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Chapter 04 - Completing the Accounting Cycle Chapter 4 Completing the Accounting Cycle QUESTIONS 1. Closing entries affect temporary accounts: revenues, expenses, withdrawals, and income summary. Specifically, closing entries at the end of an accounting period prepare the revenues (and gains), expenses (and losses), and withdrawals accounts for the next period by giving them zero balances. Closing entries also update the owner’s capital account for the events of the year just finished. Closing entries do not affect the asset and liability accounts (permanent accounts). 2. (i) Closing entries prepare the temporary accounts—revenue and expense (and gain and loss) accounts and withdrawals—for the next period by giving them zero balances. (ii) Closing entries also update the owner’s capital account for the events of the period just completed. 3. The four-step closing entry process is: (i) close the revenue (and gain) accounts to the Income Summary account, (ii) close the expense (and loss) accounts to the Income Summary account, (iii) close the Income Summary account to the owner’s capital account, and (iv) close the withdrawals account to the owner’s capital account. 4. The Income Summary account is used to summarize the period’s revenues and expenses. As a result, it temporarily has a balance equal to the net income (or net loss) for the period. (Instructor note: Closing can be accomplished without the Income Summary account by closing revenue and expense accounts directly to the owner’s capital account.) 5. Yes, an error would have occurred because a post-closing trial balance should only include permanent accounts, and Depreciation Expense is a temporary account that should have been closed. If an expense appears on the post-closing trial balance, the amounts of net income, total assets, and total equity are all in error (overstated). 6. A work sheet can be used to collect and organize data for preparing (i) adjusting entries, (ii) closing entries, and (iii) financial statements. A work sheet can also be used for what if analysis, for help with audit adjustments, and for preparing interim financial statements. 7. The adjustments in the Adjustments columns of a work sheet are identified by letters to link the debits with the credits to ensure that the entries are complete and in balance (debits = credits) and for reference purposes (audit trail). The letters can also be used to identify the reasons for the entries and help simplify preparation of the actual adjusting journal entries. 4-1 Chapter 04 - Completing the Accounting Cycle 8. A company’s operating cycle is the normal time between paying cash for merchandise inventory or for employee salaries in providing customer services and the receipt of cash from customers in exchange for those products or services. 9. Assets on a typical classified balance sheet include current assets and noncurrent assets—where noncurrent assets usually include long-term investments, plant assets, and intangible assets. Liabilities are typically classified as current and noncurrent. Note that the terms short-term and long-term are sometimes used for current and noncurrent. 10. Unearned revenue is reported as a liability—usually a current liability. 11. Plant assets (also called property, plant and equipment or long-lived assets) are tangible long-lived assets used to produce or sell goods or services. 12.A Reversing entries simplify subsequent entries for accrued expenses and accrued revenues by eliminating the need to record the removal of the accrued liability or accrued receivable when the accrual is settled. 13.A The following reversing entry could be made as of the first day of the next accounting period, after the post-closing trial balance is completed and financial statements are prepared. Salaries Payable ...............................................................500 Salaries Expense................................................... 500 14. The five main categories of noncurrent assets on Research In Motion’s balance sheet are: Long-term investments; Property, plant and equipment, net; Intangible assets, net; Goodwill, and Deferred income tax asset. 15. Nokia’s current assets are: Inventories; Accounts receivable; Prepaid expenses and accrued income; Current portion of long-term loans receivable; Other financial assets; Investments at fair value through profit and loss, liquid assets; Available-forsale investments, liquid assets; Available-for-sale investments, cash equivalents; Bank and cash. 16. Apple has three current liability accounts: Accounts payable; Accrued expenses, and Deferred revenue. 17. The closing entry likely recorded on May 31, 2009, to transfer the company’s net loss to its Retained Earnings account would likely have been (in thousands): Retained Earnings .......................................................753,473 Income Summary ............................................. 4-2 753,473 Chapter 04 - Completing the Accounting Cycle QUICK STUDIES Quick Study 4-1 (5 minutes) 1. (f) Analyzing transactions and events. 2. (i) Journalizing transactions and events. 3. (b) Posting the journal entries. 4. (h) Preparing the unadjusted trial balance. 5. (c) Journalizing and posting adjusting entries. 6. (d) Preparing the adjusted trial balance. 7. (g) Preparing the financial statements. 8. (e) Journalizing and posting closing entries. 9. (a) Preparing the post-closing trial balance. Quick Study 4-2 (10 minutes) 1. Temporary accounts accumulate data related to one accounting period. 2. Permanent accounts report on activities related to one or more future accounting periods, and they carry their ending balances into the next period. 3. Temporary accounts include all income statement accounts, the withdrawals account, and the Income Summary account. 4. Permanent accounts generally consist of all balance sheet accounts, and these accounts are not closed. 4-3 Chapter 04 - Completing the Accounting Cycle Quick Study 4-3 (5 minutes) Current assets: Cash ............................................................ Accounts receivable .................................. Office supplies ........................................... Prepaid insurance ..................................... Total current assets .................................. $ 6,000 15,000 1,800 2,500 $25,300 Current liabilities: Accounts payable ...................................... Unearned services revenue ...................... Total current liabilities .............................. $10,000 4,000 $14,000 Current ratio = $25,300 / $14,000 = 1.81 Quick Study 4-4 (10 minutes) 1. 2. D A 3. 4. B F 5. 6. A E d. e. f. IS BS BS Quick Study 4-5 (5 minutes) a. b. c. IS BS BS 4-4 7. 8. C E Chapter 04 - Completing the Accounting Cycle Quick Study 4-6 (5 minutes) a. 3 b. 1 c. 2 d. 4 e. 5 Quick Study 4-7 (10 minutes) Computation of K. Wayman, Capital for the Dec. 31, 2011, balance sheet: K. Wayman, Capital (beginning) ...................... $ 65,000 Add net income ($174,000 - $115,000) ............. 59,000 124,000 Less withdrawals...............................................(32,000) K. Wayman, Capital (ending) ............................ $ 92,000 4-5 Chapter 04 - Completing the Accounting Cycle Quick Study 4-8 (20 minutes) TERREL COMPANY Work Sheet Account Title Prepaid rent.......................... Unadjusted Trial Balance Dr. Cr. Adjustments Dr. Cr. 800 Services revenue................ Adjusted Trial Balance Dr. Cr. (a) 240 11,600 560 (b) 180 (c) 160 5,160 Accounts receivable.......... (b) 180 180 Rent expense....................... (c) 160 (a) 240 11,780 5,160 180 160 240 4-6 560 11,780 Wages expense .................. 5,000 Wages payable.................... Income Statement Dr. Cr. Balance Sheet & Statement of Owner’s Equity Dr. Cr. 160 240 Chapter 04 - Completing the Accounting Cycle Quick Study 4-9 (15 minutes) Dec. 31 Services Revenue ......................................... Income Summary .................................. 10,000 10,000 To close the revenue account. 31 Income Summary ........................................ Wages Expense..................................... Rent Expense ........................................ 6,000 5,200 800 To close the expense accounts. 31 Income Summary ........................................ L. Avril, Capital ..................................... 4,000 4,000 To close Income Summary. 31 L. Avril, Capital ........................................... L. Avril, Withdrawals ............................ 400 400 To close the withdrawals account. Quick Study 4-10 (5 minutes) The only account from QS 4-9 that would appear in post-closing trial balance is L. Avril, Capital. Quick Study 4-11A (10 minutes) 2011 Jan. 1 Management Fees Earned ............................ Accounts Receivable ........................... 6,700 6,700 To reverse accrued revenue. 16 Cash ............................................................... Management Fees Earned .................. 15,500 15,500 To record collection of management fees. Quick Study 4-12 (10 minutes) a. The closing process is identical under U.S. GAAP and IFRS. b. Under both U.S. GAAP and IFRS, the initial asset value is measured using historical cost for nearly all assets. 4-7 Chapter 04 - Completing the Accounting Cycle EXERCISES Exercise 4-1 (35 minutes) Closing entries: (1) Services Revenue ......................................... Income Summary .................................. 74,000 74,000 To close the revenue account. (2) Income Summary ......................................... Depreciation Expense .......................... Salaries Expense .................................. Insurance Expense ............................... Rent Expense ........................................ 52,100 17,000 21,000 4,500 9,600 To close the expense accounts. (3) Income Summary ......................................... M. Mallon, Capital ................................. 21,900 21,900 To close income summary. (4) M. Mallon, Capital ........................................ M. Mallon, Withdrawals ........................ 25,000 25,000 To close the withdrawals account. Posted T-accounts: M. Mallon, Capital Date PR Debit Mar.31 (3) (4) 25,000 No. 301 Credit Balance 42,000 21,900 63,900 38,900 Salaries Expense Date PR Debit Mar.31 (2) M. Mallon, Withdrawals Date PR Debit Mar.31 (4) Services Revenue Date PR Debit Credit Mar.31 (1) Insurance Expense No. 302 Credit Balance 25,000 25,000 0 74,000 Date PR Debit Mar.31 (2) No. 401 Balance 74,000 0 Rent Expense Date PR Debit Mar.31 (2) Depreciation Expense Income Summary Date PR Date PR Mar.31 (2) Debit No. 603 Credit Balance 17,000 17,000 0 Debit (1) (2) (3) 4-8 52,100 21,900 No. 622 Credit Balance 21,000 21,000 0 No. 637 Credit Balance 4,500 4,500 0 No. 640 Credit Balance 9,600 9,600 0 No. 901 Credit Balance 74,000 74,000 21,900 0 Chapter 04 - Completing the Accounting Cycle Exercise 4-2 (40 minutes) No. Account Title 101 Cash .......................................... Adjusted Trial Balance Dr. Cr. Closing Entry Information Dr. Cr. Post-Closing Trial Balance Dr. Cr. 8,200 8,200 106 Accounts receivable............ 24,000 24,000 153 Equipment............................... 41,000 41,000 154 Accumulated depreciation—Equipment........... 16,500 16,500 193 Franchise................................. 30,000 30,000 201 Accounts payable................. 14,000 14,000 209 Salaries payable .................... 3,200 3,200 233 Unearned fees........................ 2,600 2,600 301 H. Sundance, Capital ........... 64,500 (4) 14,400 (3) 16,800 (4) 14,400 611 Depreciation expense— Equipment............................. 11,000 (2) 11,000 622 Salaries expense................... 31,500 (2) 31,500 640 Rent expense ......................... 12,000 (2) 12,000 677 Miscellaneous expense...... (2) 7,700 62,200 (1) 16,800 79,000 ______ ______ ______ 172,400 103,200 103,200 302 H. Sundance, Withdrawals.. 14,400 401 Marketing fees earned......... 79,000 (1) 79,000 7,700 901 Income summary ................. ______ Totals......................................... 179,800 (2) ______ (3) 179,800 4-9 66,900 172,400 Chapter 04 - Completing the Accounting Cycle Exercise 4-3 (30 minutes) 1. 2011 Dec. 31 Services Revenue ....................................... Income Summary ................................. 36,000 36,000 To close the revenue account. 31 Income Summary ....................................... Depreciation Expense--Equipment ..... Salaries Expense ................................. Insurance Expense .............................. Rent Expense ....................................... Supplies Expense ................................ 28,100 2,000 21,000 1,500 2,400 1,200 To close the expense accounts. 31 Income Summary ........................................ R. Showers, Capital ............................. 7,900 7,900 To close Income Summary. 31 R. Showers, Capital .................................... R. Showers, Withdrawals .................... 6,000 6,000 To close the withdrawals account. 2. SHOWERS COMPANY Post-Closing Trial Balance December 31, 2011 Debit Cash ................................................................ Supplies ......................................................... Prepaid insurance ......................................... Equipment ...................................................... Accumulated depreciation–Equipment ....... R. Showers, Capital* ..................................... Totals .............................................................. *$46,600 + $7,900 - $6,000 = $48,500 4-10 Credit $18,000 12,000 2,000 23,000 $55,000 $ 6,500 48,500 $55,000 Chapter 04 - Completing the Accounting Cycle Exercise 4-4 (20 minutes) WEBB TRUCKING COMPANY Income Statement For Year Ended December 31, 2011 Trucking fees earned ................................................ Expenses Depreciation expense—Trucks ........................... $22,500 Salaries expense .................................................. 60,000 Office supplies expense ...................................... 7,000 Repairs expense—Trucks ................................... 11,000 Total expenses ..................................................... Net income ................................................................. $128,000 100,500 $ 27,500 WEBB TRUCKING COMPANY Statement of Owner’s Equity For Year Ended December 31, 2011 K. Webb, Capital, December 31, 2010 ..................... $161,000 Plus: Net income ....................................................... 27,500 Less: Owner withdrawals ......................................... 188,500 (19,000) K. Webb, Capital, December 31, 2011 ..................... 4-11 $169,500 Chapter 04 - Completing the Accounting Cycle Exercise 4-5 (20 minutes) WEBB TRUCKING COMPANY Balance Sheet December 31, 2011 Assets Current assets Cash ................................................................ Accounts receivable ..................................... Office supplies ............................................... Total current assets ...................................... Plant assets Trucks ............................................................. $170,000 Accumulated depreciation-Trucks .............. (35,000) Land ................................................................ Total plant assets .......................................... Total assets ...................................................... $ 7,000 16,500 2,000 25,500 135,000 75,000 210,000 $235,500 Liabilities Current liabilities Accounts payable .......................................... Interest payable ............................................. Total current liabilities .................................. Long-term notes payable ................................ Total liabilities ................................................. $ 11,000 3,000 14,000 52,000 66,000 Equity K. Webb, Capital ............................................. Total liabilities and equity .............................. 169,500 $235,500 * * K. Webb, Capital is computed as: Beginning balance .................................................................................... $161,000 Plus: Net income ($128,000 - $22,500 - $60,000 - $7,000 - $11,000)....... 27,500 Less: Withdrawals ..................................................................................... (19,000) Ending balance .......................................................................................... $169,500 4-12 Chapter 04 - Completing the Accounting Cycle Exercise 4-6 (15 minutes) Current assets: Cash ................................................................................. Accounts receivable ...................................................... Office supplies ................................................................ Total current assets ....................................................... $ 7,000 16,500 2,000 $25,500 Current liabilities: Accounts payable ........................................................... Interest payable .............................................................. Total current liabilities ................................................... $11,000 3,000 $14,000 Current ratio = Current assets Current liabilities = $25,500 $14,000 = 1.82 Interpretation: This company’s current ratio of 1.82 exceeds the industry norm of 1.5. This implies the company is in a slightly better liquidity position than its competitors. Moreover, if we review the makeup of the current ratio, we see that current assets consist primarily of cash and accounts receivable. The existence of these more liquid assets is a positive attribute for liquidity purposes. Exercise 4-7 (15 minutes) Current Assets Current Liabilities Current Ratio Case 1 $ 78,000 / $31,000 = 2.52 Case 2 104,000 / 75,000 = 1.39 Case 3 44,000 / 48,000 = 0.92 Case 4 84,500 / 80,600 = 1.05 Case 5 60,000 / 99,000 = 0.61 Analysis: Company 1 is in the strongest liquidity position. It has about $2.52 of current assets for each $1 of current liabilities. The only potential concern is that Company 1 may be carrying too much in current assets that could be better spent on more productive assets (note that its remaining competitors’ current ratios range from 1.39 to 0.61). 4-13 Chapter 04 - Completing the Accounting Cycle Exercise 4-8 (15 minutes) 1. C 5. C 9. B 13. C 2. D 6. C 10. A 14. A 3. D 7. A 11. D 15. A 4. D 8. C 12. B 16. C Exercise 4-9 (20 minutes) Instructor note: Entries are shown without an account reference column because no posting is required. (a) Insurance Expense—Office Equipment .............. Insurance Expense—Store Equipment ............... Prepaid Insurance .......................................... 432 468 900 To record expired insurance. (b) Office Supplies Expense ...................................... Office Supplies ............................................... 1,650 1,650 To record consumed supplies. (c) Depreciation Expense—Office Equipment. ........ Accumulated Depreciation—Office Equip... 3,300 3,300 To record depreciation of office equip. (d) Interest Receivable ................................................ Interest Revenue ............................................ 580 580 To record accrued interest income. (e) Office Salaries Expense........................................ Salaries Payable............................................. To record accrued salaries. 4-14 660 660 Chapter 04 - Completing the Accounting Cycle Exercise 4-10 (20 minutes) No. Account 101 Cash............................................................ Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Balance Sheet & Statement of Owner’s Equity Dr. Cr. 6,000 6,000 106 Accounts receivable.............................. 26,200 26,200 153 Trucks......................................................... 41,000 41,000 154 Accumulated depreciation–Trucks.. 16,500 16,500 183 Land............................................................ 30,000 30,000 201 Accounts payable .................................. 14,000 14,000 209 Salaries payable...................................... 3,200 3,200 233 Unearned fees ......................................... 2,600 2,600 301 J. Propel, Capital ..................................... 64,500 64,500 302 J. Propel, Withdrawals .......................... 14,400 401 Plumbing fees earned........................... 611 Depreciation expense—Trucks......... 14,400 79,000 79,000 5,500 5,500 622 Salaries expense..................................... 37,000 37,000 640 Rent expense........................................... 12,000 12,000 677 Miscellaneous expense........................ 7,700 ______ 7,700 ______ _______ Totals .......................................................... 179,800 179,800 62,200 79,000 117,600 100,800 Net income................................................ 16,800 ______ _______ Totals .......................................................... 79,000 79,000 117,600 117,600 4-15 ______ 16,800 Chapter 04 - Completing the Accounting Cycle Exercise 4-11 (25 minutes) 1. Account Title Debit Rent earned .................................................... Salaries expense ............................................ 45,300 Insurance expense ........................................ 6,400 Dock rental expense ...................................... 15,000 Boat supplies expense .................................. 3,200 Depreciation expense—Boats ...................... 19,500 Totals .............................................................. 89,400 Net income...................................................... 12,600 Totals .............................................................. 102,000 Credit 102,000 102,000 102,000 2. Closing entries (1) (2) (3) Rent Earned .................................................. 102,000 Income Summary .................................. To close the revenue account. Income Summary ......................................... Salaries Expense .................................. Insurance Expense ............................... Dock Rental Expense ........................... Boat Supplies Expense ........................ Depreciation Expense—Boats ............. To close the expense accounts. 89,400 Income Summary ......................................... L. Welch, Capital .................................. To close Income Summary. 12,600 4-16 102,000 45,300 6,400 15,000 3,200 19,500 12,600 Chapter 04 - Completing the Accounting Cycle Exercise 4-12 Part 1 (30 minutes) DALTON DELIVERY COMPANY Work Sheet For Year Ended December 31, 2011 Account Title Unadjusted Trial Balance Dr. Cr. Adjustments Dr. Cr. Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Balance Sheet & Statement of Owner’s Equity Dr. Cr. Cash........................................................ 14,000 14,000 14,000 Accounts receivable ......................... 33,000 33,000 33,000 1,000 1,000 340,000 340,000 Office supplies..................................... 4,000 (c) 3,000 Trucks ....................................................340,000 Accum. depreciation—Trucks ...... 70,000 (a) 35,000 Land........................................................150,000 105,000 150,000 Accounts payable.............................. 22,000 Interest payable................................... 6,000 Long-term notes payable ................ V. Dalton, Capital................................. 150,000 22,000 22,000 8,000 8,000 104,000 104,000 104,000 322,000 322,000 322,000 (b) 2,000 V. Dalton, Withdrawals..................... 38,000 Delivery fees earned.......................... 105,000 38,000 256,000 Depreciation expense—Trucks .... 45,000 38,000 256,000 (a) 35,000 Salaries expense ................................120,000 256,000 80,000 80,000 120,000 120,000 Office supplies expense................... 14,000 (c) 3,000 17,000 17,000 Interest expense ................................. 6,000 (b) 2,000 8,000 8,000 Repairs expense—Trucks.............. 16,000 ______ _____ _____ Totals......................................................780,000 780,000 40,000 40,000 817,000 817,000 241,000 256,000 576,000 561,000 Net income ........................................... 16,000 ______ 16,000 ______ 15,000 ______ Totals...................................................... ______ ______ ______ 15,000 256,000 256,000 576,000 576,000 4-17 Chapter 04 - Completing the Accounting Cycle Exercise 4-12 (Concluded) 2. Closing entries: Delivery Fees Earned ........................................ 256,000 Income Summary ....................................... 256,000 To close the revenue account. Income Summary .............................................. 241,000 Depreciation Expense—Trucks ................ 80,000 Salaries Expense ....................................... 120,000 Office Supplies Expense ........................... 17,000 Interest Expense ........................................ 8,000 Repairs Expense—Trucks ........................ 16,000 To close the expense accounts. Income Summary .............................................. V. Dalton, Capital ....................................... 15,000 15,000 To close Income Summary. V. Dalton, Capital ............................................... V. Dalton, Withdrawals ............................. To close the withdrawals account. 38,000 38,000 V. Dalton, Capital on the balance sheet: Beginning balance ....................................... $322,000 Add: Net income .......................................... 15,000 337,000 Less: Owner withdrawals ............................ Ending balance ............................................. 4-18 (38,000) $299,000 Chapter 04 - Completing the Accounting Cycle Exercise 4-13A (30 minutes) 1. Adjusting entries: Oct. 31 Rent Expense ................................................ Rent Payable ......................................... 3,200 3,200 To record accrued rent expense. 31 Rent Receivable ............................................ Rent Earned ........................................... 750 750 To record accrued rent income. 2. Subsequent entries without reversing: Nov. 5 Rent Payable ................................................. Rent Expense ................................................ Cash ....................................................... 3,200 3,200 6,400 To record payment of 2 months’ rent. 8 Cash ............................................................... Rent Receivable .................................... Rent Earned ........................................... 1,500 750 750 To record collection of 2 months’ rent. 3. Reversing entries and subsequent entries: Nov. 1 Rent Payable ................................................. Rent Expense ........................................ 3,200 3,200 To reverse accrual of rent expense. 1 Rent Earned .................................................. Rent Receivable .................................... 750 750 To reverse accrual of rent income. 5 Rent Expense ................................................ Cash ....................................................... 6,400 6,400 To record payment of 2 months’ rent. 8 Cash ............................................................... Rent Earned ........................................... To record collection of 2 months’ rent. 4-19 1,500 1,500 Chapter 04 - Completing the Accounting Cycle Exercise 4-14A (10 minutes) Reversing entries are appropriate for accounting adjustments (a) and (e): Sept. 1 Service Fees ................................................. Accounts Receivable ............................ 5,000 5,000 To reverse accrued revenues. 1 Salaries Payable ........................................... Salaries Expense .................................. 2,400 2,400 To reverse accrued salaries. Exercise 4-15 (10 minutes) Income Summary balance after closing revenues and expenses: Revenues: $35,000 + $3,500 ............................ Expenses: $19,000 + $4,000 + $2,300 ............. Credit balance ................................................... = = = $38,500 - 25,300 $13,200 Cr. Dr. Cr. D. Argosy, Capital balance after all closing entries: Beginning balance ................................ Plus net income .................................... Less withdrawals .................................. Ending balance ..................................... $14,000 13,200 27,200 6,000 $21,200 Exercise 4-16 (10 minutes) Dec. 31 Net Sales ....................................................... 1,838,622 Income Summary .................................. To close the revenue account. 1,838,622 31 Income Summary ......................................... 1,559,533 Cost of Sales ......................................... Advertising Expense ............................ Other Expense, Net ............................... To close the expense accounts. 1,044,981 117,308 397,244 4-20 Chapter 04 - Completing the Accounting Cycle Exercise 4-17 (25 minutes) MADISON COMPANY December 31, 2011 Unadjusted Trial Balance Adjustments Dr. Cr. Dr. Cr. Cash ................................................................. 7 Accounts receivable ................................... 4 (d) 3 Supplies .......................................................... 8 (e) 5 Prepaid insurance........................................ 6 Equipment...................................................... 13 (a) 1 Accumulated depreciation–Equip ......... 5 Accounts payable........................................ 2 (b) 2 Salaries payable ........................................... (c) 4 Unearned revenue ....................................... 4 T. Madison, Capital ...................................... 14 T. Madison, Withdrawals ........................... 2 (c) 4 Revenue .......................................................... 25 (a) 1 Depreciation expense– Equipment ....... (b) 2 Salaries expense.......................................... 6 (e) 5 Insurance expense...................................... (d) 3 Supplies expense ........................................ Utilities expense............................................ 4 __ __ __ Totals................................................................ 50 50 15 15 Adjusted Trial Balance Dr. Cr. 7 4 5 1 13 6 2 2 14 2 29 1 8 5 3 4 53 PROBLEM SET A Problem 4-1A (15 minutes) 1. C 6. C 11. Z 16. F 2. A 7. Z 12. A 17. E 3. C 8. A 13. A 18. A 4. A 9. E 14. E 19. G 5. C 10. B 15. C 20. E 4-21 __ 53 Chapter 04 - Completing the Accounting Cycle Problem 4-2A (90 minutes) INSTRUCTOR NOTE: Ledger accounts (as prepared per Part 1) are shown after Part 7 as they would appear after all entries are posted. Part 2 — Transactions for April April 1 Cash ............................................................... 101 Computer Equipment ................................... 167 Stafford, Capital .................................... 301 20,000 40,000 60,000 Owner invested in the business. 2 Rent Expense ................................................ 640 Cash ....................................................... 101 1,700 1,700 Paid one month’s rent. 3 Office Supplies .............................................. 124 Cash ....................................................... 101 1,100 1,100 Acquired office supplies. 10 Prepaid Insurance ......................................... 128 Cash ....................................................... 101 3,600 3,600 Paid 12-month’s premium in advance. 14 Salaries Expense ........................................... 622 Cash ....................................................... 101 1,800 1,800 Paid two weeks’ salaries. 24 Cash ............................................................... 101 Commissions Earned ........................... 405 7,900 7,900 Collected commissions from airlines. 28 Salaries Expense .......................................... 622 Cash ....................................................... 101 1,800 1,800 Paid two weeks’ salaries. 29 Repairs Expense .......................................... 684 Cash ....................................................... 101 250 250 Repaired the computer. 30 Telephone Expense ...................................... 688 Cash ....................................................... 101 650 650 Paid the telephone bill. 30 J. Stafford, Withdrawals .............................. 302 Cash ....................................................... 101 Owner withdrew cash for personal use. 4-22 1,500 1,500 Chapter 04 - Completing the Accounting Cycle Problem 4-2A (Continued) Part 3 SEE-IT-NOW TRAVEL Unadjusted Trial Balance April 30, 2011 No. 101 106 124 128 167 168 209 301 302 405 612 622 637 640 650 684 688 Account Title Cash ............................................................ Accounts receivable .................................. Office supplies ........................................... Prepaid insurance ...................................... Computer equipment ................................. Accumulated depreciation— .................... Computer equipment ................................ Salaries payable ......................................... J. Stafford, Capital ..................................... J. Stafford, Withdrawals ............................ Commissions earned................................. Depreciation expense— Computer equipment ................................ Salaries expense ........................................ Insurance expense .................................... Rent expense.............................................. Office supplies expense ............................ Repairs expense ........................................ Telephone expense.................................... Totals .......................................................... 4-23 Debit $15,500 0 1,100 3,600 40,000 Credit $ 0 0 60,000 1,500 7,900 0 3,600 0 1,700 0 250 650 $67,900 $67,900 Chapter 04 - Completing the Accounting Cycle Problem 4-2A (Continued) Part 4 Adjusting entries: (a) Apr 30 Insurance Expense ............................................... 637 200 Prepaid Insurance .......................................... 128 200 To record expired insurance (2/3 x $300 per month). (b) 30 Office Supplies Expense ...................................... 650 Office Supplies ............................................... 124 400 400 To record cost of supplies used ($1,100 - $700). (c) 30 Depreciation Exp—Computer Equipment ........... 612 Accumulated Depreciation— Computer Equipment ................................... 168 600 600 To record depreciation. (d) 30 Salaries Expense ................................................... 622 Salaries Payable............................................. 209 320 320 To record accrued salaries. (e) 30 Accounts Receivable ............................................ 106 Commissions Earned .................................... 405 1,650 1,650 To record accrued commissions. Part 5 SEE-IT-NOW TRAVEL Income Statement For Month Ended April 30, 2011 Commissions earned .................................................. Expenses Depreciation expense—Computer equipment ....... $ 600 Salaries expense ....................................................... 3,920 Insurance expense .................................................... 200 Rent expense ............................................................. 1,700 Office supplies expense ........................................... 400 Repairs expense ........................................................ 250 Telephone expense ................................................... 650 Total expenses .......................................................... Net income ................................................................... 4-24 $9,550 7,720 $1,830 Chapter 04 - Completing the Accounting Cycle Problem 4-2A (Continued) Part 5—continued SEE-IT-NOW TRAVEL Statement of Owner’s Equity For Month Ended April 30, 2011 J. Stafford, Capital, April 1, 2011 ................... $ 0 Plus: Investment by owner ............................ 60,000 Net income ............................................ 1,830 61,830 Less: Owner withdrawals ............................... J. Stafford, Capital, April 30, 2011 ................. (1,500) $60,330 SEE-IT-NOW TRAVEL Balance Sheet April 30, 2011 Assets Cash .................................................................................. Accounts receivable ....................................................... Office supplies ................................................................. Prepaid insurance ........................................................... Computer equipment ...................................................... $40,000 Accumulated depreciation–Computer equipment ....... (600) Total assets ...................................................................... $15,500 1,650 700 3,400 39,400 $60,650 Liabilities Salaries payable .............................................................. $ Equity J. Stafford, Capital ........................................................... Total liabilities and equity .............................................. 60,330 $60,650 4-25 320 Chapter 04 - Completing the Accounting Cycle Problem 4-2A (Continued) Part 6 Closing entries: April 30 Commissions Earned .................................. 405 Income Summary .................................. 901 9,550 9,550 To close the revenue account. 30 Income Summary ......................................... 901 Depreciation Exp–Computer Equip .... 612 Salaries Expense .................................. 622 Insurance Expense ............................... 637 Rent Expense ........................................ 640 Office Supplies Expense ...................... 650 Repairs Expense ................................... 684 Telephone Expense .............................. 688 7,720 600 3,920 200 1,700 400 250 650 To close the expense accounts. 30 Income Summary ......................................... 901 J. Stafford, Capital ................................ 301 1,830 1,830 To close the Income Summary account. 30 J. Stafford, Capital ........................................ 301 J. Stafford, Withdrawals ....................... 302 1,500 1,500 To close the withdrawals account. Part 7 SEE-IT-NOW TRAVEL Post-Closing Trial Balance April 30, 2011 Debit Cash .......................................................... $15,500 Accounts receivable ................................ 1,650 Office supplies ......................................... 700 Prepaid insurance .................................... 3,400 Computer equipment ............................... 40,000 Accumulated depreciation– Computer equipment ............................. Salaries payable ....................................... J. Stafford, Capital ................................... Totals ........................................................ $61,250 4-26 Credit $ 600 320 60,330 $61,250 Chapter 04 - Completing the Accounting Cycle Problem 4-2A (Continued) Part 7—continued Ledger as of April 30: Cash Date April 1 2 3 10 14 24 28 29 30 30 Date April 30 Date April 3 30 Date April 10 30 Date April 1 Date April 30 Date April 30 Explanation PR Debit 20,000 7,900 Explanation Adjusting Explanation Accounts Receivable PR Debit 1,650 Office Supplies PR Explanation Debit 1,100 Debit 3,600 Acct. No. 128 Credit Balance 3,600 200 3,400 Adjusting Explanation Computer Equipment PR Acct. No. 106 Credit Balance 1,650 Acct. No. 124 Credit Balance 1,100 400 700 Adjusting Prepaid Insurance PR Acct. No. 101 Credit Balance 20,000 1,700 18,300 1,100 17,200 3,600 13,600 1,800 11,800 19,700 1,800 17,900 250 17,650 650 17,000 1,500 15,500 Debit 40,000 Acct. No. 167 Credit Balance 40,000 Accumulated Depreciation–Computer Equipment Acct. No. 168 Explanation PR Debit Credit Balance Adjusting 600 600 Explanation Adjusting Salaries Payable PR 4-27 Debit Acct. No. 209 Credit Balance 320 320 Chapter 04 - Completing the Accounting Cycle Problem 4-2A (Continued) Date April 1 30 30 Date April 30 30 Date April 24 30 30 Date April 30 30 Date April 14 28 30 30 Date April 30 30 Explanation J. Stafford, Capital PR Closing Closing Explanation Debit 1,500 J. Stafford, Withdrawals PR Debit 1,500 Closing 9,550 Depreciation Expense–Computer Equipment Explanation PR Debit Adjusting 600 Closing Acct. No. 612 Credit Balance 600 600 0 Adjusting Closing Explanation Salaries Expense PR Adjusting Closing Explanation Adjusting Closing Insurance Expense PR Debit Debit 1,800 1,800 320 Acct. No. 622 Credit Balance 1,800 3,600 3,920 3,920 0 Debit 200 Acct. No. 637 Credit Balance 200 200 0 Rent Expense Date Explanation April 2 April 30 Closing Date April 30 30 Acct. No. 302 Credit Balance 1,500 1,500 0 Acct. No. 405 Credit Balance 7,900 7,900 1,650 9,550 0 Explanation Commissions Earned PR Acct. No. 301 Credit Balance 60,000 60,000 1,830 61,830 60,330 PR Acct. No. 640 Debit Credit Balance 1,700 1,700 Office Supplies Expense Explanation PR Debit Adjusting 400 Closing 4-28 1,700 0 Acct. No. 650 Credit Balance 400 400 0 Chapter 04 - Completing the Accounting Cycle Problem 4-2A (Concluded) Date April 29 30 Date April 30 30 Date April 30 30 30 Explanation Repairs Expense PR Debit 250 Acct. No. 684 Credit Balance 250 250 0 Debit 650 Acct. No. 688 Credit Balance 650 650 0 Closing Explanation Telephone Expense PR Closing Explanation Closing Closing Closing Income Summary PR Debit 7,720 1,830 4-29 Acct. No. 901 Credit Balance 9,550 9,550 1,830 0 Chapter 04 - Completing the Accounting Cycle Problem 4-3A (90 minutes) Part 1 KOBE REPAIRS Income Statement For Year Ended December 31, 2011 Repair fees earned ..................................... Expenses Depreciation expense—Equipment ........ Wages expense ........................................ Insurance expense ................................... Rent expense ............................................ Office supplies expense .......................... Utilities expense ....................................... Total expenses ........................................ Net income .................................................. $77,750 $ 4,000 36,500 700 9,600 2,600 1,700 55,100 $22,650 KOBE REPAIRS Statement of Owner's Equity For Year Ended December 31, 2011 S. Kobe, Capital, Jan. 1, 2011 .................... $40,000 Add net income ......................................... 22,650 62,650 Less withdrawals........................................ (15,000) S. Kobe, Capital, Dec. 31, 2011 ................. $47,650 4-30 Chapter 04 - Completing the Accounting Cycle Problem 4-3A (Continued) Part 1 (concluded) KOBE REPAIRS Balance Sheet December 31, 2011 Assets Current assets Cash ................................................................ Office supplies ............................................... Prepaid insurance .......................................... Total current assets ....................................... Plant assets Equipment ...................................................... Accumulated depreciation—Equipment ...... Total assets ...................................................... $13,000 1,200 1,950 $16,150 48,000 (4,000) 44,000 $60,150 Liabilities Current liabilities Accounts payable .......................................... Wages payable ............................................... Total current liabilities .................................. Equity S. Kobe, Capital ............................................... Total liabilities and equity ............................... 4-31 $12,000 500 12,500 47,650 $60,150 Chapter 04 - Completing the Accounting Cycle Problem 4-3A (Continued) Parts 2 and 3 KOBE REPAIRS For Year Ended December 31, 2011 No. Account Title Adjusted Trial Balance Dr. Cr. Closing Entry Information Dr. Cr. Post-Closing Trial Balance Dr. Cr. 101 Cash .................................................. 13,000 13,000 124 Office supplies ............................... 1,200 1,200 128 Prepaid insurance ........................ 1,950 1,950 167 Equipment....................................... 48,000 48,000 Accumulated depreciation— Equipment..................................... 4,000 4,000 201 Accounts payable......................... 12,000 12,000 210 Wages payable.............................. 500 500 168 301 S. Kobe, Capital ........................... 302 S. Kobe, Withdrawals ................ 40,000 (4) 15,000 15,000 401 Repair fees earned..................... (3) 22,650 (4) 15,000 77,750 (1) 77,750 Depreciation expense— Equipment................................... 4,000 (2) 4,000 623 Wages expense .......................... 36,500 (2) 36,500 637 Insurance expense..................... 700 (2) 700 640 Rent expense............................... 9,600 (2) 9,600 650 Office Supplies expense .......... 2,600 (2) 2,600 690 Utilities expense .......................... 1,700 (2) 1,700 612 47,650 901 Income summary ....................... ______ Totals .............................................. 134,250 (2) 55,100 ______ (3) 22,650 134,250 170,500 (1) 77,750 ______ ______ ______ 170,500 64,150 64,150 Closing entries (all dated December 31, 2011): (1) Repair Fees Earned ...................................... Income Summary .................................. To close the revenue account. 4-32 77,750 77,750 Chapter 04 - Completing the Accounting Cycle Problem 4-3A (Concluded) (2) (3) (4) Income Summary ......................................... Depreciation Expense, Equipment ...... Wages Expense..................................... Insurance Expense ............................... Rent Expense ........................................ Office Supplies Expense ...................... Utilities Expense ................................... To close the expense accounts. 55,100 Income Summary ......................................... S. Kobe, Capital..................................... To close the Income Summary account. 22,650 S. Kobe, Capital ............................................ S. Kobe, Withdrawals ........................... To close the withdrawals account. 15,000 4,000 36,500 700 9,600 2,600 1,700 22,650 15,000 Part 4 (a) If none of the $700 insurance expense had expired, the income statement would not report any insurance expense and net income would be increased by $700. (b) If there were no earned and unpaid wages (meaning Wages Payable equals zero), wages expense would be $500 less and net income would be $500 more. Financial Statement Changes: The income statement would reflect the following: Net income would be increased by $700 + $500 = $1,200. The balance sheet would reflect the following: Prepaid insurance and total assets would be increased by $700. There would not be any wages payable. Total current liabilities would be $500 less. Owner's equity would be increased by $1,200. Total liabilities and owner's equity would be increased by $700. 4-33 Chapter 04 - Completing the Accounting Cycle Problem 4-4A (75 minutes) Part 1 SHARP CONSTRUCTION Income Statement For Year Ended December 31, 2011 Revenues Professional fees earned ................................... $96,000 Rent earned ......................................................... 13,000 Dividends earned ............................................... 1,900 Interest earned .................................................... 1,000 Total revenues .................................................... Expenses Depreciation expense—Building ...................... 10,000 Depreciation expense—Equipment .................. 5,000 Wages expense .................................................. 31,000 Interest expense ................................................. 4,100 Insurance expense ............................................. 9,000 Rent expense ...................................................... 12,400 Supplies expense ............................................... 6,400 Postage expense ................................................ 3,200 Property taxes expense ..................................... 4,000 Repairs expense ................................................. 7,900 Telephone expense ............................................ 2,200 Utilities expense ................................................. 3,600 Total expenses ................................................... Net income ............................................................ SHARP CONSTRUCTION Statement of Owner's Equity For Year Ended December 31, 2011 J. Sharp, Capital, December 31, 2010 ................. Add: Investments by owner ............................... $50,000 Net income .................................................. 13,100 Less: Withdrawals by owner ............................... J. Sharp, Capital, December 31, 2011 ................. 4-34 $111,900 98,800 $ 13,100 $32,700 63,100 95,800 (12,000) $83,800 Chapter 04 - Completing the Accounting Cycle Problem 4-4A (Continued) SHARP CONSTRUCTION Balance Sheet December 31, 2011 Assets Current assets Cash ..................................................................... Short-term investments ..................................... Supplies .............................................................. Prepaid insurance .............................................. Total current assets ........................................... Plant assets Equipment ........................................................... Accumulated depreciation—Equipment .......... Building ............................................................... Accumulated depreciation—Building .............. Land ..................................................................... Total plant assets ............................................... Total assets ........................................................... $ 4,000 22,000 7,100 6,000 $ 39,100 39,000 (20,000) 130,000 (55,000) 19,000 75,000 45,000 139,000 $178,100 Liabilities Current liabilities Accounts payable ............................................... $ 15,500 Interest payable .................................................. 1,500 Rent payable ....................................................... 2,500 Wages payable ................................................... 1,500 Property taxes payable ...................................... 800 Unearned professional fees .............................. 6,500 Current portion of long-term note payable…... 6,600 Total current liabilities ....................................... $ 34,900 Long-term liabilities Long-term notes payable* ................................. 59,400 Total liabilities ...................................................... 94,300 Equity J. Sharp, Capital .................................................. 83,800 Total liabilities and equity ................................... $178,100 * $66,000-$6,600 4-35 Chapter 04 - Completing the Accounting Cycle Problem 4-4A (Concluded) Part 2 Closing entries (all dated December 31, 2011): (1) (2) (3) (4) Professional Fees Earned ........................... Rent Earned .................................................. Dividends Earned ......................................... Interest Earned ............................................. Income Summary .................................. To close the revenue accounts. 96,000 13,000 1,900 1,000 Income Summary ......................................... Depreciation Expense, Building .......... Depreciation Expense, Equipment ...... Wages Expense..................................... Interest Expense ................................... Insurance Expense ............................... Rent Expense ........................................ Supplies Expense ................................. Postage Expense .................................. Property Taxes Expense ...................... Repairs Expense ................................... Telephone Expense .............................. Utilities Expense ................................... To close the expense accounts. 98,800 Income Summary ......................................... J. Sharp, Capital .................................... To close the income summary account. 13,100 J. Sharp, Capital .......................................... J. Sharp, Withdrawals .......................... To close the withdrawals account. 12,000 111,900 10,000 5,000 31,000 4,100 9,000 12,400 6,400 3,200 4,000 7,900 2,200 3,600 13,100 Part 3 a. Return on assets = $13,100/[($200,000 + $178,100)/2] = 6.93% b. Debt ratio = $94,300/$178,100 = 0.53 c. Profit margin = $13,100/$111,900 =11.7% d. Current ratio = $39,100/$34,900 = 1.12 4-36 12,000 Chapter 04 - Completing the Accounting Cycle Problem 4-5A (90 minutes) Part 1 ADAMS CONSTRUCTION CO. Work Sheet For Year Ended June 30, 2011 No. 101 126 128 167 168 201 203 208 210 213 251 301 302 401 612 623 633 637 640 652 683 684 690 Account Title Unadjusted Trial Balance Dr. Cr. Cash....................................................... 17,500 Supplies................................................8,900 Prepaid insurance.............................6,200 Equipment........................................... 131,000 Accumulated depreciation— Equipment ......................................... Accounts payable............................. Interest payable.................................. Rent payable....................................... Wages payable................................... Property taxes payable.................... Long-term notes payable ............... S. Adams, Capital.............................. S. Adams, Withdrawals................... 30,000 Construction fees earned............... Depreciation expense— Equipment ......................................... Wages expense................................. 45,860 Interest expense.................................2,640 Insurance expense ........................... Rent expense...................................... 13,200 Supplies expense.............................. Property taxes expense ..................4,600 Repairs expense................................2,810 Utilities expense.................................4,000 Totals..................................................... 266,710 Net Income .......................................... Totals..................................................... Adjustments Dr. Cr. (a) 5,700 (b) 3,900 Adjusted Trial Balance Dr. Cr. 17,500 3,200 2,300 131,000 (c) 8,500 (d) 550 (h) 240 (f) 200 (e) 1,600 (g) 900 25,250 5,800 Income Statement Dr. Cr. 17,500 3,200 2,300 131,000 33,750 6,350 240 200 1,600 900 24,000 77,660 24,000 77,660 33,750 6,350 240 200 1,600 900 24,000 77,660 30,000 134,000 (c) (e) (h) (b) (f) (a) (g) 8,500 1,600 240 3,900 200 5,700 900 ______ (d) 550 266,710 21,590 _____ 21,590 4-37 Balance Sheet & Statement of Owner’s Equity Dr. Cr. 30,000 134,000 134,000 8,500 47,460 2,880 3,900 13,400 5,700 5,500 2,810 4,550 ______ 278,700 278,700 8,500 47,460 2,880 3,900 13,400 5,700 5,500 2,810 4,550 ______ 94,700 134,000 39,300 ______ 134,000 134,000 ______ ______ 184,000 144,700 ______ 39,300 184,000 184,000 Chapter 04 - Completing the Accounting Cycle Problem 4-5A (Continued) Part 2 Adjusting entries (all dated June 30, 2011): (a) (b) (c) (d) (e) (f) (g) (h) Supplies Expense ......................................... Supplies ................................................. To record consumption of supplies. 5,700 Insurance Expense....................................... Prepaid Insurance ................................. To record expiration of insurance. 3,900 Depreciation Expense, Equipment ............. Accumulated Depreciation, Equipment To record depreciation. 8,500 5,700 3,900 8,500 Utilities Expense ........................................... Accounts Payable ................................. To record accrued utilities costs. 550 Wages Expense ............................................ Wages Payable ...................................... To record accrued wages. 1,600 Rent Expense ................................................ Rent Payable ......................................... To record remainder of annual rent. 200 Property Taxes Expense.............................. Property Taxes Payable ....................... To record additional property taxes. 900 Interest Expense (1% x $24,000) ................. Interest Payable .................................... To record the month’s interest expense. 240 4-38 550 1,600 200 900 240 Chapter 04 - Completing the Accounting Cycle Problem 4-5A (Continued) Closing entries (all dated June 30, 2011): (1) (2) (3) (4) Construction Fees Earned ........................... 134,000 Income Summary .................................. To close the revenue account. Income Summary ......................................... Depreciation Expense, Equipment ...... Wages Expense..................................... Interest Expense ................................... Insurance Expense ............................... Rent Expense ........................................ Supplies Expense ................................. Property Taxes Expense ...................... Repairs Expense ................................... Utilities Expense ................................... To close the expense accounts. 94,700 Income Summary ......................................... S. Adams, Capital.................................. To close the Income Summary account. 39,300 S. Adams, Capital ......................................... S. Adams, Withdrawals ........................ To close the withdrawals account. 30,000 4-39 134,000 8,500 47,460 2,880 3,900 13,400 5,700 5,500 2,810 4,550 39,300 30,000 Chapter 04 - Completing the Accounting Cycle Problem 4-5A (Continued) Part 3 ADAMS CONSTRUCTION CO. Income Statement For Year Ended June 30, 2011 Construction fees earned ................................. Expenses Depreciation expense—Equipment ............... Wages expense ................................................ Interest expense............................................... Insurance expense........................................... Rent expense.................................................... Supplies expense............................................. Property taxes expense .................................. Repairs expense .............................................. Utilities expense............................................... Total expenses ................................................. Net income ......................................................... $134,000 $ 8,500 47,460 2,880 3,900 13,400 5,700 5,500 2,810 4,550 94,700 $ 39,300 ADAMS CONSTRUCTION CO. Statement of Owner's Equity For Year Ended June 30, 2011 S. Adams, Capital, June 30, 2010 ..................... $ 52,660 Add: Investment by owner ............................... $25,000 Net income................................................ Less: Withdrawals by owner ............................ S. Adams, Capital, June 30, 2011 ..................... 4-40 39,300 64,300 116,960 (30,000) $ 86,960 Chapter 04 - Completing the Accounting Cycle Problem 4-5A (Continued) ADAMS CONSTRUCTION CO. Balance Sheet June 30, 2011 Assets Current assets Cash ....................................................................... $ 17,500 Supplies ................................................................. 3,200 Prepaid insurance ................................................. 2,300 Total current assets .............................................. $ 23,000 Plant assets Equipment ............................................................. 131,000 Accumulated depreciation—Equipment ............. (33,750) Total assets ............................................................. 97,250 $120,250 Liabilities Current liabilities Accounts payable ................................................. $ 6,350 Interest payable..................................................... 240 Rent payable.......................................................... 200 Wages payable ...................................................... 1,600 Property taxes payable ........................................ 900 Current portion of long-term note payable ........ 5,000 Total current liabilities ......................................... $ 14,290 Noncurrent liabilities Long-term note payable (less current portion) .. 19,000 Total liabilities ......................................................... 33,290 Equity S. Adams, Capital ................................................... 86,960 Total liabilities and equity ...................................... $120,250 4-41 Chapter 04 - Completing the Accounting Cycle Problem 4-5A (Concluded) Part 4 (a) This error enters the wrong amount in the correct accounts. The ending balance of the Supplies account should be $3,200, but the entry reduces Supplies by $3,200. Because its unadjusted balance was $8,900, the adjusted balance will be $5,700 ($8,900 - $3,200), which is $2,500 greater than the correct $3,200 balance. In addition, the Supplies Expense account balance will be only $3,200 instead of $5,700. The adjusted trial balance columns in the work sheet will be equal, but the error will cause the work sheet’s net income to be overstated by $2,500 because of the understatement of the expense. In addition, the balance sheet columns will include the overstated balance for the Supplies account. This error is not likely to be detected as a result of completing the work sheet. If it is not, the income statement will overstate net income by $2,500, and the balance sheet will overstate the cost of the supplies available and the owner's equity by $2,500. (b) This error inserts a credit in the adjusted trial balance when a debit should have been inserted. As a result, the trial balance will not balance (the credit column will be greater than the debit column by $35,000), and the error will be tracked down and corrected before going on with the next step in the work sheet. Because the error will be detected and corrected before preparing the financial statements, the statements will not be affected. 4-42 Chapter 04 - Completing the Accounting Cycle Problem 4-6AA (40 minutes) Part 1 BULLSEYE RANGES December 31, 2011 Unadjusted Trial Balance Cash............................................... Adjustments 13,000 13,000 Accounts receivable................. Supplies........................................ Adjusted Trial Balance (e) 9,100 5,500 Equipment ................................... 130,000 Accumulated depreciation– Equipment ................................. Interest payable.......................... 9,100 (b) 2,800 2,700 130,000 25,000 Salaries payable......................... (f) 12,500 37,500 (c) 1,250 1,250 (a) 900 900 Unearned member fees .......... 14,000 (d) Notes payable............................. 50,000 50,000 T. Allen, Capital ........................... 58,250 58,250 T. Allen, Withdrawals................ 8,400 5,600 20,000 Member fees earned................. 20,000 53,000 Depreciation expense– Equipment ................................. (d) (e) 8,400 9,100 70,500 (f) 12,500 12,500 Salaries expense........................ 28,000 (a) 900 28,900 Interest expense......................... 3,750 (c) 1,250 5,000 Supplies expense...................... ______ ______ (b) 2,800 _____ 2,800 ______ Totals ............................................. 200,250 200,250 34,950 34,950 224,000 224,000 4-43 Chapter 04 - Completing the Accounting Cycle Problem 4-6AA (Continued) Part 2 (all adjusting entries dated December 31, 2011) (a) (b) (c) (d) (e) (f) Salaries Expense .......................................... Salaries Payable.................................... To record accrued salaries. 900 Supplies Expense ......................................... Supplies ................................................. To record cost of consumed supplies. 2,800 Interest Expense ........................................... Interest Payable .................................... To record accrued interest expense. 1,250 Unearned Member Fees ............................... Member Fees Earned ............................ To record earned fees. 8,400 Accounts Receivable ................................... Membership Fees Earned .................... To record accrued revenues. 9,100 Depreciation Expense, Equipment ............. Accumulated Depreciation, Equipment To record depreciation. 12,500 900 2,800 1,250 8,400 9,100 12,500 Part 3 (all reversing entries dated January 1, 2012) (a) (c) (e) Salaries Payable ........................................... Salaries Expense .................................. To reverse accrued salaries. 900 Interest Payable ............................................ Interest Expense ................................... To reverse accrued interest expense. 1,250 Member Fees Earned ................................... Accounts Receivable ............................ To reverse accrued revenues. 9,100 4-44 900 1,250 9,100 Chapter 04 - Completing the Accounting Cycle Problem 4-6AA (Concluded) Part 4 2012 Jan. 4 Salaries Expense ......................................... Cash ....................................................... To record payroll. 1,600 Interest Expense .......................................... Cash ....................................................... To record interest payment. 1,500 31 Cash ($9,100 + $8,000) ................................ Member Fees Earned ............................ 17,100 15 To record collection of membership fees. 4-45 1,600 1,500 17,100 Chapter 04 - Completing the Accounting Cycle PROBLEM SET B Problem 4-1B (15 minutes) 1. C 6. C 11. A 16. E 2. A 7. D 12. E 17. Z 3. E 8. Z 13. G 18. E 4. A 9. Z 14. A 19. C 5. A 10. B 15. C 20. F 4-46 Chapter 04 - Completing the Accounting Cycle Problem 4-2B (90 minutes) INSTRUCTOR NOTE: Ledger accounts (as prepared per Part 1) are shown after Part 7 as they would appear after all entries are posted. Part 2 Transactions for July: July 1 Cash ..................................................................101 Buildings ..........................................................173 L. Fogle, Capital .......................................301 20,000 120,000 140,000 Owner invested in the business. 2 Rent Expense ...................................................640 Cash ..........................................................101 1,800 1,800 Paid one month’s rent. 5 Office Supplies ................................................124 Cash ..........................................................101 2,300 2,300 Acquired office supplies. 10 Prepaid Insurance ...........................................128 Cash ..........................................................101 5,400 5,400 Paid 12-month’s premium in advance. 14 Salaries Expense .............................................622 Cash ..........................................................101 900 900 Paid two weeks’ salary. 24 Cash ..................................................................101 Storage Fees Earned ...............................401 8,800 8,800 Collected fees from customers. 28 Salaries Expense .............................................622 Cash ..........................................................101 900 900 Paid two weeks’ salary. 29 Repairs Expense .............................................684 Cash ..........................................................101 850 850 Repaired the roof. 30 Telephone Expense .........................................688 Cash ..........................................................101 300 300 Paid the telephone bill. 31 L. Fogle, Withdrawals .....................................302 Cash ..........................................................101 Owner withdrew cash.. 4-47 1,600 1,600 Chapter 04 - Completing the Accounting Cycle Problem 4-2B (Continued) Part 3 KEEPSAFE CO. Unadjusted Trial Balance July 31, 2011 No. Account Title Debit Credit 101 Cash ...................................................................... $ 14,750 106 Accounts receivable ............................................ 0 124 Office supplies ..................................................... 2,300 128 Prepaid insurance ............................................... 5,400 173 Buildings .............................................................. 120,000 174 Accum. depreciation–Buildings ......................... $ 0 209 Salaries payable .................................................. 0 301 L. Fogle, Capital ................................................... 140,000 302 L. Fogle, Withdrawals .......................................... 1,600 401 Storage fees earned ............................................ 8,800 606 Depreciation expense–Buildings ....................... 0 622 Salaries expense ................................................. 1,800 637 Insurance expense .............................................. 0 640 Rent expense ....................................................... 1,800 650 Office supplies expense ..................................... 0 684 Repairs expense .................................................. 850 688 Telephone expense ............................................. 300 Totals .................................................................... $148,800 4-48 $148,800 Chapter 04 - Completing the Accounting Cycle Problem 4-2B (Continued) Part 4 Adjusting entries: July 31 Insurance Expense ....................................... 637 Prepaid Insurance ................................. 128 300 300 To record expired insurance (2/3 x $450 per month). 31 Office Supplies Expense ............................. 650 Office Supplies ...................................... 124 750 750 To record the cost of consumed supplies ($2,300 - $1,550). 31 Depreciation Expense—Buildings .............. 606 Accum. Depreciation—Buildings ........ 174 1,200 1,200 To record depreciation. 31 Salaries Expense .......................................... 622 Salaries Payable.................................... 209 180 180 To record accrued salaries. 31 Accounts Receivable ................................... 106 Storage Fees Earned ............................ 401 950 950 To record accrued storage fees. Part 5 KEEPSAFE CO. Income Statement For Month Ended July 31, 2011 Storage fees earned ..................................... Expenses Depreciation expense–Buildings .............. $1,200 Salaries expense ......................................... 1,980 Insurance expense...................................... 300 Rent expense............................................... 1,800 Office supplies expense ............................. 750 Repairs expense ......................................... 850 Telephone expense..................................... 300 Total expenses ............................................ Net income..................................................... 4-49 $9,750 7,180 $ 2,570 Chapter 04 - Completing the Accounting Cycle Problem 4-2B (Continued) Part 5 KEEPSAFE CO. Statement of Owner’s Equity For Month Ended July 31, 2011 L. Fogle, Capital, July 1, 2011 ................... $ 0 Add: Investments by owner ...................... 140,000 Net income ......................................... 2,570 142,570 Less: Owner withdrawals .......................... L. Fogle, Capital, July 31, 2011 ................. KEEPSAFE CO. Balance Sheet July 31, 2011 Assets Cash ............................................................. Accounts receivable .................................. Office supplies ............................................ Prepaid insurance ...................................... Buildings ..................................................... $120,000 Accumulated depreciation--Buildings...... (1,200) Total assets ................................................. (1,600) $140,970 $ 14,750 950 1,550 5,100 118,800 $141,150 Liabilities Salaries payable ......................................... $ Equity L. Fogle, Capital .......................................... Total liabilities and equity ......................... 140,970 $141,150 4-50 180 Chapter 04 - Completing the Accounting Cycle Problem 4-2B (Continued) Part 6 Closing entries July 31 Storage Fees Earned ................................. 401 Income Summary .................................. 901 9,750 9,750 To close the revenue account. 31 Income Summary ....................................... 901 Depreciation Exp—Buildings .............. 606 Salaries Expense .................................. 622 Insurance Expense... ............................ 637 Rent Expense ........................................ 640 Office Supplies Expense ...................... 650 Repairs Expense ................................... 684 Telephone Expense .............................. 688 7,180 1,200 1,980 300 1,800 750 850 300 To close the expense accounts. 31 Income Summary ....................................... 901 L. Fogle, Capital .................................... 301 2,570 2,570 To close the Income Summary. 31 L. Fogle, Capital ......................................... 301 L. Fogle, Withdrawals ........................... 302 1,600 1,600 To close the Withdrawals account.. Part 7 KEEPSAFE CO. Post-Closing Trial Balance July 31, 2011 Debit Cash ............................................................. $ 14,750 Accounts receivable .................................. 950 Office supplies ............................................ 1,550 Prepaid insurance ...................................... 5,100 Credit Buildings ..................................................... 120,000 Accumulated depreciation–Buildings ...... $ 1,200 Salaries payable ......................................... 180 L. Fogle, Capital .......................................... 140,970 Totals ........................................................... $142,350 4-51 $142,350 Chapter 04 - Completing the Accounting Cycle Problem 4-2B (Continued) Ledger as of July 31: Cash Date July 1 2 5 10 14 24 28 29 30 31 Date July 31 Date July 5 31 Date July 10 31 Explanation PR Debit 20,000 8,800 Accounts Receivable Explanation PR Debit Adjusting 950 Explanation Office Supplies PR Explanation Debit 2,300 Debit 5,400 Acct. No. 128 Credit Balance 5,400 300 5,100 Adjusting Buildings Date July 1 Date July 31 Date July 31 Explanation PR Acct. No. 106 Credit Balance 950 Acct. No. 124 Credit Balance 2,300 750 1,550 Adjusting Prepaid Insurance PR Acct. No. 101 Credit Balance 20,000 1,800 18,200 2,300 15,900 5,400 10,500 900 9,600 18,400 900 17,500 850 16,650 300 16,350 1,600 14,750 Debit 120,000 Acct. No. 173 Credit Balance 120,000 Accumulated Depreciation—Buildings Acct. No. 174 Explanation PR Debit Credit Balance Adjusting 1,200 1,200 Explanation Adjusting Salaries Payable PR 4-52 Debit Acct. No. 209 Credit Balance 180 180 Chapter 04 - Completing the Accounting Cycle Problem 4-2B (Continued) Date July 1 31 31 Date July 31 31 Explanation L. Fogle, Capital PR Closing Closing Acct. No. 301 Debit Credit Balance 140,000 140,000 2,570 142,570 1,600 140,970 L. Fogle, Withdrawals Explanation PR Debit 1,600 Closing Date July 24 31 31 Adjusting Closing 9,750 Acct.No. 401 Credit Balance 8,800 8,800 950 9,750 0 Date July 31 31 Depreciation Expense—Buildings Explanation PR Debit Adjusting 1,200 Closing Acct. No. 606 Credit Balance 1,200 1,200 0 Date July 14 28 31 31 Date July 31 31 Date July 2 31 Explanation Explanation Storage Fees Earned PR Debit Acct. No. 302 Credit Balance 1,600 1,600 0 Salaries Expense PR Adjusting Closing Explanation Adjusting Closing Explanation Insurance Expense PR Rent Expense PR Closing 4-53 Debit 900 900 180 Acct. No. 622 Credit Balance 900 1,800 1,980 1,980 0 Debit 300 Acct. No. 637 Credit Balance 300 300 0 Debit 1,800 Acct. No. 640 Credit Balance 1,800 1,800 0 Chapter 04 - Completing the Accounting Cycle Problem 4-2B (Concluded) Date July 31 31 Date July 29 31 Date July 30 31 Date July 31 31 31 Office Supplies Expense Explanation PR Debit Adjusting 750 Closing Explanation Repairs Expense PR Debit 850 Closing Explanation Telephone Expense PR Debit 300 Closing Explanation Closing Closing Closing Income Summary PR Debit 7,180 2,570 4-54 Acct. No. 650 Credit Balance 750 750 0 Acct. No. 684 Credit Balance 850 850 0 Acct. No. 688 Credit Balance 300 300 0 Acct. No. 901 Credit Balance 9,750 9,750 2,570 0 Chapter 04 - Completing the Accounting Cycle Problem 4-3B (90 minutes) Part 1 HEEL-TO-TOE SHOES Income Statement For Year Ended December 31, 2011 Repair fees earned ..................................... Expenses Depreciation expense—Equipment ........ Wages expense ........................................ Insurance expense ................................... Rent expense ............................................ Store supplies expense ........................... Utilities expense ....................................... Total expenses ......................................... Net income .................................................. $62,000 $ 3,000 28,400 1,100 2,400 1,300 1,860 38,060 $23,940 HEEL-TO-TOE SHOES Statement of Owner's Equity For Year Ended December 31, 2011 P. Holt, Capital, December 31, 2010.......... $31,650 Add: Net income ......................................... 23,940 55,590 Less: Owner withdrawals .......................... (16,000) P. Holt, Capital, December 31, 2011.......... $39,590 4-55 Chapter 04 - Completing the Accounting Cycle Problem 4-3B (Continued) Part 1 (concluded) HEEL-TO-TOE SHOES Balance Sheet December 31, 2011 Assets Current assets Cash ........................................................... $13,450 Store supplies ........................................... 4,140 Prepaid insurance .................................... 2,200 Total current assets ................................. Plant assets Equipment ................................................. 33,000 Accumulated depreciation, equipment .. (9,000) Total assets ................................................. $19,790 24,000 $43,790 Liabilities Current liabilities Accounts payable ..................................... Wages payable ......................................... Total current liabilities ............................. Equity P. Holt, Capital ........................................... Total liabilities and equity ......................... 4-56 $ 1,000 3,200 4,200 39,590 $43,790 Chapter 04 - Completing the Accounting Cycle Problem 4-3B (Continued) Parts 2 and 3 No. Account Title HEEL-TO-TOE SHOES For Year Ended December 31, 2011 Adjusted Trial Balance Closing Entry Information Dr. Cr. Dr. Cr. Post-Closing Trial Balance Dr. Cr. 101 Cash ........................................ 13,450 13,450 125 Store supplies ...................... 4,140 4,140 128 Prepaid insurance............... 2,200 2,200 167 Equipment............................. 33,000 33,000 168 Accumulated depreciation—Equipment............... 9,000 9,000 201 Accounts payable............... 1,000 1,000 210 Wages payable .................... 3,200 3,200 301 P. Holt, Capital ...................... 31,650 (4) 16,000 302 P. Holt, Withdrawals ........... 16,000 401 Repair fees earned.............. (3) 23,940 39,590 (4) 16,000 62,000 (1) 62,000 612 Depreciation expense— 3,000 Equipment........................... (2) 623 Wages expense................... 28,400 (2) 28,400 637 Insurance expense............. 1,100 (2) 1,100 640 Rent expense ....................... 2,400 (2) 2,400 651 Store supplies expense .... 1,300 (2) 1,300 690 Utilities expense................... 1,860 (2) 1,860 901 Income summary................ ______ ______ (2) 38,060 (3) 23,940 Totals.......................................106,850 106,850 140,000 4-57 3,000 (1) 62,000 ______ _____ _____ 140,000 52,790 52,790 Chapter 04 - Completing the Accounting Cycle Problem 4-3B (Concluded) Part 3 Closing entries (all dated December 31, 2011): (1) Repair Fees Earned ...................................... Income Summary .................................. 62,000 62,000 To close the revenue account. (2) Income Summary ......................................... Depreciation Expense, Equipment ...... Wages Expense..................................... Insurance Expense ............................... Rent Expense ........................................ Store Supplies Expense ....................... Utilities Expense ................................... 38,060 3,000 28,400 1,100 2,400 1,300 1,860 To close the expense accounts. (3) Income Summary ......................................... P. Holt, Capital....................................... 23,940 23,940 To close the Income Summary account. (4) P. Holt, Capital .............................................. P. Holt, Withdrawals ............................. 16,000 16,000 To close the withdrawals account. Part 4 (a) If none of the $1,100 insurance expense had expired, the income statement would not report any insurance expense and net income would be increased by $1,100. (b) If there were no earned and unpaid wages (meaning Wages Payable equals zero), wages expense would be $3,200 less and net income would be $3,200 higher. Financial Statement Changes: The income statement would reflect the following: Net income would be increased by $1,100 + $3,200 = $4,300. The balance sheet would reflect the following: Prepaid insurance and total assets would be increased by $1,100. There would not be any wages payable. Total liabilities would be decreased by $3,200. Owner's equity would be increased by $4,300. Total liabilities and owner's equity would be increased by $1,100. 4-58 Chapter 04 - Completing the Accounting Cycle Problem 4-4B (75 minutes) Part 1 GIOVANNI CO. Income Statement For Year Ended December 31, 2011 Revenues Professional fees earned ................................... $47,000 Rent earned ......................................................... 3,600 Dividends earned ............................................... 500 Interest earned .................................................... 1,120 Total revenues .................................................... Expenses Depreciation expense—Building ...................... 2,000 Depreciation expense—Equipment .................. 1,000 Wages expense .................................................. 17,500 Interest expense ................................................. 1,200 Insurance expense ............................................. 1,425 Rent expense ...................................................... 1,800 Supplies expense ............................................... 900 Postage expense ................................................ 310 Property taxes expense ..................................... 3,825 Repairs expense ................................................. 579 Telephone expense ............................................ 421 Utilities expense ................................................. 1,820 Total expenses ................................................... Net income ............................................................ GIOVANNI CO. Statement of Owner's Equity For Year Ended December 31, 2011 J. Giovanni, Capital, December 31, 2010 ........... Add: Investments by owner ............................... $30,000 Net income .................................................. 19,440 Less: Withdrawals by owner ............................... J. Giovanni, Capital, December 31, 2011 ........... 4-59 $52,220 32,780 $19,440 $ 61,800 49,440 111,240 (6,000) $105,240 Chapter 04 - Completing the Accounting Cycle Problem 4-4B (Continued) GIOVANNI CO. Balance Sheet December 31, 2011 Assets Current assets Cash ..................................................................... $ 6,400 Short-term investments ..................................... 10,200 Supplies .............................................................. 3,600 Prepaid insurance .............................................. 800 Total current assets ........................................... $ 21,000 Plant assets Equipment ........................................................... $18,000 Accumulated depreciation—Equipment .......... (3,000) 15,000 Building ............................................................... 90,000 Accumulated depreciation—Building .............. (9,000) 81,000 Land ..................................................................... 28,500 Total plant assets ............................................... 124,500 Total assets ........................................................... $145,500 Liabilities Current liabilities Accounts payable ............................................... Interest payable .................................................. Rent payable ....................................................... Wages payable ................................................... Property taxes payable ...................................... Unearned professional fees .............................. Current portion of long-term note payable ...... Total current liabilities ....................................... Long-term liabilities Long-term notes payable* ................................. Total liabilities ...................................................... Equity J. Giovanni, Capital .............................................. Total liabilities and equity ................................... * $32,000-$6,400 4-60 $ 2,500 1,400 200 1,180 2,330 650 6,400 $ 14,660 25,600 40,260 105,240 $145,500 Chapter 04 - Completing the Accounting Cycle Problem 4-4B (Concluded) Part 2 Closing entries (all dated December 31, 2011): (1) (2) (3) (4) Professional Fees Earned ........................... Rent Earned .................................................. Dividends Earned ......................................... Interest Earned ............................................. Income Summary .................................. To close the revenue accounts. 47,000 3,600 500 1,120 Income Summary ......................................... Depreciation Expense—Building ........ Depreciation Expense—Equipment .... Wages Expense..................................... Interest Expense ................................... Insurance Expense ............................... Rent Expense ........................................ Supplies Expense ................................. Postage Expense .................................. Property Taxes Expense ...................... Repairs Expense ................................... Telephone Expense .............................. Utilities Expense ................................... To close the expense accounts. 32,780 Income Summary ......................................... J. Giovanni, Capital............................... To close the Income Summary account. 19,440 J. Giovanni, Capital ...................................... J. Giovanni, Withdrawals ..................... To close the withdrawals account. 6,000 52,220 2,000 1,000 17,500 1,200 1,425 1,800 900 310 3,825 579 421 1,820 19,440 Part 3 a. Return on assets = $19,440/[($150,000 + $145,500)/2] = 13.2% b. Debt ratio = $40,260/$145,500 = 0.28 c. Profit margin = $19,440/$52,220 = 37.2% d. Current ratio = $21,000/$14,660 = 1.43 4-61 6,000 Chapter 04 - Completing the Accounting Cycle Problem 4-5B (90 minutes) Part 1 CRUSH DEMOLITION COMPANY Work Sheet For Year Ended April 30, 2011 Unadjusted Trial Balance No. 101 126 128 167 168 201 203 208 210 213 251 301 302 401 612 623 633 637 640 652 683 684 690 Account Title Dr. Adjustments Cr. Cash ................................................ 9,000 Supplies ......................................... 18,000 Prepaid insurance....................... 14,600 Equipment.....................................140,000 Accumulated depreciation— 10,000 Equipment................................... Accounts payable....................... 16,000 Interest payable............................ Rent payable................................. Wages payable ............................ Property taxes payable ............. Long-term notes payable......... 20,000 J. Bonair, Capital.......................... 66,900 J. Bonair, Withdrawals .............. 24,000 Demolition fees earned............. 177,000 Depreciation expense— Equipment................................... Wages expense........................... 51,400 Interest expense .......................... 2,200 Insurance expense..................... Rent expense ............................... 8,800 Supplies expense ....................... Property taxes expense............ 8,400 Repairs expense ......................... 6,700 Utilities expense........................... 6,800 ______ Totals...............................................289,900 289,900 Net Income .................................... Totals............................................... Dr. Cr. Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. 9,000 (a) 9,900 8,100 (b) 11,500 3,100 140,000 9,000 8,100 3,100 140,000 (c) 18,000 28,000 28,000 (d) 700 (h) 200 (f) 5,360 (e) 2,200 (g) 450 16,700 200 5,360 2,200 450 20,000 66,900 16,700 200 5,360 2,200 450 20,000 66,900 24,000 24,000 177,000 (c) 18,000 (e) (h) (b) (f) (a) (g) 2,200 200 11,500 5,360 9,900 450 (d) 700 48,310 Balance Sheet and Statement of Owner’s Equity Dr. Cr. 18,000 177,000 18,000 53,600 53,600 2,400 2,400 11,500 11,500 14,160 14,160 9,900 9,900 8,850 8,850 6,700 6,700 ______ 7,500 ______ 7,500 48,310 316,810 316,810 132,610 7,500 44,390 177,000 4-62 ______ ______ ______ 177,000 184,200 139,810 ______ ______ 44,390 177,000 184,200 184,200 Chapter 04 - Completing the Accounting Cycle Problem 4-5B (Continued) Part 2 Adjusting entries (all on April 30, 2011): (a) (b) (c) (d) (e) (f) (g) (h) Supplies Expense ............................................. 9,900 Supplies ..................................................... To record consumption of supplies. 9,900 Insurance Expense ........................................... 11,500 Prepaid Insurance ..................................... To record expiration of insurance. 11,500 Depreciation Expense, Equipment ................. 18,000 Accumulated Depreciation, Equipment .. To record depreciation. 18,000 Utilities Expense ............................................... Accounts Payable ..................................... To record accrued utilities costs. 700 700 Wages Expense ................................................ 2,200 Wages Payable .......................................... To record accrued wages. 2,200 Rent Expense .................................................... 5,360 Rent Payable ............................................. To record remainder of annual rent. 5,360 Property Taxes Expense.................................. Property Taxes Payable ........................... To record additional property taxes. 450 Interest Expense (1% x $20,000) ..................... Interest Payable ........................................ To record April’s interest expense. 200 4-63 450 200 Chapter 04 - Completing the Accounting Cycle Problem 4-5B (Continued) Closing entries (all on April 30, 2011): (1) (2) (3) (4) Demolition Fees Earned .............................. 177,000 Income Summary .................................. To close the revenue account. 177,000 Income Summary ......................................... 132,610 Depreciation Expense, Equipment ...... Wages Expense..................................... Interest Expense ................................... Insurance Expense ............................... Rent Expense ........................................ Supplies Expense ................................. Property Taxes Expense ...................... Repairs Expense ................................... Utilities Expense ................................... To close the expense accounts. 18,000 53,600 2,400 11,500 14,160 9,900 8,850 6,700 7,500 Income Summary ......................................... J. Bonair, Capital................................... To close the Income Summary account. 44,390 44,390 J. Bonair, Capital .......................................... J. Bonair, Withdrawals ......................... To close the withdrawals account. 24,000 4-64 24,000 Chapter 04 - Completing the Accounting Cycle Problem 4-5B (Continued) Part 3 CRUSH DEMOLITION COMPANY Income Statement For Year Ended April 30, 2011 Demolition fees earned ........................................ Expenses Depreciation expense—Equipment .................. $18,000 Wages expense .................................................. 53,600 Interest expense ................................................. 2,400 Insurance expense ............................................. 11,500 Rent expense ...................................................... 14,160 Supplies expense ............................................... 9,900 Property taxes expense ..................................... 8,850 Repairs expense ................................................. 6,700 Utilities expense ................................................. 7,500 Total expenses ................................................... Net income ............................................................ $177,000 132,610 $ 44,390 CRUSH DEMOLITION COMPANY Statement of Owner's Equity For Year Ended April 30, 2011 J. Bonair, Capital, April 30, 2010 ......................... $ 36,900 Add: Investments by owner ............................... $30,000 Net income .................................................. Less: Withdrawals by owner ............................... J. Bonair, Capital, April 30, 2011 ......................... 4-65 44,390 74,390 111,290 (24,000) $ 87,290 Chapter 04 - Completing the Accounting Cycle Problem 4-5B (Continued) Part 3 (concluded) CRUSH DEMOLITION COMPANY Balance Sheet April 30, 2011 Assets Current assets Cash ...................................................................... $ 9,000 Supplies ............................................................... 8,100 Prepaid insurance ............................................... 3,100 Total current assets ............................................ $ 20,200 Plant assets Equipment ............................................................ 140,000 Accumulated depreciation—Equipment ........... (28,000) 112,000 Total assets ............................................................ $132,200 Liabilities Current liabilities Accounts payable ................................................ $ 16,700 Interest payable ................................................... 200 Rent payable ........................................................ 5,360 Wages payable .................................................... 2,200 Property taxes payable ....................................... 450 Current portion of long-term note payable….. . 4,000 Total current liabilities ........................................ Long-term liabilities Long-term note payable (less current portion) .. Total liabilities ....................................................... Equity J. Bonair, Capital ................................................... Total liabilities and equity .................................... 4-66 $ 28,910 16,000 44,910 87,290 $132,200 Chapter 04 - Completing the Accounting Cycle Problem 4-5B (Concluded) Part 4 (a) This error enters the wrong amount in the correct accounts. The ending balance of the Prepaid Insurance account should be $3,100, but the entry reduces that account by $3,100. Because its unadjusted balance was $14,600, the adjusted balance will be $11,500 ($14,600 $3,100), which is $8,400 greater than the correct $3,100 balance. In addition, the Insurance Expense account balance will be only $3,100 instead of $11,500. The adjusted trial balance columns in the work sheet will be equal, but the error will cause the work sheet’s net income to be overstated by $8,400 because of the understatement of the expense. In addition, the balance sheet columns will include the overstated balance for the Prepaid Insurance account. This error is not likely to be detected as a result of completing the work sheet. If it is not, the income statement will overstate net income by $8,400, and the balance sheet will overstate the cost of the unexpired insurance and owner's equity by $8,400. (b) This error inserts a debit in the balance sheet columns instead of the income statement columns. In the unlikely event that this error is not immediately detected, it will cause the work sheet measure of net income to be overstated because the total debits will incorrectly omit the $6,700 expense for repairs. In all likelihood, the error will be discovered in the process of drafting the balance sheet because the accountant will realize that repairs expense is not an asset. If it is detected and corrected, the financial statements will be unaffected. However, if the repairs expense is erroneously included on the balance sheet, the reported net income will be overstated by $6,700. On the balance sheet, a nonexistent asset will be reported for the repairs expense and owner's equity will be overstated by $6,700. 4-67 Chapter 04 - Completing the Accounting Cycle Problem 4-6BA (40 minutes) Part 1 SOLUTIONS CO. December 31, 2011 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Cash...................................................... 9,000 9,000 Accounts receivable........................ (e) 2,350 Supplies............................................... 6,600 2,350 (b) 4,150 Machinery............................................40,100 Accumulated depreciation— Machinery.......................................... 2,450 40,100 15,800 (f) 3,800 19,600 Interest payable ................................. (c) 500 500 Salaries payable............................... (a) 420 420 Unearned rental fees ....................... 5,200 (d) 2,100 3,100 Notes payable.................................... 20,000 20,000 G. Clay, Capital................................... 13,200 13,200 G. Clay, Withdrawals .......................10,500 Rental fees earned............................ 10,500 37,000 (d) (e) 2,100 2,350 41,450 Depreciation expense— Machinery......................................... (f) 3,800 3,800 Salaries expense...............................23,500 (a) 420 23,920 Interest expense................................ 1,500 (c) 500 2,000 Supplies expense............................. ______ ______ (b) 4,150 ______ 13,320 13,320 Totals ....................................................91,200 91,200 4-68 4,150 ______ 98,270 98,270 Chapter 04 - Completing the Accounting Cycle Problem 4-6BA (Continued) Part 2 (all adjusting entries dated December 31, 2011) (a) (b) (c) (d) (e) (f) Salaries Expense .......................................... Salaries Payable.................................... To record accrued wages. 420 Supplies Expense ......................................... Supplies ................................................. To record cost of consumed supplies. 4,150 Interest Expense ........................................... Interest Payable .................................... To record accrued interest expense. 500 Unearned Rental Fees .................................. Rental Fees Earned .............................. To record earned fees. 2,100 Accounts Receivable ................................... Rental Fees Earned .............................. To record accrued revenues. 2,350 Depreciation Expense, Machinery .............. Accumulated Depreciation— Machinery ............................................ To record depreciation. 3,800 420 4,150 500 2,100 2,350 3,800 Part 3 (all reversing entries dated January 1, 2012) (a) (c) (e) Salaries Payable ........................................... Salaries Expense .................................. To reverse accrued wages. 420 Interest Payable ............................................ Interest Expense ................................... To reverse accrued interest expense. 500 Rental Fees Earned ...................................... Accounts Receivable ............................ To reverse accrued revenues. 2,350 4-69 420 500 2,350 Chapter 04 - Completing the Accounting Cycle Problem 4-6BA (Concluded) Part 4 2012 Jan. 4 15 31 Salaries Expense .......................................... Cash ....................................................... To record payroll. 1,250 Interest Expense ........................................... Cash ....................................................... To record interest payment. 600 Cash ($2,350 + $4,400) ................................. Rental Fees Earned .............................. To record collection of rental fees. 6,750 4-70 1,250 600 6,750 Chapter 04 - Completing the Accounting Cycle SERIAL PROBLEM – SP 4 Serial Problem, Business Solutions (20 minutes) — Part 1 <Note: The general ledger is displayed at the end of Part 2> Closing entries 2011 Dec. 31 Computer Services Revenue .......................... 403 Income Summary ...................................... 901 31,284 31,284 To close the revenue account. 31 Income Summary ............................................. Depreciation Exp–Office Equipment ....... Depreciation Exp–Computer Equipment .. Wages Expense ........................................ Insurance Expense .................................. Rent Expense ........................................... Computer Supplies Expense .................. Advertising Expense ............................... Mileage Expense ...................................... Miscellaneous Expenses ........................ Repairs Expense—Computer ................. 901 612 613 623 637 640 652 655 676 677 684 16,824 Income Summary ............................................. 901 S. Rey, Capital ........................................... 301 14,460 400 1,250 3,875 555 2,475 3,065 2,753 896 250 1,305 To close the expense accounts. 31 14,460 To close the Income Summary account. 31 S. Rey, Capital .................................................. 301 S. Rey, Withdrawals .................................. 302 7,100 7,100 To close the withdrawals account. Note: All accounts with numbers that start with the digits 1 or 2 (the permanent accounts) are unaffected by the closing process. 4-71 Chapter 04 - Completing the Accounting Cycle Serial Problem, SP 4 (Continued) Part 2 BUSINESS SOLUTIONS Post-Closing Trial Balance December 31, 2011 Debit Credit Cash.................................................................................. $ 48,372 Accounts receivable ....................................................... 5,668 Computer supplies .......................................................... 580 Prepaid insurance ........................................................... 1,665 Prepaid rent ..................................................................... 825 Office equipment ............................................................. 8,000 Accumulated depreciation—Office equipment ............ Computer equipment ...................................................... $ 400 20,000 Accumulated depreciation—Computer equipment ..... 1,250 Accounts payable............................................................ 1,100 Wages payable ................................................................ 500 Unearned computer services revenue .......................... 1,500 S. Rey, Capital ................................................................. _______ 80,360 Totals ................................................................................ $ 85,110 $ 85,110 4-72 Chapter 04 - Completing the Accounting Cycle Serial Problem, SP 4 (Continued) [Instructor Note: Ledger includes all entries from prior three months. The Working Papers shorten the solution by showing account balances as of December 31.] General Ledger Cash Date Oct. Nov. Dec. Explanation PR 1 2 5 8 15 17 20 22 31 31 1 2 5 18 22 28 30 30 2 3 4 10 14 20 28 29 31 Debit 45,000 4,800 1,400 4,633 2,208 3,950 1,500 5,625 3,000 4-73 Acct. No. 101 Credit Balance 45,000 3,300 41,700 2,220 39,480 1,420 38,060 42,860 805 42,055 1,728 40,327 41,727 875 40,852 3,600 37,252 320 36,932 41,565 1,125 40,440 42,648 250 42,398 384 42,014 1,750 40,264 2,000 38,264 1,025 37,239 500 36,739 40,689 750 39,939 41,439 47,064 50,064 192 49,872 1,500 48,372 Chapter 04 - Completing the Accounting Cycle Serial Problem, SP 4 (Continued) Date Oct. Nov. Dec. Date Oct. Nov. Dec. Date Oct. Dec. Date Oct. Dec. Date Oct. Date Dec. 6 12 15 22 28 8 18 24 4 28 Accounts Receivable Explanation PR Debit 4,800 1,400 5,208 5,668 3,950 Computer Supplies Explanation PR 3 5 15 31 Prepaid Insurance Explanation PR 5 31 Prepaid Rent Explanation PR 2 31 Office Equipment Explanation PR 1 Acct. No. 106 Credit Balance 4,800 6,200 4,800 1,400 1,400 0 5,208 10,876 2,208 8,668 12,618 3,950 8,668 3,000 5,668 Debit 1,420 1,125 1,100 Acct. No. 126 Credit Balance 1,420 2,545 3,645 3,065 580 Debit 2,220 Acct. No. 128 Credit Balance 2,220 555 1,665 Debit 3,300 Acct. No. 131 Credit Balance 3,300 2,475 825 Debit 8,000 Acct. No. 163 Credit Balance 8,000 Accumulated Depreciation—Office Equipment Acct. No. 164 Explanation PR Debit Credit Balance 31 400 400 4-74 Chapter 04 - Completing the Accounting Cycle Serial Problem, SP 4 (Continued) Date Oct. Date Dec. Date Oct. Dec. Date Dec. Date Dec. Date Oct. Dec. Date Oct. Nov. Dec. 1 Computer Equipment Explanation PR Debit 20,000 Acct. No. 167 Credit Balance 20,000 Accumulated Depreciation—Computer Equipment Acct. No. 168 Explanation PR Debit Credit Balance 31 1,250 1,250 Accounts Payable Explanation PR Debit 3 8 15 1,420 Explanation Wages Payable PR Debit 31 Acct. No. 236 Credit Balance 1,500 1,500 S. Rey, Capital Explanation PR Acct. No. 301 Credit Balance 73,000 73,000 14,460 87,460 80,360 Closing Closing Debit 7,100 S. Rey, Withdrawals Explanation PR 31 30 31 31 Acct. No. 210 Credit Balance 500 500 Unearned Computer Services Revenue Explanation PR Debit 14 1 31 31 Acct. No. 201 Credit Balance 1,420 1,420 0 1,100 1,100 Closing 4-75 Debit 3,600 2,000 1,500 Acct. No. 302 Credit Balance 3,600 5,600 7,100 7,100 0 Chapter 04 - Completing the Accounting Cycle Serial Problem, SP 4 (Continued) Date Oct. Nov. Dec. Date Dec. Date Dec. Date Oct. Nov. Dec. Date Dec. Date Dec. Computer Services Revenue Explanation PR Debit Acct. No. 403 Credit Balance 4,800 4,800 1,400 6,200 5,208 11,408 4,633 16,041 5,668 21,709 3,950 25,659 5,625 31,284 0 6 12 28 2 8 24 20 31 Closing 31 31 Depreciation Expense—Office Equipment Acct. No. 612 Explanation PR Debit Credit Balance 400 400 Closing 400 0 31,284 Depreciation Expense—Computer Equipment Acct. No. 613 Explanation PR Debit Credit Balance 31 1,250 1,250 31 Closing 1,250 0 Wages Expense Explanation PR 31 30 10 31 31 Debit 875 1,750 750 500 Closing Acct. No. 623 Credit Balance 875 2,625 3,375 3,875 3,875 0 31 31 Insurance Expense Explanation PR Debit 555 Closing Acct. No. 637 Credit Balance 555 555 0 Explanation 31 31 Rent Expense PR Closing 4-76 Debit 2,475 Acct. No. 640 Credit Balance 2,475 2,475 0 Chapter 04 - Completing the Accounting Cycle Serial Problem, SP 4 (Concluded) Date Dec. Date Oct. Dec. Date Nov. Dec. Date Nov. Dec. Date Oct. Dec. Date Dec. 31 31 Computer Supplies Expense Explanation PR Debit 3,065 Closing Acct. No. 652 Credit Balance 3,065 3,065 0 20 2 31 Advertising Expense Explanation PR Debit 1,728 1,025 Closing Acct. No. 655 Credit Balance 1,728 2,753 2,753 0 Mileage Expense Explanation PR 1 28 29 31 Debit 320 384 192 Closing Acct. No. 676 Credit Balance 320 704 896 896 0 22 31 Miscellaneous Expense Explanation PR Debit 250 Closing Acct. No. 677 Credit Balance 250 250 0 17 3 31 Repairs Expense—Computer Explanation PR Debit 805 500 Closing Acct. No. 684 Credit Balance 805 1,305 1,305 0 31 31 31 Income Summary Explanation PR Debit Closing Closing 16,824 Closing 14,460 Acct. No. 901 Credit Balance 31,284 31,284 14,460 0 4-77 Chapter 04 - Completing the Accounting Cycle Reporting in Action — BTN 4-1 1. The revenue items from its income statement must be identified, and those would be credited to Income Summary as step 1 in the closing entry process. For Research In Motion’s fiscal year ended February 27, 2010, its revenue items consist of ($ thousands): (1) total revenue of $14,953,224, and (2) investment income of $28,640. Thus, its total revenue that is closed to Income Summary is $14,981,864. (All amounts are in thousands.) 2. The total expenses that would be debited to Income Summary as step 2 in the closing entry process must be computed. Research In Motion’s total expenses for the fiscal year ended February 27, 2010, are (in thousands): Cost of sales .................................................................. $ 8,368,958 Research and development .......................................... 964,841 Selling, marketing and administration......................... 1,907,398 Amortization ................................................................... 310,357 Litigation ......................................................................... 163,800 Provision for income taxes ........................................... 809,366 Total expenses ............................................................... $12,524,720 3. The balance of Income Summary before it is closed as of February 27, 2010, equals the net income for Research In Motion of $2,457,144 ($ thousands). This can also be computed from taking $14,981,864 from part 1 and subtracting $12,524,720 from part 2. 4. From the cash flow statement, we see that Research In Motion paid no cash dividends. 5. Solution depends on the financial statements accessed. 4-78 Chapter 04 - Completing the Accounting Cycle Comparative Analysis 1. Research In Motion’s current ratios: Current year ........ $5,813 / $2,432 Prior year ............. $4,842 / $2,115 — BTN 4-2 = 2.39 = 2.29 Apple’s current ratios: Current year ........ $31,555 / $11,506 = 2.74 Prior year ............. $30,006 / $11,361 = 2.64 2. In both years, Apple has the higher current ratio (2.74 vs. 2.39 for the current year; 2.64 vs. 2,29 in the prior year), suggesting a better ability to pay short-term obligations. Overall, neither company is in immediate danger of failing to make payment on short-term obligations. 3. Research In Motion’s current ratio improved, increasing from 2.29 to 2.39. RadioShack’s current ratio improved from 2.64 to 2.74. 4. Apple’s current ratio is above (better than) the industry average for both years, and Research In Motion’s is below (worse than) the industry average for both years. However, neither company appears at risk of failing to pay its current creditors. 4-79 Chapter 04 - Completing the Accounting Cycle Ethics Challenge — BTN 4-3 1. There are several courses of action that Tamira could have taken. Two possibilities follow: a. She could have consulted with the president and told him that finalized financial statements would not be ready by the time of the meeting. She could explain that delay in financial statement preparation is a normal event given the need to wait for final information to prepare accurate adjustments. Possibly the meeting could be rescheduled or Tamira could have asked how the president preferred her to proceed. b. The estimation decision was not a bad choice in itself, but she should have informed the president. Tamira probably should have used less optimistic estimates instead of recording expenses on the low side. Users of financial statements normally prefer knowing worst-case scenarios over best-case outcomes. Use of estimates gets the financial statements closer to their final form than ignoring the adjustments completely. 2. Students may offer one of the above alternatives or another response they may think of, given the situation. Try to generate a discussion of ethical concerns and the impact of her decisions on the well-being of users (such as the bankers and the investors in the banks). 4-80 Chapter 04 - Completing the Accounting Cycle Communicating in Practice — BTN 4-4 TO: _____________________ FROM: _____________________ DATE: ______________________ SUBJECT: CLARIFICATIONS—OBJECTIVE OF THE CLOSING PROCESS [Note: Following is a sample of what the memorandum’s contents might include.] When we speak of “closing the books” or the closing process we are not talking about ending or closing the business nor doing anything that reflects this thinking in the financial statements. Let me use an analogy to explain the concept of the closing process and then you will see the distinction more clearly. Scoreboards are used to temporarily hold information that will allow us to determine who won or lost in an athletic game or event. When the athletic event is over, the result of the game is permanently recorded elsewhere-probably in the team’s record book. If the scoreboard was not cleared before the start of a new game, the scores from the second game would be combined with scores from the first game. As a result, the scoreboard would reflect data or scores that were not relevant to either game. You can see that the scoreboard must be zeroed-out to prepare it for accumulating data to determine the outcome of the next game. The revenue and expense accounts temporarily hold the information to determine if the owner(s) won or lost in the game of business. Each fiscal period should be viewed as a separate game. After the data in these accounts has allowed us to determine if the owner(s) won or lost, in other words, the net income or loss, these accounts must be cleared to accumulate data for the next game or period. We record the score for the game of business, or the net income or loss, in the permanent recordbook or the capital account. A win, or net income, increases capital and a loss, or net loss, decreases capital. I hope this memo clarifies the objective of the closing process. [Note: The memorandum need not discuss the income summary account since the assignment requires explaining the concept, not the procedure.] 4-81 Chapter 04 - Completing the Accounting Cycle Taking It to the Net — BTN 4-5 1. The Motley Fool states that a benchmark of 1.5 is generally regarded as sufficient to meet near-term operating needs. 2. One should always check a company’s current ratio (as well as any other ratio) against its main competitors in a given industry. Industries have their own norms as far as what values of current ratios make sense and which do not. 3. A current ratio that is too high can suggest that a company is hoarding assets instead of using them to effectively grow the business—this is an inefficient use of resources that can potentially impair long-term returns. Teamwork in Action — BTN 4-6 [Note: Each team member will be working on a different component of the solution and will ultimately combine information and verify the final check figures using the accounting equation.] 1. Accounts and adjusted balances to be extended to Balance Sheet columns: Trial Balance Account Title Debit Credit Cash ..................................$15,000 Accounts receivable ......... Supplies ............................ 11,000 Prepaid insurance ............ 2,000 Equipment ........................ 24,000 Acc. deprec—Equip .......... $ 6,000 Accounts payable ............. 2,000 D. Noseworthy, Capital ..... 31,000 D. Noseworthy, Withdrawals .................... 5,000 Adjustments Debit Credit (d) 500 (c) 7,000 (a) 1,200 (b) 3,000 Balance Sheet Debit Credit $15,000 500 4,000 800 24,000 9,000 2,000 31,000 5,000 Total Assets = $44,300 - $9,000 = $35,300 (Cash + AR + Supplies + Prepaid Ins. + Equipment - Accum. Depreciation) Total Liabilities = $2,000 (only accounts payable) 4-82 Chapter 04 - Completing the Accounting Cycle Teamwork in Action (Continued) 2. Adjusted revenue account balance: Trial Balance Title Debit Credit Investigation Fees Earned ......................................... 32,000 Income Statement Debit Credit Adjustments Debit Credit (d) 500 32,500 Closing entry: Account Titles and Explanation Investigation Fees Earned Income Summary To close revenue accounts to Income Summary Debit 32,500 Credit 32,500 3. Adjusted balances of expense accounts: Title Rent Expense Insurance Expense Depreciation Expense Supplies Expense Trial Balance Debit Credit 14,000 Adjustments Debit Credit (a) 1,200 (b) 3,000 (c) 7,000 Income Statement Debit Credit 14,000 1,200 3,000 7,000 Closing entry: Account Titles and Explanation Income Summary Rent Expense Insurance Expense Depreciation Expense Supplies Expense To close expense accounts to Income Summary 4-83 Debit 25,200 Credit 14,000 1,200 3,000 7,000 Chapter 04 - Completing the Accounting Cycle Teamwork in Action (Continued) 4. (4) D. Noseworthy, Capital 5,000 31,000 7,300 (3) 33,300 Ending (2) (3) Income Summary 25,200 32,500 (1) 7,300 Third and Fourth closing entries: Account Titles and Explanation Income Summary D. Noseworthy, Capital To close Income Summary to Capital D. Noseworthy, Capital D. Noseworthy, Withdrawals To close Withdrawals to Capital Credit 7,300 5,000 5,000 5. Proving the accounting equation: ASSETS = LIABILITIES + OWNER’S EQUITY $35,300 = $2,000 Debit 7,300 + $ 33,300 4-84 Chapter 04 - Completing the Accounting Cycle Entrepreneurial Decision — BTN 4-7 1. A classified balance sheet classifies liabilities into current and noncurrent. The current liabilities are those that are due in the short-term, and must be paid soon. In addition, some assets are also classified as current. These assets are those that can be used to satisfy the current liabilities. Keith can use this information to calculate his current ratio. This will give him an idea of how liquid his firm is and how easy it will be for him to satisfy short-term liabilities. 2. To better understand his company’s operations, he must make sure that all revenues earned in a particular accounting period are included in that period’s income statement. In addition, he must match his expenses to the revenues. Without closing entries, revenues and expenses would continue to accumulate from one period to the next. Closing entries transfer the balances in the temporary revenues, expenses, and owner’s withdrawals to Keith’s permanent equity account. These temporary accounts then start each accounting period with a zero balance. These temporary account balances then reflect only the current accounting period’s activities. 3. Closing procedures will accomplish two objectives for Keith. First, the temporary accounts will be reset to zero and be readied for use in the next accounting period. Second, the profitability of the period will be updated to the company’s equity account. Hitting the Road — BTN 4-8 There is no formal solution to this field activity. The instructor may wish to tally students’ findings to show results across companies as to use of work sheets, software preferences, and time it takes to prepare finalized annual financial statements. Global Decision — BTN 4-9 1. Current ratio Current year: 23,613 / 15,188 = 1.55 Prior year: 24,470 / 20,355 = 1.20 2. Analysis: Nokia’s current ratio increased (improved) for the current year. This puts Nokia in an improved liquidity position (meaning it is more able to meet current obligations). 4-85
