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CHAPTER 3

Adjusting the Accounts


ASSIGNMENT CLASSIFICATION TABLE
Study Objectives

Questions

Brief
Exercises

Exercises

Problems
Set A

Problems
Set B

1. Explain the time period


assumption.

2. Distinguish between the revenue


recognition principle and the
matching principle.

2, 3, 4

3. Explain the accrual basis of


accounting.

5, 6

4. Explain why and distinguish when


adjusting entries are needed.

7, 8

5. Identify and distinguish between


the major types of adjusting entries.

6. Identify and prepare adjusting


entries for prepayments.

10, 11, 17,


21, 22

2, 3, 4, 7,
8, 9, *13

3, 4, 5, 6, 7,
8, 9, 10, 11

2, 3, 5, 6,
7, 8, 9, 10,
11

2, 3, 5, 6,
7, 8, 9, 10,
11

7. Identify and prepare adjusting


entries for accruals.

12, 13, 14,


15, 16, 17,
21, 22

5, 7, 8, 9

4, 5, 6, 7, 8,
9, 10, 11

3, 4, 5, 6,
7, 8, 9, 10,
11, *13

3, 4, 5, 6,
7, 8, 9, 10,
11, *13

8. Identify and prepare the adjusting


entry for amortization.

18, 19, 20,


21, 22

6, 7, 8, 9

6, 7, 8, 9,
10, 11

7, 8, 9, 10,
11, *13

3, 7, 8, 9,
10, 11,
*13

9. Describe the nature and purpose of


an adjusted trial balance and
prepare.

23

10, 11

11, 12

9, 10, 11,
*13

9, 10, 11,
*13

*10. Identify and prepare adjusting


entries for the alternative treatment
of prepayments (Appendix 3A).

*24

*12, *13

*13

*12, *13

*12, *13

1, 2

3, 4, 7

3, 4, 7

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the Appendix to each
chapter.

3-1

ASSIGNMENT CHARACTERISTICS TABLE


Problem
Number

Description

Difficulty
Level

Time
Allotted (min.)

Simple

10-15

1A

Match adjusting entry type.

2A

Prepare original and adjusting journal entries for


prepayments.

Moderate

20-25

3A

Convert income from cash to accrual basis.

Complex

25-35

4A

Record transactions on accrual basis; convert revenue to


cash receipts.

Complex

25-35

5A

Prepare original and adjusting journal entries.

Moderate

25-35

6A

Prepare adjusting entries.

Moderate

25-35

7A

Prepare accrual-based income statement from cashbased information.

Complex

25-35

8A

Identify effects of adjusting journal entries.

Moderate

10-15

9A

Prepare adjusting entries, post, and prepare adjusted trial


balance.

Moderate

50-60

10A

Prepare adjusting entries, post, and prepare adjusted trial


balance and financial statements.

Moderate

50-60

11A

Prepare adjusting entries and financial statements.

Moderate

45-55

*12A

Prepare original and adjusting journal entries for


prepayments, using alternative treatment.

Moderate

20-25

*13A

Prepare adjusting entries, adjusted trial balance and


financial statements, using alternative treatment of
prepayments.

Moderate

55-65

Simple

10-15

1B

Match adjusting entry type.

2B

Prepare original and adjusting journal entries for


prepayments.

Moderate

20-25

3B

Convert income from cash to accrual basis.

Complex

25-35

4B

Record transactions on accrual basis; convert revenue to


cash receipts.

Complex

25-35

5B

Prepare original and adjusting journal entries.

Moderate

25-35

6B

Prepare adjusting entries.

Moderate

25-35

7B

Prepare accrual-based income statement from cashbased information.

Complex

25-35

8B

Identify effects of adjusting journal entries.

Moderate

10-15

3-2

Problem
Number

Description

Difficulty
Level

Time
Allotted (min.)

9B

Prepare adjusting entries, post and prepare adjusted trial


balance.

Moderate

50-60

10B

Prepare adjusting entries, post, and prepare adjusted trial


balance and financial statements.

Moderate

50-60

11B

Prepare adjusting entries and financial statements.

Moderate

45-55

*12B

Prepare original and adjusting journal entries for


prepayments, using alternative treatment.

Moderate

20-25

*13B

Prepare adjusting entries, adjusted trial balance and


financial statements, using alternative treatment of
prepayments.

Moderate

55-65

Cumulative CoverageChapters 2 to 3

Moderate

90-100

3-3

BLOOMS TAXONOMY TABLE


Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Material
Study Objectives
1. Explain the time period
assumption.

Knowledge

Comprehension
Q3-1

2. Distinguish between the


revenue recognition
principle and the
matching principle.

Q3-2
Q3-3
Q3-4

3. Explain the accrual basis


of accounting.

Q3-5
Q3-6
E3-1

4. Explain why and


distinguish when
adjusting entries are
needed.

Q3-7
Q3-8
BE3-1

Application

BE3-7
E3-2
P3-3A
P3-4A
P3-7A

P3-3B
P3-4B
P3-7B

5. Identify and distinguish


between the major types
of adjusting entries.

P3-1A
P3-1B

Q3-9

6. Identify and prepare


adjusting entries for
prepayments.

Q3-10
Q3-11
Q3-21

Q3-17
Q3-22
BE3-8
BE3-9

BE3-2
BE3-3
BE3-4
BE3-7
*BE3-13
E3-3
E3-4
E3-5
E3-6
E3-7
E3-8
E3-9
E3-10
E3-11
P3-2A
P3-3A
P3-5A

P3-6A
P3-7A
P3-8A
P3-9A
P3-10A
P3-11A
P3-2B
P3-3B
P3-5B
P3-6B
P3-7B
P3-8B
P3-9B
P3-10B
P3-11B

7. Identify and prepare


adjusting entries for
accruals.

Q3-12
Q3-13
Q3-14
Q3-21

Q3-17
Q3-22
BE3-8
BE3-9

Q3-15
Q3-16
BE3-5
BE3-7
E3-4
E3-5
E3-6
E3-7
E3-8
E3-9
E3-10
E3-11
P3-3A
P3-4A
P3-5A
P2-6A

P3-7A
P3-8A
P3-9A
P3-10A
P3-11A
*P3-13A
P3-3B
P3-4B
P3-5B
P3-6B
P3-7B
P3-8B
P3-9B
P3-10B
P3-11B
*P3-13B

3-4

Analysis

Synthesis

Evaluation

Study Objectives
8. Identify and prepare the
adjusting entry for
amortization.

9. Describe the nature and


purpose of an adjusted
trial balance and prepare.

*10. Identify and prepare


adjusting entries for the
alternative treatment of
prepayments.
Broadening Your
Perspective

Knowledge
Q3-21

Comprehension
Q3-18
Q3-19
Q3-22
BE3-8
BE3-9

Application
P3-9A
Q3-20
P3-10A
BE3-6
P3-11A
BE3-7
*P3-13A
E3-6
P3-3B
E3-7
P3-7B
E3-8
P3-8B
E3-9
P3-9B
E3-10
P3-10B
E3-11
P3-11B
P3-7A
*P3-13B
P3-8A

Q3-23

BE3-10
BE3-11
E3-11
E3-12
P3-9A
P3-10A

P3-11A
*P3-13A
P3-9B
P3-10B
P3-11B
*P3-13B

*Q3-24

*BE3-12
*BE3-13
*E3-13
*P3-12A

*P3-13A
*P3-12B
*P3-13B

BYP3-1

BYP3-2
BYP3-3
BYP3-4
Cumulative Coverage

3-5

Analysis

Synthesis

Evaluation

BYP3-5

BYP3-6

BYP3-7

ANSWERS TO QUESTIONS
01.

(a) Under the time period assumption, an accountant is required to


determine the relevance of each business transaction to specific
accounting periods, and its effects on those periods.
(b) An accounting time period of one year in length is referred to as a
fiscal year. A fiscal year that extends from January 1 to December
31 is referred to as a calendar year. Accounting periods of less
than one year are called interim periods.

2.

The two generally accepted accounting principles that pertain to


adjusting the accounts are:
1. The revenue recognition principle, which states that revenue
should be recognized in the time period in which it is earned.
2. The matching principle, which states that efforts (expenses)
should be matched with accomplishments (revenues).

03. The law firm should recognize the revenue in April. The revenue
recognition principle states that revenue should be recognized in the
accounting period in which it is earned (i.e., when the work is done).
04. Expenses of $4,500 ($2,000 + $2,500) should be deducted from the
revenues in April. Under the matching principle, efforts (expenses)
should be matched with accomplishments (revenues).
05.

Information presented on an accrual basis is useful because it


reveals relationships that are likely to be important in predicting
future results. To illustrate, under accrual accounting, revenues are
recognized when earned so they can be related to the economic
environment in which they occur. Trends in revenues are thus more
meaningful.

06. The balance in total owners equity should not equal the balance in
the cash account. Owners equity reflects the net amount the owners
have invested in the company, which comprises total assetsnot just
cashnet of liabilities.

3-6

Questions Chapter 3 (Continued)


07. No, adjusting entries are required by the revenue recognition and
matching principles.
08. A trial balance may not contain up-to-date information for financial
statements because:
1. Some events are not journalized daily because it is unnecessary
and inefficient to do so.
2. The expiration of some costs occurs with the passage of time
rather than as a result of recurring daily transactions.
3. Some items may be unrecorded because the transaction data are
not known.
09. The three categories of adjusting entries are prepayments, accruals,
and estimates. Prepayments consist of transactions in which the cash
is exchanged in advance resulting in prepaid expenses and unearned
revenues. Accruals consist of transactions in which the cash will be
exchanged later, resulting in accrued revenues and accrued
expenses. Because we dont always know what will happen in the
future, estimates are required. One example of an estimate is the
allocation of the cost of a capital asset over its estimated useful life.
10. If the original purchase was recorded as an asset, then in the
adjusting entry expenses are debited (to increase them) and assets
are credited (to decrease them).
11. In the adjusting entry, liabilities are debited (to decrease them) and
revenues are credited (to increase them).
12. It may have credited unearned revenue or accounts receivable.
13. Asset and revenue. An asset (a receivable) is debited and revenue is
credited.
14. Utilities Expense is debited and Accounts Payable (a liability) is
credited.

3-7

Questions Chapter 3 (Continued)


15.

On the income statement, net income was understated $300. Prior to


adjustment, revenues are understated by $900 and expenses are
understated by $600. The impact on net income is $300 ($900 $600).
On the balance sheet, accounts receivable are understated by $900,
accounts payable are understated by $600, and owners equity
understated by $300 (see net income).

16.

The entry is:


Jan. 9 Salaries Payable .............................................
Salaries Expense ............................................
Cash...........................................................

17.

(a)
(b)
(c)
(d)
(e)
(f)

1,700
3,300
5,000

Accrued revenues.
Unearned revenues.
Accrued expenses.
Accrued expenses, prepaid expenses, or estimates (amortization).
Prepaid expenses or estimates (amortization).
Accrued revenues or unearned revenues.

18. No. Amortization is the process of allocating the cost of an asset to


expense over its useful life in a rational and systematic manner.
Amortization results in the presentation of the book value of the
asset, not its market value.
19. Amortization expense is an expense account whose normal balance
is a debit. This account shows the cost that has expired during the
current accounting period. Accumulated amortization is a contra
asset account whose normal balance is a credit. The balance in this
account is the total of all the amortization that has been recognized
from the date of acquisition to the balance sheet date.
*20. Equipment ......................................... $12,000
Less: Accumulated amortization ... 7,000
Net book value .................................. 5,000

3-8

Questions Chapter 3 (Continued)


21. (a)
(b)
(c)
(d)
(e)
(f)

Salaries Payable is credited.


Accumulated Amortization is credited.
Interest Expense is debited.
Supplies Expense is debited.
Service Revenue is credited.
Service Revenue is credited.

22. Disagree. An adjusting entry affects only one balance sheet account
and one income statement account.
23. Financial statements can be prepared from an adjusted trial balance
because the balances of all accounts have been adjusted to show the
effects of all financial events that have occurred during the
accounting period.
*24. For Supplies Expense: expenses are overstated and assets (prepaid
expense) are understated. The adjusting entry is:
Assets (Supplies).................................................................
Expenses (Supplies Expense)......................................

XX
XX

For Rent Revenue: revenues are overstated and liabilities (unearned


revenues) are understated. The adjusting entry is:
Revenues (Rent Revenue) ..................................................
Liabilities (Unearned Rent) ...........................................

3-9

XX
XX

SOLUTIONS TO BRIEF EXERCISES


BRIEF EXERCISE 3-1
1.

Prepaid Insuranceto recognize insurance expired (expenses) during


the period.

2.

Accumulated Amortizationto allocate the cost of the capital asset


to expense over the period it benefits.

3.

Unearned Revenueto account for Unearned Revenue received in


advance that was earned (revenues) during the period.

4.

Interest Payableto recognize interest expense accrued but unpaid


on notes payable.

5.

Rent Receivableto recognize rent earned (revenues) but not yet


collected.

BRIEF EXERCISE 3-2


Dec. 31

Advertising Supplies Expense...............................


Advertising Supplies.......................................

Advertising Supplies
12/31

8,700 12/31

Balance

1,500

7,200
7,200

Advertising Supplies Expense


7,200

12/31

3-10

7,200

BRIEF EXERCISE 3-3


July

Dec. 31

Prepaid Insurance ........................................


Cash.......................................................

10,000

Insurance Expense ($10,000 x 6/24 mos.)..


Prepaid Insurance ................................

2,500

10,000
2,500

Cash
7/1
Prepaid Insurance
7/1

Insurance Expense

10,000 12/31

12/31 Bal.

10,000

2,500

12/31

2,500

7,500

BRIEF EXERCISE 3-4


July 1
Dec. 31

Cash ........................................................................
Unearned Insurance Revenue .......................

10,000

Unearned Insurance Revenue...............................


Insurance Revenue ($10,000 x 6/24 mos.)....

2,500

10,000
2,500

Cash
7/1

10,000

Unearned Insurance Revenue


12/31

2,500 7/1
12/31 Bal.

Insurance Revenue

10,000

12/31

7,500

3-11

2,500

BRIEF EXERCISE 3-5


1.

Dec. 31

2.
3.

31
31

Interest Receivable.........................................
Interest Revenue.....................................

300

Accounts Receivable .....................................


Service Revenue .....................................

1,400

Salaries Expense ............................................


Salaries Payable .....................................

900

300
1,400
900

BRIEF EXERCISE 3-6


Dec. 31

Amortization ExpenseEquipment .....................


Accumulated Amortization
Equipment ....................................................

Amortization ExpenseEquipment
12/31

5,000
5,000

Accum. AmortizationEquipment

5,000

12/31

5,000

TAI WOO COMPANY


Balance Sheet (Partial)
December 31
Capital assets
Equipment ...............................................................
Less: Accumulated amortization..........................

3-12

$25,000
005,000

$20,000

BRIEF EXERCISE 3-7


Transaction

Cash

Purchased supplies on hand for cash


Recorded the use of supplies
Performed services on account
Received from customers payment of their
account
(e) Purchased office equipment for cash
(f) Recorded amortization of office equipment

-$100
0
0

0
-50
+1,000

+800
-500
0

0
0
-50

(a)
(b)
(c)
(d)

Net Income
$

BRIEF EXERCISE 3-8


(a)
Type of
Adjustment

(b)
Status of Accounts
Before Adjustment

Account
Relationship

1.

Prepaid
Expenses

Assets and Expenses

Assets (Supplies) Overstated


Expenses (Supplies Expense)
Understated

2.

Accrued
Revenues

Assets and Revenues

Assets (Accounts Receivable)


Understated
Revenues (Service Revenue)
Understated

3.

Accrued
Expenses

Expenses and
Liabilities

Expenses (Interest Expense)


Understated
Liabilities (Interest Payable)
Understated

4.

Unearned
Revenues

Liabilities and
Revenues

Liabilities (Unearned Rent) Overstated


Revenues (Rent Earned) Understated

5.

Amortization Expenses and Assets


(contra account)

Expenses (Amortization Expense)


Understated
Assets (Capital Assets) Overstated

3-13

BRIEF EXERCISE 3-9


(a)
Type of Adjustment

Account

(b)
Related Account

Accounts Receivable

Accrued Revenues

Service Revenue

Prepaid Insurance

Prepaid Expenses

Insurance Expense

Equipment

Estimates

Amortization
Expense/Accum.
Amortization

Supplies

Prepaid Expenses

Supplies Expense

Interest Payable

Accrued Expenses

Interest Expense

Unearned Service
Revenue

Unearned Revenues

Revenue Earned

Interest Receivable

Accrued Revenues

Interest Revenue

Rent Payable

Accrued Expenses

Rent Expense

BRIEF EXERCISE 3-10


KLAR COMPANY
Income Statement
For the Year Ended December 31, 2003
Revenues
Service revenue ......................................................
Expenses
Salaries expense.....................................................
Rent expense...........................................................
Insurance expense..................................................
Amortization expense.............................................
Supplies expense....................................................
Total expenses ................................................
Net income ......................................................................
3-14

$38,400
$13,000
4,000
2,000
001,000
500
020,500
$17,900

BRIEF EXERCISE 3-11


KLAR COMPANY
Statement of Owner's Equity
For the Year Ended December 31, 2003
S. Klar, Capital, January 1....................................................................
Add: Net income .................................................................................
Less: Drawings ....................................................................................
S. Klar, Capital, December 31 ..............................................................

$15,600
017,900
33,500
006,000
$27,500

*BRIEF EXERCISE 3-12


(a)
Dec. 31

Advertising Supplies ..............................................


Advertising Supplies Expense .......................

Advertising Supplies
12/31

1,500
1,500

Advertising Supplies Expense

1,500

12/31

8,700 12/31

12/31 Bal.

7,200

1,500

(b) The adjusted balances are the same. It does not matter whether the
original entry is recorded to an asset or an expenses account as long
as the adjustment is done correctly.

3-15

*BRIEF EXERCISE 3-13


(a)
May

May 31

Cash .........................................................................
Unearned Rental Revenue ..............................

600

Unearned Rental Revenue......................................


Rental Revenue................................................

600

Cash .........................................................................
Rental Revenue................................................

600

600
600

(b)
May

May 31

No adjustment required

(c) The ending balances are the same under either alternative.

3-16

600

SOLUTIONS TO EXERCISES
EXERCISE 3-1
(a)

Accrual basis accounting records the events that change an entitys


financial statements in the periods in which the events occur, rather
than in the periods in which the entity receives or pays cash. That
is, revenue is recognized when it is earned. Expenses are recognized
when services or goods are used or consumed in the production of
revenue. Information presented on an accrual basis is useful
because it reveals relationships that are likely to be important in
predicting future results.
Conversely, under the cash basis of accounting, revenue is recorded
only when cash is received, and an expense is recognized only when
cash is paid. As a result, the cash basis of accounting often leads to
misleading financial statements.

(b)

The government is not using either the cash or accrual basis of


accounting. It is using some other basis that is not a generally
accepted accounting policy. The government may believe it is
appropriate because the commitment to spend the funds has been
made.

(c)

Dear Member of Parliament,


It is my understanding that the Federal government is making
changes in the method of accounting it uses and is switching from
the cash basis of accounting to the accrual basis. I understand in
2001 accrual accounting is fully in use.
The government is to be commended for this change. The use of full
accrual accounting will provide a more accurate reflection of the true
costs of services that government provides and a more complete
reflection of its assets and liabilities. This will result in improved
information for decision makers and citizens.
Sincerely,
ACCOUNTING STUDENT

3-17

EXERCISE 3-2
(a)
Revenue
Expenses
Operating
Insurance
Net income

Cash
$22,000

Accrual
$26,000

13,500
2,500
$ 6,000

15,000
0000000
$ 11,000

(b) The accrual basis provides the most useful information for decision
making as it reflects transactions in the period in which they occur and
properly matches revenue and expenses.
EXERCISE 3-3
(a) 1. Prepaid Rent............................................................
Cash ...................................................................
To record payment of rent for January 1May 31, 2002.

20,000

2. Security Deposit......................................................
Cash ...................................................................
To record payment of security deposit.

5,000

3. Prepaid Rent............................................................
Cash ...................................................................
To record payment of rent for June 1November 30, 2002.

30,000

20,000

5,000

30,000

4. No entry required.
(b)

Rent Expense...............................................................
Prepaid Rent .......................................................
Rent Payable.......................................................
See (c) for calculations.

3-18

55,000
50,000
5,000

EXERCISE 3-3 (Continued)


(c) Rent expense:
$20,000 January 1 May 31 ($4,000 x 5 mos.)
30,000 June 1 November 30 ($5,000 x 6 mos.)
5,000 December 1 December 31 ($5,000 x 1 mos. accrual)
$55,000
(d) Balance sheet amounts with respect to rent:
Assets
Security deposit, $5,000
Liabilities
Rent payable, $5,000 (for the month of December)

3-19

EXERCISE 3-4
(a) July

(b) July

10 Supplies ...........................................................
Cash .........................................................

200

14 Cash .................................................................
Service Revenue .....................................

3,000

15 Salaries Expense.............................................
Cash .........................................................

1,200

20 Cash .................................................................
Unearned Service Revenue ....................

700

31

Supplies Expense...........................................
Supplies...................................................

500

Accounts Receivable .....................................


Service Revenue .....................................

500

Salaries Expense ............................................


Salaries Payable .....................................

1,200

Unearned Service Revenue ...........................


Service Revenue .....................................

900

31
31
31

3-20

200
3,000
1,200
700

500
500
1,200
900

EXERCISE 3-5
Answer

Calculation

(a) Supplies balance = $800

Supplies expense
Add: Supplies (1/31/03)
Less: Supplies purchased
Supplies (12/31/02)

(b) Total premium = $4,800

Total premium = Monthly premium X


12; $400 X 12 = $4,800

Purchase date = Aug. 1, 2002

(c) Salaries payable = $1,500

Purchase date: On Jan. 31, there


are 6 months coverage remaining
($400 X 6). Thus, the purchase date
was 6 months earlier on Aug. 1,
2002.
Cash paid
Salaries payable (1/31/03)
Less: Salaries expense
Salaries payable (12/31/02)

(d) Unearned revenue = $1,150

$950)
700)
(850)
$800)

Service revenue
Unearned revenue (1/31/03)

$2,500
800
3,300
1,800
$1,500

$2,000
750
2,750
Cash received in Jan.
1,600
Unearned revenue (12/31/02) $1,150

3-21

EXERCISE 3-6

Item

(a)
Type of
Adjustment

(b)
Accounts
Before Adjustment

1.

Accrued
Revenues

Assets (Accounts Receivable) Understated


Revenues (Service Revenue) Understated

2.

Prepaid
Expenses

Assets (Store Supplies) Overstated


Expenses (Store Supplies Expenses) Understated

3.

Accrued
Expenses

Expenses (Utility Expense) Understated


Liabilities (Accounts Payable) Understated

4.

Unearned
Revenues

Liabilities (Unearned Service Revenue) Overstated


Revenues (Service Revenue) Understated

5.

Accrued
Expenses

Expenses (Salaries Expense) Understated


Liabilities (Salaries Payable) Understated

6.

Prepaid
Expenses

Assets (Prepaid Insurance) Overstated


Expenses (Insurance Expense) Understated

7.

Amortization

Assets (Capital Assets) Overstated


Expenses (Amortization Expense) Understated

3-22

EXERCISE 3-7
1.

2.
3.
4.
5.

Mar. 31

31
31
31
31

Amortization Expense ($400 3).....................


Accumulated Amortization
Equipment...............................................

1,200

Unearned Rent Revenue...................................


Rent Revenue ($9,300 1/3) .....................

3,100

Interest Expense ...............................................


Interest Payable.........................................

500

Supplies Expense .............................................


Supplies ($2,800 $850) ...........................

1,950

Insurance Expense ($300 3)..........................


Prepaid Insurance .....................................

900

Accounts Receivable ........................................


Service Revenue........................................

750

Utilities Expense ...............................................


Utilities Payable.........................................

520

Amortization Expense ......................................


Accumulated Amortization
Dental Equipment...................................

1,000

Interest Expense ...............................................


Interest Payable.........................................

250

Insurance Expense ($12,000 12) ...................


Prepaid Insurance .....................................

1,000

Supplies Expense ($1,600 $500) ...................


Supplies .....................................................

1,100

1,200
3,100
500
1,950
900

EXERCISE 3-8
1.
2.
3.

Jan. 31
31
31

31
4.
5.

31
31

3-23

750
520

1,000
250
1,000
1,100

EXERCISE 3-9
1.
2.
3.

4.
5.
6.
7.

Oct. 31
31
31

31
31
31
31

Advertising Supplies Expense.........................


Advertising Supplies ($2,500 $1,400) ..

1,100

Insurance Expense ...........................................


Prepaid Insurance .....................................

100

Amortization Expense ......................................


Accumulated Amortization
Office Equipment....................................

50

Unearned Service Revenue..............................


Service Revenue........................................

600

Accounts Receivable ........................................


Service Revenue........................................

300

Interest Expense ...............................................


Interest Payable.........................................

70

Salaries Expense ..............................................


Salaries Payable ........................................

1,500

3-24

1,100
100

50
600
300
70
1,500

EXERCISE 3-10
Aug. 31
31
31
31

31
31

Accounts Receivable .............................................


Service Revenue.............................................

600

Office Supplies Expense .......................................


Office Supplies ...............................................

1,600

Insurance Expense ................................................


Prepaid Insurance ..........................................

1,500

Amortization Expense ...........................................


Accumulated AmortizationOffice
Equipment ....................................................

1,200

Salaries Expense....................................................
Salaries Payable .............................................

1,100

Unearned Rent Revenue........................................


Rent Revenue..................................................

800

3-25

600
1,600
1,500

1,200
1,100
800

EXERCISE 3-11
(a)

July 31
31
31
31
31

Insurance Expense.........................................
Prepaid Insurance...................................

300

Supplies...........................................................
Supplies Expense ...................................

500

Amortization Expense....................................
Accumulated Amortization Equipment

150

Wages Expense ..............................................


Wages Payable........................................

300

Accounts Receivable .....................................


Service Revenue .....................................

900

300
500
150
300
900

(b)
VIRMANI CO.
Income Statement
For the Month Ended July 31, 2003
Revenues
Service revenue ($5,500 + $900).....................
Expenses
Wages expense ($2,300 + $300) .....................
Supplies expense ($1,200 $500) ..................
Utilities expense ..............................................
Insurance expense ..........................................
Amortization expense .....................................
Total expenses .........................................
Net income ...............................................................

3-26

$6,400
$2,600
700
600
300
0,150
04,350
$2,050

EXERCISE 3-12
LIM COMPANY
Income Statement
For the Year Ended August 31, 2003
Revenues
Service revenue ...........................................................................
Rent revenue ................................................................................
Total revenues ......................................................................
Expenses
Salaries expense........................................................ $18,100
Rent expense..............................................................
15,000
Office supplies expense............................................
1,600
Insurance expense.....................................................
1,500
Amortization expense................................................
01,200
Total expenses .....................................................................
Net income ...........................................................................................

$34,600
011,800
46,400

037,400
$ 9,000

LIM COMPANY
Statement of Owner's Equity
For the Year Ended August 31, 2003
E. Lim, Capital, August 1, 2002............................................................
Add: Net income .................................................................................
E. Lim, Capital, August 31, 2003..........................................................

3-27

$15,600
009,000
$24,600

EXERCISE 3-12 (Continued)


LIM COMPANY
Balance Sheet
August 31, 2003
Assets
Cash......................................................................................................
Accounts receivable............................................................................
Office supplies .....................................................................................
Prepaid insurance................................................................................
Office equipment ..............................................................
$14,000
Less: Accumulated amortizationoffice equipment ...
004,800
Total assets ..........................................................................

$10,400
9,400
700
2,500
009,200
$32,200

Liabilities and Owner's Equity


Liabilities
Accounts payable ........................................................................
Salaries payable...........................................................................
Unearned rent revenue................................................................
Total liabilities ......................................................................

$05,800
1,100
700
7,600

Owner's equity
E. Lim, Capital ..............................................................................
Total liabilities and owner's equity .....................................

024,600
$32,200

3-28

*EXERCISE 3-13
(a) Jan. 02
10
15

Insurance Expense .........................................


Cash .........................................................

2,400

Supplies Expense ...........................................


Cash .........................................................

1,700

Cash .................................................................
Service Revenue .....................................

5,100

Insurance Expense
1/2

2,400

5,100 1/2
1/10

(b) Jan. 31
31
31

1,700
5,100

Supplies Expense
1/10

Cash
1/15

2,400

1,700
Service Revenue

2,400
1,700

1/15

5,100

Prepaid Insurance ($200 11 months) .........


Insurance Expense .................................

2,200

Supplies ...........................................................
Supplies Expense ...................................

800

Service Revenue .............................................


Unearned Service Revenue....................

3,600

3-29

2,200
800
3,600

*EXERCISE 3-13 (Continued)


(b) (Continued)
Cash
1/15

Service Revenue

5,100 1/2
1/10
1,000

Bal.

2,400
1,700

1/31

Insurance Expense
1/2
Bal.

2,400 1/31

1/31 2,200

1/10

200

Bal.

Supplies
1/31

5,100

Bal.

1,500

Supplies Expense
2,200

Prepaid Insurance

3,600 1/15

800

1,700 1/31

800

900
Unearned Service
Revenue
1/31 3,600

(c) Cash ...............................................................................................


Prepaid insurance.........................................................................
Supplies .........................................................................................
Unearned service revenue ...........................................................
Service revenue ............................................................................
Insurance expense........................................................................
Supplies expense..........................................................................

3-30

$1,000
2,200
800
3,600
1,500
200
900

SOLUTIONS TO PROBLEMS
PROBLEM 3-1A

3
4
5
4

(a)
(b)
(c)
(d)

(e)

3
1

(f)
(g)
(h)

Record interest on note payable.


Record interest on note receivable.
Allocate cost of capital asset over its useful life.
Record revenue that has been earned but not billed or
collected.
Record revenue that has been earned that was previously
received in advance.
Record hiring of employees.
Record salaries owed.
Record supplies used.

3-31

PROBLEM 3-2A

1.

Jan. 1
Dec. 31

2.

Sept. 1
Dec. 31

3.

Nov. 15
Dec. 31

4.

Dec. 15
Dec. 31

Office Supplies ..............................................


Cash ........................................................

4,500

Supplies Expense ($4,500 $900) ...............


Office Supplies.......................................

3,600

Prepaid Insurance .........................................


Cash ........................................................

3,600

Insurance Expense ($3,600 12 x 4) ...........


Prepaid Insurance..................................

1,200

Cash................................................................
Unearned Service Revenue...................

1,200

Unearned Service Revenue .........................


Service Revenue ....................................

1,200

Cash................................................................
Unearned Rent Revenue .......................

460

Unearned Rent Revenue ($460 2)..............


Rent Revenue .........................................

230

3-32

4,500
3,600

3,600
1,200

1,200
1,200

460
230

PROBLEM 3-3A
Students may find this to be a fairly challenging problem, so here are a
few points that should help:
Under the CASH BASIS, revenues are recorded when they are
collected (received in cash), even if they were earned (the sale was
made) earlier;
Under the ACCRUAL BASIS of accounting, revenues are recorded
when they are earned (the sale is made)even if the cash is not
collected until later, or is received prior to the revenue being
earned.
Under the CASH BASIS, expenses are recorded when the cash is
paid out; and
Under the ACCRUAL BASIS of accounting, expenses are recorded
when the cost has expired or been used up, which is not
always in the same time period as when the cash is paid out.
For example,
Under the CASH BASIS, Supplies are recorded as expenses as
soon as they are purchased and paid for;
Under the ACCRUAL BASIS of accounting, Supplies are not
recorded as expenses until they have been used up. While the
supplies are still on hand, they are recorded as assets because
they have future benefits;
Under the CASH BASIS, amounts such as Unpaid Wages Owing at
the end of 2002 would not be considered expenses until they are
actually paid outin 2003; and
Under the ACCRUAL BASIS of accounting, Unpaid Wages Owing at
the end of 2002 would be considered expenses in 2002, because
the cost was incurred or used up during 2002even though the
cash will not be paid out until 2003.

3-33

PROBLEM 3-3A (Continued)


$35,190

Cash basis income

+3,400

Accounts Receivable arise from sales that have been


made, thus revenue must be recognized.

-2,500

Accounts Receivable collected in 2003 from sales that


were made (and revenue that was earned) in 2002.

+1,300

Supplies are not recorded as expenses until used up).

-1,160

Supplies from 2002 that were used up (and an expense


incurred) in 2003.

-1,200

Which is an expense because the cost was incurred


during 2003.

+2,400

For 2002 wages expense that were paid in 2003.

-1,440

Which is an expense because the cost was incurred


during 2003.

+1,600

For 2002 expenses that were paid in cash in 2003.

$37,590

Accrual basis income

3-34

PROBLEM 3-4A
(a)
1. Cash .........................................................................
Fees Receivable ...............................................

9,000
9,000

2. Unearned Fees Revenue ............................................ 22,000


Fees Revenue...................................................
22,000
3. Cash ............................................................................. 30,000
Unearned Fees Revenue .................................
30,000
Unearned Fees Revenue ($30,000 $17,000)........... 13,000
Fees Revenue...................................................
13,000
4. Fees Receivable.......................................................... 118,000
Fees Revenue ($153,000 $22,000 $13,000)
118,000
5. Cash ............................................................................. 106,000
Fees Receivable ($118,000 $12,000)............
106,000
(b) Cash received with respect to fees = $9,000 + $106,000 + $30,000 =
$145,000
T accounts (not required)

(4)

Unearned Fees Revenue


22,000
(2)
22,000 (3)
30,000
(3)
13,000
17,000

Fees Receivable
9,000
118,000
(1)
9,000
(5)
106,000
12,000
Fees Revenue
(2)
(3)
(4)

22,000
13,000
118,000
153,000

(1)
(3)
(5)

3-35

Cash
9,000
30,000
106,000
145,000

PROBLEM 3-5A

1. (a) July 1 Office Supplies............................................


Cash ........................................................

1,560

(b) Dec. 31 Supplies Expense ($1,560 + $640 $740).


Office Supplies.......................................

1,460

2. (a) Jan. 1 Cash .............................................................


Note Payable ..........................................

10,000

(b) Dec. 31 Interest Expense .........................................


Interest Payable ($10,000 X 6%) ...........

600

3. (b) Dec. 31 Telephone Expense ....................................


Accounts Payable ..................................

400

4. (a) Jan. 1

1,560
1,460
10,000
600
400

Truck ............................................................
Cash ........................................................

18,000

(b) Dec. 31 Amortization Expense ................................


Accumulated AmortizationTruck........

3,600

5. (a) Dec. 26 Wages Expense...........................................


Cash ........................................................

3,000

(b) Dec. 31 Wages Expense...........................................


Wages Payable ($3,000 5 x 3) ............

1,800

18,000
3,600
3,000
1,800

Note to Instructors: The January 3, 2003 journal entry follows for


information:
Jan. 3 Wages Expense...........................................
Wages Payable............................................
Cash ........................................................

3-36

1,200
1,800
3,000

PROBLEM 3-6A

1.

Dec. 31

Advertising Expense.........................................
Prepaid Advertising ..................................
A650 $6,000 / 12 = $500 per month
for 8 months =
B974 $7,200 / 24 = $300 per month
for 4 months =
0

2.

Dec. 31

5,200
5,200
$4,000
1,200
$5,200

Unearned Rent Revenue................................... 108,000


Rent Revenue ............................................
108,000
5 $4,000 2 = $ 40,000
4 $8,500 2 =
68,000
Total rent earned $108,000

Note that the $369,000 balance in Unearned Rent Revenue includes


the security deposits.
3.

Dec. 31

Interest Expense ...............................................


Interest Payable.........................................

3,733
3,733

$80,000 8% 7/12 mos. = $3,733


4.

Dec. 31

Salaries Expense ..............................................


Salaries Payable ........................................
5 x $700 x 2/5 days = $1,400
3 x $500 x 2/5 days =
600
Total
$2,000

3-37

2,000
2,000

PROBLEM 3-7A
EXOTIC DESIGNS
Income Statement
For the Year Ended December 31, 2003
Revenues
Design revenue ($61,500 + (6) $3,800)...........
Expenses
Wage expense ($18,400 + (5) $400) ...............
Supplies expense ($12,200 (2) $1,800) .......
Rent expense ($9,600 (3) $600) ...................
Automobile expense [(7) 12,000 X $0.30)].....
Advertising expense .......................................
Amortization expense ($18,400 (1) 10) ......
Telephone expense .........................................
Insurance expense ($1,800 (4) 2) ................
Total expenses.........................................
Net income...............................................................

$65,300
$18,800
10,400
9,000
3,600
3,600
1,840
980
900
49,120
$16,180

EXOTIC DESIGNS
Balance Sheet
December 31, 2003
Assets
Cash ..........................................................................
Prepaid insurance ($1,800 2 (4)) ..........................
Rent deposit .............................................................
Accounts receivable (6)...........................................
Supplies (2)...............................................................
Equipment ................................................................ $18,400
Less: Accumulated amortizationequipment .....
1,840
Total assets ......................................................

$ 2,520
900
600
3,800
1,800
16,560
$26,180

Liabilities and Owners Equity


Liabilities
Wages payable (5) ..........................................
Accounts payable ((7) $12,000 X $0.30) .......
Total liabilities.........................................
Owners equity
Smith, Capital ($30,000 - $16,120 - $24,000).
Total liabilities and owners equity .......
3-38

400
3,600
4,000

22,180
$26,180

PROBLEM 3-8A

Balance Sheet
Adj.
Entry
1.
2.
3.
4.
5.
6.

Assets =
$500 O
$200 O
NA
NA
$100 U
$1,200 O

Liabilities +
NA
NA
$750 O
$500 U
NA
NA

Income Statement
Owners
Equity
$500 O
$200 O
$750 U
$500 O
$100 U
$1,200 O

3-39

Revenues NA
NA
$750 U
NA
$100 U
NA

Net
Expenses = Income
$500 U
$500 O
$200 U
$200 O
NA
$750 U
$500 U
$500 O
NA
$100 U
$1,200 U
$1,200 O

PROBLEM 3-9A

(a) 1. June 30
2.

30

30
3.
4.
5.
6.
7.

30
30
30
30
30

Insurance Expense ($7,200 1/12) ..........


Prepaid Insurance..............................
Amortization ExpenseOffice
Equipment...............................................
Accumulated Amortization
Office Equipment ............................

600
600
50
50

Amortization ExpenseBuses ................


Accum. AmortizationBuses ..........

2,300

Interest Expense........................................
Interest Payable .................................

300

Unearned Fees Revenue...........................


Fees Earned ($1,500 4)...................

6,000

Salaries Expense.......................................
Salaries Payable ($400 3)...............

1,200

Accounts Receivable ................................


Fees Earned .......................................

1,200

Advertising Expense.................................
Accounts Payable..............................

500

3-40

2,300
300
6,000
1,200
1,200
500

PROBLEM 3-9A (Continued)


(b)
Cash
Date

Explanation

June 30

Balance

Ref.

Debit

Credit

Balance
3,000

Accounts Receivable
Date

Explanation

June 30

Ref.

Debit

J2

1,200

Ref.

Debit

Credit

Balance
1,200

Prepaid Insurance
Date

Explanation

June 30
30

Balance

9
J2

Credit
0,600

Balance
007,200
006,600

Office Equipment
Date

Explanation

June 30

Balance

Ref.

Debit

Credit

Balance
001,800

Accumulated AmortizationOffice Equipment


Date

Explanation

Ref.

June 30

Debit

J2

Credit
0,050

Balance
000,050

Buses
Date

Explanation

June 30

Balance

Ref.
9

3-41

Debit

Credit

Balance
140,000

PROBLEM 3-9A (Continued)


(b) (Continued)
Accumulated AmortizationBuses
Date

Explanation

Ref.

June 30

Debit

J2

Credit
2,300

Balance
002,300

Notes Payable
Date

Explanation

June 30

Balance

Ref.
9

Debit

Credit

Ref.

Debit

Credit

J2

0,

500

Ref.

Debit

Credit

Balance
62,000

Accounts Payable
Date

Explanation

June 30

Balance
0,5500

Interest Payable
Date

Explanation

June 30

J2

0,300

Balance
000,300

Salaries Payable
Date

Explanation

Ref.

June 30

Debit

J2

Credit
1,200

Balance
001,200

Unearned Fees
Date

Explanation

June 30
30

Balance

Ref.
9
J2

3-42

Debit
6,000

Credit

Balance
15,000
9,000

PROBLEM 3-9A (Continued)


(b) (Continued)
Eldon Kaplan, Capital
Date

Explanation

June 30

Balance

Ref.

Debit

Credit

Balance
70,000

Fees Earned
Date

Explanation

June 30
30
30

Balance

Ref.

Debit

9
J2
J2

Credit
6,000
1,200

Balance
15,900
21,900
23,100

Salaries Expense
Date

Explanation

June 30
30

Balance

Ref.

Debit

9
J2

1,200

Ref.

Debit

Credit

Balance
09,000
10,200

Advertising Expense
Date

Explanation

June 30
30

Balance

9
J2

500

Ref.

Debit

Credit

Balance
00,800
1,300

Gas and Oil Expense


Date

Explanation

June 30

Balance

3-43

Credit

Balance
1,100

PROBLEM 3-9A (Continued)


(b) (Continued)
Insurance Expense
Date

Explanation

June 30

Ref.

Debit

J2

0,600

Credit

Balance
0,600

Amortization ExpenseOffice Equipment


Date

Explanation

June 30

Ref.

Debit

J2

0,050

Ref.

Debit

J2

2,300

Ref.

Debit

J2

0,300

Credit

Balance
0,050

Amortization ExpenseBuses
Date

Explanation

June 30

Credit

Balance
2,300

Interest Expense
Date

Explanation

June 30

3-44

Credit

Balance
0,300

PROBLEM 3-9A (Continued)


(c)

ATLANTIC TOURS
Adjusted Trial Balance
June 30, 2003
Debit
Cash .........................................................................
Accounts Receivable ..............................................
Prepaid Insurance ...................................................
Office Equipment.....................................................
Accumulated AmortizationOffice
Equipment.............................................................
Buses .......................................................................
Accumulated AmortizationBuses ......................
Notes Payable..........................................................
Accounts Payable ...................................................
Interest Payable.......................................................
Salaries Payable ......................................................
Unearned Fees.........................................................
Eldon Kaplan, Capital .............................................
Fees Earned .............................................................
Salaries Expense.....................................................
Advertising Expense...............................................
Gas and Oil Expense...............................................
Insurance Expense..................................................
Amortization ExpenseOffice Equipment ...........
Amortization ExpenseBuses ..............................
Interest Expense......................................................

3-45

Credit

$ 3,000
1,200
6,600
1,800
$

50

140,000
2,300
62,000
500
300
1,200
9,000
70,000
23,100
10,200
1,300
1,100
600
50
2,300
300
$168,450

0000000
$168,450

PROBLEM 3-10A

(a) 1. Aug. 31
2.
3.

31
31

31

4.
5.
6.
7.

31
31
31
31

Insurance Expense ($450 3) ..................


Prepaid Insurance..............................

1,350

Supplies Expense ($3,300 $1,000) ........


Supplies..............................................

2,300

1,350
2,300

Amortization ExpenseCottages
($6,250 1/4) ........................................
Accum. Amort.Cottages ................

1,562

Amortization ExpenseFurniture
($5,200 1/4) ........................................
Accum. Amort.Furniture................

1,300

1,562

1,300

Unearned Rent Revenue ...........................


Rent Revenue.....................................

5,000

Salaries Expense.......................................
Salaries Payable ................................

400

Accounts Receivable ................................


Rent Revenue.....................................

800

5,000
400

Interest Expense........................................
533
Interest Payable [($80,000 8%) 1/12]

3-46

800
533

PROBLEM 3-10A (Continued)


(b)
Cash
Date

Explanation

Aug. 31

Balance

Ref.

Debit

Credit

Balance
19,600

Accounts Receivable
Date

Explanation

Aug. 31

Ref.

Debit

J1

800

Ref.

Debit

Credit

Balance
00,800

Prepaid Insurance
Date

Explanation

Aug. 31
31

Balance

9
J1

Credit
0,1,350

Balance
005,400
004,050

Supplies
Date

Explanation

Aug. 31
31

Balance

Ref.

Debit

9
J1

Credit
2,300

Balance
003,300
001,000

Land
Date
Aug.

Explanation
31

Ref.

Debit

Credit

Balance

Balance
025,000

Cottages
Date

Explanation

Aug. 31

Balance

Ref.
9

3-47

Debit

Credit

Balance
125,000

PROBLEM 3-10A (Continued)


(b) (Continued)
Accumulated AmortizationCottages
Date

Explanation

Ref.

Aug. 31

Debit

J1

Credit
1,562

Balance
001,562

Furniture
Date

Explanation

Aug. 31

Balance

Ref.

Debit

Credit

Balance
026,000

Accumulated AmortizationFurniture
Date

Explanation

Ref.

Aug. 31

Debit

J1

Credit

Balance

1,300

000,1,300

Credit

Balance

Accounts Payable
Date

Explanation

Aug. 31

Balance

Ref.

Debit

006,500

Unearned Rent Revenue


Date

Explanation

Aug. 31
31

Balance

Ref.

Debit

9
J1

5,000

Ref.

Debit

Credit

Balance
006,800
001,800

Salaries Payable
Date

Explanation

Aug. 31

J1

Credit
400

Balance
000,400

Interest Payable
Date

Explanation

Ref.

Aug. 31

J1
3-48

Debit

Credit
0,533

Balance
000,533

PROBLEM 3-10A (Continued)


(b) (Continued)
Mortgage Payable
Date

Explanation

Aug. 31

Balance

Ref.

Debit

Credit

Balance
080,000

Keath Yhap, Capital


Date

Explanation

Aug. 31

Balance

Ref.

Debit

Credit

Balance
100,000

Keath Yhap, Drawings


Date

Explanation

Aug. 31

Balance

Ref.

Debit

Credit

Balance
05,000

Rent Revenue
Date

Explanation

Aug. 31
31
31

Balance

Ref.

Debit

9
J1
J1

Credit
5,000
0,800

Balance
80,000
85,000
85,800

Salaries Expense
Date

Explanation

Aug. 31
31

Balance

Ref.

Debit

9
J1

400

Ref.

Debit

Credit

Balance
51,000
51,400

Utilities Expense
Date

Explanation

Aug. 31

Balance

3-49

Credit

Balance
09,400

PROBLEM 3-10A (Continued)


(b) (Continued)
Repair Expense
Date

Explanation

Aug. 31

Balance

Ref.

Debit

Credit

Balance
03,600

Insurance Expense
Date

Explanation

Aug. 31

Ref.

Debit

J1

1,350

Ref.

Debit

J1

2,300

Ref.

Debit

J1

1,562

Ref.

Debit

J1

0,11,300

Ref.

Debit

J1

0,533

Credit

Balance
00,11,350

Supplies Expense
Date

Explanation

Aug. 31

Credit

Balance
2,300

Amortization ExpenseCottages
Date

Explanation

Aug. 31

Credit

Balance
1,562

Amortization ExpenseFurniture
Date

Explanation

Aug. 31

Credit

Balance
0,1,300

Interest Expense
Date

Explanation

Aug. 31

3-50

Credit

Balance
0,533

PROBLEM 3-10A (Continued)


(c)
HIGHLAND COVE RESORT
Adjusted Trial Balance
August 31, 2003
Debit
Cash ..........................................................................
Accounts Receivable...............................................
Prepaid Insurance....................................................
Supplies....................................................................
Land ..........................................................................
Cottages ...................................................................
Accumulated AmortizationCottages ..................
Furniture ...................................................................
Accumulated AmortizationFurniture ..................
Accounts Payable....................................................
Unearned Rent Revenue .........................................
Salaries Payable ......................................................
Interest Payable .......................................................
Mortgage Payable ....................................................
Keath Yhap, Capital .................................................
Keath Yhap, Drawings.............................................
Rent Revenue...........................................................
Salaries Expense .....................................................
Utilities Expense ......................................................
Repair Expense........................................................
Insurance Expense ..................................................
Supplies Expense ....................................................
Amortization ExpenseCottages ..........................
Amortization ExpenseFurniture..........................
Interest Expense ......................................................

3-51

Credit

$ 19,600
800
4,050
1,000
25,000
125,000
$ 1,562
26,000
1,300
6,500
1,800
400
533
80,000
100,000
5,000
85,800
51,400
9,400
3,600
1,350
2,300
1,562
1,300
000 0533
$277,895

0000 000
$277,895

PROBLEM 3-10A (Continued)


(d)

HIGHLAND COVE RESORT


Income Statement
For the Three Months Ended August 31, 2003

Revenues
Rent revenue .....................................................
Expenses
Salaries expense ...............................................
Utilities expense................................................
Repair expense..................................................
Supplies expense..............................................
Amortization expensecottages.....................
Insurance expense............................................
Interest expense................................................
Amortization expensefurniture.....................
Total expenses...........................................
Net income ...............................................................

$85,800
$51,400
9,400
3,600
2,300
1,562
1,350
533
1,300
71,445
$14,355

HIGHLAND COVE RESORT


Statement of Owner's Equity
For the Three Months Ended August 31, 2003
Keath Yhap, Capital, June 1........................................................ $
0
Add: Investment by owner ........................................................ 100,000
Net income ........................................................................ 0 14,355
114,355
Less: Drawings ........................................................................... 0 05,000
Keath Yhap, Capital, August 31.................................................. $109,355

3-52

PROBLEM 3-10A (Continued)


(d) (Continued)
HIGHLAND COVE RESORT
Balance Sheet
August 31, 2003
Assets
Cash ..........................................................................
Accounts receivable................................................
Prepaid insurance....................................................
Supplies....................................................................
Land ..........................................................................
Cottages ................................................................... $125,000
Less: Accumulated amortizationcottages ........
1,562
26,000
Furniture ...................................................................
1,300
Less: Accumulated amortizationfurniture ........
Total assets ..............................................

$ 19,600
800
4,050
1,000
25,000
123,438
24,700
$198,588

Liabilities and Owner's Equity


Liabilities
Accounts payable ............................................
Salaries payable ...............................................
Interest payable................................................
Unearned rent revenue ....................................
Mortgage payable.............................................
Total liabilities ..........................................
Owner's equity
Keath Yhap, Capital .........................................
Total liabilities and owner's equity.........

3-53

6,500
400
533
1,800
80,000
89,233

109,355
$198,588

PROBLEM 3-11A

(a) Dec. 31
31
31
31
31
31
31

Accounts Receivable.......................................
Advertising Revenue................................

1,500

Art Supplies Expense ......................................


Art Supplies ..............................................

3,400

Insurance Expense ..........................................


Prepaid Insurance ....................................

850

Amortization Expense .....................................


Accumulated Amortization......................

7,000

Interest Expense ..............................................


Interest Payable........................................

150

Unearned Advertising Revenue......................


Advertising Revenue................................

1,400

Salaries Expense .............................................


Salaries Payable .......................................

1,300

3-54

1,500
3,400
850
7,000
150
1,400
1,300

PROBLEM 3-11A (Continued)


(b)

YOUNT ADVERTISING AGENCY


Income Statement
For the Year Ended December 31, 2002

Revenues
Advertising revenue..............................................
Expenses
Salaries expense ...................................................
Amortization expense ...........................................
Rent expense.........................................................
Art supplies expense ............................................
Insurance expense................................................
Interest expense....................................................
Total expenses...............................................
Net income ...................................................................

$61,500
$11,300
7,000
4,000
3,400
850
000500
27,050
$34,450

YOUNT ADVERTISING AGENCY


Statement of Owner's Equity
For the Year Ended December 31, 2002
T. Yount, Capital, January 1..........................................................
Add: Net income ..........................................................................
Less: Drawings .............................................................................
T. Yount, Capital, December 31 ....................................................

3-55

$25,500
34,450
59,950
12,000
$47,950

PROBLEM 3-11A (Continued)


(b) (Continued)
YOUNT ADVERTISING AGENCY
Balance Sheet
December 31, 2002
Assets
Cash ................................................................................
Accounts receivable......................................................
Art supplies ....................................................................
Prepaid insurance..........................................................
Printing equipment ........................................................ $60,000
Less: Accumulated amortization
Printing equipment
35,000
Total assets.......................................................

$11,000
21,500
5,000
2,500
25,000
$65,000

Liabilities and Owner's Equity


Liabilities
Notes payable .........................................................
Accounts payable...................................................
Interest payable ......................................................
Unearned advertising revenue..............................
Salaries payable .....................................................
Total liabilities.................................................

$ 5,000
5,000
150
5,600
1,300
17,050

Owner's equity
T. Yount, Capital.......................................................
Total liabilities and owner's equity .............

47,950
$65,000

3-56

PROBLEM 3-11A (Continued)


(c) $5,000 x ? x 10/12 mos. = $500
$500 interest for 10 months is equivalent to $600 interest for 12
months.
$600 / $5,000 = 12% interest per year
(d) Salaries Expense, $11,300 less Salaries Payable on 12/31/02, $1,300 =
$10,000 payment made for 2002 salaries. Total Payments, $13,500
$10,000 = $3,500 Salaries Payable on 12/31/01
Salaries Payable
12/31/01
Payments 13,500 Expense
12/31/02

3-57

3,500
11,300
1,300

*PROBLEM 3-12A

1.

Jan. 1
Dec. 31

2.

Sept. 1
Dec. 31

3.

4.

Nov. 15

Supplies Expense..........................................
Cash ........................................................

4,500

Office Supplies .............................................


Office Supplies Expense .......................

900

Insurance Expense........................................
Cash ........................................................

3,600

Prepaid Insurance ($3,600 12 x 8) ............


Insurance Expense ................................

2,400

Cash................................................................
Service Revenue ....................................

1,200

4,500
900

3,600
2,400

1,200

Dec. 31

No entry required

Dec. 15

Cash................................................................
Rental Revenue ......................................

460

Rental Revenue ($460 2) ............................


Unearned Rental Revenue ....................

230

Dec. 31

3-58

460
230

*PROBLEM 3-13A

(a) 1. June 30
2.
3.
4.
5.
6.

30
30
30
30
30

Supplies .....................................................
Supplies Expense ..............................

1,500

Interest Expense ($17,000 8% 5/12) ..


Interest Payable ................................

567

Prepaid Insurance ($1,800 x 8/12)............


Insurance Expense ...........................

1,200

Consulting Revenue..................................
Unearned Consulting Revenue ........

1,000

Accounts Receivable ................................


Graphic Revenue ...............................

2,000

Amortization Expense ($9,000 2) ..........


Accumulated Amortization
Equipment .......................................

4,500

3-59

1,500
567
1,200
1,000
2,000

4,500

*PROBLEM 3-13A (Continued)


(b)

GLOBAL GRAPHICS COMPANY


Adjusted Trial Balance
June 30, 2003
Debit
Cash .........................................................................
Accounts Receivable ($14,000 + $2,000)...............
Supplies ...................................................................
Prepaid Insurance ...................................................
Equipment................................................................
Accumulated Amortization.....................................
Notes Payable..........................................................
Accounts Payable ...................................................
Interest Payable.......................................................
Unearned Consulting Revenue ..............................
Jill Batke, Capital.....................................................
Graphic Revenue ($52,100 + $2,000) .....................
Consulting Revenue ($5,000 $1,000) ..................
Salaries Expense.....................................................
Supplies Expense ($2,700 $1,500) ......................
Advertising Expense...............................................
Rent Expense...........................................................
Utilities Expense......................................................
Amortization Expense.............................................
Insurance Expense ($1,800 $1,200) ....................
Interest Expense......................................................

3-60

Credit

$ 9,500
16,000
1,500
1,200
45,000
$ 4,500
17,000
9,000
567
1,000
25,000
54,100
4,000
30,000
1,200
1,900
1,500
1,700
4,500
600
567
$115,167

$115,167

*PROBLEM 3-13A (Continued)


(c)

GLOBAL GRAPHICS COMPANY


Income Statement
For the Six Months Ended June 30, 2003

Revenues
Graphic revenue...................................................
Consulting revenue..............................................
Total revenues...............................................
Expenses
Salaries expense..................................................
Advertising expense ............................................
Utilities expense...................................................
Rent expense........................................................
Supplies expense.................................................
Amortization expense..........................................
Interest expense...................................................
Insurance expense...............................................
Total expenses ..............................................
Net income ...................................................................

$54,100
4,000
58,100
$30,000
1,900
1,700
1,500
1,200
4,500
567
600
41,967
$16,133

GLOBAL GRAPHICS COMPANY


Statement of Owner's Equity
For the Six Months Ended June 30, 2003
Jill Batke, Capital, January 1 ........................................................
Add: Investment by owner ..........................................................
Net income ..........................................................................
Jill Batke, Capital, June 30............................................................

3-61

0
25,000
16,133
$41,133

*PROBLEM 3-13A (Continued)


(c) (Continued)
GLOBAL GRAPHICS COMPANY
Balance Sheet
June 30, 2003
Assets
Cash...........................................................................
Accounts receivable.................................................
Supplies.....................................................................
Prepaid insurance.....................................................
Equipment .................................................................
Less: Accumulated amortization ...........................
Total assets ......................................................

$ 9,500
16,000
1,500
1,200
$45,000
4,500

40,500
$68,700

Liabilities and Owner's Equity


Liabilities
Notes payable .............................................................
Accounts payable.......................................................
Interest payable ..........................................................
Unearned consulting revenue...................................
Total liabilities.....................................................

$17,000
9,000
567
1,000
27,567

Owner's equity
Jill Batke, Capital .......................................................
Total liabilities and owner's equity ...................

41,133
$68,700

3-62

PROBLEM 3-1B

3
4
5
4
2

(a)
(b)
(c)
(d)
(e)

3
1

(f)
(g)
(h)

Record interest on overdue account payable.


Record interest earned on overdue account receivable.
Allocate cost of equipment over its useful life.
Record revenue owed by customers for services provided.
Record fees that have been earned that were previously
received in advance.
Record signing of lease for rental space.
Record property taxes due.
Record expiration of rent at the end of the month.

3-63

PROBLEM 3-2B

1.

Jan. 1
Dec. 31

2.

Aug. 1
Dec. 31

3.

Nov. 15
Dec. 31

4.

Dec. 15
Dec. 31

Office Supplies ..............................................


Cash ........................................................

2,800

Supplies Expense ($2,800 $500) ...............


Office Supplies.......................................

2,300

Prepaid Insurance .........................................


Cash ........................................................

3,600

Insurance Expense ($3,600 12 x 5) ...........


Prepaid Insurance..................................

1,500

Cash................................................................
Unearned Service Revenue...................

1,200

Unearned Service Revenue ($400 x 2).........


Service Revenue ....................................

800

Prepaid Rent ..................................................


Cash ........................................................

4,500

No entry required

3-64

2,800
2,300

3,600
1,500

1,200
800

4,500

PROBLEM 3-3B

$43,900
+3,600
- 2,700
+1,550
- 1,310
- 1,500
+2,200
- 1,360
+1,500
- 2,000
$43,880

Cash basis earnings.


Accounts receivable arise from sales that have been made,
thus revenue must be recognized for balance outstanding at
the end of the current year.
Accounts receivable collected in current year, for sales
made in previous year must be deducted from earnings.
Prepaid expenses at year end should be set up as an asset
rather than expensed, this increases earnings.
Prepaid expenses at the end of the previous year should be
expensed this year, this decreases earnings.
Accounts payable owing at the end of the current year
should be accrued, thus reducing earnings.
Accounts payable owed at the end of the previous year
should not be deducted from the current years earnings,
thus increasing earnings.
Unearned revenue at the end of the current year should be
accrued, thus reducing earnings.
Unearned revenue at the end of the previous year should
not be deducted from the current years income, thus
increasing earnings.
Amortization expense is equal to the increase in
accumulated amortization from 2001 to 2002 ($22,000 $20,000 = $2,000)
Accrual basis income.

3-65

PROBLEM 3-4B

(a)

1. Cash ...............................................................
Dues Receivable...................................

11,000

2. Unearned Ticket Revenue.............................


Ticket Revenue.....................................

25,000

3. Cash ...............................................................
Unearned Ticket Revenue ...................

35,000

11,000
25,000
35,000

Unearned Ticket Revenue ($35,000- $20,000)


Ticket Revenue.....................................

15,000
15,000

4. Dues Receivable ............................................


Dues Revenue .....................................

148,000

5. Cash ...............................................................
Dues Receivable ($148,000 $15,000)

133,000

148,000
133,000
Dues Revenue
4.
148,000

Dues Receivable
2001 Bal. 11,000
4.
148,000 1.
11,000
5.
133,000
2002 Bal. 15,000

2002 Bal.148,000
Ticket Revenue
2.
25,000
3.
15,000
2002 Bal. 50,000

Unearned Ticket Revenue


2001 Bal. 25,000
35,000
2.
25,000 3.
3.
15,000
2002 Bal. 20,000
(b)

Cash received with respect to dues and tickets:

1.
3.
5.

Collection of 2001 dues


Sale of tickets
Collection of 2002 dues

$ 11,000
35,000
133,000
$179,000
3-66

PROBLEM 3-5B
1. (a) Jan. 31 Supplies .......................................................
Cash ......................................................

,500

(b) Dec. 31 Supplies Expense ($300 + $1,500 $500).


Office Supplies .....................................

1,300

2. (a) June 1

1,500
1,300

Cash .............................................................
Note Payable.........................................

4,000

(b) Dec. 31 Interest Expense .........................................


Interest Payable ($4,000 X 8% x 7/12).

187

3. (b) Dec. 31 Utilities Expense .........................................


Accounts Payable ................................

1,400

4. (a) Jan. 1

5.

4,000
187
1,400

Truck ............................................................
Cash ......................................................

38,000

(b) Dec. 31 Amortization Expense ................................


Accumulated Amortization Truck....

10,000

Dec. 31 Wages Expense ($3,000 x 2/12* days).......


Wages Payable .....................................

500

38,000
10,000
500

*See errata note.


Note to Instructors: The January 11, 2003 journal entry follows for
information:
Jan. 11

Wages Expense ($3,000 x 10/12 days) ......


Wages Payable ($3,000 x 1/12 days) .........
Cash ......................................................

Errata Note: Advise students to see errata sheet if


they have the first printing of the text. In
transaction #5, December 31 falls on a Tuesday,
not Thursday, in 2002. December 28 falls on a
Saturday. No adjusting entry has been recorded
for the period from December 30 through
December 31. Assume a six-day (Monday through
Saturday) work week.
3-67

2,500
500
3,000

PROBLEM 3-6B

(a)

Prepaid Insurance before adjustments


A2958 $ 5,800
B4564
9,600
$15,400

(b)
1.

Dec. 31

Insurance Expense ..........................


Prepaid Insurance...................

5,300

Prepaid Insurancebalance after adjustment


($15,400 - $5,300 = $10,100)
A2958 $5,800 24 = $242 per month
for 12 months =
$ 2,900
B4564 $9,600 24 = $400 per month
for 18 months =
0 7,200
$10,100
Insurance Expense
A2958 $5,800 24 = $242 per month
for 12 months =
$2,900
B4564 $9,600 24 = $400 per month
for 6 months =
2,400
$5,300

3-68

5,300

PROBLEM 3-6B (Continued)


(b) (Continued)
2.

Dec. 31

Unearned Subscription Revenue....


Rent Subscription Revenue ...

Subscription Revenue Earned


October 200 x $50 x 3/12 =
November 300 x $50 x 2/12 =
December 480 x $50 x 1/12 =

7,000
7,000

$2,500
2,500
2,000
$7,000

Unearned Subscription Revenue ($49,000 - $7,000 = $42,000)


October 200 x $50 x 9/12 =
$ 7,500
November 300 x $50 x 10/12 =
12,500
December 480 x $50 x 11/12 =
22,000
$42,000

3.

Dec. 31

Salaries Expense ........................ 3,060


Salaries Payable ................
5 x $600 x 3/5 days =
3 x $700 x 3/5 days =
Total

3-69

$1,800
1,260
$3,060

3,060

PROBLEM 3-7B
(a)

THE RADICAL EDGE


Income Statement
For the Six Months Ended April 30, 2003

Revenues
Repair services ($32,150 + $650) ...................
Expenses
Wages expense ($2,600 + $120).....................
Rent expense ($1,225 - $175) .........................
Advertising expense .......................................
Amortization expense ($9,200 (i) 8 x 6/12 )
Utilities expense ..............................................
Total expenses.........................................
Net income...............................................................

$32,800
$2,720
1,050
375
575
970
5,690
$27,110

(b)
THE RADICAL EDGE
Balance Sheet
April 30, 2003
Assets
Cash ........................................................................
Rent deposit ...........................................................
Accounts receivable .............................................
Equipment ..............................................................
Less: Accumulated amortizationequip............
Total assets.....................................................

$37,780
175
650
$9,200
575

8,625
$47,230

Liabilities and Owners Equity


Liabilities
Wages payable ..............................................

Owners equity
Charron, Capital ($20,000 + $27,110) ...........
Total liabilities and owners equity ......

47,110
$47,230

3-70

120

PROBLEM 3-8B

Adj.
Entry
1.
2.
3.
4.
5.
6.

Balance Sheet
Assets =
$300 O
$1,000 O
NA
$2,000 U
NA
$1,000 O

Liabilities +
NA
NA
$750 O
NA
$250 U
NA

Income Statement
Owners
Revenues - Expenses =
Equity
$300 O
NA
$300 U
$1,000 O
NA
$1,000 U
$750 U
$750 U
NA
$2,000 U
$2,000 U
NA
$250 O
NA
$250 U
$1,000 O
NA
$1,000 U

3-71

Net
Income
$300 O
$1,000 O
$750 U
$2,000 U
$250 O
$1,000 O

PROBLEM 3-9B

(a) 1. Dec. 31
2.

31

Accounts Receivable ................................


Service Revenue ................................

2,500

Insurance Expense ($3,600 1/2) ............


Prepaid Insurance..............................

1,800

2,500
1,800

3.

31

Amortization ExpenseAutomobiles .... 15,000


Accumulated Amortization
Automobiles ....................................
15,000

4.

31

Interest Expense........................................
Interest Payable .................................

5,400

Unearned Service Revenue ......................


Service Revenue ...............................

1,000

Salaries Expense.......................................
Salaries Payable ($500 3) ...............

1,500

Repair Expense .........................................


Accounts Payable..............................

650

5.
6.
7.

31
31
31

3-72

5,400
1,000
1,500
650

PROBLEM 3-9B (Continued)


(b)
Cash
Date

Explanation

Dec. 31

Balance

Ref.

Debit

Credit

Balance
12,400

Accounts Receivable
Date

Explanation

Dec. 31
31

Balance

Ref.

Debit

9
J2

2,500

Ref.

Debit

Credit

Balance
3,200
5,700

Prepaid Insurance
Date

Explanation

Dec. 31
31

Balance

9
J2

Credit
0,1,800

Balance
003,600
001,800

Automobiles
Date

Explanation

Dec. 31

Balance

Ref.

Debit

Credit

Balance
0058,000

Accumulated AmortizationAutomobiles
Date

Explanation

Ref.

Dec. 31

Debit

J2

Credit
0,015,000

Balance
0015,000

Notes Payable
Date

Explanation

Dec. 31

Balance

Ref.
9

3-73

Debit

Credit

Balance
45,000

PROBLEM 3-9B (Continued)


(b) (Continued)
Accounts Payable
Date

Explanation

Dec. 31

Ref.

Debit

Credit

Balance

J2

0,

650

Ref.

Debit

Credit

Balance

0,5,400

000,5,400

Credit

Balance

0,5650

Interest Payable
Date

Explanation

Dec. 31

J2

Salaries Payable
Date

Explanation

Ref.

Dec. 31

Debit

J2

1,500

001,500

Unearned Revenue
Date

Explanation

Dec. 31
31

Balance

Ref.

Debit

9
J2

1,000

Ref.

Debit

Credit

Balance
2,500
1,500

C. Orosco, Capital
Date

Explanation

Dec. 31

Balance

Credit

Balance
18,000

Service Revenue
Date

Explanation

Dec. 31
31
31

Balance

Ref.
9
J2
J2

3-74

Debit

Credit
2,500
1,000

Balance
84,000
86,500
87,500

PROBLEM 3-9B (Continued)


(b) (Continued)
Salaries Expense
Date

Explanation

Dec. 31
31

Balance

Ref.

Debit

9
J2

1,500

Ref.

Debit

Credit

Balance
057,000
58,500

Repair Expense
Date

Explanation

Dec. 31
31

Balance

9
J2

650

Ref.

Debit

Credit

Balance
00,6,000
6,650

Gas and Oil Expense


Date

Explanation

Dec. 31

Balance

Credit

Balance
9,300

Insurance Expense
Date

Explanation

Dec. 31

Ref.

Debit

J2

0,1,800

Ref.

Debit

J2

0,015,000

Ref.

Debit

J2

05,400

Credit

Balance
0,11,800

Amortization ExpenseAutomobiles
Date

Explanation

Dec. 31

Credit

Balance
0,15,000

Interest Expense
Date

Explanation

Dec. 31

3-75

Credit

Balance
05,400

PROBLEM 3-9B (Continued)


(c)

OROSCO SECURITY SERVICE


Adjusted Trial Balance
December 31, 2002
Debit
Cash ..........................................................................
Accounts Receivable...............................................
Prepaid Insurance....................................................
Automobiles .............................................................
AmortizationAutomobiles....................................
Notes Payable ..........................................................
Interest Payable .......................................................
Accounts Payable ....................................................
Salaries Payable ......................................................
Unearned Revenue ..................................................
C. Orosco, Capital....................................................
Service Revenue ......................................................
Salaries Expense .....................................................
Repair Expense ........................................................
Gas and Oil Expense ...............................................
Insurance Expense ..................................................
Amortization ExpenseAutomobiles....................
Interest Expense ......................................................

3-76

Credit

$ 12,400
5,700
1,800
58,000
$ 15,000
45,000
5,400
650
1,500
1,500
18,000
87,500
58,500
6,650
9,300
1,800
15,000
0005,400
$174,550

0000000
$174,550

PROBLEM 3-10B

(a) 1. May 31
2.
3.

31
31

31

4.
5.
6.
7.

31
31
31
31

Insurance Expense ($1,800 x 1/12) ..........


Prepaid Insurance..............................

150

Supplies Expense ($1,900 $1,000) ........


Supplies..............................................

900

150
900

Amortization ExpenseLodge
($3,500 1/12) ......................................
Accum. Amort.Lodge.....................

292

Amortization ExpenseFurniture
($3,360 1/12) ......................................
Accum. Amort.Furniture................

280

Interest Expense........................................
Interest Payable ($35,000 8% 1/12)

292

280
233
233

Unearned Rent Revenue ...........................


Rent Revenue.....................................

1,500

Accounts Receivable ................................


Rent Revenue.....................................

800

Salaries Expense.......................................
Salaries Payable ................................

300

3-77

1,500
800
300

PROBLEM 3-10B (Continued)


(b)
Cash
Date

Explanation

May 31

Balance

Ref.

Debit

Credit

Balance
2,500

Accounts Receivable
Date

Explanation

May 31

Ref.

Debit

J1

800

Ref.

Debit

Credit

Balance
00,800

Prepaid Insurance
Date

Explanation

May 31
31

Balance

9
J1

Credit
0, 150

Balance
001,800
001,650

Supplies
Date

Explanation

May 31
31

Balance

Ref.

Debit

9
J1

Credit
900

Balance
001,900
001,000

Land
Date

Explanation

May 31

Balance

Ref.

Debit

Credit

Balance
015,000

Lodge
Date

Explanation

May 31

Balance

Ref.
9

3-78

Debit

Credit

Balance
70,000

PROBLEM 3-10B (Continued)


(b) (Continued)
Accumulated AmortizationLodge
Date

Explanation

Ref.

May 31

Debit

J1

Credit
292

Balance
292

Furniture
Date

Explanation

May 31

Balance

Ref.

Debit

Credit

Balance
016,800

Accumulated AmortizationFurniture
Date

Explanation

Ref.

May 31

Debit

J1

Credit
280

Balance
000,280

Accounts Payable
Date

Explanation

May 31

Balance

Ref.

Debit

Credit

Balance
004,700

Unearned Rent Revenue


Date

Explanation

May 31
31

Balance

Ref.

Debit

9
J1

1,500

Ref.

Debit

Credit

Balance
003,600
002,100

Salaries Payable
Date

Explanation

May 31

J1

3-79

Credit
300

Balance
000,300

PROBLEM 3-10B (Continued)


(b) (Continued)
Interest Payable
Date

Explanation

Ref.

May 31

Debit

Credit
0,233

Balance
0,233

Debit

Credit

Balance

J1

Mortgage Payable
Date

Explanation

May 31

Balance

Ref.
9

035,000

Sara Sutton, Capital


Date

Explanation

May 31

Balance

Ref.

Debit

Credit

Balance
60,000

Rent Revenue
Date

Explanation

May 31
31
31

Balance

Ref.

Debit

9
J1
J1

Credit
1,500
0,800

Balance
9,200
10,700
11,500

Salaries Expense
Date

Explanation

May 31
31

Balance

Ref.

Debit

9
J1

300

Ref.

Debit

Credit

Balance
3,000
3,300

Utilities Expense
Date

Explanation

May 31

Balance

3-80

Credit

Balance
01,000

PROBLEM 3-10B (Continued)


(b) (Continued)
Advertising Expense
Date

Explanation

May 31

Balance

Ref.

Debit

Credit

Balance
0 500

Insurance Expense
Date

Explanation

May 31

Ref.

Debit

J1

150

Ref.

Debit

Credit

Balance
150

Supplies Expense
Date

Explanation

May 31

J1

Credit

900

Balance
900

Amortization ExpenseLodge
Date

Explanation

Ref.

May 31

J1

Debit

Credit

292

Balance
292

Amortization ExpenseFurniture
Date

Explanation

May 31

Ref.

Debit

J1

0,280

Ref.

Debit

J1

0,233

Credit

Balance
0280

Interest Expense
Date

Explanation

May 31

3-81

Credit

Balance
0233

PROBLEM 3-10B (Continued)


(c)
SUPER MOTEL
Adjusted Trial Balance
May 31, 2003
Debit
Cash ..........................................................................
Accounts Receivable...............................................
Prepaid Insurance....................................................
Supplies....................................................................
Land ..........................................................................
Lodge ........................................................................
Accumulated AmortizationLodge .......................
Furniture ...................................................................
Accumulated AmortizationFurniture ..................
Accounts Payable ....................................................
Unearned Rent Revenue .........................................
Salaries Payable ......................................................
Interest Payable .......................................................
Mortgage Payable ....................................................
Sara Sutton, Capital.................................................
Rent Revenue...........................................................
Salaries Expense .....................................................
Utilities Expense ......................................................
Advertising Expense ...............................................
Insurance Expense ..................................................
Supplies Expense ....................................................
Amortization ExpenseLodge...............................
Amortization ExpenseFurniture..........................
Interest Expense ......................................................

3-82

Credit

2,500
800
1,650
1,000
15,000
70,000
$

292

16,800
280
4,700
2,100
300
233
35,000
60,000
11,500
3,300
1,000
500
150
900
292
280
00 00233
$114,405

0000 000
$114,405

PROBLEM 3-10B (Continued)


(d)

SUPER MOTEL
Income Statement
For the Month Ended May 31, 2003

Revenues
Rent revenue ...................................................
Expenses
Salaries expense.............................................
Utilities expense..............................................
Advertising expense.......................................
Supplies expense............................................
Amortization expenselodge .......................
Insurance expense..........................................
Interest expense..............................................
Amortization expensefurniture ..................
Total expenses ........................................
Net income ...............................................................

$11,500
$3,300
1,000
500
900
292
150
233
280
6,655
$ 4,845

SUPER MOTEL
Statement of Owner's Equity
For the Month Ended May 31, 2003
Sara Sutton, Capital, May 1.........................................................
Add: Investment by owner .........................................................
Net income .........................................................................
Less: Drawings ...........................................................................
Sara Sutton, Capital, May 31.......................................................

3-83

0
60,000
4,845
64,845
0
$64,845

PROBLEM 3-10B (Continued)


(d) (Continued)
SUPER MOTEL
Balance Sheet
May 31, 2003
Assets
Cash ..........................................................................
Accounts receivable................................................
Prepaid insurance....................................................
Supplies....................................................................
Land ..........................................................................
Cottages ...................................................................
Less: Accumulated amortizationcottages ........
Furniture ...................................................................
Less: Accumulated amortizationfurniture ........
Total assets .....................................................

$ 2,500
800
1,650
1,000
15,000
$70,000
000292
16,800
000280

69,708
0016,520
$107,178

Liabilities and Owner's Equity


Liabilities
Accounts payable ............................................
Salaries payable ...............................................
Interest payable................................................
Unearned revenue............................................
Mortgage payable.............................................
Total liabilities ..........................................

4,700
300
233
2,100
0035,000
42,333

Owner's equity
Sara Sutton, Capital .........................................
Total liabilities and owner's equity.........

0064,845
$107,178

3-84

PROBLEM 3-11B

(a) Sept. 30
30
30
30
30
30
30

Accounts Receivable ....................................


Commission Revenue...........................

600

Rent Expense ................................................


Prepaid Rent ..........................................

600

Supplies Expense .........................................


Supplies .................................................

200

Amortization Expense ..................................


Accum. AmortizationEquipment ......

350

Interest Expense ...........................................


Interest Payable.....................................

50

Unearned Rent Revenue...............................


Rent Revenue ........................................

300

Salaries Expense ..........................................


Salaries Payable ....................................

400

3-85

600
600
200
350
50
300
400

PROBLEM 3-11B (Continued)


(b)

IRABU CO.
Income Statement
For the Quarter Ended September 30, 2003
Revenues
Commission revenue ......................................
Rent revenue....................................................
Total revenues .........................................
Expenses
Salaries expense .............................................
Rent expense ...................................................
Utilities expense ..............................................
Amortization expense .....................................
Supplies expense ............................................
Interest expense ..............................................
Total expenses.........................................
Net income .......................................................

$14,600
700
15,300
$9,400
1,500
510
350
200
50
12,010
$ 3,290

IRABU CO.
Statement of Owners Equity
For the Quarter Ended September 30, 2003
Yosuke Irabu, Capital, July 1 .....................................................
Add: Investment .......................................................................
Net income.......................................................................
Less: Drawings ..........................................................................
Yosuke Irabu, Capital, September 30 ........................................

3-86

$
0
14,000
3,290
17,290
600
$16,690

PROBLEM 3-11B (Continued)


(b) (Continued)
IRABU CO.
Balance Sheet
September 30, 2003
Assets
Cash ........................................................................
Accounts receivable ..............................................
Prepaid rent ............................................................
Supplies ..................................................................
Equipment ..............................................................
Less: Accum. amortizationequipment.............
Total assets.....................................................

$ 6,700
1,000
900
1,000
$15,000
350

14,650
$24,250

Liabilities and Owners Equity


Liabilities
Notes payable .................................................
Accounts payable...........................................
Salaries payable .............................................
Interest payable ..............................................
Unearned rent revenue ..................................
Total liabilities.........................................

$ 5,000
1,510
400
50
600
7,560

Owners equity
Yosuke Irabu, Capital.....................................
Total liabilities and owners equity .......

16,690
$24,250

(c) Interest of 12% per year equals a monthly rate of 1%; monthly interest
is $50 ($5,000 X 1%). Since total interest expense is $50, the note has
been outstanding one month.

3-87

*PROBLEM 3-12B

1.

Jan. 1
Dec. 31

2.

Aug. 1
Dec. 31

3.

Nov. 15
Dec. 31

4.

Dec. 15
Dec. 31

Supplies Expense..........................................
Cash ........................................................

2,800

Office Supplies ..............................................


Supplies Expense ..................................

500

Insurance Expense........................................
Cash ........................................................

3,600

Prepaid Insurance ($3,600 12 x 7) .............


Insurance Expense ................................

2,100

Cash................................................................
Service Revenue ....................................

1,200

Service Revenue ...........................................


Unearned Service Revenue...................

400

Rent Expense.................................................
Cash ........................................................

4,500

Prepaid Rent ..................................................


Rent Expense .........................................

4,500

3-88

2,800
500

3,600
2,100

1,200
400

4,500
4,500

*PROBLEM 3-13B

(a) 1. Dec. 31
2.
3.
4.
5.

6.

31
31
31
31

31

Supplies .....................................................
Supplies Expense ($3,300 - $1,500) .

1,800

Interest Expense ($18,000 10% 2/12)


Interest Payable ................................

300

Prepaid Insurance ($2,100 x 8/12)............


Insurance Expense ...........................

1,400

Consulting Fees Earned ...........................


Unearned Consulting Fees ...............

1,600

Amortization Expense ($2,200 2) ..........


Accumulated Amortization
Equipment .......................................

1,100

Utilities Expense........................................
Accounts Payable.............................

200

3-89

1,800
300
1,400
1,600

1,100
200

*PROBLEM 3-13B (Continued)


(b)

ROYAL GRAPHICS COMPANY


Adjusted Trial Balance
December 31, 2002
Debit
Cash.......................................................................... $ 8,600
Accounts Receivable .............................................
13,000
Supplies ...................................................................
1,800
Prepaid Insurance ...................................................
1,400
Equipment ................................................................
48,000
Accumulated Amortization .....................................
Notes Payable ..........................................................
Accounts Payable ($11,000 + $200) .......................
Interest Payable .......................................................
Unearned Consulting Fees .....................................
Jan Bejar, Capital ....................................................
Graphic Fees Earned ..............................................
Consulting Fees Earned ($7,600 $1,600) ............
Salaries Expense.....................................................
33,000
Supplies Expense ($3,300 $1,800) ......................
1,500
Advertising Expense ...............................................
1,700
Rent Expense...........................................................
2,500
Utilities Expense ($1,900 + $200) ...........................
2,100
Amortization Expense.............................................
1,100
Insurance Expense ($2,100 $1,400) ....................
700
Interest Expense...................................................... 00 00300
$115,700

3-90

Credit

$ 1,100
18,000
11,200
300
1,600
22,000
55,500
6,000

00 0000
$115,700

*PROBLEM 3-13B (Continued)


(c)

ROYAL GRAPHICS COMPANY


Income Statement
For the Six Months Ended December 31, 2002

Revenues
Graphic fees earned ...........................................
Consulting fees earned ......................................
Total revenues ............................................
Expenses
Salaries expense................................................. $33,000
Advertising expense...........................................
1,700
Utilities expense..................................................
2,100
Rent expense.......................................................
2,500
Supplies expense................................................
1,500
Amortization expense.........................................
1,100
Interest expense..................................................
300
Insurance expense.............................................. 000700
Total expenses ............................................
Net income ...................................................................

$55,500
6,000
61,500

42,900
$18,600

ROYAL GRAPHICS COMPANY


Statement of Owner's Equity
For the Six Months Ended December 31, 2002
Jan Bejar, Capital, July 1 ..............................................................
Add: Investment by owner ............................................................
Net income ............................................................................
Jan Bejar, Capital, December 31 ..................................................

3-91

0
22,000
18,600
$40,600

*PROBLEM 3-13B (Continued)


(c) (Continued)
ROYAL GRAPHICS COMPANY
Balance Sheet
December 31, 2002
Assets
Cash.............................................................................
Accounts receivable...................................................
Supplies.......................................................................
Prepaid insurance ......................................................
Equipment ................................................................... $48,000
Less: Accumulated amortization ............................. 001,100
Total assets..................................................

$ 8,600
13,000
1,800
1,400
46,900
$71,700

Liabilities and Owner's Equity


Liabilities
Notes payable .............................................................
Accounts payable.......................................................
Interest payable ..........................................................
Unearned consulting fees .........................................
Total liabilities.....................................................

$18,000
11,200
300
1,600
31,100

Owner's equity
Jan Bejar, Capital .......................................................
Total liabilities and owner's equity ...................

40,600
$71,700

3-92

CUMULATIVE COVERAGE: CHAPTERS 2 TO 3


(a), (c), & (e)
Cash

No. 101

Date

Explanation

Ref.

Sept. 1
8
10
12
20
22
25
29

Balance

9
J102
J102
J102
J102
J102
J102
J102

Debit

Credit
1,200

1,200
3,400
6,000
0,500
1,200
0,650

Accounts Receivable

Balance
04,880
03,680
04,880
08,280
02,280
01,780
0 580
01,230
No. 112

Date

Explanation

Ref.

Sept. 1
10
27

Balance

9
J102
J102

Debit

Credit
1,200

1,000

Supplies

Balance
03,520
02,320
03,320
No. 126

Date

Explanation

Ref.

Sept. 1
17
30

Balance

9
J102
J103

Adj. entry

Debit

Credit

1,500
500

Store Equipment

Balance
01,000
02,500
02,000
No. 153

Date

Explanation

Ref.

Sept. 1
15

Balance

9
J102

3-93

Debit
3,000

Credit

Balance
15,000
18,000

CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)


(a), (c), & (e) (Continued)
Accumulated AmortizationStore Equipment
Date

Explanation

Ref.

Sept. 1
30

Balance
Adj. entry

9
J103

No. 154
Debit

Credit
0,300

Accounts Payable
Explanation

Ref.

Sept. 1
15
17
20

Balance

9
J102
J102
J102

Debit

Credit
3,000
1,500

6,000

Unearned Service Revenue


Explanation

Ref.

Sept. 1
29
30

Balance

9
J102
J103

Debit

Credit
0,650

300

Salaries Payable
Explanation

Ref.

Sept. 1
8
30

Balance

9
J102
J103

Debit

Credit

0,500
500

R. Pitre, Capital
Explanation

Sept. 1

Balance

03,400
06,400
07,900
01,900

Balance
00,400
01,050
00,750
No. 212

Date

Date

Balance

No. 209

Date

Adj. entry

01,500
01,800
No. 201

Date

Adj. entry

Balance

Balance
00,500
00,000
00,500
No. 301

Ref.
9

3-94

Debit

Credit

Balance
18,600

CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)


(a), (c), & (e) (Continued)
Service Revenue
Date
Sept. 12
27
30

No. 400

Explanation

Ref.

Adj. entry

J102
J102
J103

Debit

Credit
3,400
1,000
0,300

Amortization Expense
Explanation

Ref.

Debit

Sept. 30

Adj. entry

J103

0,300

Credit

No. 631

Date

Explanation

Ref.

Debit

Sept. 30

Adj. entry

J103

0,500

Credit

No. 726

Explanation

Ref.

Debit

Adj. entry

J102
J102
J103

0,700
1,200
0,500

Credit

Balance
0,700
1,900
2,400

Rent Expense
Sept. 22

Balance
0,500

Salaries Expense

Date

Balance
0,3300

Supplies Expense

Sept. 8
20
30

3,400
4,400
4,700

No. 711

Date

Date

Balance

No. 729
Explanation

Ref.

Debit

J102

0,500

3-95

Credit

Balance
0,500

CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)


(b)
GENERAL JOURNAL

J102

Date

Account Titles and Explanation

Ref.

Sept. 8

Salaries Payable
Salaries Expense
Cash

212
726
101

0,500
0,700

Cash
Accounts Receivable

101
112

1,200

Cash
Service Revenue

101
400

3,400

Store Equipment
Accounts Payable

153
201

3,000

Supplies
Accounts Payable

126
201

1,500

Accounts Payable
Cash

201
101

6,000

Rent Expense
Cash

729
101

0,500

Salaries Expense
Cash

726
101

1,200

Accounts Receivable
Service Revenue

112
400

0,1,000

Cash
Unearned Service Revenue

101
209

0,650

10
12
15
17
20
22
25
27
29

3-96

Debit

Credit

1,200
1,200
3,400
3,000
1,500
6,000
0,500
1,200
0,1,000
0,650

CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)


(d) & (f)

PITRE EQUIPMENT REPAIR


Unadjusted and Adjusted Trial Balances
September 30, 2003
Unadjusted
Dr.

Cash ................................................. $ 1,230


Accounts Receivable...................... 3,320
Supplies........................................... 2,500
Store Equipment ............................. 18,000
Accumulated Amortization ............
Accounts Payable ...........................
Unearned Service Revenue ...........
Salaries Payable .............................
R. Pitre, Capital ...............................
Service Revenue .............................
Amortization Expense ....................
Supplies Expense ...........................
Salaries Expense ............................ 1,900
Rent Expense ..................................
500
$27,450
(e)

Cr.

Adjusted
Dr.
$ 1,230
3,320
2,000
18,000

$ 1,500
1,900
1,050

$ 1,800
1,900
750
500
18,600
4,700

18,600
4,400

300
500
2,400
500
$ 27,450 $28,250 $ 28,250

GENERAL JOURNAL

Date

Account Titles and Explanation

J103
Ref.

Debit

1. Sept. 30 Supplies Expense.................................. 631


Supplies ($2,500 $2,000) ............ 126

500

2.

30 Salaries Expense................................... 726


Salaries Payable ............................ 212

500

30

Amortization Expense.......................... 711


Accumulated Amortization
Store Equipment......................... 154

300

Unearned Service Revenue ................. 209


Service Revenue............................ 400

300

3.

4.

30

3-97

Cr.

Credit

500
500

300
300

CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)


(g)

PITRE EQUIPMENT REPAIR


Income Statement
For the Month Ended September 30, 2003
Revenues
Service revenue .................................................
Expenses
Salaries expense ............................................... $2,400
Supplies expense ..............................................
500
Rent expense .....................................................
500
Amortization expense .......................................
300
Total expenses...................................................
Net income ...............................................................

$4,700

3,700
$1,000

PITRE EQUIPMENT REPAIR


Statement of Owner's Equity
For the Month Ended September 30, 2003
R. Pitre, Capital, September 1 ................................................. $18,600
Add: Net income .....................................................................
1,000
R. Pitre, Capital, September 30 ............................................... $19,600

3-98

CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)


(g) (Continued)
PITRE EQUIPMENT REPAIR
Balance Sheet
September 30, 2003
Assets
Cash ....................................................................
Accounts receivable ..........................................
Supplies ..............................................................
Store equipment................................................. $18,000
Less: Accumulated amortizationstore
equipment...........................................................
1,800
Total assets................................................

$ 1,230
3,320
2,000
16,200
$22,750

Liabilities and Owner's Equity


Liabilities
Accounts payable........................................................... $01,900
Salaries payable .............................................................
500
Unearned service revenue............................................. 00 0750
Total liabilities ............................................................
3,150
Owner's equity
R. Pitre, Capital ...............................................................
Total liabilities and owner's equity ..........................

3-99

019,600
$22,750

BYP 3-1 FINANCIAL REPORTING PROBLEM

(a) The title The Second Cup used for its income statement is
Consolidated Statement of Operations and Deficit.
(b) The types of revenues reported include Franchise Revenue, Sales from
Corporate Stores, and Product Sales.
(c) For competitive reasons, The Second Cup does not want to disclose
details of its operating costs and expenses. Most of the items shown
on its income statement are minimum required disclosures (many of
which are related to non-typical events rather than regular operations).
(d) Prepayments: Prepaid Expenses and Sundry Assets are reported on
the balance sheet ($419,000). In adjusting this account the other side
of the entry would be an expense account, for example insurance
expense. Deferred Financing Charges are also reported ($125,000). The
other account involved in adjustments to this account would likely be
interest expense.
(e) Accruals: Accrued revenues might include Income Taxes Receivable
($1,150,000) and Future Income Taxes ($295,000). The other account
use in preparing adjustments for this account would be a reduction of
income taxes expense. Accounts Receivable ($2,294,000) may also
include some accrued revenue amounts. Accrued expenses are
included in the line Accounts Payable and Accrued Liabilities
($2,718,000). The other accounts used in preparing adjustments for
this account would be expense accounts.

3-100

BYP 3-2 INTERPRETING FINANCIAL STATEMENTS

COTT CORPORATION
(a) (in millions)
1997 Prepaid Contract Costs ...............................
Cash ........................................................
(b) (in millions)
1997 Amortization Expense .................................
Accumulated Amortization
(or Prepaid Contract Costs) ..................
(c)

29,743

29,743

26,349
26,349

I think it should be recorded as an expense not a reduction of sales


revenue. All expenses are incurred to earn revenuethis item should
not be treated any differently than other expenses.

(d) 1.

Cott may have made this change from capitalizing to expensing


these cost because of uncertainty relating to the future benefit of
the costs.
[The company states, in its 1999 Annual report, that this change
in accounting policy reflected the maturing of the companys
operations in the industry and its relationships with customers.]

2. (in millions)
1997

Contract Costs Expense .............................


Cash ........................................................

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29,743

29,743

BYP 3-3 INTERPRETING FINANCIAL STATEMENTS

(a) The company is recording its legal expenses using an accrued


expense account.
(b) All of the adjustments are accrued expense adjustments, which
decrease net income.
(c) The accrued interest would have been recorded as follows:
Interest Expense.................................... 18,000
Interest Payable .............................

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18,000

BYP 3-4 ACCOUNTING ON THE WEB

Due to the frequency of change with regard to information available on the


world wide web, the Accounting on the Web cases are updated as required.
Their suggested solutions are also updated whenever necessary, and can
be found on-line in the Instructor Resources section of our home page
[www.wiley.com/canada/weygandt2].

3-103

BYP 3-5 COLLABORATIVE LEARNING ACTIVITY


(a)

RV WORLD
Income Statement
For the Quarter Ended March 31, 2003
Revenues
Rental fees ($95,000 $30,000)...........................................
Expenses
Wages expense [$29,800 + ($400 2)] .............. $30,600
Advertising expense ($5,200 + $110).................
5,310
Supplies expense ($5,200 $1,300)...................
3,900
Repair expense ($4,000 + $260) .........................
4,260
Insurance expense ($7,200 3/12) ....................
1,800
Utilities expense ($900 + $180) ..........................
1,080
Amortization expense .........................................
800
Interest expense ($12,000 8% 3/12) .............
00,240
Total expenses..............................................................
Net income....................................................................................

$65,000

047,990
$17,010

(b) (1) The generally accepted accounting principles pertaining to the


income statement that were not recognized by Michel were the
revenue recognition principle and the matching principle.
The revenue recognition principle states that revenue is
recognized when it is earned. The fees of $30,000 for summer
rentals have not been earned and, therefore, should not be
reported in income for the quarter ended March 31.
The matching principle dictates that efforts (expenses) be
matched with accomplishments (revenues). This means that the
expenses should include amounts incurred in March but not paid
until April, and any other costs related to the operations of the
business during the period January March.
(2) The difference in expenses was $7,290 ($47,990 $40,700). The
overstatement of revenues ($30,000) plus the understatement of
expenses ($7,290) equals the difference in reported income of
$37,290 ($54,300 $17,010).

3-104

BYP 3-6 COMMUNICATION ACTIVITY

Memorandum
To:
From:
Date:
Re:

Mary Lee Virgil


Student
Adjusting Journal Entries

Upon reviewing the accounts of your company at the end of the year, I
discovered that adjusting entries were not made.
Adjusting entries are made at the end of the accounting period to ensure
that the revenue recognition and matching principles required under
generally accepted accounting principles are followed. The use of adjusting
entries makes it possible to report on the balance sheet the appropriate
assets, liabilities, and owner's equity at the statement date, and to report
on the income statement the proper revenue, expense, and net income (or
loss) for the year.
Adjusting entries are needed because the trial balance may not contain an
up-to-date and complete record of transactions and events, for the
following reasons:
1.

Some events are not journalized daily because it is inexpedient to


do so. Examples are the use of supplies and the earning of wages
by employees.

2.

The expiration of some costs is not journalized during the


accounting period because these costs expire with the passage of
time, rather than as a result of recurring daily transactions.
Examples of such costs are building and equipment deterioration,
rent, and insurance.

3-105

BYP 3-6 (Continued)


3.

Some expenses, such as the cost of utility service and property


taxes, may be unrecorded because the bills for the costs have not
been received.

There are five types of adjusting entries:


1.

Prepaid expensesexpenses paid in cash and recorded as assets


until they are used.

2.

Unearned revenuesrevenues received in cash and recorded as


liabilities until they are earned.

3.

Accrued revenuesrevenues earned but not yet received in cash


or recorded.

4.

Accrued expensesexpenses incurred but not yet paid in cash or


recorded.

5.

Amortizationallocation of the cost of capital assets to expense,


over their estimated useful lives.

I will be happy to answer any questions you may have on adjusting entries.

3-106

BYP 3-7 ETHICS CASE

(a) The stakeholders in this situation are:

Carole Chiasson, controller


The president of Die Hard Company
The external users of Die Hards financial information

(b) 1.

It is unethical for the president to place pressure on Carole to


misstate net earnings by requesting her to prepare incorrect
adjusting entries.

2.

It is customary for adjusting entries to be dated as of the balance


sheet date although the entries are prepared at a later date. Carole
did nothing unethical by dating the adjusting entries December 31.

(c) Carole can accrue revenues and defer expenses through the
preparation of adjusting entries and be ethical so long as the entries
reflect economic reality. Intentionally misrepresenting the companys
financial condition and its results of operations is unethical (it is also
illegal).

3-107