Harrison FA IFRS 11e CH03 SM

Chapter 3
Accrual Accounting & Income
Short Exercises
(10 min.) S 3-1

Millions
Sales revenue……………………………………………. 850
Cost of goods sold……………………………………… (225)
All other expenses……………………………………… (355)
Net income……………………………………………….. $ 270
Beginning cash………………………………………….. $ 140

Collections ($850 − $30)……………………………….. 820
Payments for: inventory………………………………. (320)
everything else………………………. (265)
Ending cash……………………………………………… $ 375
Chapter 3 Accrual Accounting & Income 162

(10 min.) S 3-2
Statement Reports (Amounts in millions)
Income statement Interest expense……………. $1.5
Balance sheet Notes payable

($4.2 + $2.8 − $2.4)…………. $4.6
Interest payable……………….. 0.3
(10 min.) S 3-3

At the end of each accounting period, the business reports
its performance through the preparation of financial
statements. In order to be useful to the various users of
financial statements, they must be up-to-date. Accounts such
as Cash, Equipment, Accounts Payable, Share Capital and
Dividends are up-to date and require no adjustment at the end
of the accounting period. Accounts such as Accounts
Receivable, Supplies, Salary Expense and Salaries Payable
may not be up to date as of the last day of the accounting
period. Why? Because certain transactions that took place in
the month may not have been recorded.
The accrued salaries, which are owed to the employees yet

have not been paid, are an expense related to the current
period. The salaries that are owed to the employees but are
unpaid also represent a liability or debt that is owed by the
business. The business must make an adjusting entry to
record the accrued salary owed as both an increase in Salary
Expense and an increase in Salaries Payable. If the business
does not make this adjustment the expenses will be
understated and net income will be overstated. In addition,
liabilities will be understated.

(10 min.) S 3-4
The large auto manufacturer should record sales revenue
when the revenue is earned by delivering automobiles to Lewis
or Clark. The large auto manufacturer should not record any
revenue prior to delivery of the vehicles because the large auto
manufacturer hasn’t earned the revenue yet. The revenue
recognition principle governs this decision.
When the large auto manufacturer records the revenue from

the sale, at that time — not before or after — the large auto
manufacturer should also record cost of goods sold, the
expense. The matching principle tells when to record expenses.
(10 min.) S 3-5
Depreciation is the periodic allocation of the cost of a tangible

non-current asset, less its estimated residual value, over its
estimated useful life. All non-current assets, except for land,
decline in usefulness during their life and this decline is an
expense. Accountants must allocate the cost of each non-
current asset, except for land, over the asset’s useful life.
Depreciation is the process of allocating the cost of a non-
current asset to expense. Depreciation also decreases the
book value of the asset over the asset’s useful life to reflect its
usage.
(10 min.) S 3-6

a. The Revenue Recognition Principle
b. The Time Period Concept
c. The Matching Principle
d. The Matching Principle
e. The Revenue Recognition Principle
(10 min.) S 3-7

a.
Mar. 31 Rent Expense ($5,400 / 6)………... 900

Prepaid Rent…………………….. 900
To record rent expense.
Prepaid Rent Rent Expense

Mar. 1 5,400 Mar. 31 900 Mar. 31 900
Bal. 4,500 Bal. 900
b.
Dec. 31 Supplies Expense ($980 − $750)…. 230

Supplies……………………………. 230
To record supplies expense.
Supplies Supplies Expense

Dec. 1 980 Mar. 31 230 Marc. 230
31
Bal. 750 Bal. 230
(10 min.) S 3-8

Req. 1
(a) Jan. 1 Computer Equipment…………….….. 60,000

Cash………………………………….. 60,000
Purchased computer equipment.
(b) Dec. 31 Depreciation Expense −

Computer Equipment ($60,000 / 4)… 15,000
Accumulated Depreciation −
Computer Equipment……………... 15,000
Req. 2
Accumulated Depreciation
Depreciation − Expense −
Computer Computer Computer
Equipment Equipment Equipment
Jan. 1 60,000 Dec. 31 15,000 Dec. 31 15,000
Bal. 60,000 Bal. 15,000 Bal. 15,000
Req. 3
Computer equipment…………………………………. $60,000

Less Accumulated depreciation……………………. (15,000)
Book value……………………………………………… $45,000

(10 min.) S 3-9
(Amounts in millions)
Income statement: 20X6

Salary expense ($39.7 + $3.1)….. $42.8
Balance sheet: 20X6

Salary payable………………... $ 3.1
(10 min.) S 3-10

Req. 1
Oct. 31 Interest Expense………………………………. 800

Interest Payable…………………………….. 800
To accrue interest expense for October.
Nov. 30 Interest Expense………………………………. 800

To accrue interest expense for November.
Dec. 31 Interest Expense………………………………. 800

To accrue interest expense for December.
Req. 2
Interest Payable
Oct. 31 800
Nov. 30 800
Dec. 31 800
Bal. 2,400
Req. 3
Dec. 31 Interest Payable…………………………… 2,400

Cash……………………………………… 2,400
To pay interest.

(10 min.) S 3-11
Req. 1
Oct. 31 Interest Receivable………………………….. 800

Interest Revenue………………………….. 800
To accrue interest revenue for October.
Nov. 30 Interest Receivable………………………….. 800

Interest Revenue……...………………….. 800
To accrue interest revenue for November.
Dec. 31 Interest Receivable………………………….. 800

Interest Revenue……...……………….….. 800
To accrue interest revenue for December.
Req. 2
Interest Receivable
Oct. 31 800
Nov. 30 800
Dec. 31 800
Bal. 2,400
Req. 3
Dec. 31 Cash………………………………………… 2,400

Interest Receivable…………………… 2,400
To collect interest.

(5-10 min.) S 3-12
Unearned revenues are liabilities because The Asahi Shimbun
has received cash from subscribers in advance of providing
them with newspapers. Receiving the cash in advance creates
an obligation (to deliver the newspapers, which is a liability) for
The Asahi Shimbun. As The Asahi Shimbun delivers
newspapers to subscribers, it earns the revenue, and the dollar
amount of the unearned revenue then goes into the revenue
account.
a. Cash……………………………………… 5,000,000
Unearned Subscription Revenue…. 5,000,000
Received cash for revenue in advance.
b. Unearned Subscription Revenue........... 5,000,000

Subscription Revenue………………… 5,000,000
To record the earning of subscription
revenue that was collected in advance.

(5-10 min.) S 3-13
Prepaid Rent at December 31:
a. Unadjusted amount…………………………. $24,000
b. Adjusted amount ($24,000 − $6,000)………. 18,000
Rent Expense at December 31:

c. Unadjusted amount…………………………. $ 0
d. Adjusted amount ($24,000 / 4)………………. 6,000
(10 min.) S 3-14

a. Accounts Receivable……………………. 75,000
Service Revenue……………………. 75,000
Cash………………………………………… 50,000
Accounts Receivable………………… 50,000
b. Cash………………………………………… 8,000
Unearned Service Revenue…………. 8,000
Unearned Service Revenue……………. 3,600

Service Revenue……………………. 3,600

(15-30 min.) S 3-15
Hawk Sporting Goods Company
Income Statement
Year Ended March 31, 20X8
Thousands
Net revenues……………………………. $188,000
Cost of goods sold……………………. (142,500)
All other expenses…………………….. (24,300)
Net income……………………………… $ 21,200

Statement of Changes in Equity
Year Ended March 31, 20X8
Thousands
Total equity, March 31, 20X7…............. $ 34,000
Add: Net income………………………. 21,200
$55,200
Less: Dividends………………………… (1,200)
Total equity, March 31, 20X8.………….. $54,000

(continued) S 3-15
Balance Sheet
March 31, 20X8
Thousands
ASSETS
Current:
Cash……………………………………… $ 1,700
Accounts receivable………………….. 37,800
Inventories……………………………… 25,000
Other current assets………………….. 6,400
Total current assets……………….. 70,900
Property and equipment, net………… 7,500
Other assets………………………………. 31,600
Total assets…………………………………... $110,000
LIABILITIES
Current liabilities…………………………. $48,000
Long-term liabilities…………………… 8,000
Total liabilities……………………………….. 56,000
SHAREHOLDERS’ EQUITY
Share capital……………………………… 30,000
Retained earnings……………………….. 24,000
Total shareholders’ equity………….…....... 54,000
Total liabilities and shareholders’ equity.. $110,000

(5-10 min.) S 3-16
CLOSING ENTRIES
Thousands
Mar. 31 Net Revenues………………… 188,000
Retained Earnings………… 188,000
31 Retained Earnings……………… 166,800

Cost of Goods Sold………… 142,500
All Other Expenses………… 24,300
Retained Earnings
Mar. 31, 20X8 Expenses 166,800 Mar. 31, 20X7 Bal. 4,000
Mar. 31, 20X8 Dividends 1,200 Mar. 31, 20X8 Revenues 188,000
Mar. 31, 20X8 Bal. 24,000
Retained Earnings’ ending balance agrees with the amount

reported on the retained earnings T-account and the balance
sheet (in S 3-15).

Exercises
Group A
(5-10 min.) E 3-17A

Statement Reports
1. Income statement Sales revenue……… $4,600
Operating expenses… 1,100
Balance sheet Accounts receivable.. $ 500

Accounts payable…… 1,200
2. Cash basis would report only the cash collections of

$4,800 from customers and the payment of operating
expenses ($1,100). Their balance sheet should have
included neither accounts receivable nor accounts
payable.
(5-10 min.) E 3-18A

a. Cash Basis b. Accrual Basis
Revenues………………… $610,000 $590,000

...
Expenses………………… 460,000 450,000
...
Net $150,000 $ 140,000
income…………………
The accrual basis measures net income better because its

information on revenues and expenses is more complete than
the information provided by the cash basis. The accrual basis
also clearly states what the business is expecting in terms of
its knowable future economic benefits and economic
obligations.
(5-10 min.) E 3-19A
Millions
a. Revenue………………………………………………. $850
The revenue of $850 million is fully earned. The revenue

recognition principle says to record revenue when it has
been earned, regardless of when cash is collected.
Therefore, report the amount of revenue earned,
regardless of when the company collects cash.
b. Total expense…………………………………….….. $560
The matching principle governs accounting for

expenses.
c. The income statement reports revenues and expenses.

The statement of cash flows reports cash receipts and
cash payments.

(15-20 min.) E 3-20A
Req. 1
Adjusting Entries
DATE ACCOUNT TITLES DEBIT CREDIT
a. Insurance Expense…………………………... 1,400

Prepaid Insurance ($600+$1,800−$1,000).. 1,400
b. Interest Receivable……………………...…… 1,500

Interest Revenue…………………………...... 1,500
c. Unearned Service Revenue ($1,200 − $800).. 400

Service Revenue…………………………… 400
d. Depreciation Expense……………………..….. 4,400

Accumulated Depreciation………………... 4,400
e. Salary Expense ($20,000 × 3/5)……………… 12,000

Salary Payable……………………….…..….. 12,000
f. Income Tax Expense ($24,000 × .25)……..… 6,000

Income Tax Payable…………………..……. 6,000

(continued) E 3-20A
Req. 2
Net income understated by omission

of:
Interest $ 1,500
revenue……………………………..
Service 400
revenue…………………………...
Total $ 1,900
understatement……………………….
Net income overstated by omission

of:
Insurance $1,400
expense………………………….
Depreciation 4,400
expense………………………
Salary 12,000
expense………………………………
Income tax 6,000
expense…………………………
Total 23,800
overstatement…………………………
Overall effect — net income $21,900

overstated by..

(10-15 min.) E 3-21A
Missing amounts in italics.
1 2 3 4
Beginning Supplies $ 200 $900 $ 1,500 $ 800
Add: Payments for
supplies
during the year 1,400 600 1,200 700
Total amount to 1,600 1,500 2,700 1,500
account for
Less: Ending (500) (200) (1,200) (300)
Supplies
Supplies Expense $ 1,100 $1,300 $ 1,500 $1,200
Journal entries:
Situation 1: Supplies…………………………… 1,400

Cash………………………….…. 1,400
Paid cash for supplies
Situation 2: Supplies Expense……………….. 1,300

Supplies………………………... 1,300
To record supplies expense

(10-20 min.) E 3-22A
Adjusting Entries
a. Interest Expense……………………………… 8,400

Interest Payable……………………………. 8,400
b. Interest Receivable…………………………… 5,000

Interest Revenue…………………….…….. 5,000
c. Unearned Rent Revenue ($12,800 / 2 × 6/12) 3,200

Rent Revenue………………………………. 3,200
d. Salary Expense ($1,600 × 3)……………….... 4,800

Salary Payable……………………………… 4,800
e. Supplies Expense…………………………….. 2,200

Supplies ($3,500 − 1,300)……………….…. 2,200
f. Depreciation Expense ($110,000 / 5)………... 22,000

Accumulated Depreciation………………. 22,000
Book value = $88,000 ($110,000 − $22,000)

(10-20 min.) E 3-23A
Accounts Receivable Supplies
1,500 900 (a) 700
(c) 600 Bal. 200
Bal. 2,100
Salary Payable Unearned Service Revenue

(b) 500 (d) 400 700
Bal. 500 Bal. 300
Service Revenue Salary Expense

5,000 2,500
(c) 600 (b) 500
(d) 400 Bal. 3,000
Bal. 6,000
Supplies Expense
(a) 700
Bal. 700

(20-30 min.) E 3-24A
Tasty Food, Inc.
Income Statement
Year Ended December 31, 20X8
Thousands
Revenues:
Sales revenue………………... $41,800
Expenses:
Cost of goods sold………….. $26,300
Selling, administrative, and
general expense………….. 10,200
Total expenses…………. 36,500
Income before tax……………… 5,300
Income tax expense……………. 1,400
Net income………………………. $ 3,900
Tasty Food, Inc.

Thousands
Total equity, January 1, 20X8…………….. $ 9,500
Add: Net income …………………………. 3,900
13,400
Less: Dividends……………………………. (1,500)
Total equity, December 31, 20X6………. $11,900

(continued) E 3-24A
Tasty Food, Inc.
Balance Sheet
December 31, 20X8
Thousands
ASSETS LIABILITIES
Cash……………………………. $ 3,900 Accounts payable……… $ 7,700
Accounts receivable………… 1,600 Income tax payable…….. 500
Inventories……………………. 1,200 Other liabilities………….. 2,300
Prepaid expenses……………. 1,800 Total liabilities…………... 10,500
Prop., plant & equip. $ 6,600 SHAREHOLDERS’
Less: Accum. EQUITY
deprec……. (2,200) 4,400 Share capital………….. 4,800
Other assets………………….. 9,500 Retained earnings……… 7,100
Total shareholders’ equity 11,900
Total liabilities and
Total assets…………………… $22,400 shareholders’ equity... $22,400

(10-20 min.) E 3-25A
One mechanism for solving this exercise is to prepare the
relevant T-accounts, insert the given information, and solve for
the unknown amounts, shown in italics.
Amounts in millions
Receivables
Beg. bal. 290
Sales revenue 20,480 Collections 20,400
End. bal. 370
Prepaid Insurance
Beg. bal. 190
Payment 450 Insurance expense 480
End. bal. 160
Accrued Liabilities Payable

Beg. bal. 630
Other operating
Payments 4,100 expenses 4,180
End. bal. 710

(10 min.) E 3-26A
Req. 1
Mother Catherine’s income statement:

Service revenue ($6,000 × 1/2)…………………..... $3,000
Mother Catherine’s balance sheet:

Unearned service revenue ($6,000 × 1/2)……… $3,000
Req. 2
Cologne’s income statement:

Medical expense ($6,000 × 1/2)…………………… $3,000
Cologne’s balance sheet:

Prepaid medical expense ($6,000 × 1/2)………… $3,000

(10-15 min.) E 3-27A
Req. 1
Millions
Income statement
Service revenue (£410 − £160)…………………… £250
Balance sheet
Unearned service revenue………………………... £160
Req. 2
Income statement
Service revenue (£65 + £410 − £160)……………. £315
Balance sheet
Service revenue is greater in (2) because New Age Mobile

began the year owing more phone service to customers. With
collections for the year and the amount of the ending liability
unchanged, New Age Mobile must have earned more revenue in
situation 2 than in situation 1.
Not required, but helpful:
Unearned Service Revenue

Beg. bal. 65
Earned revenue 315 Collected cash 410
End. bal. 160

(10-20 min.) E 3-28A
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Closing Entries
Dec. 31 Service Revenue………………………… 24,900
Other Revenue…………………………… 800
Retained Earnings……………………. 25,700
31 Retained Earnings………………………. 23,000

Cost of Services Sold………………... 11,500
Selling, General, and Administrative
Expense……………………………... 6,200
Depreciation Expense……………….. 4,800
Income Tax Expense………………. 500
31 Retained Earnings………………………. 900

Dividends…………………………….… 900
Net income for 20X8 was $2,700 ($25,700 − $23,000).
Retained Earnings
Dec. 31, 20X7 2,600
Dividends 900 Net income 2,700
Dec. 31, 20X8 4,400

(15-25 min.) E 3-29A
Journal
Adjusting Entries
Dec. 31 Unearned Service Revenue………………. 6,800
Service Revenue ($20,400 − $13,600)... 6,800
31 Salary Expense ($5,200 − $4,600)………... 600

Salary Payable……………………….…... 600
31 Rent Expense ($1,400 − $1,000)………….. 400

Prepaid Rent……………………………… 400
31 Depreciation Expense ($500 − $0)……….. 500

Accumulated Depreciation…………….. 500
31 Income Tax Expense ($1,000 − $0)………. 1,000

Income Tax Payable…………………….. 1,000
Closing Entries
31 Service Revenue……………………………. 20,400
Retained Earnings………………………. 20,400
31 Retained Earnings………………………….. 8,100

Salary Expense…………………………... 5,200
Rent Expense…………………………….. 1,400
Depreciation Expense…………………... 500
Income Tax Expense……………………. 1,000

Dividends…………………………….…… 1,300

Exercises
Group B
(5-10 min.) E 3-30B

Statement Reports
1. Income statement Sales revenue……… €4,200
Operating expenses.. 1,400
Balance sheet Accounts receivable.. € 400

Accounts payable… 800
2. Cash basis would report only the cash collections of

€4,800 from customers and the payment of operating
expenses (€1,400).The balance sheet would include
neither accounts receivable nor accounts payable.
(5-10 min.) E 3-31B

a. Cash Basis b. Accrual Basis
Revenues……………… €650,000 €690,000

…
Expenses……………… 440,000 500,000
…
Net income……………… €210,000 € 190,000
The accrual basis measures net income better because its

information on revenues and expenses is more complete than
the information provided by the cash basis. The accrual basis
also clearly states what the business is expecting in terms of

its knowable future economic benefits and economic
obligations.
(5-10 min.) E 3-32B

Millions
a. Revenue………………………………………………. €800
The revenue of €800 million is earned, though not fully

collected. The revenue recognition principle says to
record revenue when it has been earned, regardless of
when cash is collected. Therefore, report the amount of
revenue earned, regardless of when the company
collects cash.
b. Total expense…………………………………….….. €590
The matching principle governs accounting for

expenses.
c. The income statement reports revenues and expenses.

The statement of cash flows reports cash receipts and
cash payments.
(15-20 min.) E 3-33B

Req. 1
Adjusting Entries

a. Insurance Expense……………………………... 1,900
Prepaid Insurance (€800+€2,500-€1,400)… 1,900
b. Interest Receivable…………………..………… 1,200

Interest Revenue……………………..……... 1,200
c. Unearned Service Revenue (€1,500 − €600) 900

Service Revenue……………………..……… 900
d. Depreciation Expense…………………..…….. 4,700

Accumulated Depreciation…………..……. 4,700
e. Salary Expense (€24,000 × 3/5)………….…… 14,400

Salary Payable……………………….…..…... 14,400
f. Income Tax Expense (€21,000 × .25)……… 5,250

Income Tax Payable…………………………. 5,250

(continued) E 3-33B
Req. 2
Net income understated by omission of:

Interest € 1,200
revenue……………………………..
Service 900
revenue……………………………...
Total € 2,100
understatement……………………….
Net income overstated by omission of:

Insurance €1,900
expense………………………….
Depreciation 4,700
expense………………………
Salary 14,400
expense………………………………
Income tax 5,250
expense…………………………
Total 26,250
overstatement…………………………
Overall effect — net income overstated €24,150

by

(10-15 min.) E 3-34B
Missing amounts in italics.
1 2 3 4
Beginning Supplies $ 100 $600 $ 1,100 $ 700
Add: Payments for
supplies
during the year 1,500 1,000 700 600
Total amount to 1,600 1,600 1,800 1,300
account for
Less: Ending (400) (200) (800) (500)
Supplies
Supplies Expense $ 1,200 $ 1,400 $ 1,000 $ 800
Journal entries:
Situation 1: Supplies…………………………… 1,500

Cash………………………….…. 1,500
Paid cash for supplies
Situation 2: Supplies Expense……………….. 1,400

Supplies………………………... 1,400
To record supplies expenses

(10-20 min.) E 3-35B
Adjusting Entries
a. Interest Expense……………………………… 9,000

Interest Payable……………………………. 9,000
b. Interest Receivable…………………………… 4,800

Interest Revenue…………………….…….. 4,800
c. Unearned Rent Revenue ($13,200 / 2 × 6/12) 3,300

Rent Revenue………………………………. 3,300
d. Salary Expense ($1,800 × 3)……………….... 5,400

Salary Payable……………………………… 5,400
e. Supplies Expense…………………………….. 2,100

Supplies ($3,300 − 1,200)……………….…. 2,100
f. Depreciation Expense ($150,000 / 5)………... 30,000

Accumulated Depreciation………………. 30,000
Book value = $120,000 ($150,000 − $30,000)

(10-20 min.) E 3-36B
Accounts Receivable Supplies
1,400 500 (a) 200
(c) 200 Bal. 300
Bal. 1,600

(b) 800 (d) 100 600
Bal. 800 Bal. 500
Service Revenue Salary Expense

4,900 1,700
(c) 200 (b) 800
(d) 100 Bal. 2,500
Bal. 5,200
Supplies Expense
(a) 200
Bal. 200

(20-30 min.) E 3-37B
Sweet Hut, Inc.
Income Statement
Thousands
Revenues:
Sales revenue………………... $40,900
Expenses:
Cost of goods sold………….. $26,400
Selling, administrative, and
general expense………….. 10,500
Total expenses……………. 36,900
Income before tax……………… 4,000
Income tax expense……………. 2,400
Net income………………………. $ 1,600
Sweet Hut, Inc.

Thousands
Total equity, January 1, 20X8… $9,700
Add: Net income …………………………. 1,600
11,300
Less: Dividends……………………………. (1,200)
Total equity, December 31, 20X8… $10,100

(continued) E 3-37B
Sweet Hut, Inc.
Balance Sheet
December 31, 20X8
Thousands
ASSETS LIABILITIES
Cash……………………………. € 3,600 Accounts payable……… $ 7,900
Accounts receivable………… 1,600 Income tax payable…….. 1,000
Inventories……………………. 1,300 Other liabilities………….. 2,800
Prepaid expenses……………. 1,700 Total liabilities…………... 11,700
Prop., plant & equip. $ 6,800 SHAREHOLDERS’
Less: Accum. EQUITY
deprec……. (2,800) 4,000 Share capital………….. 4,900
Other assets………………….. 9,600 Retained earnings……… 5,200
Total assets…………………… $21,800 shareholders’ equity... $21,800

(10-20 min.) E 3-38B
One mechanism for solving this exercise is to prepare the
relevant T-accounts, insert the given information, and solve for
the unknown amounts, shown in italics.
Amounts in millions
Receivables
Beg. bal. 230
Sales revenue 20,620 Collections 20,500
End. bal. 350
Prepaid Insurance
Beg. bal. 140
Payment 420 Insurance expense 430
End. bal. 130
Accrued Liabilities Payable

Beg. bal. 660
Other operating
Payments 4,300 expenses 4,340
End. bal. 700

(10 min.) E 3-39B
Req. 1
Mother Claire’s income statement:

Service revenue (€8,600 × 1/2)………………….... $4,300
Mother Claire’s balance sheet:

Unearned service revenue (€8,600 × 1/2)……… $4,300
Req. 2
Murcia’s income statement:

Medical expense ($8,600 × 1/2)…………………… $4,300
Murcia’s balance sheet:

Prepaid medical expense ($8,600 × 1/2)………… $4,300

(10 min.) E 3-40B
Req. 1
Millions
Income statement
Service revenue (£500 − £125)…………………… £375
Balance sheet
Req. 2
Income statement
Service revenue (£85 + £500 − £125)……………. £460
Balance sheet
Service revenue is greater in (2) because GTel began the year

owing more phone service to customers. With collections for
the year and the amount of the ending liability unchanged, GTel
must have earned more revenue in situation 2 than in situation
1.
Not required, but helpful:
Unearned Service Revenue

Beg. bal. 85
Earned revenue 460 Collected cash 500
End. bal. 125

(10-20 min.) E 3-41B
Journal
Closing Entries
Dec. 31 Service Revenue………………………… 24,800
Other Revenue…………………………… 900
Retained Earnings……………………. 25,700
31 Retained Earnings………………………. 23,400

Cost of Services Sold………………... 11,600
Selling, General, and Administrative
Expense……………………………... 6,400
Depreciation Expense……………….. 4,700
Income Tax Expense…………………. 700
31 Retained Earnings………………………. 800

Dividends…………………………….… 800
Net income for 20X6 was €2,300 (€25,700 − €23,400).
Retained Earnings
Dec. 31, 20X7 2,500
Dividends 800 Net income 2,300
Dec. 31, 20X8 4,000

(15-25 min.) E 3-42B
Journal
Adjusting Entries
Dec. 31 Unearned Service Revenue………………. 6,300
Service Revenue (€19,600 − €13,300).. 6,300
31 Salary Expense (€5,200 − €4,500)………... 700

Salary Payable……………………….…... 700
31 Rent Expense (€1,500 − €800)………….. 700

Prepaid Rent……………………………… 700
31 Depreciation Expense (€600 − €0)……….. 600

Accumulated Depreciation…………….. 600
31 Income Tax Expense (€900 − €0)………. 900

Income Tax Payable…………………….. 900
Closing Entries
31 Service Revenue……………………………. 19,600
Retained Earnings………………………. 19,600

Salary Expense…………………………... 5,200
Rent Expense…………………………….. 1,500
Depreciation Expense…………………... 600
Income Tax Expense……………………. 900

Dividends…………………………….…… 1,100

Serial Exercises
(3 hours) E 3-43
Reqs. 2, 4, 5, and 7 [refer to Exercise 2-36, p. 102]
Cash Accounts Receivable

Mar. 2 6,500 Mar. 2 500 Mar. 18 1,900 Mar. 28 1,900
9 1,500 3 2,500 Bal. 0
21 2,000 12 400 Adj. 1,800
28 1,900 26 800 Bal. 1,800
31 1,600
Bal. 6,100
Supplies Equipment
Mar. 5 400 Adj. 100 Mar. 3 2,500
Bal. 300
Accumulated Depreciation –
Equipment Furniture
Adj. 70 Mar. 4 7,200
Accumulated Depreciation –
Furniture Accounts Payable
Adj. 125 Mar. 26 800 Mar. 4 7,200
5 400
Bal. 6,800

(continued) E 3-43
Reqs. 1, 3, 6, and 8

Adj. 620 Adj. 600 Mar. 21 2,000
Bal. 1,400
Share Capital Retained Earnings

Mar. 2 6,500 Clo. 1,815 Clo. 5,800
Clo. 1,600
Bal. 2,385
Dividends Service Revenue

Mar. 31 1,600 Clo. 1,600 Mar. 9 1,500
18 1,900
Bal. 3,400
Adj. 1,800
Adj. 600
Clo. 5,800 Bal. 5,800
Rent Expense Utilities Expense

Mar. 2 500 Clo. 500 Mar. 12 400 Clo. 400
Depreciation Expense –
Salary Expense Equipment
Adj. 620 Clo. 620 Adj. 70 Clo. 70
Depreciation Expense –
Furniture Supplies Expense
Adj. 125 Clo. 125 Adj. 100 Clo. 100

(continued) E 3-43
Req. 1
March 2 through 18 entries are repeated from Solution to

Exercise 2-36.
Journal
Mar. 2 Cash…………………………………….. 6,500

Share Capital…………………….. 6,500
2 Rent Expense………………………….. 500

Cash………………………………….. 500
3 Equipment……………………………… 2,500
Cash………………………………….. 2,500
4 Furniture……………………………….. 7,200
Accounts Payable…………………. 7,200
5 Supplies………………………………… 400
Accounts Payable…………………. 400
9 Cash…………………………………….. 1,500
Service Revenue…………………… 1,500
12 Utilities Expense……………………… 400

Cash………………………………….. 400
18 Accounts Receivable………………… 1,900

Service Revenue…………………… 1,900

(continued) E 3-43
Req. 1
Journal
Mar. 21 Cash…………………………………….. 2,000

Unearned Service Revenue……… 2,000
21 No entry; no transaction yet
26 Accounts Payable……………………. 800

Cash…………………………………. 800
28 Cash…………………………………….. 1,900
Accounts Receivable…………… 1,900
31 Dividends……………………………… 1,600
Cash…………………………………. 1,600

(continued) E 3-43
Reqs. 3 and 4
Jerome Smith, Certified Public Accountant, P.C.
Adjusted Trial Balance
March 31, 20X6
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash 6,100 6,100
Accounts receivable — (a) 1,800 1,800
Supplies 400 (c) 100 300
Equipment 2,500 2,500
Accumulated depr. – equip. — (d1) 70 70
Furniture 7,200 7,200
Accumulated depr. – furn. — (d2) 125 125
Accounts payable 6,800 6,800
Salary payable — (e) 620 620
Unearned service revenue 2,000 (b) 600 1,400
Share capital 6,500 6,500
Retained earnings — —
Dividends 1,600 1,600
Service revenue 3,400 (a)1,800 5,800
(b) 600
Rent expense 500 500
Utilities expense 400 400
Salary expense (e) 620 620
Depreciation expense – equip. (d1) 70 70
Depreciation expense – furn. (d2) 125 125
Supplies expense (c) 100 100
18,700 18,700 3,315 3,315 21,315 21,315

(continued) E 3-43
Req. 5
Journal
Adjusting Entries
(a) Mar. 31 Accounts Receivable………………….. 1,800
Service Revenue…………………….. 1,800
(b) 31 Unearned Service Revenue………… 600

Service Revenue…………………….. 600
(c) 31 Supplies Expense ($400 − $300)…….. 100

Supplies……………………………….. 100
(d1) 31 Depreciation Expense – Equipment… 70

Accumulated Depreciation – Equip 70
(d2) 31 Depreciation Expense – Furniture… 125

Accumulated Depreciation – Furn.. 125
(e) 31 Salary Expense…………………………. 620

Salary Payable……………………….. 620

(continued) E 3-43
Req. 6

Income Statement
Month Ended March 31, 20X6
Revenues:
Service revenue $5,800
Expenses:
Salary expense $620
Supplies expense 100
Rent expense 500
Utilities expense 400
Depreciation expense – furniture 70
Depreciation expense – equipment 125
Total expenses 1,815
Net income $3,985

Month Ended March 31, 20X6
Total equity, March 1, 20X6 $ 0
Add: Share capital 6,500
Net income 3,985
10,485
Less: Dividends (1,600)
Total equity, March 31, 20X6 $ 8,885

(continued) E 3-43
Req. 6

Balance Sheet
March 31, 20X6
ASSETS LIABILITIES
Current assets: Current liabilities:
Cash $ 6,100 Accounts payable $ 6,800
Accounts receivable 1,800 Salary payable 620
Supplies 300 Unearned service
Total current assets 8,200 revenue 1,400
Prop., plant & equip.: Total current liabilities 8,820
Equipment $2,500
Less accum. SHAREHOLDERS’ EQUITY
depr. (70) 2,430 Share capital 6,500
Furniture $7,200 Retained earnings 2,385
Less accum. Total shareholders’ equity 8,885
depr. (125) 7,075 Total liabilities and ______
Total assets $17,705 shareholders’ equity $17,705

(continued) E 3-43
Req. 7
Journal
Closing Entries
Mar. 31 Service Revenue………………………….. 5,800
Retained Earnings…………………….. 5,800
31 Retained Earnings……………………….. 1,815

Rent Expense………………………….. 500
Utilities Expense………………………. 400
Salary Expense………………………… 620
Depreciation Expense – Equipment.. 70
Depreciation Expense – Furniture…. 125
Supplies Expense……………………... 100
31 Retained Earnings……………………….. 1,600

Dividends……………………………….. 1,600

(60 min.) E 3-44
a. Net income: Service revenue:
($165,000 + $1,820 + $34,000). $200,820
Expenses:
Salary ($38,000 + $3,300)……… $ 41,300
Depreciation expense—
building……….. 2,500
Supplies………………………….. 3,400
Insurance………………………… 1,400
Advertising………………………. 7,700
Utilities…………………………… 2,400 58,700
Net income………………………….. $142,120
b. Total assets: Cash………………………………….. 16,700

Accounts receivable
($7,200 + $34,000)…………..... 41,200
Supplies ($4,100 − $3,400)……….. 700
Prepaid insurance
($3,500 − $1,400)………………... 2,100
Building……………………………… $110,000
Less: Accum. Depr.
($15,000 + $2,500)………….…… (17,500) 92,500
Land………………………………….. 50,000
Total assets………………….….. $203,200

(continued) E 3-44
c. Total
liabilities: Accounts payable……………………. $ 7,700
Salary payable………………………… 3,300
Unearned service revenue
($5,400 − $1,820)…………………... 3,580
Total liabilities………………………… $ 14,580
d. Total share-
holders’
equity: Share capital………………………... $ 14,500
Retained earnings, beginning….…... 45,000
Add: Net income….…………………... 142,120
201,620
Less: Dividends.............................. (13,000)
Total shareholders’ equity………….. $188,620
e. Total assets = Total liabilities + Total shareholders’ equity

$203,200 = $14,580 + $188,620

Quiz
Q3-45 b
Q3-46 b
Q3-47 b
Q3-48 d
Q3-49 d ($1,200 / 6 = $200)
Q3-50 c
Q3-51 c
Q3-52 a
Q3-53 a ($3,200 × 9/12 = $2,400)
Q3-54 b $3,000 + $27,000 − $18,000

= revenue of $12,000
Q3-55 d
Q3-56 c
Q3-57 a
Q3-58 a
Q3-59 c ($7,800 − $680 − $120 + $940 − $360)
Q3-60 c Salary Payable

Beg. bal. 27,000
Payment 141,000 Salary exp. 132,000
End. bal. 18,000

Problems
Group A
(15-20 min.) P 3-61A

(All amounts in millions)
1. R – E = NI
$45 – E = $8
E = $45 – $8 = $37
2. Revenues…………….. $45
Expenses…………….. 37
Net income…………... $ 8
3. Beginning receivables……… $ 6
Add: Sales………………….. 45
Less: Collections…………... (25)
Ending receivables…………. $26
Balance sheet
ASSETS
Current assets:
Receivables…………. $ 26
4. Beginning accounts payable………. $ 8

Add: Expenses……………………… 37
Less: Payments……………………... (41)
Ending accounts payable…………… $ 4
Balance sheet
LIABILITIES
Current liabilities:
Accounts payable…………… $ 4

(20-30 min.) P 3-62A
Req. 1
Ethan Consulting
Amount of Revenue (Expense) for May
Date Cash Basis Accrual Basis
May 1 Expense $(400) $ 0
4 Expense (700) 0
5 Revenue 800 800
8 Expense (500) (500)
11 Revenue 0 3,600
19 0 0
24 Revenue 3,600 0
26 Expense (1,300) 0
29 Expense (600) (600)
31 Expense 0 $400 ÷ 5 = (80)
31 Revenue 0 400
Req. 2
Income (loss) before tax $ 900 $3,620

(continued) P 3-62A
Req. 3
The accrual-basis measure of net income is preferable because

it accounts for revenues and expenses when they occur, not
when they are received or paid in cash. For example, on May
11, the company earned $3,600 of revenue and increased its
total equity as a result. The accrual basis records this revenue,
but the cash basis ignores it. On May 24, the business collected
the receivable that was created by the revenue earned on
account at May 11. The accrual basis records no revenue on
May 24 because the company’s increase in total equity
occurred back on May 11. The cash basis waits until cash is
received, on May 24, to record the revenue. This is too late.

(10-20 min.) P 3-63A
Journal
Dec. 31 a. Insurance Expense………………….. 2,800*

Prepaid Insurance……………...... 2,800
To record insurance expense.
31 b. Salary Expense.……………….…….. 2,480**

Salary Payable……………………. 2,480
To accrue salary expense.
31 c. Interest Receivable…………………. 500

Interest Revenue…………………. 500
To accrue interest revenue.
31 d. Supplies Expense…………………… 6,700***

Supplies……………………………. 6,700
31 e. Unearned Service Revenue……….. 10,500****

Service Revenue…………….…… 10,500
To record revenue that was collected in advance.
31 f. Dep. Expense – Office Furniture….. 3,200

Dep. Expense – Equipment………… 5,000
Acc. Dep. – Office Furniture……. 3,200
Acc. Dep. – Equipment………….. 5,000
To record depreciation expense.
_____
* $ 900 + $3,600 − $1,700= $2,800
** ($6,200 × 2/5) = $2,480
*** $2,500 + $6,300 − $2,100 = $6,700
**** ($15,000 × 70%) = $10,500

(45-60 min.) P 3-64A
Req. 1
Moscow, Inc.
December 31, 20X6
Cash 8,900 8,900
Accounts receivable 1,300 (a) 2,200 3,500
Prepaid rent 2,400 (b) 800* 1,600
Supplies 2,600 (c) 2,100 500
Furniture 72,000 72,000
Accumulated depreciation 4,000 (d) 2,000** 6,000
Salary payable (e) 3,000*** 3,000
Retained earnings 63,250 63,250
Service revenue 11,200 (a) 2,200 13,400
Salary expense 2,400 (e) 3,000*** 5,400
Rent expense (b) 800* 800
Depreciation expense (d) 2,000** 2,000
Supplies expense (c) 2,100 _____ 2,100
93,850 93,850 10,100 10,100 101,050 101,050
_____
* $2,400 ÷ 3 = $800
** $72,000 ÷ 3 = $24,000 ÷ 12 = $2,000
*** $5,000 × 3/5 = $3,000

(continued) P 3-64A
Req. 2
Moscow, Inc.
Income Statement
Month Ended December 31, 20X6
Revenues:
Expenses:
Salary expense $5,400
Supplies expense 2,100
Depreciation expense 2,000
Rent expense 800
Net income $ 2,450
Moscow, Inc.
Month Ended December 31, 20X6
Total equity, December 1, 20X6 $75,250
Add: Net income 2,450
77,700

(continued) P 3-64A
Req. 2 (continued)
Moscow, Inc.
Balance Sheet
December 31, 20X6
ASSETS LIABILITIES
Cash $ 8,900 Accounts payable $3,400
Accounts receivable 3,500 Salary payable 3,000
Prepaid rent 1,600 Total current liabilities 6,400
Supplies 500
Total current assets 14,500
Furniture $72,000 SHAREHOLDERS’ EQUITY
Less: Accum. Share capital 12,000
deprec. (6,000) 66,000 Retained earnings 62,100

(10-20 min.) P 3-65A
[Errata: Interest revenue credited under Adjusted Trial Balance
should be 800, not 600]
Req. 1
Journal
Apr. 30 Accounts Receivable ($7,580 − $5,900)... 1,680

Rental Revenue…………………………. 1,680
To accrue rental revenue.
30 Interest Receivable ($400 − $0)………….. 400

Interest Revenue ($800 − $400)…….… 400
30 Supplies Expense ($1,000 − $0)………… 1,000

Supplies ($1,800 − $800)………………. 1,000
30 Insurance Expense ($1,800 − $0)……….. 1,800

Prepaid Insurance ($2,300 − $500)…... 1,800
30 Depreciation Expense ($1,500 − $0)……. 1,500

($8,900 − $7,400)……………………... 1,500
30 Wage Expense ($2,400 − $1,300)………... 1,100

Wages Payable ($1,100 − $0)……….… 1,100
To accrue wage expense.
30 Unearned Rental Revenue ($2,100 −

1,400)………………………………………… 700

Rental Revenue…………………………. 700

(continued) P 3-65A
Req. 2
Total assets = $83,680 ($8,900 + $7,580 + $400 + $4,400 +

$800 + $500 + $70,000 − $8,900)
Total liabilities = $ 9,200 ($6,700 + $1,100 + $1,400)
Total equity = $74,480 ($83,680 − $9,200)
Net income = $ 20,780 ($27,480 + $800 − $1,500 −

$1,000 − $400 − $2,400 − $400 − $1,800)

(20-30 min.) P 3-66A
Req. 1
Seinfield Corporation
Income Statement
Year Ended September 30, 20X6
Revenues:
Expenses:
Rent expense 10,400
Insurance expense 3,500
Interest expense 3,400
Depreciation expense 1,800 61,800
Income before tax 40,800
Income tax expense 6,500
Net income $ 34,300
Year Ended September 30, 20X6
Total equity, October 1, 20X5 $ 9,200
43,500
Total equity, September 30, 20X6 $23,500

continued) P 3-66A
Req. 1 (continued)
Balance Sheet
September 30, 20X6
ASSETS LIABILITIES
Accounts receivable 9,500 Interest payable 300
Supplies 2,600 Unearned service revenue 900
Prepaid rent 1,300 Income tax payable 2,000
Note payable 19,800
Equipment $38,800 Total liabilities 26,500
Less: Accum.
deprec. (4,400) 34,400 SHAREHOLDERS’ EQUITY
Share capital 4,000
Retained earnings 19,500

(20 min.) P 3-67A
Req. 1
Journal
Closing Entries
Jun. 30 Service Revenue…………………….. 95,400
Retained Earnings………………... 95,400
30 Retained Earnings…………………… 35,200

Advertising Expense…………….. 10,500
Depreciation Expense…………… 1,800
Interest Expense………..………… 800
Salary Expense…………………… 17,600
Supplies Expense………………… 4,500
30 Retained Earnings…………………… 21,200

Dividends…………………………... 21,200
Req. 2
Retained Earnings
Jun. 30, 20X6 Expenses 35,200 Jun. 30, 20X5 Bal. 21,000
Jun. 30, 20X6 Dividends 21,200 Jun. 30, 20X6 Revenues 95,400
Jun. 30, 20X6 Bal. 60,000
Net income = $60,200 (revenues of $95,400 −

expenses of $35,200)
Req. 3
Retained Earnings increased during the year because net

income of $60,200 exceeded dividends of $21,200.

(25-40 min.) P 3-67A
[Errata: In the print book, Accounts receivable... 16,100 should
be Accounts receivable... 16,600. The correct value has been
used in the solution. The error in the print book will be updated]
Req. 1
Bay View Services, Inc.

Balance Sheet
June 30, 20X6
ASSETS
Current assets:
Cash $ 7,900
Accounts receivable 16,600
Prepaid expenses 6,000
Supplies 3,900
Property, plant & equipment:
Equipment $51,600
Less: Accumulated depreciation (6,900) 44,700
Other assets 14,400

Total assets $93,500
LIABILITIES
Current portion of note payable $ 1,000
Accounts payable 14,400
Salary payable 2,700
Unearned service revenue 2,800
Total current liabilities 20,900
Note payable, non-current 6,000
Total liabilities 26,900
Share capital 6,600
Retained earnings 60,000*
Total liabilities and shareholders’ equity $93,500

_____

Problems
Group B
(15-20 min.) P 3-68B

(All amounts in millions)
1. R–E=I
$38 – E = $4
E = $38 – $4 = $34
2. Revenues…………….. $38
Expenses…………….. 34
Net income…………... $ 4
3. Beginning receivables……... $ 9
Add: Revenues……………. 38
Less: Collections………….. (27)
Ending receivables…………. $ 20
Balance sheet
ASSETS
Current assets:
Receivables…………. $ 20
4. Beginning accounts payable……….. $ 10

Add: Expenses………………………. 34
Less: Payments…………………….... (28)
Ending accounts payable……………. $ 16
Balance sheet
LIABILITIES
Accounts payable……………. $ 16

(20-30 min.) P 3-69B
Req. 1
Queen Consulting
Amount of Revenue (Expense) for August
Date Cash Basis Accrual Basis
Aug 1 Expense $(500) Expense 0
4 Expense $(800) Expense 0
5 Revenue $600 Revenue $600
8 Expense $(700) Expense $(700)
11 Revenue Revenue $3,200
19 0 0
24 Revenue $3,200 Revenue 0
26 Expense $(1,100) Expense 0
29 Expense $(500) Expense $(500)
31 Expense 0 Expense $(100)
31 Revenue 0 Revenue $300
Req. 2
Income (loss)
before tax $200 Income before $2,800
tax
Req. 3
The accrual basis better measures net income. For example,

the accrual basis accounts for the prepayment of insurance on
August 1 as an asset because prepaid insurance gives the
business insurance coverage of the business’ assets for the
next five months. The cash basis ignores the future benefit
(asset nature) of the prepayment and accounts for the
prepayment as an expense.

(10-20 min.) P 3-70B
Journal
Mar 31 a. Insurance Expense………………… 3,600*

Prepaid Insurance………………. 3,600
To record insurance expense
31 b. Salary Expense………………..……... 3,240**

Salary Payable…………………….. 3,240
31 c. Interest Receivable………………….. 800

Interest Revenue………………….. 800
31 d. Supplies Expense……………………. 6,800***

Supplies…………………………….. 6,800
31 e. Unearned Service Revenue 7,500****

Service Revenue………………….. 7,500
31 f. Dep. Expense – Office Furniture….. 3,500

Dep. Expense – Equipment………… 5,400
Acc. Dep. – Office Furniture……. 3,500

Acc. Dep. – Equipment………….. 5,400
_____
* €500 + 3,800 − €700 = €3,600
** (€5,400 × 3/5) = €3,240
*** €2,900 + €6,200 − €2,300 = €6,800
**** (€12,500 × 60%) = €7,500

(45-60 min.) P 3-71B
Req. 1
Glasgow, Inc.
August 31, 20X6
Cash 9,300 9,300
Accounts receivable 1,600 (a) 2,200 3,800
Prepaid rent 2,400 (b) 800* 1,600
Supplies 2,200 (c) 1,900 300
Furniture 81,000 81,000
Accumulated depreciation 4,000 (d) 1,350** 5,350
Salary payable (e) 3,300*** 3,300
Retained earnings 71,000 71,000
Service revenue 10,400 (a) 2,200 12,600
Salary expense 3,200 (e) 3,300*** 6,500
Rent expense (b) 800* 800
Depreciation expense (d) 1,350** 1,350
Supplies expense (c) 1,900 _____ 1,900
104,100 104,100 9,550 9,550 110,950 110,950
___
* €2,400 ÷ 3 = €800
** €81,000 ÷ 5 = €16,200 ÷ 12 = €1,350
*** €5,500 × 3/5 = €3,300

(continued) P 3-71B
Req. 2 (continued)
Glasgow, Inc.
Income Statement
Month Ended August 31, 20X6
Revenues:
Service revenue €12,600
Expenses:
Salary expense €6,500
Rent expense 800
Depreciation expense 1,350
Net income €1,450
Glasgow, Inc.
Month Ended August 31, 20X6
Total equity, August 1, 20X6 €86,200
87,650
Total equity, Aug 31, 20X6 €83,850

(continued) P 3-71B
Req. 2 (continued)
Glasgow, Inc.
Balance Sheet
August 31, 20X6
ASSETS LIABILITIES
Cash €9,300 Accounts payable €3,500
Accounts receivable 3,800 Salary payable 3,300
Prepaid rent 1,600 Total current liabilities 6,800
Supplies 300
Furniture $81,000 SHAREHOLDERS’ EQUITY
Less: Accum. Share capital 15,200
deprec. (5,350) 75,650 Retained earnings 68,650
______ Total liabilities and ______
Total assets €90,650 shareholders’ equity €90,650

(10-20 min.) P 3-72B
Req. 1
Journal
Apr. 30 Accounts Receivable (€7,850 − €6,000)….. 1,850

Rental Revenue……………………….…… 1,850
To accrue rental revenue.
30 Supplies Expense (€700 − €0)……………... 700

Supplies (€1,500 − €800)…………………. 700
30 Insurance Expense (€1,900 − €0)………….. 1,900

Prepaid Insurance (€2,500 − €600)…….. 1,900
30 Depreciation Expense (€1,500 − €0)……… 1,500

(€10,300 − €8,800)…………………………. 1,500
30 Wage Expense (€3,000 − €1,900)…………. 1,100

Wages Payable (€1,100 − €0)………….. 1,100
30 Interest Receivable (€750 − 0)……….……. 750

Interest Revenue (€950 − €200)………… 750
To accrue interest expense.
30 Unearned Rental Revenue

(€1,500 − €1,200)…………………………… 300
Rental Revenue…………………………. 300

(continued) P 3-72B
Req. 2
Total assets = $79,600 ($7,900 + $7,850 + $750 + $5,000 +

$800 + $600 + $67,000 − $10,300)
Total liabilities = $8,800 ($6,500 + $1,100 + $1,200)
Total equity = $70,800 ($79,600 − $8,800)
Net income = $13,700 ($20,450 + $950 − $1,500 − $700 −

$300 − $3,000 − $300 − $1,900)

(20-30 min.) P 3-73B
Req. 1
Murray Corporation
Income Statement
Revenues:
Expenses:
Rent expense 10,300
Interest expense 3,300
Income before tax 41,900
Income tax expense 7,600
Net income $ 34,300
Murray Corporation
Total equity, January 1, 20X6 $12,500
46,800

(continued) P 3-73B
Req. 1 (continued)
Murray Corporation.
Balance Sheet
December 31, 20X6
ASSETS LIABILITIES
Accounts receivable 8,900 Unearned service
Supplies 2,300 revenue 700
Prepaid rent 1,200 Interest payable 500
Income tax payable 2,600
Equipment $38,700 Note payable 18,800
Less: Accum. Total liabilities 26,500
deprec. (4,500) 34,200
Share capital 8,000
Retained earnings 13,800

(20 min.) P 3-74B
Req. 1
Journal
Closing Entries
Mar. 31 Service Revenue……………………… 95,600
Retained Earnings………………… 95,600
31 Retained Earnings……………………. 37,000

Salary Expense………………….. 18,200
Supplies Expense…………………. 4,500
Advertising Expense…………… 11,200
Depreciation Expense……………. 2,200
Interest Expense…………………... 900
31 Retained Earnings…………………. 30,000

Dividends…………………………… 30,000
Req. 2
Retained Earnings
Mar. 31, 20X6 Expenses 37,000 Mar. 31, 20X5 Bal. 22,500
Mar. 31, 20X6 Dividends 30,000 Mar. 31, 20X6 Revenues 95,600
Mar. 31, 20X6 Bal. 51,100
Net income = $58,600 (revenues of $95,600 − expenses of

$37,000)
Req. 3
Retained Earnings increased during the year because net

income of $58,600 exceeded dividends of $30,000.

Decision Cases
(25 min.) Decision Case 1
Req. 1 Unadjusted trial balance:
Cash…………………………………….. $8,200
Accounts receivable…………………. 4,300
Supplies………………………………... 900
Prepaid rent…………………………… 1,200
Land…………………………………….. 43,000
Accounts payable……………………. $12,100
Salary payable………………………… –0–
Unearned service revenue……….. 500
Note payable, due in 3 years……….. 23,400
Share capital………………………... 5,000
Retained earnings……………………. 9,500
Service revenue………………………. 9,900
Salary expense……………………….. 3,600
Rent expense……………………….. –0–
Advertising expense………………. 800
Supplies expense………………….. –0–
Totals…………………………………… $62,000 $60,400
Out of balance $1,600

(continued) Decision Case 1
Req. 2 Adjusted trial balance:
Cash……………………………………………... $8,200
Accounts receivable………………………….. 4,300
Supplies ($900 -600)..………………………. 300
Prepaid rent ($1,200 x 11/12)……………… 1,100
Land ……………………………………………. 43,000
Accounts payable……………………………... 12,100
Salary payable…………………………………. 1,200
Unearned service revenue ($500 - $300)…. 200
Note payable, due in 3 years ($23,400 + $1,600) 25,000
Share capital………………………………… 5,000
Retained earnings…………………………….. 9,500
Service revenue ($9,900 + $300)……………. 10,200
Salary expense ($3,600 + $1,200)………….. 4,800
Rent expense ($1,200 x 1/12)……………….. 100
Advertising expense………………………….. 800
Supplies expense……………………………... 600
Total……………………………………………… $63,200 $63,200

(20-30 min.) Decision Case 2
Tiger Restaurant, Inc.

Income Statement
Month Ended October 31, 20X7
Sales revenue $33,000
Cost of goods sold $12,500
Wages expense 6,000
Rent expense 4,500
Net income $ 8,000

Month Ended October 31, 20X7
Total equity, October 1, 20X7 $25,000
+ Net income 8,000
- Dividends (3,000)
Total equity, October 31, 20X7 $30,000


Balance Sheet
October 31, 20X7
ASSETS LIABILITIES
Food inventory 6,000 Unearned revenue 5,000
Prepaid insurance 2,000 14,000
Dishes, silver 4,000
Fixtures $25,000 OWNERS’ EQUITY
Less: Accum. Share capital $25,000
deprec. (1,000) 24,000 Retained earnings 7,000 30,000

Total assets $44,000 Total liabilities and equity $44,000
Recommendation: Do not expand the business. It is not

meeting Lou Clark’s goals for net income or
for total assets.

(30-40 min.) Decision Case 3
Req. 1 (your highest price)
Advertising revenue ($20,000 + $5,000) $25,000

Expenses:
Salary $4,000
Utilities 800
Other (unrecorded) 1,200
Salary of your manager 5,000 11,000
Your expected monthly net income $14,000
Multiplier to compute price X 16
Your highest price $224,000
Req. 2 (Williams’ asking price)
SW Advertising, Inc.
June 30, 20X6
Beginning total equity $ 142,000
Add: Net income
Revenue ($20,000 + $5,000) $25,000
Less: Expenses ($4,000 +
$800 + $1,200) (6,000) 19,000
161,000
Ending total equity $152,000
Multiplier to compute price X 2__
Williams’ asking price $304,000

Req. 3
You may start by offering Stanley Williams approximately

$200,000 for the business. His asking price is $304,000 so you
are starting out quite far apart. If Williams appears especially
eager to sell out, you may be able to buy the firm for closer to
your highest price of $224,000. However, if he is not so eager to
sell and if you want the business badly enough, you may have
to pay somewhere between $224,000 and $304,000. It might pay
to hire an expert to value the business’s assets. You may find
that Williams’ price is inflated based on the value of its assets.
You can always raise your offer, but you cannot decrease it, so
start the negotiating process with an offer around $200,000.

Ethical Issues
Ethical Issue 1
1. The journal entry to record the revenue is:
Dec. Accounts Receivable……….. XXX

Sales Revenue…………….. XXX
The debit to Accounts Receivable will increase total current

assets and, as a result, increase (improve) the current ratio.
The credit to Sales Revenue will increase total owner equity

and, as a result, decrease (improve) the debt ratio.
2. a. – c. The issue is whether it is ethical to record the revenue

in the current year. The contract has been signed, but the
implication is that the company will not have done everything
it needs to do in order to earn the revenue in the current
year. The stakeholders are the company, the bank, the
shareholders, and the company’s other creditors. From an
economic standpoint, the entry would obviously improve the
company’s short term financial position. However, the
advantage would probably be short-lived. When the bank
finds out about this entry, they will likely protest, and
demand immediate payment, so the longer-term economic
impact will likely be negative. From a “legal” standpoint, to
record this transaction in December violates IFRS by
violating the revenue principle. In this case Cross Timbers
has not made the sale (has not delivered the merchandise) to
the customer and, therefore, has not earned the revenue
prior to December 31 of the current year. From an ethical
standpoint, recording this revenue violates the bank’s rights
for proper disclosure of the company’s income and assets.
Revenue should be recorded no earlier than when it is
earned. Cross Timbers expects to earn the revenue in

January of next year. Cross Timbers clearly cannot record
this revenue until it is earned. To do so is not in their best
economic, legal or ethical best interests.
3. The authors would suggest either of two actions. Cross

Timbers can either:
a. Report the current ratio of 1.47 and the debt ratio of .51
because these are the true values. Then tell the bank of the
signed contract for additional work and the hope for a
better set of ratio values next year. In some cases, banks
will agree to sign a waiver of the terms of loan covenants,
meaning that, although the company is in violation, the
bank will not move to enforce the covenant. They may
give Cross Timbers a “grace period” to cure the violation
in the covenant.
b. Pay off some current liabilities before year end. This will
improve both the current ratio and the debt ratio. This may
enable Cross Timbers to bring its ratio values into
compliance with the bank’s requirements.

Ethical Issue 2
1. These transactions — recorded as directed by Almond —

overstate the reported income of the company by $21,000
($10,000 + $10,000 + $1,000).
2. It appears that Almond wants to improve the company’s

reported income in order to borrow on favorable terms. Her
action is unethical and probably illegal as well because she
is deliberately overstating the company’s reported income.
Almond appears to be letting the potential short term
economic advantage of these deliberate misstatements take
precedence. She needs to remember that these
misstatements violate IFRS, and that, depending on what use
is made of the financial statements, could subject the
company to civil or criminal legal proceedings. If this
happens, the short term economic gains ($21,000) would not
even come close to the long-term economic costs associated
with the legal actions, not to mention the negative publicity.
The business will need a bank loan, and perhaps the money
would be used to pay bills, expand the business, and so on.
However, based on Almond’s lack of integrity, the money
may be destined for her own use. Regardless of its use, the
money is obtained under false pretenses and cannot be
headed for a good outcome.

The bank is harmed by Almond’s and Lail’s actions.
Lending money to Almond under false pretenses may lead
the bank to charge an unrealistically low interest rate that
robs the bank’s owners of interest revenue. In the extreme,
the public is robbed if taxpayers wind up financing the
bailout of a failed institution.
3. Personal advice will vary from student to student. The
purpose of asking this question is to challenge students to
take the high road of ethical conduct by having nothing to do
with Almond’s scheme. The authors would advise Lail, the
accountant, to take these actions, in order:
a. Refuse to take any part in Almond’s scheme, explaining
that the result is overstatement of reported income. This
is both illegal and unethical, and will ultimately have a
negative economic impact on the company, as well.
Accountants are bound to standards of ethical conduct
that these actions violate. They can go to prison when
caught falsifying financial statements.
b. To remain ethical, the accountant must be willing to lose
his/her job. It is better to protect one’s reputation even if
that causes a short-term hardship.

Focus on Financials: Nestlé Corporation
(15-20 min.)
1. Nestlé’s provisions consist of restructuring,

environmental, litigation and other provisions, which
themselves are made up of onerous contracts and damage
claims that have occurred but are not covered by
insurance companies.
2. (Amounts are in millions of CHF)
Journal
ACCOUNT TITLES AND
DATE EXPLANATION DEBIT CREDIT
a. Provisions for warranties …….… 464

Cash………………….. 464
b. Warranty expenses….………………. 895

Provisions for warranties.………... 895
c. Warranty adjustment….…………… 336

Provisions for warranties.………... 336
3. After posting, the balance of accrued expenses agrees

with the financial statements at December 31, 2016.
Provisions
Dr Cr
3,165 Beginning balance
Cash 464 895 Warranty expense
Adjustments 336
3,260 Ending balance
4. Total depreciation for the year ending Dec 31, 2016 was
CHF 2,795 million. However, the actual increase in

accumulated depreciation is CHF 2,053 million. The reason
why total depreciation is CHF 742 million higher would
mainly be due to PPE disposals in the year ending Dec 31,
2016 that resulted in CHF 1,061 million of corresponding
accumulated depreciation being removed from the
account. Additionally, currency translation effects,
consolidation and reclassification effects also contributed
to the deviance between these two figures.
Group Project
Req. 1
Davis Lawn Service, Inc.

Income Statement
Four Months Ended August 31, 2010
Service revenue ($5,600 + $600) $6,200
Expenses:
Wage expense ($1,900 + $200) $2,100
Rent expense ($600 × 4/6) 400
Supplies expense ($400 − $50) 350
Repair expense 300
Depreciation expense ($300× 1/3) 100
Net income $2,950
Req. 2
Davis Lawn Service, Inc.
Balance Sheet
August 31, 20X6
ASSETS LIABILITIES
Current: Current:
Cash $2,040 Wages payable $ 200
Accounts receivable 600 Total current liabilities 200
Receivable from
Ludwig
(or Prepaid rent) 200
Supplies 50 SHAREHOLDERS’
Total current assets 2,890 EQUITY
Non-current: Share capital 400
Mower $300 Retained earnings
Less accum. ($2,950 − $460) 2,490
deprec. (100) 200 Total shareholders’ 2,890
equity

Harrison FA IFRS 11e CH03 SM

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Chapter 3

Accrual Accounting & Income

(10 min.) S 3-1

Beginning cash………………………………………….. $ 140

Chapter 3 Accrual Accounting & Income 162

Balance sheet Notes payable

(10 min.) S 3-3

The accrued salaries, which are owed to the employees yet

Chapter 3 Accrual Accounting & Income 163

When the large auto manufacturer records the revenue from

(10 min.) S 3-5

Depreciation is the periodic allocation of the cost of a tangible

(10 min.) S 3-6

Chapter 3 Accrual Accounting & Income 164

b. The Time Period Concept

c. The Matching Principle

d. The Matching Principle

e. The Revenue Recognition Principle

(10 min.) S 3-7

Mar. 31 Rent Expense ($5,400 / 6)………... 900

Prepaid Rent Rent Expense

Dec. 31 Supplies Expense ($980 − $750)…. 230

Supplies Supplies Expense

(10 min.) S 3-8

(a) Jan. 1 Computer Equipment…………….….. 60,000

(b) Dec. 31 Depreciation Expense −

Computer equipment…………………………………. $60,000

Chapter 3 Accrual Accounting & Income 166

Income statement: 20X6

Balance sheet: 20X6

(10 min.) S 3-10

Oct. 31 Interest Expense………………………………. 800

Nov. 30 Interest Expense………………………………. 800

Dec. 31 Interest Expense………………………………. 800

Dec. 31 Interest Payable…………………………… 2,400

Chapter 3 Accrual Accounting & Income 168

Oct. 31 Interest Receivable………………………….. 800

Nov. 30 Interest Receivable………………………….. 800

Dec. 31 Interest Receivable………………………….. 800

Dec. 31 Cash………………………………………… 2,400

Chapter 3 Accrual Accounting & Income 169

b. Unearned Subscription Revenue........... 5,000,000

Chapter 3 Accrual Accounting & Income 170

Rent Expense at December 31:

(10 min.) S 3-14

Unearned Service Revenue……………. 3,600

Chapter 3 Accrual Accounting & Income 171

Hawk Sporting Goods Company

Chapter 3 Accrual Accounting & Income 172

Chapter 3 Accrual Accounting & Income 173

31 Retained Earnings……………… 166,800

Retained Earnings’ ending balance agrees with the amount

Chapter 3 Accrual Accounting & Income 174

(5-10 min.) E 3-17A

Balance sheet Accounts receivable.. $ 500

2. Cash basis would report only the cash collections of

(5-10 min.) E 3-18A

Revenues………………… $610,000 $590,000

The accrual basis measures net income better because its

The revenue of $850 million is fully earned. The revenue

b. Total expense…………………………………….….. $560

The matching principle governs accounting for

c. The income statement reports revenues and expenses.