3
Adjusting CHAPTER the Accounts
ASSIGNMENT CLASSIFICATION TABLE
Brief Exercises A Problems B Problems
Study Objectives *1. Explain the time period assumption. *2. Explain the accrual basis of accounting. *3. Explain the reasons for adjusting entries. *4. Identify the major types of adjusting entries. *5. Prepare adjusting entries for deferrals.
Questions 1
Exercises 1
2, 3, 4, 5
2, 3, 10
6, 7
1
8, 18
2, 8
4, 6, 11
8, 9, 10, 11, 12, 13, 18, 19, 20 8, 14, 15, 16, 17, 18, 19, 20 21
3, 4, 5, 6
5, 6, 7, 8, 9, 10, 11, 12, 13, 15 5, 6, 7, 8, 9, 10, 11, 12, 13, 15 10, 11, 12, 13, 14
1A, 2A, 3A, 4A, 5A, 6A
1B, 2B, 3B, 4B, 5B
*6. Prepare adjusting entries for accruals.
7
1A, 2A, 3A, 4A, 5A, 6A
1B, 2B, 3B, 4B, 5B
*7. Describe the nature and purpose of an adjusted trial balance. *8. Prepare adjusting entries for the alternative treatment of deferrals.
9, 10
1A, 2A, 3A, 5A, 6A
1B, 2B, 3B, 5B
22
11
16, 17
6A
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter.
3-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem Number 1A Difficulty Level Simple Time Allotted (min.) 4050
Description Prepare adjusting entries, post to ledger accounts, and prepare an adjusted trial balance. Prepare adjusting entries, post, and prepare adjusted trial balance and financial statements. Prepare adjusting entries and financial statements. Prepare adjusting entries. Journalize transactions and follow through accounting cycle to preparation of financial statements. Prepare adjusting entries, adjusted trial balance, and financial statements using appendix. Prepare adjusting entries, post to ledger accounts, and prepare an adjusted trial balance. Prepare adjusting entries, post, and prepare adjusted trial balance and financial statements. Prepare adjusting entries and financial statements. Prepare adjusting entries. Journalize transactions and follow through accounting cycle to preparation of financial statements.
2A
Simple
5060
3A 4A 5A
Moderate Moderate Moderate
4050 3040 6070
*6A*
Moderate
4050
1B
Simple
4050
2B
Simple
5060
3B 4B 5B
Moderate Moderate Moderate
4050 3040 6070
3-2
Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
Knowledge Q3-1 Q3-2 Q3-3 Q3-6 Q3-7 Q3-8 Q3-18 BE3-2 Q3-8 Q3-9 Q3-10 Q3-11 Q3-12 Q3-13 Q3-19 Q3-20 Q3-8 Q3-14 Q3-15 Q3-19 Q3-20 Q3-17 Q3-16 Q3-18 BE3-7 E3-5 E3-6 E3-7 E3-8 E3-9 Q3-21 BE3-9 BE3-10 E3-14 E3-10 E3-11 E3-12 E3-13 P3-1A Q3-22 Communication BE3-11 E3-16 BE3-8 E3-6 E3-4 E3-11 P3-4A E3-15 P3-5A P3-6A P3-1B P3-2B P3-3B P3-4B P3-5B Q3-18 BE3-3 BE3-4 BE3-5 BE3-6 E3-5 E3-6 E3-7 E3-8 E3-9 E3-10 E3-11 E3-12 E3-13 E3-15 P3-1A P3-2A P3-3A E3-10 E3-11 E3-12 E3-13 E3-15 P3-1A P3-2A P3-3A P3-4A E3-15 P3-5A P3-6A P3-1B P3-2B P3-3B P3-4B P3-5B P3-2A P3-2B P3-3A P3-3B P3-5A P3-5B P3-6A P3-1B E3-17 P3-6A Decision Making All About You Financial Reporting Ethics Case Comparative Analysis Across the Organization Exploring the Web BE3-1 Q3-4 Q3-5 E3-3 E3-10 E3-1 E3-2 Comprehension Application Analysis Synthesis Evaluation
Study Objective
*1.
Explain the time period assumption.
*2.
Explain the accrual basis of accounting.
*3.
Explain the reasons for adjusting entries.
*4.
Identify the major types of adjusting entries.
BLOOMS TAXONOMY TABLE
*5.
Prepare adjusting entries for deferrals.
3-3
*6.
Prepare adjusting entries for accruals.
*7.
Describe the nature and purpose of an adjusted trial balance.
*8.
Prepare adjusting entries for the alternative treatment of deferrals.
Broadening Your Perspective
ANSWERS TO QUESTIONS
1. (a) Under the time period assumption, an accountant is required to determine the relevance of each business transaction to specific accounting periods. (b) An accounting time period of one year in length is referred to as a fiscal year. A fiscal year that extends from January 1 to December 31 is referred to as a calendar year. Accounting periods of less than one year are called interim periods. The two generally accepted accounting principles that relate to adjusting the accounts are: The revenue recognition principle, which states that revenue should be recognized in the accounting period in which it is earned. The matching principle, which states that efforts (expenses) be matched with accomplishments (revenues). The law firm should recognize the revenue in April. The revenue recognition principle states that revenue should be recognized in the accounting period in which it is earned. Information presented on an accrual basis is more useful than on a cash basis because it reveals relationships that are likely to be important in predicting future results. To illustrate, under accrual accounting, revenues are recognized when earned so they can be related to the economic environment in which they occur. Trends in revenues are thus more meaningful. Expenses of $4,500 should be deducted from the revenues in April. Under the matching principle efforts (expenses) should be matched with accomplishments (revenues). No, adjusting entries are required by the revenue recognition and matching principles. A trial balance may not contain up-to-date information for financial statements because: (1) Some events are not journalized daily because it is not efficient to do so. (2) The expiration of some costs occurs with the passage of time rather than as a result of daily transactions. (3) Some items may be unrecorded because the transaction data are not known. The two categories of adjusting entries are deferrals and accruals. Deferrals consist of prepaid expenses and unearned revenues. Accruals consist of accrued revenues and accrued expenses. In the adjusting entry for a prepaid expense, an expense is debited and an asset is credited. No. Depreciation is the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner. Depreciation results in the presentation of the book value of the asset, not its market value. Depreciation expense is an expense account whose normal balance is a debit. This account shows the cost that has expired during the current accounting period. Accumulated depreciation is a contra asset account whose normal balance is a credit. The balance in this account is the depreciation that has been recognized from the date of acquisition to the balance sheet date. Equipment .................................................................................................................. Less: Accumulated Depreciation.......................................................................... $18,000 6,000
2.
3.
4.
5.
6. 7.
8.
9. 10.
11.
12.
$12,000
3-4
Questions Chapter 3 (Continued)
*13. *14. *15. *16.
In the adjusting entry for an unearned revenue, a liability is debited and a revenue is credited. Asset and revenue. An asset would be debited and a revenue would be credited. An expense is debited and a liability is credited. Net income was understated $200 because prior to adjustment, revenues are understated by $900 and expenses are understated by $700. The difference in this case is $200 ($900 $700). The entry is: Jan. 9 Salaries Payable ......................................................................................... Salaries Expense........................................................................................ Cash ..................................................................................................... (a) (b) (c) (a) (b) (c) Accrued revenues. Unearned revenues. Accrued expenses. Salaries Payable. Accumulated Depreciation. Interest Expense. (d) (e) (f) (d) (e) (f)
*17.
2,000 3,000 5,000
*18.
Accrued expenses or prepaid expenses. Prepaid expenses. Accrued revenues or unearned revenues. Supplies Expense. Service Revenue. Service Revenue.
*19.
*20.
Disagree. An adjusting entry affects only one balance sheet account and one income statement account. Financial statements can be prepared from an adjusted trial balance because the balances of all accounts have been adjusted to show the effects of all financial events that have occurred during the accounting period. For Supplies Expense (prepaid expense): expenses are overstated and assets are understated. The adjusting entry is: Assets (Supplies)...................................................................................................... XX Expenses (Supplies Expense)........................................................................ XX For Rent Revenue (unearned revenues): revenues are overstated and liabilities are understated. The adjusting entry is: Revenues (Rent Revenue) ..................................................................................... XX Liabilities (Unearned Rent Revenue) ............................................................ XX
*21.
*22.
3-5
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3-1 (a) Prepaid Insuranceto recognize insurance expired during the period. (b) Depreciation Expenseto account for the depreciation that has occurred on the asset during the period. (c) Unearned Revenueto record revenue earned for services provided. (d) Interest Payableto recognize interest accrued but unpaid on notes payable.
BRIEF EXERCISE 3-2 Item 1. (a) Type of Adjustment Prepaid Expenses (b) Account Balances before Adjustment Assets Overstated Expenses Understated Assets Understated Revenues Understated Expenses Understated Liabilities Understated Liabilities Overstated Revenues Understated
2.
Accrued Revenues
3.
Accrued Expenses
4.
Unearned Revenues
BRIEF EXERCISE 3-3 Dec. 31 Advertising Supplies Expense.................................. Advertising Supplies ($6,700 $2,700) ......... 4,000 4,000
Advertising Supplies 6,700 12/31 4,000 12/31 Bal. 2,700
Advertising Supplies Expense 12/31 4,000
3-6
BRIEF EXERCISE 3-4 Dec. 31 Depreciation ExpenseEquipment........................ Accumulated Depreciation Equipment.......................................................... 5,000 5,000
Depr. ExpenseEquipment 12/31 5,000
Accum. DepreciationEquipment 12/31 5,000
Balance Sheet: Equipment....................................................................... Less: Accumulated Depreciation...........................
$30,000 5,000
$25,000
BRIEF EXERCISE 3-5 July 1 Prepaid Insurance.................................................... Cash..................................................................... Insurance Expense [($18,000 3) X 1/2] .......... Prepaid Insurance........................................... 18,000 18,000 3,000 3,000
Dec. 31
Prepaid Insurance 7/1 18,000 12/31 12/31 Bal. 15,000
3,000
12/31
Insurance Expense 3,000
BRIEF EXERCISE 3-6 July 1 Cash ............................................................................. Unearned Insurance Revenue .................... Unearned Insurance Revenue ............................. Insurance Revenue......................................... 18,000 18,000 3,000 3,000
Dec. 31
Unearned Insurance Revenue 12/31 3,000 7/1 18,000 12/31 Bal. 15,000
Insurance Revenue 12/31
3,000
3-7
BRIEF EXERCISE 3-7 1. Dec. 31 Interest Expense................................................... Interest Payable ........................................... Accounts Receivable .......................................... Service Revenue .......................................... Salaries Expense .................................................. Salaries Payable .......................................... 400 400 1,500 1,500 900 900
2.
31
3.
31
BRIEF EXERCISE 3-8
Account Accounts Receivable Prepaid Insurance Accum. Depr.Equipment Interest Payable Unearned Service Revenue (a) Type of Adjustment Accrued Revenues Prepaid Expenses Prepaid Expenses Accrued Expenses Unearned Revenues (b) Related Account Service Revenue Insurance Expense Depreciation Expense Interest Expense Service Revenue
BRIEF EXERCISE 3-9 HARMONY COMPANY Income Statement For the Year Ended December 31, 2008 Revenues Service revenue.............................................................. Expenses Salaries expense ............................................................ Rent expense................................................................... Insurance expense ........................................................ Supplies expense........................................................... Depreciation expense................................................... Total expenses....................................................... Net income ................................................................................ $35,400 $16,000 4,000 2,000 1,500 1,300 24,800 $10,600
3-8
BRIEF EXERCISE 3-10 HARMONY COMPANY Owners Equity Statement For the Year Ended December 31, 2008 Capital, January 1.......................................................................................... Add: Net income........................................................................................... Less: Drawings ............................................................................................. Capital, December 31 ................................................................................... $15,600 10,600 26,200 6,000 $20,200
*BRIEF EXERCISE 3-11 (a) Apr. 30 Supplies................................................................... Supplies Expense........................................ Service Revenue................................................... Unearned Service Revenue...................... 1,000 1,000 3,000 3,000
(b)
30
3-9
SOLUTIONS TO EXERCISES
EXERCISE 3-1 1. 2. 3. True. True. False. Many business transactions affect more than one of these artificial time periods. For example, the purchase of a building affects expenses for many years. True. False. A time period that lasts less than one year, such as monthly or quarterly periods, is called an interim period. False. All calendar years are fiscal years, but not all fiscal years are calendar years. An accounting time period that is one year in length is referred to as a fiscal year. A fiscal year that starts on January 1 and ends on December 31 is a calendar year.
4. 5. 6.
EXERCISE 3-2 (a) Accrual-basis accounting records the transactions that change a companys financial statements in the periods in which the events occur rather than in the periods in which the company receives or pays cash. Information presented on an accrual basis is useful because it reveals relationships that are likely to be important in predicting future results. Conversely, under cash-basis accounting, revenue is recorded only when cash is received, and an expense is recognized only when cash is paid. As a result, the cash basis of accounting often leads to misleading financial statements. (b) Politicians might desire a cash-basis accounting system over an accrualbasis system because if an accrual-accounting system is used, it could mean that billions in government liabilities presently unrecorded would have to be reported in the federal budget immediately. The recognition of these additional liabilities would make the deficit even worse. This is not what politicians would like to see and be held responsible for.
3-10
(c) Dear Senator, It is my understanding, after having taken a beginning course in accounting principles, that the Federal government uses a cash-basis system rather than an accrual-basis accounting system. I am shocked at such a practice! There must be billions of dollars of liabilities hidden in many contracts that have not been recorded yet for the mere reason that they havent been paid yet. I realize that the deficit would dramatically increase if we were to implement an accrual system, but in all fairness, we citizens should be given a more accurate picture of what our government is up to. Sincerely, CONCERNED STUDENT
EXERCISE 3-3 (a) Cash received from revenue................................................... Cash paid for expenses............................................................ Cash-basis net income................................................... Revenues [($100,000 $25,000) + $40,000]........................ Expenses [($70,000 $30,000) + $42,000] .......................... Accrual-basis net income.............................................. $100,000 (70,000) $ 30,000 $115,000 (82,000) $ 33,000
(b)
EXERCISE 3-4 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Unearned revenue. Accrued expense. Accrued expense. Accrued revenue. Prepaid expense. Unearned revenue. Accrued revenue. Prepaid expense. Prepaid expense. Prepaid expense. Accrued expense.
3-11
EXERCISE 3-5 1. Interest Expense............................................................... Interest Payable ........................................................ ($10,000 X 12% X 4/12) Supplies Expense ............................................................ Supplies ...................................................................... ($2,450 $800) Depreciation Expense..................................................... Accumulated DepreciationEquipment .......... Insurance Expense .......................................................... Prepaid Insurance.................................................... ($2,100 X 7/12) Unearned Consulting Revenue.................................... Consulting Revenue................................................ ($40,000 X 1/4) Accounts Receivable ...................................................... Consulting Revenue................................................ Salaries Expense.............................................................. Salaries Payable ....................................................... ($9,000 X 3/5) 400 400
2.
1,650 1,650
3.
1,000 1,000 1,225 1,225
4.
5.
10,000 10,000
6.
4,200 4,200 5,400 5,400
7.
3-12
EXERCISE 3-6 (a) Type of Adjustment Accrued Revenues (b) Accounts before Adjustment Assets Understated Revenues Understated Assets Overstated Expenses Understated Expenses Understated Liabilities Understated Liabilities Overstated Revenues Understated Expenses Understated Liabilities Understated Assets Overstated Expenses Understated
Item 1.
2.
Prepaid Expenses
3.
Accrued Expenses
4.
Unearned Revenues
5.
Accrued Expenses
6.
Prepaid Expenses
EXERCISE 3-7 1. Mar. 31 Depreciation Expense ($400 X 3) .................... Accumulated Depreciation Equipment ................................................. Unearned Rent....................................................... Rent Revenue ($9,900 X 1/3) .................... Interest Expense................................................... Interest Payable ........................................... Supplies Expense................................................. Supplies ($2,800 $700) ........................... Insurance Expense ($200 X 3).......................... Prepaid Insurance ....................................... 1,200 1,200 3,300 3,300 500 500 2,100 2,100 600 600
2.
31
3.
31
4.
31
5.
31
3-13
EXERCISE 3-8 1. Jan. 31 Accounts Receivable........................................... Service Revenue .......................................... Utilities Expense ................................................... Utilities Payable............................................ Depreciation Expense ......................................... Accumulated Depreciation Dental Equipment.................................... Interest Expense ................................................... Interest Payable............................................ Insurance Expense ($12,000 12) .................. Prepaid Insurance........................................ Supplies Expense ($1,600 $400)................... Supplies .......................................................... 875 875 520 520 400 400 500 500 1,000 1,000 1,200 1,200
2.
31
3.
31
31
4.
31
5.
31
EXERCISE 3-9 1. Oct. 31 Advertising Supplies Expense ......................... Advertising Supplies .................................. ($2,500 $500) Insurance Expense............................................... Prepaid Insurance........................................ Depreciation Expense ......................................... Accumulated Depreciation Office Equipment..................................... Unearned Revenue............................................... Service Revenue .......................................... Accounts Receivable........................................... Service Revenue .......................................... 2,000 2,000
2.
31
100 100 50 50 600 600 300 300
3.
31
4.
31
5.
31
3-14
EXERCISE 3-9 (Continued) 6. Oct. 31 Interest Expense............................................ Interest Payable .................................... Salaries Expense........................................... Salaries Payable ................................... 70 70 1,500 1,500
7.
31
EXERCISE 3-10 BENNING CO. Income Statement For the Month Ended July 31, 2008 Revenues Service revenue ($5,500 + $500)................................... Expenses Wages expense ($2,300 + $300).................................... Supplies expense ($1,200 $200)................................ Utilities expense................................................................. Insurance expense............................................................ Depreciation expense ...................................................... Total expenses .......................................................... Net income.................................................................................... $6,000 $2,600 1,000 600 400 150 4,750 $1,250
EXERCISE 3-11 Answer (a) Supplies balance = $1,300 Computation Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1) $ 950 850 (500) $1,300
(b) Total premium = $4,800 Purchase date = Aug. 1, 2007
Total premium = Monthly premium X 12; $400 X 12 = $4,800 Purchase date: On Jan. 31, there are 6 months coverage remaining ($400 X 6). Thus, the purchase date was 6 months earlier on Aug. 1, 2007.
3-15
EXERCISE 3-11 (Continued) (c) Salaries payable = $2,500 Cash paid Salaries payable (1/31/08) Less: Salaries expense Salaries payable (12/31/07) (d) Unearned revenue = $1,150 Service revenue Unearned service revenue (1/31/08) Cash received in January Unearned service revenue (12/31/07) EXERCISE 3-12 (a) July 10 Supplies ................................................................... Cash ................................................................. Cash .......................................................................... Service Revenue .......................................... Salaries Expense .................................................. Cash ................................................................. Cash .......................................................................... Unearned Revenue ...................................... Supplies Expense................................................. Supplies .......................................................... Accounts Receivable........................................... Service Revenue .......................................... Salaries Expense .................................................. Salaries Payable........................................... Unearned Revenue............................................... Service Revenue ..........................................
3-16
$3,500 800 4,300 1,800 $2,500 $2,000 750 2,750 1,600 $1,150
400 400 2,000 2,000 1,200 1,200 1,000 1,000 800 800 500 500 1,200 1,200 900 900
14
15
20
(b) July 31
31
31
31
EXERCISE 3-13 Aug. 31 Accounts Receivable............................................ Service Revenue ........................................... Office Supplies Expense..................................... Office Supplies .............................................. Insurance Expense................................................ Prepaid Insurance ........................................ Depreciation Expense .......................................... Accumulated DepreciationOffice Equipment .................................................. Salaries Expense ................................................... Salaries Payable............................................ Unearned Rent........................................................ Rent Revenue................................................. 1,000 1,000 1,600 1,600 1,500 1,500 900 900 1,100 1,100 900 900
31
31
31
31
31
EXERCISE 3-14 GARCIA COMPANY Income Statement For the Year Ended August 31, 2008 Revenues Service revenue ................................................................. Rent revenue....................................................................... Total revenues ........................................................... Expenses Salaries expense................................................................ Rent expense ...................................................................... Office supplies expense.................................................. Insurance expense............................................................ Depreciation expense ...................................................... Total expenses .......................................................... Net income.................................................................................... $35,000 11,900 46,900 $18,100 15,000 1,600 1,500 900 37,100 $ 9,800
3-17
EXERCISE 3-14 (Continued) GARCIA COMPANY Owners Equity Statement For the Year Ended August 31, 2008 Capital, September 1, 2007 ........................................................................ Add: Net income ......................................................................................... Capital, August 31, 2008............................................................................. $15,600 9,800 $25,400
GARCIA COMPANY Balance Sheet August 31, 2008 Assets Cash ................................................................................................ Accounts receivable .................................................................. Office supplies............................................................................. Prepaid insurance....................................................................... Office equipment......................................................................... Less: Accum. depreciationoffice equipment ............... Total assets................................................................. Liabilities and Owners Equity Liabilities Accounts payable ................................................................................ Salaries payable ................................................................................... Unearned rent........................................................................................ Total liabilities.............................................................................. Owners equity T. Garcia, Capital.................................................................................. Total liabilities and owners equity ....................................... $ 5,800 1,100 600 7,500 25,400 $32,900 $10,400 9,800 700 2,500 $14,000 4,500 9,500 $32,900
3-18
EXERCISE 3-15 (a) 1. Cash ............................................................................... Fees Receivable ................................................ Unearned Fees ........................................................... Fees Revenue .................................................... (a) Cash ...................................................................... Unearned Fees.......................................... (b) Unearned Fees .................................................. ($35,000 $17,000) Fees Revenue ........................................... 4. Fees Receivable......................................................... Fees Revenue .................................................... ($153,000 $25,000 $18,000) Cash ............................................................................... Fees Receivable ................................................ ($110,000 $14,000) 9,000 9,000 25,000 25,000 35,000 35,000 18,000 18,000 110,000 110,000
2.
3.
5.
96,000 96,000
(b) Cash received with respect to fees = $9,000 + $96,000 + $35,000 = $140,000
*EXERCISE 3-16 1. Prepaid Insurance ........................................................... Insurance Expense ................................................. ($2,100 X 5/12) Consulting Revenue ....................................................... Unearned Consulting Revenue........................... ($40,000 X 3/4) Supplies.............................................................................. Supplies Expense.................................................... 875 875
2.
30,000 30,000
3.
800 800
3-19
*EXERCISE 3-17 (a) Jan. 2 Insurance Expense............................................. Cash ............................................................... Supplies Expense............................................... Cash ............................................................... Cash ........................................................................ Service Revenue ........................................ 1,800 1,800 1,700 1,700 6,100 6,100
10
15
1/2
Insurance Expense 1,800 Cash 6,100 1/2 1/10
1/10
Supplies Expense 1,700 Service Revenue 1/15
1/15
1,800 1,700
6,100
(b) Jan. 31
Prepaid Insurance ($150 X 11 months)........ Insurance Expense.................................... Supplies ................................................................. Supplies Expense ...................................... Service Revenue ................................................. Unearned Revenue .................................... Supplies Expense 1/10 1,700 1/31 800 Bal. 900 Supplies 800
1,650 1,650 800 800 3,600 3,600
31
31
Insurance Expense 1/2 1,800 1/31 1,650 Bal. 150 Prepaid Insurance 1/31 1,650
Service Revenue 1/31 3,600 1/15 6,100 Bal. 2,500 Unearned Revenue 1/31 3,600
1/31
(c) Insurance expense ................................................................................. Supplies expense.................................................................................... Service revenue....................................................................................... Prepaid insurance................................................................................... Supplies ..................................................................................................... Unearned revenue ..................................................................................
3-20
$ 150 900 2,500 1,650 800 3,600
SOLUTIONS TO PROBLEMS
PROBLEM 3-1A
(a) Date 2008 June 30 Account Titles and Explanation Supplies Expense................................. Supplies ........................................ ($2,000 $600) Utilities Expense ................................... Utilities Payable.......................... Insurance Expense .............................. Prepaid Insurance...................... ($3,000 12 months) Unearned Service Revenue............... Service Revenue......................... Salaries Expense .................................. Salaries Payable ......................... Depreciation Expense......................... Accumulated Depreciation Office Equipment................... ($15,000 60 months) Accounts Receivable .......................... Service Revenue......................... Ref. 631 126 Debit 1,400 1,400 J3 Credit
30
732 244 722 130
150 150 250 250
30
30
209 400 726 212 711 158
2,500 2,500 2,000 2,000 250 250
30
30
30
112 400
1,000 1,000
(b) Cash Date 2008 June 30 No. 101 Balance 7,150
3-21
Explanation Balance
Ref.
Debit
Credit
PROBLEM 3-1A (Continued) Accounts Receivable Date Explanation 2008 June 30 Balance 30 Adjusting No. 112 Balance 6,000 7,000
Ref.
Debit
Credit
J3
1,000
Supplies Date 2008 June 30 30
Explanation Balance Adjusting
Ref.
Debit
Credit
No. 126 Balance 2,000 600 No. 130 Balance 3,000 2,750 No. 157 Balance 15,000 No. 158 Balance 250 No. 201 Balance 4,500
J3
1,400
Prepaid Insurance Date Explanation 2008 June 30 Balance 30 Adjusting Office Equipment Date Explanation 2008 June 30 Balance
Ref.
Debit
Credit
J3
250
Ref.
Debit
Credit
Accumulated DepreciationOffice Equipment Date Explanation Ref. Debit 2008 June 30 Adjusting J3 Accounts Payable Date Explanation 2008 June 30 Balance
Credit 250
Ref.
Debit
Credit
3-22
PROBLEM 3-1A (Continued) Unearned Service Revenue Date Explanation 2008 June 30 Balance 30 Adjusting Salaries Payable Date Explanation 2008 June 30 Adjusting No. 209 Balance 4,000 1,500 No. 212 Balance 2,000
Ref.
Debit
Credit
J3
2,500
Ref. J3
Debit
Credit 2,000
Utilities Payable Date Explanation 2008 June 30 Adjusting T. Masasi, Capital Date Explanation 2008 June 30 Balance Service Revenue Date Explanation 2008 June 30 Balance 30 Adjusting 30 Adjusting Supplies Expense Date Explanation 2008 June 30 Adjusting
Ref. J3
Debit
Credit 150
No. 244 Balance 150 No. 301 Balance 21,750 No. 400 Balance 7,900 10,400 11,400 No. 631 Balance 1,400
Ref.
Debit
Credit
Ref.
Debit
Credit
J3 J3
2,500 1,000
Ref. J3
Debit 1,400
Credit
3-23
PROBLEM 3-1A (Continued) Depreciation Expense Date Explanation 2008 June 30 Adjusting Insurance Expense Date Explanation 2008 June 30 Adjusting Salaries Expense Date Explanation 2008 June 30 Balance 30 Adjusting Rent Expense Date Explanation 2008 June 30 Balance Utilities Expense Date Explanation 2008 June 30 Adjusting No. 711 Balance 250 No. 722 Balance 250 No. 726 Balance 4,000 6,000 No. 729 Balance 1,000 No. 732 Balance 150
Ref. J3
Debit 250
Credit
Ref. J3
Debit 250
Credit
Ref.
Debit
Credit
J3
2,000
Ref.
Debit
Credit
Ref. J3
Debit 150
Credit
3-24
PROBLEM 3-1A (Continued) (c) MASASI COMPANY Adjusted Trial Balance June 30, 2008 Cash................................................................................. Accounts Receivable ................................................. Supplies.......................................................................... Prepaid Insurance....................................................... Office Equipment......................................................... Accumulated DepreciationOffice Equipment................................................................. Accounts Payable ....................................................... Utilities Payable ........................................................... Salaries Payable .......................................................... Unearned Service Revenue ..................................... T. Masasi, Capital ........................................................ Service Revenue.......................................................... Supplies Expense ....................................................... Depreciation Expense................................................ Insurance Expense ..................................................... Salaries Expense......................................................... Rent Expense ............................................................... Utilities Expense.......................................................... Debit $ 7,150 7,000 600 2,750 15,000 Credit
$
250 4,500 150 2,000 1,500 21,750 11,400
1,400 250 250 6,000 1,000 150 $41,550
$41,550
3-25
PROBLEM 3-2A
(a) Date Aug. 31 31 31 Account Titles and Explanation Insurance Expense ($400 X 3) ............ Prepaid Insurance ........................ Supplies Expense ($3,300 $600) ......... Supplies........................................... Depreciation ExpenseCottages ..... ($6,000 X 1/4) Accumulated Depreciation Cottages...................................... Depreciation ExpenseFurniture..... ($2,400 X 1/4) Accumulated Depreciation Furniture ..................................... Unearned Rent......................................... Rent Revenue ................................ Salaries Expense .................................... Salaries Payable ........................... Accounts Receivable............................. Rent Revenue ................................ Interest Expense ..................................... Interest Payable ............................ [($80,000 X 9%) X 1/12] Ref. 722 130 631 126 620 Debit 1,200 2,700 2,700 1,500 J1 Credit 1,200
144 621 600
1,500
31
150 208 429 726 212 112 429 718 230 4,100
600 4,100 400 400 1,000 1,000 600 600
31 31 31 31
(b) Cash Date Explanation Aug. 31 Balance Ref. Debit Credit No. 101 Balance 19,600
3-26
PROBLEM 3-2A (Continued) Accounts Receivable Date Explanation Aug. 31 Adjusting No. 112 Balance 1,000
Ref. J1
Debit 1,000
Credit
Supplies Date Explanation Aug. 31 Balance 31 Adjusting
Ref. J1
Debit
Credit 2,700
No. 126 Balance 3,300 600
Prepaid Insurance Date Explanation Aug. 31 Balance 31 Adjusting
Ref. J1
Debit
Credit 1,200
No. 130 Balance 6,000 4,800
Land Date Explanation Aug. 31 Balance
Ref.
Debit
Credit
No. 140 Balance 25,000
Cottages Date Explanation Aug. 31 Balance
Ref.
Debit
Credit
No. 143 Balance 125,000
Accumulated DepreciationCottages Date Explanation Ref. Aug. 31 Adjusting J1
Debit
Credit 1,500
No. 144 Balance 1,500
Furniture Date Explanation Aug. 31 Balance Ref. Debit Credit
No. 149 Balance 26,000
3-27
PROBLEM 3-2A (Continued) Accumulated DepreciationFurniture Date Explanation Ref. Aug. 31 Adjusting J1 No. 150 Balance 600
Debit
Credit 600
Accounts Payable Date Explanation Aug. 31 Balance
Ref.
Debit
Credit
No. 201 Balance 6,500
Unearned Rent Date Explanation Aug. 31 Balance 31 Adjusting
Ref. J1
Debit 4,100
Credit
No. 208 Balance 7,400 3,300
Salaries Payable Date Explanation Aug. 31 Adjusting
Ref. J1
Debit
Credit 400
No. 212 Balance 400
Interest Payable Date Explanation Aug. 31 Adjusting
Ref. J1
Debit
Credit 600
No. 230 Balance 600
Mortgage Payable Date Explanation Aug. 31 Balance
Ref.
Debit
Credit
No. 275 Balance 80,000
P. Harder, Capital Date Explanation Aug. 31 Balance
Ref.
Debit
Credit
No. 301 Balance 100,000
3-28
PROBLEM 3-2A (Continued) P. Harder, Drawing Date Explanation Aug. 31 Balance Rent Revenue Date Explanation Aug. 31 Balance 31 Adjusting 31 Adjusting Depreciation ExpenseCottages Date Explanation Aug. 31 Adjusting Depreciation ExpenseFurniture Date Explanation Aug. 31 Adjusting Repair Expense Date Explanation Aug. 31 Balance Supplies Expense Date Explanation Aug. 31 Adjusting Interest Expense Date Explanation Aug. 31 Adjusting Ref. J1 Debit 2,700 Credit No. 306 Balance 5,000 No. 429 Balance 80,000 84,100 85,100 No. 620 Balance 1,500 No. 621 Balance 600 No. 622 Balance 3,600 No. 631 Balance 2,700 No. 718 Balance 600
Ref.
Debit
Credit
Ref. J1 J1
Debit
Credit 4,100 1,000
Ref. J1
Debit 1,500
Credit
Ref. J1
Debit 600
Credit
Ref.
Debit
Credit
Ref. J1
Debit 600
Credit
3-29
PROBLEM 3-2A (Continued) Insurance Expense Date Explanation Aug. 31 Adjusting No. 722 Balance 1,200
Ref. J1
Debit 1,200
Credit
Salaries Expense Date Explanation Aug. 31 Balance 31 Adjusting Utilities Expense Date Explanation Aug. 31 Balance
Ref. J1
Debit 400
Credit
No. 726 Balance 51,000 51,400 No. 732 Balance 9,400
Ref.
Debit
Credit
3-30
PROBLEM 3-2A (Continued) (c) NEOSHO RIVER RESORT Adjusted Trial Balance August 31, 2008 Cash................................................................................. Accounts Receivable ................................................. Supplies.......................................................................... Prepaid Insurance....................................................... Land................................................................................. Cottages ......................................................................... Accumulated DepreciationCottages................. Furniture......................................................................... Accumulated DepreciationFurniture ................ Accounts Payable ....................................................... Unearned Rent ............................................................. Salaries Payable .......................................................... Interest Payable ........................................................... Mortgage Payable ....................................................... P. Harder, Capital ........................................................ P. Harder, Drawing...................................................... Rent Revenue ............................................................... Depreciation ExpenseCottages.......................... Depreciation ExpenseFurniture ......................... Repair Expense............................................................ Supplies Expense ....................................................... Interest Expense.......................................................... Insurance Expense ..................................................... Salaries Expense......................................................... Utilities Expense.......................................................... Debit $ 19,600 1,000 600 4,800 25,000 125,000 $ 26,000 600 6,500 3,300 400 600 80,000 100,000 5,000 85,100 1,500 600 3,600 2,700 600 1,200 51,400 9,400 $278,000 Credit
1,500
$278,000
3-31
PROBLEM 3-2A (Continued)
(d)
NEOSHO RIVER RESORT Income Statement For the Three Months Ended August 31, 2008 Revenues Rent revenue .......................................................... Expenses Salaries expense ................................................... Utilities expense .................................................... Repair expense ...................................................... Supplies expense.................................................. Depreciation expensecottages..................... Insurance expense ............................................... Interest expense .................................................... Depreciation expensefurniture..................... Total expenses.............................................. Net income ....................................................................... $ 85,100 $51,400 9,400 3,600 2,700 1,500 1,200 600 600 71,000 $ 14,100
NEOSHO RIVER RESORT Owners Equity Statement For the Three Months Ended August 31, 2008 P. Harder, Capital, June 1................................................................ Investment by owner ........................................................................ Add: Net income................................................................................ Less: Drawings.................................................................................. P. Harder, Capital, August 31......................................................... $ 0 100,000 14,100 114,100 5,000 $109,100
3-32
PROBLEM 3-2A (Continued) NEOSHO RIVER RESORT Balance Sheet August 31, 2008 Assets Cash .............................................................................. Accounts receivable................................................ Supplies....................................................................... Prepaid insurance .................................................... Land .............................................................................. Cottages ...................................................................... Less: Accum. depreciationcottages ............. Furniture ...................................................................... Less: Accum. depreciationfurniture ............. Total assets .............................................. $ 19,600 1,000 600 4,800 25,000 $125,000 1,500 26,000 600 123,500 25,400 $199,900
Liabilities and Owners Equity Liabilities Accounts payable............................................ Mortgage payable ............................................ Unearned rent ................................................... Interest payable................................................ Salaries payable............................................... Total liabilities.......................................... Owners equity P. Harder, Capital............................................. Total liabilities and owners equity...................................................... $ 6,500 80,000 3,300 600 400 90,800
109,100 $199,900
3-33
PROBLEM 3-3A
(a) Dec. 31
Accounts Receivable ................................... Advertising Revenue........................... Unearned Advertising Fees ....................... Advertising Revenue........................... Art Supplies Expense .................................. Art Supplies............................................ Depreciation Expense.................................. Accumulated Depreciation................ Interest Expense............................................ Interest Payable .................................... Insurance Expense ....................................... Prepaid Insurance ................................ Salaries Expense ........................................... Salaries Payable ...................................
2,500 2,500 1,600 1,600 3,600 3,600 6,000 6,000 150 150 850 850 1,300 1,300
31 31 31 31 31 31
(b)
FERNETTI ADVERTISING AGENCY Income Statement For the Year Ended December 31, 2008 Revenues Advertising revenue................................................. Expenses Salaries expense ....................................................... Depreciation expense.............................................. Rent expense.............................................................. Art supplies expense ............................................... Insurance expense ................................................... Interest expense ........................................................ Total expenses.................................................. Net income ........................................................................... $62,700 $11,300 6,000 4,000 3,600 850 500 26,250 $36,450
3-34
PROBLEM 3-3A (Continued) FERNETTI ADVERTISING AGENCY Owners Equity Statement For the Year Ended December 31, 2008 J. Fernetti, Capital, January 1........................................................... Add: Net income................................................................................. Less: Drawing....................................................................................... J. Fernetti, Capital, December 31 .................................................... $25,500 36,450 61,950 12,000 $49,950
FERNETTI ADVERTISING AGENCY Balance Sheet December 31, 2008 Assets Cash .................................................................................... Accounts receivable...................................................... Art supplies ...................................................................... Prepaid insurance .......................................................... Printing equipment ........................................................ Accumulated Less: depreciation ............................. Total assets .................................................... Liabilities and Owners Equity Liabilities Notes payable ......................................................... Accounts payable.................................................. Unearned advertising fees ................................. Salaries payable..................................................... Interest payable...................................................... Total liabilities................................................ Owners equity J. Fernetti, Capital ................................................. Total liabilities and owners equity............................................................ $ 5,000 5,000 5,600 1,300 150 17,050 49,950 $67,000 $11,000 22,500 5,000 2,500 $60,000 34,000 26,000 $67,000
3-35
PROBLEM 3-3A (Continued) (c) (1) I = P X R X T $150 = $5,000 X R X 1/2 $150 = $2,500R R = $150 $2,500 R = 6% (2) Salaries Expense, $11,300 less Salaries Payable 12/31/08, $1,300 = $10,000. Total payments, $12,500 $10,000 = $2,500 Salaries Payable 12/31/07.
3-36
PROBLEM 3-4A
1.
Dec. 31
Salaries Expense............................................. Salaries Payable ..................................... [5 X $800 X 2/5 = $1,600 [3 X $600 X 2/5 = 720 $2,320] Unearned Rent.................................................. Rent Revenue .......................................... [5 X $4,000 X 2 = $40,000) (4 X $8,500 X 1 = 34,000) $74,000] Advertising Expense ...................................... Prepaid Advertising............................... [A650 $450 per month for 8 months = $3,600) (B974 $400 per month for 3 months = 1,200) $4,800] Interest Expense.............................................. Interest Payable ...................................... ($120,000 X 9% X 7/12)
2,320 2,320
2.
31
74,000 74,000
3.
31
4,800 4,800
4.
31
6,300 6,300
3-37
PROBLEM 3-5A
(a), (c) & (e) Cash Date Sept. No. 101 Balance 4,880 3,480 4,680 8,080 3,580 3,080 1,830 2,480
Explanation 1 Balance 8 10 12 20 22 25 29
Ref. J1 J1 J1 J1 J1 J1 J1
Debit
Credit 1,400
1,200 3,400 4,500 500 1,250 650
Accounts Receivable Date Explanation Sept. 1 Balance 10 27
Ref. J1 J1
Debit
Credit 1,200
1,500
No. 112 Balance 3,520 2,320 3,820
Supplies Date Explanation Sept. 1 Balance 17 30 Adjusting
Ref. J1 J1
Debit 1,200
Credit
2,000
No. 126 Balance 2,000 3,200 1,200
Store Equipment Date Explanation Sept. 1 Balance 15
Ref. J1
Debit 3,000
Credit
No. 153 Balance 15,000 18,000
3-38
PROBLEM 3-5A (Continued) Accumulated DepreciationEquipment Date Explanation Ref. Sept. 1 Balance 30 Adjusting J1 No. 154 Balance 1,500 1,600
Debit
Credit 100
Accounts Payable Date Explanation Sept. 1 Balance 15 17 20
Ref. J1 J1 J1
Debit
Credit 3,000 1,200
4,500
No. 201 Balance 3,400 6,400 7,600 3,100
Unearned Service Revenue Date Explanation Sept. 1 Balance 29 30 Adjusting
Ref. J1 J1
Debit
Credit 650
1,450
No. 209 Balance 1,400 2,050 600
Salaries Payable Date Explanation Sept. 1 Balance 8 30 Adjusting
Ref. J1 J1
Debit 500
Credit
400
No. 212 Balance 500 0 400
J. Rand, Capital Date Explanation Sept. 1 Balance
Ref.
Debit
Credit
No. 301 Balance 18,600
3-39
PROBLEM 3-5A (Continued) Service Revenue Date Explanation Sept. 12 27 30 Adjusting No. 407 Balance 3,400 4,900 6,350
Ref. J1 J1 J1
Debit
Credit 3,400 1,500 1,450
Depreciation Expense Date Explanation Sept. 30 Adjusting
Ref. J1
Debit 100
Credit
No. 615 Balance 100
Supplies Expense Date Explanation Sept. 30 Adjusting
Ref. J1
Debit 2,000
Credit
No. 631 Balance 2,000
Salaries Expense Date Explanation Sept. 8 25 30 Adjusting
Ref. J1 J1 J1
Debit 900 1,250 400
Credit
No. 726 Balance 900 2,150 2,550
Rent Expense Date Explanation Sept. 22
Ref. J1
Debit 500
Credit
No. 729 Balance 500
3-40
PROBLEM 3-5A (Continued) (b) Date Sept. General Journal Account Titles Salaries Payable...................................... Salaries Expense .................................... Cash .................................................... Cash ............................................................ Accounts Receivable..................... Cash ............................................................ Service Revenue ............................. Store Equipment ..................................... Accounts Payable........................... Supplies ..................................................... Accounts Payable........................... Accounts Payable................................... Cash .................................................... Rent Expense........................................... Cash .................................................... Salaries Expense .................................... Cash .................................................... Accounts Receivable............................. Service Revenue ............................. Cash ............................................................ Unearned Service Revenue ........... Ref. 212 726 101 101 112 101 407 153 201 126 201 201 101 729 101 726 101 112 407 101 209 Debit 500 900 J1 Credit
8
1,400 1,200 1,200 3,400 3,400 3,000 3,000 1,200 1,200 4,500 4,500 500 500 1,250 1,250 1,500 1,500 650 650
10
12
15
17
20
22
25
27
29
3-41
PROBLEM 3-5A (Continued) (d) & (f) RAND EQUIPMENT REPAIR Trial Balances September 30, 2008 Before Adjustment Cash .................................................... Accounts Receivable..................... Supplies ............................................. Store Equipment ............................. Accumulated Depreciation .......... Accounts Payable........................... Unearned Service Revenue......... Salaries Payable.............................. J. Rand, Capital ............................... Service Revenue ............................. Depreciation Expense ................... Supplies Expense........................... Salaries Expense ............................ Rent Expense................................... Dr. $ 2,480 3,820 3,200 18,000 Cr. After Adjustment Dr. $ 2,480 3,820 1,200 18,000 Cr.
$ 1,500 3,100 2,050 -018,600 4,900
$ 1,600 3,100 600 400 18,600 6,350
100 2,000 2,550 2,150 500 500 $30,150 $30,150 $30,650 $30,650
(e) 1. Sept. 30
Supplies Expense............................ Supplies ($3,200 $1,200) ....... Salaries Expense ............................. Salaries Payable ....................... Depreciation Expense .................... Accumulated Depreciation Equipment .............................. Unearned Service Revenue.......... Service Revenue .......................
631 126 726 212 615 154 209 407
2,000 2,000 400 400 100 100 1,450 1,450
2.
30
3.
30
4.
30
3-42
PROBLEM 3-5A (Continued) (g) RAND EQUIPMENT REPAIR Income Statement For the Month Ended September 30, 2008 Revenues Service revenue .......................................................... Expenses Salaries expense......................................................... Supplies expense ....................................................... Rent expense ............................................................... Depreciation expense ............................................... Total expenses ................................................... Net income............................................................................. $6,350 $2,550 2,000 500 100 5,150 $1,200
RAND EQUIPMENT REPAIR Owners Equity Statement For the Month Ended September 30, 2008 J. Rand, Capital, September 1 .......................................................... Add: Net income ................................................................................. J. Rand, Capital, September 30........................................................ $18,600 1,200 $19,800
3-43
PROBLEM 3-5A (Continued) RAND EQUIPMENT REPAIR Balance Sheet September 30, 2008 Assets Cash ................................................................................... Accounts receivable ..................................................... Supplies ............................................................................ Equipment ........................................................................ Less: Accumulated depreciation equipment ....................................................... Total assets............................................................. Liabilities and Owners Equity Liabilities Accounts payable ....................................................................... Unearned service revenue ....................................................... Salaries payable .......................................................................... Total liabilities ..................................................................... Owners equity J. Rand, Capital............................................................................ Total liabilities and owners equity .............................. $ 3,100 600 400 4,100 19,800 $23,900 $ 2,480 3,820 1,200 $18,000 1,600 16,400 $23,900
3-44
*PROBLEM 3-6A
(a) 1.
June 30
Supplies ......................................................... Supplies Expense .............................. Interest Expense ......................................... ($20,000 X 9% X 5/12) Interest Payable.................................. Prepaid Insurance ...................................... [($1,800 12) X 8] Insurance Expense............................ Consulting Revenue .................................. Unearned Consulting Revenue........ Accounts Receivable................................. Graphic Revenue ............................... Depreciation Expense ............................... ($2,000 2) Accumulated Depreciation Equipment .......................................
1,300 1,300 750 750 1,200 1,200 1,500 1,500 2,000 2,000 1,000
2.
30
3.
30
4.
30
5.
30
6.
30
1,000
3-45
*PROBLEM 3-6A (Continued) (b) GIVENS GRAPHICS COMPANY Adjusted Trial Balance June 30, 2008 Cash ............................................................................. Accounts Receivable ($14,000 + $2,000) ......... Supplies ...................................................................... Prepaid Insurance ................................................... Equipment.................................................................. Accumulated Depreciation ................................... Notes Payable........................................................... Accounts Payable.................................................... Interest Payable ....................................................... Unearned Consulting Revenue ........................... Sue Givens, Capital................................................. Graphic Revenue ($52,100 + $2,000)................. Consulting Revenue ($6,000 $1,500) ............. Salaries Expense ..................................................... Supplies Expense ($3,700 $1,300) .................. Advertising Expense .............................................. Rent Expense............................................................ Utilities Expense ...................................................... Depreciation Expense ............................................ Insurance Expense ($1,800 $1,200)................ Interest Expense ...................................................... Debit $ 9,500 16,000 1,300 1,200 45,000 $ Credit
1,000 20,000 9,000 750 1,500 22,000 54,100 4,500
30,000 2,400 1,900 1,500 1,700 1,000 600 750 $112,850
$112,850
3-46
*PROBLEM 3-6A (Continued) (c) GIVENS GRAPHICS COMPANY Income Statement For the Six Months Ended June 30, 2008 Revenues Graphic revenue..................................................... Consulting revenue............................................... Total revenues ............................................... Expenses Salaries expense.................................................... Supplies expense .................................................. Advertising expense............................................. Utilities expense..................................................... Rent expense .......................................................... Depreciation expense .......................................... Interest expense..................................................... Insurance expense ................................................ Total expenses .............................................. Net income........................................................................ $54,100 4,500 58,600 $30,000 2,400 1,900 1,700 1,500 1,000 750 600 39,850 $18,750
GIVENS GRAPHICS COMPANY Owners Equity Statement For the Six Months Ended June 30, 2008 Sue Givens, Capital, January 1........................................................ Investment by owner ........................................................................... Add: Net income.................................................................................. Sue Givens, Capital, June 30............................................................ $ 0 22,000 18,750 $40,750
3-47
*PROBLEM 3-6A (Continued) GIVENS GRAPHICS COMPANY Balance Sheet June 30, 2008 Assets Cash ................................................................................... Accounts receivable ..................................................... Supplies ............................................................................ Prepaid insurance.......................................................... Equipment ........................................................................ Less: Accumulated depreciation............................. Total assets.................................................... Liabilities and Owners Equity Liabilities Notes payable......................................................... Accounts payable ................................................. Unearned consulting revenue .......................... Interest payable ..................................................... Total liabilities ............................................... Owners equity Sue Givens, Capital .............................................. Total liabilities and owners equity ........... $20,000 9,000 1,500 750 31,250 40,750 $72,000 $ 9,500 16,000 1,300 1,200 $45,000 1,000 44,000 $72,000
3-48
PROBLEM 3-1B (a) Date Account Titles 2008 May 31 Supplies Expense...................................... Supplies ............................................. 31 Travel Expense......................................... Travel Payable ............................... 31 Insurance Expense ................................... Prepaid Insurance......................... ($4,800 24 months) 31 Unearned Service Revenue.................... Service Revenue ............................. ($3,000 $1,000) 31 Salaries Expense ..................................... Salaries Payable.............................. [(3/5 X $700) X 2 employees] 31 Depreciation Expense............................ Accumulated Depreciation Office Furniture......................... ($9,600 60 months) 31 Accounts Receivable.............................. Service Revenue ............................. (b) Cash Date Explanation 2008 May 31 Balance Ref. Debit Credit No. 101 Balance 7,700 Ref. 631 126 736 229 722 130 Debit 500 500 200 200 200 200 J4 Credit
209 400
2,000 2,000
726 212
840 840
717 150
160 160
112 400
1,000 1,000
3-49
PROBLEM 3-1B (Continued) Accounts Receivable Date Explanation 2008 May 31 Balance 31 Adjusting Supplies Date Explanation 2008 May 31 Balance 31 Adjusting No. 112 Balance 4,000 5,000 No. 126 Balance 1,500 1,000
Ref.
Debit
Credit
J4
1,000
Ref.
Debit
Credit
J4
500
Prepaid Insurance Date Explanation 2008 May 31 Balance 31 Adjusting Office Furniture Date Explanation 2008 May 31 Balance
Ref.
Debit
Credit
No. 130 Balance 4,800 4,600 No. 149 Balance 9,600 No. 150 Balance 160 No. 201 Balance 3,500
J4
200
Ref.
Debit
Credit
Accumulated DepreciationOffice Furniture Date Explanation Ref. Debit 2008 May 31 Adjusting J4 Accounts Payable Date Explanation 2008 May 31 Balance
Credit 160
Ref.
Debit
Credit
3-50
PROBLEM 3-1B (Continued) Unearned Service Revenue Date Explanation 2008 May 31 Balance 31 Adjusting Salaries Payable Date Explanation 2008 May 31 Adjusting Travel Payable Date Explanation 2008 May 31 Adjusting L. Ace, Capital Date Explanation 2008 May 31 Balance Service Revenue Date Explanation 2008 May 31 Balance 31 Adjusting 31 Adjusting Supplies Expense Date Explanation 2008 May 31 Adjusting No. 209 Balance 3,000 1,000 No. 212 Balance 840 No. 229 Balance 200 No. 301 Balance 19,100 No. 400 Balance 6,000 8,000 9,000 No. 631 Balance 500
Ref.
Debit
Credit
J4
2,000
Ref. J4
Debit
Credit 840
Ref. J4
Debit
Credit 200
Ref.
Debit
Credit
Ref.
Debit
Credit
J4 J4
2,000 1,000
Ref. J4
Debit 500
Credit
3-51
PROBLEM 3-1B (Continued) Depreciation Expense Date Explanation 2008 May 31 Adjusting No. 717 Balance 160
Ref. J4
Debit 160
Credit
Insurance Expense Date Explanation 2008 May 31 Adjusting
Ref. J4
Debit 200
Credit
No. 722 Balance 200
Salaries Expense Date Explanation 2008 May 31 Balance 31 Adjusting
Ref.
Debit
Credit
No. 726 Balance 3,000 3,840
J4
840
Rent Expense Date Explanation 2008 May 31 Balance
Ref.
Debit
Credit
No. 729 Balance 1,000
Travel Expense Date Explanation 2008 May 31 Adjusting
Ref. J4
Debit 200
Credit
No. 736 Balance 200
3-52
PROBLEM 3-1B (Continued) (c) MODINE CONSULTING Adjusted Trial Balance May 31, 2008 Cash................................................................................. Accounts Receivable ................................................. Supplies.......................................................................... Prepaid Insurance....................................................... Office Furniture............................................................ Accumulated DepreciationOffice Furniture .................................................................... Accounts Payable ....................................................... Travel Payable.............................................................. Salaries Payable .......................................................... Unearned Service Revenue ..................................... L. Ace, Capital .............................................................. Service Revenue.......................................................... Supplies Expense ....................................................... Depreciation Expense................................................ Insurance Expense ..................................................... Salaries Expense......................................................... Rent Expense ............................................................... Travel Expense ............................................................ Debit $ 7,700 5,000 1,000 4,600 9,600 $ Credit
160 3,500 200 840 1,000 19,100 9,000
500 160 200 3,840 1,000 200 $33,800
$33,800
3-53
PROBLEM 3-2B
(a) Date May 31 Account Titles Insurance Expense.................................... Prepaid Insurance ........................... Supplies Expense ...................................... Supplies ($1,900 $500) ............... Depreciation ExpenseLodge.............. ($3,600 X 1/12) Accumulated Depreciation Lodge.............................................. Depreciation ExpenseFurniture........ ($3,000 X 1/12) Accumulated Depreciation Furniture ........................................ Interest Expense ........................................ Interest Payable ............................... [($40,000 X 12%) X 1/12] Unearned Rent ............................................ Rent Revenue ................................... Salaries Expense ....................................... Salaries Payable .............................. Ref. 722 130 631 126 619 Debit 200 J1 Credit 200 1,400 1,400 300
31
31
142 621 250
300
31
150 718 230 400
250
31
400
31
208 429 726 212
2,500 2,500 800 800
31
(b) Cash Date Explanation May 31 Balance No. 101 Balance 2,500
Ref.
Debit
Credit
3-54
PROBLEM 3-2B (Continued) Supplies Date Explanation May 31 Balance 31 Adjusting No. 126 Balance 1,900 500
Ref. J1
Debit
Credit 1,400
Prepaid Insurance Date Explanation May 31 Balance 31 Adjusting
Ref. J1
Debit
Credit 200
No. 130 Balance 2,400 2,200
Land Date Explanation May 31 Balance
Ref.
Debit
Credit
No. 140 Balance 15,000
Lodge Date Explanation May 31 Balance
Ref.
Debit
Credit
No. 141 Balance 70,000
Accumulated DepreciationLodge Date Explanation May 31 Adjusting
Ref. J1
Debit
Credit 300
No. 142 Balance 300
Furniture Date Explanation May 31 Balance
Ref.
Debit
Credit
No. 149 Balance 16,800
Accumulated DepreciationFurniture Date Explanation May 31 Adjusting Ref. J1 Debit Credit 250
No. 150 Balance 250
3-55
PROBLEM 3-2B (Continued) Accounts Payable Date Explanation May 31 Balance No. 201 Balance 5,300
Ref.
Debit
Credit
Unearned Rent Date Explanation May 31 Balance 31 Adjusting
Ref. J1
Debit 2,500
Credit
No. 208 Balance 3,600 1,100
Salaries Payable Date Explanation May 31 Adjusting
Ref. J1
Debit
Credit 800
No. 212 Balance 800
Interest Payable Date Explanation May 31 Adjusting
Ref. J1
Debit
Credit 400
No. 230 Balance 400
Mortgage Payable Date Explanation May 31 Balance
Ref.
Debit
Credit
No. 275 Balance 40,000
Mary Lerner, Capital Date Explanation May 31 Balance
Ref.
Debit
Credit
No. 301 Balance 55,000
Rent Revenue Date Explanation May 31 Balance 31 Adjusting
Ref. J1
Debit
Credit 2,500
No. 429 Balance 9,200 11,700
3-56
PROBLEM 3-2B (Continued) Advertising Expense Date Explanation May 31 Balance No. 610 Balance 500
Ref.
Debit
Credit
Depreciation ExpenseLodge Date Explanation May 31 Adjusting
Ref. J1
Debit 300
Credit
No. 619 Balance 300
Depreciation ExpenseFurniture Date Explanation May 31 Adjusting
Ref. J1
Debit 250
Credit
No. 621 Balance 250
Supplies Expense Date Explanation May 31 Adjusting
Ref. J1
Debit 1,400
Credit
No. 631 Balance 1,400
Interest Expense Date Explanation May 31 Adjusting
Ref. J1
Debit 400
Credit
No. 718 Balance 400
Insurance Expense Date Explanation May 31 Adjusting
Ref. J1
Debit 200
Credit
No. 722 Balance 200
Salaries Expense Date Explanation May 31 Balance 31 Adjusting
Ref. J1
Debit 800
Credit
No. 726 Balance 3,000 3,800
3-57
PROBLEM 3-2B (Continued) Utilities Expense Date Explanation May 31 Balance No. 732 Balance 1,000
Ref.
Debit
Credit
(c)
ELSTON MOTEL Adjusted Trial Balance May 31, 2008 Cash ............................................................................. Supplies ...................................................................... Prepaid Insurance ................................................... Land ............................................................................. Lodge........................................................................... Accumulated DepreciationLodge .................. Furniture ..................................................................... Accumulated DepreciationFurniture............. Accounts Payable.................................................... Unearned Rent.......................................................... Salaries Payable....................................................... Interest Payable ....................................................... Mortgage Payable.................................................... Mary Lerner, Capital ............................................... Rent Revenue............................................................ Advertising Expense .............................................. Depreciation ExpenseLodge ........................... Depreciation ExpenseFurniture...................... Supplies Expense.................................................... Interest Expense ...................................................... Insurance Expense.................................................. Salaries Expense ..................................................... Utilities Expense ...................................................... Debit $ 2,500 500 2,200 15,000 70,000 $ 16,800 250 5,300 1,100 800 400 40,000 55,000 11,700 500 300 250 1,400 400 200 3,800 1,000 $114,850 Credit
300
$114,850
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PROBLEM 3-2B (Continued) (d) ELSTON MOTEL Income Statement For the Month Ended May 31, 2008 Revenues Rent revenue ............................................................ Expenses Salaries expense..................................................... Supplies expense ................................................... Utilities expense...................................................... Advertising expense.............................................. Interest expense...................................................... Depreciation expenselodge ............................ Depreciation expensefurniture ...................... Insurance expense ................................................. Total expenses ............................................... Net income......................................................................... $11,700 $3,800 1,400 1,000 500 400 300 250 200 7,850 $ 3,850
ELSTON MOTEL Owners Equity Statement For the Month Ended May 31, 2008 Mary Lerner, Capital, May 1............................................................... Investment by owner ........................................................................... Add: Net income ................................................................................. Mary Lerner, Capital, May 31 ............................................................ $ 0 55,000 3,850 $58,850
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PROBLEM 3-2B (Continued) ELSTON MOTEL Balance Sheet May 31, 2008 Assets Cash ................................................................................ Supplies ......................................................................... Prepaid insurance....................................................... Land................................................................................. Lodge .............................................................................. Less: Accumulated depreciationlodge........... Furniture ........................................................................ Less: Accumulated depreciationfurniture........ Total assets................................................. Liabilities and Owners Equity Liabilities Accounts payable .............................................. Mortgage payable .............................................. Unearned rent...................................................... Salaries payable ................................................. Interest payable .................................................. Total liabilities ............................................ Owners equity Mary Lerner, Capital.......................................... Total liabilities and owners equity ......... $ 5,300 40,000 1,100 800 400 47,600 $ 2,500 500 2,200 15,000 69,700 16,550 $106,450
$70,000 300 16,800 250
58,850 $106,450
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PROBLEM 3-3B
(a) Sept. 30 30 30 30 30 30 30
Accounts Receivable..................................... Commission Revenue ............................ Rent Expense................................................... Prepaid Rent .............................................. Supplies Expense........................................... Supplies ...................................................... Depreciation Expense................................... Accum. DepreciationEquipment........ Interest Expense ............................................. Interest Payable........................................ Unearned Rent................................................. Rent Revenue ............................................ Salaries Expense ............................................ Salaries Payable....................................... ORTEGA CO. Income Statement For the Quarter Ended September 30, 2008
500 500 600 600 200 200 350 350 50 50 400 400 600 600
(b)
Revenues Commission revenue ................................................. Rent revenue ................................................................. Total revenues ..................................................... Expenses Salaries expense.......................................................... Rent expense ................................................................ Utilities expense........................................................... Depreciation expense ................................................ Supplies expense ........................................................ Interest expense........................................................... Total expenses .................................................... Net income..............................................................................
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$14,500 800 15,300 $9,600 1,500 510 350 200 50 12,210 $ 3,090
PROBLEM 3-3B (Continued) ORTEGA CO. Owners Equity Statement For the Quarter Ended September 30, 2008 Jose Ortega, Capital, July 1, 2008 .................................................. Investment by owner .......................................................................... Add: Net income ................................................................................ Less: Drawings.................................................................................... Jose Ortega, Capital, September 30, 2008................................... ORTEGA CO. Balance Sheet September 30, 2008 Assets Cash ................................................................................... Accounts receivable ..................................................... Supplies ............................................................................ Prepaid rent ..................................................................... Equipment ........................................................................ Less: Accum. depreciationequipment............... Total assets.................................................... Liabilities and Owners Equity Liabilities Notes payable......................................................... Accounts payable ................................................. Salaries payable .................................................... Unearned rent......................................................... Interest payable ..................................................... Total liabilities ............................................... Owners equity Jose Ortega, Capital............................................. Total liabilities and owners equity ........ $ 5,000 1,510 600 500 50 $ 7,660 16,490 $24,150 $ 6,700 900 1,000 900 $15,000 350 14,650 $24,150 $ 0 14,000 3,090 17,090 600 $16,490
(c) Interest of 12% per year equals a monthly rate of 1%; monthly interest is $50 ($5,000 X 1%). Since total interest expense is $50, the note has been outstanding one month.
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PROBLEM 3-4B
1.
Dec. 31
Insurance Expense .............................................. Prepaid Insurance ....................................... [($6,000 3) = $2,000 [($3,600 2) = 1,800 $3,800] Unearned Subscriptions .................................... Subscription Revenue ............................... [Oct. 200 X $50 X 3/12 = $2,500 [Nov. 300 X $50 X 2/12 = 2,500 [Dec. 480 X $50 X 1/12 = 2,000 $7,000] Interest Expense................................................... Interest Payable ........................................... ($60,000 X 9% X 4/12) Salaries Expense.................................................. Salaries Payable .......................................... [5 X $500 X 3/5 = $1,500 [3 X $750 X 3/5 = 1,350 $2,850]
3,800 3,800
2.
Dec. 31
7,000 7,000
3.
Dec. 31
1,800 1,800
4.
Dec. 31
2,850 2,850
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PROBLEM 3-5B
(a), (c) & (e) Cash Date Nov. 1 8 10 12 20 22 25 29 No. 101 Balance 2,790 1,690 2,890 4,290 1,790 1,490 190 740
Explanation Balance
Ref. J1 J1 J1 J1 J1 J1 J1
Debit
Credit 1,100
1,200 1,400 2,500 300 1,300 550
Accounts Receivable Date Explanation Nov. 1 Balance 10 27
Ref. J1 J1
Debit
Credit 1,200
400
No. 112 Balance 2,510 1,310 1,710
Supplies Date Explanation Nov. 1 Balance 17 30 Adjusting
Ref. J1 J1
Debit 500
Credit
2,000
No. 126 Balance 2,000 2,500 500
Store Equipment Date Explanation Nov. 1 Balance 15
Ref. J1
Debit 3,000
Credit
No. 153 Balance 10,000 13,000
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PROBLEM 3-5B (Continued) Accumulated DepreciationStore Equipment Date Explanation Ref. Debit Nov. 1 Balance 30 Adjusting J1 No. 154 Balance 500 600
Credit 100
Accounts Payable Date Explanation Nov. 1 Balance 15 17 20
Ref. J1 J1 J1
Debit
Credit 3,000 500
2,500
No. 201 Balance 2,100 5,100 5,600 3,100
Unearned Service Revenue Date Explanation Nov. 1 Balance 29 30 Adjusting
Ref. J1 J1
Debit
Credit 550
1,150
No. 209 Balance 1,400 1,950 800
Salaries Payable Date Explanation Nov. 1 Balance 8 30 Adjusting
Ref. J1 J1
Debit 500
Credit
500
No. 212 Balance 500 0 500
P. Rondeli, Capital Date Explanation Nov. 1 Balance
Ref.
Debit
Credit
No. 301 Balance 12,800
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PROBLEM 3-5B (Continued) Service Revenue Date Explanation Nov. 12 27 30 Adjusting No. 407 Balance 1,400 1,800 2,950
Ref. J1 J1 J1
Debit
Credit 1,400 400 1,150
Depreciation Expense Date Explanation Nov. 30 Adjusting
Ref. J1
Debit 100
Credit
No. 615 Balance 100
Supplies Expense Date Explanation Nov. 30 Adjusting
Ref. J1
Debit 2,000
Credit
No. 631 Balance 2,000
Salaries Expense Date Explanation Nov. 8 25 30 Adjusting
Ref. J1 J1 J1
Debit 600 1,300 500
Credit
No. 726 Balance 600 1,900 2,400
Rent Expense Date Explanation Nov. 22
Ref. J1
Debit 300
Credit
No. 729 Balance 300
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PROBLEM 3-5B (Continued) (b) Date Nov. General Journal Account Titles and Explanation Salaries Payable........................................ Salaries Expense ...................................... Cash...................................................... Cash .............................................................. Accounts Receivable ..................... Cash .............................................................. Service Revenue .............................. Store Equipment ....................................... Accounts Payable ........................... Supplies ....................................................... Accounts Payable ........................... Accounts Payable..................................... Cash ..................................................... Rent Expense ............................................. Cash ..................................................... Salaries Expense ...................................... Cash ..................................................... Accounts Receivable............................... Service Revenue .............................. Cash .............................................................. Unearned Service Revenue .......... Ref. 212 726 101 101 112 101 407 153 201 126 201 201 101 729 101 726 101 112 407 101 209 Debit 500 600 J1 Credit
8
1,100 1,200 1,200 1,400 1,400 3,000 3,000 500 500 2,500 2,500 300 300 1,300 1,300 400 400 550 550
10
12
15
17
20
22
25
27
29
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PROBLEM 3-5B (Continued) (d) & (f) RONDELI EQUIPMENT REPAIR Trial Balances November 30, 2008 Before After Adjustment Adjustment Dr. Cr. Dr. Cr. $ 740 $ 740 1,710 1,710 500 2,500 13,000 13,000 $ 500 $ 600 3,100 3,100 1,950 800 500 12,800 12,800 1,800 2,950 100 2,000 2,400 1,900 300 300 $20,150 $20,150 $20,750 $20,750
Cash .................................................... Accounts Receivable..................... Supplies ............................................. Store Equipment ............................. Accumulated Depreciation .......... Accounts Payable........................... Unearned Service Revenue......... Salaries Payable.............................. P. Rondeli, Capital.......................... Service Revenue ............................. Depreciation Expense ................... Supplies Expense........................... Salaries Expense ............................ Rent Expense...................................
(e) 1. Nov. 30
Supplies Expense ............................ Supplies ($2,500 $500) ......... Salaries Expense.............................. Salaries Payable ........................ Depreciation Expense..................... Accumulated Depreciation Store Equipment ................... Unearned Service Revenue........... Service Revenue........................
631 126 726 212 615 154 209 407
2,000 2,000 500 500 100 100 1,150 1,150
2.
30
3.
30
4.
30
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PROBLEM 3-5B (Continued) (g) RONDELI EQUIPMENT REPAIR Income Statement For the Month Ended November 30, 2008 Revenues Service revenue ...................................................... Expenses Salaries expense..................................................... Supplies expense ................................................... Rent expense ........................................................... Depreciation expense ........................................... Total expenses ............................................... Net loss ............................................................................... $ 2,950 $2,400 2,000 300 100 4,800 $(1,850)
RONDELI EQUIPMENT REPAIR Owners Equity Statement For the Month Ended November 30, 2008 P. Rondeli, Capital, November 1...................................................... Less: Net loss...................................................................................... P. Rondeli, Capital, November 30.................................................... $12,800 1,850 $10,950
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PROBLEM 3-5B (Continued) RONDELI EQUIPMENT REPAIR Balance Sheet November 30, 2008 Assets Cash ................................................................................... Accounts receivable ..................................................... Supplies ............................................................................ Equipment ........................................................................ Less: Accumulated depreciation equipment ....................................................... Total assets............................................................. Liabilities and Owners Equity Liabilities Accounts payable ....................................................................... Unearned service revenue ....................................................... Salaries payable .......................................................................... Total liabilities ..................................................................... Owners equity P. Rondeli, Capital ...................................................................... Total liabilities and owners equity .............................. $ 3,100 800 500 4,400 10,950 $15,350 $ 740 1,710 500
$13,000 600 12,400 $15,350
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BYP 3-1
FINANCIAL REPORTING PROBLEM
(a) Items that may result in adjusting entries for prepayments are: 1. Prepaid expenses and other current assets (per balance sheet). 2. Property, plant, and equipment, net of depreciation (per balance sheet). 3. Amortizable intangibles assets, net (per balance sheet)amortization is similar to depreciation (explained later in Chapter 10). (b) Accrual adjusting entries were probably made for accounts payable and other current liabilities, interest expense, and income taxes payable. (c) As indicated in the 5-Year Summary, the trend in net income has been positive. In every year since 2001 (except 2005), net income has increased. In 2001 net income was $2,400 million and in 2005 it was $4,078 million.
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BYP 3-2
COMPARATIVE ANALYSIS PROBLEM
PepsiCo (a) Net increase (decrease) in property, plant, and equipment from 2004 to 2005. Increase (decrease) in selling, general, and administrative expenses from 2004 to 2005. Increase (decrease) in longterm debt (obligations) from 2004 to 2005. Increase (decrease) in net income from 2004 to 2005. Increase (decrease) in cash and cash equivalents from 2004 to 2005. $ 532,000,000
Coca-Cola ($ 305,000,000)
(b)
$1,283,000,000
$ 849,000,000
(c)
($
84,000,000)
($
3,000,000)
(d)
($ 134,000,000)
$
25,000,000
(e)
($ 436,000,000
($2,006,000,000)
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BYP 3-3
EXPLORING THE WEB
(a) The categories are: 1. 2. 3. 4. 5. 6. 7. 8. 9. The Big 4 Professional Associations Education Finance Professors Taxation Audit and Law Government 10. 11. 12. 13. 14. 15. 16. 17. 18. Edgar FASB International Publishers Journals and Publications Softwares Other sites Entertainment Interest books
(b) Student answers will vary depending on the category selected.
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BYP 3-4
DECISION MAKING ACROSS THE ORGANIZATION
(a)
HAPPY CAMPER PARK Income Statement For the Quarter Ended March 31, 2008 Revenues Rental revenue ($90,000 $15,000)................. Expenses Wages expense [$29,800 + ($300 X 2)]........... Advertising expense ($5,200 + $110).............. Supplies expense ($6,200 $1,700)................ Repairs expense ($4,000 + $260) ..................... Insurance expense ($7,200 X 3/12).................. Utilities expense ($900 + $180)......................... Depreciation expense.......................................... Interest expense ($12,000 X 10% X 3/12)........... Total expenses.............................................. Net income ....................................................................... $75,000 $30,400 5,310 4,500 4,260 1,800 1,080 800 300 48,450 $26,550
(b) The generally accepted accounting principles pertaining to the income statement that were not recognized by Amaya were the revenue recognition principle and the matching principle. The revenue recognition principle states that revenue is recognized when it is earned. The fees of $15,000 for summer rentals have not been earned and, therefore, should not be reported in income for the quarter ended March 31. The matching principle dictates that efforts (expenses) be matched with accomplishments (revenues) whenever it is reasonable and practicable to do so. This means that the expenses should include amounts incurred in March but not paid until April. The difference in expenses was $7,750 ($48,450 $40,700). The overstatement of revenues ($15,000) plus the understatement of expenses ($7,750) equals the difference in reported income of $22,750 ($49,300 $26,550).
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BYP 3-5
COMMUNICATION ACTIVITY
Dear President Nickels: Upon reviewing the accounts of your company at the end of the year, I discovered that adjusting entries were not made. Adjusting entries are made at the end of the accounting period to ensure that the revenue recognition and matching principles required under generally accepted accounting principles are followed. The use of adjusting entries makes it possible to report on the balance sheet the appropriate assets, liabilities, and owners equity at the statement date and to report on the income statement the proper net income (or loss) for the year. Adjusting entries are needed because the trial balance may not contain an up-to-date and complete record of transactions and events for the following reasons: 1. Some events are not journalized daily because it is not efficient to do so. Examples are the use of supplies and the earning of wages by employees. The expiration of some costs is not journalized during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. Examples of such costs are building and equipment depreciation, rent, and insurance. Some expenses, such as the cost of utility service and property taxes, may be unrecorded because the bills for the costs have not been received.
2.
3.
There are four types of adjusting entries: 1. Prepaid expensesexpenses paid in cash and recorded as assets before they are used or consumed. Unearned revenuesrevenues received in cash and recorded as liabilities before they are earned.
2.
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BYP 3-5 (Continued) 3. Accrued revenuesrevenues earned but not yet received in cash or recorded. Accrued expensesexpenses incurred but not yet paid in cash or recorded.
4.
I will be happy to answer any questions you may have on adjusting entries.
Signature
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BYP 3-6
ETHICS CASE
(a) The stakeholders in this situation are: Cathi Bell, controller. The president of Bluestem Company. Bluestem Company stockholders. (b) 1. It is unethical for the president to place pressure on Cathi to misstate net income by requesting her to prepare incorrect adjusting entries. It is customary for adjusting entries to be dated as of the balance sheet date although the entries are prepared at a later date. Cathi did nothing unethical by dating the adjusting entries December 31.
2.
(c) Cathi can accrue revenues and defer expenses through the preparation of adjusting entries and be ethical so long as the entries reflect economic reality. Intentionally misrepresenting the companys financial condition and its results of operations is unethical (it is also illegal).
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BYP 3-7
ALL ABOUT YOU ACTIVITY
We address the issue of contingent liabilities with greater precision in Chapter 11. Our primary interest in this exercise is to engage students in a discussion regarding the general nature of the financial statement elements (assets, liabilities, equity, revenues and expenses). (a) By taking out the bank loan your friend has incurred a liability. You do not have a liability unless your friend defaults, or unless it becomes clear that he will default. The loan application may, however, require you to disclose any guarantees that you have signed, since they represent potential liabilities.
(b) Accounting standards have specific requirements regarding accounting for situations where there is uncertainty regarding whether a liability has been incurred. Those standards require an evaluation of the probability of an amount being owed. Without going into detail regarding those standards, the basic idea is that if it is probable that you will owe money, then you should accrue a liability. If it is not probable, but it is possible that you will owe money, then you should disclose facts regarding the situation. The most important point is that this event has the potential to materially impact your finances, and therefore you have a responsibility to disclose it to the bank in some form. (c) Losing your job would not create a financial liability, although it would most certainly reduce your revenues. You are obviously concerned that you might lose your job, but you dont have specific information that would suggest that it will happen. Therefore, you probably dont have an obligation to disclose this information to the bank. However, unless you are relatively certain that you would be able to find suitable employment relatively quickly, you might want to wait until your job situation has stabilized before pursuing a loan of this size.
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