Exercise 3.7 p.

121

1. The following transactions were carried out during the month of May by M. Palmer and Company,
a firm of design architects. For each of the five transactions, you are to state whether the transaction
represented revenue to the firm during the month of May. Give reasons for your decision in each
case.

a. M. Palmer and Company received $25,000 cash by issuing additional shares of capital stock.

b. Collected cash of $2,400 from an account receivable. The receivable originated in April from
services rendered to a client.

c. Borrowed $12,800 from Century Bank to be repaid in three months.

d. Earned $83 interest on a company bank account during the month of May. No withdrawals were
made from this account in May.

e. Completed plans for guesthouse, pool, and spa for a client. The $5,700 fee for this project was
billed to the client in May, but will not be collected until June 25.

Exercise 4.3 p. 170

1. The Golden Goals, a professional soccer team, prepares financial statements on a monthly basis.
The soccer season begins in May, but in April the team engaged in the following transactions:

a. Paid $1,200,000 to the municipal stadium as advance rent for use of the facilities for the five-
month period from May 1 through September 30. This payment was initially recorded as Prepaid
Rent.

b. Collected $4,500,000 cash from the sale of season tickets for the team’s home games. The entire
amount was initially recorded as Unearned Ticket Revenue. During the month of May, the Golden
Goals played several home games at which $148,800 of the season tickets sold in April were used by
fans.

_______Income Statement ___ ______Balance Sheet ______

Adjusting Net Owners’
Entry Revenue - Expenses = Income Assets = Liabilities + Equity
a NE I D D NE D

Instructions:

Prepare the two adjusting entries required on May 31.

Exercise 4.7 p. 171

A. Sweeney & Associates, a large marketing firm, adjusts its accounts at the end of each month. The
following information is available:

1. A bank loan had been obtained on December 1. Accrued interest on the loan at December 31
amounts to $1,200. No interest expense has yet been recorded.

2. Depreciation of the firm’s office building is based on an estimated life of 25 years. The building
was purchased in 2001 for $330,000.
3. Accrued, but unbilled, revenue during December amounts to $64,000.

4. On March 1, the firm paid $1,800 to renew a 12-month insurance policy. The entire amount was
recorded as Prepaid Insurance.

5. The firm received $14,000 from the King Biscuit Company in advance of developing a six-month
marketing campaign. The entire amount was initially recorded as Unearned Revenue. At December
31, $3,500 had actually been earned by the firm.

6. The company’s policy is to pay its employees every Friday. Since December 31 fell on a
Wednesday, there was an accrued liability for salaries amounting to $2,400.

Instructions:
a. Record the necessary adjusting journal entries on December 31, 2005.

b. By how much did Sweeney & Associates’ net income increase or decrease as a result of the
adjusting entries performed in part a? (Ignore income taxes.)

Problem 4.3A p. 175

1. Gunflint Adventures operates an airplane service that takes fishing parties to a remote lake resort
in northern Manitoba, Canada. Individuals must purchase their tickets at least one month in advance
during the busy summer season. The company adjusts its accounts only once each month. Selected
balances appearing in the company’s June 30 adjusted trial balance appear as follows:

Other Information
1. The airplane is being depreciated over a 20-year life with no residual value.
2. Unearned passenger revenue represents advance ticket sales for bookings in July and August at
$300 per ticket.
3. Six months’ airport rent had been prepaid on May 1.
4. The unexpired insurance is what remains of a 12-month policy purchased on February 1.
5. Passenger revenue earned in June totaled $75,000.
Instructions:

a. Determine the following:

1. The age of the airplane in months.

2. The monthly airport rent expense.
3. The amount paid for the 12-month insurance policy on February 1.

b. Prepare the adjusting entries made on June 30 involving the following accounts:

1. Depreciation Expense: Airplane

2. Airport Rent Expense
3. Insurance Expense
4. Passenger Revenue Earned

Exercise 5.5 p. 223

1. Refer to the adjusted trial balance of Wilderness Guides Services, Inc. illustrated in Exercise
5.3 to respond to the following items:

a. Prepare all necessary closing entries at December 31, 2009.

b. Prepare an after-closing trial balance dated December 31, 2009.

c. Compare the Retained Earnings balance reported in the after-closing trial balance prepared in part
b to the balance reported in the adjusted trial balance. Explain why the two balances are different.
(Include in your explanation why the balance reported in the after-closing trial balance has increased
or decreased subsequent to the closing process.)

Appendix C, Problem C.3, page C23

1. Guenther and Firmin, both of whom are CPAs from a partnership, with Guenther investing
$100,000 and Firmin, $80,000. They agree to share net income as follows:

1. Salary allowances of $80,000 to Guenther and $50,000 to Firmin.

2. Interest allowances at 15 percent of beginning capital account balances.
3. Any partnership earnings in excess of the amount required to cover the interest and salary
allowances to be divided 60 percent to Guenther and 40 percent to Firmin.

The partnership net income for the first year of operations amounted to $247,000 before interest and
salary allowances.  Show how this $247,000 should be divided between the two partners.  Use a
three-column schedule of the type illustrated in Exhibit C-9. List on separate lines the amounts of
interest, salaries, and the residual amount divided.

Appendix C, Problem C.9, pages C25–C26

1. The partnership of Avery and Kirk was formed on July 1, when George Avery and Dinah Kirk
agreed to invest equal amounts and to share profits and losses equally. The investment by Avery
consists of $30,000 cash and an inventory of merchandise valued at $56,000.
 Kirk also is to contribute a total of $86,000. However, it is agreed that her contributions will consist
of the transfer of both assets of her business and its liabilities (listed below). A list of the agreed
values of the various items as well as their carrying values on Kirk’s records follows. Kirk also
contributes enough cash to bring her capital account to $86,000.

Investment by Kirk
Balances on Agreed
Kirk's Records Value
Accounts Receivable $81,680 $79,600
Inventory 11,400 12,800
Office Equipment (net) 14,300 9,000
Accounts Payable 24,800 24,800

Instructions:
a. Draft entries (in general journal form) to record the investments of Avery and Kirk in the new
partnership.

b. Prepare the beginning balance sheet of the partnership (in report form) at the close of business
July 1, reflecting the above transfers to the firm.

c. On the following June 30 after one year of operation, the Income Summary account showed a
credit balance of $74,000, and the Drawing account for each partner showed a debit balance of
$31,000. Prepare journal entries to close the Income Summary account and the Drawing accounts at
June 30.