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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. The accrual basis of accounting generally provides a better indication of company
performance and financial condition than does the cash basis. Also, the accrual
basis increases the comparability of financial statements from one period to the
next. Thus, business decision makers generally prefer the accrual basis.
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. The Accumulated Depreciation contra asset account is used for depreciation. It
provides financial statement users with additional information about the relative age
of the assets. Without the contra account information, the reader would not be able
to tell whether the assets are new or in need of replacement.
7. Unearned revenue refers to cash received in advance of providing products and
services. Another name for unearned revenue is deferred revenue. It is reported as
a liability on the balance sheet.
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.
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
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 Palm’s balance sheet.
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
QUICK STUDIES
Quick Study 3-1 (10 minutes)
a. UR Unearned revenue
b. PE Prepaid expenses (Depreciation)
c. AE Accrued expenses
d. AR Accrued revenue
e. PE Prepaid expenses
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
Cash Accounting:
Revenues (cash receipts)....................................................... $33,000
Expenses (cash payments: $22,500 - $2,250 + $3,750)....... 24,000
Net income .............................................................................. $ 9,000
Accrual Accounting:
Revenues (earned) ................................................................. $39,000
Expenses (incurred) ............................................................... 22,500
Net income............................................................................... $16,500
The answer is c.
Explanation:
The debit balance in Prepaid Insurance was reduced by $400, implying a
$400 debit to Insurance Expense. The credit balance in Interest Payable
increased by $800, which implies an $800 debit to Interest Expense.
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
The answer is 2.
Explanation:
Insurance premium error:
Understates expenses (and overstates assets) by........... $1,600
Accrued salaries error:
Understates expenses (and understates liabilities) by.... 1,000
Combination of errors:
Understates expenses by..................................................... $2,600
Overstates assets by............................................................. $1,600
Understates liabilities by...................................................... $1,000
Interpretation: For each one dollar that Yang Company records as revenue, it
earns 9.7 cents in net income. Yang’s 9.7% is markedly lower than the
competitors’ average profit margin of 15%. Thus, it must improve performance.
The answer is d.
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
EXERCISES
Exercise 3-1 (10 minutes)
1. B 4. F
2. E 5. D
3. C 6. A
Notes:
Office Supplies* Prepaid Insurance**
Beg. Bal. 480 Beg. Bal. 5,000
Purch. 5,349
? Used ? Used
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
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Notes:
Prepaid Insurance* Office Supplies**
Bal. Bal. 7,000 Beg. Bal. 300
Purch. 2,680
? Used ? Used
End. Bal. 1,040 End. Bal. 354
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a.
Apr. 30 Legal Fees Expense........................................... 2,500
Legal Fees Payable..................................... 2,500
To record accrued legal fees.
b.
Apr. 30 Interest Expense................................................. 2,080
Interest Payable........................................... 2,080
To record accrued interest expense (9.6% x
$780,000 x 10/360) or ($6,240 x 10/30).
c.
Apr. 30 Salaries Expense................................................. 3,600
Salaries Payable.......................................... 3,600
To record accrued salaries
($9,000 x 2/5 week).
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a. $ 1,650
b. $ 5,700
c. $10,080
d. $ 1,375
Proof:
(a) (b) (c) (d)
Supplies available – prior year-end......... $ 300 $1,600 $ 1,360 $1,375
Supplies purchased in current year........ 2,100 5,400 10,080 6,000
Total supplies available............................ 2,400 7,000 11,440 7,375
Supplies available – current year-end..... (750) (5,700) (1,840) (800)
Supplies expense for current year........... $1,650 $1,300 $ 9,600 $6,575
a. Adjusting entry:
2011
Dec. 31 Wages Expense..............................................................500
Wages Payable....................................................... 500
To record accrued wages for one day.
(5 workers x $100 x 1 day)
b. Payday entry:
2012
Jan. 4 Wages Expense..............................................................1,500
Wages Payable...............................................................500
Cash........................................................................ 2,000
To record accrued and current wages.
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
31 Unearned Fees.........................................................
4,200
Fees Earned..................................................... 4,200
To record earned fees collected in
advance (70% x $6,000).
31 Depreciation Expense—Computers.......................
1,500
Accumulated Depreciation—Computers...... 1,500
To record depreciation on computers.
31 Utilities Expense...................................................... 70
Utilities Payable............................................... 70
To record incurred and unpaid utility costs.
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
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
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
6 Cash....................................................................... 8,400
Unearned Fees.............................................. 8,400
Received fees for work to be done.
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
18 Cash....................................................................... 7,500
Unearned Fees.............................................. 7,500
Received fees for work to be done.
6 Cash....................................................................... 8,400
Fees Earned................................................... 8,400
Received fees for work to be done.
12 No entry required.
18 Cash....................................................................... 7,500
Fees Earned................................................... 7,500
Received fees for work to be done.
27 No entry required.
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
e.
Dec. 31 Supplies............................................................. 1,920
Supplies Expense.................................... 1,920
Adjust expenses for unused supplies.
f.
Dec. 31 Prepaid Insurance ($1,440 - $240)................. 1,200
Insurance Expense.................................. 1,200
Adjust expenses for unexpired coverage.
g.
Dec. 31 Remodeling Fees Earned .............................. 9,300
Unearned Remodeling Fees................... 9,300
Adjusted revenues for unfinished
projects ($12,000 + $3,600 - $6,300).
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
adidas AG
Balance Sheet
December 31, 2009
(Euros in millions)
Assets
Noncurrent assets
Intangible assets.................................................... € 2,980
Tangible and other assets..................................... 1,410
Total noncurrent assets........................................ 4,390
Current assets
Other current assets.............................................. 486
Inventories.............................................................. 1,471
Receivables and financial assets......................... 1,753
Cash and cash equivalents................................... 775
Total current assets............................................... 4,485
Total assets.............................................................. € 8,875
Equity
Total equity............................................................... € 3,776
Liabilities
Total noncurrent liabilities...................................... 2,263
Total current liabilities............................................. 2,836
Total liabilities.......................................................... 5,099
Total equity and liabilities....................................... € 8,875
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
PROBLEM SET A
Problem 3-1A (35 minutes)
Part 1
Adjustment (a)
Dec. 31 Office Supplies Expense.............................. 12,760
Office Supplies...................................... 12,760
To record cost of supplies used
($3,000 + $12,400 - $2,640).
Adjustment (b)
31 Insurance Expense....................................... 12,312
Prepaid Insurance................................. 12,312
To record annual insurance coverage expense.
Adjustment (c)
31 Salaries Expense (2 days x $2,100)............. 4,200
Salaries Payable.................................... 4,200
To record accrued but unpaid wages.
Adjustment (d)
31 Depreciation Expense—Building................ 27,000
Accumulated Depreciation—Building. 27,000
To record annual depreciation expense
[($855,000 -$45,000) / 30 years = $27,000].
Adjustment (e)
31 Rent Receivable............................................ 2,400
Rent Earned........................................... 2,400
To record earned but unpaid Dec. rent.
Adjustment (f)
31 Unearned Rent.............................................. 4,350
Rent Earned........................................... 4,350
To record the amount of rent earned for
November and December (2 x 2,175).
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
Part 2
Cash Payment for (c)
1. G 5. G 9. F
2. E 6. C 10. D
3. I 7. H 11. A
4. B 8. E 12. D
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Cash Equipment
Unadj. Bal. 26,000 Unadj. Bal. 70,000
Accumulated Depreciation—
Accounts Receivable Equipment
Unadj. Bal. 0 Unadj. Bal. 16,000
(f) 7,500 (c) 12,000
Adj. Bal. 7,500 Adj. Bal. 28,000
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
Depreciation Expense—
Professional Library Advertising Expense
Unadj. Bal. 0 Unadj. Bal. 7,000
(d) 6,000
Adj. Bal. 6,000
Depreciation Expense—
Equipment Utilities Expense
Unadj. Bal. 0 Unadj. Bal. 5,600
(c) 12,000
Adj. Bal. 12,000
Salaries Expense
Unadj. Bal. 48,000
(g) 400
Adj. Bal. 48,400
Insurance Expense
Unadj. Bal. 0
(a) 3,000
Adj. Bal. 3,000
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
Liabilities
Accounts payable........................................................... $ 36,000
Salaries payable............................................................. 400
Unearned training fees.................................................. 6,600
Total liabilities................................................................ 43,000
Equity
T. Watson, Capital.......................................................... 62,100
Total liabilities and equity............................................. $105,100
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
Adjustment description:
(a) Earned but uncollected revenues.
(b) Cost of consumed office supplies.
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
Problem 3-4A
Part 2
JJW COMPANY
Income Statement
For Year Ended July 31, 2011
Revenues
Consulting fees earned ................................ $168,160
Expenses
Depreciation expense—Office equipment. . $ 6,000
Salaries expense .......................................... 77,600
Interest expense ........................................... 2,200
Insurance expense ....................................... 2,440
Rent expense ................................................ 13,200
Office supplies expense .............................. 15,000
Advertising expense .................................... 14,700
Total expenses.............................................. 131,140
Net income....................................................... $ 37,020
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
JJW COMPANY
Statement of Owner’s Equity
For Year Ended July 31, 2011
Liabilities
Accounts payable....................................................... $ 10,200
Interest payable........................................................... 800
Salaries payable.......................................................... 6,600
Unearned consulting fees.......................................... 14,300
Long-term notes payable........................................... 44,000
Total liabilities............................................................. 75,900
Equity
J. Winner, Capital........................................................ 55,440
Total liabilities and equity.......................................... $131,340
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
Revenues
Fees earned.............................................. $420,000
Interest earned.......................................... 16,000
Total revenues.......................................... $436,000
Expenses
Depreciation expense—Automobiles..... 18,000
Depreciation expense—Equipment........ 10,000
Salaries expense...................................... 180,000
Wages expense........................................ 32,000
Interest expense....................................... 24,000
Office supplies expense.......................... 26,000
Advertising expense................................ 50,000
Repairs expense—Automobiles............. 16,800
Total expenses......................................... 356,800
Net income.................................................. $ 79,200
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
CALLAHAY COMPANY
Statement of Owner's Equity
For Year Ended December 31, 2011
Liabilities
Accounts payable................................................... $ 88,000
Interest payable...................................................... 12,000
Salaries payable..................................................... 11,000
Unearned fees......................................................... 22,000
Long-term notes payable....................................... 130,000
Total liabilities........................................................ 263,000
Owner’s Equity
J. Callahay, Capital................................................. 289,000
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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.
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
30 Cash.................................................................. 3,300
Service Fees Earned................................ 3,300
Received fees in advance.
15 Cash.................................................................. 7,650
Service Fees Earned................................ 7,650
Received fees in advance.
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
PROBLEM SET B
Problem 3-1B (30 minutes)
Part 1
Adjustment (a)
Oct. 31 Office Supplies Expense........................................ 3,450
Office Supplies................................................ 3,450
To record cost of supplies used
($500 + $3,650 - $700).
Adjustment (b)
31 Insurance Expense................................................. 2,675
Prepaid Insurance........................................... 2,675
To record annual insurance coverage expense.
Adjustment (c)
31 Salaries Expense.................................................... 800
Salaries Payable.............................................. 800
To record accrued but unpaid wages
(1 day x $800).
Adjustment (d)
31 Depreciation Expense—Building.......................... 5,400
Accumulated Depreciation—Building........... 5,400
To record annual depreciation
[($155,000-$20,000) / 25 years = $5,400].
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
Adjustment (e)
Oct. 31 Rent Receivable...................................................... 600
Rent Earned..................................................... 600
To record earned but unpaid Oct. rent.
Adjustment (f)
31 Unearned Rent........................................................ 1,050
Rent Earned..................................................... 1,050
To record rent earned for September
and October (2 x $525).
Part 2
Cash Payment for (c)
15 Cash......................................................................... 1,200
Rent Receivable............................................... 600
Rent Earned..................................................... 600
To record past due rent for two months.
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1. E 5. D 9. F
2. H 6. B 10. I
3. G 7. F 11. A
4. C 8. I 12. B
Problem 3-3B (90 minutes)
Parts 1 and 2
Professional Library
Unadj. Bal. 10,000
Accumulated Depreciation—
Professional Library
Unadj. Bal. 1,500
(d) 2,000
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Equipment
Unadj. Bal. 30,000
Accumulated Depreciation—
Equipment
Unadj. Bal. 16,000
(c) 4,000
Adj. Bal. 20,000
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
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
Salaries Expense
Unadj. Bal. 43,200
(g) 540
Adj. Bal. 43,740
Insurance Expense
Unadj. Bal. 0
(a) 6,400
Adj. Bal. 6,400
Rent Expense
Unadj. Bal. 28,600
(h) 2,600
Adj. Bal. 31,200
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
Adjustment (b)
31 Teaching Supplies Expense................................. 57,500
Teaching Supplies......................................... 57,500
To record the cost of supplies used
($60,000-$2,500).
Adjustment (c)
31 Depreciation Expense—Equipment..................... 4,000
Accumulated Depreciation—Equipment..... 4,000
To record equipment depreciation.
Adjustment (d)
31 Depreciation Expense—Professional Library.... 2,000
Accumulated Depreciation—
Professional Library............................. 2,000
To record professional library depreciation.
Adjustment (e)
31 Unearned Training Fees........................................ 9,200
Training Fees Earned..................................... 9,200
To record training fees earned that
were collected in advance.
Adjustment (f)
31 Accounts Receivable............................................ 5,500
Tuition Fees Earned....................................... 5,500
To record tuition earned ($2,200 x 2 1/2 mo).
Adjustment (g)
31 Salaries Expense................................................... 540
Salaries Payable............................................. 540
To accrue salaries expense (3 days x $180).
Adjustment (h)
31 Rent Expense ........................................................ 2,600
Prepaid Rent................................................... 2,600
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ALCORN INSTITUTE
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash............................................................................... $ 50,000
Accounts receivable...................................................... 5,500
Teaching supplies.......................................................... 2,500
Prepaid insurance.......................................................... 11,600
Prepaid rent................................................................... 0
Professional library........................................................ 10,000
Accumulated depreciation—Professional library........... $ 3,500
Equipment..................................................................... 30,000
Accumulated depreciation—Equipment........................ 20,000
Accounts payable.......................................................... 12,200
Salaries payable............................................................. 540
Unearned training fees................................................... 18,400
M. Alcorn, Capital........................................................... 68,500
M. Alcorn, Withdrawals.................................................. 20,000
Tuition fees earned........................................................ 110,500
Training fees earned...................................................... 71,200
Depreciation expense—Professional library.................. 2,000
Depreciation expense—Equipment............................... 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 $304,840
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ALCORN INSTITUTE
Income Statement
For Year Ended December 31, 2011
Revenues
Tuition fees earned.................................................... $110,500
Training fees earned.................................................. 71,200
Total revenues............................................................ $181,700
Expenses
Depreciation expense—Professional library.......... 2,000
Depreciation expense—Equipment......................... 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
Total expenses........................................................... 175,240
Net income.................................................................... $ 6,460
ALCORN INSTITUTE
Statement of Owner’s Equity
For Year Ended December 31, 2011
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ALCORN INSTITUTE
Balance Sheet
December 31, 2011
Assets
Cash.............................................................................. $50,000
Accounts receivable.................................................... 5,500
Teaching supplies....................................................... 2,500
Prepaid insurance........................................................ 11,600
Professional library..................................................... $10,000
Accumulated depreciation—Professional library........... (3,500) 6,500
Equipment.................................................................... 30,000
Accumulated depreciation—Equipment.................... (20,000) 10,000
Total assets.................................................................. $86,100
Liabilities
Accounts payable........................................................ $12,200
Salaries payable........................................................... 540
Unearned training fees................................................ 18,400
Total liabilities.............................................................. 31,140
Equity
M. Alcorn, Capital......................................................... 54,960
Total liabilities and equity........................................... $86,100
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Unadjusted Adjusted
Account Trial Balance Adjustments Trial Balance
Cash...................................$ 48,000 $ 48,000
Accounts receivable............. 70,000 (a) 6,660 76,660
Office supplies..................... 30,000 (b) 23,000 7,000
Prepaid insurance................ 13,200 (c) 4,600 8,600
Office equipment..................150,000 150,000
Accumulated depreciation—
$ 30,000 (d) 10,000 $ 40,000
Office equipment....................
Accounts payable................ 36,000 (e) 6,000 42,000
Interest payable.................... (f) 1,600 1,600
Salaries payable................... (g) 11,200 11,200
Unearned consulting fees..... 30,000 (h) 12,200 17,800
Long-term notes payable...... 80,000 80,000
D. Chen, Capital.................... 70,200 70,200
D. Chen, Withdrawals........... 10,000 10,000
(a) 6,660
Consulting fees earned........ 264,000 282,860
(h) 12,200
Depreciation expense—
Office equipment............... (d) 10,000 10,000
Salaries expense..................115,600 (g) 11,200 126,800
Interest expense................... 6,400 (f) 1,600 8,000
Insurance expense.............. (c) 4,600 4,600
Rent expense....................... 24,000 24,000
Office supplies expense........ (b) 23,000 23,000
Advertising expense............. 43,000 _______ (e) 6 ,000 ______ 49,000 _______
Totals..................................
$510,200 $510,200 $75,260 $75,260 $545,660 $545,660
Adjustment Descriptions:
(a) Earned but uncollected revenues.
(b) Cost of consumed office supplies.
(c) Cost of expired insurance coverage.
(d) Depreciation expense on office equipment.
(e) Incurred but unpaid advertising expense.
(f) Incurred but unpaid interest expense.
(g) Incurred but unpaid salaries expense.
(h) Earned revenues previously received in advance.
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Problem 3-4B
Part 2
DAXU CONSULTING COMPANY
Income Statement
For Year Ended December 31, 2011
Revenues
Consulting fees earned ..................................... $282,860
Expenses
Depreciation expense—Office 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................................................... 245,400
Net income............................................................ $ 37,460
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Liabilities
Accounts payable.......................................................... $ 42,000
Interest payable............................................................. 1,600
Salaries payable............................................................ 11,200
Unearned consulting fees............................................ 17,800
Long-term notes payable.............................................. 80,000
Total liabilities............................................................... 152,600
Equity
D. Chen, Capital............................................................. 97,660
Total liabilities and equity............................................ $250,260
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Revenues
Delivery fees earned..................................... $580,000
Interest earned............................................... 24,000
Total revenues............................................... $604,000
Expenses
Depreciation expense—Trucks.................... 24,000
Depreciation expense—Equipment............. 46,000
Salaries expense........................................... 64,000
Wages expense............................................. 290,000
Interest expense............................................ 25,000
Office supplies expense............................... 33,000
Advertising expense..................................... 26,400
Repairs expense—Trucks............................ 34,600
Total expenses.............................................. 543,000
Net income....................................................... $ 61,000
LIGHTNING COURIER
Statement of Owner's Equity
For Year Ended December 31, 2011
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Part 1 (concluded)
LIGHTNING COURIER
Balance Sheet
December 31, 2011
Assets
Cash....................................................................... $ 48,000
Accounts receivable............................................ 110,000
Interest receivable................................................ 6,000
Notes receivable (due in 90 days)......................... 200,000
Office supplies...................................................... 12,000
Trucks.................................................................... $124,000
Accumulated depreciation—Trucks................... (48,000) 76,000
Equipment............................................................. 260,000
Accumulated depreciation—Equipment............ (190,000) 70,000
Land....................................................................... 90,000
Total assets........................................................... $612,000
Liabilities
Accounts payable................................................. $124,000
Interest payable.................................................... 22,000
Salaries payable................................................... 30,000
Unearned delivery fees........................................ 110,000
Long-term notes payable..................................... 190,000
Total liabilities...................................................... 476,000
Equity
J. Hallam, Capital.................................................. 136,000
Total liabilities and equity................................... $612,000
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Part 2
Method that records prepaid expenses and unearned revenues in balance sheet accounts:
30 Cash....................................................................... 7,500
Unearned Service Fees................................ 7,500
Received fees in advance.
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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
30 Cash..................................................................... 7,500
Service Fees Earned................................... 7,500
Received fees in advance.
23 Cash..................................................................... 9,450
Service Fees Earned................................... 9,450
Received fees in advance.
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There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
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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 Advertising Expense..................................655 1,025
Cash.....................................................101 1,025
Paid share of mall advertising costs.
4 Cash.............................................................101 3,950
Accounts Receivable..........................106 3,950
Collected accounts receivable.
14 Cash.............................................................101 1,500
Unearned Computer Services Revenue...236 1,500
Received advance on work to be performed.
20 Cash.............................................................101 5,625
Computer Services Revenue.............403 5,625
Collected cash revenue from customer.
28 Cash.............................................................101 3,000
Accounts Receivable..........................106 3,000
Collected accounts receivable.
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Revenue
Computer services revenue....................................... $31,284
Expenses
Depreciation expense—Office equipment................ $ 400
Depreciation expense—Computer equipment......... 1,250
Wages expense........................................................... 3,875
Insurance expense...................................................... 555
Rent expense............................................................... 2,475
Computer supplies expense...................................... 3,065
Advertising expense................................................... 2,753
Mileage expense......................................................... 896
Miscellaneous expenses............................................ 250
Repairs expense—Computer..................................... 1,305
Total expenses............................................................ 16,824
Net income..................................................................... $14,460
Part 5
BUSINESS SOLUTIONS
Statement of Owner’s Equity
For Three Months Ended December 31, 2011
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BUSINESS SOLUTIONS
Balance Sheet
December 31, 2011
Assets
Cash ................................................................................ $ 48,372
Accounts receivable ..................................................... 5,668
Computer supplies ........................................................ 580
Prepaid insurance ......................................................... 1,665
Prepaid rent ................................................................... 825
Office equipment ........................................................... $ 8,000
Accumulated depreciation–Office equipment............. (400) 7,600
Computer equipment..................................................... 20,000
Accumulated depreciation–Computer equipment...... (1,250) 18,750
Total assets..................................................................... $ 83,460
Liabilities
Accounts payable........................................................... $ 1,100
Wages payable............................................................... 500
Unearned computer services revenue......................... 1,500
Total liabilities................................................................ 3,100
Equity
S. Rey, Capital................................................................ 80,360
Total liabilities and equity............................................. $ 83,460
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[Note: Ledger includes all entries from prior three months. The Working Papers shorten
the solution by showing account balances as of November 30.]
General Ledger
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3. For fiscal year-end February 28, 2009, the profit margin is ($ millions):
$1,893 / $11,065 = 0.171 = 17.1%
For fiscal year-end February 27, 2010, the profit margin is ($ millions):
$2,457 / $14,953 = 0.164 = 16.4%
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1. Research In Motion
Apple
3. While both approaches would lead to the same total assets on the
balance sheet, GAAP requires Bergez’s approach. As a professional,
Bergez is required to uphold the standards of her profession and, thus,
the decision is an ethical one for her.
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1. The Gap’s main brands (stores) are The Gap, Old Navy, and Banana
Republic. It also has Piperlime and Athleta brands.
2. The Gap’s fiscal year-end is January 30, 2010. It appears that The Gap’s
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.
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Note that there is no specific solution to this activity. Still, the presentation
of each expert team should reflect the following summary points:
Before Adjusting
Balance Sheet Income Statement
Type Account Account Adjusting Entry
* For depreciation, one would Credit the Accumulated Depreciation contra account.
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Cash..................................................................... 300
Unearned revenue....................................... 300
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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.
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