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Chapter 3
Adjusting Accounts and Preparing
Financial Statements
QUESTIONS
1.
The cash basis of accounting reports revenues when cash is received while the
accrual basis reports revenues when they are earned. The cash basis reports
expenses when cash is paid while the accrual basis reports expenses when they are
incurred and matched with revenues they generated.
2.
3.
Businesses that have major seasonal variations in sales are most likely to select the
natural business year as the fiscal year.
4.
A prepaid expense is an item paid for in advance of receiving its benefits. As such, it
is reported as an asset on the balance sheet.
5.
Long-term tangible plant assets such as equipment, buildings, and machinery lead
to adjustments for depreciation. Generally, land is the only long-term tangible plant
asset that does not require depreciation.
6.
7.
8.
Accrued revenue is revenue that is earned but is not yet received in cash (and/or
other assets) and the customer has not been billed prior to the end of the period.
Therefore, end-of-period adjustments are made to record accrued revenue.
Examples are interest income that has been earned but not collected and revenues
from services performed that are neither collected nor billed.
9.A If prepaid expenses are initially recorded with debits to expense accounts, then the
prepaid expenses asset accounts are debited in the adjusting entries.
3-1
10.
For Research In Motion, all of the accounts under the category of Property and
Equipment (except for Land), require adjusting entries. The expense related to the
Depreciation Expense account would be understated on the income statement if
Research In Motion fails to adjust these asset accounts. If the adjusting entries are
not made, net income would be overstated. Note: Students might also correctly
identify accounts receivable (for bad debts), Intangible assets (for amortization),
Inventories (for shrinkage), and Short- and Long-term investments (for fair value) as
needing adjustment.
11.
Nokia reports 1,867 EUR (000,000s) for property, plant and equipment. For its
adjusting entry, it would need to record Depreciation Expense (debit) on the plant
and equipment and Accumulated Depreciation (credit) as the contra to the Property,
plant and equipment account.
12.
The accrued wages would be reported as part of the liability Other Accrued
Liabilities on Palms balance sheet.
3-2
QUICK STUDIES
Quick Study 3-1 (10 minutes)
a.
b.
c.
d.
e.
UR
PE
AE
AR
PE
Unearned revenue
Prepaid expenses (Depreciation)
Accrued expenses
Accrued revenue
Prepaid expenses
1,800
1,800
2,700
2,700
3-3
5,000
5,000
15,000
15,000
3-4
2,400
2,400
Salaries Expense...........................................................
Salaries Payable ....................................................
400
Financial Statement
Balance Sheet
Income Statement
b.
Debit
Credit
Depreciation Expense
Accumulated Depreciation
Income Statement
Balance Sheet
c.
Debit
Credit
Wages Expense
Wages Payable
Income Statement
Balance Sheet
d.
Debit
Credit
Accounts Receivable
Revenue Earned
Balance Sheet
Income Statement
e.
Debit
Credit
Insurance Expense
Prepaid Insurance
Income Statement
Balance Sheet
a.
3-5
400
Cash Accounting:
Revenues (cash receipts) ......................................................
Expenses (cash payments: $22,500 - $2,250 + $3,750) ......
Net income .............................................................................
$33,000
24,000
$ 9,000
Accrual Accounting:
Revenues (earned) ................................................................
Expenses (incurred) ..............................................................
Net income ..............................................................................
$39,000
22,500
$16,500
3-6
$1,600
1,000
$2,600
$1,600
$1,000
Credit
Adjusting entry
b.
3-7
EXERCISES
Exercise 3-1 (10 minutes)
1.
4.
2.
5.
3.
6.
10,000
10,000
9,000
9,000
c.
19,127
19,127
5,242
5,242
e.
2,800
2,800
f.
750
750
3,500
3,500
Office Supplies*
480
5,349
?
587
Prepaid Insurance**
Beg. Bal.
5,000
Used
?
End. Bal.
3-8
2,200
Used
16,000
5,960
c.
2,626
5,000
e.
4,600
4,000
f.
16,000
5,960
2,626
5,000
4,600
4,000
Notes:
Prepaid Insurance*
Bal. Bal.
7,000
?
End. Bal.
Used
1,040
3-9
Office Supplies**
Beg. Bal.
300
Purch.
2,680
?
End. Bal.
354
Used
2,500
2,500
2,500
2,500
b.
Apr. 30 Interest Expense ................................................
Interest Payable ..........................................
To record accrued interest expense (9.6% x
$780,000 x 10/360) or ($6,240 x 10/30).
May 20 Interest Payable ..................................................
Interest Expense .................................................
Cash ............................................................
To record payment of accrued and current
interest expense (9.6% x $780,000 x 20/360).
c.
Apr. 30 Salaries Expense.................................................
Salaries Payable..........................................
To record accrued salaries
($9,000 x 2/5 week).
May 3
3-10
2,080
2,080
2,080
4,160
6,240
3,600
3,600
3,600
5,400
9,000
$ 1,650
$ 5,700
$10,080
$ 1,375
Proof:
(a)
Supplies available prior year-end ......... $ 300
(b)
(c)
(d)
$1,600
$ 1,360
$1,375
2,100
5,400
10,080
6,000
2,400
7,000
11,440
7,375
(750)
(5,700)
(1,840)
$1,300
$ 9,600
(800)
$6,575
Wages Expense..............................................................500
Wages Payable ......................................................
500
b. Payday entry:
2012
Jan. 4
Wages Expense..............................................................
1,500
Wages Payable ...............................................................500
Cash ........................................................................
To record accrued and current wages.
3-11
2,000
1,800
4,200
1,500
1,750
2,450
1,300
480
70
3-12
1,800
4,200
1,500
1,750
2,450
1,300
480
70
2010 ..................................
5,400
2011 ..................................
5,400
2012 ..................................
900
Total .................................
$16,200
$16,200
EXPLANATIONS:
*
Accrual asset balance equals months left in the policy x $450 per month (monthly
cost is computed as $450, from $16,200 divided by 36 months).
Months Left
Balance
12/31/2009 ....
26
$11,700
12/31/2010 ....
14
6,300
12/31/2011 ....
2
900
12/31/2012 ....
0
0
**
Accrual insurance expense equals months covered in the year x $450 per month.
Months Covered
Expense
2009..................................
10
$ 4,500
2010..................................
12
5,400
2011..................................
12
5,400
2012..................................
2
900
$16,200
3-13
$5,390
$87,644
$93,385
$55,234
$70,158
/
/
/
/
/
$44,830
$398,954
$257,082
$1,458,999
$435,925
= 12.0%
= 22.0%
= 36.3%
= 3.8%
= 16.1%
2,000
Cash .......................................................................
Unearned Fees ..............................................
8,400
8,400
12
3-14
2,000
2,000
18
Cash .......................................................................
Unearned Fees ..............................................
7,500
7,500
27
8,400
8,400
31
b.
July 1
Cash .......................................................................
Fees Earned...................................................
2,000
2,000
Cash .......................................................................
Fees Earned...................................................
8,400
8,400
12
No entry required.
18
Cash .......................................................................
Fees Earned...................................................
7,500
7,500
27
No entry required.
31
3-15
7,500
7,500
3,000
3,000
Purchased supplies.
b.
Dec. 2
1,440
1,440
c.
Dec. 15 Cash .................................................................. 12,000
Remodeling Fees Earned ........................
12,000
d.
Dec. 28 Cash ..................................................................
Remodeling Fees Earned ........................
Received fees for work to be done.
3-16
3,600
3,600
e.
Dec. 31 Supplies .............................................................
Supplies Expense ....................................
1,920
1,920
f.
Dec. 31 Prepaid Insurance ($1,440 - $240)..................
Insurance Expense ..................................
1,200
1,200
g.
Dec. 31 Remodeling Fees Earned ..............................
Unearned Remodeling Fees ...................
Adjusted revenues for unfinished
projects ($12,000 + $3,600 - $6,300).
3-17
9,300
9,300
adidas AG
Balance Sheet
December 31, 2009
(Euros in millions)
Assets
Noncurrent assets
Intangible assets ...................................................
Tangible and other assets ....................................
Total noncurrent assets ........................................
Current assets
Other current assets .............................................
Inventories .............................................................
Receivables and financial assets ........................
Cash and cash equivalents ..................................
Total current assets ..............................................
Total assets ..............................................................
Equity
Total equity ..............................................................
Liabilities
Total noncurrent liabilities .....................................
Total current liabilities ............................................
Total liabilities .........................................................
Total equity and liabilities ......................................
3-18
2,980
1,410
4,390
486
1,471
1,753
775
4,485
8,875
3,776
2,263
2,836
5,099
8,875
PROBLEM SET A
Problem 3-1A (35 minutes)
Part 1
Adjustment (a)
Dec. 31 Office Supplies Expense .............................
Office Supplies ......................................
12,760
12,760
Adjustment (b)
31 Insurance Expense .......................................
Prepaid Insurance .................................
12,312
12,312
Adjustment (c)
31 Salaries Expense (2 days x $2,100) ............
Salaries Payable....................................
4,200
4,200
Adjustment (d)
31 Depreciation ExpenseBuilding ................
Accumulated DepreciationBuilding
27,000
27,000
Adjustment (e)
31 Rent Receivable ............................................
Rent Earned ...........................................
2,400
2,400
Adjustment (f)
31 Unearned Rent ..............................................
Rent Earned ...........................................
To record the amount of rent earned for
November and December (2 x 2,175).
3-19
4,350
4,350
4,200
6,300
10,500
15
5.
9. F
2.
6.
10. D
3.
7.
11. A
4.
8.
12. D
3-20
4,800
2,400
2,400
Unadj. Bal.
Cash
26,000
Unadj. Bal.
Accumulated Depreciation
Equipment
Unadj. Bal.
16,000
(c)
12,000
Adj. Bal.
28,000
Accounts Receivable
0
(f)
7,500
Adj. Bal.
7,500
Unadj. Bal.
Unadj. Bal.
Adj. Bal.
Teaching Supplies
10,000
(b)
2,600
Equipment
70,000
Accounts Payable
Unadj. Bal.
Salaries Payable
Unadj. Bal.
Unadj. Bal.
Adj. Bal.
Prepaid Insurance
15,000
(a)
12,000
(g)
Adj. Bal.
Unadj. Bal.
Adj. Bal.
0
400
400
3,000
Unearned Training Fees
Unadj. Bal.
Prepaid Rent
2,000
(h)
0
36,000
7,400
(e)
11,000
4,400
Adj. Bal.
6,600
2,000
T. Watson, Capital
Unadj. Bal.
Professional Library
30,000
Unadj. Bal.
T. Watson, Withdrawals
40,000
Unadj. Bal.
Accumulated Depreciation
Professional Library
Unadj. Bal.
9,000
(d)
6,000
Adj. Bal.
15,000
3-21
63,600
(f)
Adj. Bal.
Unadj. Bal.
102,000
7,500
109,500
(h)
Adj. Bal.
(e)
Adj. Bal.
Rent Expense
22,000
2,000
24,000
38,000
4,400
42,400
Depreciation Expense
Professional Library
Unadj. Bal.
0
(d)
6,000
Adj. Bal.
6,000
Advertising Expense
Unadj. Bal.
7,000
Depreciation Expense
Equipment
Unadj. Bal.
0
(c)
12,000
Adj. Bal.
12,000
Unadj. Bal.
Salaries Expense
Unadj. Bal.
48,000
(g)
400
Adj. Bal.
48,400
Insurance Expense
Unadj. Bal.
0
(a)
3,000
Adj. Bal.
3,000
3-22
Utilities Expense
5,600
Part 2
Dec. 31
Adjustment (a)
Insurance Expense ......................................................
3,000
Prepaid Insurance ..................................................
3,000
Adjustment (b)
31 Teaching Supplies Expense .......................................
7,400
Teaching Supplies .................................................
7,400
Adjustment (c)
31 Depreciation ExpenseEquipment ...........................
12,000
Accumulated DepreciationEquipment ....................
To record equipment depreciation.
Adjustment (d)
31 Depreciation ExpenseProfess. Library ..................
6,000
Accumul. DepreciationProfess. Library ................
12,000
6,000
Adjustment (e)
31 Unearned Training Fees ..............................................
4,400
Training Fees Earned ............................................
4,400
Adjustment (f)
31 Accounts Receivable ...................................................
7,500
Tuition Fees Earned...............................................
7,500
Adjustment (g)
31 Salaries Expense .........................................................400
Salaries Payable.....................................................
400
Adjustment (h)
31 Rent Expense ...............................................................
2,000
Prepaid Rent ...........................................................
To record expiration of prepaid rent.
3-23
2,000
Debit
$ 26,000
7,500
2,600
12,000
0
30,000
Cash ..........................................................................
Accounts receivable ................................................
Teaching supplies ...................................................
Prepaid insurance ....................................................
Prepaid rent ..............................................................
Professional library .................................................
Accumulated depreciationProfessional library ...
Equipment ................................................................
70,000
Accumulated depreciationEquipment ................
Accounts payable ....................................................
Salaries payable .......................................................
Unearned training fees ............................................
T. Watson, Capital ....................................................
T. Watson, Withdrawals ..........................................
40,000
Tuition fees earned ..................................................
Training fees earned ................................................
Depreciation expenseProfessional library ........
6,000
Depreciation expenseEquipment .......................
12,000
Salaries expense .....................................................
48,400
Insurance expense ..................................................
3,000
Rent expense............................................................
24,000
Teaching supplies expense ....................................
7,400
Advertising expense ................................................
7,000
Utilities expense.......................................................
5,600
Totals ........................................................................ $301,500
3-24
Credit
$ 15,000
28,000
36,000
400
6,600
63,600
109,500
42,400
_______
$301,500
$151,900
113,400
$ 38,500
3-25
$ 63,600
38,500
102,100
40,000
$ 62,100
3-26
$ 26,000
7,500
2,600
12,000
15,000
42,000
$105,100
$ 36,000
400
6,600
43,000
62,100
$105,100
Unadjusted
Trial Balance
Adjusted
Trial Balance
Adjustments
Cash............................................. $ 27,000
Accounts receivable...............
Office supplies..........................
Prepaid insurance...................
Office equipment.....................
12,000
18,000
7,320
92,000
(a)
10,460
(b)
(c)
15,000
2,440
$ 27,000
22,460
3,000
4,880
92,000
Accumulated depreciation
Office equipment ..............
$ 12,000
(d)
6,000
$ 18,000
Accounts payable...................
9,300
(e)
(f)
(g)
900
800
6,600
10,200
800
6,600
14,300
44,000
28,420
(a)
(h)
10,460
1,700
Interest payable........................
Salaries payable.......................
Unearned consulting fees....
16,000 (h)
44,000
28,420
10,000
Consulting fees
earned .......................................
Depreciation expense
Office equipment...................
Salaries expense .....................
Interest expense.......................
10,000
156,000
71,000
1,400
Advertising expense..............
6,000
6,000
(g)
6,600
800
2,440
77,600
2,200
2,440
13,200
15,000
14,700
_______
$43,900 $290,480
$290,480
13,200
(b)
13,800
_______ (e)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
168,160
(d)
(f)
(c)
1,700
15,000
900
$43,900
Adjustment description:
Earned but uncollected revenues.
Cost of consumed office supplies.
Cost of expired insurance coverage.
Depreciation expense on office equipment.
Incurred but unpaid advertising expense.
Incurred but unpaid interest expense.
Incurred but unpaid salaries expense.
Earned revenues previously received in advance.
3-27
______
Problem 3-4A
Part 2
JJW COMPANY
Income Statement
For Year Ended July 31, 2011
Revenues
Consulting fees earned ................................
Expenses
Depreciation expenseOffice equipment ..
Salaries expense ..........................................
Interest expense ...........................................
Insurance expense .......................................
Rent expense ................................................
Office supplies expense ..............................
Advertising expense ....................................
Total expenses ..............................................
Net income .......................................................
3-28
$168,160
$ 6,000
77,600
2,200
2,440
13,200
15,000
14,700
131,140
$ 37,020
JJW COMPANY
Statement of Owners Equity
For Year Ended July 31, 2011
J. Winner, Capital, July 31, 2010 ....................
Plus: Net income .............................................
Less: Owner withdrawals ...............................
J. Winner, Capital, July 31, 2011 ....................
$28,420
37,020
65,440
10,000
$55,440
$ 27,000
22,460
3,000
4,880
74,000
$131,340
Liabilities
Accounts payable .......................................................
Interest payable ..........................................................
Salaries payable .........................................................
Unearned consulting fees .........................................
Long-term notes payable ...........................................
Total liabilities ............................................................
$ 10,200
800
6,600
14,300
44,000
75,900
Equity
J. Winner, Capital .......................................................
Total liabilities and equity .........................................
55,440
$131,340
3-29
3-30
$436,000
356,800
$ 79,200
CALLAHAY COMPANY
Statement of Owner's Equity
For Year Ended December 31, 2011
J. Callahay, Capital, December 31, 2010 ..
Plus: Net income .......................................
Less: Withdrawals by owner ....................
J. Callahay, Capital, December 31, 2011 ..
$247,800
79,200
327,000
38,000
$289,000
$ 22,000
44,000
10,000
160,000
8,000
$160,000
(42,000)
130,000
(10,000)
118,000
120,000
70,000
$552,000
Liabilities
Accounts payable ..................................................
Interest payable ......................................................
Salaries payable .....................................................
Unearned fees ........................................................
Long-term notes payable ......................................
Total liabilities ........................................................
$ 88,000
12,000
11,000
22,000
130,000
263,000
Owners Equity
J. Callahay, Capital ................................................
289,000
3-31
$552,000
Part 2
Profit margin = $79,200 / $436,000 = 18.2%
Problem 3-6AA (40 minutes)
Part 1
Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.
Nov. 1
1,500
1,500
2,160
2,160
30 Cash ..................................................................
Unearned Service Fees ...........................
3,300
3,300
2,700
2,700
15 Cash ..................................................................
Unearned Service Fees ...........................
7,650
7,650
600
600
3-32
360
360
2,100
900
900
3-33
3,000
3,000
2,100
Nov.1
1,500
1,500
2,160
2,160
30
Cash ..................................................................
Service Fees Earned ................................
3,300
3,300
Dec. 1
2,700
2,700
15
Cash ..................................................................
Service Fees Earned ................................
7,650
7,650
31
900
900
31
1,800
1,800
31
1,200
1,200
31
1,800
1,800
31
3-34
4,650
4,650
$ 600
900
360
1,800
900
1,800
5,100
5,850
3-35
PROBLEM SET B
Problem 3-1B (30 minutes)
Part 1
Adjustment (a)
Oct. 31 Office Supplies Expense .......................................
Office Supplies ................................................
3,450
3,450
Adjustment (b)
31 Insurance Expense .................................................
Prepaid Insurance ...........................................
2,675
2,675
Months Active
in 2011
12
9
5
2011
Expense
$1,500
900
275
$2,675
Adjustment (c)
31 Salaries Expense ....................................................
Salaries Payable..............................................
800
800
Adjustment (d)
31 Depreciation ExpenseBuilding ..........................
Accumulated DepreciationBuilding ..........
To record annual depreciation
[($155,000-$20,000) / 25 years = $5,400].
3-36
5,400
5,400
600
600
Adjustment (f)
31 Unearned Rent ........................................................
Rent Earned .....................................................
1,050
1,050
Part 2
Cash Payment for (c)
Nov. 7
800
3,200
4,000
Cash .........................................................................
Rent Receivable ..............................................
Rent Earned .....................................................
To record past due rent for two months.
3-37
1,200
600
600
5.
9. F
2.
6.
10. I
3.
7.
11. A
4.
8.
12. B
Cash
50,000
Accounts Payable
Unadj. Bal.
Accounts Receivable
0
(f)
5,500
Adj. Bal.
5,500
Salaries Payable
Unadj. Bal.
Unadj. Bal.
Adj. Bal.
Unadj. Bal.
Adj. Bal.
Unadj. Bal.
Adj. Bal.
Teaching Supplies
60,000
(b)
2,500
Prepaid Insurance
18,000
(a)
11,600
Prepaid Rent
2,600
(h)
0
12,200
Unadj. Bal.
(g)
Adj. Bal.
0
540
540
(e)
Unadj. Bal.
27,600
Adj. Bal.
18,400
9,200
M. Alcorn, Capital
Unadj. Bal.
6,400
M. Alcorn, Withdrawals
20,000
Unadj. Bal.
2,600
Professional Library
10,000
Unadj. Bal.
Accumulated Depreciation
Professional Library
Unadj. Bal.
1,500
(d)
2,000
3-38
68,500
Adj. Bal.
Unadj. Bal.
3,500
Equipment
30,000
Accumulated Depreciation
Equipment
Unadj. Bal. 16,000
(c)
4,000
Adj. Bal.
20,000
3-39
(f)
Adj. Bal.
105,000
5,500
110,500
(e)
Adj. Bal.
62,000
9,200
71,200
Depreciation Expense
Professional Library
Unadj. Bal.
0
(d)
2,000
Adj. Bal.
2,000
Depreciation Expense
Equipment
Unadj. Bal.
0
(c)
4,000
Adj. Bal.
4,000
Unadj. Bal.
(g)
Adj. Bal.
Unadj. Bal.
(a)
Adj. Bal.
Unadj. Bal.
(h)
Adj. Bal.
Salaries Expense
43,200
540
43,740
Insurance Expense
0
6,400
6,400
Rent Expense
28,600
2,600
31,200
3-40
Advertising Expense
18,000
Unadj. Bal.
Utilities Expense
Unadj. Bal.
12,400
6,400
6,400
Adjustment (b)
31 Teaching Supplies Expense ................................. 57,500
Teaching Supplies .........................................
57,500
31
Adjustment (c)
Depreciation ExpenseEquipment.....................
Accumulated DepreciationEquipment .....
4,000
4,000
31
Adjustment (d)
Depreciation ExpenseProfessional Library ....
Accumulated Depreciation
Professional Library .............................
2,000
2,000
31
Adjustment (e)
Unearned Training Fees .......................................
Training Fees Earned ....................................
9,200
9,200
31
Adjustment (f)
Accounts Receivable ............................................
Tuition Fees Earned.......................................
5,500
5,500
31
Adjustment (g)
Salaries Expense ...................................................
Salaries Payable.............................................
540
540
31
Adjustment (h)
Rent Expense ........................................................
Prepaid Rent ...................................................
To record expiration of prepaid rent.
3-41
2,600
2,600
Debit
Cash ........................................................................................... $ 50,000
Accounts receivable ...............................................................
5,500
Teaching supplies ...................................................................
2,500
Prepaid insurance ...................................................................
11,600
Prepaid rent ..............................................................................
0
Professional library.................................................................
10,000
Accumulated depreciationProfessional library ............
Equipment ................................................................................
30,000
Accumulated depreciationEquipment ............................
Accounts payable ...................................................................
Salaries payable ......................................................................
Unearned training fees ...........................................................
M. Alcorn, Capital ....................................................................
M. Alcorn, Withdrawals ..........................................................
20,000
Tuition fees earned .................................................................
Training fees earned ...............................................................
Depreciation expenseProfessional library .....................
2,000
Depreciation expenseEquipment ....................................
4,000
Salaries expense .....................................................................
43,740
Insurance expense..................................................................
6,400
Rent expense ...........................................................................
31,200
Teaching supplies expense ..................................................
57,500
Advertising expense...............................................................
18,000
Utilities expense ......................................................................
12,400
Totals ......................................................................................... $304,840
3-42
Credit
$ 3,500
20,000
12,200
540
18,400
68,500
110,500
71,200
_______
$304,840
$181,700
175,240
$ 6,460
ALCORN INSTITUTE
Statement of Owners Equity
For Year Ended December 31, 2011
M. Alcorn, Capital, December 31, 2010 ..............
Plus: Net income ..................................................
Less: Owner withdrawals ....................................
M. Alcorn, Capital, December 31, 2011 ..............
3-43
$68,500
6,460
74,960
20,000
$54,960
3-44
$50,000
5,500
2,500
11,600
6,500
10,000
$86,100
$12,200
540
18,400
31,140
54,960
$86,100
Account
Accounts payable.......................
Interest payable............................
Salaries payable ..........................
Unearned consulting fees........
Long-term notes payable.........
D. Chen, Capital ...........................
D. Chen, Withdrawals ................ 10,000
Consulting fees earned............
(a)
6,660
(b)
(c)
$ 30,000
(d)
36,000
30,000 (h)
80,000
70,200
23,000
4,600
$ 48,000
76,660
7,000
8,600
150,000
10,000
$ 40,000
(e)
(f)
(g)
6,000
1,600
11,200
42,000
1,600
11,200
17,800
80,000
70,200
(a)
(h)
6,660
12,200
12,200
10,000
264,000
Depreciation expense
Office equipment......................
Salaries expense.........................115,600
Interest expense .......................... 6,400
Insurance expense....................
Rent expense ............................... 24,000
Office supplies expense ...........
Advertising expense.................. 43,000 _______
Totals...............................................
$510,200 $510,200
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Adjusted
Trial Balance
Adjustments
282,860
(d)
10,000
10,000
(g)
(f)
(c)
11,200
1,600
4,600
(b)
(e)
23,000
6 ,000
$75,260
126,800
8,000
4,600
24,000
23,000
______
49,000 _______
$75,260 $545,660 $545,660
Adjustment Descriptions:
Earned but uncollected revenues.
Cost of consumed office supplies.
Cost of expired insurance coverage.
Depreciation expense on office equipment.
Incurred but unpaid advertising expense.
Incurred but unpaid interest expense.
Incurred but unpaid salaries expense.
Earned revenues previously received in advance.
3-45
Problem 3-4B
Part 2
DAXU CONSULTING COMPANY
Income Statement
For Year Ended December 31, 2011
Revenues
Consulting fees earned .....................................
Expenses
Depreciation expenseOffice equipment ....... $ 10,000
Salaries expense ............................................... 126,800
Interest expense ................................................
8,000
Insurance expense ............................................
4,600
Rent expense ..................................................... 24,000
Office supplies expense ................................... 23,000
Advertising expense ......................................... 49,000
Total expenses ...................................................
Net income ............................................................
$282,860
245,400
$ 37,460
3-46
$ 70,200
37,460
107,660
10,000
$ 97,660
$ 42,000
1,600
11,200
17,800
80,000
152,600
Equity
D. Chen, Capital .............................................................
Total liabilities and equity ............................................
97,660
$250,260
3-47
$604,000
543,000
$ 61,000
LIGHTNING COURIER
Statement of Owner's Equity
For Year Ended December 31, 2011
J. Hallam, Capital, December 31, 2010 ..........
Plus : Net income ...........................................
Less: Withdrawals by owner .........................
J. Hallam, Capital, December 31, 2011 ..........
3-48
$115,000
61,000
176,000
40,000
$136,000
$124,000
22,000
30,000
110,000
190,000
476,000
Equity
J. Hallam, Capital .................................................
Total liabilities and equity ...................................
136,000
$612,000
3-49
Part 2
Profit margin = $61,000 / $604,000 = 10.1%
Problem 3-6BA (40 minutes)
Part 1
Method that records prepaid expenses and unearned revenues in balance sheet accounts:
Apr. 1
3,450
2,700
7,500
May 1
3,450
23
9,450
1,500
450
450
3,900
2,400
Method that records prepaid expenses and unearned revenues in income statement accounts:
Apr. 1
3,450
3,450
2,700
2,700
30
Cash .....................................................................
Service Fees Earned ...................................
7,500
7,500
May 1
3,450
3,450
23
Cash .....................................................................
Service Fees Earned ...................................
9,450
9,450
31
1,950
1,950
31
2,250
2,250
31
3,600
3,600
31
1,050
1,050
31
3-51
4,950
4,950
$ 1,950
1,500
450
2,250
8,550
8,400
1,050
2,400
3-52
SERIAL PROBLEM SP 3
Serial Problem, Business Solutions (180 minutes) Part 1
<Note: The general ledger is displayed at the end of Part 6>
Journal entries
Dec. 2
1,025
1,025
500
500
3,950
3,950
10
750
750
14
1,500
1,500
15
1,100
1,100
16
20
5,625
5,625
28
3,000
3,000
29
192
192
31
3-53
1,500
1,500
3,065
3,065
555
555
500
500
1,250
1,250
400
400
$8,000
5 years
$1,600
$400
3-54
2,475
2,475
3-55
Credit
400
1,250
1,100
500
1,500
73,000
31,284
_______
$109,034
$31,284
$ 400
1,250
3,875
555
2,475
3,065
2,753
896
250
1,305
16,824
$14,460
Part 5
BUSINESS SOLUTIONS
Statement of Owners Equity
For Three Months Ended December 31, 2011
S. Rey, Capital, October 1, 2011 ..................................
Plus: Net income ..........................................................
Less: Withdrawals ........................................................
S. Rey, Capital, December 31, 2011 ............................
3-56
$73,000
14,460
87,460
7,100
$80,360
3-57
20,000
(1,250)
$ 48,372
5,668
580
1,665
825
7,600
18,750
$ 83,460
1,100
500
1,500
3,100
80,360
$ 83,460
General Ledger
Cash
Date
Oct.
Nov.
Dec.
Explanation
PR
1
2
5
8
15
17
20
22
31
31
1
2
5
18
22
28
30
30
2
3
4
10
14
20
28
29
31
Debit
45,000
4,800
1,400
4,633
2,208
3,950
1,500
5,625
3,000
3-58
Nov.
Dec.
Date
Oct.
Nov.
Dec.
Date
Oct.
Dec.
Date
Oct.
Dec.
Date
Oct.
Date
Dec.
6
12
15
22
28
8
18
24
4
28
Accounts Receivable
Explanation
PR
Debit
4,800
1,400
5,208
5,668
3,950
Computer Supplies
Explanation
PR
3
5
15
31
Prepaid Insurance
Explanation
PR
5
31
Prepaid Rent
Explanation
PR
2
31
Office Equipment
Explanation
PR
1
Debit
1,420
1,125
1,100
Debit
2,220
Debit
3,300
Debit
8,000
3-59
Date
Dec.
Date
Oct.
Dec.
Date
Dec.
Date
Dec.
Date
Oct.
Date
Oct.
Nov.
Dec.
Computer Equipment
Explanation
PR
Debit
20,000
1,420
Explanation
Wages Payable
PR
Debit
31
S. Rey, Capital
Explanation
PR
14
Debit
31
30
31
S. Rey, Withdrawals
Explanation
PR
Debit
3,600
2,000
1,500
3-60
6
12
28
2
8
24
20
Date
Dec.
31
Date
Dec.
Date
Oct.
Nov.
Dec.
Date
Oct.
Nov.
Dec.
Date
Dec.
Wages Expense
Explanation
PR
31
30
10
31
Debit
875
1,750
750
500
31
Insurance Expense
Explanation
PR
Debit
555
3-61
Date
Dec.
Date
Oct.
Dec.
Date
Nov.
Dec.
Date
Nov.
Date
Oct.
Dec.
31
Debit
2,475
31
20
2
Advertising Expense
Explanation
PR
Debit
1,728
1,025
Mileage Expense
Explanation
PR
1
28
29
Debit
320
384
192
22
Miscellaneous Expense
Explanation
PR
Debit
250
17
3
Repairs ExpenseComputer
Explanation
PR
Debit
805
500
Explanation
Rent Expense
PR
3-62
Reporting in Action
BTN 3-1
3-63
Comparative Analysis
BTN 3-2
1. Research In Motion
Current year, profit margin = $2,457 / $14,953 = 16.4%
Prior year, profit margin
= $1,893 / $11,065 = 17.1%
Apple
Current year, profit margin = $8,235 / $42,905
Prior year, profit margin
= $6,119 / $37,491
= 19.2%
= 16.3%
Ethics Challenge
BTN 3-3
1. GAAP requires that annual deprecation be accumulated in a contraasset account, called Accumulated Depreciation. While property, plant,
and equipment is often shown at its net value on the balance sheet (as
with Research In Motions balance sheet in Appendix A) the cost of
property, plant, and equipment along with its related accumulated
depreciation are reported in the footnotes. Thus, Bergez is correct with
her journal entry recommendation.
2. One strength of Welchs method would be the ease of preparing the
balance sheet. The property, plant, and equipment balance in the
adjusted trial balance would be directly transferable to the balance sheet
when the preparer desired to show the amount at net. Welchs approach
carries weaknesses in that financial statement users would not be able
to ascertain the original cost of the equipment or be able to know how
much of the original cost had been allocated to depreciation to date.
3. While both approaches would lead to the same total assets on the
balance sheet, GAAP requires Bergezs approach. As a professional,
Bergez is required to uphold the standards of her profession and, thus,
the decision is an ethical one for her.
3-64
Communicating in Practice
BTN 3-4
BTN 3-5
1. The Gaps main brands (stores) are The Gap, Old Navy, and Banana
Republic. It also has Piperlime and Athleta brands.
2. The Gaps fiscal year-end is January 30, 2010. It appears that The Gaps
fiscal year-end is consistently set as of the Saturday closest to January
31 meaning it falls in the last week of January or first week of
February.
3. Net sales for the year ended January 30, 2010, are $14,197 million.
4. Net income for the year ended January 30, 2010, is $1,102 million.
5. Profit margin = $1,102 million / $14,197 million = 7.76%
6. The company probably chose a fiscal year-end as the end of January or
early February to have it be consistent with their natural year. For many
retailers, the highest amount of sales is in November and December
(with some residual in January including sales returns).
3-65
Teamwork in Action
BTN 3-6
Note that there is no specific solution to this activity. Still, the presentation
of each expert team should reflect the following summary points:
Type
Before Adjusting
Balance Sheet
Account
Account
Prepaid expense
Asset overstated
Income Statement
Adjusting Entry
Accrued Revenues
Asset understated
* For depreciation, one would Credit the Accumulated Depreciation contra account.
3-66
Entrepreneurial Decision
BTN 3-7
300
300
300
300
3-67
BTN 3-8
There is no formal solution to this field activity. The instructor may wish to
tally students findings to see what companies were selected, who
responded, what was the response time, etc. The instructor can also
periodically ask students to bring in examples from their selected
companies at certain times, and then compare and contrast them with the
examples in the book.
Global Decision
BTN 3-9
3-68