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CHAPTER 3
Understanding the Accounting Information System
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
1, 2
1, 2, 3, 4, 5
1
3, 4, 5
1, 2, 7
6, 7, 8, 9,
10, 22
1, 2, 3, 4, 5, 6,
7, 8, 9, 11
12, 13,
23
1, 2, 4, 6
1, 4, 8, 9, 11
1.
Transaction identification.
1, 2, 3, 5,
6, 7, 8
2.
Nominal accounts.
4, 7
3.
Trial balance.
6, 10
4.
Adjusting entries.
8, 11, 13, 14
5.
Financial statements.
6.
Closing.
12
11
14, 15, 16
7.
Inventory and cost
of goods sold.
9
12
17, 18, 19
8.
Comprehensive
accounting cycle.
*9.
3, 4, 5, 6, 7,
8, 9, 10
1, 2, 6, 11
Cash vs. Accrual Basis.
18, 19, 20
13
20, 21
*10.
Reversing entries.
21
14
22
*11.
Worksheet.
22
23, 24, 25
10
11
*These topics are dealt with in an Appendix to the Chapter.
Copyright © 2010 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 13/e, Solutions Manual
(For Instructor Use Only)
3-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Brief
Exercises
Learning Objectives
Exercises
Problems
1.
Understand basic accounting terminology.
2.
Explain double-entry rules.
3.
Identify steps in accounting cycle.
4.
Record transactions in journals, post to ledger
accounts, and prepare a trial balance.
1, 2, 3, 4,
5, 6, 7
1, 2, 3, 4, 5
1, 2, 3, 4
5.
Explain the reasons for preparing adjusting
entries.
3, 4, 5, 6,
7, 8, 9, 10
6, 7, 8, 9, 10,
11, 22
2, 3, 4, 5, 6,
7, 8, 9, 10
6.
Prepare financial statements from the adjusted
trail balance.
12, 13
1, 2, 3, 4,
7, 8, 9, 10
7.
Prepare closing entries.
11
14, 15, 16
1, 2, 3, 4, 10
8.
Explain how to adjust inventory accounts
at year-end.
12
17, 18, 19
*9.
Differentiate the cash basis of accounting from
the accrual basis of accounting.
13
20, 21
*10.
Identify adjusting entries that may be reversed.
14
22
*11.
Prepare a 10-column worksheet.
23, 24, 25
*These topics are dealt with in the Appendix to the Chapter.
3-2
11
10
ASSIGNMENT CHARACTERISTICS TABLE
Item
E3-1
Description
Level of
Difficulty
Time
(minutes)
Moderate
10–15
E3-2
E3-3
E3-4
E3-5
E3-6
E3-7
E3-8
E3-9
E3-10
E3-11
E3-12
E3-13
E3-14
E3-15
E3-16
E3-17
E3-18
E3-19
*E3-20
*E3-21
*E3-22
*E3-23
*E3-24
*E3-25
Transactions of a corporation, including investment
and dividend.
Transaction analysis–service company.
Corrected trial balance.
Corrected trial balance.
Corrected trial balance.
Adjusting entries.
Adjusting entries.
Adjusting entries.
Adjusting entries.
Analyze adjusted data.
Adjusting entries.
Prepare financial statements.
Prepare financial statements.
Closing entries for a corporation.
Closing entries.
Closing entries.
Missing amounts.
Cost of goods sold–periodic inventory.
Find missing amounts–periodic inventory.
Cash and accrual basis.
Cash to accrual basis.
Adjusting and reversing entries.
Partial worksheet preparation.
Worksheet.
Worksheet and balance sheet presentation.
Simple
Simple
Simple
Simple
Moderate
Complex
Moderate
Moderate
Complex
Moderate
Moderate
Moderate
Moderate
Moderate
Simple
Simple
Moderate
Moderate
Moderate
Moderate
Complex
Moderate
Simple
Moderate
15–20
10–15
15–20
10–15
15–20
25–30
10–15
10–15
15–20
15–20
20–25
20–25
10–15
10–15
10–15
10–15
10–15
20–25
10–15
15–20
20–25
10–15
10–15
20–25
P3-1
P3-2
*P3-3
*P3-4
P3-5
P3-6
P3-7
P3-8
P3-9
*P3-10
*P3-11
Transactions, financial statements–service company.
Adjusting entries and financial statements
Adjusting entries.
Financial Statements, Adjusting and Closing Entries
Adjusting entries.
Adjusting entries and Financial Statements.
Adjusting entries and financial statements.
Adjusting entries and closing.
Adjusting entries and closing.
Cash and accrual basis
Worksheet, balance sheet, adjusting and closing entries
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Complex
Moderate
25–35
40–50
30–40
30–35
25–30
15–20
35–40
25–35
25–35
40–50
35–40
3-3
ANSWERS TO QUESTIONS
1. Examples are:
(a) Payment of an accounts payable.
(b) Collection of an accounts receivable from a customer.
(c) Transfer of an accounts payable to a note payable.
2. Transactions (a), (b), (d) are considered business transactions and are recorded in the accounting
records because a change in assets, liabilities, or owners’/stockholders’ equity has been effected as
a result of a transfer of values from one party to another. Transactions (c) and (e) are not business
transactions because a transfer of values has not resulted, nor can the event be considered financial
in nature and capable of being expressed in terms of money.
3. Transaction (a):
Transaction (b):
Transaction (c):
Transaction (d):
Accounts Receivable (debit), Service Revenue (credit).
Cash (debit), Accounts Receivable (credit).
Office Supplies (debit), Accounts Payable (credit).
Delivery Expense (debit), Cash (credit).
4. Revenue and expense accounts are referred to as temporary or nominal accounts because each
period they are closed out to Income Summary in the closing process. Their balances are reduced to
zero at the end of the accounting period; therefore, the term temporary or nominal is given to these
accounts.
5. Andrea is not correct. The double-entry system means that for every debit amount there must be a
credit amount and vice-versa. At least two accounts are affected. It does not mean that each transaction must be recorded twice.
6. Although it is not absolutely necessary that a trial balance be taken periodically, it is customary and
desirable. The trial balance accomplishes two principal purposes:
(1) It tests the accuracy of the entries in that it proves that debits and credits of an equal amount are in
the ledger.
(2) It provides a list of ledger accounts and their balances which may be used in preparing the
financial statements and in supplying financial data about the concern.
7. (a) Real account; balance sheet.
(b) Real account; balance sheet.
(c) Merchandise inventory is generally considered a real account appearing on the balance sheet. It has
the elements of a nominal account when the periodic inventory system is used. It may appear on the
income statement when the multiple-step format is used under a periodic inventory system.
(d) Real account; balance sheet.
(e) Real account; balance sheet.
(f) Nominal account; income statement.
(g) Nominal account; income statement.
(h) Real account; balance sheet.
8. At December 31, the three days’ wages due to the employees represent a current liability. The related
expense must be recorded in this period to properly reflect the expense incurred.
9. (a) In a service company, revenues are service revenues and expenses are operating expenses. In a
merchandising company, revenues are sales revenues and expenses consist of cost of goods sold
plus operating expenses.
(b) The measurement process in a merchandising company consists of comparing the sales price of
the merchandise inventory to the cost of goods sold and operating expenses.
3-4
Copyright © 2010 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 13/e, Solutions Manual
(For Instructor Use Only)
Questions Chapter 3 (Continued)
10. (a)
(b)
(c)
(d)
No change.
Before closing, balances exist in these accounts; after closing, no balances exist.
Before closing, balances exist in these accounts; after closing, no balances exist.
Before closing, a balance exists in this account exclusive of any dividends or the net income or net
loss for the period; after closing, the balance is increased or decreased by the amount of net income
or net loss, and decreased by dividends declared.
(e) No change.
11. Adjusting entries are prepared prior to the preparation of financial statements in order to bring the
accounts up to date and are necessary (1) to achieve a proper matching of revenues and expenses in
measuring income and (2) to achieve an accurate presentation of assets, liabilities and stockholders’
equity.
12. Closing entries are prepared to transfer the balances of nominal accounts to capital (retained earnings)
after the adjusting entries have been recorded and the financial statements prepared. Closing entries
are necessary to reduce the balances in nominal accounts to zero in order to prepare the accounts for
the next period’s transactions.
13. Cost – Salvage Value = Depreciable Cost: $4,000 – $0 = $4,000. Depreciable Cost ÷ Useful Life =
Depreciation Expense For One Year $4,000 ÷ 5 years = $800 per year. The asset was used for
6 months (7/1 – 12/31), therefore 1/2-year of depreciation expense should be reported. Annual
depreciation X 6/12 = amount to be reported on 2010 income statement: $800 X 6/12 = $400.
14.
December 31
Interest Receivable ............................................................................................................... 10,000
Interest Revenue...........................................................................................................
(To record accrued interest revenue on loan)
10,000
Accrued expenses result from the same causes as accrued revenues. In fact, an accrued expense on
the books of one company is an accrued revenue to another company.
15. No, all international companies are not subject to the same internal control standards. All public companies that list their securities on U.S. stock exchanges are subject to the internal control testing and
assurance provisions of the Sarbanes-Oxley Act of 2002. International companies that list their
securities on non-U.S. exchanges are not subject to these rules and there is debate as to whether they
should have to comply.
16. There is concern that the cost of complying with the higher internal control provisions is making U.S.
markets less competitive as a place to list securities. This in turn could give U.S. investors less
investment opportunities. On the other hand, some argue that the enhanced internal control requirements in the U.S. increase the perceived reliability of companies’ financial statements and helps
reduce their cost of capital. Furthermore, the decline in public listings in the U.S. are more likely due to
other factors, such as growth in non-U.S. markets and general globalization. Thus, the jury is still out
on the net cost/benefit of Sarbanes-Oxley and its impact on international competitiveness.
17. As with accounting standards, there are differences in auditing standards across international jurisdictions.
In the U.S., auditors of public companies are regulated by the Public Company Accounting Oversight
Board (PCAOB). The PCAOB enforces the provisions of the Sarbanes-Oxley Act through its various
auditing standards. In the international domain, the auditing standards board is the International Auditing
and Assurance Standards Board (IAASB). The IAASB is working on a broad set of international
auditing standards but to date does not have a law like Sarbanes-Oxley to guide its work.
Note to instructors—Some instructors may wish to direct students to the IAASB web-site
http://www.ifac.org/iaasb/-to learn more about its work and to compare to the work of the PCAOB—
http://www.pcaobus.org/.
Copyright © 2010 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 13/e, Solutions Manual
(For Instructor Use Only)
3-5
Questions Chapter 3 (Continued)
*18. Under the cash basis of accounting, revenue is recorded only when cash is received and expenses
are recorded only when paid. Under the accrual basis of accounting, revenue is recognized when it is
earned and expenses are recognized when incurred, without regard to the time of the receipt or
payment of cash.
A cash-basis balance sheet and income statement are incomplete and inaccurate in comparison to
accrual-basis financial statements. The accrual basis matches effort (expenses) with accomplishment
(revenues) in the income statement while the cash basis only presents cash receipts and cash
disbursements. The accrual basis balance sheet contains receivables, payables, accruals, prepayments,
and deferrals while a cash basis balance sheet shows none of these.
*19. Wages paid during the year will include the payment of any wages attributable to the prior year but
unpaid at the end of the prior year. This amount is an expense of the prior year and not of the current
year, and thus should be subtracted in determining wages expense. Similarly, wages paid during the
year will not include any wages attributable to hours worked during the current year but not actually
paid until the following year. This should be added in determining wages expense.
*20. Although similar to the strict cash basis, the modified cash basis of accounting requires that expenditures for capital items be charged against income over all the periods to be benefited. This is done
through conventional accounting methods, such as depreciation and amortization. Under the strict cash
basis, expenditures would be recognized as expenses in the period in which the corresponding cash
disbursements are made.
*21. Reversing entries are made at the beginning of the period to reverse accruals and some deferrals.
Reversing entries are not required. They are made to simplify the recording of certain transactions that
will occur later in the period. The same results will be attained whether or not reversing entries are
recorded.
*22. Disagree. A worksheet is not a permanent accounting record and its use is not required in the accounting cycle. The worksheet is an informal device for accumulating and sorting information needed
for the financial statements. Its use is optional in helping to prepare financial statements.
3-6
Copyright © 2010 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 13/e, Solutions Manual
(For Instructor Use Only)
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3-1
Aug.
2
Cash ..................................................................
12,000
Equipment.........................................................
2,500
Brett Favre, Capital...................................
7
Supplies ............................................................
14,500
400
Accounts Payable.....................................
12
400
Cash ..................................................................
1,300
Accounts Receivable .......................................
670
Service Revenue .......................................
15
Rent Expense ...................................................
1,970
600
600
Cash ...........................................................
19
Supplies Expense ............................................
130
Supplies ($400 – $270) .............................
130
BRIEF EXERCISE 3-2
May
1
Cash .................................................................
3,000
Common Stock ........................................
3
Equipment........................................................
Accounts Payable....................................
3-7
3,000
1,100
1,100
BRIEF EXERCISE 3-2 (Continued)
13
Rent Expense ..................................................
400
Cash..........................................................
21
Accounts Receivable ......................................
400
500
Service Revenue ......................................
500
BRIEF EXERCISE 3-3
Feb.
1
Prepaid Insurance ............................................ 840,000
Cash...........................................................
June 30
840,000
Insurance Expense .......................................... 175,000
Prepaid Insurance ....................................
175,000
($840,000 X 5/24)
BRIEF EXERCISE 3-4
Nov.
1
Cash ..................................................................
2,700
Unearned Rent Revenue ..........................
Dec.
31
Unearned Rent Revenue..................................
Rent Revenue............................................
($2,700 X 2/3)
3-8
2,700
1,800
1,800
BRIEF EXERCISE 3-5
Dec. 31
Salaries Expense..............................................
3,600
Salaries Payable .......................................
3,600
($6,000 X 3/5)
Jan.
2
Salaries Payable...............................................
3,600
Salaries Expense..............................................
2,400
Cash ...........................................................
6,000
BRIEF EXERCISE 3-6
July
1
Prepaid Insurance ............................................
18,000
Cash ...........................................................
Dec. 31
Insurance Expense ..........................................
18,000
3,000
Prepaid Insurance.....................................
3,000
($18,000 X 1/2 X 1/3)
BRIEF EXERCISE 3-7
July
1
Cash ..................................................................
18,000
Unearned Insurance Revenue .................
Dec.
31
Unearned Insurance Revenue.........................
Insurance Revenue...................................
($18,000 X 1/2 X 1/3)
3-9
18,000
3,000
3,000
BRIEF EXERCISE 3-8
Depreciation Expense.......................................................
Accumulated
3,000
Depreciation—Equipment .................
3,000
Equipment.......................................................................... $30,000
Less: Accumulated depreciation—equipment ...............
3,000 $27,000
BRIEF EXERCISE 3-9
Dec. 31
Interest Receivable ..........................................
300
Interest Revenue.......................................
Feb.
1
Cash ..................................................................
300
10,400
Notes Receivable ......................................
10,000
Interest Receivable ...................................
300
Interest Revenue.......................................
100
BRIEF EXERCISE 3-10
Aug. 31
Interest Expense ..............................................
400
Interest Payable ........................................
31
Accounts Receivable .......................................
400
1,400
Service Revenue .......................................
31
Salaries Expense .............................................
1,400
700
Salaries Payable .......................................
31
Bad Debt Expense ...........................................
Allowance for Doubtful Accounts ...........
3-10
700
900
900
BRIEF EXERCISE 3-11
Sales...........................................................................
828,900
Interest Revenue .......................................................
13,500
Income
Summary ...............................................
Income Summary ......................................................
842,400
780,300
Cost of Goods Sold ...........................................
Operating
Income
Expenses ..........................................
189,000
Tax Expense .........................................
35,100
Income Summary ......................................................
Retained
62,100
Earnings .............................................
Retained Earnings.....................................................
Dividends
556,200
62,100
18,900
............................................................
18,900
BRIEF EXERCISE 3-12
Beginning inventory
$ 81,000
Purchases $540,
000
Less: Purchase returns
$5,800
Purchase discounts
5,000
10,800
Net purchases
529,200
Add: Freight-in
16,200
Cost of goods purchased
545,400
Cost of goods available for sale
626,400
Ending inventory
70,200
Cost of goods sold
$556,200
3-11
*BRIEF EXERCISE 3-13
(a) Cash
receipts..........................................................
$152,000
+ Increase in accounts receivable ........................
5,600
($18,600 – $13,000)
Service
(b)
revenue......................................................
$157,600
Payments for operating expenses........................
$ 97, 000
– Increase in prepaid expenses ............................
(5,700)
($23,200 – $17,500)
________
Operating expenses ...............................................
$ 91,300
*BRIEF EXERCISE 3-14
(a) Salaries
Payable .....................................................
3,600
Salaries Expense ............................................
(b) Salaries
Expense....................................................
3,600
6,000
Cash .................................................................
6,000
(c) Salaries
Payable .....................................................
3,600
Salaries
Expense....................................................
2,400
Cash .................................................................
3-12
6,000
SOLUTIONS TO EXERCISES
EXERCISE 3-1(10–15 minutes)
Date
Mar
.
3
J1
Account Titles and Explanation
1 Cash
Ref.
Debit
Credit
50,000
Common Stock
(Investment of cash in business)
Land
Building
Equipment
Cash
(Purchased Michelle Wie’s Golf Land)
50,000
10,000
22,000
6,000
5
Advertising Expense
Cash
(Paid for advertising)
1,600
6
Prepaid Insurance
Cash
(Paid for one-year insurance policy)
1,480
10
Equipment
Accounts Payable
(Purchased equipment on account)
2,500
18
Cash
1,200
25
Dividends
Cash
(Declared and paid a $500 cash dividend)
500
30
Wages Expense
Cash
(Paid wages expense)
900
30
Accounts Payable
Cash
(Paid creditor on account)
Service Revenue
(Received cash for services performed)
3-13
2,500
38,000
1,600
1,480
2,500
1,200
500
900
2,500
EXERCISE 3-1 (Continued)
31
Cash
Service Revenue
(Received cash for services performed)
750
750
EXERCISE 3-2 (15–20 minutes)
Apr.
2
Cash................................................................
Equipment......................................................
Brown, Capital........................................
73,600
32,200
2
No entry—not a transaction.
3
Supplies .........................................................
Accounts Payable ..................................
1,610
7
Rent Expense.................................................
Cash ........................................................
1,380
11
Accounts Receivable ....................................
Service Revenue ....................................
2,530
12
Cash................................................................
Unearned Service Revenue...................
7,360
17
Cash................................................................
Service Revenue ....................................
5,290
21
Insurance Expense........................................
Cash ........................................................
253
30
Salaries Expense...........................................
Cash ........................................................
2,668
30
Supplies Expense..........................................
Supplies ..................................................
276
30
Equipment......................................................
Brown, Capital........................................
14,030
3-14
105,800
1,610
1,380
2,530
7,360
5,290
253
2,668
276
14,030
EXERCISE 3-3(10–15 minutes)
Wanda Landowska Company
Trial Balance
April 30, 2007
Debit
Cash......................................................................
$ 4,800
Accounts Receivable ..........................................
2,750
Prepaid Insurance ($700 + $100)........................
800
Equipment............................................................
8,000
Credit
Accounts Payable ($4,500 – $100) .....................
$ 4,400
Property Tax Payable..........................................
560
Wanda Landowska, Capital ($11,200 + $1,500) ....
12,700
Wanda Landowska, Drawing..............................
1,500
Service Revenue..................................................
6,690
Salaries Expense.................................................
4,200
Advertising Expense ($1,100 + $300) ................
1,400
Property Tax Expense ($800 + $100) .................
900
$24,350
3-15
$24,350
EXERCISE 3-4 15–20 minutes)
The ledger accounts are reproduced below, and corrections are shown in
the accounts.
Cash
Bal.
(1)
5,912 (4)
Accounts Payable
190
Bal.
7,044
450
Accounts Receivable
Bal.
5,240 (1)
Common Stock
450
Bal.
Supplies on Hand
Bal.
8,000
Retained Earnings
2,967
Bal.
Furniture and Equipment
2,000
Service Revenue
Bal.
6,100
Bal.
5,200
(2)
3,200
(3)
2,025
(5)
80
Office Expense
Bal.
3-16
4,320 (2)
3,200
EXERCISE 3-4 (Continued)
Blues Traveler Corporation
Trial Balance (corrected)
April 30, 2007
Debit
Cash ....................................................................
$ 6,172
Accounts Receivable .........................................
4,790
Supplies on Hand ...............................................
2,967
Furniture and Equipment...................................
9,300
Credit
Accounts Payable ..............................................
$ 7,044
Common Stock ...................................................
8,000
Retained Earnings..............................................
2,000
Service Revenue ................................................
7,305
Office Expense ...................................................
1,120
$24,349
3-17
$24,349
EXERCISE 3-5 (15–20 minutes)
Watteau Co.
Trial Balance
June 30, 2007
Debit
Credit
Cash ($2,870 + $180 – $65 – $65) ....................................... $ 2,920
Accounts Receivable ($3,231 – $180)................................
Supplies ($800 – $500)........................................................
3,051
300
Equipment ($3,800 + $500) .................................................
Accounts Payable ($2,666 – $206 – $260) .........................
4,300
$ 2,200
875
6,000
Unearned Service Revenue ($1,200 – $325) .....................
Common Stock....................................................................
Dividends .............................................................................
Retained Earnings...............................................................
Service Revenue ($2,380 + $801 + $325) ...........................
Wages Expense ($3,400 + $670 – $575) ............................
Office Expense ....................................................................
575
3,000
3,506
3,495
940
$15,581
$15,581
EXERCISE 3-6 (10–15 minutes)
1.
2.
3.
August 31, 2007
Wages Expense..........................................................
Wages Payable....................................................
(To record wages payable at 8/31)
August 31, 2007
Utilities Expense ........................................................
Accounts Payable...............................................
(To record utility expense for August)
August 31, 2007
Interest Expense ($36,000 X 6% X 1/12) ...................
Interest Payable ..................................................
(To record interest expense for August)
3-18
2,280
2,280
720
720
180
180
EXERCISE 3-6 (Continued)
4.
August 31, 2007
Telephone Expense ...................................................
Accounts Payable...............................................
(To record telephone expense for August)
140
140
EXERCISE 3-7 (25–30 minutes)
(a)
1. Aug. 31 Insurance Expense ($4,500 X 3/12)........
Prepaid Insurance ...........................
1,125
2. Aug. 31 Supplies Expense ($2,600 – $450) .........
Supplies............................................
2,150
1,125
2,150
3. Aug. 31 Depreciation Expense—Cottages..........
1,080
Accumulated Depreciation—
Cottages ........................................
($120,000 – $12,000 = $108,000;
$108,000 X 4% = $4,320 per year;
$4,320 X 1/4 = $1,080)
Aug. 31 Depreciation Expense—Furniture .........
Accumulated Depreciation—
Furniture........................................
($16,000 – $1,600 = $14,400;
$14,400 X 10% = $1,440;
$1,440 X 1/4 = $360)
360
4. Aug. 31 Unearned Rent Revenue ........................
Rent Revenue...................................
3,800
5. Aug. 31 Salaries Expense ....................................
Salaries Payable ..............................
375
6. Aug. 31 Accounts Receivable ..............................
Rent Revenue...................................
800
7. Aug. 31 Interest Expense .....................................
Interest Payable ...............................
[($60,000 X 8%) X 1/4]
1,200
3-19
1,080
360
3,800
375
800
1,200
EXERCISE 3-7 (Continued)
(b)
Greco Resort
Adjusted Trial Balance
August 31, 2007
Debit
Cash ..................................................................... $ 19,600
Accounts Receivable ..........................................
800
3,375
Prepaid Insurance ($4,500 – $1,125)..................
Supplies ($2,600 – $2,150)..................................
450
Land......................................................................
20,000
Cottages............................................................... 120,000
Accumulated Depreciation—Cottages ..............
Furniture ..............................................................
16,000
Accumulated Depreciation—Furniture..............
Accounts Payable ...............................................
Unearned Rent Revenue ($4,600 – $3,800) .......
Salaries Payable..................................................
Interest Payable...................................................
Mortgage Payable ...............................................
Common Stock....................................................
Retained Earnings...............................................
Dividends .............................................................
5,000
Rent Revenue ($76,200 + $3,800 + $800)...........
Salaries Expense ($44,800 + $375) ....................
45,175
Utilities Expense .................................................
9,200
Repair Expense ...................................................
3,600
Insurance Expense .............................................
1,125
Supplies Expense ...............................................
2,150
Depreciation Expense—Cottages......................
1,080
Depreciation Expense—Furniture .....................
360
Interest Expense .................................................
1,200
$249,115
3-20
Credit
$
1,080
360
4,500
800
375
1,200
60,000
91,000
9,000
80,800
$249,115
EXERCISE 3-8 (10–15 minutes)
1.
Accounts Receivable ...................................................
750
Service Revenue ...................................................
2.
3.
750
Utilities Expense...........................................................
Utilities Payable.....................................................
520
Depreciation Expense ..................................................
400
520
Accumulated Depreciation – Dental Equipment
Interest Expense...........................................................
400
500
Interest Payable.....................................................
4.
Insurance Expense ($12,000 X 1/12) ...........................
500
1,000
Prepaid Insurance .................................................
5.
Supplies Expense ($1,600 – $500) ..............................
Supplies .................................................................
1,000
1,100
1,100
EXERCISE 3-9 (10–15 minutes)
1.
2.
3.
4.
Depreciation Expense ($250 X 3) ...............................
Accumulated Depreciation—Equipment............
750
Unearned Rent Revenue ($9,300 X 1/3) .....................
Rent Revenue .......................................................
3,100
Interest Expense..........................................................
Interest Payable ...................................................
500
Supplies Expense........................................................
Supplies ($2,800 – $850)......................................
1,950
3-21
750
3,100
500
1,950
EXERCISE 3-9 (Continued)
5.
Insurance Expense ($300 X 3)....................................
900
Prepaid Insurance................................................
900
EXERCISE 3-10 (15–20 minutes)
(a)
Ending balance of supplies
$700
Add: Adjusting entry
950
Deduct: Purchases
850
Beginning balance of supplies
800
(b) Total prepaid insurance
$4,800
Amount used (6 X $400)
2,400
Present balance
2,400
($400 X 12)
The policy was purchased six months ago (August 1, 2006)
(c)
The entry in January to record salary expense was
Salaries Expense................................................
1,800
Salaries Payable.................................................
700
Cash ..............................................................
The “T” account for salaries payable is
3-22
2,500
EXERCISE 3-10 (Continued)
Paid
January
Salaries Payable
700 Beg. Bal.
End Bal.
?
800
The beginning balance is therefore
Ending balance of salaries payable
Plus: Reduction of salaries payable
Beginning balance of salaries payable
(d)
Service revenue
Cash received
Unearned revenue reduced
$ 800
700
$1,500
$2,000
1,600
$ 400
Ending unearned revenue January 31, 2007
Plus: Unearned revenue reduced
Beginning unearned revenue December 31, 2006
$ 750
400
$1,150
EXERCISE 3-11 (15–20 minutes)
(a)
10/15 Salaries Expense ............................................
Cash..........................................................
(To record payment of October 15
payroll)
800
10/17 Accounts Receivable......................................
Service Revenue......................................
(To record revenue for services
performed for which payment has
not yet been received)
2,400
3-23
800
2,400
EXERCISE 3-11 (Continued)
10/20 Cash ....................................................................
Unearned Service Revenue .......................
(To record receipt of cash for
services not yet performed)
650
(b) 10/31 Supplies Expense ..............................................
Supplies.......................................................
(To record the use of supplies during
October)
470
10/31 Accounts Receivable.........................................
Service Revenue.........................................
(To record revenue for services
performed for which payment has
not yet been received)
1,650
10/31 Salaries Expense ...............................................
Salaries Payable .........................................
(To record liability for accrued payroll)
600
10/31 Unearned Service Revenue...............................
Service Revenue.........................................
(To reduce the Unearned Service
Revenue account for service that
has been performed)
400
3-24
650
470
1,650
600
400
EXERCISE 3-12 (20–25 Minutes)
(a)
ANDERSON COOPER CO.
Income Statement
For the Year Ended December 31, 2007
Revenues
Service revenue ..............................................
$11,590
Expenses
Salaries expense ............................................
$6,840
Rent expense ..................................................
2,260
Depreciation expense ....................................
145
Interest expense .............................................
83
Net Income .................................................................
(b)
9,328
$ 2,262
ANDERSON COOPER CO.
Statement of Retained Earnings
For the Year Ended December 31, 2007
Retained earnings, January 1 .......................................................
$11,310
Add: Net income.............................................................................
2,262
13,572
Less: Dividends..............................................................................
3,000
Retained earnings, December 31..................................................
$10,572
3-25
EXERCISE 3-12 (Continued)
(c)
ANDERSON COOPER CO.
Balance Sheet
December 31, 2007
Assets
Current Assets
Cash .................................................................
$19,472
Accounts receivable .......................................
6,920
Prepaid rent .....................................................
2,280
Total current assets ..................................
28,672
Property, plant, and equipment
Equipment .......................................................
Less Accumulated depreciation ....................
$18,050
(4,895)
Total assets ....................................................................
13,155
$41,827
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ...........................................
$ 5,472
Interest payable...............................................
83
Notes payable..................................................
5,700
Total current liabilities ..............................
11,255
Stockholders’ equity
Common Stock................................................
Retained Earnings ..........................................
$20,000
10,572*
Total liabilities and stockholders’ equity.....................
*Beg. Balance + Net Income – Dividends = Ending Balance
$11,310
+
$2,262
– $3,000
3-26
=
$10,572
30,572
$41,827
EXERCISE 3-13 (20–25 Minutes)
(a)
SANTO DESIGN AGENCY
Income Statement
For the Year Ended December 31, 2007
Revenues
Advertising revenue ......................................
$61,500
Expenses
Salaries expense ...........................................
$11,300
Depreciation expense ...................................
7,000
Rent expense .................................................
4,000
Art supplies expense ....................................
3,400
Insurance expense ........................................
850
Interest expense ............................................
500
Total expenses........................................
27,050
Net income ................................................................
$34,450
SANTO DESIGN AGENCY
Statement of Retained Earnings
For the Year Ended December 31, 2007
Retained earnings, January 1 .......................................................
$ 3,500
Add: Net income.............................................................................
34,450
Retained earnings, December 31..................................................
$37,950
3-27
EXERCISE 3-13 (Continued)
(a) Continued
SANTO DESIGN AGENCY
Balance Sheet
December 31, 2007
Assets
Cash .................................................................................
$11,000
Accounts receivable .......................................................
21,500
Art supplies .....................................................................
Prepaid insurance ...........................................................
5,000
2,500
Printing equipment .........................................................
$60,000
Less: Accumulated depreciation—printing equipment...
35,000
Total assets ...........................................................
25,000
$65,000
Liabilities and Stockholders’ Equity
Liabilities
Notes payable........................................................
$ 5,000
Accounts payable .................................................
5,000
Interest payable.....................................................
150
Unearned advertising revenue.............................
5,600
Salaries payable ....................................................
1,300
Total liabilities ................................................
$17,050
Stockholders’ equity
Common stock ......................................................
Retained earnings .................................................
Total liabilities and stockholders’ equity .....
$10,000
37,950
47,950
$65,000
(b) (1) Based on interest payable at December 31, 2007, interest is $25 per
month or .5% of the note payable. .5% X 12 = 6% interest per year.
(2) Salaries Expense, $11,300 less Salaries Payable 12/31/07, $1,300 =
$10,000. Total Payments, $17,500 – $10,000 = $7,500 Salaries
Payable 12/31/06.
3-28
EXERCISE 3-14 (10–15 minutes)
Sales....................................................................
Cost of Goods Sold ....................................
Sales Returns and Allowances..................
Sales Discounts ..........................................
Selling Expenses ........................................
Administrative Expenses ...........................
Income Tax Expense ..................................
Income Summary........................................
164,000
90,280
4,800
6,000
6,400
15,200
12,000
29,320
OR
Sales....................................................................
Income Summary........................................
164,000
Income Summary ...............................................
Cost of Goods Sold ....................................
Sales Returns and Allowances..................
Sales Discounts ..........................................
Selling Expense ..........................................
Administrative Expense .............................
Income Tax Expense ..................................
134,680
Income Summary ...............................................
29,320
164,000
90,280
4,800
6,000
6,400
15,200
12,000
Retained Earnings ......................................
Retained Earnings..............................................
Dividends.....................................................
29,320
7,200
7,200
EXERCISE 3-15 (10–15 minutes)
Sales .......................................................................
350,000
Sales Returns and Allowances .....................
Sales Discounts .............................................
13,000
8,000
Income Summary ...........................................
329,000
Income Summary ..................................................
3-29
308,000
EXERCISE 3-15 (Continued)
Cost of Goods Sold ........................................
208,000
Freight-out .......................................................
7,000
Insurance Expense .........................................
12,000
Rent Expense ..................................................
20,000
Salary Expense ...............................................
61,000
Income Summary ...................................................
21,000
21,000
Retained Earnings ..........................................
EXERCISE 3-16 (10–15 Minutes)
(a) Sales ........................................................................
$800,000
Less: Sales returns and allowances.....................
$24,000
Sales discount..............................................
15,000
Net sales..................................................................
(b) Sales ........................................................................
$761,000
800,000
800,000
Income Summary ............................................
Income Summary ...................................................
39,000
39,000
Sales Returns and Allowances ......................
24,000
Sales Discounts ..............................................
15,000
3-30
EXERCISE 3-17 (10–15 minutes)
(a) $9,000
(b) $25,000
(c) $10,000
(d) $100,000
(e) $57,000
EXERCISE 3-18 (10–15 minutes)
Inventory, September 1, 2006
Purchases
Less: Purchase returns and allowances
Net purchases
Add: Freight-in
Cost of goods purchased
Cost of goods available for sale
Inventory, August 31, 2007
Cost of goods sold
$ 19,250
$164,340
(2,200)
162,140
4,400
166,540
185,790
(27,500)
$158,290
EXERCISE 3-19 (20–25 minutes)
(a) Sales
*Sales returns
Net sales
$78,000
(4,000)
$74,000
(b) Beginning inventory
Purchases
Purchase returns
Goods available for sale
*Ending inventory
Cost of goods sold
$16,000
88,000
(6,000)
98,000
(34,000)
$64,000
(c) *Sales
Sales returns
Net sales
$99,000
(5,000)
$94,000
3-31
EXERCISE 3-19 (Continued)
(d) *Beginning inventory
$ 30,000
Purchases
Purchase returns
100,000
(10,000)
Goods available for sale
Ending inventory
120,000
(48,000)
Cost of goods sold
$ 72,000
(e) Beginning inventory
(f)
$ 44,000
*Purchases
108,000
Purchase returns
Goods available for sale
(8,000)
144,000
Ending inventory
Cost of goods sold
(30,000)
$114,000 from (f) below
Net sales
*Cost of goods sold
$132,000
(114,000)
Gross profit
$ 18,000
(g) Sales
Sales returns
$100,000
(9,000)
*Net sales
$ 91,000
(h) Beginning inventory
$ 24,000
Purchases
*Purchase returns
85,000
(9,000)
Goods available for sale
100,000
Ending inventory
Cost of goods sold
(28,000)
$ 72,000
3-32
EXERCISE 3-19 (Continued)
(i)
Net sales
$91,000
Cost of goods sold
(72,000)
*Gross profit
$19,000
*EXERCISE 3-20 (10–15 minutes)
(a)
Wayne Rogers Corp.
Income Statement (Cash Basis)
For the Year Ended December 31,
2006
Sales
$295,000
$515,000
225,000
272,000
$ 70,000
$243,000
Expenses
Net income
(b)
2007
Wayne Rogers Corp.
Income Statement (Accrual Basis)
For the Year Ended December 31,
2006
2007
$485,000
$445,000
Expenses**
277,000
255,000
Net income
$208,000
$190,000
Sales*
*2006:
2007:
$295,000 + $160,000 + $30,000 = $485,000
$355,000 + $90,000 = $445,000
**2006:
$185,000 + $67,000 + $25,000 = $277,000
2007:
$40,000 + $160,000 + $55,000 = $255,000
3-33
*EXERCISE 3-21 (15–20 minutes)
Jill Accardo, M.D.
Conversion of Cash Basis to Accrual Basis
For the Year 2007
Excess of cash collected over cash disbursed
($142,600 – $55,470)
$87,130
Add increase in accounts receivable ($9,250 – $15, 927)
6,677
Deduct increase in unearned service revenue ($2,840 – $4,111)
(1,271)
Add decrease in accrued liabilities ($3,435 – $2,108)
1,327
Add increase in prepaid expenses ($1,917 – $3,232)
1,315
Net income on an accrual basis
$95,178
Alternate solution:
Jill Accardo, M.D.
Conversion of Income Statement Data
from Cash Basis to Accrual Basis
For the Year 2007
Cash
Basis
Collections from customers:
–Accounts receivable, Jan. 1
+Accounts receivable, Dec. 31
+Unearned service revenue, Jan. 1
–Unearned service revenue, Dec. 31
Service revenue
Disbursements for expenses:
–Accrued liabilities, Jan. 1
+Accrued liabilities, Dec. 31
+Prepaid expenses, Jan. 1
–Prepaid expenses, Dec. 31
Operating expenses
Net income—cash basis
Net income—accrual basis
Adjustments
Add
Deduct
Accrual
Basis
$142,600
$9,250
$15,927
2,840
4,111
$148,006
55,470
3,435
2,108
1,917
3,232
$ 87,130
3-34
52,828
$ 95,178
EXERCISE 3-22 (20–25 minutes)
(a)
Adjusting Entries:
1. Insurance Expense ..............................................
Prepaid Insurance ........................................
2.
3.
4.
(b)
1,500
1,500
Rental Revenue ....................................................
Unearned Rental Revenue ...........................
500
Advertising Materials...........................................
Advertising Expense ....................................
300
Interest Expense ..................................................
Interest Payable ............................................
850
500
300
850
Reversing Entries:
1. No reversing entry required.
2.
3.
4.
Unearned Rental Revenue ..................................
Rental Revenue.............................................
500
Advertising Expense ...........................................
Advertising Materials ...................................
300
Interest Payable ...................................................
Interest Expense...........................................
850
500
300
850
*EXERCISE 3-23 (10–15 minutes)
Jurassic Park Co.
Worksheet (partial)
For Month Ended February 28, 2007
Adjusted
Trial
Balance
Account Titles
Supplies
Dr.
Cr.
1,756
Adjustments
Dr.
Cr.
Trial
Income
Balance
Statement
Dr.
(a) 1,041
Cr.
715
Dr.
Cr.
Balance Sheet
Dr.
Cr.
715
Accumulated
depreciation
6,939
(b)
257
3-35
7,196
7,196
*EXERCISE
3-23 (Continued)
Interest
payable
150
(c)
50
200
200
Supplies
expense
(a) 1,041
1,041
1,041
Depreciation
expense
(b)
257
257
257
(c)
50
50
50
Interest
expense
The following accounts and amounts would be shown in the February
income statement:
Supplies expense
Depreciation expense
Interest expense
50
$1,041
257
*EXERCISE 3-24 (10–15 minutes)
Accounts
Adjusted Trial
Income
Balance
Statement
Dr.
Cash
Cr.
Dr.
Cr.
Balance Sheet
Dr.
9,000
9,000
80,000
80,000
Merchandise
Inventory
Sales
450,000
450,000
Sales Returns and
Allowances
10,000
10,000
Sales Discounts
5,000
5,000
Cost of Goods Sold 250,000
250,000
3-36
Cr.
*EXERCISE 3-25 (20–25 minutes)
Ed Bradley Co.
Worksheet (partial)
For the Month Ended April 30, 2007
Account Titles
Cash
Adjusted Trial
Income
Balance
Statement
Dr.
Cr.
Dr.
Cr.
Balance Sheet
Dr.
19,472
19,472
Accounts receivable
6,920
6,920
Prepaid rent
2,280
2,280
18,050
18,050
Equipment
Cr.
Accum. depreciation
4,895
4,895
Notes payable
5,700
5,700
Accounts payable
5,472
5,472
34,960
34,960
Bradley, capital
Bradley, drawing
6,650
Services revenue
6,650
11,590
11,590
Salaries expense
6,840
6,840
Rent expense
2,260
2,260
145
145
83
83
Depreciation expense
Interest expense
Interest payable
Totals
83
62,700
62,700
83
9,328
Net income
2,262
Totals
11,590
3-37
11,590
53,372
51,110
2,262
11,590
53,372
53,372
*EXERCISE 3-25 (Continued)
Ed Bradley Co.
Balance Sheet
April 30, 2007
Assets
Current Assets
Cash..............................................................
$19,472
Accounts receivable ...................................
6,920
Prepaid rent .................................................
2,280
Total current assets ...........................
28,672
Property, plant, and equipment
Equipment....................................................
Less Accumulated depreciation ................
$18,050
(4,895)
Total assets ....................................................................
13,155
$41,827
Liabilities and Owner’s Equity
Current liabilities
Accounts payable........................................
$ 5,472
Interest payable ...........................................
83
Notes payable ..............................................
5,700
Total current liabilities.......................
11,255
Owner’s equity
Bradley, Capital ...........................................
Total liabilities and owner’s equity ..............................
*Beg. Balance – Drawings + Net Income = Ending Balance
$34,960
–
$6,650 +
$2,262
3-38
=
$30,572
30,572*
$41,827
TIME AND PURPOSE OF PROBLEMS
Problem 3-1 (Time 25–35 minutes)
Purpose—to provide an opportunity for the student to post daily transactions to a “T” account ledger, take
a trial balance, prepare an income statement, a balance sheet and a statement of owner’s equity, close
the ledger, and take a post-closing trial balance. The problem deals with routine transactions of a
professional service firm and provides a good integration of the accounting process.
Problem 3-2 (Time 40–50 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting entries and an adjusted trail balance
and then prepare an income statement, retained earnings statement, and a balance sheet. In addition,
closing entries must be made and a post-closing trial balance prepared.
Problem 3-3 (Time 30–40 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting, closing, and reversing entries. This
problem presents basic adjustments including a number of accruals and deferrals. It provides the
student with an integrated flow of the year-end accounting process.
Problem 3-4 (Time 30–35 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting and closing entries from a trial
balance and related information. The student is also required to post the entries to “T” accounts.
Problem 3-5 (Time 25–30 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting entries. The adjusting entries are
fairly complex in nature.
Problem 3-6 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to determine what adjusting entries need to be made
to specific accounts listed in a partial trial balance. The student is also required to determine the amounts of
certain revenue and expense items to be reported in the income statement.
Problem 3-7 (Time 35–40 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting entries, and prepare financial
statements (income statement, balance sheet, and statement of retained earnings). The student also is asked
to analyze two transactions to find missing amounts.
Problem 3-8 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to prepare year-end adjusting entries from a trial
balance and related information presented. The problem also requires the student to prepare an income
statement, a balance sheet, and a statement of owner’s equity. The problem covers the basics of the endof-period adjusting process.
Problem 3-9 (Time 25–35 minutes)
Purpose—to provide an opportunity for the student to figure out the year-end adjusting entries that were
made from a trial balance and an adjusted trial balance. The student is also required to prepare an income
statement, a statement of retained earnings, and a balance sheet. In addition, the student needs to answer
a number of questions related to specific accounts.
*Problem 3-10 (Time 40–50 minutes)
Purpose—to provide an opportunity for the student to complete a worksheet and then prepare a classified
balance sheet. In addition, adjusting and closing entries must be made and a post-closing trial balance
prepared.
*Problem 3-11 (Time 35–40 minutes)
Purpose—to provide an opportunity for the student to prepare and compare (a) cash basis and accrual
basis income statements, (b) cash basis and accrual basis balance sheets, and (c) to discuss the weaknesses of cash basis accounting.
3-39
SOLUTIONS TO PROBLEMS
PROBLEM 3-1
(a)
(Explanations are omitted.) and (d)
Cash
Sept.
8
1
20
30 Bal
Furniture and Equipment
20,000 Sept. 4
1,690 5
980
10
18
680
942
430
3,600
Sept.
19
30
30
3,000
1,800
85
Sept.
2
17,280
Yasunari Kawabata, Capital
19
3,000 Sept.
Bal.
1
30
30
20,000
6,007
23,007
2
17,280
30
13,680
8
1,690
14
5,820
2,110
9,620
12,133
Accounts Receivable
Sept. 14
25
Bal. 30
5,820 Sept. 20
2,110
6,950
980
Sept.
18
Accounts Payable
3,600 Sept.
Bal.
Rent Expense
Sept. 4
680 Sept.
Sept.
5
Bal.
30
30
Supplies on Hand
942 Sept.
30
680
330
Sept.
30
Service Revenue
9,620 Sept.
612
25
9,620
Miscellaneous Office Expense
Sept.
10
30
430 Sept.
85
515
30
Accumulated Depreciation
515
Sept.
515
Office Salaries Expense
Sept. 30
1,800 Sept.
30
1,800
Supplies Expense
Sept. 30
330 Sept.
30
330
3-40
30
288
PROBLEM 3-1 (Continued)
Depreciation Expense
Sept. 30
288 Sept.
(b) YASUNARI
30
Income Summary
288 Sept.
30
30
30
30
30
30 Inc.
680 Sept.
515
1,800
330
288
6,007
9,620
30
9,620
9,620
KAWABATA, D.D.S.
Trial Balance
September 30
Debit
Cash .............................................................................
12,133
Accounts Receivable ..................................................
6,950
Supplies on Hand........................................................
612
Furniture and Equipment ...........................................
17,280
Credit
Accumulated Depreciation.........................................
288
Accounts Payable .......................................................
13,680
Yasunari Kawabata, Capital .......................................
17,000
Service Revenue .........................................................
9,620
Rent Expense ..............................................................
680
Miscellaneous Office Expense...................................
515
Office Salaries Expense .............................................
1,800
Supplies Expense .......................................................
330
Depreciation Expense.................................................
288
Totals
.................................................................
3-41
40,588 40,588
PROBLEM 3-1 (Continued)
(c) YASUNARI
KAWABATA, D.D.S.
Income Statement
For the Month of September
Service revenue .........................................................
$9,620
Expenses:
Office
salaries expense .............................
$1,800
expense ..............................................
680
expense .......................................
330
expense ................................
288
Miscellaneous office expense...................
515
Rent
Supplies
Depreciation
Total expenses .......................................
3,613
Net income .................................................................
$6,007
YASUNARI KAWABATA, D.D.S.
Statement of Owner’s Equity
For the Month of September
Kawabata, Capital September 1.............................................
Add: Net income for September..........................................
$20,000
6,007
26,007
Less: Withdrawal by owner...................................................
Kawabata, Capital September 30...........................................
3-42
3,000
$23,007
PROBLEM 3-1 (Continued)
YASUNARI KAWABATA, D.D.S.
Balance Sheet
As of September 30
Assets
Liabilities and Owner’s Equity
Cash ............................... $12,133
Accounts payable ................... $13,680
Accounts receivable.....
6,950
Yasunari Kawabata, Capital....
Supplies on Hand .........
612
Furniture and equip. .....
17,280
Accum. depreciation ....
Total
(e) YASUNARI
(288)
assets........... $36,687
23,007
Total liabilities and
owner’s equity ..................... $36,687
KAWABATA, D.D.S.
Post-Closing Trial Balance
September 30
Debit
Cash ..............................................................
12,133
Accounts Receivable ...................................
6,950
Supplies on Hand.........................................
612
Furniture and Equipment ............................
17,280
Credit
Accumulated Depreciation..........................
288
Accounts Payable ........................................
13,680
Yasunari Kawabata, Capital ........................
Totals
..................................................
3-43
23,007
36,975 36,975
PROBLEM 3-2
(a)
Dec. 31 Accounts Receivable........................................
3,500
Advertising Revenue.................................
31 Unearned Advertising Revenue ......................
3,500
1,400
Advertising Revenue.................................
31 Art Supplies Expense.......................................
1,400
5,400
Art Supplies ...............................................
31
Depreciation Expense ......................................
5,400
5,000
Accumulated Depreciation .......................
31
Interest Expense ...............................................
5,000
150
Interest Payable.........................................
31
Insurance Expense ...........................................
150
850
Prepaid Insurance .....................................
31
Salaries Expense ..............................................
Salaries Payable ........................................
3-44
850
1,300
1,300
PROBLEM 3-2 (Continued)
(b)
MASON ADVERTISING AGENCY
Income Statement
For the Year Ended December 31, 2010
Revenues
Advertising
revenue..............................
$63,500
Expenses
Salaries
expense ...................................
$11,300
Art supplies expense ............................
5,400
Depreciation
Rent
Insurance
Interest
expense ...........................
5,000
expense.........................................
4,000
expense................................
850
expense....................................
500
Total expenses ...............................
27,050
Net income .......................................................
$36,450
MASON ADVERTISING AGENCY
Statement of Retained Earnings
For the Year Ended December 31, 2010
Retained earnings, January 1...................................................
$ 3,500
Add: Net income .......................................................................
36,450
Retained earnings, December 31 .............................................
$39,950
3-45
PROBLEM 3-2 (Continued)
MASON ADVERTISING AGENCY
Balance Sheet
December 31, 2010
Assets
Cash...............................................................................
$11,000
Accounts receivable ....................................................
23,500
Art supplies...................................................................
3,000
Prepaid insurance ........................................................
2,500
Printing equipment.......................................................
$60,000
Less: Accumulated depreciation—printing
equipment
..........................................................
33,000
Total assets....................................................
27,000
$67,000
Liabilities and Stockholders’ Equity
Liabilities
Notes payable .....................................................
$ 5,000
Accounts payable...............................................
5,000
Unearned advertising revenue ..........................
5,600
Salaries payable .................................................
1,300
Interest payable ..................................................
150
Total liabilities .............................................
$17,050
Stockholders’ equity
Common stock ...................................................
$10,000
Retained earnings ..............................................
39,950
49,950
Total liabilities and stockholders’
equity........................................................
$67,000
(c) 1 . Interest is $50 per month or 1% of the note payable. 1% X 12 = 12%
interest per year.
2. Salaries Expense, $11,300 less Salaries Payable 12/31/10, $1,300 =
$10,000. Total Payments, $12,500 – $10,000 = $2,500 Salaries Payable
12/31/09.
3-46
PROBLEM 3-3
1.
Dec. 31 Salaries Expense ..............................................
Salaries Payable ........................................
(5 X $700 X 2/5) = $1,400
(3 X $600 X 2/5) =
720
Total accrued salaries $2,120
2,120
2.
31 Unearned Rent Revenue ..................................
Rent Revenue ............................................
(5 X $6,000 X 2) = $60,000
(4 X $8,500 X 1) = 34,000
Total rent earned $94,000
94,000
3. 31
Advertising Expense ........................................
Prepaid Advertising ..................................
(A650 – $500 per month
for 8 months) = $4,000
(B974 – $300 per month
for 3 months) =
900
Total advertising expense $4,900
4,900
4. 31
Interest Expense ...............................................
Interest Payable
($60,000 X 12% X 7/12) ..........................
4,200
3-47
2,120
94,000
4,900
4,200
PROBLEM 3-4
(a) Nov. 30 Store Supplies Expense...........................
4,000
Store Supplies ...................................
30 Depr. Expense—Store Equipment ..........
4,000
9,000
Accumulated Depreciation—
Store Equipment............................
30
Depr. Expense—Delivery Equipment......
9,000
6,000
Accumulated Depreciation—
Delivery Equipment.......................
30
Interest Expense .......................................
Interest Payable.................................
3-48
6,000
11,000
11,000
PROBLEM 3-4 (Continued)
(b)
BELLEMY FASHION CENTER
Adjusted Trial Balance
November 30, 2010
Dr. Cr.
28,700
33,700
45,000
1,500
85,000
Cash.......................................................................
Accounts Receivable ...........................................
Merchandise Inventory ........................................
Store Supplies ......................................................
Store Equipment...................................................
Accumulated Depr.—
Store Equipment................................................
Delivery Equipment ..............................................
48,000
Accumulated Depr.—
Delivery Equipment ...........................................
Notes Payable .......................................................
Accounts Payable.................................................
Common Stock .....................................................
Retained Earnings ................................................
Sales ......................................................................
Sales Returns and
Allowances.........................................................
4,200
Cost of Goods Sold ..............................................
495,400
Salaries Expense ..................................................
140,000
Advertising Expense ............................................
26,400
Utilities Expense...................................................
14,000
Repair Expense ....................................................
12,100
Delivery Expense..................................................
16,700
Rent Expense........................................................
24,000
Store Supplies Expense.......................................
4,000
Depreciation Expense—
Store Equipment................................................
9,000
Depreciation Expense—
Delivery Equipment ...........................................
6,000
Interest Expense...................................................
11,000
Interest Payable .................................................... ________
Totals ............................................................... 1,004,700
3-49
27,000
12,000
51,000
48,500
90,000
8,000
757,200
11,000
1,004,700
PROBLEM 3-4 (Continued)
(c)
BELLEMY FASHION CENTER
Income Statement
For the Year Ended November 30, 2010
Sales revenue
Sales
......................................................
$757,200
Less: Sales returns and
4,200
allowanc
es.................................
Net
sales................................................
753,000
495,400
Cost of goods sold..........................................
Gross profit......................................................
257,600
Operating expenses
Selling
expenses
Salaries expense
($140,000 X 70%) ..................... $98,000
Advertising expense ................... 26,400
Rent expense
($24,000 X 80%) ....................... 19,200
Delivery expense ......................... 16,700
Utilities expense
($14,000 X 80%) ....................... 11,200
9,000
Depr. exp.—store equipment .....
6,000
Depr. exp.—deliv. equipment ....
4,000
Store supplies expense ..............
$190,500
Total selling expenses .........
Administrative
expenses
Salaries
expense
($140,000 X 30%) ..................... 42,000
Repair
expense............................ 12,100
Rent
expense
4,800
($24,000 X 20%) .......................
Utilities
expense
2,800
($14,000 X 20%) .......................
61,700
Total admin. expenses .........
252,200
Total oper. expenses......
Income from operations ................................
5,400
Other expenses and losses
11,000
Interest
expense ...................................
Net loss...........................................................
($ 5,600)
3-50
PROBLEM 3-4 (Continued)
BELLEMY FASHION CENTER
Retained Earnings Statement
For the Year Ended November 30, 2010
$8,000
5,600
$2,400
Retained earnings, December 1, 2009....................
Less: Net loss..........................................................
Retained earnings, November 30, 2010 .................
BELLEMY FASHION CENTER
Balance Sheet
November 30, 2010
Assets
Current assets
$28,700
Cash
.......................................................
33,700
Accounts
receivable.............................
45,000
Merchandise
inventory ........................
1,500
Store
supplies.......................................
Total current assets ....................
Property, plant, and equipment
Store
equipment ................................... $85,000
Accum.
depr.—store equipment .........
27,000 58,000
48,000
Delivery
equipment ..............................
12,000 36,000
Accum.
depr.—delivery equipment ....
Total assets..................................
$108,900
94,000
$202,900
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable due next year .........................
Accounts
payable...........................................
Interest
payable ..............................................
Total current liabilities ..........................
Long-term liabilities
Notes
payable .................................................
Total liabilities .......................................
Stockholders’ equity
Common
Stock ...............................................
Retained
Earnings ..........................................
Total liabilities and stockholders’
equity..................................................
3-51
$30,000
48,500
11,000
$ 89,500
21,000
110,500
90,000
2,400
92,400
$202,900
PROBLEM 3-4 (Continued)
(d) Nov. 30 Sales ..........................................................
757,200
Income Summary ..............................
30
Income Summary......................................
757,200
762,800
Sales Returns and Allowances ........
4,200
Cost of Goods Sold...........................
495,400
Salaries Expense...............................
140,000
Advertising Expense.........................
26,400
Utilities Expense................................
14,000
Repair Expense .................................
12,100
Delivery Expense...............................
16,700
Rent Expense.....................................
24,000
Store Supplies Expense ...................
4,000
Depreciation Expense—Store
Equipment......................................
9,000
Depreciation Expense—Delivery
Equipment......................................
6,000
Interest Expense................................
30
Retained Earnings ....................................
Income Summary ..............................
3-52
11,000
5,600
5,600
PROBLEM 3-4 (Continued)
(e)
BELLEMY FASHION CENTER
Post-Closing Trial Balance
November 30, 2010
Debit
Cash...........................................................................
$ 28,700
Accounts Receivable ...............................................
33,700
Merchandise Inventory ............................................
45,000
Store Supplies ..........................................................
1,500
Store Equipment.......................................................
85,000
Accumulated Depreciation—Store Equipment......
Delivery Equipment..................................................
Credit
$ 27,000
48,000
Accumulated Depreciation—Delivery
Equipment.............................................................
12,000
Notes Payable...........................................................
51,000
Accounts Payable ....................................................
48,500
Interest Payable........................................................
11,000
Common Stock .........................................................
90,000
Retained Earnings....................................................
$241,
2,400
900 $241,
3-53
900
PROBLEM 3-5
(a) -1Depreciation
Expense...............................................
10,500
Accumulated Depreciation—Equipment
(1/16 X $168,000) ............................................
10,500
-2Interest
Expense .......................................................
1,440*
Interest Payable
($90,000 X 8% X 72/360) ................................
1,440*
-3Admissions
Revenue................................................
60,000
Unearned Admissions Revenue
(2,000 X $30) ...................................................
60,000
-4Prepaid
Advertising ..................................................
1,100
Advertising Expense .........................................
1,100
-5Salaries
Expense.......................................................
4,700
Salaries Payable ................................................
(b) 1.
4,700
Interest expense, $2,840 ($1,400 + $1,440).
2.
Admissions revenue, $320,000 ($380,000 – $60,000).
3.
Advertising expense, $12,580 ($13,680 – $1,100).
4.
Salaries expense, $62,300 ($57,600 + $4,700).
*Note to instructor : If 30-day months are a ssumed, interest expense =
$1,400 ($90,000 X 8% X 70/360).
3-54
PROBLEM 3-6
(a) -1Service
Revenue .............................................................
Unearned Service Revenue ....................................
-2Accounts
Receivable ......................................................
Service Revenue ......................................................
-3-
Bad Debt Expense...........................................................
Allowance for Doubtful Accounts ..........................
-4Insurance
Expense .........................................................
Prepaid Insurance....................................................
-5-
Depreciation Expense—Furniture and Equipment ......
Accum. Depr.—Furniture and Equipment
($25,000 X .10) ......................................................
-6Interest
4,900
1,430
480
4,900
1,430
480
2,500
60
Rent ....................................................................
Rent Expense ...........................................................
750
Office Salaries Expense .................................................
Salaries Payable ......................................................
2,510
3-55
6,000
2,500
Expense .............................................................
Interest Payable
($7,200 X .10 X 30/360).........................................
-7Prepaid
-8-
6,000
60
750
2,510
PROBLEM 3-6 (Continued)
(b) YORKI
S PEREZ, CONSULTING ENGINEER
Income Statement
For the Year Ended December 31, 2010
Service revenue ($100,000 – $6,000 + $4,900) ............
$98,900
Expenses
Office
salaries expense ($30,500 + $2,510).........
$33,010
Rent expense ($9,750 – $750) ..............................
9,000
Depreciation
expense...........................................
2,500
Bad debt expense .................................................
1,430
Heat, light, and water expense ............................
1,080
Miscellaneous
office expense .............................
720
expense................................................
480
Interest expense....................................................
60
Insurance
Total expenses .................................................
48,280
Net income.....................................................................
$50,620
3-56
PROBLEM 3-6 (Continued)
YORKIS PEREZ, CONSULTING ENGINEER
Statement of Owner’s Equity
For the Year Ended December 31, 2010
Yorkis Perez, Capital, January 1 ................................................
$ 52,010
Add: Net income ..........................................................................
50,620
Less: Withdrawals .......................................................................
(17,000)
Yorkis Perez, Capital, December 31 ...........................................
(a)
Yorkis Perez, Capital—trial balance ...............
$35,010
Withdrawals during the year...........................
17,000
Yorkis Perez, Capital, as of January 1, 2010...
$52,010
3-57
a
$ 85,630
PROBLEM 3-6 (Continued)
YORKIS PEREZ, CONSULTING ENGINEER
Balance Sheet
December 31, 2010
Assets
Current
assets
$29,500
Cash ...................................................
Accounts receivable
($49,600 + $4,900) ......................... $54,500
Less: Allowance for
doubtful accounts ................. (2,180)* 52,320
1,960
Engineering supplies inventory ......
Prepaid insurance
620
($1,100 – $480) ..............................
750
Prepaid rent .......................................
$ 85,150
Total
current assets...................
25,000
Furniture and equipment ........................
(8,750)** 16,250
Less: Accum. depreciation ............
Total
assets ................................
$101, 400
Liabilities and Owner’s Equity
Current
liabilities
Notes payable....................................
Unearned service revenue ...............
Salaries payable ................................
Interest payable.................................
Yorkis Perez, Capital
($35,010 + $50,620)...............................
Total liabilities and owner’s
equity........................................
*($750 + $1,430)
**($6,250 + $2,500)
3-58
$7,200
6,000
2,510
60
$ 15,770
85,630
$101,400
PROBLEM 3-7
(a)
Dec. 31 Account Receivable..................................
1,000
Service Revenue................................
31 Unearned Service Revenue .....................
1,000
1,400
Service Revenue................................
31 Art Supplies Expense...............................
1,400
5,000
Art Supplies .......................................
31
Depreciation Expense ..............................
5,000
8,750
Accumulated Depreciation—
Printing Equipment .......................
31
Interest Expense .......................................
8,750
150
Interest Payable.................................
31
Insurance Expense ...................................
150
750
Prepaid Insurance .............................
31
Salaries Expense ......................................
Salaries Payable ................................
3-59
750
1,500
1,500
PROBLEM 3-7 (Continued)
(b) SORENSTAM
ADVERTISING CORP.
Income Statement
For the Year Ended December 31, 2010
Revenues
Service
revenue ...........................................
$61,000
Expenses
Salaries
expense..........................................
$11,500
Art supplies expense...................................
10,000
Depreciation
Rent
Insurance
Interest
expense..................................
8,750
expense ...............................................
4,000
expense ......................................
750
expense ..........................................
500
Total expenses.....................................
35,500
Net income ..............................................................
$25,500
SORENSTAM ADVERTISING CORP.
Statement of Retained Earnings
For the Year Ended December 31, 2010
Retained earnings, January 1.........................................................
$ 4,500
Add: Net income .............................................................................
25,500
Retained earnings, December 31 ...................................................
$30,000
3-60
PROBLEM 3-7 (Continued)
SORENSTAM ADVERTISING CORP.
Balance Sheet
December 31, 2010
Assets
Cash ...............................................................................
$ 7,000
Accounts receivable.....................................................
20,000
Art supplies ...................................................................
3,500
Prepaid insurance.........................................................
2,500
Printing equipment .......................................................
$60,000
Less: Accum. depr.—printing equipment..................
35,750
Total
assets........................................................
24,250
$57,250
Liabilities and Stockholders’ Equity
Liabilities
Notes payable.....................................................
Accounts
$ 5,000
payable ..............................................
5,000
Unearned service revenue ................................
5,600
Salaries payable .................................................
1,500
Interest payable..................................................
150
Total liabilities ...........................................
$17,250
Stockholders’ equity
Common
Stock...................................................
10,000
Retained Earnings..............................................
30,000
Total stockholders’ equity .......................
40,000
Total liabilities and stockholders’
equity ......................................................
3-61
$57,250
PROBLEM 3-7 (Continued)
(c)
1.
2.
3.
Total depreciable cost = $8,750 X 6 = $52,500.
Salvage value = cost $60,000 less depreciable cost $52,500 = $7,500
Based on the balance in interest payable, interest is $50 per month
or 1% of the note payable.
1% X 12 = 12% interest per year.
Salaries Expense, $11,500 less Sa laries Payable 12/31/ 10, $1,500 =
$10,000. Total p ayments, $12, 500 – $10, 000 = $2, 500 S alaries
Payable 12/31/09.
3-62
*PROBLEM 3-8
(a), (b), (d)
Cash
Bal.
Prepaid Insurance
15,000
Bal.
9,000 Adj.
Salaries Expense
3,500
5,500
Bal.
80,000 Close
Adj.
3,600
83,600 83,600
83,600
Common Stock
Bal.
400,000
Accounts Receivable
Bal.
Retained Earnings
13,000
Bal.
Inc.
Allow. for Doubtful Accts.
Bal.
1,100
Adj.
460
1,560
Bal.
Greens Fee Revenue
350,000
Close
Buildings
Bal.
Close
Accum. Depr.—Buildings
Bal. 38,400
Adj. 4,000
42,400
Rev.
5,900 Bal. 5,900
Rev.
Bal.
Utilities Expense
54,000 Close 54,000
Adj.
460 Close
3-63
24,000
Depr. Expense—Buildings
Adj.
4,000 Close
4,000
Close
15,000
Accum. Depr.—Equipment
Bad Debt Expense
1,600
24,000 Close
Adj. 15,000
19,200 Bal.
17,600
Adj.
1,600
19,200 19,200
1,600
Rent Receivable
Bal.
Depr. Expense—Equipment
Rental Revenue
120,000
Adj. $1,600
82,000
31,640
113,640
Dues Revenue
8,900 Bal.
200,000
191,100
200,000 200,000
Rev.
8,900
Adj.
Cls.
Land
Maintenance Expense
Bal.
Adj.
70,000
15,000
85,000
Insurance Expense
Adj. 3,500
Close
3,500
Income Summary
460
Exp. 184,560 Rev. 216,200
Inc.
31,640
216,200 216,200
*PROBLEM 3-8 (Continued)
Salaries Payable
Adj.
Unearned Dues Revenue
3,600
Adj.
8,900
Equipment
Bal.
150,000
(b) -1Depreciation
Expense—Buildings ..........................
Accumulated Depreciation—Buildings
(1/30 X $120,000)............................................
-2Depreciation
Expense—Equipment ........................
Accumulated Depreciation—Equipment
(10% X $150,000)............................................
-3Insurance
Expense ...................................................
Prepaid Insurance .............................................
-4Rent
-5-
4,000
4,000
15,000
15,000
3,500
Receivable ........................................................
Rental Revenue
(1/11 X $17,600)..............................................
1,600
Bad Debt Expense ....................................................
Allowance for Doubtful Accounts
[($13,000 X 12%) – $1,100].............................
460
-6Salaries
-7Dues
1,600
460
Expense ......................................................
Salaries Payable ................................................
3,600
Revenue ...........................................................
Unearned Dues Revenue ..................................
8,900
3-64
3,500
3,600
8,900
*PROBLEM 3-8 (Continued)
(c)
CRESTWOOD GOLF CLUB, INC.
Adjusted Trial Balance
December 31, XXXX
Dr.
Cash......................................................................
$ 15,000
Accounts Receivable ..........................................
13,000
Allowance for Doubtful Accounts......................
$
Prepaid Insurance ...............................................
5,500
Land......................................................................
350,000
Building ................................................................
120,000
Accum. Depreciation—Buildings.......................
Equipment............................................................
Cr.
1,560
42,400
150,000
Accum. Depreciation—Equipment.....................
85,000
Salaries Payable ..................................................
3,600
Common Stock ....................................................
400,000
Retained Earnings...............................................
82,000
Dues Revenue......................................................
191,100
Greens Fee Revenue ...........................................
5,900
Rental Revenue ...................................................
19,200
Utilities Expense..................................................
54,000
Salaries Expense.................................................
83,600
Maintenance Expense.........................................
24,000
Bad Debt Expense...............................................
460
Unearned Dues Revenue ....................................
8,900
Rent Receivable...................................................
1,600
Depreciation Expense—Buildings .....................
4,000
Depreciation Expense—Equipment...................
15,000
Insurance Expense..............................................
3,500
Totals
.........................................................
3-65
$839,660 $839,
660
*PROBLEM 3-8 (Continued)
(d)
-Dec. 31-
Dues
Revenue ...........................................................
191,100
Greens Fee Revenue ................................................
5,900
Rental
Revenue .........................................................
19,200
Income Summary ..............................................
216,200
-31Income
Summary ......................................................
184,560
Utilities Expense................................................
54,000
Bad Debt Expense .............................................
460
Salaries Expense ...............................................
83,600
Maintenance Expense .......................................
24,000
Depreciation Expense—Buildings ...................
4,000
Depreciation Expense—Equipment.................
15,000
Insurance Expense............................................
3,500
-31Income
Summary ......................................................
Retained Earnings .............................................
3-66
31,640
31,640
*PROBLEM 3-9
(a), (b), (c)
Cash
Bal.
Accounts Receivable
18,500
Bal.
Inventory
Bal.
32,000
Bal.
Adj.
Bal.
Prepaid Insurance
80,600
84,000
Bal.
Adj.
35,000
12,000
47,000
Admin. Salaries Expense
Notes Payable
Adj.
2,550
Bal. 5,100
2,550
Common Stock
Bal.
28,000
Cls.
600,000 Bal. 600,000
Advertising Expense
Bal.
6,700 Adj.
700
Cls. 6,000
6,700 6,700
Bad Debt Expense
Office Expense
Cls.
1,400
Interest Payable
Adj.
Adj.
Bal.
5,000 Adj.
1,500
Cls. 3,500
5,000 5,000
Depr. Exp.—Furn. & Equip.
3,360
Adj.
Office Supplies
1,500
12,000 Cls. 12,000
Salaries Payable
Adj.
2,400
Retained Earnings
Bal. 10,000
Inc. 45,790
Bal. 55,790
Bal.
Sales
Sales Salaries Expense
Bal.
50,000 Cls. 52,400
Adj.
2,400
52,400
52,400
Adj. 1,400
700
1,400
2,100
Accum. Depr.—F. & E.
Furniture & Equipment
80,000
Bal.
Allow. for Doubtful Accts.
Cost of Goods Sold
Bal.
408,000 Cls. 408,000
3-67
65,000 Cls. 65,000
Insurance Expense
Adj. 2,550
Adj.
Cls. 2,550
Interest Expense
3,360 Cls. 3,360
Prepaid Advertising
Adj.
700
Income Summary
Exp. 554,210 Sales 600,000
Inc.
45,790
600,000 600,000
*PROBLEM 3-9 (Continued)
(b) -1Bad Debt Expense ....................................................
1,400
Allowance for Doubtful Accounts....................
1,400
-2Depreciation Expense—Furniture and
Equipment ($84,000 ÷ 7) .......................................
12,000
Accum. Depr.—Furniture and Equipment .......
12,000
-3Insurance
Expense ...................................................
2,550
Prepaid Insurance .............................................
2,550
-4Interest
Expense .......................................................
3,360
Interest Payable .................................................
3,360
-5Sales Salaries Expense ............................................
2,400
Salaries Payable ................................................
2,400
-6Prepaid Advertising Expense ..................................
700
Advertising Expense .........................................
700
-7Office
Supplies..........................................................
Office Expense...................................................
3-68
1,500
1,500
*PROBLEM 3-9 (Continued)
(c)
Dec. 31
Sales..........................................................................
.
Income Summary...............................................
Dec. 31
Income
Summary ......................................................
Cost of Goods Sold ...........................................
Advertising Expense .........................................
Administrative Salaries Expense .....................
Sales Salaries Expense.....................................
Office Expense...................................................
Insurance Expense............................................
Bad Debt Expense .............................................
600,000
600,000
554,210
408,000
6,000
65,000
52,400
3,500
2,550
1,400
Depreciation Expense—Furniture and
Equipment ......................................................
Interest Expense................................................
Dec. 31
Income
Summary ......................................................
Retained Earnings .............................................
3-69
12,000
3,360
45,790
45,790
*PROBLEM 3-10
(a) ARKANSAS
SALES AND SERVICE
Income Statement
For the Month Ended January 31, 2010
(1)
(2)
Cash Basis
Revenues ......................................................
$ 75,000
Accrual Basis
$98,400*
Expenses
Cost of computers & printers:
Purchased and paid.....................
82,500**
Cost of goods sold ......................
Salaries
Rent
59,500***
...............................................
9,600
12,600
.....................................................
6,000
2,000
Other operating expenses ................
8,400
10,400
Total expenses...........................
106,500
84,500
$(31,500)
$13,900
Net income (loss) .........................................
*($2,550 X 30) + ($3,600 X 4) + ($500 X 15)
**($1,500 X 40) + ($2,500 X 6) + ($300 X 25)
***($1,500 X 30) + ($2,500 X 4) + ($300 X 15)
3-70
*PROBLEM 3-10 (Continued)
(b) ARKANSAS
SALES AND SERVICE
Balance Sheet
As of January 31, 2010
(1)
Assets
Cash
.....................................................
Accounts
Receivable..........................
Inventory
..............................................
Prepaid rent .........................................
Total assets....................................
Cash Basis
Liabilities and Owners’ Equity
Salaries payable..................................
Accounts
payable ...............................
Owners’
equity ....................................
Total liabilities and owners’
equity...........................................
Original investment
Cash sales
Cash purchases
Rent paid
Salaries paid
Other operating expenses
Cash balance Jan. 31
$ 58,500
23,400
b
23,000
4,000
900
$58,500 $108,
$58,500
a
c
$58,500
$58,500
(10 @ $1,500) + (2 @ $2,500) + (10 @ $300).
b
Initial investment minus net loss: $90,000 – $31,500.
c
Initial investment plus net income: $90,000 + $13,900.
d
3-71
a
$
$ 90,000
75,000
(82,500)
(6,000)
(9,600)
(8,400)
$ 58,500
a
(2)
Accrual Basis
3,000
2,000
d
103,900
$108,900
*PROBLEM 3-10 (Continued)
(c)
1.
The $23,400 in receivables from customers is an asset and a future
cash flow resulting from sales that is ignor ed. The cash basis understates the amount of revenues and inflow of assets in January from
the sale of computers and printers by $23,400.
2.
The cost of computers and printers sold in January is overstated by
$23,000. The unsold computers and printers are an asset of $23,000 in
the form of inventory.
3.
The cash basis ignores $3,000 of the salaries that have been earned
by the employees in January and will be paid in February.
4.
Rent expense on the cash basis is overstated by $4,000 unde r the
cash basis. This prep ayment is an asset in the form of two months’
future right to the use of offi ce, showroom, and repair space and
should appear on the balance sheet.
5.
Other operating expenses on a cash basis are understated by $2,000
as is the liability for the unpaid portion of these expenses incurred in
January.
3-72
Account Titles
3-73
5,800
(c)
(e)
(f)
(d)
(c)
(b)
(a)
59,200
3,000
6,000
2,000
5,800
14,400
28,000
Cr.
506,500
______
5,800
28,000
14,400
12,000
109,000
30,500
9,400
16,900
21,000
14,000
37,400
4,200
3,900
80,000
120,000
Dr.
506,500
3,000
6,000
280,500
42,000
14,600
700
50,000
109,700
Cr.
247,000
______
5,800
28,000
14,400
12,000
109,000
30,500
9,400
16,900
21,000
Dr.
259,500
______
259,500
______
14,000
37,400
4,200
3,900
80,000
120,000
Dr.
259,500
33,500
226,000
3,000
6,000
42,000
14,600
700
50,000
109,700
Cr.
Balance Sheet
Key: (a) Expired Insurance; (b) Supplies Used; (c) Depreciation Expensed; (d) Admission Revenue Earned; (e) Accrued Property
Taxes; (f) Accrued Interest Payable.
280,500
______
280,500
______
280,500
Cr.
Income
Statement
280,500
59,200
_____
28,000
14,400
6,000
3,000
2,000
(a)
(b)
(f)
(e)
(d)
Dr.
Adjusted Trial
Balance
Totals
491,700
______
278,500
36,200
14,600
2,700
50,000
109,700
Cr.
Adjustments
33,500
491,700
6,000
109,000
30,500
9,400
16,900
18,000
14,000
37,400
18,600
31,900
80,000
120,000
Dr.
Trial Balance
COOKE COMPANY
Worksheet
For the Year Ended September 30, 2010
Net Income
Totals
Prop. Taxes Payable
Insurance Expense
Supplies Expense
Interest Payable
Depreciation Expense
Totals
Interest Expense
Cash
Supplies
Prepaid Insurance
Land
Equipment
Accum. Depreciation
Accounts Payable
Unearned Ad. Rev.
Mortgage Payable
Cooke, Capital
Cooke, Drawing
Admissions Revenue
Salaries Expense
Repair Expense
Advertising Expense
Utilities Expense
Prop. Taxes Expense
(a)
*PROBLEM 3-11
*PROBLEM 3-11 (Continued)
(b) COOKE
COMPANY
Balance Sheet
September 30, 2010
Assets
Current assets
Cash
................................................
$37,400
Supplies
..........................................
4,200
Prepaid
insurance..........................
3,900
Total current assets .............
$ 45,500
Property, plant, and equipment
Land
................................................
80,000
......................................
$120,000
Less: Accum. depreciation ..........
42,000
Equipment
78,000
Total assets...........................
158,000
$203,500
Liabilities and Owner’s Equity
Current liabilities
Accounts
payable ..............................................
$14,600
Current maturity of long-term debt ..................
10,000
Interest
payable .................................................
6,000
Property taxes payable......................................
3,000
Unearned admissions revenue.........................
700
Total current liabilities .............................
$ 34,300
Long-term liabilities
Mortgage payable ..............................................
40,000
Total liabilities...........................................
74,300
Owner’s equity
Cooke, Capital
($109,700 + $33,500 – $14,000) .....................
129,200
Total liabilities and owner’s equity .........
$203,500
3-74
*PROBLEM 3-11 (Continued)
(c)
Sep. 30 Insurance Expense ...................................
28,000
Prepaid Insurance .............................
30
Supplies Expense .....................................
28,000
14,400
Supplies .............................................
30 Depreciation Expense ..............................
14,400
5,800
Accum. Depreciation........................
30 Unearned Admissions Revenue ..............
5,800
2,000
Admissions Revenue ........................
30 Property Taxes Expense ..........................
2,000
3,000
Property Taxes Payable....................
30
Interest Expense .......................................
3,000
6,000
Interest Payable.................................
(d) Sep. 30 Admissions Revenue ...............................
6,000
280,500
Income Summary ..............................
30
Income Summary......................................
280,500
247,000
Salaries Expense...............................
109,000
Repair Expense .................................
30,500
Insurance Expense............................
28,000
Property Taxes Expense...................
21,000
Supplies Expense..............................
14,400
Utilities Expense................................
16,900
Interest Expense................................
12,000
Advertising Expense.........................
9,400
Depreciation Expense.......................
5,800
3-75
*PROBLEM 3-11 (Continued)
30
Income Summary......................................
33,500
Cooke, Capital ...................................
30
33,500
Cooke, Capital...........................................
14,000
Cooke, Drawing .................................
(e) COOKE
14,000
COMPANY
Post-Closing Trial Balance
September 30, 2010
Debit
Cash ................................................................
$ 37,400
Supplies ..........................................................
4,200
Prepaid Insurance ..........................................
3,900
Land.................................................................
80,000
Equipment.......................................................
120,000
Credit
Accumulated Depreciation............................
$ 42,000
Accounts Payable ..........................................
14,600
Unearned Admissions Revenue ...................
700
Interest Payable..............................................
6,000
Property Taxes Payable.................................
3,000
Mortgage Payable ..........................................
50,000
Cooke, Capital ................................................
129,200
$245,
500 $245,
3-76
500
FINANCIAL REPORTING PROBLEM
(a)
June 30, 2007 total assets: $138,014 million.
June 30, 2006 total assets: $135,695 million.
(b)
June 30, 2007 cash and cash equivalents: $5,354 million.
(c)
2005 research and development costs: $1,940 million.
2007 research and development costs: $2,112 million.
(d)
2005 net sales: $56,741 million.
2007 net sales: $76,476 million.
(e)
An ad justing entry f or deferrals is ne cessary when th e r eceipt/disbursement
precedes the recognition in the financial statements. Accounts such as
prepaid insurance and prepaid rent may be included in the Prepaid expenses and othe r cur rent assets s ection ($3,3 00 million a t June 30, 2 007).
Both of these accounts would require an adjusting entry to recognize the
proper amount of expense incurred during the period. In addition, depreciation expense is an adjusting entry related to a deferral.
An adjusting entry for an accrual is necessary when recognition in the
financial statements precedes the cash receipt/disbursement, such as
interest or taxes payable. Other adjusting entries probably made by P&G
include interest revenue and expense and interest receivable and interest
payable. P&G reports $9,586 million of Accrued and other liabilities at
June 30, 2007.
(f)
2005 Depreciation and amortization expense: $1,884 million
2006 Depreciation and amortization expense: $2,627 million
2007 Depreciation and amortization expense: $3,130 million
(From the Statement of Cash Flows)
3-77
COMPARATIVE ANALYSIS CASE
(a)
The Coca-Cola Company percentage increase is computed as follows:
Total assets (December 31, 2007) ....................................................
Total assets (December 31, 2006) ....................................................
Difference .................................................................................................
$43,269
$29,963
$13,306
$13,306 ÷ $29,963 = $44.4%
PepsiCo, Inc.’s percentage increase is computed as follows:
Total assets (December 29, 2007) ....................................................
Total assets (December 30, 2006) ....................................................
Difference .................................................................................................
$34,628
$29,930
$ 4,698
$4,698 ÷ $29,930 = $15.7%
Coca-Cola Company had the larger increase.
(b)
5-Year Growth Rate
Net sales
Income from continuing
operations
(c)
The Coca-Cola Company
7.7%
7.8%
PepsiCo, Inc.
9.3%
11.7%
The Coca-Cola Company had depreciatio n and amortization expense of
$1,163 million; PepsiCo, Inc. had depreciation and amortization expense
of $1,426 million.
PepsiCo has substantially more property, plant, and equipment and intangible assets than doe s C oca-Cola. PepsiCo is engaged i n t hree d ifferent
types of busine sses: soft drinks, snack-food, and juices. As a result, it has
more tang ible f ixed a ssets. In ad dition, PepsiCo ha s subs tantial inta ngible
assets. Amortizable intangible assets for Coke and Pepsi increase the
3-78
COMPARATIVE ANALYSIS CASE (Continued)
amount of amortization expense recorded in income. The amount of
property, plant, and equipment and amortizable intangible assets reported
for these two companies is as follows:
Property, plant, and
equipment (net)
Amortizable intangible
assets (net)
3-79
The Coca-Cola Company
PepsiCo, Inc.
$ 8,493,000,000
$11,228,000,000
2,810,000,000
$11,303,000,000
796,000,000
$12,024,000,000
FINANCIAL STATEMENT ANALYSIS
(a)
2007
Sales
Gross Profit %
(b)
3-80
$11,776.00
43.98%
2006
$11,906.70
48.92%
2005
$10,177.20
%
%
Change Change
2007
2006
–1.10% 16.99%
44.86% –10.10%
9.05%
Operating Profit
1,544.10
1,508.10
1167.90
2.39% 29.13%
Net Cash Flow less
Capital Expenditures
1,031.00
957.40
769.10
7.69% 24.48%
Net Earnings
1,103.00
1,004.10
980.40
9.85%
2.42%
Kellogg experienced a slowing in sales (slight decline) and a reduced
gross-profit percentage. Its growth in operating profit and cash flows,
compared to 2006, suggest it may be entering a challenging period. This
may bode well for the strength and flexibility of its business model.
PROFESSIONAL RESEARCH
(a)
The three essential characteristics of assets.
Search String: asset and characteristics.
CON6, Par26. An asset has three essential characteristics: (a) it embodies a probable future benefit
that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly
to future net cash inflows, (b) a particular entity can obtain the benefit and control others’ access to it,
and (c) the transaction or other event giving rise to the entity’s right to or control of the benefit has
already occurred.
(b)
Three essential characteristics of liabilities.
Search String: liability and characteristic.
CON6, Par36. A liability has three essential characteristics: (a) it embodies a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets
at a specified or determinable date, on occurrence of a specified event, or on demand, (b) the duty or
responsibility obligates a particular entity, leaving it little or no discretion to avoid the future sacrifice,
and (c) the transaction or other event obligating the entity has already happened.
(c)
Uncertainty, and its effects on financial statements.
Search Strings: “uncertainty”, effect of uncertainty.
CON6, Par44. Uncertainty about economic and business activities and results is pervasive, and it
often clouds whether a particular item qualifies as an asset or a liability of a particular entity at the time
the definitions are applied. The presence or absence of future economic benefit that can be obtained
and controlled by the entity or of the entity’s legal, equitable, or constructive obligation to sacrifice
assets in the future can often be discerned reliably only with hindsight. As a result, some items that with
hindsight actually qualified as assets or liabilities of the entity under the definitions may, as a practical
matter, have been recognized as expenses, losses, revenues, or gains or remained unrecognized in its
financial statements because of uncertainty about whether they qualified as assets or liabilities of the
entity or because of recognition and measurement considerations stemming from uncertainty at the time
of assessment. Conversely, some items that with hindsight did not qualify under the definitions may
have been included as assets or liabilities because of judgments made in the face of uncertainty at the
time of assessment.
CON6, Par45. An effect of uncertainty is to increase the costs of financial reporting in general and
the costs of recognition and measurement in particular. Some items that qualify as assets or liabilities
under the definitions may therefore be recognized as expenses, losses, revenues, or gains or remain
unrecognized as a result of cost and benefit analyses indicating that their formal incorporation in
financial statements is not useful enough to justify the time and effort needed to do it. It may be
possible, for example, to make the information more reliable in the face of uncertainty by exerting
greater effort or by spending more money, but it also may not be worth the added cost.
Note to instructors: The FASB codification does not contain the Concepts Statements. However, the
Concepts Statements can be accessed at another link on the FASB website.
3-81
PROFESSIONAL RESEARCH (Continued)
(d)
The difference between realization and recognition
Search String: realization, recognition.
CON6, Par143. Realization in the most precise sense means the process of converting noncash
resources and rights into money and is most precisely used in accounting and financial reporting to
refer to sales of assets for cash or claims to cash. The related terms realized and unrealized therefore
identify revenues or gains or losses on assets sold and unsold, respectively. Those are the meanings
of realization and related terms in the Board’s conceptual framework. Recognition is the process of
formally recording or incorporating an item in the financial statements of an entity. Thus, an asset,
liability, revenue, expense, gain, or loss may be recognized (recorded) or unrecognized (unrecorded).
Realization and recognition are not used as synonyms, as they sometimes are in accounting and
financial literature.
3-82