Ch 4: Apply Your Knowledge

Decision Case 4-1

The way to solve this case is to:

Prepare the income statement to determine net income.

2
Compare net income to drawing. If net income exceeds
drawing, Collins’ capital increased. But if drawing exceed net
income, the company’s owner’s equity decreased.

Collins Consignment Sales Company

Income Statement
Year Ended December 31, 20XX
Revenues:
Service revenue ($80,700 + $1,000 + $800) $82,500
Expenses:
Salary expense ($17,000 + $1,200) $18,200
Depreciation expense 7,000
Advertising expense 2,400
Supplies expense 2,100
Utilities expense 800
Total expenses 30,500
Net income $52,000

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 (continued) Decision Case 4-1

Net income ($52,000) exceeded Drawing ($50,000), so owner’s

equity grew during the year. Collins can expect to get the loan.

Ethical Issue 4-1

Req. 1

The journal entry to record the revenue is:

Dec Accounts receivable.............. 10,000

Service revenue............... 10,000

The debit to Accounts receivable will increase total current

assets and, as a result, increase (improve) the current ratio.

Req. 2
To record this transaction in December violates the revenue
principle. At December 31, the business has not performed the
service for the client and, therefore, has not yet earned the
revenue. Revenue should not be recorded before it is earned.
This action is unethical because it deliberately misrepresents
the facts.

Chapter 4 Completing the Accounting Cycle 393

Fraud Case 4-1

Req. 1
When a customer pays for product received, there will be a
debit to cash and a credit to accounts receivable, which has
zero net effect on current assets, and on the current ratio. In
this case, however, no cash is received. The accounts
receivable is reduced which in turn reduces current assets
and also reduces the current ratio. Note: ratio analysis is
sometimes used to identify accounting irregularities.

Req. 2
A manager may receive a bonus for reaching income targets;
a manager may wish to conceal the fact that the company is
having problems with product quality; a manager who has an
equity interest (capital investment) in this company may wish
to hide bad news to keep stakeholders (creditors) happy.

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Financial Statement Case 4-1
Req. 1 Report format of balance sheet

Req. 2 Largest current asset = Cash and cash equivalents

$3,444 M Corrected to reflect 2009 and 2008 data from
annual report (pts 2, 3, and 5)

Largest current liability = Accounts payable $5,605 M

Req. 3 Current ratio:

December 31, December 31,

2009 2008

Corrected to
show data for
2009 and 2008

Total current
assets 9,797 = 1.33 6,157 = 1.30

Total current
liabilities 7,364 4,746

The current ratio went up (improved slightly) from 2008 to 2009.

Req. 4 Fixed assets

Req. 5
Cost…………………………………………………. $1,905
Accumulated depreciation…………................... (625)
Book value…………………………………………. $1,290

Chapter 4 Completing the Accounting Cycle 395

Team Project 4-1
Req. 1

Wintz Lawn Service

Income Statement
Four Months Ended August 31, 20XX
Service revenue: ($5,500 + $750) $6,250
Expenses:
Wage expense ($1,800 + $300) $2,100
Equipment rent expense ($600 u 4/6) 400
Supplies expense ($400 – $50) 350
Repair expense 300
Depreciation expense ($300 u 1/3) 100
Total expenses 3,250
Net income $3,000

Wintz Lawn Service

Statement of Owner’s Equity
Four Months Ended August 31, 20XX
Wintz, capital, May 1, 20XX $ 0
Owner investment 400
Net income 3,000
3,400
Drawing (500)
Wintz, capital, August 31, 20XX $ 2,900

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 (continued) Team Project
Req. 2

Wintz Lawn Service

Balance Sheet
August 31, 20XX
ASSETS LIABILITIES
Current assets: Current:
Cash $2,000 Wages payable $ 300
Accounts receivable 750 Total current liabilities 300

Prepaid equipment rent 200

Supplies 50
Total current assets 3,000
Long-term: OWNER’S EQUITY
Trailer $ 300
Acc. depr. (100) 200 Wintz, capital 2,900
Total liabilities and
Total assets $3,200 owner’s equity $3,200

Req. 3

Wintz’s summer work was successful. She earned net income of

$3,000.

Chapter 4 Completing the Accounting Cycle 397

 Communication Activity 4-1

Closing zeroes out the score keeping (revenue and expense)

accounts as well as the drawing account and updates owner’s
capital.

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Chapter 4: Appendix A
Reversing Entries: An Optional Step
Appendix Problem
(20 min.) P 4A-1A
Req. 1
Unadjusted balance at the end of October 31, 2012:
Salary payable Salary expense
Oct 31 0 Oct 31 2,500

At the end of month Adjusting and Journal entries:

Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Oct 31 Adjusting Entry
e. Salary expense 200
Salary payable 200

Closing Entry
Oct 31 Income summary 2,700
Salary expense 2,700

Chapter 4 Completing the Accounting Cycle 399

 (continued) P 4A-1A
Req. 2

Adjusting and Closing entries

Salary payable Salary expense

Oct 31 0 Oct 31 2,500 Clo 2,700
Adj 200 Adj (e) 200
Bal 200 Bal 0

Req. 3
The following month, November, 2012:

Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Cash payment entry
Nov 5 Salary payable 200
Salary expense 700
Cash 900

Cash payment for salary expense:

Cash Salary payable
Nov 5 900 Nov 5 200 Nov 1 200
Bal 0

Salary expense
Nov 1 0
Nov 5 700
Bal 700

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 (continued) P 4A-1A
Req. 4

Situation: Using Reversing entry, repeat Req. 1 - 3

Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Oct 31 Adjusting Entry
e. Salary expense 200
Salary payable 200

Closing Entry
Oct 31 Income summary 2,700
Salary expense 2,700

Nov 1 Salary payable 200

Salary expense 200

5 Salary expense 900

Cash 900

Chapter 4 Completing the Accounting Cycle 401

 (continued) P 4A-1A
Req. 4

Salary payable Salary expense

Oct 31 200 Oct 31 2,500 Clo 2,700
Nov 1 Rev. 200 Adj (e) 200
Bal 0 Nov 5 900 Nov 1 Rev. 200
Bal 700

The balance of the Salary payable account after using a

reversing entry is the same as the balance computed without the
reversing entry (as it appears in the answer to requirement 3).
The balance of the Salary expense account after using a
reversing entry is the same as the balance computed without the
reversing entry (as it appears in the answer to requirement 3).

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 (20 min.) P 4A-2B
Req. 1
Unadjusted balance at the end of January 31, 2012:
Salary payable Salary expense
Jan 31 0 Jan 31 2,500

Req. 2
At the end of month Adjusting and Journal entries:
Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Jan 31 Adjusting Entry
e. Salary expense 500
Salary payable 500

Closing Entry
Jan 31 Income summary 3,000
Salary expense 3,000

Adjusting and Closing entries

Salary payable Salary expense

Jan 31 0 Jan 31 2,500 Clo 3,000
Adj(e) 500 Adj (e) 500
Bal 500 Bal 0

Chapter 4 Completing the Accounting Cycle 403

 (continued) P 4A-2B
Req. 3

The following month, February, 2012:

Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Cash payment entry
Feb 5 Salary payable 500
Salary expense 100
Cash 600

Cash payment for salary expense:

Cash Salary payable

Feb 5 600 Feb 5 500 Feb 1 500
Bal 0

Salary expense
Feb 1 0
Feb 5 100
Bal 100

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 (continued) P 4A-2B
Req. 4

Situation: Using Reversing entry, repeat Req. 1 - 3

Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Jan 31 Adjusting Entry
e. Salary expense 500
Salary payable 500

Closing Entry
Jan 31 Income summary 3,000
Salary expense 3,000

Feb 1 Salary payable 500

Salary expense 500

5 Salary expense 600

Cash 600

Chapter 4 Completing the Accounting Cycle 405

 (continued) P 4A-2B
Req. 4

Salary payable Salary expense

Jan 31 500 Jan 31 2,500 Clo 3,000
Feb1 Rev 500 Adj (e) 500
Bal 0 Feb 5 600 Feb1 Rev 500
Bal 100

The balance of the Salary payable account after using a

reversing entry is the same as the balance computed without the
reversing entry (as it appears in the answer to requirement 3).
The balance of the Salary expense account after using a
reversing entry is the same as the balance computed without the
reversing entry (as it appears in the answer to requirement 3).

406 Accounting 9/e Solutions Manual