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Chapter 3

Adjusting Accounts and Preparing


Financial Statements
QUESTIONS
1.

The cash basis of accounting reports revenues when cash is received while the
accrual basis reports revenues when they are earned. The cash basis reports
expenses when cash is paid while the accrual basis reports expenses when they are
incurred and matched with revenues they generated.

2.

The accrual basis of accounting generally provides a better indication of company


performance and financial condition than does the cash basis. Also, the accrual
basis increases the comparability of financial statements from one period to the
next. Thus, business decision makers generally prefer the accrual basis.

3.

Businesses that have major seasonal variations in sales are most likely to select the
natural business year as the fiscal year.

4.

A prepaid expense is an item paid for in advance of receiving its benefits. As such, it
is reported as an asset on the balance sheet.

5.

Long-term tangible plant assets such as equipment, buildings, and machinery lead
to adjustments for depreciation. Generally, land is the only long-term tangible plant
asset that does not require depreciation.

6.

The Accumulated Depreciation contra account is used for depreciation. It provides


financial statement users with additional information about the relative age of the
assets. Without the contra account information, the reader would not be able to tell
whether the assets are new or in need of replacement.

7.

Unearned revenue refers to cash received in advance of providing products and


services. Another name for an unearned revenue is deferred revenue. It is reported
as a liability on the balance sheet.

8.

An accrued revenue is revenue that is earned but is not yet received in cash (and/or
other assets) and the customer has not been billed prior to the end of the period.
Therefore, end-of-period adjustments are made to record accrued revenue.
Examples are interest income that has been earned but not collected and revenues
from services performed that are neither collected nor billed.

9.A If prepaid expenses are initially recorded with debits to expense accounts, then the
prepaid expenses asset accounts are debited in the adjusting entries.

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10.

For Best Buy, all of the accounts under the category of Property and Equipment
(except for Land), require adjusting entries. The expense related to the depreciation
expense account would be understated on the income statement if Best Buy fails to
adjust these asset accounts. If the adjusting entries are not made, net income would
be overstated. Note: Students might also correctly identify accounts receivable,
goodwill, and tradename as needing adjustment.

11.

Circuit City must make adjusting entries to Prepaid expenses and other current
assets; Deferred income taxes; Accrued expenses and other current liabilities;
Accrued income taxes; and possibly other assets and liabilities such as Receivables
for bad debts. (It is also possible that Circuit City would need to adjust Goodwill and
Other intangible assets.)

12.

The accrued Wages Expense would be reported as part of Accrued Expenses on


Apples balance sheet.

13.

Closing entries at the end of the current period prepare the revenues (and gains),
expenses (and losses), and dividends accounts for the next period by giving them
zero balances. Closing entries also update the retained earnings account for the
events of the year just finished. Closing entries do not affect the asset and liability
accounts.

14.

(i) Closing entries prepare the temporary accountsrevenue and expense (and gain
and loss) accounts and dividendsfor the next period by giving them zero balances.
(ii) Closing entries also update the retained earnings account for the events of the
period just completed.

15.

The four-step closing entry process is: (i) close the revenue (and gain) accounts
to the Income Summary account, (ii) close the expense (and loss) accounts to the
Income Summary account, (iii) close the Income Summary account to the Retained
Earnings account, and (iv) close the Dividends account to the Retained Earnings
account.

16.

The Income Summary account is used to summarize the periods revenues and
expenses. As a result, it temporarily has a balance equal to the net income (or net
loss) for the period. (Instructor note: Closing can be accomplished without the
Income Summary account by closing revenue and expense accounts directly to the
retained earnings account.)

17.

Yes, an error would have occurred because a post-closing trial balance should only
include permanent accounts, and Depreciation Expense is a temporary account that
should have been closed. If an expense appears on the post-closing trial balance,
the amounts of net income, total assets, and total equity are all in error (overstated).

18.B A work sheet can be used to collect and organize data for preparing (i) adjusting
entries, (ii) closing entries, and (iii) financial statements. A work sheet can also be
used for what if analysis, for help with audit adjustments, and for preparing interim
financial statements.
19.B The adjustments in the Adjustments columns of a work sheet are identified by letter
to link the debits with the credits to ensure that the entries are complete and in
balance (debits = credits) and for reference purposes (audit trail). The letters can
also be used to identify the reasons for the entries and help simplify preparation of
the actual adjusting journal entries.

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20.

A companys operating cycle is the normal time between paying cash for
merchandise inventory or for employee salaries in providing customer services and
the receipt of cash from customers in exchange for those products or services.

21.

Assets on a typical classified balance sheet include current assets and noncurrent
assetswhere noncurrent assets usually include long-term investments, plant
assets, and intangible assets. Liabilities are typically classified as current and
noncurrent. Note that the terms short-term and long-term are sometimes used for
current and noncurrent.

22.

Unearned revenue is reported as a liabilityusually a current liability.

23.

Plant assets (also called property, plant and equipment or long-lived assets) are
tangible long-lived assets used to produce or sell goods or services.

24.C Reversing entries simplify subsequent entries for accrued expenses and accrued
revenues by eliminating the need to record the removal of the accrued liability or
accrued receivable when the accrual is settled.
25.C The following reversing entry could be made as of the first day of the next
accounting period, after the post-closing trial balance is completed and financial
statements are prepared.
Salaries Payable.........................................................

500

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

500

26.

The five categories of noncurrent assets on Best Buys balance sheet are: Property
and equipment, Goodwill, Tradename, Long-term investments, and Other assets.

27.

Circuit City has six current liability accounts: Accounts payable, Accrued expenses
and other current liabilities, Accrued income taxes, Deferred income taxes, Current
installments of long-term debt, and Liabilities of discontinued operations.

28.

The closing entry recorded on September 25, 2004, to transfer the companys net
income to its Retained Earnings account would likely have been (in millions):
Income Summary.........................................................
Retained Earnings.............................................

276
276

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QUICK STUDIES
Quick Study 3-1 (10 minutes)
a.
b.
c.
d.
e.

UR
AE
AR
PE
PE

Unearned revenue
Accrued expenses
Accrued revenue
Prepaid expenses
Prepaid expenses (Depreciation)

Quick Study 3-2 (15 minutes)


Accounts Debited and Credited

Financial Statement

a. Debit
Credit

Unearned Revenue
Revenue Earned

Balance Sheet
Income Statement

b. Debit
Credit

Wages Expense
Wages Payable

Income Statement
Balance Sheet

c. Debit
Credit

Accounts Receivable
Revenue Earned

Balance Sheet
Income Statement

d. Debit
Credit

Insurance Expense
Prepaid Insurance

Income Statement
Balance Sheet

e. Debit
Credit

Depreciation Expense
Accumulated Depreciation

Income Statement
Balance Sheet

Quick Study 3-3 (15 minutes)


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

1,200
1,200

To record 6-month insurance coverage expired.

b. Supplies Expense.........................................................
Supplies..................................................................

1,700
1,700

To record supplies used during the year.


($500 + $2,000 [supplies used] = $800)

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Quick Study 3-4 (10 minutes)


a. Depreciation ExpenseEquipment............................
Accumulated DepreciationEquipment.............

3,600
3,600

To record depreciation expense for the year.


($20,000 - $2,000) / 5 years = $3,600

b. No depreciation adjustment is made for land as it is


expected to last indefinitely.
Quick Study 3-5 (10 minutes)
Salaries Expense...........................................................
Salaries Payable....................................................

400
400

To record salaries incurred but not yet paid.


[The one student earns $100 x 4 days MR]

Quick Study 3-6 (15 minutes)


a. Unearned Revenue........................................................
Legal Revenue.......................................................

7,500
7,500

To recognize revenue earned ($10,000 x 3/4).

b. Unearned Subscription Revenue................................


Subscription Revenue...........................................

1,200
1,200

To recognize subscription revenue earned.


[100 x ($24 / 12 month) x 6 months]

Quick Study 3-7 (15 minutes)


Adjusting entry

Debit

Credit

1. Accrue salaries expense

2. Adjust the Unearned Services Revenue account


to recognize earned revenue

3. Record the earning of services revenue for which


cash will be received the following period

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Quick Study 3-8 (10 minutes)


The answer is b.
Explanation:
The debit balance in Prepaid Insurance was reduced by $400, implying a
$400 debit to Insurance Expense. The credit balance in Interest Payable
increased by $800, implying an $800 debit to Interest Expense.
Quick Study 3-9 (20 minutes)
Cash Accounting
Revenues (cash receipts)....................................................... $37,000
Expenses (cash payments: $25,500 - $5,250 + $6,750)....... 27,000
Net income (cash-basis) ........................................................ $10,000
Accrual Accounting
Revenues (earned) ................................................................. $45,000
Expenses (incurred) ............................................................... 25,500
Net income (accrual-basis).................................................... $19,500

Quick Study 3-10 (15 minutes)


The answer is 2.
Explanation:
Insurance premium error
Understates expenses (and overstates assets) by...........

$1,600

Accrued salaries error


Understates expenses (and understates liabilities) by....

1,000

Combination of errors
Understates expenses by.....................................................
Overstates assets by.............................................................
Understates liabilities by......................................................

$2,600
$1,600
$1,000

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Financial and Managerial Accounting, 2nd Edition

Quick Study 3-11 (20 minutes)


Income Summary balance after closing revenues and expenses:
Revenues: $45,000 + $6,000............................
Expenses: $29,000 + $9,000 + $3,000.............
Credit balance (equal to net income)..............

=
=
=

$51,000
- 41,000
$10,000

Cr.
Dr.
Cr.

Retained Earnings balance after all closing entries:


Beginning balance.....................................
Plus net income..........................................

$28,000
10,000
38,000
7,200
$30,800

Less dividends...........................................
Ending balance...........................................
Quick Study 3-12 (5 minutes)
1. (e)

Analyzing transactions and events.

2. (h)

Journalizing transactions and events.

3. (a)

Posting the journal entries.

4. (g)

Preparing the unadjusted trial balance.

5. (b)

Journalizing and posting adjusting entries.

6. (c)

Preparing the adjusted trial balance.

7. (f)

Preparing the financial statements.

8. (d)

Journalizing and posting closing entries.

9. (i)

Preparing the post-closing trial balance.

Quick Study 3-13 (10 minutes)


1.
2.

B
F

3.
4.

A
D

5.
6.

E
C

7.
8.

E
A

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Quick Study 3-14 (15 minutes)


Dec. 31 Services Revenue.........................................
Income Summary..................................
To close the revenue account.

13,000

31 Income Summary.........................................
Wages Expense.....................................
Rent Expense.........................................
To close the expense accounts.

10,000

31 Income Summary.........................................
Retained Earnings.................................
To close Income Summary.

3,000

31 Retained Earnings.......................................
Dividends ..............................................
To close the dividends account.

800

13,000

8,400
1,600

3,000

800

Quick Study 3-15 (5 minutes)


The only account from QS 3-15 that would appear in a post-closing trial
balance is Retained Earnings.

Quick Study 3-16 (10 minutes)


Profit margin = $48,152 / $425,000 = 11.3%
Interpretation: For every one dollar that Sidone Company records as
revenue, it earns 11.3 cents in net income. Sidones 11.3% is markedly lower
than its competitors average profit margin of 15%. Accordingly, Sidone
should focus on improving its profit margin to at least be competitive.

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Financial and Managerial Accounting, 2nd Edition

Quick Study 3-17 (10 minutes)


Current assets
Cash
Accounts receivable..................................
Office supplies...........................................
Prepaid insurance......................................
Total current assets...................................

$ 7,000
18,000
2,800
3,500
$31,300

Current liabilities
Accounts payable......................................
Unearned services revenue......................
Total current liabilities...............................

$11,000
3,000
$14,000

Current ratio = $31,300 / $14,000 = 2.24

Quick Study 3-18A (10 minutes)


The answer is d.
Quick Study 3-19B (10 minutes)
a.
b.
c.

B
B
B

d.
e.
f.

I
B
I

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Quick Study 3-20B (20 minutes)


CLAUDELL COMPANY
Work Sheet
Account Title

Unadjusted
Trial Balance
Dr.
Cr.

Adjustments
Dr.
Cr.

Prepaid Rent.................. 1,000


Services Revenue..........

Adjusted
Trial Balance
Dr.
Cr.

55,00
0

(a)

200

(b)

900

800

(c)

700

25,70
0

Accounts Receivable......

(b)

900

900

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

(c)
(a)

200

700

55,900
25,70
0
900

700
200

Balance Sheet
Dr.
Cr.
800

55,90
0

Wages Expense............. 25,00


0

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

Income
Statement
Dr.
Cr.

700
200

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Quick Study 3-21C (15 minutes)


2007

--Not required--

Dec. 31 Accounts Receivable ...................................


Management Fees Earned ...................

12,000
12,000

To record accrued revenue.

2008
Jan. 1 Management Fees Earned ............................
Accounts Receivable ...........................

12,000
12,000

To reverse accrued revenue.

16 Cash ...............................................................
Management Fees Earned ...................

26,700
26,700

To record collection of management fees.

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EXERCISES
Exercise 3-1 (25 minutes)
a.

Depreciation ExpenseEquipment.................................
Accumulated DepreciationEquipment.....................
To record depreciation expense for the year.

18,000

b. Insurance Expense............................................................
Prepaid Insurance*........................................................
To record insurance coverage that expired
($6,000 - $1,100).

4,900

c.

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


Office Supplies**............................................................
To record office supplies used ($700 + $3,480 - $298).

3,882

d. Unearned Fee Revenue.....................................................


Fee Revenue..................................................................
To record earned portion of fee received in advance
($15,000 x 2/3).

10,000

e.

f.

18,000

4,900

3,882

10,000

Insurance Expense............................................................
Prepaid Insurance.........................................................
To record insurance coverage that expired.

5,800

Wages Expense.................................................................
Wages Payable..............................................................
To record wages accrued but not yet paid.

3,200

5,800

3,200

Notes
Prepaid Insurance*
Bal. Bal.
6,000
?
End. Bal.

1,100

Used

Office Supplies**
Beg. Bal.
700
Purchase
3,480
?
End. Bal.
298

Used

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Financial and Managerial Accounting, 2nd Edition

Exercise 3-2 (30 minutes)


a.

Unearned Fee Revenue.....................................................


Fee Revenue..................................................................

5,000
5,000

To record earned portion of fee received in advance


($15,000 x 1/3).

b. Wages Expense.................................................................
Wages Payable..............................................................

8,000
8,000

To record wages accrued but not yet paid.

c.

Depreciation ExpenseEquipment.................................
Accumulated DepreciationEquipment.....................

18,531
18,531

To record depreciation expense for the year.

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


Office Supplies**............................................................

4,992
4,992

To record office supplies used ($240 + $5,239 - $487).

e.

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

2,800
2,800

To record insurance coverage expired ($4,000 - $1,200).

f.

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

1,000
1,000

To record interest earned but not yet received.

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

2,500
2,500

To record interest incurred but not yet paid.


Notes
Beg. Bal.

Prepaid Insurance*
4,000
?

End. Bal.

1,200

Beg. Bal.
Purchase
Used
End. Bal.

Office Supplies**
240
5,239
?
487

Used

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Exercise 3-3 (20 minutes)


a. Adjusting entry
2008
Dec. 31

1,250
Wages Expense..............................................................
Wages Payable...........................................................

1,250

To record accrued wages for one day


(5 workers x $250).

b. Payday entry
2009
Jan. 4

Wages Expense..............................................................
3,750
Wages Payable...............................................................
1,250
Cash.............................................................................

5,000

To record accrued and current wages


Wages expense = 5 workers x 3 days x $250
Cash = 5 workers x 4 days x $250.

Exercise 3-4 (25 minutes)


a.
Apr. 30 Legal Fees Expense.............................................
Legal Fees Payable.......................................

3,500
3,500

To record accrued legal fees.

May 12 Legal Fees Payable..............................................


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

3,500
3,500

To pay accrued legal fees.

b.
Apr. 30 Interest Expense...................................................
Interest Payable............................................

2,667
2,667

To record accrued interest expense.

May 20 Interest Payable....................................................


Interest Expense...................................................
Cash...............................................................

2,667
5,333
8,000

To record payment of accrued and current


interest expense ($8,000 2,667).

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Exercise 3-4 (concluded)


c.
Apr. 30 Salaries Expense..................................................
Salaries Payable...........................................

4,000
4,000

To record accrued salaries ($10,000 x 2/5 week).

May 3

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

4,000
6,000
10,000

To record payment of accrued and


current salaries ($10,000 x 3/5 week).

Exercise 3-5 (20 minutes)


Balance Sheet Insurance Asset using
Accrual
Cash
*
Basis
Basis
Dec. 31, 2006....................
$13,000
$0

Insurance Expense using


Accrual
Cash
**
Basis
Basis
2006...................................
$ 5,000
$18,000

Dec. 31, 2007....................


7,000

2007...................................
6,000

Dec. 31, 2008....................


1,000

2008...................................
6,000

Dec. 31, 2009....................


0

2009...................................
1,000

Total...................................
$18,000

$18,000

EXPLANATIONS
*

Accrual asset balance equals months left in the policy x $500 per month (monthly
cost is computed as $18,000 / 36 months).
Months Left
Balance
12/31/2006. . .
26
$13,000
12/31/2007. . .
14
7,000
12/31/2008. . .
2
1,000
12/31/2009. . .
0
0
**

Accrual insurance expense equals months covered in the year x $500 per month.
Months Covered
Expense
2006...................................
10
$ 5,000
2007...................................
12
6,000
2008...................................
12
6,000
2009...................................
2
1,000
$18,000

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Exercise 3-6 (30 minutes)


1.
2008

Dec. 31 Services Revenue .......................................


Income Summary .................................

44,000
44,000

To close the revenue account.

31 Income Summary ........................................


Depreciation Expense--Equipment......
Salaries Expense ..................................
Insurance Expense ...............................
Rent Expense ........................................
Supplies Expense .................................

33,100
3,000
22,000
2,500
3,400
2,200

To close the expense accounts.

31 Income Summary.........................................
Retained Earnings.................................

10,900
10,900

To close Income Summary.

31 Retained Earnings.......................................
Dividends ..............................................

7,000
7,000

To close the dividends account.

2.
CRUZ COMPANY
Post-Closing Trial Balance
December 31, 2008
Debit
Cash...............................................................
Supplies.........................................................
Prepaid insurance.........................................
Equipment.....................................................
Accumulated depreciationEquipment......
Common stock..............................................
Retained earnings*.......................................
Totals..............................................................

Credit

$19,000
13,000
3,000
24,000

$59,000

$ 7,500
30,000
21,500
$59,000

*$17,600 + $10,900 - $7,000 = $21,500

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Exercise 3-7 (20 minutes)


WILSON TRUCKING COMPANY
Income Statement
For Year Ended December 31, 2008
Trucking fees earned..............................................
Expenses
Depreciation expenseTrucks........................... $23,500
Salaries expense.................................................. 61,000
Office supplies expense...................................... 8,000
Repairs expenseTrucks.................................... 12,000
Total expenses......................................................
Net income...............................................................

$130,000

104,500
$ 25,500

WILSON TRUCKING COMPANY


Statement of Retained Earnings
For Year Ended December 31, 2008
Retained earnings, December 31, 2007................

$ 75,000

Plus: Net income.....................................................

25,500

Less: Dividends......................................................

100,500
(20,000)

Retained earnings, December 31, 2008................

$ 80,500

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Exercise 3-8 (20 minutes)


WILSON TRUCKING COMPANY
Balance Sheet
December 31, 2008
Assets
Current assets
Cash........................................................................
$ 8,000
Accounts receivable..............................................
17,500
Office supplies.......................................................
3,000
Total current assets...............................................
28,500
Plant assets
Trucks...................................................................... $172,000
Accumulated depreciation-Trucks....................... (36,000) 136,000
Land.........................................................................
85,000
Total plant assets...................................................
221,000
Total assets...............................................................
$249,500
Liabilities
Current liabilities
Accounts payable..................................................
Interest payable......................................................
Total current liabilities...........................................
Long-term notes payable........................................
Total liabilities..........................................................

$ 12,000
4,000
16,000
53,000
69,000

Equity
Common stock.........................................................
Retained earnings*...................................................
Total liabilities and equity.......................................

100,000
80,500
$249,500

*From Exercise 3-7

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Exercise 3-9 (10 minutes)


Note: Net income and revenues are from Exercise 3-7

Profit margin = $25,500 / $130,000 = 19.6%


Interpretation: Wilson Trucking Companys profit margin exceeds the
industry average of 15%, so they are performing better than competitors on
this dimension. Wilsons profit margin implies that they earn 19.6 cents for
each dollar of sales recorded compared to the industry average of only 15
cents for each dollar of sales recorded.
Exercise 3-10 (15 minutes)
Note: Current asset and current liability totals are from Exercise 3-8

Current ratio =

Current assets
Current liabilities

$28,500
$16,000

= 1.78

Interpretation: The companys current ratio of 1.78 exceeds the industry


average of 1.5. This ratio implies that the company is in a slightly better
liquidity position than its competitors. Moreover, if we review the makeup
of the current ratio, we see that current assets consist primarily of cash
and accounts receivable. The existence of these more liquid assets is a
positive attribute for liquidity purposes.
Exercise 3-11 (10 minutes)
a.
b.
c.
d.
e.

$ 4,390 /
$ 97,644 /
$111,385 /
$ 65,234 /
$ 80,158 /

$ 44,830
$ 398,954
$ 257,082
$1,458,999
$ 435,925

= 9.8%
= 24.5%
= 43.3%
= 4.5%
= 18.4%

Analysis and Interpretation: Company c has the highest profitability


according to the profit margin ratio. Company cs profit margin indicates
that it earns 43.3 cents in net income for each one dollar of net sales
recorded.

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Exercise 3-12 (15 minutes)


Current
Assets

Current
Liabilities

Current
Ratio

Case 1

$ 79,000

/ $ 32,000

2.47

Case 2

105,000

76,000

1.38

Case 3

45,000

49,000

0.92

Case 4

85,500

81,600

1.05

Case 5

61,000

100,000

0.61

Analysis: Company 1 is in the strongest liquidity position. It has about $2.47


of current assets for each $1 of current liabilities. The only potential concern
for Company 1 is that it may be carrying too much in current assets that could
be better spent on more productive assets (note that its remaining
competitors current ratios range from 1.39 to 0.61).

Exercise 3-13A (25 minutes)


a.
Initial credit recorded in the Unearned Fees account:
July 1 Cash.......................................................................
3,000
Unearned Fees..............................................

3,000

Received fees for work to be done for Solana.

Cash.......................................................................
Unearned Fees..............................................

7,500
7,500

Received fees for work to be done for Haru.

12

Unearned Fees......................................................
Fees Earned...................................................

3,000
3,000

Completed work for Solana.

18

Cash.......................................................................
Unearned Fees..............................................

8,500
8,500

Received fees for work to be done for Jordan.

27

Unearned Fees......................................................
Fees Earned...................................................

7,500
7,500

Completed work for customer Haru.

31

No adjusting entries required.

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Financial and Managerial Accounting, 2nd Edition

Exercise 3-13A continued


b.
Initial credit recorded in the Fees Earned account:
July 1 Cash.......................................................................
Fees Earned...................................................

3,000
3,000

Received fees for work to be done for Solana.

Cash.......................................................................
Fees Earned...................................................

7,500
7,500

Received fees for work to be done for Haru.

12

No entry required.

18

Cash.......................................................................
Fees Earned...................................................

8,500
8,500

Received fees for work to be done for Jordan.

27

No entry required.

31

Fees Earned..........................................................
Unearned Fees..............................................

8,500
8,500

Adjusted to reflect unearned fees for unfinished job


for Jordan.

c. Under the first method (and using entries from a)


Unearned Fees = $3,000 + $7,500 - $3,000 + $8,500 - $7,500 = $8,500
Fees Earned = $3,000 + $7,500 = $10,500
Under the second method (and using entries from b)

Unearned Fees = $8,500


Fees Earned = $3,000 + $7,500 + $8,500 - $8,500 = $10,500
[Note: Both procedures yield identical results in the financial statements.]

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

139

Exercise 3-14A (30 minutes)


a.
Dec. 1 Supplies Expense.................................................
Cash...............................................................

2,000
2,000

Purchased supplies.

b.
Dec. 2 Insurance Expense...............................................
Cash...............................................................

1,540
1,540

Paid insurance premiums.

c.
Dec. 15 Cash.......................................................................
Remodeling Fees Earned.............................

13,000
13,000

Received fees for work to be done.

d.
Dec. 28 Cash.......................................................................
Remodeling Fees Earned.............................

3,700
3,700

Received fees for work to be done.

e.
Dec. 31 Supplies................................................................
Supplies Expense.........................................

1,840
1,840

Adjust expenses for unused supplies.

f.
Dec. 31 Prepaid Insurance ($1,540 - $340)......................
Insurance Expense.......................................

1,200
1,200

Adjust expenses for unexpired coverage.

g.
Dec. 31 Remodeling Fees Earned ...................................
Unearned Remodeling Fees........................

11,130
11,130

Adjusted revenues for unfinished


projects ($13,000 + 3,700 - $5,570).

McGraw-Hill Companies, 2007


140

Financial and Managerial Accounting, 2nd Edition

Exercise 3-15B (30 minutes) Part 1.


DYLAN DELIVERY COMPANY
Work Sheet
For Year Ended December 31, 2008
Unadjusted
Trial Balance
Dr.
Cr.

Adjustments
Dr.
Cr.

Account Title
Cash...........................................16,000
Accounts receivable.......................34,000
Office supplies.............................. 5,000

(c)

3,000

Trucks.........................................
350,000
Accum. depreciationTrucks..........

80,000

(a)

Adjusted
Trial Balance
Dr.
Cr.

Balance Sheet
Dr.
Cr.

16,000

16,000

34,000

34,000

2,000

2,000

350,000

350,000

40,000

Land...........................................
160,000

Income
Statement
Dr.
Cr.

120,000

120,000

160,000

Accounts payable..........................

24,000

Interest payable.............................

5,000

Long-term notes payable................

160,000
24,000

24,000

6,000

6,000

100,000

100,000

100,000

Common stock.............................

105,000

105,000

105,000

Retained earnings..........................

202,000

202,000

202,000

(b
)

1,000

Dividends.....................................34,000
Delivery fees earned.......................

34,000
263,000

Depreciation expenseTrucks........40,000

34,000
263,000

(a)

40,000

Salaries expense...........................
110,000

263,000

80,000

80,000

110,000

110,000

Office supplies expense..................15,000

(c)

3,000

18,000

18,000

Interest expense............................ 5,000

(b
)

1,000

6,000

6,000

Repairs expenseTrucks...............10,000

______

_____

_____

10,000

______

Totals..........................................
779,000

779,000

44,000

44,000

820,000

820,000

Net income...................................

10,000

______

______ ______

224,000 263,000

596,000 557,000

39,000

______

______

39,000

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

141

Totals..........................................

263,000 256,000

596,000 596,000

McGraw-Hill Companies, 2007


142

Financial and Managerial Accounting, 2nd Edition

Exercise 3-15B (Continued)


2.

Closing entries
Delivery Fees Earned.......................................... 263,000
Income Summary.........................................

263,000

To close the revenue accounts.

Income Summary................................................ 224,000


Depreciation ExpenseTrucks..................
Salaries Expense.........................................
Office Supplies Expense.............................
Interest Expense..........................................
Repairs ExpenseTrucks..........................

80,000
110,000
18,000
6,000
10,000

To close the expense accounts.

Income Summary................................................
Retained Earnings.......................................

39,000
39,000

To close Income Summary.

Retained Earnings...............................................
Dividends ....................................................

34,000
34,000

To close the dividends account.

Retained Earnings on the balance sheet


Retained earnings, beginning balance............

$202,000

Add: Net income.................................................

39,000

..............................................................................

241,000

Less: Dividends..........................................

(34,000)

Retained earnings, ending balance...................

$207,000

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

143

Exercise 3-16C (30 minutes)


1. Adjusting entries
Oct. 31 Rent Expense.........................................................
Rent Payable...................................................

2,800
2,800

To record accrued rent expense.

31 Rent Receivable.....................................................
Rent Earned....................................................

850
850

To record accrued rent income.

2. Subsequent entries without reversing entries


Nov. 5 Rent Payable..........................................................
Rent Expense.........................................................
Cash................................................................

2,800
2,800
5,600

To record payment of 2 months rent.

8 Cash........................................................................
Rent Receivable.............................................
Rent Earned....................................................

1,700
850
850

To record collection of 2 months rent.

3. Subsequent entries with reversing entries


Nov. 1 Rent Payable..........................................................
Rent Expense.................................................

2,800
2,800

To reverse accrual of rent expense.

1 Rent Earned...........................................................
Rent Receivable.............................................

850
850

To reverse accrual of rent income.

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

5,600
5,600

To record payment of 2 months rent.

8 Cash........................................................................
Rent Earned....................................................

1,700
1,700

To record collection of 2 months rent.

McGraw-Hill Companies, 2007


144

Financial and Managerial Accounting, 2nd Edition

Exercise 3-17C (10 minutes)


Reversing entries are appropriate for accounting adjustments (a) and (e)
Sept. 1 Service Fees Earned.....................................
Accounts Receivable............................

6,000
6,000

To reverse accrued revenues.

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

3,400
3,400

To reverse accrued salaries.

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Solutions Manual, Chapter 3

145

PROBLEM SET A
Problem 3-1A (35 minutes)
Part 1
Adjustment (a)
Dec. 31 Office Supplies Expense................................ 14,846
Office Supplies.........................................

14,846

To record cost of supplies used


($4,000 + $13,400 - $2,554).

Adjustment (b)
31 Insurance Expense.......................................... 11,440
Prepaid Insurance....................................

11,440

To record annual insurance coverage cost.


Policy
A
B
C
Total

Cost per Month


$600 ($14,400/24 mo.)
360 ($12,960/36 mo.)
200 ($ 2,400 /12 mo.)

Months
Active in 2008
12
9
5

Adjustment (c)
31 Salaries Expense (2 days x $1,960)...............
Salaries Payable......................................

2008
Cost
$ 7,200
3,240
1,000
$11,440

3,920
3,920

To record accrued but unpaid wages.

Adjustment (d)
31 Depreciation ExpenseBuilding................... 30,500
Accumulated DepreciationBuilding. . .

30,500

To record annual depreciation expense


[($960,000 - $45,000) / 30 years = $30,500]

Adjustment (e)
31 Rent Receivable............................................
Rent Earned...........................................

3,000
3,000

To record earned but unpaid Dec. rent.

Adjustment (f)
31 Unearned Rent..............................................
Rent Earned...........................................

5,600
5,600

To record the amount of rent earned for


November and December (2 x $2,800).
McGraw-Hill Companies, 2007
146

Financial and Managerial Accounting, 2nd Edition

Problem 3-1A (Continued)


Part 2
Cash Payment for (c)
Jan. 6

Salaries Payable...........................................
Salaries Expense*.........................................
Cash........................................................

3,920
5,880
9,800

To record payment of accrued and


current salaries. *(3 days x $1,960)

15

Cash Payment for (e)


Cash...............................................................
6,000
Rent Receivable.....................................
.................................................................Rent Earned

3,000

3,000
To record past due rent for two months.

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

147

Problem 3-2A (90 minutes)


Parts 1 and 2
Unadj. Bal.

Cash
34,000

Unadj. Bal.

Accumulated Depreciation
Equipment
Unadj. Bal.
15,000
(c)
13,200
Adj. Bal.
28,200

Accounts Receivable
0
(f)
7,500
Adj. Bal.
7,500
Unadj. Bal.

Unadj. Bal.
Adj. Bal.

Teaching Supplies
8,000
(b)
2,800

Equipment
80,000

Accounts Payable
Bal.

Salaries Payable
Unadj. Bal.

Unadj. Bal.
Adj. Bal.

Prepaid Insurance
12,000
(a)
9,600

(g)
Adj. Bal.

Unadj. Bal.
Adj. Bal.

Unearned Training Fees


(e)

12,500

5,000
Adj. Bal.

7,500

3,000
Common Stock
Bal.

Bal.

0
400
400

2,400
Unadj. Bal.

Prepaid Rent
3,000
(h)
0

26,000

5,200

Professional Library
35,000

Retained Earnings
Bal.

Accumulated Depreciation
Professional Library
Unadj. Bal.
10,000
(d)
7,200
Adj. Bal.
17,200

80,000

Bal.

10,000

Dividends
50,000

McGraw-Hill Companies, 2007


148

Financial and Managerial Accounting, 2nd Edition

Problem 3-2A (Continued)


Tuition Fees Earned
Unadj. Bal.

(f)
Adj. Bal.

123,900
7,500
131,400

Training Fees Earned


Unadj. Bal.

(e)
Adj. Bal.

40,000
5,000
45,000

Unadj. Bal.

(h)
Adj. Bal.

Rent Expense
33,000
3,000
36,000

Teaching Supplies Expense


0
(b)
5,200
Adj. Bal.
5,200
Unadj. Bal.

Depreciation Expense
Professional Library
Unadj. Bal.
0
(d)
7,200
Adj. Bal.
7,200

Bal.

Advertising Expense
6,000

Depreciation Expense
Equipment
Unadj. Bal.
0
(c)
13,200
Adj. Bal.
13,200

Bal.

Utilities Expense
6,400

Salaries Expense
Unadj. Bal.
50,000
(g)
400
Adj. Bal.
50,400

Unadj. Bal.

(a)
Adj. Bal.

Insurance Expense
0
2,400
2,400

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Solutions Manual, Chapter 3

149

Problem 3-2A (Continued)

Part 2
Adjustment (a)
Dec. 31 Insurance Expense.......................................................
2,400
Prepaid Insurance..................................................

2,400

To record the insurance expired.

Adjustment (b)
31 Teaching Supplies Expense........................................
5,200
Teaching Supplies..................................................

5,200

To record supplies used ($8,000 - $2,800).

Adjustment (c)
31 Depreciation ExpenseEquipment...........................
13,200
Accumulated DepreciationEquipment.....................
To record equipment depreciation.

Adjustment (d)
31 Depreciation ExpenseProfess. Library...................
7,200
Accumul. DepreciationProfess. Library................

13,200

7,200

To record professional library depreciation.

Adjustment (e)
31 Unearned Training Fees...............................................
5,000
Training Fees Earned.............................................

5,000

To record 2 months training fees earned that


were collected in advance.

Adjustment (f)
31 Accounts Receivable...................................................
7,500
Tuition Fees Earned...............................................

7,500

To record tuition earned ($3,000 x 2 1/2 months).

Adjustment (g)
31 Salaries Expense..........................................................
400
Salaries Payable.....................................................

400

To record accrued salaries (2 days x $100 x 2


employees).

Adjustment (h)
31 Rent Expense................................................................
3,000
Prepaid Rent...........................................................

3,000

To record expiration of prepaid rent.

McGraw-Hill Companies, 2007


150

Financial and Managerial Accounting, 2nd Edition

Problem 3-2A (Continued)


Part 3
WELLS TECHNICAL INSTITUTE
Adjusted Trial Balance
December 31, 2008
Debit

Cash.......................................................................... $ 34,000
Accounts receivable................................................
7,500
Teaching supplies ...................................................
2,800
Prepaid insurance....................................................
9,600
Prepaid rent..............................................................
0
Professional library.................................................
35,000
Accumulated depreciationProfessional library....
Equipment................................................................
80,000
Accumulated depreciationEquipment................
Accounts payable....................................................
Salaries payable.......................................................
Unearned training fees............................................
Common stock.........................................................
Retained earnings....................................................
Dividends..................................................................
50,000
Tuition fees earned..................................................
Training fees earned................................................
Depreciation expenseProfessional library........
7,200
Depreciation expenseEquipment.......................
13,200
Salaries expense .....................................................
50,400
Insurance expense..................................................
2,400
Rent expense............................................................
36,000
Teaching supplies expense....................................
5,200
Advertising expense................................................
6,000
Utilities expense.......................................................
6,400
Totals......................................................................... $345,700

Credit

$ 17,200
28,200
26,000
400
7,500
80,000
10,000
131,400
45,000

.
$345,700

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

151

Problem 3-2A (Continued)


Part 4
WELLS TECHNICAL INSTITUTE
Income Statement
For Year Ended December 31, 2008
Revenues
Tuition fees earned............................................. $131,400
Training fees earned..........................................
45,000
Total revenues....................................................
Expenses
Depreciation expenseProfessional library...
7,200
Depreciation expenseEquipment..................
13,200
Salaries expense................................................
50,400
Insurance expense.............................................
2,400
Rent expense......................................................
36,000
Teaching supplies expense...............................
5,200
Advertising expense..........................................
6,000
Utilities expense.................................................
6,400
Total expenses....................................................
Net income............................................................

$176,400

126,800
$ 49,600

WELLS TECHNICAL INSTITUTE


Statement of Retained Earnings
For Year Ended December 31, 2008
Retained earnings, December 31, 2007..............
Plus: Net income..................................................
................................................................................
Less: Dividends....................................................
Retained earnings, December 31, 2008..............

$ 10,000
49,600
59,600
50,000
$ 9,600

McGraw-Hill Companies, 2007


152

Financial and Managerial Accounting, 2nd Edition

Problem 3-2A (Concluded)


WELLS TECHNICAL INSTITUTE
Balance Sheet
December 31, 2008
Assets
Cash.................................................................................
Accounts receivable......................................................
Teaching supplies..........................................................
Prepaid insurance..........................................................
Professional library........................................................ $35,000
Accumulated depreciationProfessional library....... (17,200)
Equipment....................................................................... 80,000
Accumulated depreciationEquipment...................... (28,200)
Total assets.....................................................................
Liabilities
Accounts payable...........................................................
Salaries payable.............................................................
Unearned training fees..................................................
Total liabilities.................................................................
Equity
Common stock...............................................................
Retained earnings..........................................................
Total liabilities and equity..............................................

$ 34,000
7,500
2,800
9,600
17,800
51,800
$123,500
$ 26,000
400
7,500
33,900
80,000
9,600
$123,500

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Solutions Manual, Chapter 3

153

Problem 3-3A (90 minutes)


Part 1
LING REPAIRS
Income Statement
For Year Ended December 31, 2008
Repair fees earned...................................
Expenses
Depreciation expenseEquipment.....
Wages expense......................................
Insurance expense................................
Rent expense..........................................
Office supplies expense........................
Utilities expense.....................................
Total expenses......................................
Net income................................................

$90,950
$ 5,000
37,500
800
10,600
3,600
2,700
60,200
$30,750

LING REPAIRS
Statement of Retained Earnings
For Year Ended December 31, 2008
Retained earnings, Dec. 31, 2007...........

$20,000

Add: Net income ....................................

30,750
50,750

Less: Dividends.......................................

(16,000)

Retained earnings, Dec. 31, 2008...........

$34,750

McGraw-Hill Companies, 2007


154

Financial and Managerial Accounting, 2nd Edition

Problem 3-3A (Continued)


LING REPAIRS
Balance Sheet
December 31, 2008
Assets
Current assets
Cash..............................................................
Office supplies.............................................
Prepaid insurance........................................
Total current assets.....................................
Plant assets
Equipment.....................................................
Accumulated depreciationEquipment....
Total assets.....................................................

$14,000
1,300
2,050
$17,350
50,000
(5,000)

45,000
$62,350

Liabilities
Current liabilities
Accounts payable........................................
Wages payable.............................................
Total current liabilities.................................
Equity
Retained earnings..........................................
Common stock...............................................
Total liabilities and equity.............................

$14,000
600
14,600
34,750
13,000
$62,350

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

155

Problem 3-3A (Continued)


Parts 2 and 3
LING REPAIRS
For Year Ended December 31, 2008
No.

Account Title

Adjusted
Trial Balance
Dr.
Cr.

Post-Closing
Trial Balance
Dr.
Cr.

Closing Entries
Dr.
Cr.

101 Cash...................................

14,000

14,000

124 Office supplies......................

1,300

1,300

128 Prepaid insurance .................

2,050

2,050

167 Equipment...........................

50,000

50,000

168 Accumulated depreciation

5,000

5,000

201 Accounts payable.................

14,000

14,000

210 Wages payable.....................

600

600

307 Common stock...................

13,000

13,000

318 Retained earnings................

20,000 (4)

Equipment.........................

16,000 (3)

30,750

(4)

16,000

5,000

(2)

5,000

623 Wages expense...................

37,500

(2)

37,500

637 Insurance expense...............

800

(2)

800

640 Rent expense......................

10,600

(2)

10,600

650 Office supplies expense........

3,600

(2)

3,600

690 Utilities expense..................

2,700

(2)

2,700

319 Dividends...........................

16,000

401 Repair fees earned..............


612 Depreciation expense

Equipment........................

90,950 (1)

901 Income summary................

(2)

_______
Totals................................. 143,550

_______ (3)
143,550

34,750

90,950

60,20 (1) 90,950


0
30,750
_______ ______
197,900

197,900

67,350

______
67,350

Closing entries (all dated December 31, 2008)


(1)

Repair Fees Earned......................................


Income Summary..................................
To close the revenue account.

90,950
90,950

McGraw-Hill Companies, 2007


156

Financial and Managerial Accounting, 2nd Edition

Problem 3-3A (Continued)


(2)

(3)

(4)

Income Summary.................................................
Depreciation Expense, Equipment..............
Wages Expense.............................................
Insurance Expense.......................................
Rent Expense................................................
Office Supplies Expense..............................
Utilities Expense...........................................
To close the expense accounts.

60,200

Income Summary.................................................
Retained Earnings........................................
To close the Income Summary account.

30,750

Retained Earnings................................................
Dividends.......................................................
To close the dividends account.

16,000

5,000
37,500
800
10,600
3,600
2,700

30,750

16,000

Part 4
(a) If none of the $800 insurance expense had expired, the income
statement would not report any insurance expense and net income
would be increased by $800.
(b) If there were no earned and unpaid wages (meaning Wages Payable
equals zero), wages expense would be $600 less and net income would
be $600 more.
Financial Statement Changes
The income statement would reflect the following:
Net income would be increased by $800 + $600 = $1,400. (a) & (b)
The balance sheet would reflect the following:
Prepaid insurance and total assets would be increased by $800. (a)
There would be no wages payable. (b)
Total current liabilities would be $600 less. (b)
Total equity would be increased by $1,400. (a) & (b)
Total liabilities would be decreased by $600. (b)

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

157

Problem 3-4A (90 minutes)


INSTRUCTOR NOTE: Ledger accounts are shown at the end of Part 7 as they would appear after
all entries are posted.

Part 2 Transactions for April


April 1 Cash...............................................................101
Computer Equipment...................................167
Common Stock......................................307

30,000
20,000
50,000

Owner invested in the business.

2 Rent Expense................................................640
Cash........................................................101

1,800
1,800

Paid one months rent.

3 Office Supplies..............................................124
Cash........................................................101

1,000
1,000

Acquired office supplies.

10 Prepaid Insurance.........................................128
Cash........................................................101

2,400
2,400

Paid 12 months premium in advance.

14 Salaries Expense..........................................622
Cash........................................................101

1,600
1,600

Paid two weeks salaries.

24 Cash...............................................................101
Commissions Earned............................405

8,000
8,000

Collected commissions from airlines.

28 Salaries Expense..........................................622
Cash........................................................101

1,600
1,600

Paid two weeks salaries.

29 Repairs Expense...........................................684
Cash........................................................101

350
350

Repaired the computer.

30 Telephone Expense......................................688
Cash........................................................101

750
750

Paid the telephone bill.

30 Dividends.......................................................319
Cash........................................................101

1,500
1,500

Paid cash for dividends.

McGraw-Hill Companies, 2007


158

Financial and Managerial Accounting, 2nd Edition

Problem 3-4A (Continued)


Part 3
ADVENTURE TRAVEL
Unadjusted Trial Balance
April 30, 2008
No.
101
106
124
128
167
168
209
307
318
319
405
612
622
637
640
650
684
688

Account Title
Debit
Cash.......................................................... $27,000
Accounts receivable................................
0
Office supplies.........................................
1,000
Prepaid insurance....................................
2,400
Computer equipment...............................
20,000
Accumulated depreciation..................
Computer equipment..............................
Salaries payable.......................................
Common stock.........................................
Retained earnings....................................
Dividends..................................................
1,500
Commissions earned..............................
Depreciation expense
Computer equipment..............................
0
Salaries expense......................................
3,200
Insurance expense..................................
0
Rent expense............................................
1,800
Office supplies expense..........................
0
Repairs expense......................................
350
Telephone expense..................................
750
Totals......................................................... $58,000

Credit

0
0
50,000
0
8,000

$58,000

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

159

Problem 3-4A (Continued)


Part 4
Adjusting entries
(a) Apr

30 Insurance Expense............................................... 637

133

Prepaid Insurance.......................................... 128

133

To record expired insurance ($2,400/12 x 2/3).


(b)

30 Office Supplies Expense....................................... 650


Office Supplies............................................... 124

400
400

To record cost of supplies used ($1,000 - $600).


(c)

30 Depreciation ExpComputer Equipment........... 612


Accumulated Depreciation
Computer Equipment .................................. 168

500
500

To record depreciation.
(d)

30 Salaries Expense................................................... 622


Salaries Payable............................................. 209

420
420

To record accrued salaries.


(e)

30 Accounts Receivable............................................ 106


Commissions Earned.................................... 405

1,750
1,750

To record accrued commissions.

Part 5
ADVENTURE TRAVEL
Income Statement
For Month Ended April 30, 2008
Commissions earned..................................................
Expenses
Depreciation expenseComputer equipment........
Salaries expense........................................................
Insurance expense....................................................
Rent expense..............................................................
Office supplies expense............................................
Repairs expense........................................................
Telephone expense....................................................
Total expenses...........................................................
Net income....................................................................

$9,750
$ 500
3,620
133
1,800
400
350
750
7,553
$2,197

McGraw-Hill Companies, 2007


160

Financial and Managerial Accounting, 2nd Edition

Problem 3-4A (Continued)


Part 5continued
ADVENTURE TRAVEL
Statement of Retained Earnings
For Month Ended April 30, 2008
Retained earnings, April 1, 2008....................................

Plus: Net income............................................................

2,197
2,197

Less: Dividends...............................................................

(1,500)

Retained earnings, April 30, 2008..................................

697

ADVENTURE TRAVEL
Balance Sheet
April 30, 2008
Assets
Cash..................................................................................
Accounts receivable........................................................
Office supplies.................................................................
Prepaid insurance...........................................................
Computer equipment...................................................... $20,000
Accumulated depreciationComputer equipment.......
(500)
Total assets......................................................................

$27,000
1,750
600
2,267
19,500
$51,117

Liabilities
Salaries payable..............................................................

Equity
Common stock.................................................................
Retained earnings...........................................................
Total liabilities and equity...............................................

50,000
697
$51,117

420

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

161

Problem 3-4A (Continued)


Part 6
Closing entries
April 30 Commissions Earned...................................405
Income Summary..................................901

9,750
9,750

To close the revenue account.

30 Income Summary..........................................901
Depreciation ExpComputer Equip.....612
Salaries Expense...................................622
Insurance Expense................................637
Rent Expense.........................................640
Office Supplies Expense......................650
Repairs Expense...................................684
Telephone Expense...............................688

7,553
500
3,620
133
1,800
400
350
750

To close the expense accounts.

30 Income Summary..........................................901
Retained Earnings.................................318

2,197
2,197

To close the Income Summary account.

30 Retained Earnings........................................318
Dividends...............................................319

1,500
1,500

To close the dividends account.

Part 7
ADVENTURE TRAVEL
Post-Closing Trial Balance
April 30, 2008
Debit

Cash.......................................................... $27,000
Accounts receivable................................
1,750
Office supplies.........................................
600
Prepaid insurance....................................
2,267
Computer equipment............................... 20,000
Accumulated depreciation
Computer equipment.............................
Salaries payable.......................................
Common stock.........................................
Retained earnings....................................
Totals......................................................... $51,617

Credit

500
420
50,000
697
$51,617

McGraw-Hill Companies, 2007


162

Financial and Managerial Accounting, 2nd Edition

Problem 3-4A (Continued)


Part 7continued
Ledger as of April 30
Cash
Date
April 1
2
3
10
14
24
28
29
30
30
Date
April 30
Date
April 3
30
Date
April 10
30
Date
April 1
Date
April 30
Date
April 30

Explanation

PR

Debit
30,000

8,000

Explanation
Adjusting
Explanation

Accounts Receivable
PR
Debit
1,750
Office Supplies
PR

Explanation

Debit
1,000

Debit
2,400

Acct. No. 128


Credit Balance
2,400
133
2,267

Adjusting
Explanation

Computer Equipment
PR

Acct. No. 106


Credit Balance
1,750
Acct. No. 124
Credit Balance
1,000
400
600

Adjusting
Prepaid Insurance
PR

Acct. No. 101


Credit Balance
30,000
1,800 28,200
1,000 27,200
2,400 24,800
1,600 23,200
31,200
1,600 29,600
350 29,250
750 28,500
1,500 27,000

Debit
20,000

Acct. No. 167


Credit Balance
20,000

Accumulated DepreciationComputer Equipment


Acct. No. 168
Explanation
PR
Debit
Credit Balance
Adjusting
500
500
Explanation
Adjusting

Salaries Payable
PR

Debit

Acct. No. 209


Credit Balance
420
420

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

163

Problem 3-4A (Continued)


Date
April 1
Date
April 30
30

Explanation

Explanation
Closing
Closing

Common Stock
PR
Retained Earnings
PR

Debit

Debit
1,500

Dividends
Date
April 30
30
Date
April 24
30
30
Date
April 30
30
Date
April 14
28
30
30
Date
April 30
30

Explanation

PR

Debit
1,500

Closing

Acct. No. 319


Credit Balance
1,500
1,500
0

9,750

Depreciation ExpenseComputer Equipment


Explanation
PR
Debit
Adjusting
500
Closing

Acct. No. 612


Credit Balance
500
500
0

Adjusting
Closing

Explanation

Salaries Expense
PR

Adjusting
Closing
Explanation
Adjusting
Closing

Insurance Expense
PR

Debit

Debit
1,600
1,600
420

Acct. No. 622


Credit Balance
1,600
3,200
3,620
3,620
0

Debit
133

Acct. No. 637


Credit Balance
133
133
0

Rent Expense

Date

Explanation

April 2
April 30

Closing

Date
April 30
30

Acct. No. 318


Credit Balance
2,197
2,197
697

Acct. No. 405


Credit Balance
8,000
8,000
1,750
9,750
0

Explanation

Commissions Earned
PR

Acct. No. 307


Credit Balance
50,000 50,000

Acct. No. 640

PR

Debit

Credit Balance

1,800
1,800

Office Supplies Expense


Explanation
PR
Debit
Adjusting
400
Closing

1,800
0

Acct. No. 650


Credit Balance
400
400
0

McGraw-Hill Companies, 2007


164

Financial and Managerial Accounting, 2nd Edition

Problem 3-4A (Concluded)


Date
April 29
30

Date
April 30
30
Date
April 30
30
30

Repairs Expense
PR

Explanation

Debit
350

Acct. No. 684


Credit Balance
350
350
0

Debit
750

Acct. No. 688


Credit Balance
750
750
0

Closing

Explanation

Telephone Expense
PR

Closing
Explanation
Closing
Closing
Closing

Income Summary
PR

Debit
7,553
2,197

Acct. No. 901


Credit Balance
9,750
9,750
2,197
0

Problem 3-5A (15 minutes)


1.

11.

2.

12.

3.

13.

4.

14.

5.

15.

6.

16.

7.

17.

8.

18.

9.

19.

10.

20.

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

165

Problem 3-6AA (40 minutes)


Part 1
Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.

Nov. 1 Prepaid Advertising ........................................


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

1,800
1,800

Paid for future advertising.

1 Prepaid Insurance...........................................
Cash..........................................................

2,460
2,460

Paid insurance for one year.

30 Cash..................................................................
Unearned Service Fees...........................

3,600
3,600

Received fees in advance.

Dec. 1 Prepaid Consulting Fees ...............................


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

3,000
3,000

Paid for future consulting.

15 Cash..................................................................
Unearned Service Fees...........................

7,950
7,950

Received fees in advance.

31 Advertising Expense.......................................
Prepaid Advertising ................................

600
600

To adjust prepaid advertising ($1,800 - $1,200).

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

410
410

To adjust prepaid insurance ($2,460 x 2/12).

31 Unearned Service Fees ..................................


Service Fees Earned................................

2,100
2,100

To adjust unearned service fees ($3,600 - $1,500).

31 Consulting Fees Expense ..............................


Prepaid Consulting Fees.........................

1,000
1,000

To adjust prepaid consulting fees ($3,000 x 1/3).

31 Unearned Service Fees...................................


Service Fees Earned................................

3,300
3,300

To adjust unearned service fees.

McGraw-Hill Companies, 2007


166

Financial and Managerial Accounting, 2nd Edition

Problem 3-6AA (Continued)


Part 2
Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.

Nov. 1

Advertising Expense.......................................
Cash..........................................................

1,800
1,800

Paid for future advertising.

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

2,460
2,460

Paid insurance for one year.

30

Cash..................................................................
Service Fees Earned................................

3,600
3,600

Received fees in advance.

Dec. 1

Consulting Fees Expense...............................


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

3,000
3,000

Paid for future consulting.

15

Cash..................................................................
Service Fees Earned................................

7,950
7,950

Received fees in advance.

31

Prepaid Advertising.........................................
Advertising Expense...............................

1,200
1,200

To adjust for prepaid advertising.

31

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

2,050
2,050

To adjust for prepaid insurance


($2,460 x 10/12).

31

Service Fees Earned.......................................


Unearned Service Fees...........................

1,500
1,500

To adjust for unearned service fees.

31

Prepaid Consulting Fees................................


Consulting Fees Expense.......................

2,000
2,000

To adjust for prepaid consulting fees


($3,000 x 2/3).

31

Service Fees Earned.......................................


Unearned Service Fees...........................

4,650
4,650

To adjust for unearned service fees


($7,950 - $3,300).
McGraw-Hill Companies, 2007
Solutions Manual, Chapter 3

167

Problem 3-6AA (Concluded)


Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
Advertising expense for two months................................... $ 600
Prepaid advertising as of December 31...............................

1,200

Insurance expense for two months.....................................

410

Prepaid insurance as of December 31.................................

2,050

Consulting fees expense (1/3 of total paid).........................

1,000

Prepaid consulting fees........................................................

2,000

Service fees earned for two months ($2,100 + $3,300)......

5,400

Unearned service fees at 12/31 ($1,500 + $4,650)...............

6,150

When prepaid expenses and unearned revenues are recorded in balance


sheet accounts, the related adjusting entries are designed to generate the
correct asset, expense, liability, and revenue account balances. When
prepaid expenses and unearned revenues are recorded in income
statement accounts, the related adjusting entries are designed to
accomplish exactly the same result.

McGraw-Hill Companies, 2007


168

Financial and Managerial Accounting, 2nd Edition

Problem 3-7A (90 minutes) Part 1


ACE CONSTRUCTION CO.
Work Sheet
For Year Ended June 30, 2008
No.
101
126
128
167
168
201
203
208
210
213
251
307
318
319
401
612
623
633
637
640
652
683
684
690

Unadjusted
Trial Balance
Account Title
Dr.
Cr.
Cash...........................................
18,500
Supplies.......................................
9,900
Prepaid insurance..........................
7,200
Equipment...................................
132,000
Accumulated depreciation
Equipment..................................
26,250
Accounts payable..........................
6,800
Interest payable.............................
Rent payable.................................
Wages payable..............................
Property taxes payable...................
Long-term notes payable................
25,000
Common stock.............................
40,000
Retained earnings..........................
48,660
Dividends.....................................
33,000
Construction fees earned................
132,100
Depreciation expense
Equipment..................................
Wages expense.............................
46,860
Interest expense............................
2,750
Insurance expense.........................
Rent expense................................
12,000
Supplies expense..........................
Property taxes expense..................
7,800
Repairs expense............................
2,910
Utilities expense............................
5,890
Totals..........................................
278,810
Net income...................................
Totals..........................................

Adjustments
Dr.
Cr.

6,600
3,800

(c)
(d)
(h)
(f)
(e)
(g)

8,400
650
250
500
1,800
1,000

Income
Statement
Dr.
Cr.

Balance Sheet
Dr.
Cr.

18,500
3,300
3,400
132,000

18,500
3,300
3,400
132,000
34,650
7,450
250
500
1,800
1,000
25,000
40,000
48,660

34,650
7,450
250
500
1,800
1,000
25,000
40,000
48,660

33,000

33,000
132,100

(c)
(e)
(h)
(b)
(f)
(a)
(g)

______
278,810

(a)
(b)

Adjusted
Trial Balance
Dr.
Cr.

(d)

8,400
1,800
250
3,800
500
6,600
1,000
650
23,000

_____
23,000

8,400
48,660
3,000
3,800
12,500
6,600
8,800
2,910
6,540
291,410

______
291,410

132,100
8,400
48,660
3,000
3,800
12,500
6,600
8,800
2,910
6,540
101,210
30,890
132,100

______
132,100
______
132,100

______ ______
190,200 159,310
______ 30,890
190,200 190,200

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

169

McGraw-Hill Companies, 2007


170

Financial and Managerial Accounting, 2nd Edition

Problem 3-7A (Continued)


Part 2.

Adjusting entries (all dated June 30, 2008)

(a)

Supplies Expense.............................................. 6,600


Supplies......................................................
To record consumption of supplies.

6,600

Insurance Expense............................................ 3,800


Prepaid Insurance......................................
To record expiration of insurance.

3,800

Depreciation ExpenseEquipment................. 8,400


Accumulated DepreciationEquipment.......
To record depreciation.

8,400

(b)

(c)

(d)

(e)

(f)

(g)

(h)

Utilities Expense................................................
Accounts Payable......................................
To record accrued utilities costs.

650
650

Wages Expense.................................................. 1,800


Wages Payable...........................................
To record accrued wages.
Rent Expense.....................................................
Rent Payable...............................................
To record remainder of annual rent.

500
500

Property Taxes Expense................................... 1,000


Property Taxes Payable.............................
To record additional property taxes.
Interest Expense................................................
Interest Payable..........................................
To record prior months interest expense.

1,800

1,000

250
250

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

171

Problem 3-7A (Continued)


Closing entries (all dated June 30, 2008)
(1)

(2)

(3)

(4)

Construction Fees Earned........................... 132,100


Income Summary..................................
To close the revenue account.

132,100

Income Summary.......................................... 101,210


Depreciation ExpenseEquipment......
Wages Expense.....................................
Interest Expense....................................
Insurance Expense................................
Rent Expense.........................................
Supplies Expense..................................
Property Taxes Expense.......................
Repairs Expense...................................
Utilities Expense....................................
To close the expense accounts.

8,400
48,660
3,000
3,800
12,500
6,600
8,800
2,910
6,540

Income Summary..........................................
Retained Earnings.................................
To close the Income Summary account.

30,890
30,890

Retained Earnings........................................
Dividends...............................................
To close the dividends account.

33,000
33,000

McGraw-Hill Companies, 2007


172

Financial and Managerial Accounting, 2nd Edition

Problem 3-7A (Continued)


Part 3
ACE CONSTRUCTION CO.
Income Statement
For Year Ended June 30, 2008
Construction fees earned.................................
Expenses
Depreciation expenseEquipment...............
Wages expense................................................
Interest expense..............................................
Insurance expense..........................................
Rent expense....................................................
Supplies expense............................................
Property taxes expense..................................
Repairs expense..............................................
Utilities expense...............................................
Total expenses.................................................
Net income..........................................................

$132,100
$ 8,400
48,660
3,000
3,800
12,500
6,600
8,800
2,910
6,540
101,210
$ 30,890

ACE CONSTRUCTION CO.


Statement of Retained Earnings
For Year Ended June 30, 2008
Retained earnings, June 30, 2007....................

$ 48,660

Add: Net income...............................................

30,890
79,550

Less: Dividends.................................................

(33,000)

Retained earnings, June 30, 2008....................

$ 46,550

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

173

Problem 3-7A (Continued)


ACE CONSTRUCTION CO.
Balance Sheet
June 30, 2008
Assets
Current assets
Cash.......................................................................
Supplies.................................................................
Prepaid insurance.................................................
Total current assets..............................................
Plant assets
Equipment.............................................................
Accumulated depreciationEquipment............
Total assets.............................................................

$ 18,500
3,300
3,400
$ 25,200
132,000
(34,650)

97,350
$122,550

Liabilities
Current liabilities
Accounts payable.................................................
Interest payable....................................................
Rent payable.........................................................
Wages payable......................................................
Property taxes payable........................................
Current portion of long-term note payable........
Total current liabilities..........................................
Noncurrent liabilities
Long-term note payable (less current portion)..
Total liabilities.........................................................
Equity
Common stock........................................................
Retained earnings...................................................
Total liabilities and equity......................................

$ 7,450
250
500
1,800
1,000
5,000
$ 16,000
20,000
36,000
40,000
46,550
$122,550

McGraw-Hill Companies, 2007


174

Financial and Managerial Accounting, 2nd Edition

Problem 3-7A (Continued)


Part 4
(a) This error enters the wrong amount in the correct accounts. The
ending balance of the Supplies account should be $3,300, but the
entry reduces Supplies by $3,300. Because its unadjusted balance
was $9,900, the adjusted balance will be $6,600 ($9,900 - $3,300),
which is $3,300 greater than the correct $3,300 balance. In addition,
the Supplies Expense account balance will be only $3,300 instead of
$6,600.
The adjusted trial balance columns in the work sheet will be equal,
but the error will cause the work sheets net income to be overstated
by $3,300 because of the understatement of the expense. In
addition, the balance sheet columns will include the overstated
balance for the Supplies account.
This error is not likely to be detected as a result of completing the
work sheet. If it is not, the income statement will overstate net
income by $3,300, and the balance sheet will overstate the cost of
the supplies available and the retained earnings by $3,300.
(b) This error inserts a credit in the adjusted trial balance when a debit
should have been inserted. As a result, the trial balance will not
balance (the credit column will be greater than the debit column by
$37,000), and the error will be tracked down and corrected before
going on with the next step in the work sheet.
Because the error will be detected and corrected before preparing
the financial statements, the statements will not be affected.

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

175

PROBLEM SET B
Problem 3-1B (30 minutes)
Part 1
Adjustment (a)
Oct. 31 Office Supplies Expense........................................
Office Supplies................................................

4,370
4,370

To record cost of supplies used


($600 + $4,570 - $800).

31

Adjustment (b)
Insurance Expense.................................................
Prepaid Insurance...........................................

4,730
4,730

To record annual insurance coverage cost.


Policy
A
B
C
Total

31

Cost per Month


$250 ($6,000/24 mo.)
200 ($7,200/36 mo.)
110 ($1,320/12 mo.)

Months
Active in 2008
12
7
3

2008
Expense
$3,000
1,400
330
$4,730

Adjustment (c)
Salaries Expense....................................................
Salaries Payable..............................................

1,000
1,000

To record accrued but unpaid wages


(1 day x $1,000).

31

Adjustment (d)
Depreciation ExpenseBuilding..........................
Accumulated DepreciationBuilding...........

5,400
5,400

To record annual depreciation


($175,000 - $40,000) / 25 years = $5,400.

McGraw-Hill Companies, 2007


176

Financial and Managerial Accounting, 2nd Edition

Problem 3-1B (Concluded)


Adjustment (e)
Oct. 31 Rent Receivable......................................................
Rent Earned.....................................................

1,000
1,000

To record earned but unpaid Oct. rent.

31

Adjustment (f)
Unearned Rent........................................................
Rent Earned.....................................................

1,450
1,450

To record rent earned for September


and October (2 x $725).

Part 2
Cash Payment for (c)
Nov. 7 Salaries Payable.....................................................
Salaries Expense*...................................................
Cash..................................................................

1,000
4,000
5,000

To record payment of accrued and


current salaries. *(4 days x $1,000)

Cash Payment for (e)


15

Cash.........................................................................
Rent Receivable...............................................
Rent Earned.....................................................

2,000
1,000
1,000

To record past due rent for two months.

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

177

Problem 3-2B (90 minutes)


Parts 1 and 2
Cash
60,000

Bal.

Accounts Payable
Bal.

Accounts Receivable
Unadj. Bal.
0
(f)
5,750
Adj. Bal.
5,750
Teaching Supplies
Unadj. Bal.
70,000
(b)
Adj. Bal.
20,000

Unadj. Bal.
Adj. Bal.

Prepaid Insurance
19,000
(a)
9,500

11,200

Salaries Payable
Unadj. Bal.

(g)
Adj. Bal.

0
450
450

Unearned Training Fees


Unadj. Bal.

50,000

(e)

28,600

28,600
Adj. Bal.

Common Stock
Bal.

30,000

9,500
Retained Earnings

Unadj. Bal.
Adj. Bal.

Bal.

Prepaid Rent
3,800
(h)
0

Bal.

41,500

3,800

Professional Library
12,000

Bal.

Dividends
20,000

Accumulated Depreciation
Professional Library
Unadj. Bal.
2,500
(d)
2,400
Adj. Bal.
4,900

Bal.

Equipment
40,000
Accumulated Depreciation
Equipment
Unadj. Bal. 20,000
(c)
5,000
Adj. Bal.
25,000

McGraw-Hill Companies, 2007


178

Financial and Managerial Accounting, 2nd Edition

Problem 3-2B (Continued)


Parts 1 and 2
Tuition Fees Earned
Unadj. Bal.

(f)
Adj. Bal.

129,200
5,750
134,950

Bal.

Advertising Expense
19,000

Bal.

Utilities Expense
13,400

Training Fees Earned


Unadj. Bal.

(e)
Adj. Bal.

68,000
28,600
96,600

Depreciation Expense
Professional Library
Unadj. Bal.
0
(d)
2,400
Adj. Bal.
2,400
Depreciation Expense
Equipment
Unadj. Bal.
0
(c)
5,000
Adj. Bal.
5,000

Unadj. Bal.

(g)
Adj. Bal.

Unadj. Bal.

(a)
Adj. Bal.

Unadj. Bal.

(h)
Adj. Bal.

Salaries Expense
44,200
450
44,650
Insurance Expense
0
9,500
9,500
Rent Expense
29,600
3,800
33,400

Teaching Supplies Expense


Unadj. Bal.
0
(b)
50,000
Adj. Bal.
50,000

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

179

Problem 3-2B (Continued)


Part 2
Adjustment (a)
Dec. 31 Insurance Expense................................................
Prepaid Insurance..........................................

9,500
9,500

To record the insurance expired.

Adjustment (b)
31 Teaching Supplies Expense................................. 50,000
Teaching Supplies..........................................

50,000

To record the cost of supplies used


($70,000 - $20,000).

Adjustment (c)
31 Depreciation ExpenseEquipment.....................
Accumulated DepreciationEquipment.....

5,000
5,000

To record equipment depreciation.

Adjustment (d)
31 Depreciation ExpenseProfessional Library....
Accumulated Depreciation
Professional Library.............................

2,400
2,400

To record professional library depreciation.

Adjustment (e)
31 Unearned Training Fees........................................ 28,600
Training Fees Earned.....................................

28,600

To record training fees earned that were


collected in advance.

Adjustment (f)
31 Accounts Receivable............................................
Tuition Fees Earned.......................................

5,750
5,750

To record tuition earned ($2,300 x 2 1/2 mo).

Adjustment (g)
31 Salaries Expense...................................................
Salaries Payable.............................................

450
450

To accrue salaries expense (3 days x $150).

Adjustment (h)
31 Rent Expense ........................................................
Prepaid Rent...................................................

3,800
3,800

McGraw-Hill Companies, 2007


180

Financial and Managerial Accounting, 2nd Edition

To record expiration of prepaid rent.

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

181

Problem 3-2B (Continued)


Part 3
AUGUSTUS INSTITUTE
Adjusted Trial Balance
December 31, 2008
Debit

Cash............................................................................... $ 60,000
Accounts receivable......................................................
5,750
Teaching supplies..........................................................
20,000
Prepaid insurance..........................................................
9,500
Prepaid rent...................................................................
0
Professional library........................................................
12,000
Accumulated depreciationProfessional library...........
Equipment.....................................................................
40,000
Accumulated depreciationEquipment........................
Accounts payable..........................................................
Salaries payable.............................................................
Unearned training fees...................................................
Common stock..............................................................
Retained earnings..........................................................
Dividends.......................................................................
20,000
Tuition fees earned.........................................................
Training fees earned.......................................................
Depreciation expenseProfessional library..................
2,400
Depreciation expenseEquipment...............................
5,000
Salaries expense............................................................
44,650
Insurance expense.........................................................
9,500
Rent expense.................................................................
33,400
Teaching supplies expense............................................
50,000
Advertising expense......................................................
19,000
Utilities expense.............................................................
13,400
Totals............................................................................. $344,600

Credit

$ 4,900
25,000
11,200
450
0
30,000
41,500
134,950
96,600

.
$344,600

McGraw-Hill Companies, 2007


182

Financial and Managerial Accounting, 2nd Edition

Problem 3-2B (Continued)


Part 4
AUGUSTUS INSTITUTE
Income Statement
For Year Ended December 31, 2008
Revenues
Tuition fees earned.................................................... $134,950
Training fees earned..................................................
96,600
Total revenues............................................................
Expenses
Depreciation expenseProfessional library..........
2,400
Depreciation expenseEquipment.........................
5,000
Salaries expense........................................................
44,650
Insurance expense....................................................
9,500
Rent expense..............................................................
33,400
Teaching supplies expense......................................
50,000
Advertising expense..................................................
19,000
Utilities expense.........................................................
13,400
Total expenses...........................................................
Net income....................................................................

$231,550

177,350
$ 54,200

AUGUSTUS INSTITUTE
Statement of Retained Earnings
For Year Ended December 31, 2008
Retained earnings, December 31, 2007.....................
Plus: Net income..........................................................
Less: Dividends...........................................................
Retained earnings, December 31, 2008.....................

$41,500
54,200
95,700
20,000
$75,700

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

183

Problem 3-2B (Concluded)


AUGUSTUS INSTITUTE
Balance Sheet
December 31, 2008
Assets
Cash..............................................................................
Accounts receivable....................................................
Teaching supplies........................................................
Prepaid insurance........................................................
Professional library..................................................... $12,000
Accumulated depreciationProfessional library........... (4,900)
Equipment.................................................................... 40,000
Accumulated depreciationEquipment...................... (25,000)
Total assets..................................................................
Liabilities
Accounts payable........................................................
Salaries payable...........................................................
Total liabilities..............................................................
Equity
Common stock.............................................................
Retained earnings........................................................
Total liabilities and equity...........................................

$ 60,000
5,750
20,000
9,500
7,100
15,000
$117,350

$ 11,200
450
11,650
30,000
75,700
$117,350

McGraw-Hill Companies, 2007


184

Financial and Managerial Accounting, 2nd Edition

Problem 3-3B (90 minutes)


Part 1
SANTO COMPANY
Income Statement
For Year Ended December 31, 2008
Repair fees earned.....................................
Expenses
Depreciation expenseEquipment........
Wages expense.........................................
Insurance expense...................................
Rent expense............................................
Store supplies expense...........................
Utilities expense.......................................
Total expenses..........................................
Net income..................................................

$54,700
$ 2,000
26,400
600
3,600
1,200
1,960
35,760
$18,940

SANTO COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2008
Retained earnings, December 31, 2007....

$25,650

Add: Net income........................................

18,940
44,590

Less: Dividends..........................................

(15,000)

Retained earnings, December 31, 2008....

$29,590

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

185

Problem 3-3B (Continued)


SANTO COMPANY
Balance Sheet
December 31, 2008
Assets
Current assets
Cash........................................................... $14,450
Store supplies...........................................
5,140
Prepaid insurance....................................
1,200
Total current assets.................................
Plant assets
Equipment................................................. 31,000
Accumulated depreciation, equipment. .
(8,000)
Total assets.................................................

$20,790

23,000
$43,790

Liabilities
Current liabilities
Accounts payable.....................................
Wages payable..........................................
Total current liabilities.............................
Equity
Common stock...........................................
Retained earnings......................................
Total liabilities and equity..........................

$ 1,500
2,700
4,200
10,000
29,590
$43,790

McGraw-Hill Companies, 2007


186

Financial and Managerial Accounting, 2nd Edition

Problem 3-3B (Continued)


Parts 2 and 3
SANTO COMPANY
For Year Ended December 31, 2008

No.

Adjusted
Trial Balance
Dr.
Cr.

Account Title

Post-Closing
Trial Balance
Dr.
Cr.

Closing Entries
Dr.
Cr.

101

Cash................................ 14,450

14,450

125

Store supplies.................... 5,140

5,140

128

Prepaid insurance.............. 1,200

1,200

167

Equipment........................ 31,000

31,000

168

Accumulated depreciationEquipment..............

8,000

8,000

201

Accounts payable..............

1,500

1,500

210

Wages payable..................

2,700

2,700

307

Common stock..................

10,000

10,000

318

Retained earnings..............

25,650 (4)

319

Dividends......................... 15,000

401

Repair fees earned..............

612

15,000 (3)

18,940

(4)

15,000

Depreciation expense
2,000
Equipment......................

(2)

2,000

623

Wages expense................. 26,400

(2)

26,400

637

Insurance expense.............

600

(2)

600

640

Rent expense.................... 3,600

(2)

3,600

651

Store supplies expense....... 1,200

(2)

1,200

690

Utilities expense................. 1,960

(2)

1,960

901

Income summary...............

35,760 (1)
18,940

54,700
______

54,700 (1)

______
Totals...............................102,550

(2)

______ (3)
102,550

29,590

54,700

124,400

_____

_____

124,400 51,790

51,790

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

187

Problem 3-3B (Continued)


Part 3
Closing entries (all dated December 31, 2008)
(1)

Repair Fees Earned..............................................


Income Summary..........................................

54,700
54,700

To close the revenue account.

(2)

Income Summary.................................................
Depreciation Expense, Equipment..............
Wages Expense.............................................
Insurance Expense.......................................
Rent Expense................................................
Store Supplies Expense...............................
Utilities Expense...........................................

35,760
2,000
26,400
600
3,600
1,200
1,960

To close the expense accounts.

(3)

Income Summary.................................................
Retained Earnings........................................

18,940
18,940

To close the Income Summary account.

(4)

Retained Earnings................................................
Dividends.......................................................

15,000
15,000

To close the dividends account.

Part 4
(a) If none of the $600 insurance expense had expired, the income
statement would not report any insurance expense and net income
would be increased by $600.
(b) If there were no earned and unpaid wages (meaning Wages Payable
equals zero), wages expense would be $2,700 less.
Financial Statement Changes
The income statement would reflect the following
Net income would be increased by $600 + $2,700 = $3,300. (a) & (b)
The balance sheet would reflect the following
Prepaid insurance and total assets would be increased by $600. (a)
There would not be any wages payable. (b)
Total liabilities would be decreased by $2,700. b)
Total equity would be increased by $3,300. (a) & (b)
McGraw-Hill Companies, 2007
188

Financial and Managerial Accounting, 2nd Edition

Problem 3-4B (90 minutes)


INSTRUCTOR NOTE: Ledger accounts are shown at the end of Part 7 as they would
appear after all entries are posted.

Part 2
Transactions for July
July 1 Cash...............................................................101
30,000
Buildings........................................................173 150,000
Common Stock......................................307

180,000

Owner invested in the business.

2 Rent Expense................................................640
Cash........................................................101

2,000
2,000

Paid one months rent.

5 Office Supplies..............................................124
Cash........................................................101

2,400
2,400

Acquired office supplies.

10

Prepaid Insurance.........................................128
Cash........................................................101

7,200
7,200

Paid 12 months premium in advance.

14

Salaries Expense..........................................622
Cash........................................................101

1,000
1,000

Paid two weeks salary.

24

Cash...............................................................101
Storage Fees Earned.............................401

9,800
9,800

Collected fees from customers.

28

Salaries Expense..........................................622
Cash........................................................101

1,000
1,000

Paid two weeks salary.

29

Repairs Expense...........................................684
Cash........................................................101

950
950

Repaired the roof.

30

Telephone Expense......................................688
Cash........................................................101

400
400

Paid the telephone bill.

31

Dividends.......................................................319
Cash........................................................101

2,000
2,000

Paid cash for dividends.

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

189

Problem 3-4B (Continued)


Part 3
SAFE STORAGE CO.
Unadjusted Trial Balance
July 31, 2008
No.

Account Title

Debit

Credit

101 Cash................................................................... $ 22,850


106 Accounts receivable.........................................

124 Office supplies..................................................

2,400

128 Prepaid insurance............................................

7,200

173 Buildings........................................................... 150,000


174 Accumulated depreciationBuildings............

209 Salaries payable...............................................


307 Common stock..................................................

180,000

318 Retained earnings............................................

319 Dividends..........................................................

2,000

401 Storage fees earned.........................................

9,800

606 Depreciation expenseBuildings....................

622 Salaries expense..............................................

2,000

637 Insurance expense...........................................

640 Rent expense....................................................

2,000

650 Office supplies expense..................................

684 Repairs expense...............................................

950

688 Telephone expense...........................................

400

Totals................................................................. $189,800

$189,800

McGraw-Hill Companies, 2007


190

Financial and Managerial Accounting, 2nd Edition

Problem 3-4B (Continued)


Part 4
Adjusting entries
July 31 Insurance Expense.......................................637
Prepaid Insurance.................................128

400
400

To record expired insurance (2/3 x 600


per month).

31 Office Supplies Expense..............................650


Office Supplies......................................124

875
875

To record the cost of consumed


supplies ($2,400 - $1,525).

31 Depreciation ExpenseBuildings..............606
Accum. DepreciationBuildings.........174

1,500
1,500

To record depreciation.

31 Salaries Expense..........................................622
Salaries Payable....................................209

100
100

To record accrued salaries.

31 Accounts Receivable....................................106
Storage Fees Earned.............................401

1,150
1,150

To record accrued storage fees.

Part 5
SAFE STORAGE CO.
Income Statement
For Month Ended July 31, 2008
Storage fees earned...................................
Expenses
Depreciation expenseBuildings............ $1,500
Salaries expense......................................
2,100
Insurance expense...................................
400
Rent expense............................................
2,000
Office supplies expense..........................
875
Repairs expense.......................................
950
Telephone expense..................................
400
Total expenses..........................................
Net income..................................................

$10,950

8,225
$ 2,725

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

191

Problem 3-4B (Continued)


Problem 5-1B (Continued)
SAFE STORAGE CO.
Statement of Retained Earnings
For Month Ended July 31, 2008
Retained earnings, July 1, 2008................

Add: Net income........................................

2,725
2,725

Less: Dividends..........................................

(2,000)

Retained earnings, July 31, 2008..............

SAFE STORAGE CO.


Balance Sheet
July 31, 2008
Assets
Cash.............................................................
Accounts receivable..................................
Office supplies............................................
Prepaid insurance......................................
Buildings..................................................... $150,000
Accumulated depreciation--Buildings.....
(1,500)
Total assets.................................................

725

$ 22,850
1,150
1,525
6,800
148,500
$180,825

Liabilities
Salaries payable.........................................

Equity
Common stock...........................................
Retained earnings......................................
Total liabilities and equity..........................

180,000
725
$180,825

100

McGraw-Hill Companies, 2007


192

Financial and Managerial Accounting, 2nd Edition

Problem 3-4B (Continued)


Part 6
Closing entries
July 31

Storage Fees Earned.................................401 10,950


Income Summary..................................901

10,950

To close the revenue account.

31

Income Summary.......................................901
Depreciation ExpBuildings...............606
Salaries Expense...................................622
Insurance Expense................................637
Rent Expense.........................................640
Office Supplies Expense......................650
Repairs Expense...................................684
Telephone Expense...............................688

8,225
1,500
2,100
400
2,000
875
950
400

To close the expense accounts.

31

Income Summary.......................................901
Retained Earnings.................................318

2,725
2,725

To close the Income Summary.

31

Retained Earnings......................................318
Dividends...............................................319

2,000
2,000

To close the dividends account.

Part 7
SAFE STORAGE CO.
Post-Closing Trial Balance
July 31, 2008
Debit
Cash............................................................. $ 22,850
Accounts receivable..................................

1,150

Office supplies............................................

1,525

Prepaid insurance......................................

6,800

Credit

Buildings..................................................... 150,000
Accumulated depreciationBuildings......

1,500

Salaries payable.........................................

100

Common stock...........................................

180,000

Retained earnings......................................

725
McGraw-Hill Companies, 2007

Solutions Manual, Chapter 3

193

Totals........................................................... $182,325

$182,325

McGraw-Hill Companies, 2007


194

Financial and Managerial Accounting, 2nd Edition

Problem 3-4B (Continued)

Date
July 1
2
5
10
14
24
28
29
30
31
Date
July 31
Date
July 5
31
Date
July 10
31

Explanation

Ledger as of July 31
Cash
PR
Debit
30,000

9,800

Accounts Receivable
Explanation
PR
Debit
Adjusting
1,150
Explanation

Office Supplies
PR

Explanation

Debit
2,400

Debit
7,200

Acct. No. 128


Credit Balance
7,200
400
6,800

Adjusting
Buildings

Date
July 1
Date
July 31
Date
July 31

Explanation

PR

Acct. No. 106


Credit Balance
1,150
Acct. No. 124
Credit Balance
2,400
875
1,525

Adjusting
Prepaid Insurance
PR

Acct. No. 101


Credit Balance
30,000
2,000 28,000
2,400 25,600
7,200 18,400
1,000 17,400
27,200
1,000 26,200
950 25,250
400 24,850
2,000 22,850

Debit
150,000

Acct. No. 173


Credit Balance
150,000

Accumulated DepreciationBuildings
Acct. No. 174
Explanation
PR
Debit Credit Balance
Adjusting
1,500
1,500
Explanation
Adjusting

Salaries Payable
PR

Debit

Acct. No. 209


Credit Balance
100
100

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

195

Problem 3-4B (Continued)


Date
July 1
Date
July 31
31

Explanation

Explanation
Closing
Closing

Common Stock
PR

Acct. No. 307


Debit Credit Balance
180,000 180,000

Retained Earnings
PR

Acct. No. 318


Credit Balance
2,725
2,725
725

Debit
2,000

Dividends
Date
July 31
31

Explanation

PR

Debit
2,000

Closing

Date
July 24
31
31

Adjusting
Closing

10,950

Acct.No. 401
Credit Balance
9,800
9,800
1,150 10,950
0

Date
July 31
31

Depreciation ExpenseBuildings
Explanation
PR
Debit
Adjusting
1,500
Closing

Acct. No. 606


Credit Balance
1,500
1,500
0

Date
July 14
28
31
31
Date
July 31
31
Date
July 2
31

Explanation

Explanation

Storage Fees Earned


PR
Debit

Acct. No. 319


Credit Balance
2,000
2,000
0

Salaries Expense
PR

Adjusting
Closing
Explanation
Adjusting
Closing
Explanation
Closing

Insurance Expense
PR

Rent Expense
PR

Debit
1,000
1,000
100

Acct. No. 622


Credit Balance
1,000
2,000
2,100
2,100
0

Debit
400

Acct. No. 637


Credit Balance
400
400
0

Debit
2,000

Acct. No. 640


Credit Balance
2,000
2,000
0

McGraw-Hill Companies, 2007


196

Financial and Managerial Accounting, 2nd Edition

Problem 3-4B (Concluded)


Date
July 31
31
Date
July 29
31
Date
July 30
31
Date
July 31
31
31

Office Supplies Expense


Explanation
PR
Debit
Adjusting
875
Closing
Repairs Expense
PR

Explanation

Debit
950

Acct. No. 684


Credit Balance
950
950
0

Debit
400

Acct. No. 688


Credit Balance
400
400
0

Closing
Explanation

Telephone Expense
PR

Closing
Explanation
Closing
Closing
Closing

Income Summary
PR

Acct. No. 650


Credit Balance
875
875
0

Debit
8,225
2,725

Acct. No. 901


Credit Balance
10,950 10,950
2,725
0

Problem 3-5B (15 minutes)


1.

11.

2.

12.

3.

13.

4.

14.

5.

15.

6.

16.

7.

17.

8.

18.

9.

19.

10.

20.

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

197

Problem 3-6BA (40 minutes)


Part 1
Method that records prepaid expenses and unearned revenues in balance sheet accounts

Apr. 1

Prepaid Consulting Fees..................................... 2,450


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

2,450

Paid for future consulting services.

Prepaid Insurance................................................ 3,600


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

3,600

Paid insurance for one year.

30

Cash....................................................................... 8,500
Unearned Service Fees................................

8,500

Received fees in advance.

May 1

Prepaid Advertising.............................................. 4,450


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

4,450

Paid for future advertising.

23

Cash ..................................................................... 10,450


Unearned Service Fees...............................

10,450

Received fees in advance.

31

Consulting Fees Expense.................................... 2,000


Prepaid Consulting Fees..............................

2,000

To adjust prepaid consulting fees.

31

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

600
600

To adjust prepaid insurance ($3,600 x 2/12).

31

Unearned Service Fees ....................................... 3,900


Service Fees Earned.....................................

3,900

To adjust unearned service fees ($8,500 - $4,600).

31

Advertising Expense............................................ 2,400


Prepaid Advertising......................................

2,400

To adjust prepaid advertising ($4,450 - $2,050).

31

Unearned Service Fees........................................ 5,500


Service Fees Earned.....................................

5,500

To adjust unearned service fees.

McGraw-Hill Companies, 2007


198

Financial and Managerial Accounting, 2nd Edition

Problem 3-6BA (Continued)


Part 2
Method that records prepaid expenses and unearned revenues in income statement accounts:

Apr. 1

Consulting Fees Expense..................................


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

2,450
2,450

Paid for future consulting services.

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

3,600
3,600

Paid insurance for one year.

30

Cash.....................................................................
Service Fees Earned...................................

8,500
8,500

Received fees in advance.

May 1

Advertising Expense...........................................
Cash..............................................................

4,450
4,450

Paid for future advertising.

23

Cash..................................................................... 10,450
Service Fees Earned...................................

10,450

Received fees in advance.

31

Prepaid Consulting Fees....................................


Consulting Fees Expense...........................

450
450

To adjust for prepaid consulting fees ($2,450 - $2,000).

31

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


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

3,000
3,000

To adjust for prepaid insurance ($3,600 x 10/12).

31

Service Fees Earned...........................................


Unearned Service Fees ..............................

4,600
4,600

To adjust for unearned service fees.

31

Prepaid Advertising............................................
Advertising Expense...................................

2,050
2,050

To adjust for prepaid advertising.

31

Service Fees Earned...........................................


Unearned Service Fees ..............................

4,950
4,950

To adjust for unearned service fees ($10,450 - $5,500).

McGraw-Hill Companies, 2007


Solutions Manual, Chapter 3

199

Problem 3-6BA (Concluded)


Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
Prepaid consulting fees as of May 31....................................

$ 450

Consulting fees expense for two months..............................

2,000

Insurance expense for two months........................................

600

Prepaid insurance as of May 31..............................................

3,000

Unearned service fees as of May 31 ($4,600 + $4,950).........

9,550

Service fees earned for two months ($3,900 + $5,500).........

9,400

Prepaid advertising as of May 31...........................................

2,050

Advertising expense for two months.....................................

2,400

When prepaid expenses and unearned revenues are recorded in balance


sheet accounts, the related adjusting entries are designed to generate the
correct asset, expense, liability, and revenue account balances. When
prepaid expenses and unearned revenues are recorded in income
statement accounts, the related adjusting entries are designed to
accomplish exactly the same result.

McGraw-Hill Companies, 2007


200

Financial and Managerial Accounting, 2nd Edition

Problem 3-7B (90 minutes) Part 1


POWER DEMOLITION COMPANY
Work Sheet
For Year Ended April 30, 2008
No.
101
126
128
167
168
201
203
208
210
213
251
307
318
319
401
612
623
633
637
640
652
683
684
690

Unadjusted
Trial Balance
Account Title
Dr.
Cr.
Cash...........................................
7,000
Supplies.......................................
16,000
Prepaid insurance..........................
12,600
Equipment...................................
200,000
Accumulated depreciation
14,000
Equipment..................................
Accounts payable..........................
6,800
Interest payable.............................
Rent payable.................................
Wages payable..............................
Property taxes payable...................
Long-term notes payable................
30,000
Common stock.............................
40,000
Retained earnings..........................
46,900
Dividends.....................................
12,000
Demolition fees earned...................
187,000
Depreciation expense
Equipment..................................
Wages expense.............................
41,400
Interest expense............................
3,300
Insurance expense.........................
Rent expense................................
13,200
Supplies expense..........................
Property taxes expense..................
9,700
Repairs expense............................
4,700
Utilities expense............................
4,800 ______
Totals..........................................
324,700 324,700
Net income...................................
Totals..........................................

Adjustments
Dr.
Cr.

Adjusted
Trial Balance
Dr.
Cr.

Income
Statement
Dr.
Cr.

7,000
7,900
2,000
200,000

7,000
7,900
2,000
200,000

(a)
(b)

8,100
10,600

(c)

7,000

21,000

21,000

(d)
(h)
(f)
(e)
(g)

800
300
3,000
2,000
550

7,600
300
3,000
2,000
550
30,000
40,000
46,900

7,600
300
3,000
2,000
550
30,000
40,000
46,900

12,000
(c)
(e)
(h)
(b)
(f)
(a)
(g)

7,000
2,000
300
10,600
3,000
8,100
550

(d)

800
32,350

Balance Sheet
Dr.
Cr.

______
32,350

12,000
187,000

187,000

7,000
43,400
3,600
10,600
16,200
8,100
10,250
4,700
5,600 ______
338,350 338,350

7,000
43,400
3,600
10,600
16,200
8,100
10,250
4,700
5,600 ______
109,450 187,000
77,550 ______
187,000 187,000

______ ______
228,900 151,350
______ 77,550
228,900 228,900

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Solutions Manual, Chapter 3

201

Problem 3-7B (Continued)


Part 2.

Adjusting entries (all on April 30, 2008)

(a)

Supplies Expense............................................. 8,100


Supplies.....................................................
To record consumption of supplies.

8,100

Insurance Expense........................................... 10,600


Prepaid Insurance.....................................
To record expiration of insurance.

10,600

Depreciation ExpenseEquipment................ 7,000


Accumulated DepreciationEquipment. .
To record depreciation.

7,000

(b)

(c)

(d)

(e)

(f)

(g)

(h)

Utilities Expense...............................................
Accounts Payable.....................................
To record accrued utilities costs.

800
800

Wages Expense................................................ 2,000


Wages Payable..........................................
To record accrued wages.

2,000

Rent Expense.................................................... 3,000


Rent Payable..............................................
To record remainder of annual rent.

3,000

Property Taxes Expense..................................


Property Taxes Payable............................
To record additional property taxes.

550

Interest Expense (1% x $30,000).....................


Interest Payable.........................................
To record Aprils interest expense.

300

550

300

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202

Financial and Managerial Accounting, 2nd Edition

Problem 3-7B (Continued)


Closing entries (all on April 30, 2008):
(1)

(2)

(3)

(4)

Demolition Fees Earned............................... 187,000


Income Summary..................................
To close the revenue account.

187,000

Income Summary.......................................... 109,450


Depreciation ExpenseEquipment......
Wages Expense.....................................
Interest Expense....................................
Insurance Expense................................
Rent Expense.........................................
Supplies Expense..................................
Property Taxes Expense.......................
Repairs Expense...................................
Utilities Expense....................................
To close the expense accounts.

7,000
43,400
3,600
10,600
16,200
8,100
10,250
4,700
5,600

Income Summary..........................................
Retained Earnings.................................
To close the Income Summary account.

77,550
77,550

Retained Earnings........................................
Dividends...............................................
To close the dividends account.

12,000
12,000

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Solutions Manual, Chapter 3

203

Problem 3-7B (Continued)


Part 3
POWER DEMOLITION COMPANY
Income Statement
For Year Ended April 30, 2008
Demolition fees earned.....................................
Expenses
Depreciation expenseEquipment................. $ 7,000
Wages expense................................................ 43,400
Interest expense..............................................
3,600
Insurance expense.......................................... 10,600
Rent expense.................................................... 16,200
Supplies expense............................................
8,100
Property taxes expense.................................. 10,250
Repairs expense..............................................
4,700
Utilities expense...............................................
5,600
Total expenses.................................................
Net income..........................................................

$187,000

109,450
$ 77,550

POWER DEMOLITION COMPANY


Statement of Retained Earnings
For Year Ended April 30, 2008
Retained earnings, April 30, 2007.....................
Add: Net income...............................................
Less: Dividends.................................................
Retained earnings, April 30, 2008.....................

$ 46,900
77,550
124,450
(12,000)
$112,450

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204

Financial and Managerial Accounting, 2nd Edition

Problem 3-7B (Continued)


POWER DEMOLITION COMPANY
Balance Sheet
April 30, 2008
Assets
Current assets
Cash..................................................................... $ 7,000
Supplies..............................................................
7,900
Prepaid insurance..............................................
2,000
Total current assets...........................................
$ 16,900
Plant assets
Equipment........................................................... 200,000
Accumulated depreciationEquipment............ (21,000)
179,000
Total assets...........................................................
$195,900
Liabilities
Current liabilities
Accounts payable............................................... $ 7,600
Interest payable..................................................
300
Rent payable.......................................................
3,000
Wages payable....................................................
2,000
Property taxes payable......................................
550
Current portion of long-term note payable...... 10,000
Total current liabilities.......................................
Long-term liabilities
Long-term note payable (less current portion)
Total liabilities.......................................................
Equity
Common stock.....................................................
Retained earnings................................................
Total liabilities and equity....................................

$ 23,450
20,000
43,450
40,000
112,450
$195,900

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Solutions Manual, Chapter 3

205

Problem 3-7B (Continued)


Part 4
(a) This error enters the wrong amount in the correct accounts. The
ending balance of the Prepaid Insurance account should be $2,000,
but the erroneous entry reduces that account by $2,000. Because its
unadjusted balance was $12,600, the adjusted balance will now be
$10,600 ($12,600 - $2,000), which is $8,600 greater than the correct
$2,000 balance. In addition, the Insurance Expense account balance
will be only $2,000 instead of the correct amount of $10,600.
The adjusted trial balance columns in the work sheet will be equal,
but the error will cause the work sheets net income to be overstated
by $8,600 because of the understatement of expense. In addition,
the balance sheet columns will include the overstated balance for
the Prepaid Insurance account.
This error is not likely to be detected as a result of completing the
work sheet. If it is not, the income statement will overstate net
income by $8,600, and the balance sheet will overstate the cost of
the unexpired insurance and total equity by $8,600.
(b) This error inserts a debit in the balance sheet columns instead of the
income statement columns. In the unlikely event that this error is not
immediately detected, it will cause the work sheet measure of net
income to be overstated because the total debits will incorrectly omit
the $4,700 expense for repairs.
In all likelihood, the error will be discovered in the process of
drafting the balance sheet because the accountant will realize that
repairs expense is not an asset. If it is detected and corrected, the
financial statements will be unaffected. However, if the repairs
expense is erroneously included on the balance sheet, the reported
net income will be overstated by $4,700. On the balance sheet, a
nonexistent asset will be erroneously reported for the repairs
expense and total equity will be overstated by $4,700.

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Financial and Managerial Accounting, 2nd Edition

SERIAL PROBLEM

SP 3

Serial Problem, Success Systems (180 minutes) Part 1


<Note: The general ledger is displayed at the end of Part 6.>

Journal entries
Dec. 2

Advertising Expense..................................655
Cash.....................................................101

1,200
1,200

Paid share of mall advertising costs.

Repairs ExpenseComputer.....................684
Cash.....................................................101

500
500

Repaired the computer.

Cash.............................................................101
Accounts Receivable..........................106

7,000
7,000

Collected accounts receivable.

10

Wages Expense..........................................623
Cash.....................................................101

900
900

Paid employee for part-time work.

14

Cash.............................................................101
Unearned Computer Services Revenue...236

2,500
2,500

Received advance on work to be performed.

15

Computer Supplies....................................126
Accounts Payable...............................201

2,100
2,100

Purchased supplies on credit.

16
20

No entry recorded in the journal.


Cash.............................................................101
Computer Services Revenue.............403

3,620
3,620

Collected cash revenue from customer.

28

Cash.............................................................101
Accounts Receivable..........................106

3,000
3,000

Collected accounts receivable.

29

Mileage Expense........................................676
Cash.....................................................101

256
256

Reimbursed Lopez for mileage.

31

Dividends....................................................319
Cash.....................................................101

2,000
2,000

Paid cash for dividends.

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Solutions Manual, Chapter 3

207

Serial Problem SP 3 (Continued)


Part 2
Adjusting entries
Dec. 31 Computer Supplies Expense .........................652
Computer Supplies .................................126

4,675
4,675

Adjustment for supplies used (supplies


balance less cost of supplies available).

31 Insurance Expense .........................................637


Prepaid Insurance ...................................128

600
600

Adjustment for expired insurance (1/4


of original prepaid amount).

31 Wages Expense ..............................................623


Wages Payable ........................................210

600
600

Adjustment for accrued wages.

31 Depreciation ExpenseComputer Equip.......613


Accumulated Depreciation
Computer Equipment...........................168

1,250
1,250

Adjustment for computer equipment depreciation:


Cost.........................................................
$25,000
Predicted life...........................................
5 years
Annual depreciation (cost/life)..............
$5,000
Expense for three months.....................
$1,250

31 Depreciation ExpenseOffice Equip............612


Accumulated Depreciation
Office Equipment ..................................164

625
625

Adjustment for office equipment depreciation:


Cost..........................................................
Predicted life............................................
Annual depreciation (cost/life)...............
Expense for three months.......................

$10,000
4 years
$2,500
$625

31 Rent Expense ..................................................640


Prepaid Rent ............................................131

2,625
2,625

Adjustment for expired rent (3/4 of


original prepaid amount).

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208

Financial and Managerial Accounting, 2nd Edition

Serial Problem SP 3 (Continued)


Part 3
SUCCESS SYSTEMS
Adjusted Trial Balance
December 31, 2007
Debit
Cash ............................................................................ $ 80,260
Accounts receivable ..................................................
5,800
Computer supplies ....................................................
775
Prepaid insurance .....................................................
1,800
Prepaid rent ................................................................
875
Office equipment ....................................................... 10,000
Accumulated depreciationOffice equipment.......
Computer equipment ................................................ 25,000
Accumulated depreciationComputer equipment.
Accounts payable ......................................................
Wages payable ...........................................................
Unearned computer services revenue ....................
Common stock............................................................
Retained earnings......................................................
Dividends....................................................................
8,500
Computer services revenue .....................................
Depreciation expenseOffice equipment ..............
625
Depreciation expenseComputer equipment........
1,250
Wages expense ..........................................................
4,650
Insurance expense ....................................................
600
Rent expense .............................................................
2,625
Computer supplies expense ....................................
4,675
Advertising expense..................................................
2,990
Mileage expense ........................................................
1,120
Miscellaneous expenses ..........................................
300
Repairs expenseComputer ...................................
1,400
Totals........................................................................... $153,245

Credit

625

1,250
2,100
600
2,500
110,000
0
36,170

_______
$153,245

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Solutions Manual, Chapter 3

209

Serial Problem SP 3 (Continued)


Part 4
SUCCESS SYSTEMS
Income Statement
For Three Months Ended December 31, 2007
Revenue
Computer services revenue.......................................
Expenses
Depreciation expenseOffice equipment................
Depreciation expenseComputer equipment.........
Wages expense...........................................................
Insurance expense......................................................
Rent expense...............................................................
Computer supplies expense......................................
Advertising expense...................................................
Mileage expense.........................................................
Miscellaneous expenses............................................
Repairs expenseComputer.....................................
Total expenses............................................................
Net income.....................................................................

$36,170
$ 625
1,250
4,650
600
2,625
4,675
2,990
1,120
300
1,400
20,235
$15,935

SUCCESS SYSTEMS
Statement of Retained Earnings
For Three Months Ended December 31, 2007
Retained earnings, October 1, 2007............................
Plus: Net income..........................................................
Less: Dividends............................................................
Retained earnings, December 31, 2007......................

$
0
15,935
15,935
8,500
$ 7,435

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Financial and Managerial Accounting, 2nd Edition

Serial Problem SP 3 (Continued)


Part 4continued
SUCCESS SYSTEMS
Balance Sheet
December 31, 2007
Assets
Cash ................................................................................
Accounts receivable .....................................................
Computer supplies ........................................................
Prepaid insurance .........................................................
Prepaid rent ...................................................................
Office equipment ........................................................... $10,000
Accumulated depreciationOffice equipment.............
(625)
Computer equipment..................................................... 25,000
Accumulated depreciationComputer equipment...... (1,250)
Total assets.....................................................................
Liabilities
Accounts payable...........................................................
Wages payable................................................................
Unearned computer services revenue.........................
Total liabilities.................................................................
Equity
Common stock...............................................................
Retained earnings..........................................................
Total liabilities and equity..............................................

$ 80,260
5,800
775
1,800
875
9,375
23,750
$122,635
$

2,100
600
2,500
5,200

110,000
7,435
$122,635

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Solutions Manual, Chapter 3

211

Serial Problem SP 3 (Continued)


Part 5
Closing entries
2007

Dec. 31 Computer Services Revenue .......................... 403


Income Summary...................................... 901

36,170
36,170

To close the revenue account.

31 Income Summary.............................................. 901


Depreciation ExpOffice Equipment....... 612
Depreciation ExpComputer Equipment... 613
Wages Expense ........................................ 623
Insurance Expense .................................. 637
Rent Expense ........................................... 640
Computer Supplies Expense .................. 652
Advertising Expense ................................ 655
Mileage Expense ...................................... 676
Miscellaneous Expenses ......................... 677
Repairs ExpenseComputer ................. 684

20,235
625
1,250
4,650
600
2,625
4,675
2,990
1,120
300
1,400

To close the expense accounts.

31

Income Summary.............................................. 901


Retained Earnings..................................... 318

15,935
15,935

To close the Income Summary account.

31

Retained Earnings............................................ 318


Dividends................................................... 319

8,500
8,500

To close the dividends account.

Note: All accounts with numbers that start with the digits 1 or 2
(the permanent accounts) are unaffected by the closing process.

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212

Financial and Managerial Accounting, 2nd Edition

Serial Problem SP 3 (Concluded)


Part 6
SUCCESS SYSTEMS
Post-Closing Trial Balance
December 31, 2007
Debit

Credit

Cash............................................................................... $ 80,260
Accounts receivable.....................................................
5,800
Computer supplies........................................................
775
Prepaid insurance.........................................................
1,800
Prepaid rent...................................................................
875
Office equipment........................................................... 10,000
Accumulated depreciationOffice equipment..........
$
625
Computer equipment.................................................... 25,000
Accumulated depreciationComputer equipment...
1,250
Accounts payable.........................................................
2,100
Wages payable..............................................................
600
Unearned computer services revenue........................
2,500
Common stock..............................................................
110,000
Retained earnings.........................................................
7,435
Totals.............................................................................. $124,510 $124,510

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Solutions Manual, Chapter 3

213

Serial Problem SP 3 (Continued)


[Note: The ledger includes all entries from the prior three months. The Working Papers
shorten the solution by showing the balances of the accounts as of November 30, 2007.]

General Ledger

Cash
Date
Oct.

Nov.

Dec.

Explanation
1
2
5
8
15
17
20
22
31
31
1
2
5
18
22
28
30
30
2
3
4
10
14
20
28
29
31

PR

Debit
75,000

6,200
1,950

3,600
5,000

7,000
2,500
3,620
3,000

Acct. No. 101


Credit
Balance
75,000
3,500
71,500
2,400
69,100
1,600
67,500
73,700
900
72,800
1,790
71,010
72,960
1,050
71,910
4,000
67,910
384
67,526
71,126
1,750
69,376
74,376
300
74,076
480
73,596
2,100
71,496
2,500
68,996
1,200
67,796
500
67,296
74,296
900
73,396
75,896
79,516
82,516
256
82,260
2,000
80,260

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214

Financial and Managerial Accounting, 2nd Edition

Serial Problem SP 3 (Continued)


Date
Oct.

Nov.
Dec.

Date
Oct.
Nov.
Dec.

Date
Oct.
Dec.

Date
Oct.
Dec.

Date
Oct.

Date
Dec.

6
12
15
22
28
8
18
24
4
28

Accounts Receivable
Explanation
PR
Debit
6,200
1,950
7,300
6,500
7,000

Computer Supplies
Explanation
PR
3
5
15
31
Prepaid Insurance
Explanation
PR
5
31
Prepaid Rent
Explanation
PR
2
31
Office Equipment
Explanation
PR
1

Acct. No. 106


Credit
Balance
6,200
8,150
6,200
1,950
1,950
0
7,300
13,800
5,000
8,800
15,800
7,000
8,800
3,000
5,800

Debit
1,600
1,750
2,100

Acct. No. 126


Credit
Balance
1,600
3,350
5,450
4,675
775

Debit
2,400

Acct. No. 128


Credit
Balance
2,400
600
1,800

Debit
3,500

Acct. No. 131


Credit
Balance
3,500
2,625
875

Debit
10,000

Acct. No. 163


Credit
Balance
10,000

Accumulated DepreciationOffice Equipment


Acct. No. 164
Explanation
PR
Debit
Credit
Balance
31
625
625

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Solutions Manual, Chapter 3

215

Serial Problem SP 3 (Continued)


Date
Oct.

Date
Dec.

Date
Oct.
Dec.

Date
Dec.

Date
Dec.

Date
Oct.

Date
Dec.

Date
Oct.
Nov.
Dec.

Computer Equipment
Explanation
PR
Debit
25,000

Acct. No. 167


Credit
Balance
25,000

Accumulated DepreciationComputer Equipment


Acct. No. 168
Explanation
PR
Debit
Credit
Balance
31
1,250
1,250
Accounts Payable
Explanation
PR
Debit
3
8
15

1,600

Explanation

Wages Payable
PR

Debit

31

Acct. No. 210


Credit
Balance
600
600

Unearned Computer Services Revenue


Explanation
PR
Debit

Acct. No. 236


Credit
Balance
2,500
2,500

Common Stock
Explanation
PR

Acct. No. 307


Credit
Balance
110,000
110,000

14

Debit

1
Retained Earnings
Explanation
PR
Debit
31
31

8,500

Explanation
31
30
31
31

Acct. No. 201


Credit
Balance
1,600
1,600
0
2,100
2,100

Closing

Dividends
PR

Debit
4,000
2,500
2,000

Acct. No. 318


Credit
Balance
15,935
15,935
7,435
Acct. No. 319
Credit
Balance
4,000
6,500
8,500
8,500
0

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216

Financial and Managerial Accounting, 2nd Edition

Serial Problem SP 3 (Continued)


Date
Oct.
Nov.
Dec.

Date
Dec.

Date
Dec.

Date
Oct.
Nov.
Dec.

Date
Dec.

Date
Dec.

Computer Services Revenue


Explanation
PR
Debit

Acct. No. 403


Credit
Balance
6,200
6,200
1,950
8,150
7,300
15,450
3,600
19,050
6,500
25,550
7,000
32,550
3,620
36,170
0

6
12
28
2
8
24
20
31

Closing

31
31

Depreciation ExpenseOffice Equipment


Acct. No. 612
Explanation
PR
Debit
Credit
Balance
625
625
Closing
625
0

36,170

Depreciation ExpenseComputer Equipment


Acct. No. 613
Explanation
PR
Debit
Credit
Balance
31
1,250
1,250
31
Closing
1,250
0
Wages Expense
Explanation
PR
31
30
10
31
31

Debit
1,050
2,100
900
600

Closing

Acct. No. 623


Credit
Balance
1,050
3,150
4,050
4,650
4,650
0

31
31

Insurance Expense
Explanation
PR
Debit
600
Closing

Acct. No. 637


Credit
Balance
600
600
0

Explanation
31
31

Closing

Rent Expense
PR

Debit
2,625

Acct. No. 640


Credit
Balance
2,625
2,625
0

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Solutions Manual, Chapter 3

217

Serial Problem SP 3 (Continued)


Date
Dec.

Date
Oct.
Dec.

Date
Nov.
Dec.

Date
Nov.
Dec.

Date
Oct.
Dec.

Date
Dec.

31
31

Computer Supplies Expense


Explanation
PR
Debit
4,675
Closing

Acct. No. 652


Credit
Balance
4,675
4,675
0

20
2
31

Advertising Expense
Explanation
PR
Debit
1,790
1,200
Closing

Acct. No. 655


Credit
Balance
1,790
2,990
2,990
0

Mileage Expense
Explanation
PR
1
28
29
31

Debit
384
480
256

Closing

Acct. No. 676


Credit
Balance
384
864
1,120
1,120
0

22
31

Miscellaneous Expense
Explanation
PR
Debit
300
Closing

Acct. No. 677


Credit
Balance
300
300
0

17
3
31

Repairs ExpenseComputer
Explanation
PR
Debit
900
500
Closing

Acct. No. 684


Credit
Balance
900
1,400
1,400
0

31
31
31

Income Summary
Explanation
PR
Debit
Closing
Closing
20,235
Closing
15,935

Acct. No. 901


Credit
Balance
36,170
36,170
15,935
0

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218

Financial and Managerial Accounting, 2nd Edition

Reporting in Action

BTN 3-1

1. The revenue recognition principle requires that revenue be recorded


when earned, not before and not after. Most companies earn revenue
when they provide services and products to customers.
2. Best Buy provides information on revenue recognition in footnote 1
entitled Summary of Significant Accounting Policies. A revenue
recognition policy is stated for the sale of merchandise, service, gift
cards, and extended service contracts.
Merchandise revenue is recognized when the customer takes
possession of the merchandise.
Service revenue is recognized at the time the service is provided, the
sales price is fixed or determinable, and collectibility is reasonably
assured.
Gift card revenue is deferred until the customer redeems the card.
Extended service contracts are sold on behalf of an unrelated third
party. Some jurisdictions do not deem Best Buy to be the guarantor,
and those commissions are recognized at the date of sale. For those
jurisdictions where Best Buy is considered to be obligated under the
contract, commissions are earned evenly over the course of the
contract.
3. For fiscal year-end February 26, 2005, the profit margin is:
$984,000,000 / $27,433,000,000 = 0.036 = 3.6%
For fiscal year-end February 28, 2004, the profit margin is:
$705,000,000 / $24,548,000,000 = 0.029 = 2.9%
4. The total revenues that would be credited to Income Summary as step 1
in the closing entry process must be computed. Best Buys sales
revenue for the fiscal year-ended February 26, 2005, is $27,433,000,000,
its interest income is $1,000,000, and it has a gain on the disposal of
discontinued operations of $50,000,000. Thus, its total revenue that is
closed to Income Summary is $27,484,000,000.

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Solutions Manual, Chapter 3

219

Reporting in Action

BTN 3-1 (continued)

5. The total expenses that would be debited to Income Summary as step 2


in the closing entry process must be computed. Best Buys total
expenses for the fiscal year ended February 26, 2005, are:
Cost of goods sold........................................................ $20,938,000,000
Selling, general and administrative..............................
5,053,000,000
Income tax expense.......................................................
509,000,000
Total expenses............................................................... $26,500,000,000
6. The balance of Income Summary before it is closed as of February 26,
2005, equals the net income for Best Buy of $984,000,000.
7. Solution depends on the financial statements accessed.

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220

Financial and Managerial Accounting, 2nd Edition

Comparative Analysis

BTN 3-2

1. Best Buy
Current year, profit margin = $984,000 / $27,433,000
Prior year, profit margin
= $705,000 / $24,548,000

= 3.6%
= 2.9%

Circuit City
Current year, profit margin = $ 61,658 / $10,472,364
Prior year, profit margin
= $(89,269) / $9,857,057

= 0.6%
=- 0.9%

2. Best Buy is more successful on the basis of profit margin. In the


current year, Best Buy earned an average of 3.6 cents on each dollar
while Circuit City earned only 0.6 cents on each dollar.
3. Best Buys current ratios
Current year......... $6,903,000 / $4,959,000 = 1.39
Prior year.............. $5,724,000 / $4,501,000 = 1.27
Circuit Citys current ratios
Current year......... $2,685,715 / $1,263,846 = 2.13
Prior year.............. $2,919,061 / $1,138,198 = 2.56
4. In both years, Circuit City has the higher current ratio (2.13 vs. 1.39 for
this year; 2.56 vs. 1.27 in the prior year), suggesting a better ability to
pay short-term obligations. Overall, neither company is in immediate
danger of failing to make payment on short-term obligations.
5

Best Buys current ratio improved, moving from 1.27 to 1.39. Circuit
Citys current ratio declined from 2.56 to 2.13.

6. Circuit Citys current ratio is above the industry average for both years,
and Best Buys is below the industry average for both years. However,
neither company appears at risk of failing to pay its current creditors.

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Ethics Challenge

BTN 3-3

1. There are several courses of action that Tamira could have taken. Two
possibilities follow:
a. She could have consulted with the president and told him that
finalized financial statements would not be ready by the time of the
meeting. She could explain that delay in financial statement
preparation is a normal event given the need to wait for final
information to prepare accurate adjustments. Possibly the meeting
could be rescheduled or Tamira could have asked how the president
preferred her to proceed.
b. The estimation decision was not a bad choice in itself. But she
should have informed the president. Tamira probably should have
used less optimistic estimates instead of recording expenses on the
low side. Users of financial statements usually prefer knowing
worst-case scenarios over best-case outcomes. Use of estimates
gets the financial statements closer to their final form than ignoring
the adjustments completely.
2.

Students may offer one of the above alternatives or another response


they may think of given the situation. Try to generate a discussion of
ethical concerns and the impact of her decisions on the well-being of
users (such as the bankers and the investors in the banks).

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Communicating in Practice
TO:
FROM:
DATE:
SUBJECT:

BTN 3-4

_____________________
_____________________
______________________
CLARIFICATIONSOBJECTIVE OF THE CLOSING PROCESS

[Note: The following is a sample of what the memorandums contents might include.]

When we speak of closing the books or the closing process we are not
talking about ending or closing the business nor doing anything that reflects
this thinking in the financial statements. Let me use an analogy to explain the
concept of the closing process and then you will see the distinction more
clearly.
Scoreboards are used to temporarily hold information that will allow us to
determine who won or lost in an athletic game or event. When the athletic
event is over the result of the game is permanently recorded elsewhere-probably in the teams record book. If the scoreboard was not cleared before
the start of a new game the scores from the second game would be combined
with scores from the first game. As a result, the scoreboard would reflect data
or scores that were not relevant to either game. You can see that the
scoreboard must be zeroed out to prepare it for accumulating data to
determine the outcome of the next game.
The revenue and expense accounts temporarily hold the information to
determine if the owner(s) won or lost in the game of business. Each fiscal
period should be viewed as a separate game. After the data in these accounts
has allowed us to determine if the owner(s) won or lost, in other words, the net
income or loss, these accounts must be cleared to accumulate data for the
next game or period. We record the score of the game of business, or the net
income or loss, in the permanent recordbook or the capital account. A win or
net income increases capital and a loss or net loss decreases capital.
I hope this memo clarifies the objective of the closing process.
[Note: The memorandum need not discuss the income summary account since the assignment
requires explaining the concept, not the procedure.]

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Taking It to the Net

BTN 3-5

1. The Gaps main brands (stores) are The Gap, Old Navy, and Banana
Republic.
2. The Gaps fiscal year-end is January 29, 2005. It appears that The Gaps
fiscal year-end is late January or early February.
3. Net sales for the year ended January 29, 2005 are $16,267,000,000.
4. Net income for the year ended January 29, 2005 is $1,150,000,000.
5. Profit margin = $1,150,000,000 / $16,267,000,000 = 7.1%
6. The company probably chose a year-end at the end of January or early
February to have it be consistent with their natural year. For many
retailers, the highest amount of sales is in November and December.

Taking It to the Net

BTN 3-6

1. The Motley Fool states that a benchmark of 1.5 is generally regarded as


sufficient to meet near-term operating needs.
2. One should always check a companys current ratio (as well as any
other ratio) against its main competitors in a given industry.
3. A current ratio that is too high can suggest that a company is hoarding
assets instead of using them to effectively grow the businessthis is an
inefficient use of resources that can potentially impair long-term returns.

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Teamwork in Action

BTN 3-7

Note that there is no specific solution to this activity. Nevertheless, the


presentation of each expert team should reflect the following summary points:

Type

Before Adjusting
Balance Sheet
Income Statement
Account
Account

Prepaid expenses

Asset overstated

Expense understated

Unearned revenues

Liability overstated

Revenue understated

Accrued Expenses

Liability understated Expense understated

Accrued Revenues

Asset understated

Adjusting Entry

Revenue understated

Dr. Expense
Cr. Asset*
Dr. Liability
Cr. Revenue
Dr. Expense
Cr. Liability
Dr. Asset
Cr. Revenue

* For depreciation, one would Credit the Accumulated Depreciation contra account.

Some implementation notes: This activity allows all students to be actively involved in
the learning process. Encourage students to take the opportunity to ask questions in the
small group environment the learning team provides. Encourage the better students to
serve as experts on unearned revenues. The instructors observation of and reactions to
expert teams development of presentation material as well as the delivery to learning
teams will have a significant impact on the effectiveness of this activity.

BusinessWeek Activity

BTN 3-8

1. Estimates are to allow companies to make sure revenues and expenses


are recorded in the proper time periods. For instance, a company must
estimate a plant assets useful life in order to calculate depreciation.
2. Companies can use these estimates to manipulate revenues, expense,
and income. In the depreciation example, the longer the useful life
estimated, the smaller the depreciation expanse for a period (and the
higher the income will be). The shorter the useful life estimated, the
higher the depreciation expense for a period (and the lower the net
income will be).

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BusinessWeek Activity BTN 3-8 (concluded)


3. The five ways suggested by the article are:
a. Estimate sales An example is a company that estimates future sales
discounts. The higher the discounts estimated, the lower the net
sales (and the lower the income). The lower the discounts estimated,
the higher the net sales (and the higher the net income).
b. Predict bad debts Companies can change the estimate of amounts
they reasonably expect to collect from customers, thereby
manipulating revenues and expenses.
c. Forecast unusual gains or losses A company may choose which
accounting period to report big and unusual gains or expenses.
d. Adjust inventory Companies can estimate that their inventories
must be written down (and a loss recorded). In a future year, when
the inventory is sold, no further loss is needed.
e. Massage cash Companies can improve cash flow from operating
activities. An example is to sell receivables to a financing company.
This is accounted for as an operating activity.
4. The article suggests the following solutions:
a. The FASB should turn its attention to making the form and
presentation of financial information cleaner and more consistent.
b. The cash flow statement should define more clearly what constitutes
an operating, investing, and financing item.
c. Companies should report their statements and cash flow for the
same periods. In addition, companies should report cumulative
earnings and cash flows for the previous four quarters along with
annual data.
d. Auditors should be on increased alert, knowing that investors are
interested.

Entrepreneurial Decision

BTN 3-9

1. a. To record cash collection in advance of the sale of the computer


Cash..................................................................... 3,000
Unearned revenue..........................................

3,000

b. To record the shipment of the computer to the customer


Unearned revenue............................................... 3,000
Revenue earned.............................................

3,000

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Entrepreneurial Decision BTN 3-9 (concluded)


2. Not carrying inventory allows Aguila and Gonzalez to save the costs of
carrying the inventory such as warehousing costs, insurance, and
losses. Saving these costs can increase income. In addition, not
having any uncollectible accounts increases income as well. By
increasing income, profit margin should be increased as well.
3. By carrying inventories, Alienware can provide their computers to
customers more quickly. This might increase sales as their reputation
for quick delivery becomes known. On the other hand, carrying
inventory has some risk. The most important for a company like
Alienware is that of obsolescence. Computer hardware is constantly
changing, and by carrying no inventory, Aguila and Gonzalez can be
flexible in the products they offer.

Hitting the Road

BTN 3-10

There is no formal solution to this field activity. The instructor may wish to
tally students findings to show results across companies as to use of work
sheets, software preferences, and time it takes to prepare finalized annual
financial statements.

Global Decision

BTN 3-11

1. Dixons titles its sales revenue account Turnover. Its Note 1.3 reports
that revenue for merchandise is recognized at the point of sale or upon
delivery to the customer. Revenue from extended warranties and service
contracts is recognized over the life of the agreement.
2. Profit margin = 243,600,000 / 6,458,000,000 = 3.8%
3. Current ratio
This year: 2,303,900,000 / 1,565,800,000 = 1.47
Last year: 2,220,400,000 / 1,679,000,000 = 1.32

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