Adjusting 500 500 Explanation Adjusting Salaries Payable PR Debit Acct. No. 209 Credit Balance 120 120
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-4B (Continued) Date July 1 Date July 31 31 Date July 31 31 Date July 24 31 31 Date July 31 31 Explanation Common Stock PR Retained Earnings PR Debit Acct. No. 307 Credit Balance 48,000 48,000 Acct. No. 318 Credit Balance 5,063 5,063 4,163 Acct. No. 319 Credit Balance 900 900 0 Acct. No. 401 Credit Balance 11,000 11,000 2,550 13,550 0 Acct. No. 606 Credit Balance 500 500 0 Acct. No. 622 Credit Balance 1,700 3,400 3,520 3,520 0 Acct. No. 637 Credit Balance 167 167 0 Acct. No. 640 Credit Balance 1,700 1,700 0
Explanation Closing Closing Explanation Closing Explanation Adjusting Closing
Debit 900
Dividends PR Debit 900
Storage Fees Earned PR Debit 13,550
Depreciation ExpenseBuildings Explanation PR Debit Adjusting 500 Closing Salaries Expense PR
Date July 14 28 31 31 Date July 31 31 Date July 2 31
Explanation Adjusting Closing Explanation Adjusting Closing Explanation Closing
Debit 1,700 1,700 120
Insurance Expense PR
Debit 167
Rent Expense PR
Debit 1,700
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-4B (Concluded) Date July 31 31 Date July 29 31 Date July 30 31 Date July 31 31 31 Office Supplies Expense Explanation PR Debit Adjusting 1,300 Closing Explanation Closing Explanation Closing Explanation Closing Closing Closing Income Summary PR Debit 8,487 5,063 Telephone Expense PR Debit 600 Repairs Expense PR Debit 700 Acct. No. 650 Credit Balance 1,300 1,300 0 Acct. No. 684 Credit Balance 700 700 0 Acct. No. 688 Credit Balance 600 600 0 Acct. No. 901 Credit Balance 13,550 13,550 5,063 0
Problem 3-5B (15 minutes)
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. A E E A A E Z A C Z 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Z A B G C F D E C C
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Problem 3-6BA (40 minutes) Part 1
Method that records prepaid expenses and unearned revenues in balance sheet accounts
Apr. 1
Prepaid Consulting Fees..................................... 2,600 Cash...............................................................
Paid for future consulting services.
2,600
1
Prepaid Insurance................................................ 2,484 Cash...............................................................
Paid insurance for one year.
2,484
30
Cash....................................................................... 4,600 Unearned Service Fees................................
Received fees in advance.
4,600
May 1
Prepaid Advertising............................................. 2,700 Cash...............................................................
Paid for future advertising.
2,700
23
Cash ..................................................................... 7,450 Unearned Service Fees...............................
Received fees in advance.
7,450
31
Consulting Fees Expense.................................... 1,700 Prepaid Consulting Fees..............................
To adjust prepaid consulting fees.
1,700
31
Insurance Expense............................................... Prepaid Insurance.........................................
To adjust prepaid insurance ($2,484 x 2/12).
414 414
31
Unearned Service Fees ....................................... 3,200 Service Fees Earned.....................................
To adjust unearned service fees ($4,600 - $1,400).
3,200
31
Advertising Expense............................................ 1,800 Prepaid Advertising......................................
To adjust prepaid advertising ($2,700 [2,700/3]).
1,800
31
Unearned Service Fees........................................ 3,000 Service Fees Earned.....................................
To adjust unearned service fees.
3,000
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Problem 3-6BA (Continued) Part 2
Method that records prepaid expenses and unearned revenues in income statement accounts:
Apr. 1
Consulting Fees Expense.................................. Cash..............................................................
Paid for future consulting services.
2,600 2,600 2,484 2,484 4,600 4,600 2,700 2,700 7,450 7,450 900 900 2,070 2,070 1,400 1,400 900 900
1
Insurance Expense............................................. Cash..............................................................
Paid insurance for one year.
30
Cash..................................................................... Service Fees Earned...................................
Received fees in advance.
May 1
Advertising Expense........................................... Cash..............................................................
Paid for future advertising.
23
Cash..................................................................... Service Fees Earned...................................
Received fees in advance.
31
Prepaid Consulting Fees.................................... Consulting Fees Expense...........................
To adjust for prepaid consulting fees ($2,600 - $1,700).
31
Prepaid Insurance .............................................. Insurance Expense......................................
To adjust for prepaid insurance ($2,484 x 10/12).
31
Service Fees Earned........................................... Unearned Service Fees ..............................
To adjust for unearned service fees.
31
Prepaid Advertising............................................ Advertising Expense...................................
To adjust for prepaid advertising ($2,700 / 3).
31
Service Fees Earned........................................... Unearned Service Fees ..............................
To adjust for unearned service fees ($7,450 3,000).
4,450 4,450
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Problem 3-6BA (Concluded) Part 3 There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following: Prepaid consulting fees as of May 31.................................... Consulting fees expense for two months.............................. Insurance expense for two months........................................ Prepaid insurance as of May 31.............................................. Unearned service fees as of May 31 ($1,400 + $4,450)......... Service fees earned for two months ($3,200 + $3,000)......... Prepaid advertising as of May 31........................................... Advertising expense for two months..................................... $ 900 1,700 414 2,070 5,850 6,200 900 1,800
When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.
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Problem 3-7B (90 minutes) Part 1
BRAUN DEMOLITION COMPANY Work Sheet For Year Ended April 30, 2009 No. 101 126 128 167 168 201 203 208 210 213 251 307 318 319 401 612 623 633 637 640 652 683 684 690 Account Title Cash................................... 17,000 Supplies.............................. 9,500 Prepaid insurance................. 6,500 Equipment........................... 140,460 Accumulated depreciation 22,000 Equipment......................... Accounts payable................. 6,000 Interest payable.................... Rent payable........................ Wages payable..................... Property taxes payable........... Long-term notes payable........ 25,000 Common stock.................... 44,000 Retained earnings................. 37,610 Dividends............................ 25,500 Demolition fees earned.......... 140,000 Depreciation expense Equipment......................... Wages expense.................... 48,000 Interest expense................... 2,750 Insurance expense................ Rent expense....................... 15,400 Supplies expense................. Property taxes expense.......... 4,400 Repairs expense................... 2,100 Utilities expense.................... 3,000 ______ Totals.................................. 274,610 274,610 Net income.......................... Totals.................................. Unadjusted Trial Balance Dr. Cr. Adjustments Dr. Cr. (a) (b) Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Balance Sheet Dr. Cr.
17,000 6,080 3,420 4,095 2,405 140,460 (c) 11,000 580 250 1,400 1,500 500
17,000 3,420 2,405 140,460 33,000 6,580 250 1,400 1,500 500 25,000 44,000 37,610 33,000 6,580 250 1,400 1,500 500 25,000 44,000 37,610 25,500 140,000 140,000
(d) (h) (f) (e) (g)
25,500
(c) (e) (h) (b) (f) (a) (g) (d)
11,000 1,500 250 4,095 1,400 6,080 500 580 25,405
11,000 11,000 49,500 49,500 3,000 3,000 4,095 4,095 16,800 16,800 6,080 6,080 4,900 4,900 2,100 2,100 ______ 3,580 ______ 3,580 25,405 289,840 289,840 101,055 38,945 140,000
______ 140,000 ______ 140,000
______ ______ 188,785 149,840 ______ 38,945 188,785 188,785
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Problem 3-7B (Continued) Part 2. (a) Adjusting entries (all on April 30, 2009) Supplies Expense............................................. 6,080 Supplies..................................................... To record consumption of supplies. Insurance Expense........................................... 4,095 Prepaid Insurance..................................... To record expiration of insurance. Depreciation ExpenseEquipment................ 11,000 Accumulated DepreciationEquipment. . To record depreciation. Utilities Expense............................................... Accounts Payable..................................... To record accrued utilities costs. 580 580 6,080
(b)
4,095
(c)
11,000
(d)
(e)
Wages Expense................................................ 1,500 Wages Payable.......................................... To record accrued wages. Rent Expense.................................................... 1,400 Rent Payable.............................................. To record remainder of annual rent. Property Taxes Expense.................................. Property Taxes Payable........................... To record additional property taxes. 500
1,500
(f)
1,400
(g)
500 250 250
(h)
Interest Expense (1% x $25,000)..................... Interest Payable......................................... To record Aprils interest expense. Problem 3-7B (Continued) Closing entries (all on April 30, 2009): (1)
Demolition Fees Earned............................... 140,000 Income Summary.................................. To close the revenue account.
140,000
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(2)
Income Summary.......................................... 101,055 Depreciation ExpenseEquipment...... Wages Expense..................................... Interest Expense.................................... Insurance Expense................................ Rent Expense......................................... Supplies Expense.................................. Property Taxes Expense....................... Repairs Expense................................... Utilities Expense.................................... To close the expense accounts. Income Summary.......................................... Retained Earnings................................. To close the Income Summary account. 38,945
11,000 49,500 3,000 4,095 16,800 6,080 4,900 2,100 3,580
(3)
38,945 25,500 25,500
(4)
Retained Earnings........................................ Dividends............................................... To close the dividends account. Problem 3-7B (Continued) Part 3
BRAUN DEMOLITION COMPANY Income Statement For Year Ended April 30, 2009 Demolition fees earned..................................... Expenses Depreciation expenseEquipment................. $11,000 Wages expense................................................ 49,500 Interest expense.............................................. 3,000 Insurance expense.......................................... 4,095 Rent expense.................................................... 16,800 Supplies expense............................................ 6,080 Property taxes expense.................................. 4,900 Repairs expense.............................................. 2,100 Utilities expense.............................................. 3,580 Total expenses................................................. Net income.......................................................... $140,000
101,055 $ 38,945
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BRAUN DEMOLITION COMPANY Statement of Retained Earnings For Year Ended April 30, 2009 Retained earnings, April 30, 2008.................... Add: Net income............................................... Less: Dividends................................................. Retained earnings, April 30, 2009.................... Problem 3-7B (Continued) BRAUN DEMOLITION COMPANY Balance Sheet April 30, 2009 Assets Current assets Cash.......................................................................... $ 17,000 Supplies................................................................... 3,420 Prepaid insurance................................................... 2,405 Total current assets................................................ Plant assets Equipment................................................................ 140,460 Accumulated depreciationEquipment................. (33,000) Total assets................................................................ Liabilities Current liabilities Accounts payable.................................................... $ 6,580 Interest payable....................................................... 250 Rent payable............................................................ 1,400 Wages payable........................................................ 1,500 Property taxes payable........................................... 500 Current portion of long-term note payable........... 5,000 Total current liabilities............................................ $37,610 38,945 76,555 (25,500) $51,055
$ 22,825
107,460 $130,285
$ 15,230
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Long-term liabilities Long-term note payable (less current portion).... Total liabilities........................................................... Equity Common stock.......................................................... Retained earnings..................................................... Total liabilities and equity........................................ Problem 3-7B (Continued) Part 4
20,000 35,230 44,000 51,055 $130,285
(a) This error enters the wrong amount in the correct accounts. The ending balance of the Prepaid Insurance account should be $2,405, but the erroneous entry reduces that account by $2,405. Because its unadjusted balance was $6,500, the adjusted balance will now be $4,095 ($6,500 - $2,405), which is $1,690 greater than the correct $2,405 balance. In addition, the Insurance Expense account balance will be only $2,405 instead of the correct amount of $4,095. The adjusted trial balance columns in the work sheet will be equal, but the error will cause the work sheets net income to be overstated by $1,690 because of the understatement of expense. In addition, the balance sheet columns will include the overstated balance for the Prepaid Insurance account. This error is not likely to be detected as a result of completing the work sheet. If it is not, the income statement will overstate net income by $1,690, and the balance sheet will overstate the cost of the unexpired insurance and total equity by $1,690. (b) This error inserts a debit in the balance sheet columns instead of the income statement columns. In the unlikely event that this error is not immediately detected, it will cause the work sheet measure of net income to be overstated because the total debits will incorrectly omit the $2,100 expense for repairs.
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In all likelihood, the error will be discovered in the process of drafting the balance sheet because the accountant will realize that repairs expense is not an asset. If it is detected and corrected, the financial statements will be unaffected. However, if the repairs expense is erroneously included on the balance sheet, the reported net income will be overstated by $2,100. On the balance sheet, a nonexistent asset will be erroneously reported for the repairs expense and total equity will be overstated by $2,100.
SERIAL PROBLEM
Journal entries Dec. 2
SP 3
Serial Problem, Success Systems (180 minutes) Part 1
<Note: The general ledger is displayed at the end of Part 6.>
Advertising Expense..................................655 Cash.....................................................101
Paid share of mall advertising costs.
1,025 1,025 500 500 3,950 3,950 750 750 1,500 1,500 1,100 1,100
3
Repairs ExpenseComputer.....................684 Cash.....................................................101
Repaired the computer.
4
Cash.............................................................101 Accounts Receivable..........................106
Collected accounts receivable.
10
Wages Expense..........................................623 Cash.....................................................101
Paid employee for part-time work.
14
Cash.............................................................101 Unearned Computer Services Revenue...236
Received advance on work to be performed.
15
Computer Supplies....................................126 Accounts Payable...............................201
Purchased supplies on credit.
16 20
No entry recorded in the journal. Cash.............................................................101 Computer Services Revenue.............403
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Collected cash revenue from customer.
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28
Cash.............................................................101 Accounts Receivable..........................106
Collected accounts receivable.
3,000 3,000 192 192 1,500 1,500
29
Mileage Expense........................................676 Cash.....................................................101
Reimbursed Lopez for mileage.
31
Dividends....................................................319 Cash.....................................................101
Paid cash for dividends. Serial Problem SP 3 (Continued)
Part 2 Adjusting entries Dec. 31 Computer Supplies Expense .........................652 Computer Supplies .................................126
Adjustment for supplies used (supplies balance less cost of supplies available).
3,065 3,065
31 Insurance Expense .........................................637 Prepaid Insurance ...................................128
Adjustment for expired insurance (1/4 of original prepaid amount).
555 555
31 Wages Expense ..............................................623 Wages Payable ........................................210
Adjustment for accrued wages.
500 500 1,250 1,250
31 Depreciation ExpenseComputer Equip.......613 Accumulated Depreciation Computer Equipment...........................168
Adjustment for computer equipment depreciation: Cost......................................................... $20,000 Predicted life........................................... 4 years Annual depreciation (cost/life).............. $5,000 Expense for three months..................... $1,250
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31 Depreciation ExpenseOffice Equip............612 Accumulated Depreciation Office Equipment ..................................164
Adjustment for office equipment depreciation: Cost.......................................................... $8,000 Predicted life............................................ 5 years Annual depreciation (cost/life)............... $1,600 Expense for three months....................... $400
400 400
31 Rent Expense ..................................................640 Prepaid Rent ............................................131
Adjustment for expired rent (3/4 of original prepaid amount). Serial Problem SP 3 (Continued)
2,475 2,475
Part 3 SUCCESS SYSTEMS Adjusted Trial Balance December 31, 2009 Debit Cash ............................................................................ $ 58,160 Accounts receivable .................................................. 5,668 Computer supplies .................................................... 580 Prepaid insurance ..................................................... 1,665 Prepaid rent ................................................................ 825 Office equipment ....................................................... 8,000 Accumulated depreciationOffice equipment....... Computer equipment ................................................ 20,000 Accumulated depreciationComputer equipment. Accounts payable ...................................................... Wages payable ........................................................... Unearned computer services revenue .................... Common stock............................................................ Retained earnings...................................................... Dividends.................................................................... 7,100 Computer services revenue ..................................... Credit
$
400 1,250 1,100 500 1,500 83,000 0 31,284
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Depreciation expenseOffice equipment .............. 400 Depreciation expenseComputer equipment........ 1,250 Wages expense .......................................................... 3,875 Insurance expense .................................................... 555 Rent expense ............................................................. 2,475 Computer supplies expense .................................... 3,065 Advertising expense.................................................. 2,965 Mileage expense ........................................................ 896 Miscellaneous expenses .......................................... 250 Repairs expenseComputer ................................... 1,305 Totals........................................................................... $119,034 Serial Problem SP 3 (Continued) Part 4 SUCCESS SYSTEMS Income Statement For Three Months Ended December 31, 2009 Revenue Computer services revenue....................................... Expenses Depreciation expenseOffice equipment................ Depreciation expenseComputer equipment......... Wages expense........................................................... Insurance expense...................................................... Rent expense............................................................... Computer supplies expense...................................... Advertising expense................................................... Mileage expense......................................................... Miscellaneous expenses............................................ Repairs expenseComputer..................................... Total expenses............................................................ Net income.....................................................................
_______ $119,034
$31,284 $ 400 1,250 3,875 555 2,475 3,065 2,965 896 250 1,305 17,036 $14,248
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
SUCCESS SYSTEMS Statement of Retained Earnings For Three Months Ended December 31, 2009 Retained earnings, October 1, 2009............................ Plus: Net income.......................................................... Less: Dividends............................................................ Retained earnings, December 31, 2009...................... Serial Problem SP 3 (Continued) Part 4continued SUCCESS SYSTEMS Balance Sheet December 31, 2009 Assets Cash ................................................................................ Accounts receivable ..................................................... Computer supplies ........................................................ Prepaid insurance ......................................................... Prepaid rent ................................................................... Office equipment ........................................................... $ 8,000 Accumulated depreciationOffice equipment............. (400) Computer equipment..................................................... Accumulated depreciationComputer equipment...... Total assets..................................................................... 20,000 (1,250) $ 0 14,248 14,248 7,100 $ 7,148
$ 58,160 5,668 580 1,665 825 7,600 18,750 $ 93,248
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Liabilities Accounts payable........................................................... Wages payable............................................................... Unearned computer services revenue......................... Total liabilities................................................................ Equity Common stock............................................................... Retained earnings.......................................................... Total liabilities and equity............................................. Serial Problem SP 3 (Continued) Part 5 Closing entries
2009
$
1,100 500 1,500 3,100
83,000 7,148 $ 93,248
Dec. 31 Computer Services Revenue .......................... 403 Income Summary...................................... 901
To close the revenue account.
31,284 31,284 17,036 400 1,250 3,875 555 2,475 3,065 2,965 896 250 1,305 14,248 14,248
31 Income Summary.............................................. 901 Depreciation ExpOffice Equipment....... 612 Depreciation ExpComputer Equipment... 613 Wages Expense ........................................ 623 Insurance Expense .................................. 637 Rent Expense ........................................... 640 Computer Supplies Expense .................. 652 Advertising Expense ................................ 655 Mileage Expense ...................................... 676 Miscellaneous Expenses ......................... 677 Repairs ExpenseComputer ................. 684
To close the expense accounts.
31
Income Summary.............................................. 901 Retained Earnings..................................... 318
To close the Income Summary account.
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31
Retained Earnings............................................ 318 Dividends................................................... 319
To close the dividends account.
7,100 7,100
Note: All accounts with numbers that start with the digits 1 or 2 (the permanent accounts) are unaffected by the closing process.
Serial Problem SP 3 (Concluded) Part 6 SUCCESS SYSTEMS Post-Closing Trial Balance December 31, 2009 Debit Cash............................................................................... $ 58,160 Accounts receivable..................................................... Computer supplies........................................................ Prepaid insurance......................................................... Prepaid rent................................................................... Office equipment........................................................... Accumulated depreciationOffice equipment.......... Computer equipment.................................................... Accumulated depreciationComputer equipment... Accounts payable......................................................... Wages payable.............................................................. Unearned computer services revenue........................ Common stock.............................................................. Retained earnings......................................................... 20,000 1,250 1,100 500 1,500 83,000 7,148 5,668 580 1,665 825 8,000 $ 400 Credit
Totals.............................................................................. $ 94,898 $ 94,898
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Serial Problem SP 3 (Continued)
[Note: The ledger includes all entries from the prior three months. The Working Papers shorten the solution by showing the balances of the accounts as of November 30, 2009.]
General Ledger
Cash Date Oct. Explanation 1 2 5 8 15 17 20 22 31 31 1 2 5 18 22 28 30 30 2 3 4 10 14 20 28 29 31 PR Debit 55,000
4,800 1,400
Nov.
4,633 2,208
Dec.
3,950 1,500 5,625 3,000
Acct. No. 101 Credit Balance 55,000 3,300 51,700 2,220 49,480 1,420 48,060 52,860 805 52,055 1,940 50,115 51,515 875 50,640 3,600 47,040 320 46,720 51,353 1,125 50,228 52,436 250 52,186 384 51,802 1,750 50,052 2,000 48,052 1,025 47,027 500 46,527 50,477 750 49,727 51,227 56,852 59,852 192 59,660 1,500 58,160
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Serial Problem SP 3 (Continued) Date Oct. Accounts Receivable Explanation PR Debit 4,800 1,400 5,208 5,668 3,950 Acct. No. 106 Credit Balance 4,800 6,200 4,800 1,400 1,400 0 5,208 10,876 2,208 8,668 12,618 3,950 8,668 3,000 5,668 Acct. No. 126 Credit Balance 1,420 2,545 3,645 3,065 580 Acct. No. 128 Credit Balance 2,220 555 1,665 Acct. No. 131 Credit Balance 3,300 2,475 825 Acct. No. 163 Credit Balance 8,000
Nov. Dec.
6 12 15 22 28 8 18 24 4 28
Date Oct. Nov. Dec.
Computer Supplies Explanation PR 3 5 15 31 Prepaid Insurance Explanation PR 5 31 Prepaid Rent Explanation PR 2 31 Office Equipment Explanation PR 1
Debit 1,420 1,125 1,100
Date Oct. Dec. Date Oct. Dec. Date Oct. Date Dec.
Debit 2,220
Debit 3,300
Debit 8,000
Accumulated DepreciationOffice Equipment Acct. No. 164 Explanation PR Debit Credit Balance 31 400 400
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Serial Problem SP 3 (Continued) Date Oct. Date Dec. Date Oct. Dec. Date Dec. Date Dec. Date Oct. Date Dec. Computer Equipment Explanation PR Debit 20,000 Acct. No. 167 Credit Balance 20,000
1
Accumulated DepreciationComputer Equipment Acct. No. 168 Explanation PR Debit Credit Balance 31 1,250 1,250 Accounts Payable Explanation PR Debit 3 8 15 Explanation 31 Unearned Computer Services Revenue Explanation PR Debit 14 Common Stock Explanation PR 1 Retained Earnings Explanation PR Debit 31 31 Explanation 31 30 31 31 Dividends PR 7,100 Debit 3,600 2,000 1,500 Debit Wages Payable PR 1,420 Acct. No. 201 Credit Balance 1,420 1,420 0 1,100 1,100 Acct. No. 210 Credit Balance 500 500 Acct. No. 236 Credit Balance 1,500 1,500 Acct. No. 307 Credit Balance 83,000 83,000 Acct. No. 318 Credit Balance 14,248 14,248 7,148 Acct. No. 319 Credit Balance 3,600 5,600 7,100 7,100 0
Debit
Date Oct. Nov. Dec.
Closing
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Serial Problem SP 3 (Continued) Date Oct. Nov. Dec. Computer Services Revenue Explanation PR Debit 6 12 28 2 8 24 20 31 Acct. No. 403 Credit Balance 4,800 4,800 1,400 6,200 5,208 11,408 4,633 16,041 5,668 21,709 3,950 25,659 5,625 31,284 0
Closing
31,284
Date Dec.
31 31
Depreciation ExpenseOffice Equipment Acct. No. 612 Explanation PR Debit Credit Balance 400 400 Closing 400 0
Date Dec.
Depreciation ExpenseComputer Equipment Acct. No. 613 Explanation PR Debit Credit Balance 31 1,250 1,250 31 Closing 1,250 0 Wages Expense Explanation PR 31 30 10 31 31 Debit 875 1,750 750 500 Acct. No. 623 Credit Balance 875 2,625 3,375 3,875 3,875 0 Acct. No. 637 Credit Balance 555 555 0 Acct. No. 640 Credit Balance 2,475 2,475 0
Date Oct. Nov. Dec.
Closing Insurance Expense Explanation PR Debit 555 Closing Explanation Rent Expense PR Debit 2,475
Date Dec.
31 31
Date Dec.
31 31
Closing
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Serial Problem SP 3 (Continued) Date Dec. Computer Supplies Expense Explanation PR Debit 3,065 Closing Advertising Expense Explanation PR Debit 1,940 1,025 Closing Mileage Expense Explanation PR 1 28 29 31 Debit 320 384 192 Acct. No. 652 Credit Balance 3,065 3,065 0 Acct. No. 655 Credit Balance 1,940 2,965 2,965 0 Acct. No. 676 Credit Balance 320 704 896 896 0 Acct. No. 677 Credit Balance 250 250 0 Acct. No. 684 Credit Balance 805 1,305 1,305 0 Acct. No. 901 Credit Balance 31,284 31,284 14,248 0
31 31
Date Oct. Dec.
20 2 31
Date Nov. Dec.
Closing Miscellaneous Expense Explanation PR Debit 250 Closing Repairs ExpenseComputer Explanation PR Debit 805 500 Closing Income Summary Explanation PR Debit Closing Closing 17,036 Closing 14,248
Date Nov. Dec. Date Oct. Dec.
22 31
17 3 31
Date Dec.
31 31 31
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Reporting in Action
BTN 3-1
1. The revenue recognition principle requires that revenue be recorded when earned, not before and not after. Most companies earn revenue when they provide services and products to customers. 2. Best Buy provides information on revenue recognition in footnote 1 entitled Summary of Significant Accounting Policies. They state that they recognize revenue when the sales price is fixed or determinable, collectibility is reasonably assured and the customer takes possession of the merchandise. In the case of services, revenue is regonized at the time the service is provided Extended service contracts are sold on behalf of an unrelated third party. Some jurisdictions do not deem Best Buy to be the guarantor, and those commissions are recognized at the date of sale. For those jurisdictions where Best Buy is considered to be obligated under the contract, commissions are earned evenly over the course of the contract. Gift card revenue is deferred until the customer redeems the card, or when the likelihood of the gift card being redeemed is remote. 3. For fiscal year-end March 3, 2007, the profit margin is: $1,377 / $35,934 = 0.038 = 3.8% For fiscal year-end February 25, 2006, the profit margin is: $1,140 / $30,848 = 0.037 = 3.7% 4. The total revenues that would be credited to Income Summary as step 1 in the closing entry process must be computed. Best Buys sales revenue for the fiscal year-ended March 3, 2007, is $35,934, its interest income is $111, and it has a gain on investments of $20. Thus, its total revenue that is closed to Income Summary is $36,065. (All amounts are in millions.) Reporting in Action BTN 3-1 (concluded)
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5. The total expenses that would be debited to Income Summary as step 2 in the closing entry process must be computed. Best Buys total expenses for the fiscal year ended March 3, 2007, are (in millions): Cost of goods sold........................................................ $27,165 Selling, general and administrative.............................. 6,770 Income tax expense....................................................... 752 Minority interest in earnings......................................... 1 Total expenses............................................................... $34,688 6. The balance of Income Summary before it is closed as of March 3, 2007, equals the net income for Best Buy of $1,377,000,000. 7. Solution depends on the financial statements accessed.
Comparative Analysis
1. Best Buy
BTN 3-2
Current year, profit margin = $1,377 / $35,934 Prior year, profit margin = $1,140 / $30,848 RadioShack Current year, profit margin = $ 73 / $4,778 Prior year, profit margin = $267 / $5,082
= 3.8% = 3.7%
= 1.5% = 5.3%
2. Best Buy is more successful on the basis of profit margin in the current year, but RadioShack is more successful in the prior year. In the current year, Best Buy earned an average of 3.8 cents on each dollar while RadioShack earned only 1.5 cents on each dollar. 3. Best Buys current ratios Current year......... $9,081 / $6,301 Prior year.............. $7,985 / $6,056 RadioShacks current ratios Current year......... $1,600 / $984 Prior year.............. $1,627 / $986
= 1.44 = 1.32
= 1.63 = 1.65
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4. In both years, RadioShack has the higher current ratio (1.63 vs. 1.44 for this year; 1.65 vs. 1.32 in the prior year), suggesting a better ability to pay short-term obligations. Overall, neither company is in immediate danger of failing to make payment on short-term obligations. 5 Best Buys current ratio improved, moving from 1.32 to 1.44. RadioShacks current ratio declined slightly from 1.65 to 1.63.
6. RadioShacks current ratio is slightly above the industry average for both years, and Best Buys is below the industry average for both years. However, neither company appears at risk of failing to pay its current creditors.
Ethics Challenge
BTN 3-3
1. There are several courses of action that Tamira could have taken. Two possibilities follow: a. She could have consulted with the president and told him that finalized financial statements would not be ready by the time of the meeting. She could explain that delay in financial statement preparation is a normal event given the need to wait for final information to prepare accurate adjustments. Possibly the meeting could be rescheduled or Tamira could have asked how the president preferred her to proceed. b. The estimation decision was not a bad choice in itself. But she should have informed the president. Tamira probably should have used less optimistic estimates instead of recording expenses on the low side. Users of financial statements usually prefer knowing worst-case scenarios over best-case outcomes. Use of estimates gets the financial statements closer to their final form than ignoring the adjustments completely. 2. Students may offer one of the above alternatives or another response they may think of given the situation. Try to generate a discussion of ethical concerns and the impact of her decisions on the well-being of users (such as the bankers and the investors in the banks).
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3.
Communicating in Practice
BTN 3-4
TO: _____________________ FROM: _____________________ DATE: ______________________ SUBJECT: CLARIFICATIONSOBJECTIVE OF THE CLOSING PROCESS
[Note: The following is a sample of what the memorandums contents might include.]
When we speak of closing the books or the closing process we are not talking about ending or closing the business nor doing anything that reflects this thinking in the financial statements. Let me use an analogy to explain the concept of the closing process and then you will see the distinction more clearly. Scoreboards are used to temporarily hold information that will allow us to determine who won or lost in an athletic game or event. When the athletic event is over the result of the game is permanently recorded elsewhere-probably in the teams record book. If the scoreboard were not cleared before the start of a new game the scores from the second game would be combined with scores from the first game. As a result, the scoreboard would reflect data or scores that were not relevant to either game. You can see that the scoreboard must be zeroed out to prepare it for accumulating data to determine the outcome of the next game. The revenue and expense accounts temporarily hold the information to determine if the owner(s) won or lost in the game of business. Each fiscal period should be viewed as a separate game. After the data in these accounts has allowed us to determine if the owner(s) won or lost, in other words, the net income or loss, these accounts must be cleared to accumulate data for the next game or period. We record the score of the game of business, or the net income or loss, in the permanent recordbook or equity (the retained earnings account). A win or net income increases equity and a loss or net loss decreases equity. I hope this memo clarifies the objective of the closing process.
[Note: The memorandum need not discuss the income summary account since the assignment requires explaining the concept, not the procedure.]
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Taking It to the Net
BTN 3-5
1. The Gaps main brands (stores) are The Gap, Old Navy, and Banana Republic. It also has Piperlime and Forth & Towne brands. 2. The Gaps fiscal year-end is February 3, 2007. It appears that The Gaps fiscal year-end is late January or early February. 3. Net sales for the year ended February 3, 2007, are $15,943,000,000. 4. Net income for the year ended February 3, 2007, is $778,000,000. 5. Profit margin = $778,000,000 / $15,943,000,000 = 4.88% 6. The company probably chose a year-end at the end of January or early February to have it be consistent with their natural year. For many retailers, the highest amount of sales is in November and December.
Taking It to the Net
BTN 3-6
1. The Motley Fool states that a benchmark of 1.5 is generally regarded as sufficient to meet near-term operating needs.
2.
One should always check a companys current ratio (as well as any other ratio) against its main competitors in a given industry. Industries have their own norms as far as what values of current ratios make sense and which do not. A current ratio that is too high can suggest that a company is hoarding assets instead of using them to effectively grow the businessthis is an inefficient use of resources that can potentially impair long-term returns.
3.
Teamwork in Action
BTN 3-7
Note that there is no specific solution to this activity. Nevertheless, the presentation of each expert team should reflect the following summary points: Before Adjusting Balance Sheet Income Statement Account Account
Type
Adjusting Entry
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
Prepaid Expenses Unearned Revenues Accrued Expenses Accrued Revenues
Asset overstated Liability overstated
Expense understated Revenue understated
Liability understated Expense understated Asset understated Revenue understated
Dr. Expense Cr. Asset* Dr. Liability Cr. Revenue Dr. Expense Cr. Liability Dr. Asset Cr. Revenue
* For depreciation, one would Credit the Accumulated Depreciation contra account.
Some implementation notes: This activity allows all students to be actively involved in the learning process. Encourage students to take the opportunity to ask questions in the small group environment the learning team provides. Encourage the better students to serve as experts on unearned revenues. The instructors observation of and reactions to expert teams development of presentation material as well as the delivery to learning teams will have a significant impact on the effectiveness of this activity.
Entrepreneurial Decision
BTN 3-8
1. a. To record cash collection in advance of the sale of apparel Cash..................................................................... 3,000 Unearned revenue.......................................... b. To record the shipment of apparel to the customer Unearned revenue............................................... 3,000 Revenue earned............................................. Entrepreneurial Decision BTN 3-8 (concluded) 3,000 3,000
2. Not carrying inventory allows Janet Freeman to save costs associated with carrying inventory such as warehousing costs, insurance, and losses. Saving these costs can increase income. (In addition, not having any uncollectible accounts from sales on credit would increase income as well.) By increasing income, profit margin should be increased as well.
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Chapter 03 Adjusting Accounts and Preparing Financial Statements
3. When carrying sufficient inventories, Janet Freeman of Betty Rides can provide her apparel to customers more quickly. This might increase sales as her reputation for quick delivery becomes known. On the other hand, carrying inventory has risks. The most important for a company like Betty Rides is that of obsolescence (missing trends). Consumer tastes and trends are constantly changing, and by carrying no inventory, Janet Freeman can be flexible in the products offered.
Hitting the Road
BTN 3-9
There is no formal solution to this field activity. The instructor may wish to tally students findings to show results across companies as to use of work sheets, software preferences, and time it takes to prepare finalized annual financial statements.
Global Decision
1.
BTN 3-10
DSGs Note 1.3 reports that revenue from sales of good is recognized at the point of sale or upon delivery to the customer. Revenue from customer support agreements is recognized over the life of the agreement. Profit margin = 206.6 / 7,929.7 = 2.6% ( amounts in millions)
2.
3. Current ratio ( amounts in millions) This year: 2,066.9 / 1,869.4 = 1.11 Last year: 2,093.9 / 1,749.1 = 1.20
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