Upload
ummarajaved
View
1.551
Download
3
Embed Size (px)
DESCRIPTION
mabjofowfhihdsvchvsiuc
Citation preview
Chapter 3
Adjusting Accounts and Preparing Financial Statements
QUESTIONS
1. The cash basis of accounting reports revenues when cash is received while the accrual basis reports revenues when they are earned. The cash basis reports expenses when cash is paid while the accrual basis reports expenses when they are incurred (and matched with revenues they generated).
2. The accrual basis of accounting generally provides a better indication of company performance and financial condition than does the cash basis. Also, the accrual basis increases the comparability of financial statements from one period to the next. Thus, business decision makers generally prefer the accrual basis.
3. Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year.
4. A prepaid expense is reported as an asset on the balance sheet.
5. Depreciable plant assets (such as equipment, buildings, and machinery) lead to adjustments for depreciation.
6. The Accumulated Depreciation contra account is used for depreciation. It provides financial statement users with additional information about the relative age of the assets. Without the contra account information, the reader would not be able to tell whether the assets are new or in need of replacement.
7. An unearned revenue is reported as a liability on the balance sheet.
8. An accrued revenue is revenue that is earned but is not yet received in cash (and/or other assets) and the customer has not been billed prior to the end of the period. Therefore, end-of-period adjustments are made to record accrued revenue. Examples are interest income that has been earned but not collected and revenues from services performed that are neither collected nor billed.
9. If prepaid expenses are initially recorded with debits to expense accounts, then the prepaid expenses asset accounts are debited in the adjusting entries.
10. For Krispy Kreme, the two accounts of Prepaid Expenses and Property and Equipment require adjusting entries. The expense account(s) related to the prepaid account and the depreciation expense account would be understated on the income statement if Krispy Kreme fails to adjust these two asset accounts. If the adjusting entries are not made, net income would be overstated. Note: Students might also correctly identify accounts receivable, deferred income taxes and intangible assets as needing adjustment.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 119
11. In addition to prepayments, Tastykake must make adjusting entries to Property, Plant and Equipment, Deferred Income Taxes, Accrued Payroll and Employee Benefits, and possibly other assets and liabilities such as Receivables (for bad debts).
12. The Accrued Wages Expense would be reported as part of “Accrued Expenses and Other Liabilities” on Harley-Davidson’s balance sheet.
QUICK STUDIES
Quick Study 3-1 (10 minutes)
a. UR Unearned revenueb. PE Prepaid expenses (Depreciation)c. AE Accrued expensesd. AR Accrued revenuee. PE Prepaid expenses
Quick Study 3-2 (10 minutes)
a. Insurance Expense....................................................... 1,800Prepaid Insurance................................................. 1,800
To record 6-month insurance coverage expired.
b. Supplies Expense......................................................... 2,700Supplies.................................................................. 2,700
To record supplies used during the year.($1,000 + $3,000 – [?] = $1,300)
Quick Study 3-3 (10 minutes)
a. Depreciation Expense—Equipment............................ 5,000Accumulated Depreciation—Equipment............. 5,000
To record depreciation expense for the year.($30,000 - $5,000) / 5 years = $5,000
b. No depreciation adjustments are made for land as it is expected to last indefinitely.
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition120
Quick Study 3-4 (15 minutes)
a. Unearned Revenue........................................................ 15,000Legal Revenue....................................................... 15,000
To recognize legal revenue earned (20,000 x 3/4).
b. Unearned Subscription Revenue................................ 2,400Subscription Revenue........................................... 2,400
To recognize subscription revenue earned.[100 x ($48 / 12 month) x 6 months]
Quick Study 3-5 (10 minutes)
Salaries Expense........................................................... 400Salaries Payable.................................................... 400
To record salaries incurred but not yet paid.[One student earns, $100 x 4 days, M-R]
Quick Study 3-6 (15 minutes)
Accounts Debited and Credited Financial Statementa. Debit Unearned Revenue Balance Sheet
Credit Revenue Earned Income Statement
b. Debit Depreciation Expense Income StatementCredit Accumulated Depreciation Balance Sheet
c. Debit Wages Expense Income StatementCredit Wages Payable Balance Sheet
d. Debit Accounts Receivable Balance SheetCredit Revenue Earned Income Statement
e. Debit Insurance Expense Income StatementCredit Prepaid Insurance Balance Sheet
Quick Study 3-7 (10 minutes)
Adjusting entry Debit Credit
1. Accrue salaries expense f d
2. Adjust the Unearned Services Revenue account e g
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 121
to recognize earned revenue
3. Record the earning of services revenue for which cash will be received the following period
a g
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition122
Quick Study 3-8 (10 minutes)
The answer is c.
Explanation:The debit balance in Prepaid Insurance was reduced by $400, implying a $400 debit to Insurance Expense. The credit balance in Interest Payable increased by $800, implying an $800 debit to Interest Expense.
Quick Study 3-9 (10 minutes)
Cash Accounting:Revenues (cash receipts)....................................................... $33,000 Expenses (cash payments: $22,500 - $2,250 + $3,750)....... 24,000Net income .............................................................................. $ 9,000
Accrual Accounting:Revenues (earned) ................................................................. $39,000Expenses (incurred) ............................................................... 22,500Net income............................................................................... $16,500
Quick Study 3-10 (15 minutes)
The answer is 2.
Explanation:Insurance premium error:
Understates expenses (and overstates assets) by........... $1,600Accrued salaries error:
Understates expenses (and understates liabilities) by... . 1,000Combination of errors:
Understates expenses by..................................................... $2,600Overstates assets by............................................................. $1,600Understates liabilities by...................................................... $1,000
Quick Study 3-11 (10 minutes)
Profit margin = $37,925 / $390,000 = 9.7%
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 123
Interpretation: For every one dollar that Yang Company records as revenue, it earns 9.7 cents in net income. Yang’s 9.7% is markedly lower than competitors’ average profit margin of 15%—it must improve performance.
Quick Study 3-12A (5 minutes)
The answer is d.
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition124
EXERCISES
Exercise 3-1 (15 minutes)
1. B. 4. F2. E. 5. D3. C. 6. A.
Exercise 3-2 (30 minutes)
a. Unearned Fee Revenue..................................................... 10,000Fee Revenue.................................................................. 10,000
To record earned portion of fee received in advance.
b. Wages Expense................................................................. 9,000Wages Payable.............................................................. 9,000
To record wages accrued but not yet paid.
c. Depreciation Expense—Equipment................................. 19,127Accumulated Depreciation—Equipment..................... 19,127
To record depreciation expense for the year.
d. Office Supplies Expense.................................................. 5,242Office Supplies**............................................................ 5,242
To record office supplies used ($480 + $5,349 - $587).
e. Insurance Expense............................................................ 2,800Prepaid Insurance*........................................................ 2,800
To record insurance coverage expired ($5,000 - $2,200).
f. Interest Receivable.......................................................... 750 Interest Revenue......................................................... 750 To record interest earned but not yet received.
g. Interest Expense.............................................................. 3,500 Interest Payable........................................................... 3,500 To record interest incurred but not yet paid.
Notes:Prepaid Insurance* Office Supplies**
Beg. Bal. 5,000 Beg. Bal. 480Purch. 5,349
? Used ? Used
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 125
End. Bal. 2,200 End. Bal. 587
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition126
Exercise 3-3 (25 minutes)
a. Depreciation Expense—Equipment................................. 16,000Accumulated Depreciation—Equipment..................... 16,000
To record depreciation expense for the year.
b. Insurance Expense............................................................ 5,960Prepaid Insurance*........................................................ 5,960
To record insurance coverage that expired ($7,000 - $1,040).
c. Office Supplies Expense.................................................. 2,626Office Supplies**............................................................ 2,626
To record office supplies used ($300 + $2,680 - $354).
d. Unearned Fee Revenue..................................................... 5,000Fee Revenue.................................................................. 5,000
To record earned portion of fee received in advance ($10,000 x 1/2).
e. Insurance Expense............................................................ 4,600Prepaid Insurance......................................................... 4,600
To record insurance coverage that expired.
f. Wages Expense................................................................. 4,000Wages Payable.............................................................. 4,000
To record wages accrued but not yet paid.
Notes:Prepaid Insurance* Office Supplies**
Bal. Bal. 7,000 Beg. Bal. 300Purch. 2,680
? Used ? UsedEnd. Bal. 1,040 End. Bal. 354
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 127
Exercise 3-4 (15 minutes)
a. Adjusting entry:
2005
Dec. 31 Wages Expense..............................................................500Wages Payable........................................................... 500
To record accrued wages for one day. (5 workers x $100)
b. Payday entry:
2006Jan. 4 Wages Expense.............................................................. 1,500
Wages Payable...............................................................500Cash............................................................................. 2,000
To record accrued and current wages.
Exercise 3-5 (15 minutes)
a. $1,650b. $5,700c. $10,080d. $1,375
Proof:(a) (b) (c) (d)
Supplies available – prior year-end......... $ 300 $1,600 $ 1,360 $1,375
Supplies purchased in current year........ 2,100 5,400 10,080 6,000
Total supplies available............................ 2,400 7,000 11,440 7,375
Supplies available – current year-end..... (750 ) (5,700 ) (1,840 ) (800 )
Supplies expense for current year........... $1,650 $1,300 $ 9,600 $6,575
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition128
Exercise 3-6 (25 minutes)
a.Apr. 30 Legal Fees Expense............................................ 2,500
Legal Fees Payable..................................... 2,500To record accrued legal fees.
May 12 Legal Fees Payable............................................. 2,500Cash.............................................................. 2,500
To pay accrued legal fees.
b.Apr. 30 Interest Expense................................................. 2,080
Interest Payable........................................... 2,080To record accrued interest expense(9.6% x $780,000 x 10/360) or ($6,240 x 10/30).
May 20 Interest Payable................................................... 2,080Interest Expense................................................. 4,160
Cash.............................................................. 6,240To record payment of accrued and current interest expense (9.6% x $780,000 x 20/360).
c.Apr. 30 Salaries Expense................................................. 3,600
Salaries Payable.......................................... 3,600To record accrued salaries($9,000 x 2/5 week).
May 3 Salaries Payable.................................................. 3,600Salaries Expense................................................. 5,400
Cash.............................................................. 9,000To record payment of accrued and current salaries ($9,000 x 3/5 week).
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 129
Exercise 3-7 (20 minutes)
Balance Sheet Insurance Asset using Insurance Expense usingAccrual Basis*
Cash Basis
Accrual Basis**
Cash Basis
Dec. 31, 2003....................$11,700 $0 2003...................................$ 4,500 $16,200
Dec. 31, 2004....................6,300 0 2004...................................5,400 0
Dec. 31, 2005....................900 0 2005................................... 5,400 0
Dec. 31, 2006....................0 0 2006................................... 900 0
Total..................................$16,200 $16,200
EXPLANATIONS:
*Accrual asset balance equals months left in the policy x $450 per month (monthly cost is computed as $450, from $16,200 divided by 36 months).
Months Left Balance12/31/2003... 26 $11,70012/31/2004... 14 6,300 12/31/2005... 2 900 12/31/2006... 0 0
**Accrual insurance expense equals months covered in the year x $450 per month.
Months Covered Expense2003...................................10 $ 4,5002004...................................12 5,4002005...................................12 5,4002006...................................2 900
$16,200
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition130
Exercise 3-8 (25 minutes)
Dec. 31 Accounts Receivable.............................................. 1,800Fees Earned..................................................... 1,800
To record earned but unbilled fees (30% x $6,000).
31 Unearned Fees......................................................... 4,200Fees Earned..................................................... 4,200
To record earned fees collected in advance (70% x $6,000).
31 Depreciation Expense—Computers....................... 1,500Accumulated Depreciation—Computers...... 1,500
To record depreciation on computers.
31 Depreciation Expense—Office Furniture................ 1,750Accumulated Depreciation—Office Furniture.... 1,750
To record depreciation on office furniture.
31 Salaries Expense.................................................... 2,450Salaries Payable.............................................. 2,450
To record accrued salaries.
31 Insurance Expense.................................................. 1,300Prepaid Insurance........................................... 1,300
To record expired prepaid insurance.
31 Office Supplies Expense......................................... 480Office Supplies................................................ 480
To record use of office supplies.
31 Utilities Expense...................................................... 70Utilities Payable............................................... 70
To record incurred and unpaid utility costs.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 131
Exercise 3-9 (10 minutes)
a. $5,390 / $44,830 = 12.0%b. $87,644 / $398,954 = 22.0%c. $93,385 / $257,082 = 36.3%d. $55,234 / $1,458,999 = 3.8%e. $70,158 / $435,925 = 16.1%
Analysis and Interpretation: Company c has the highest profitability according to the profit margin ratio. Company c earns 36.3 cents in net income for each one dollar of net sales recorded.
Exercise 3-10A (30 minutes)a.Dec. 1 Supplies Expense............................................ 3,000
Cash.......................................................... 3,000Purchased supplies.
b.Dec. 2 Insurance Expense.......................................... 1,440
Cash.......................................................... 1,440Paid insurance premiums.
c.Dec.15 Cash.................................................................. 12,000
Remodeling Fees Earned........................ 12,000Received fees for work to be done.
d.Dec.28 Cash.................................................................. 3,600
Remodeling Fees Earned........................ 3,600Received fees for work to be done.
e.Dec.31 Supplies........................................................... 1,920
Supplies Expense.................................... 1,920Adjust expenses for unused supplies.
f.Dec.31 Prepaid Insurance ($1,440 - $240)................. 1,200
Insurance Expense.................................. 1,200Adjust expenses for unexpired coverage.
g.Dec.31 Remodeling Fees Earned .............................. 9,300
Unearned Remodeling Fees................... 9,300Adjusted revenues for unfinished projects ($12,000 + $3,600 - $6,300).
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition132
Exercise 3-11A (25 minutes)
a. Initial credit recorded in the Unearned Fees account:July 1 Cash....................................................................... 2,000
Unearned Fees.............................................. 2,000Received fees for work to be done.
6 Cash....................................................................... 8,400Unearned Fees.............................................. 8,400
Received fees for work to be done.
12 Unearned Fees...................................................... 2,000Fees Earned................................................... 2,000
Completed work for customer.
18 Cash....................................................................... 7,500Unearned Fees.............................................. 7,500
Received fees for work to be done.
27 Unearned Fees...................................................... 8,400Fees Earned................................................... 8,400
Completed work for customer.
31 No adjusting entries required.
b. Initial credit recorded in the Fees Earned account:July 1 Cash....................................................................... 2,000
Fees Earned................................................... 2,000Received fees for work to be done.
6 Cash....................................................................... 8,400Fees Earned................................................... 8,400
Received fees for work to be done.
12 No entry required.18 Cash....................................................................... 7,500
Fees Earned................................................... 7,500Received fees for work to be done.
27 No entry required. 31 Fees Earned.......................................................... 7,500
Unearned Fees.............................................. 7,500Adjusted to reflect unearned fees for unfinished job.
c. Under the first method (and using entries from a):Unearned Fees = $2,000 + $8,400 - $2,000 + $7,500 - $8,400 = $7,500Fees Earned = $2,000 + $8,400 = $10,400
Under the second method (and using entries from b):Unearned Fees = $7,500
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 133
Fees Earned = $2,000 + $8,400 + $7,500 - $7,500 = $10,400[Note: Both procedures yield identical results in the financial statements.]
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition134
PROBLEM SET A
Problem 3-1A (15 minutes)
1. G. 4. B. 7. H. 10. D.2. E. 5. G. 8. E. 11. A.3. I. 6. C. 9. F. 12. D.
Problem 3-2A (35 minutes) Part 1
Adjustment (a)Dec.31 Office Supplies Expense......................... 12,760
Office Supplies................................. 12,760To record cost of supplies used($3,000 + $12,400 - $2,640).
Adjustment (b)31 Insurance Expense.................................. 12,312
Prepaid Insurance............................ 12,312To record annual insurance coverage cost.
Policy Cost per MonthMonths Active
in 2005 2005 CostA $660 ($15,840/24 mo.) 12 $ 7,920B 363 ($13,068/36 mo.) 9 3,267C 225 ($ 2,700 /12 mo.) 5 1,125
Total $12,312
Adjustment (c)31 Salaries Expense (2 days x $2,100)........ 4,200
Salaries Payable............................... 4,200To record accrued but unpaid wages.
Adjustment (d)31 Depreciation Expense—Building........... 27,000
Accumulated Depreciation—Building 27,000To record annual depreciation expense [($855,000 -$45,000) / 30 years = $27,000]
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 135
Problem 3-2A (Continued)
Adjustment (e) Dec.31 Rent Receivable....................................... 2,400
Rent Earned...................................... 2,400To record earned but unpaid Dec. rent.
Adjustment (f)
31 Unearned Rent......................................... 4,350Rent Earned...................................... 4,350
To record the amount of rent earned for November and December (2 x $2,175).
Part 2
Cash Payment for (c)
Jan. 6 Salaries Payable...................................... 4,200Salaries Expense*.................................... 6,300
Cash................................................... 10,500To record payment of accrued and current salaries. *(3 days x $2,100)
Cash Payment for (e)15 Cash.......................................................... 4,800
Rent Receivable................................ 2,400Rent Earned...................................... 2,400
To record past due rent for two months.
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition136
Problem 3-3A (90 minutes) Parts 1 and 2
Cash EquipmentUnadj. Bal. 26,000 Unadj. Bal. 70,000
Accounts ReceivableAccumulated Depreciation—
EquipmentUnadj. Bal. 0 Unadj. Bal. 16,000(f) 7,500 (c) 12,000Adj. Bal. 7,500 Adj. Bal. 28,000
Teaching Supplies Accounts PayableUnadj. Bal. 10,000 Bal. 36,000
(b) 7,400Adj. Bal. 2,600 Salaries Payable
Unadj. Bal. 0Prepaid Insurance (g) 400
Unadj. Bal. 15,000 Adj. Bal. 400(a) 3,000
Adj. Bal. 12,000 Unearned Training FeesUnadj. Bal. 11,000
Prepaid Rent (e) 4,400Unadj. Bal. 2,000 Adj. Bal. 6,600
(h) 2,000Adj. Bal. 0 T. Watson, Capital
Bal. 63,600Professional Library
Bal. 30,000 T. Watson, WithdrawalsBal. 40,000
Accumulated Depreciation—Professional Library
Unadj. Bal. 9,000(d) 6,000
Adj. Bal. 15,000
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 137
Problem 3-3A (Continued)
Tuition Fees Earned Rent ExpenseUnadj. Bal. 102,000 Unadj. Bal. 22,000(f) 7,500 (h) 2,000Adj. Bal. 109,500 Adj. Bal. 24,000
Training Fees Earned Teaching Supplies ExpenseUnadj. Bal. 38,000 Unadj. Bal. 0(e) 4,400 (b) 7,400Adj. Bal. 42,400 Adj. Bal. 7,400
Depreciation Expense—Professional Library Advertising Expense
Unadj. Bal. 0 Bal. 7,000(d) 6,000Adj. Bal. 6,000
Depreciation Expense—Equipment Utilities Expense
Unadj. Bal. 0 Bal. 5,600(c) 12,000Adj. Bal. 12,000
Salaries ExpenseUnadj. Bal. 48,000(g) 400Adj. Bal. 48,400
Insurance ExpenseUnadj. Bal. 0(a) 3,000Adj. Bal. 3,000
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition138
Problem 3-3A (Continued)Part 2
Adjustment (a)Dec. 31 Insurance Expense.......................................................3,000
Prepaid Insurance.................................................. 3,000To record the insurance expired.
Adjustment (b)31 Teaching Supplies Expense........................................7,400
Teaching Supplies.................................................. 7,400To record supplies used ($10,000-$2,600).
Adjustment (c)31 Depreciation Expense—Equipment............................12,000
Accumulated Depreciation—Equipment.................... 12,000To record equipment depreciation.
Adjustment (d)31 Depreciation Expense—Profess. Library...................6,000
Accumul. Depreciation—Profess. Library................ 6,000To record professional library depreciation.
Adjustment (e)31 Unearned Training Fees..............................................4,400
Training Fees Earned............................................. 4,400To record training fees earned that were collected in advance.
Adjustment (f)31 Accounts Receivable...................................................7,500
Tuition Fees Earned............................................... 7,500To record tuition earned ($3,000 x 2 1/2 months).
Adjustment (g)31 Salaries Expense..........................................................400
Salaries Payable..................................................... 400To record accrued salaries (2 days x $100 x 2).
Adjustment (h)31 Rent Expense................................................................2,000
Prepaid Rent........................................................... 2,000To record expiration of prepaid rent.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 139
Problem 3-3A (Continued) Part 3
Watson Technical InstituteAdjusted Trial Balance
December 31, 2005Debit Credit
Cash.......................................................................... $ 26,000Accounts receivable................................................ 7,500Teaching supplies .................................................. 2,600Prepaid insurance.................................................... 12,000Prepaid rent.............................................................. 0Professional library................................................. 30,000Accumulated depreciation—Professional library.... $ 15,000Equipment................................................................ 70,000Accumulated depreciation—Equipment................ 28,000Accounts payable.................................................... 36,000Salaries payable....................................................... 400Unearned training fees............................................ 6,600T. Watson, Capital.................................................... 63,600T. Watson, Withdrawals.......................................... 40,000Tuition fees earned.................................................. 109,500Training fees earned................................................ 42,400Depreciation expense—Professional library........ 6,000Depreciation expense—Equipment....................... 12,000Salaries expense ..................................................... 48,400Insurance expense.................................................. 3,000Rent expense............................................................ 24,000Teaching supplies expense.................................... 7,400Advertising expense................................................ 7,000Utilities expense....................................................... 5,600 _______Totals........................................................................ $301,500 $301,500
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition140
Problem 3-3A (Continued)Part 4
WATSON TECHNICAL INSTITUTEIncome Statement
For Year Ended December 31, 2005Revenues Tuition fees earned............................................ $109,500 Training fees earned.......................................... 42,400 Total revenues.................................................... $151,900 Expenses Depreciation expense—Professional library... 6,000 Depreciation expense—Equipment.................. 12,000 Salaries expense................................................ 48,400 Insurance expense............................................. 3,000 Rent expense...................................................... 24,000 Teaching supplies expense............................... 7,400 Advertising expense.......................................... 7,000 Utilities expense................................................. 5,600 Total expenses................................................... 113,400 Net income............................................................ $ 38,500
WATSON TECHNICAL INSTITUTEStatement of Owner’s Equity
For Year Ended December 31, 2005
T. Watson, Capital, December 31, 2004.............. $ 63,600Plus: Net income.................................................. 38,500
102,100 Less: Owner withdrawals.................................... 40,000 T. Watson, Capital, December 31, 2005.............. $ 62,100
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 141
Problem 3-3A (Concluded)
WATSON TECHNICAL INSTITUTEBalance Sheet
December 31, 2005Assets
Cash................................................................................. $ 26,000 Accounts receivable...................................................... 7,500 Teaching supplies.......................................................... 2,600 Prepaid insurance.......................................................... 12,000 Professional library........................................................ $30,000 Accumulated depreciation—Professional library....... (15,000) 15,000Equipment....................................................................... 70,000 Accumulated depreciation—Equipment...................... (28,000) 42,000 Total assets..................................................................... $105,100
LiabilitiesAccounts payable........................................................... $ 36,000 Salaries payable............................................................. 400 Unearned training fees.................................................. 6,600 Total liabilities................................................................ 43,000
EquityT. Watson, Capital.......................................................... 62,100Total liabilities and equity............................................. $105,100
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition142
Problem 3-4A (45 minutes) — Part 1
AccountUnadjusted
Trial Balance AdjustmentsAdjusted
Trial Balance
Cash................................ $ 27,000 $ 27,000
Accounts receivable.......... 12,000 (a)
10,460 22,460
Office supplies.................. 18,000 (b)
15,000 3,000
Prepaid insurance............. 7,320 (c) 2,440 4,880
Office equipment............... 92,000 92,000
Accumulated depreciation —Office equipment.......... $ 12,000 (d
)6,000 $ 18,000
Accounts payable............. 9,300 (e) 900 10,200
Interest payable................. (f) 800 800
Salaries payable................ (g)
6,600 6,600
Unearned consulting fees... 16,000 (h) 1,700 14,300
Long-term notes payable.... 44,000 44,000
J. Winner, Capital............... 28,420 28,420
J. Winner, Withdrawals....... 10,000 10,000
Consulting fees earned........................... 156,000
(a)(h)
10,4601,700 168,160
Depreciation expense— Office equipment............. (d) 6,000 6,000
Salaries expense............... 71,000 (g) 6,600 77,600
Interest expense................ 1,400 (f) 800 2,200
Insurance expense............ (c)
2,440 2,440
Rent expense.................... 13,200 13,200
Office supplies expense..... (b) 15,000 15,000
Advertising expense.......... 13,800 _______ (e)
90 0
______ 14,700 _______
Totals.............................. $265,720 $265,720 $43,900 $43,90
0
$290,480 $290,480
Adjustment description:
(a) Earned but uncollected revenues.
(b) Cost of consumed office supplies.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 143
(c) Cost of expired insurance coverage.
(d) Depreciation expense on office equipment.
(e) Incurred but unpaid advertising expense.
(f) Incurred but unpaid interest expense.
(g) Incurred but unpaid salaries expense.
(h) Earned revenues previously received in advance.
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition144
Problem 3-4A
Part 2
JJW COMPANYIncome Statement
For Year Ended July 31, 2005
Revenues Consulting fees earned ................................ $168,160 Expenses Depreciation expense—Office equipment. . $ 6,000 Salaries expense .......................................... 77,600 Interest expense ........................................... 2,200 Insurance expense ....................................... 2,440 Rent expense ................................................ 13,200 Office supplies expense .............................. 15,000 Advertising expense .................................... 14,700 Total expenses.............................................. 131,140 Net income....................................................... $ 37,020
JJW COMPANYStatement of Owner’s EquityFor Year Ended July 31, 2005
J. Winner, Capital, July 31, 2004.................... $28,420
Plus: Net income............................................. 37,020
65,440
Less: Owner withdrawals............................... 10,000
J. Winner, Capital, July 31, 2005.................... $55,440
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 145
Problem 3-4A (Concluded)Part 2
JJW COMPANYBalance Sheet
July 31, 2005
AssetsCash............................................................................. $ 27,000Accounts receivable................................................... 22,460Office supplies............................................................ 3,000Prepaid insurance....................................................... 4,880Office equipment......................................................... $92,000Accumulated depreciation—Office equipment........ (18,000) 74,000 Total assets................................................................. $131,340
LiabilitiesAccounts payable....................................................... $ 10,200Interest payable........................................................... 800Salaries payable.......................................................... 6,600Unearned consulting fees.......................................... 14,300Long-term notes payable........................................... 44,000 Total liabilities............................................................. 75,900
EquityJ. Winner, Capital........................................................ 55,440 Total liabilities and equity.......................................... $131,340
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition146
Problem 3-5A (50 minutes) Part 1
CALLAHAY COMPANYIncome Statement
For Year Ended December 31, 2005
Revenues Fees earned.............................................. $420,000 Interest earned.......................................... 16,000 Total revenues.......................................... $436,000 Expenses Depreciation expense—Automobiles..... 18,000 Depreciation expense—Equipment........ 10,000 Salaries expense...................................... 180,000 Wages expense........................................ 32,000 Interest expense....................................... 24,000 Office supplies expense.......................... 26,000 Advertising expense................................ 50,000 Repairs expense—Automobiles............. 16,800 Total expenses......................................... 356,800 Net income.................................................. $ 79,200
CALLAHAY COMPANYStatement of Owner's Equity
For Year Ended December 31, 2005
J. Callahay, Capital, December 31, 2004. . $247,800
Plus: Net income....................................... 79,200
327,000
Less: Withdrawals by owner.................... 38,000
J. Callahay, Capital, December 31, 2005. . $289,000
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 147
Problem 3-5A (Concluded)
CALLAHAY COMPANYBalance Sheet
December 31, 2005
AssetsCash......................................................................... $ 22,000Accounts receivable.............................................. 44,000Interest receivable.................................................. 10,000Notes receivable (due in 90 days)......................... 160,000Office supplies........................................................ 8,000Automobiles............................................................ $160,000Accumulated depreciation—Automobiles........... (42,000) 118,000Equipment............................................................... 130,000Accumulated depreciation—Equipment.............. (10,000) 120,000Land......................................................................... 70,000 Total assets............................................................. $552,000
LiabilitiesAccounts payable................................................... $ 88,000Interest payable...................................................... 12,000Salaries payable..................................................... 11,000Unearned fees......................................................... 22,000Long-term notes payable....................................... 130,000 Total liabilities........................................................ 263,000
EquityJ. Callahay, Capital................................................. 289,000 Total liabilities and equity..................................... $552,000
Part 2
Profit margin = $79,200 / $436,000 = 18.2%
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition148
Problem 3-6AA (40 minutes)Part 1 Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.
Nov. 1 Prepaid Advertising ....................................... 1,500Cash.......................................................... 1,500
Paid for future advertising.
1 Prepaid Insurance........................................... 2,160Cash.......................................................... 2,160
Paid insurance for one year.
30 Cash.................................................................. 3,300Unearned Service Fees........................... 3,300
Received fees in advance.
Dec. 1 Prepaid Consulting Fees ............................... 2,700Cash.......................................................... 2,700
Paid for future consulting.
15 Cash.................................................................. 7,650Unearned Service Fees........................... 7,650
Received fees in advance.
31 Advertising Expense....................................... 600Prepaid Advertising ................................ 600
To adjust prepaid advertising ($1,500-$900).
31 Insurance Expense.......................................... 360Prepaid Insurance.................................... 360
To adjust prepaid insurance($2,160 x 2/12).
31 Unearned Service Fees .................................. 2,100Service Fees Earned................................ 2,100
To adjust unearned service fees ($3,300-$1,200).
31 Consulting Fees Expense .............................. 900Prepaid Consulting Fees......................... 900
To adjust prepaid consulting fees ($2,700 x 1/3).
31 Unearned Service Fees .................................. 3,000Service Fees Earned................................ 3,000
To adjust unearned service fees.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 149
Problem 3-6AA (Continued)Part 2 Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.
Nov. 1 Advertising Expense....................................... 1,500Cash.......................................................... 1,500
Paid for future advertising.
1 Insurance Expense.......................................... 2,160Cash.......................................................... 2,160
Paid insurance for one year.
30 Cash.................................................................. 3,300Service Fees Earned................................ 3,300
Received fees in advance.
Dec. 1 Consulting Fees Expense............................... 2,700Cash.......................................................... 2,700
Paid for future consulting.
15 Cash.................................................................. 7,650Service Fees Earned................................ 7,650
Received fees in advance.
31 Prepaid Advertising........................................ 900Advertising Expense............................... 900
To adjust for prepaid advertising.
31 Prepaid Insurance........................................... 1,800Insurance Expense.................................. 1,800
To adjust for prepaid insurance.
31 Service Fees Earned....................................... 1,200Unearned Service Fees........................... 1,200
To adjust for unearned service fees.
31 Prepaid Consulting Fees................................ 1,800Consulting Fees Expense....................... 1,800
To adjust for prepaid consulting fees.
31 Service Fees Earned....................................... 4,650Unearned Service Fees........................... 4,650
To adjust for unearned service fees.
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition150
Problem 3-6AA (Concluded)
Part 3
There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following:
Advertising expense for two months................................... $ 600Prepaid advertising as of December 31............................... 900Insurance expense for two months..................................... 360Prepaid insurance as of December 31................................. 1,800Consulting fees expense (1/3 of total paid)......................... 900Prepaid consulting fees........................................................ 1,800Service fees earned for two months ($2,100 + $3,000)...... 5,100Unearned service fees at 12/31 ($1,200 + $4,650)............... 5,850
When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 151
PROBLEM SET B
Problem 3-1B (15 minutes)
1. E. 4. C. 7. F. 10. I.2. H. 5. D. 8. I. 11. A.3. G. 6. B. 9. F. 12. B.
Problem 3-2B (30 minutes) Part 1
Adjustment (a)Oct. 31 Office Supplies Expense........................................ 3,450
Office Supplies................................................ 3,450To record cost of supplies used($500 + $3,650 - $700).
Adjustment (b) 31 Insurance Expense................................................. 2,365
Prepaid Insurance........................................... 2,365To record annual insurance coverage cost.
Policy Cost per MonthMonths Active
in 20052005
ExpenseA $125 ($3,000/24 mo.) 12 $1,500B 100 ($3,600/36 mo.) 7 700C 55 ( $660 / 12 mo.) 3 165
Total $2,365
Adjustment (c) 31 Salaries Expense.................................................... 800
Salaries Payable.............................................. 800To record accrued but unpaid wages(1 day x $800).
Adjustment (d) 31 Depreciation Expense—Building.......................... 5,400
Accumulated Depreciation—Building........... 5,400To record annual depreciation[($155,000-$20,000) / 25 years = $5,400].
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition152
Problem 3-2B (Concluded)
Adjustment (e)Oct. 31 Rent Receivable...................................................... 600
Rent Earned..................................................... 600To record earned but unpaid Oct. rent.
Adjustment (f) 31 Unearned Rent........................................................ 1,050
Rent Earned..................................................... 1,050To record rent earned for September and October (2 x $525).
Part 2Cash Payment for (c)
Nov. 7 Salaries Payable..................................................... 800Salaries Expense*................................................... 3,200
Cash.................................................................. 4,000To record payment of accrued and current salaries. *(4 days x $800)
Cash Payment for (e)
15 Cash......................................................................... 1,200Rent Receivable............................................... 600Rent Earned..................................................... 600
To record past due rent for two months.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 153
Problem 3-3B (90 minutes) Parts 1 and 2
Cash Accounts PayableBal. 50,000 Bal. 12,200
Accounts Receivable Salaries PayableUnadj. Bal. 0 Unadj. Bal. 0(f) 5,500 (g) 540Adj. Bal. 5,500 Adj. Bal. 540
Teaching Supplies Unearned Training FeesUnadj. Bal. 60,000 Unadj. Bal. 27,600
(b) 57,500 (e) 9,200Adj. Bal. 2,500 Adj. Bal. 18,400
Prepaid Insurance M. Alcorn, CapitalUnadj. Bal. 18,000 Bal. 68,500
(a) 6,400Adj. Bal. 11,600
M. Alcorn, WithdrawalsPrepaid Rent Bal. 20,000
Unadj. Bal. 2,600(h) 2,600
Adj. Bal. 0
Professional LibraryBal. 10,000
Accumulated Depreciation—Professional Library
Unadj. Bal. 1,500(d) 2,000Adj. Bal. 3,500
EquipmentBal. 30,000
Accumulated Depreciation—Equipment
Unadj. Bal. 16,000(c) 4,000Adj. Bal. 20,000
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition154
Problem 3-3B (Continued)Parts 1 and 2
Tuition Fees Earned Advertising ExpenseUnadj. Bal. 105,000 Bal. 18,000(f) 5,500Adj. Bal. 110,500
Training Fees Earned Utilities ExpenseUnadj. Bal. 62,000 Bal. 12,400(e) 9,200Adj. Bal. 71,200
Depreciation Expense—Professional Library
Unadj. Bal. 0(d) 2,000Adj. Bal. 2,000
Depreciation Expense—Equipment
Unadj. Bal. 0(c) 4,000Adj. Bal. 4,000
Salaries ExpenseUnadj. Bal. 43,200(g) 540Adj. Bal. 43,740
Insurance ExpenseUnadj. Bal. 0(a) 6,400Adj. Bal. 6,400
Rent ExpenseUnadj. Bal. 28,600(h) 2,600Adj. Bal. 31,200
Teaching Supplies ExpenseUnadj. Bal. 0(b) 57,500Adj. Bal. 57,500
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 155
Problem 3-3B (Continued)Part 2
Adjustment (a)Dec. 31 Insurance Expense................................................ 6,400
Prepaid Insurance.......................................... 6,400To record the insurance expired.
Adjustment (b) 31 Teaching Supplies Expense................................. 57,500
Teaching Supplies......................................... 57,500To record the cost of supplies used ($60,000-$2,500).
Adjustment (c) 31 Depreciation Expense—Equipment..................... 4,000
Accumulated Depreciation—Equipment..... 4,000To record equipment depreciation.
Adjustment (d) 31 Depreciation Expense—Professional Library... . 2,000
Accumulated Depreciation— Professional Library............................. 2,000
To record professional library depreciation.
Adjustment (e) 31 Unearned Training Fees........................................ 9,200
Training Fees Earned..................................... 9,200To record training fees earned that were collected in advance.
Adjustment (f) 31 Accounts Receivable............................................ 5,500
Tuition Fees Earned....................................... 5,500To record tuition earned ($2,200 x 2 1/2 mo).
Adjustment (g) 31 Salaries Expense................................................... 540
Salaries Payable............................................. 540 To accrue salaries expense (3 days x $180).
Adjustment (h) 31 Rent Expense ........................................................ 2,600
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition156
Prepaid Rent.............................................................. 2,600 To record expiration of prepaid rent.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 157
Problem 3-3B (Continued)Part 3
ALCORN INSTITUTEAdjusted Trial Balance
December 31, 2005
Debit Credit Cash............................................................................... $ 50,000Accounts receivable...................................................... 5,500Teaching supplies.......................................................... 2,500Prepaid insurance.......................................................... 11,600Prepaid rent................................................................... 0Professional library........................................................ 10,000Accumulated depreciation—Professional library........... $ 3,500Equipment..................................................................... 30,000Accumulated depreciation—Equipment........................ 20,000Accounts payable.......................................................... 12,200Salaries payable............................................................. 540Unearned training fees................................................... 18,400M. Alcorn, Capital........................................................... 68,500M. Alcorn, Withdrawals.................................................. 20,000Tuition fees earned........................................................ 110,500Training fees earned...................................................... 71,200Depreciation expense—Professional library.................. 2,000Depreciation expense—Equipment............................... 4,000Salaries expense............................................................ 43,740Insurance expense......................................................... 6,400Rent expense................................................................. 31,200Teaching supplies expense........................................... 57,500Advertising expense...................................................... 18,000Utilities expense............................................................. 12,400 _______Totals............................................................................. $304,840 $304,840
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition158
Problem 3-3B (Continued)Part 4
ALCORN INSTITUTEIncome Statement
For Year Ended December 31, 2005Revenues Tuition fees earned.................................................... $110,500 Training fees earned.................................................. 71,200 Total revenues............................................................ $181,700 Expenses Depreciation expense—Professional library.......... 2,000 Depreciation expense—Equipment......................... 4,000 Salaries expense........................................................ 43,740 Insurance expense.................................................... 6,400 Rent expense.............................................................. 31,200 Teaching supplies expense...................................... 57,500 Advertising expense.................................................. 18,000 Utilities expense......................................................... 12,400 Total expenses........................................................... 175,240 Net income.................................................................... $ 6,460
ALCORN INSTITUTEStatement of Owner’s Equity
For Year Ended December 31, 2005
M. Alcorn, Capital, December 31, 2004.............. $68,500 Plus: Net income.................................................. 6,460
74,960 Less: Owner withdrawals.................................... 20,000 M. Alcorn, Capital, December 31, 2005.............. $54,960
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 159
Problem 3-3B (Concluded)
ALCORN INSTITUTEBalance Sheet
December 31, 2005
AssetsCash.............................................................................. $50,000 Accounts receivable.................................................... 5,500 Teaching supplies....................................................... 2,500 Prepaid insurance........................................................ 11,600 Professional library..................................................... $10,000 Accumulated depreciation—Professional library........... (3,500) 6,500 Equipment.................................................................... 30,000 Accumulated depreciation—Equipment.................... (20,000) 10,000 Total assets.................................................................. $86,100
LiabilitiesAccounts payable........................................................ $12,200 Salaries payable........................................................... 540 Unearned training fees................................................ 18,400 Total liabilities.............................................................. 31,140
EquityM. Alcorn, Capital......................................................... 54,960Total liabilities and equity........................................... $86,100
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition160
Problem 3-4B (45 minutes) — Part 1
AccountUnadjusted
Trial Balance AdjustmentsAdjusted
Trial Balance
Cash..................................$ 48,000 $ 48,000
Accounts receivable............. 70,000 (a) 6,660 76,660
Office supplies..................... 30,000 (b) 23,000 7,000
Prepaid insurance................ 13,200 (c) 4,600 8,600
Office equipment.................150,000 150,000
Accumulated depreciation— Office equipment.....................
$ 30,000 (d) 10,000 $ 40,000
Accounts payable................ 36,000 (e) 6,000 42,000
Interest payable................... (f) 1,600 1,600
Salaries payable................... (g) 11,200 11,200
Unearned consulting fees..... 30,000 (h) 12,200 17,800
Long-term notes payable...... 80,000 80,000
D. Chen, Capital................... 70,200 70,200
D. Chen, Withdrawals........... 10,000 10,000
Consulting fees earned........264,000
(a)(h)
6,66012,200 282,860
Depreciation expense— Office equipment............... (d) 10,000 10,000
Salaries expense..................115,600 (g) 11,200 126,800
Interest expense.................. 6,400 (f) 1,600 8,000
Insurance expense.............. (c) 4,600 4,600
Rent expense...................... 24,000 24,000
Office supplies expense........ (b) 23,000 23,000
Advertising expense............. 43,000 _______ (e) 6 ,000 ______ 49,000 _______
Totals.................................$510,200 $510,200 $75,260 $75,260 $545,660 $545,660
Adjustment Descriptions:(a) Earned but uncollected revenues.(b) Cost of consumed office supplies.(c) Cost of expired insurance coverage.(d) Depreciation expense on office equipment.(e) Incurred but unpaid advertising expense.(f) Incurred but unpaid interest expense.(g) Incurred but unpaid salaries expense.(h) Earned revenues previously received in advance.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 161
Problem 3-4B
Part 2
DAXU CONSULTING COMPANYIncome Statement
For Year Ended December 31, 2005
Revenues Consulting fees earned ..................................... $282,860 Expenses Depreciation expense—Office equipment....... $ 10,000 Salaries expense ............................................... 126,800 Interest expense ................................................ 8,000 Insurance expense ............................................ 4,600 Rent expense ..................................................... 24,000 Office supplies expense ................................... 23,000 Advertising expense ......................................... 49,000 Total expenses................................................... 245,400Net income............................................................ $ 37,460
DAXU CONSULTING COMPANYStatement of Owner’s Equity
For Year Ended December 31, 2005
D. Chen, Capital, December 31, 2004................. $ 70,200
Plus: Net income.................................................. 37,460
107,660
Less: Owner withdrawals.................................... 10,000
D. Chen, Capital, December 31, 2005................. $ 97,660
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition162
Problem 3-4B (Concluded)
Part 2
DAXU CONSULTING COMPANYBalance Sheet
December 31, 2005
AssetsCash................................................................................ $ 48,000Accounts receivable..................................................... 76,660Office supplies............................................................... 7,000Prepaid insurance......................................................... 8,600Office equipment........................................................... $150,000Accumulated depreciation—Office equipment.......... (40,000 ) 110,000 Total assets.................................................................... $250,260
LiabilitiesAccounts payable.......................................................... $ 42,000Interest payable............................................................. 1,600Salaries payable............................................................ 11,200Unearned consulting fees............................................ 17,800Long-term notes payable.............................................. 80,000 Total liabilities............................................................... 152,600
EquityD. Chen, Capital............................................................. 97,660 Total liabilities and equity............................................ $250,260
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 163
Problem 3-5B (50 minutes)Part 1
LIGHTNING COURIERIncome Statement
For Year Ended December 31, 2005
Revenues Delivery fees earned..................................... $580,000 Interest earned............................................... 24,000 Total revenues............................................... $604,000Expenses Depreciation expense—Trucks.................... 24,000 Depreciation expense—Equipment............. 46,000 Salaries expense........................................... 64,000 Wages expense............................................. 290,000 Interest expense............................................ 25,000 Office supplies expense............................... 33,000 Advertising expense..................................... 26,400 Repairs expense—Trucks............................ 34,600 Total expenses.............................................. 543,000Net income....................................................... $ 61,000
LIGHTNING COURIERStatement of Owner's Equity
For Year Ended December 31, 2005
J. Hallam, Capital, December 31, 2004.......... $115,000
Plus : Net income........................................... 61,000
176,000
Less: Withdrawals by owner......................... 40,000
J. Hallam, Capital, December 31, 2005.......... $136,000
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition164
Problem 3-5B (Concluded)
LIGHTNING COURIERBalance Sheet
December 31, 2005
AssetsCash....................................................................... $ 48,000Accounts receivable............................................ 110,000Interest receivable................................................ 6,000Notes receivable (due in 90 days)......................... 200,000Office supplies...................................................... 12,000Trucks.................................................................... $ 124,000Accumulated depreciation—Trucks................... (48,000 ) 76,000Equipment............................................................. 260,000Accumulated depreciation—Equipment............ (190,000) 70,000Land....................................................................... 90,000 Total assets........................................................... $612,000
LiabilitiesAccounts payable................................................. $124,000Interest payable.................................................... 22,000Salaries payable................................................... 30,000Unearned delivery fees........................................ 110,000Long-term notes payable..................................... 190,000 Total liabilities...................................................... 476,000
EquityJ. Hallam, Capital.................................................. 136,000 Total liabilities and equity................................... $612,000
Part 2
Profit margin = $61,000 / $604,000 = 10.1%
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 165
Problem 3-6BA (40 minutes) Part 1
Method that records prepaid expenses and unearned revenues in balance sheet accounts:
Apr. 1 Prepaid Consulting Fees..................................... 3,450 Cash............................................................... 3,450
Paid for future consulting services.
1 Prepaid Insurance................................................ 2,700Cash............................................................... 2,700
Paid insurance for one year.
30 Cash....................................................................... 7,500Unearned Service Fees................................ 7,500
Received fees in advance.
May 1 Prepaid Advertising............................................. 3,450Cash............................................................... 3,450
Paid for future advertising.
23 Cash ..................................................................... 9,450 Unearned Service Fees............................... 9,450
Received fees in advance.
31 Consulting Fees Expense.................................... 1,500Prepaid Consulting Fees.............................. 1,500
To adjust prepaid consulting fees.
31 Insurance Expense............................................... 450Prepaid Insurance......................................... 450
To adjust prepaid insurance.
31 Unearned Service Fees ....................................... 3,900Service Fees Earned..................................... 3,900
To adjust unearned service fees.
31 Advertising Expense............................................ 2,400Prepaid Advertising...................................... 2,400
To adjust prepaid advertising.
31 Unearned Service Fees........................................ 4,500Service Fees Earned..................................... 4,500
To adjust unearned service fees.
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition166
Problem 3-6BA (Continued)Part 2
Method that records prepaid expenses and unearned revenues in income statement accounts:
Apr. 1 Consulting Fees Expense ................................. 3,450Cash.............................................................. 3,450
Paid for future consulting services.
1 Insurance Expense............................................. 2,700Cash.............................................................. 2,700
Paid insurance for one year.
30 Cash..................................................................... 7,500Service Fees Earned................................... 7,500
Received fees in advance.
May 1 Advertising Expense........................................... 3,450Cash.............................................................. 3,450
Paid for future advertising.
23 Cash..................................................................... 9,450Service Fees Earned................................... 9,450
Received fees in advance.
31 Prepaid Consulting Fees.................................... 1,950Consulting Fees Expense........................... 1,950
To adjust for prepaid consulting fees.
31 Prepaid Insurance .............................................. 2,250Insurance Expense...................................... 2,250
To adjust for prepaid insurance.
31 Service Fees Earned........................................... 3,600Unearned Service Fees .............................. 3,600
To adjust for unearned service fees.
31 Prepaid Advertising............................................ 1,050Advertising Expense................................... 1,050
To adjust for prepaid advertising.
31 Service Fees Earned........................................... 4,950Unearned Service Fees .............................. 4,950
To adjust for unearned service fees.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 167
Problem 3-6BA (Concluded) Part 3
There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following:
Prepaid consulting fees as of May 31.................................... $ 1,950Consulting fees expense for two months.............................. 1,500Insurance expense for two months........................................ 450Prepaid insurance as of May 31.............................................. 2,250Unearned service fees as of May 31 ($3,600 + $4,950)......... 8,550Service fees earned for two months ($3,900 + $4,500)......... 8,400Prepaid advertising as of May 31............................................ 1,050Advertising expense for two months..................................... 2,400
When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition168
Serial Problem
Serial Problem, Success Systems (120 minutes) Part 1
Journal entries:
Dec. 2 Advertising Expense..................................655 1,025Cash.....................................................101 1,025
Paid share of mall advertising costs.
3 Repairs Expense—Computer....................684 500Cash.....................................................101 500
Repaired the computer.
4 Cash.............................................................101 3,950Accounts Receivable..........................106 3,950
Collected accounts receivable.
10 Wages Expense..........................................623 750Cash.....................................................101 750
Paid employee for part-time work.
14 Cash.............................................................101 1,500Unearned Computer Services Revenue...236 1,500
Received advance on work to be performed.
15 Computer Supplies....................................126 1,100Accounts Payable...............................201 1,100
Purchased supplies on credit.
16 No entry recorded in the journal.20 Cash.............................................................101 5,625
Computer Services Revenue.............403 5,625Collected cash revenue from customer.
28 Cash.............................................................101 3,000Accounts Receivable..........................106 3,000
Collected accounts receivable.
29 Mileage Expense........................................676 192Cash.....................................................101 192
Reimbursed Breeze for mileage.
31 K. Breeze, Withdrawals..............................302 1,500Cash.....................................................101 1,500
Owner withdraws cash.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 169
Serial Problem (Continued) Part 2
Adjusting entries:
Dec. 31 Computer Supplies Expense .........................652 3,065Computer Supplies .................................126 3,065
Adjustment for supplies used (supplies balance less cost of supplies available).
31 Insurance Expense .........................................637 555Prepaid Insurance ...................................128 555
Adjustment for expired insurance (1/4 of original prepaid amount).
31 Wages Expense ..............................................623 500Wages Payable ........................................210 500
Adjustment for accrued wages.
31 Depreciation Exp—Computer Equip.............613 1,250Accumulated Depreciation— Computer Equipment...........................168 1,250
Adjustment for computer equipment depreciation:Cost.......................................................... $20,000Predicted life........................................... 4 yearsAnnual depreciation (cost/life).............. $5,000Expense for three months..................... $1,250
31 Depreciation Expense—Office Equip............612 400Accumulated Depreciation— Office Equipment ..................................164 400
Adjustment for office equipment depreciation:Cost........................................................... $8,000Predicted life............................................. 5 yearsAnnual depreciation (cost/life)................ $1,600Expense for three months....................... $400
31 Rent Expense ..................................................640 2,475Prepaid Rent ............................................131 2,475
Adjustment for expired rent (3/4 of original prepaid amount).
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition170
Serial Problem (Continued) Parts 1 and 2
Posting to the accounts:
Cash Acct. No. 101Date Explanation PR Debit Credit BalanceOct. 1 55,000 55,000
2 3,300 51,7005 2,220 49,4808 1,420 48,060
15 4,800 52,86017 805 52,05520 1,940 50,11522 1,400 51,51531 875 50,64031 3,600 47,040
Nov. 1 320 46,7202 4,633 51,3535 1,125 50,228
18 2,208 52,43622 250 52,18628 384 51,80230 1,750 50,05230 2,000 48,052
Dec. 2 1,025 47,0273 500 46,5274 3,950 50,477
10 750 49,72714 1,500 51,22720 5,625 56,85228 3,000 59,85229 192 59,66031 1,500 58,160
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 171
Serial Problem (Continued) Parts 1 and 2
Accounts Receivable Acct. No. 106Date Explanation PR Debit Credit BalanceOct. 6 4,800 4,800
12 1,400 6,20015 4,800 1,40022 1,400 028 5,208 5,208
Nov. 8 5,668 10,87618 2,208 8,66824 3,950 12,618
Dec. 4 3,950 8,66828 3,000 5,668
Computer Supplies Acct. No. 126Date Explanation PR Debit Credit BalanceOct. 3 1,420 1,420Nov. 5 1,125 2,545Dec. 15 1,100 3,645
31 3,065 580
Prepaid Insurance Acct. No. 128Date Explanation PR Debit Credit BalanceOct. 5 2,220 2,220Dec. 31 555 1,665
Prepaid Rent Acct. No. 131 Date Explanation PR Debit Credit BalanceOct. 2 3,300 3,300Dec. 31 2,475 825
Office Equipment Acct. No. 163Date Explanation PR Debit Credit BalanceOct. 1 8,000 8,000
Accumulated Depreciation—Office Equipment Acct. No. 164Date Explanation PR Debit Credit BalanceDec. 31 400 400
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition172
Serial Problem (Continued)Parts 1 and 2
Computer Equipment Acct. No. 167Date Explanation PR Debit Credit BalanceOct. 1 20,000 20,000
Accumulated Depreciation—Computer Equipment Acct. No. 168Date Explanation PR Debit Credit BalanceDec. 31 1,250 1,250
Accounts Payable Acct. No. 201Date Explanation PR Debit Credit BalanceOct. 3 1,420 1,420
8 1,420 0Dec. 15 1,100 1,100
Wages Payable Acct. No. 210Date Explanation PR Debit Credit BalanceDec. 31 500 500
Unearned Computer Services Revenue Acct. No. 236Date Explanation PR Debit Credit BalanceDec. 14 1,500 1,500
K. Breeze, Capital Acct. No. 301Date Explanation PR Debit Credit BalanceOct. 1 83,000 83,000
K. Breeze, Withdrawals Acct. No. 302Date Explanation PR Debit Credit BalanceOct. 31 3,600 3,600Nov. 30 2,000 5,600Dec. 31 1,500 7,100
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 173
Serial Problem (Continued)Parts 1 and 2
Computer Services Revenue Acct. No. 403Date Explanation PR Debit Credit BalanceOct. 6 4,800 4,800
12 1,400 6,20028 5,208 11,408
Nov. 2 4,633 16,0418 5,668 21,709
24 3,950 25,659Dec. 20 5,625 31,284
Depreciation Expense—Office Equipment Acct. No. 612Date Explanation PR Debit Credit BalanceDec. 31 400 400
Depreciation Expense—Computer Equipment Acct. No. 613Date Explanation PR Debit Credit BalanceDec. 31 1,250 1,250
Wages Expense Acct. No. 623Date Explanation PR Debit Credit BalanceOct. 31 875 875Nov. 30 1,750 2,625Dec. 10 750 3,375
31 500 3,875
Insurance Expense Acct. No. 637Date Explanation PR Debit Credit BalanceDec. 31 555 555
Rent Expense Acct. No. 640Date Explanation PR Debit Credit BalanceDec. 31 2,475 2,475
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition174
Serial Problem (Continued)Parts 1 and 2
Computer Supplies Expense Acct. No. 652Date Explanation PR Debit Credit BalanceDec. 31 3,065 3,065
Advertising Expense Acct. No. 655Date Explanation PR Debit Credit BalanceOct. 20 1,940 1,940Dec. 2 1,025 2,965
Mileage Expense Acct. No. 676Date Explanation PR Debit Credit BalanceNov. 1 320 320
28 384 704Dec. 29 192 896
Miscellaneous Expenses Acct. No. 677Date Explanation PR Debit Credit BalanceNov. 22 250 250
Repairs Expense—Computer Acct. No. 684Date Explanation PR Debit Credit BalanceOct. 17 805 805Dec. 3 500 1,305
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 175
Serial Problem (Continued)Part 3
SUCCESS SYSTEMSAdjusted Trial Balance
December 31, 2004 Debit Credit
Cash ............................................................................ $ 58,160Accounts receivable .................................................. 5,668Computer supplies .................................................... 580Prepaid insurance ..................................................... 1,665Prepaid rent ................................................................ 825Office equipment ....................................................... 8,000Accumulated depreciation—Office equipment....... $ 400Computer equipment ................................................ 20,000Accumulated depreciation—Computer equipment. 1,250Accounts payable ...................................................... 1,100Wages payable ........................................................... 500Unearned computer services revenue .................... 1,500K. Breeze, Capital....................................................... 83,000K. Breeze, Withdrawals.............................................. 7,100Computer services revenue ..................................... 31,284Depreciation expense—Office equipment .............. 400Depreciation expense—Computer equipment........ 1,250Wages expense .......................................................... 3,875Insurance expense .................................................... 555Rent expense ............................................................. 2,475Computer supplies expense .................................... 3,065Advertising expense.................................................. 2,965Mileage expense ........................................................ 896Miscellaneous expenses .......................................... 250Repairs expense—Computer ................................... 1,305 _______Totals........................................................................... $119,034 $119,034
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition176
Serial Problem (Continued) Part 4
SUCCESS SYSTEMSIncome Statement
For Three Months Ended December 31, 2004
Revenue Computer services revenue....................................... $31,284 Expenses Depreciation expense—Office equipment................ $ 400 Depreciation expense—Computer equipment......... 1,250 Wages expense........................................................... 3,875 Insurance expense...................................................... 555 Rent expense............................................................... 2,475 Computer supplies expense...................................... 3,065 Advertising expense................................................... 2,965 Mileage expense......................................................... 896 Miscellaneous expenses............................................ 250 Repairs expense—Computer..................................... 1,305 Total expenses............................................................ 17,036 Net income..................................................................... $14,248
Part 5
SUCCESS SYSTEMSStatement of Owner’s Equity
For Three Months Ended December 31, 2004
K. Breeze, Capital, October 1, 2004.................. $ 0 Plus: Owner investment.......... 83,000 Net income.............................................. 14,248
97,248Less: Owner withdrawals.................................. 7,100 K. Breeze, Capital, December 31, 2004............ $90,148
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 177
Serial Problem (Continued) Part 6
SUCCESS SYSTEMSBalance Sheet
December 31, 2004
AssetsCash ................................................................................ $58,160 Accounts receivable ..................................................... 5,668 Computer supplies ........................................................ 580 Prepaid insurance ......................................................... 1,665 Prepaid rent ................................................................... 825 Office equipment ........................................................... $ 8,000 Accumulated depreciation—Office equipment........... (400) 7,600 Computer equipment..................................................... 20,000 Accumulated depreciation—Computer equipment.... (1,250) 18,750 Total assets..................................................................... $93,248
Liabilities Accounts payable........................................................... $ 1,100 Wages payable............................................................... 500 Unearned computer services revenue......................... 1,500 Total liabilities................................................................ 3,100
Equity K. Breeze, Capital........................................................... 90,148Total liabilities and equity............................................. $93,248
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition178
Reporting in Action — BTN 3-1
1. The revenue recognition principle requires that revenue be recorded when earned, not before and not after. Most companies earn revenue when they provide services and products to customers.
2. Krispy Kreme provides information related to revenue recognition in footnote 2 discussing the “Nature of Business and Significant Accounting Policies.” A policy on revenue recognition is stated for each segment of the company.
Company Store operations revenue is derived from the sale of doughnuts and related items to on-premises and off-premises customers. Revenue is recognized at the time of sale for on-premises sales and at the time of delivery for off premises sales.
Franchise Operations revenue is derived from: (1) development and franchise fees from the opening of new stores; and (2) royalties charged to franchisees based on sales. Development and franchise fees are charged for certain new stores and are deferred until the store is opened. The royalties recognized in each period are based on the sales in that period.
KKM&D revenue is derived from the sale of doughnut-making equipment, mix and other supplies needed to operate a doughnut store to Company-owned and franchised stores. Revenue is recognized at the time the title and risk of loss pass to the customer, generally upon delivery of the goods.
3. For fiscal year-end February 2, 2003, the profit margin is: $33,478,000 / $491,549,000 = 0.068 = 6.8%
For fiscal year-end February 3, 2002, the profit margin is: $26,378,000 / $394,354,000 = 0.067 = 6.7%
4. Solution depends on the financial statements accessed.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 179
Comparative Analysis — BTN 3-2
1. Krispy Kreme
Current year, profit margin = $33,478 / $491,549 = 6.8% Prior year, profit margin = $26,378 / $394,354 = 6.7%
Tastykake
Current year, profit margin = $2,000 / $162,263 = 1.2% Prior year, profit margin = $8,048 / $166,245 = 4.8%
2. Krispy Kreme is more successful on the basis of profit margin. In the most current year, Krispy Kreme earned an average of 6.8 cents on the dollar while Tastykake earned 1.2 cents on the dollar. For the prior years, Krispy Kreme earned 6.7 cents on the dollar compared to 4.8 cents for Tastykake.
Ethics Challenge — BTN 3-3
1. GAAP requires that annual deprecation be accumulated in a contra-asset account, called Accumulated Depreciation. While property, plant, and equipment is often shown at its net value on the balance sheet (as in Krispy Kreme’s balance sheet in Appendix A) the cost of property, plant, and equipment along with its related accumulated depreciation are reported in the footnotes. Thus, Bergez is correct with her journal entry recommendation.
2. One strength of Welch’s method would be the ease of preparing the balance sheet. The property, plant, and equipment balance in the adjusted trial balance would be directly transferable to the balance sheet when the preparer desired to show the amount at net. Welch’s approach carries weaknesses in that financial statement users would not be able to ascertain the original cost of the equipment or be able to know how much of the original cost had been allocated to depreciation to date.
3. While both approaches would lead to the same total assets on the balance sheet, GAAP requires Bergez’s approach. As a professional, Bergez is required to uphold the standards of her profession and thus the decision is an ethical one for her.
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition180
Communicating in Practice — BTN 3-4
This communication activity has no set solution. A class discussion of the ratios can be conducted with emphasis on (1) return and profitability by industries and (2) a contrast of debt financing between industries.
Taking It to the Net — BTN 3-5
1. Cannondale’s primarily sells mountain bikes.
2. Review 10-K.
3. Recent fiscal years have ended on June 29, 2002, June 30, 2001 and July 1, 2000. While Cannondale labels these endings as “12 months ended” they appear to be reporting as of the end of the 52nd week.
4. Net sales for the fiscal year ended June 29, 2002, is $156,655,000.
5. Net loss for the fiscal year ended June 29, 2002, is $15,440,000.
6. Profit margin is: $(15,440) / $156,655 = -0.099 = -9.8% (or non-interpretable)
7. Cannondale’s fiscal year-end appears to (but does not necessarily) correspond to its natural business year. The difficulty in reaching a definitive answer to this question is the lack of information in Cannondale’s statements. The quarterly sales data does reveal that the 3 months ending in June has reported the highest sales of the four quarters for the last two years reported. Management does discuss “seasonality” as a factor affecting business. The bottom line is Cannondale’s fiscal year-end appears to correspond to its natural business year, but we cannot be certain.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 181
Teamwork in Action — BTN 3-6
Note that there is no specific solution to this activity. Nevertheless, the presentation of each expert team should reflect the following summary points:
Before Adjusting
Balance Sheet Income Statement Type Account Account Adjusting Entry
Prepaid expense Asset overstated Expense understated Dr. ExpenseCr. Asset*
Unearned revenues Liability overstated Revenue understated Dr. LiabilityCr. Revenue
Accrued Expenses Liability understated Expense understated Dr. ExpenseCr. Liability
Accrued Revenues Asset understated Revenue understated Dr. AssetCr. Revenue
* For depreciation, one would Credit the Accumulated Depreciation contra account.
Some implementation notes: This activity allows all students to be actively involved in the learning process. Encourage students to take the opportunity to ask questions in the small group environment the learning team provides. Encourage the better students to serve as experts on unearned revenues. The instructor’s observation of and reactions to expert teams’ development of presentation material as well as the delivery to learning teams will have a significant impact on the effectiveness of this activity.
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition182
Business Week Activity — BTN 3-7
1. Herz personally favors a move toward what is known as “principles-based accounting.” This type of accounting would require a vast simplification of accounting standards where professionals would be asked to comply with broad goals and objectives. Such accounting would be a move away from a lengthy list of rules and exceptions.
2. Herz believes that breaking the rules is at the core of most of the scandals. When a person or company just outright violates standards and commits fraud, it is hard to say the standard is wrong. It’s like when someone robs a bank: You can’t really say that the law against bank robbing was part of the problem.
3. A principles-based system is one where the accounting standard simply lays out objectives of good reporting in an area. It may include some rules, based on the objectives, but it does not try to answer every question or provide a rule for every situation. So a typical standard would be more like 10-to-12 pages in length rather than 200 pages.
4. Principles-based accounting requires the exercise of good judgment by both companies and auditors. Those who don’t like the principles-based approach say, “I don’t trust people to do that.” They think people need rules to follow or they will try to find a way to make an objective fit almost any situation.
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 183
Entrepreneurial Decision — BTN 3-8
1. Many businesses find it cheaper to use outside collection agencies rather than hire in-house staff to handle past-due account collections. Additionally, owners of collection agencies are usually experts in the art of collection and may be able to collect on accounts that the businesses themselves never would be able to. Although a 50% commission seems steep, it must be weighed against the possibility that zero collections may be realized if the account is not turned over.
2. Mellie’s net income = Income x Profit margin = $40,000,000 x 0.08 = $3,200,000.
3. Current commission expense = $40,000,000 x 0.02 = $800,000.
4. If the commission fee charged can be negotiated down from 50% to 40%, this will be a 20% reduction in commission expense. This is computed as: (50% - 40%) / 50% = 20%. Specifically, the commission expense would change from $800,000 to 80% of $800,000 or $640,000 (also computed as $40,000,000 x 0.02 x (40%/50%)).
The $160,000 reduction from $800,000 to $640,000 represents a 20% decline from $800,000.
5. Net income would be $160,000 higher since commission expense would be reduced by $160,000. Net income would change to $3,360,000 [$3,200,000 + $160,000].
Profit margin would then equal: $3,360,000/$40,000,000 = 8.4%.
Hitting the Road — BTN 3-9
There is no formal solution to this field activity. The instructor may wish to tally students’ findings to see what companies were selected, who responded, what was the response time, etc. The instructor can also periodically ask students to bring in examples from their selected companies at certain times, and then compare and contrast them with the examples in the book.
©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition184
Global Decision — BTN 3-10
1. Grupo Bimbo states under its “Significant Accounting Policies” in its annual report that revenue is recognized when the product is shipped.
2. The five types of assets that are depreciated by Grupo Bimbo are:
a. Buildings
b. Manufacturing equipment
c. Vehicles
d. Office equipment
e. Computer equipment
Land, construction-in-progress, and machinery-in-transit are not depreciated.
3. Grupo Bimbo profit margin (in thousands of pesos):
2002 profit margin = 1,002,664 / 41,373,269 = 2.4%
2001 profit margin = 1,682,025 / 34,968,097 = 4.8%
©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 185