Fundamentals of Financial Accounting 5th Edition Phillips Solutions Manual 1

Fundamentals of Financial Accounting 5th Edition Phillips
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Chapter 4
Adjustments, Financial Statements, and
Financial Results
ANSWERS TO QUESTIONS
1. Adjusting entries are made at the end of the accounting period to record all
revenues and expenses that have not been recorded but belong in the current
period. These adjustments also ensure that the related accounts on the balance
sheet and income statement are up–to–date and complete.
2. (a) The time period assumption states that the long life of a company can be
divided into shorter time periods. Adjustments are required by GAAP to
ensure that a company’s financial statements include all the transactions of
the given time period.
(b) The revenue recognition principle states that revenues should be recorded
when earned. Adjustments assist in recording revenues during the period in
which they are earned, rather than when cash is received.
(c) The expense recognition or “matching” principle states that expenses are
recorded when incurred to generate revenues. Adjustments ensure that the
expenses incurred during a particular period are, in fact, recorded during that
period.
3. The two different types of adjusting journal entries are:
(1) Deferral adjustments:
Fundamentals of Financial Accounting, 5/e 4–1

© 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
(a) Revenues – previously recorded liabilities that need to be adjusted at the
end of the period to reflect earned revenues (e.g., unearned revenue must be
adjusted for the portion of sales revenues earned in the current period).
(b) Expenses– previously recorded assets that need to be adjusted at the end
of the period to reflect incurred expenses (e.g., prepaid insurance must be
adjusted for the portion of insurance expense incurred in the current period).
(2) Accrual adjustments:
(a) Revenues - revenues that have been earned by the end of the accounting
period, but will be collected in a future accounting period (e.g., recording
interest receivable for interest earned but not yet collected).
(b) Expenses – expenses that have been incurred by the end of the accounting
period, but will be paid in a future accounting period (e.g., recording an account
payable for utilities used during the period but which have not yet been paid).
4. Adjusting entries have no effect on cash. For unearned revenues and

prepayments, cash was received or paid at some point in the past. For accruals,
cash will be received or paid in a future accounting period. At the time of the
adjusting entry, no cash is received or paid.
5. A contra–asset is an account related to an asset that is an offset or reduction to the

asset's balance. Accumulated Depreciation is a contra–account to the equipment
and buildings accounts.
6. Depreciation expense is reported on the income statement. It indicates the amount

of depreciation for the current period. Accumulated depreciation is reported on the
balance sheet (as a contra–asset). It indicates the total depreciation, which has
accumulated from the date the asset was acquired to the date of the balance sheet.
7. An adjusted trial balance is a list of the individual accounts, usually in financial

statement order, with their adjusted debit or credit balances. It is used to provide a
check on the equality of the debits and credits.
8.
Assets = Liabilities + Stockholders’ Equity
Dec Cash 9,000
=
31 Prepaid Rent +9,000
Jan Prepaid Rent 3,000 Rent 3,000
=
31 Expense (+E)
Feb Prepaid Rent 3,000 Rent 3,000
=
28 Expense (+E)
Mar Prepaid Rent 3,000 Rent 3,000
=
31 Expense (+E)
9. Balance sheet accounts at January 31:

Prepaid rent $6,000

Education.
Income statement accounts for period ended January 31:
Rent expense $3,000

Education.
10.
12/31 Prepaid Rent (+A) .................................................. 9,000
Cash (A)....................................................... 9,000
1/31 Rent Expense (+E, SE)........................................ 3,000

Prepaid Rent (A) ........................................... 3,000
2/28 Rent Expense (+E, SE)........................................ 3,000

Prepaid Rent (A) ........................................... 3,000
3/31 Rent Expense (+E, SE)........................................ 3,000

Prepaid Rent (A) ........................................... 3,000
11. (a) Income statement: Revenues  Expenses = Net Income

(b) Balance sheet: Assets = Liabilities + Stockholders' Equity
(c) Statement of retained earnings: Beginning Retained Earnings + Net Income
 Dividends = Ending Retained Earnings
12. The net income from the income statement is included on the statement of retained
earnings to determine the ending retained earnings balance, which is then reported
on the balance sheet as a stockholders’ equity account.
13. Closing journal entries are made at the end of the accounting period to transfer the
balances in the temporary accounts to retained earnings. The closing journal
entries reduce the revenue, expense, and dividends accounts to a zero balance so
that they can be used for the accumulation process during the next period. Closing
entries must be entered into the system through the journal and posted to the
ledger accounts to state properly the temporary and permanent account balances
(i.e., zero balances in the temporary accounts).
14. Permanent accounts are balance sheet accounts (for assets, liabilities, and
stockholders’ equity accounts). These accounts are not closed at the end of
each period.
Temporary accounts include all income statement accounts (for revenues and
expenses) and the Dividends account. These accounts are used to track results
of only the current period, so they are closed (into Retained Earnings) at the
end of each year.

Education.
15. The income statement accounts are closed at the end of the accounting period
because, in effect, they are temporary sub–accounts to retained earnings (i.e., a
part of stockholders' equity). They are used only for accumulation during the
accounting period. When the period ends, these accumulated accounts must be
transferred (closed) to retained earnings. The closing process serves:
(1) to correctly state retained earnings, and

(2) to clear out the balances of the temporary accounts for the year just ended, so
that these sub–accounts can be used again during the next period for
accumulation and classification purposes.
Balance sheet accounts are not closed at the end of the period because they reflect
permanent accumulated balances of assets, liabilities, and stockholders' equity.
Permanent accounts show the business’s financial position at the end of the period
and are the beginning amounts for the next period.
16. A post–closing trial balance is a list of all the accounts and their balances taken
from the ledger, after the adjusting and closing journal entries have been
journalized and posted. It is not a necessary part of the accounting information
processing cycle but it is useful because it demonstrates the equality of the debits
and credits in the ledger, after the closing entries have been journalized and
posted. It also shows that all temporary accounts (revenues, expenses, dividends)
contain zero balances (after the closing entries have been posted).
17. The owner is correct; the adjustment process does consume a lot of time and it
delays month–end reporting of financial results. However, prior to adjustments, the
financial results are not complete or up–to–date. Important information relating to
assets, liabilities, revenues, and expenses has not yet been incorporated into the
accounting records. Without this information, the owner may make decisions that
are inappropriate for the business. Only after adjustments have been completed,
will the owner have accurate information on which to base her decisions.

Education.
Authors' Recommended Solution Time
(Time in minutes)
Skills Continuing
Mini–exercises Exercises Problems Development Case
Cases*
No. Time No. Time No. Time No. Time No. Time
1 5 1 10 CP4–1 20 1 20 1 45
2 5 2 10 CP4–2 20 2 20
3 5 3 15 CP4–3 15 3 30
4 5 4 10 CP4–4 45 4 25
5 5 5 20 PA4–1 20 5 25
6 5 6 20 PA4–2 20 6 40
7 5 7 20 PA4–3 15 7 45
8 5 8 15 PA4–4 45
9 5 9 15 PB4–1 20
10 5 10 20 PB4–2 20
11 10 11 5 PB4–3 15
12 5 12 15 PB4–4 45
13 5 13 10 C4–1 45
14 5 14 20 C4–2 60
15 5 15 20 C4–3 60
16 10 16 10 C4–4 60
17 5 17 15 C4–5 45
18 5 18 10 C4–6 45
19 5 19 20
20 5
21 5
22 10
23 10
24 10
25 10
26 10
* Due to the nature of cases, it is very difficult to estimate the amount of time students
will need to complete them. As with any open–ended project, it is possible for students
to devote a large amount of time to these assignments. While students often benefit
from the extra effort, we find that some become frustrated by the perceived difficulty of
the task. You can reduce student frustration and anxiety by making your expectations
clear, and by offering suggestions (about how to research topics or what companies to
select). The skills developed by these cases are indicated on the following page.

Education.
Financial Ethical Critical
Case Research Technology Writing Teamwork
Analysis Reasoning Thinking
1 x
2 x
3 x X x x x
4 x x x
5 x x x x
6 x x x
7 x x

Education.
ANSWERS TO MINI–EXERCISES
M4–1
1. A, D
2. A, E
3. B, C
4. B, F
M4–2
1. A, E
2. A, D
3. B, F
4. B, C
M4–3 (1) B (2) A (3) A (4) A (5) B
M4–4
(1) Supplies Expense (+E –SE) 400

Supplies (–A) 400
(2) Interest Receivable (+A) 250

Interest Revenue (+R +SE) 250
(3) Salaries and Wages Expense (+E, –SE) 3,600

Salaries and Wages Payable (+L) 3,600
(4) Accounts Receivable (+A) 1,000

Service Revenue (+R, +SE) 1,000
(5) Unearned Revenue (–L) 600

Service Revenue (+R, +SE) 600

Education.
M4–5
Assets =
Liabilities + Stockholders’ Equity
a Unearned 800 Rent +800
=
Revenue Revenue (+R)
b Prepaid Insurance 50 = Insurance 50
Expense (+E)
c Accum. Depn–Equip. 400 = Depreciation 400
(+xA) Expense (+E)
a $2,400 ÷ 3 months = $800 per month

b $1,200 ÷ 24 months = $50 for one month
M4–6
a. Unearned Revenue (L).......................................................... 800

Rent Revenue (+R, +SE) ................................................. 800
($800 = 1/3 x $2,400)
b. Insurance Expense (+E, SE) ................................................. 50

Prepaid Insurance (A) .................................................... 50
($50 = 1/24 x $1,200)
c. Depreciation Expense (+E, SE) ............................................ 400

Accumulated Depreciation–Equipment (+xA, A) ........ 400
($400 = 1/12 x $4,800)
M4–7
Assets =
A Accounts +600 Utilities 600
=
Payable Expense (+E)
B Salaries +3,000 Salaries and 3,000
and Wages
=
Wages Expense (+E)
Payable
C Interest +100 Interest +100
=
Receivable Revenue (+R)
b $3,000 = 10 employees x 3 days x $100 per day

c $1,200 ÷ 12 months = $100 for one month
M4–8
Education.
(a) Utilities Expense (+E, SE) ............................... 600
Accounts Payable (+L) ............................ 600
To record utilities expense incurred but not yet paid.
(b) Salaries and Wages Expense (+E, SE) ........... 3,000

Salaries and Wages Payable (+L) ........... 3,000
To record Salaries and Wages Expense incurred but not yet paid,
calculated as 10 employees x 3 days x $100 per day.
(c) Interest Receivable (+A) .................................... 100

Interest Revenue (+R, +SE) .................... 100
To record interest earned but not yet collected,
calculated as $1,200 x 1/12.
M4–9
a)
Sept. 30 Prepaid Rent (+A) 4,000
Cash (–A) 4,000
Oct. 31 AJE Rent Expense (+E –SE) 2,000

Prepaid Rent (–A) 2,000
b)
Sept. 30 Cash (+A) 16,000
Unearned Revenue (+L) 16,000
Oct. 31 AJE Unearned Revenue (–L) 8,000

Service Revenue (+R +SE) 8,000
c)
Sept. 30 Prepaid Insurance (+A) 3,000
Cash (–A) 3,000
Oct. 31 AJE Insurance Expense (+E –SE) 1,000

Prepaid Insurance (–A) 1,000
M4–10
Education.
a)
Dec. 31 Cash (+A) 12,000
Jan. 31 AJE Unearned Revenue (–L) 1,000

b)
Dec. 31 Supplies (+A) 1,200
Cash (–A) 1,200
Jan. 31 AJE Supplies Expense (+E –SE) 200

Supplies (–A) 200
c)
Dec. 31 Cash (+A) 3,000
Jan. 31 AJE Unearned Revenue (–L) 1,000

M4–11
(a) Prepaid Insurance (+A)...................................... 2,275

Insurance Expense (E, +SE) ................. 2,275
(b) Service Revenue (R, SE)............................... 1,000

Unearned Revenue (+L) .......................... 1,000
(c) Income Tax Expense (+E, SE) ........................ 2,000

Income Tax Payable (+L) ........................ 2,000
Calculations for (a) and (b):

Prepaid Insurance Service Unearned
Insurance (A) Expense (E) Revenue (R) Revenue (L)
0 2,340 1,500 0
(a) (a) (b) (b)
2,275 65 500 1,000
($2,275 = $2,340 x 35/36 months remaining; $65 used up)

($500 = $1,500 x 1/3 earned; 2/3 unearned)
Calculation for (c): $10,000 x 20% = 10,000 x 0.20 = $2,000

Education.
M4–12
Account Financial Classification? Normal dr or cr

Statement? Balance?
Interest Expense IS E Dr
Prepaid Rent BS CA Dr
Amortization Expense IS E Dr
Unearned Revenue BS CL Cr
Retained Earnings BS SE Cr
Accumulated Depreciation BS NCA Cr
M4–13
MACRO COMPANY
Adjusted Trial Balance
At June 30
Account Titles Debit Credit
Cash $ 1,020
Accounts Receivable 550
Supplies 710
Prepaid Rent 40
Equipment 1,400
Accumulated Depreciation–Equipment $ 250
Software 200
Accumulated Amortization 150
Accounts Payable 300
Income Tax Payable 30
Unearned Revenue 100
Notes Payable (long–term) 1,300
Common Stock 300
Retained Earnings 120
Sales Revenue 3,600
Interest Revenue 50
Office Expense 820
Salaries and Wages Expense 660
Rent Expense 400
Depreciation Expense 110
Interest Expense 180
Income Tax Expense 110
Totals $ 6,200 $ 6,200

Education.
M4–14
SKY BLUE CORPORATION
Income Statement
For the Year Ended December 31
Revenues:
Sales Revenue $ 42,030
Rent Revenue 300
Total Revenues 42,330
Expenses:
Salaries and Wages Expense 21,600
Rent Expense 6,000
Utilities Expense 4,220
Insurance Expense 1,400
Depreciation Expense 1,300
Income Tax Expense 2,900
Total Expenses 37,420
Net Income $ 4,910
The Sky Blue Corporation generated $4,910 of net income during the year.
M4–15
Statement of Retained Earnings
Balance, January 1 $ 1,000

Add: Net Income 4,910
Subtract: Dividends (300)
Balance, December 31 $ 5,610

Education.
M4–16
Balance Sheet
At December 31
Assets
Current Assets:
Cash $ 1,230
Accounts Receivable 2,000
Prepaid Insurance 2,300
Total Current Assets 5,530
Notes Receivable (long–term) 3,000
Equipment $12,000
Accumulated Depreciation (2,600) 9,400
Total Assets $ 17,930
Liabilities
Current Liabilities:
Accounts Payable $ 5,420
Salaries and Wages Payable 1,000
Income Taxes Payable 2,900
Total Current Liabilities 9,920
Stockholders’ Equity
Common Stock 2,400
Retained Earnings 5,610
Total Stockholders’ Equity 8,010
Total Liabilities and Stockholders’ Equity $ 17,930
Sky Blue’s total assets are financed more by debt ($9,920) than by equity ($8,010).
M4–17
Sales Revenue (R) ............................................... 42,030

Rent Revenue (R) ................................................ 300
Salaries and Wages Expense (E) .............. 21,600
Depreciation Expense (E) .......................... 1,300
Utilities Expense (E) .................................. 4,220
Insurance Expense (E) .............................. 1,400
Rent Expense (E) ...................................... 6,000
Income Tax Expense (E) ........................... 2,900
Retained Earnings (+SE) ............................. 4,910
Retained Earnings (SE)…………………………. 300

300
Dividends (D)…………………..

Education.
M4–18
Supplies Expense (+E, SE) ....................................... 1,300

Supplies (A) ..................................................... 1,300
($1,300 = $9,000 beginning – $7,700 still on hand = $1,300 used)
Supplies (A) Supplies Expense (E)

Bal. 9,000 Bal. 0
AJE 1,300 AJE 1,300
End. 7,700 End. 1,300
M4–19
Depreciation Expense (+E, SE) ......................................... 6,000

Accumulated Depreciation–Equipment (+xA, A) ...... 6,000
Accumulated Depreciation– Depreciation Expense (E)

Equipment (xA)
Bal. 0 Bal. 0
AJE 6,000 AJE 6,000
End. 6,000 End. 6,000
M4–20
Insurance Expense (+E, SE) ..................................... 1,800

Prepaid Insurance (A) ..................................... 1,800
($1,800 = $7,200 total x 6/24 used)
Prepaid Insurance (A) Insurance Expense (E)

Bal. 7,200 Bal. 0
AJE 1,800 AJE 1,800
End. 5,400 End. 1,800
M4–21
Unearned Revenue (L) .............................................. 2,500

Service Revenue (+R, +SE) .............................. 2,500
Unearned Revenue (L) Service Revenue (R)

5,000 Bal. 33,800 Bal.
AJE 2,500 2,500 AJE
2,500 End. 36,300 End.

Education.
M4–22
Salaries and Wages Expense (+E, SE)..................... 1,200

Salaries and Wages Payable (+L) ..................... 1,200
Salaries and Wages Salaries and Wages

Payable (L) Expense (E)
0 Bal. Bal. 20,000
1,200 AJE AJE 1,200
1,200 End. End. 21,200
M4–23
Interest Expense (+E, SE) ......................................... 500

Interest Payable (+L) ......................................... 500
Interest Payable (L) Interest Expense (E)

0 Bal. Bal. 0
500 AJE AJE 500
500 End. End. 500
M4–24
Amortization Expense (+E, –SE) ......................................... 5,000

Accumulated Amortization (+xA, A) ......................... 5,000
Accum. Amortization (xA) Amortization Expense (E)

0 Bal. Bal. 0
5,000 AJE AJE
5,000
5,000 End. End. 5,000

Education.
M4–25
PI DETECTIVES
As of December 31
Cash $ ?
Supplies 9,000
Equipment 28,000
Accumulated Depreciation–Equipment $ 4,000
Unearned Revenue 5,000
Notes Payable 3,000
Common Stock 22,000
Dividends 3,000
Service Revenue 33,800
Totals $ ? $ 73,700
Total debits must equal total credits, so total debits must sum to $73,700. Thus, the
missing balance for Cash is $5,000.

Education.
M4–26
a 1/2/15 Prepaid Insurance (+A) ......................................... 30,000

JE Cash (A) ........................................................ 30,000
b 12/31/15 Insurance Expense (+E, SE) ............................... 10,000

AJE Prepaid Insurance (A)................................... 10,000
c 12/31/15 Retained Earnings (SE) ....................................... 10,000

CJE Insurance Expense (E) ................................. 10,000
d 12/31/16 Insurance Expense (+E, SE) .............................. 10,000

AJE Prepaid Insurance (A).................................. 10,000
e 12/31/16 Retained Earnings (SE) ..................................... 10,000

CJE Insurance Expense (E) ................................ 10,000
Cash (A) Prepaid Insurance (A)

1/2/15 90,000 1/2/15 0
30,000 a a 30,000 10,000 b
12/31/15 60,000 12/31/15 20,000
10,000 d
12/31/16 60,000 12/31/16 10,000
Retained Earnings (SE) Insurance Expense (E)

80,000 1/2/15 1/2/15 0
c 10,000 b 10,000 10,000 c
70,000 12/31/15 0
e 10,000 d 10,000 10,000 e
End. 0
60,000 12/31/16
Balance sheet: 12/31/2015 12/31/2016

Assets
Cash $60,000 $60,000
Prepaid Insurance 20,000 10,000
Retained Earnings 70,000 60,000
Income statement:
Insurance Expense $10,000 $10,000
ANSWERS TO EXERCISES
Education.
E4–1
Req. 1
Depreciation Exp. Acc. Depn.–Equip. Inc. Tax Expense Inc. Tax Payable
0 18,100 0 2,030
3,000 3,000 26,200 26,200
3,000 21,100 26,200 28,230
GIBSON COMPANY
At December 31, 2015
Cash $ 178,000
Supplies 12,200
Prepaid Rent 10,200
Equipment 323,040
Land 60,000
Accounts Payable 86,830
Income Taxes Payable 28,230
Common Stock 233,370
Retained Earnings * 171,160
Service Revenue 2,564,200
Salaries and Wages Expense 1,590,000
Office Expense 632,250
Rent Expense 152,080
Supplies Expense 42,590
Interest Expense 17,200
Totals $ 3,297,390 $ 3,297,390
Because debits must equal credits in a trial balance, the balance in Retained
Earnings is determined in this exercise as the amount in the credit column
necessary to make debits equal credits (a “plugged” figure).
E4–1 (continued)

Education.
Req. 2
Because the temporary accounts for 2015 have not yet been closed to Retained
Earnings, the Retained Earnings balance determined in requirement 1 must represent
the balance as of December 31, 2014.
E4–2
Req. 1
(a) Rent Expense (b) Accumulated Depreciation—Equipment
Req. 2
(a) Interest Receivable (b) Salaries and Wages Payable
Req. 3
FEDEX CORP.
Income Statement
For the Year Ended May 31, 2013
Service Revenue $ 44,200

Interest Revenue 20
Total Revenues 44,220
Transportation Expense 11,900
Office Expenses 7,540
Rent Expense 2,500
Repairs and Maintenance Expense 1,900
Net Income $ 380

Education.
E4-2 (continued)
Req. 3 (continued)
FEDEX CORP.
For the Year Ended May 31, 2013
Beginning Balance, 6/1/2012 $ 17,100

Add: Net Income 380
Ending Balance, 5/31/2013 $ 17,310
FEDEX CORP.
Balance Sheet
At May 31, 2013
Assets Liabilities
Current Assets Current Liabilities
Cash $ 4,900 Accounts Payable $ 2,900
Accounts Receivable 5,000 Salaries and Wages Payable 1,700
Interest Receivable 10 Notes Payable (short-term) 300
Prepaid Rent 850 Income Tax Payable 900
Supplies 450 Total Current Liabilities 5,800
Notes Payable (long-term) 7,700
Equipment $38,100 Total Liabilities 13,500
Accum. Depn. (19,600)
Equipment, Net 18,500 Stockholders' Equity
Common Stock 2,700
Goodwill 3,800 Retained Earnings 17,310
Total Liabilities and
Total Assets $ 33,510 Stockholders' Equity $ 33,510

Education.
E4–3
Ref / Date Journal Entries and Adjusting Journal Entries

(a) Sept 1 Prepaid Rent (+A)……………………………………12,000
Cash (A)……………………………………. 12,000
Sept 30 Rent Expense (+E, SE) ($12,000 x 1/6)………. 2,000
Prepaid Rent (A)………………………….... 2,000
(b) Sept 1 Cash (+A)……………………………………………60,000
Unearned Revenue (+L)……………………. 60,000
Sept 30 Unearned Revenue (L)……………………………. 5,000
Sales Revenue (+R, +SE) ($60,000 x 1/12) 5,000
(c) Sept 1 No journal entry. A transaction has not yet occurred.
Sept 30 Accounts Receivable (+A)………………………… 2,000

Rent Revenue (+R, +SE)…………………… 2,000
(d) Sept 1 No journal entry. A transaction has not yet occurred.
Sept 30 Salaries and Wages Expense (+E, SE)..……… 3,000

Salaries and Wages Payable (+L)………… 3,000

Education.
E4–4
Req. 1
The annual reporting period for this company is November 1 through October 31.
Req. 2
Both transactions are accruals because revenue has been earned and expenses
incurred but no cash has yet been received or paid.
Req. 3
Assets =
a. Salaries +6,000 Salaries and –6,000
and Wages
=
Wages Expense (+E)
Payable
b. Interest +3,000 Interest +3,000
Receivable = Revenue
(+R)
Req. 4
Adjustments are needed to ensure the financial statements are up–to–date and
complete. Adjusting entries are necessary at the end of the accounting period to
ensure that all revenues earned and expenses incurred and the related assets and
liabilities are measured properly. The entries above are accruals; entry (a) is an
accrued expense (incurred but not yet recorded) and entry (b) is an accrued revenue
(earned but not yet recorded). In applying the accrual basis of accounting, revenues
should be recognized when earned and expenses should be recognized when incurred
in generating revenues.

Education.
E4–5
(a) October 31:
Salaries and Wage Expense (+E, SE).................... 6,000

Salaries and Wages Payable (+L) .................. 6,000
To record salaries and wages incurred during the year, but not yet paid.
(b) October 31:
Interest Receivable (+A) ........................................... 3,000

Interest Revenue (+R, +SE)............................ 3,000
To record interest revenue earned during the year, but not yet collected.

Education.
E4–6
Req. 1
2015 Income statement:

Insurance Expense ($7,200 x 12/24) = $3,600 used.
2015 Balance sheet:

Prepaid Insurance ($7,200 x 12/24) = $3,600
Req. 2
2015 Income statement:

Supplies Expense: $72,000 + ($15,000  $10,000) = $77,000 used.
2015 Balance sheet:

Supplies (given) = $10,000
Req. 3

a. Prepaid 3,600 Insurance 3,600
=
Insurance Expense (+E)
b. Supplies 5,000 = Supplies 5,000
Expense (+E)
E4–7
(a)
Insurance Expense (+E, SE) .................................. 3,600
Prepaid Insurance (A) ................................... 3,600
To record the expiration of insurance for twelve months ($300 per month).
(b)
Supplies Expense (+E, SE) .................................... 5,000
Supplies (A) .................................................. 5,000
To record the use of supplies for the year.

Education.
E4–8
a. Supplies Expense (+E, SE) ..................................... 750

Supplies (A) .................................................... 750
Supplies used ($850  100 = $750).
b. Salaries and Wages Expense (+E, SE) ................... 3,700

Salaries and Wages Payable (+L) ..................... 3,700
c. Unearned Revenue (L) ............................................ 2,200

Rent Revenue (+R, +SE)................................... 2,200
Rent earned ($2,200 = $6,600 x 2/6)
d. Depreciation Expense (+E, SE) ............................... 2,000

Accumulated Depreciation–Equipment (+xA, A) 2,000
e. Insurance Expense (+E, SE) ................................... 750

Prepaid Insurance (A)..................................... 750
($3,000 x 6/24 months)
f. Accounts Receivable (+A) ......................................... 750

Service Revenue (+R, +SE) ............................. 750
E4–9
Trans. Assets Liabilities Stockholders’ Equity

(a) Supplies –750 NE Supplies Expense (+E) –750
(b) NE Salaries and Salaries and Wages Expense (+E)
Wages Payable –3,700
+3,700
(c) NE Unearned Revenue Rent Revenue (+R) +2,200
–2,200
(d) Accum. Depn–Equip. NE Depreciation Expense (+E) –2,000
(+xA) –2,000
(e) Prepaid Ins. –750 NE Insurance Expense (+E) –750
(f) Accts. Rec. +750 NE Service Revenue (+R) +750

Education.
E4–10
Req. 1
Income Tax Payable

 Increase – With a credit for accrual of additional income taxes payable.
 Decrease – With a debit for cash paid on accrued income taxes payable.
Interest Payable
 Increase – With a credit for accrual of additional interest payable.
 Decrease – With a debit for cash paid on accrued interest payable.
Salaries and Wages Payable

 Increase – With a credit for accrual of salaries and wages expense for the
period that is not yet paid.
 Decrease – With a debit for cash paid on accrued salaries and wages
payable.
Req. 2 Computations:
(a)
Beg. Bal. + accrued income taxes  cash paid = End. bal.
$100 + ?  $600 = $80
? = $580 accrued
(b)
Beg. Bal. + accrued wages  cash paid = End. bal.
$1,000 + 20,000  ? = $1,200
? = $19,800 paid
(c)
Beg. Bal. + accrued interest expense  cash paid = End. bal.
$140 + ?  $1,000 = $150
? = $1,010 accrued
E4–11
Balance Sheet Income Statement

Assets Revenues
Equipment 250,000
Accum. Depn–Equip. (150,000)
Liabilities Expenses

Education.
E4–12
Debit Credit
Code Amount Code Amount
a. K $ 400 L $ 400
b. C 600 P 600
c. F 220 G 220
d. D 1,000 B 1,000
e. A 1,000 M 1,000
f. O 250 N 250
g. M 75,000 J 75,000
E4–13
Net Total Total Stockholders’
Items Income Assets Liabilities Equity
Amounts reported $30,000 $90,000 $40,000 $50,000
Effects of:
a. Amortization (8,000) (8,000) (8,000)
b. Salaries and (17,000) 17,000 (17,000)
Wages
c. Rent Revenue 1,600 (1,600) 1,600
Adjusted balances 6,600 82,000 55,400 26,600
d. Effect of
Income Taxes (1,980) 1,980 (1,980)
Correct amounts $ 4,620 $82,000 $57,380 $24,620
Computations:
a. Given, $8,000 Amortization Expense.
b. Given, $17,000 accrued and unpaid.
c. $4,800 x 1/3 = $1,600 Rent Revenue earned. The remaining $3,200 in Unearned
Revenue is a liability for two months of occupancy "owed'' to the renter.
d. $6,600 income before taxes x 30% = $1,980.

Education.
E4–14
Req. 1
a. Salaries and Wages Expense (+E, SE) ............ 310

Salaries and Wages Payable (+L)................. 310
b. Utilities Expense (+E, SE) ................................. 400

Accounts Payable (+L) .................................. 400
c. Depreciation Expense (+E, SE)......................... 23,000

Accum. Depn–Equip. (+xA, A)..................... 23,000
d. Interest Expense (+E, SE) ................................. 500

Interest Payable (+L) ..................................... 500
e. Rent Revenue (–R, SE)..................................... 4,000

Unearned Revenue (+L) ................................ 4,000
f. Supplies Expense (+E, SE) ............................... 600

Supplies (A) ................................................ 600
g. Income Tax Expense (+E, SE) .......................... 7,000

Income Taxes Payable (+L) .......................... 7,000
Req. 2
DYER, INC.
Income Statement
For the Year Ended December 31, 2015
Rent Revenue ($114,000  $4,000) $ 110,000

Expenses:
Salaries and Wages ($28,500 + $310) $ 28,810
Repairs and Maintenance Expense 13,000
Rent Expense 9,000
Utilities Expense ($4,000 + $400) 4,400
Travel Expense 3,000
Supplies Expense 600
Net Income $ 20,690
E4–14 (continued)
Education.
Req. 3
Net income was $56,500 before adjustments and $20,690 after adjustments. This
decrease of $35,810 is significant; adjusted net income is only 36.6% of the unadjusted
net income ($20,690/$56,500).
E4–15
Req. 1

a. Prepaid Rent 1,200 Rent Expense 1,200
=
(+E)
b. Accumulated 1,000 Depreciation 1,000
Depreciation Expense (+E)
=
–Equipment
(+xA)
c. Accounts +9,000 Utilities Expense 9,000
=
Payable (+E)
d. Income Tax +390 Income Tax 390
=
Req. 2
(a) Rent Expense (+E, SE) ......................................... 1,200

Prepaid Rent (A) ........................................... 1,200
(b) Depreciation Expense (+E, SE) .............................. 1,000

(c) Utilities Expense (+E, SE) ...................................... 9,000

Accounts Payable (+L).................................... 9,000
(d) Income Tax Expense (+E, SE) ............................... 390

Income Tax Payable (+L)................................ 390

Education.
E4–15 (continued)
Req. 3
Prepaid Rent (A) Rent Expense (E)
Bal. 2,400 Bal. 0
1,200 a a 1,200
1,200 1,200
Accumulated Dep.–Equipment Depreciation Expense (E)

(xA)
1,000 Bal. Bal. 0
1,000 b b 1,000
2,000 1,000
Accounts Payable (L) Utilities Expense (E)

1,000 Bal. Bal. 12,500
9,000 c c 9,000
10,000 21,500
Income Tax Payable (L) Income Tax Expense (E)

0 Bal. Bal. 0
390 d d 390
390 390
NORTH STAR
As of December 31

Cash 12,000
Prepaid Rent 1,200
Equipment 21,000
Accumulated Depreciation–Equipment 2,000
Income Taxes Payable 390
Common Stock 24,800
Sales Revenue 50,000
Rent Expense 1,200
Totals $ 89,290 $ 89,290

Education.
E4–15 (continued)
Req. 4
(a) Preliminary net income = $50,000 – 25,000 – 12,500 = $12,500

(b) Adjusted net income = $50,000 – 25,000 – 21,500 – 1,200 – 1,000 – 390 = $910
Without adjustments, preliminary net income would have been overstated by $11,590.
E4–16
Req. 1
(a) Insurance Expense (+E, SE) .................................. 5

Prepaid Insurance (A) ................................... 5
(b) Depreciation Expense (+E, SE) ............................... 4

Accumulated Depreciation–Equipment (+xA, A) 4
(c) Salaries and Wages Expense (+E, SE) ................... 7

Salaries and Wages Payable (+L) .................. 7
(d) Income Tax Expense (+E, SE) ................................ 9

Income Taxes Payable (+L) ............................ 9
Req. 2 Accounts Prepaid

Cash (A) Receivable(A) Insurance (A)
Bal. 38 Bal. 9 Bal. 6 a 5
Bal. 38 Bal. 9 Bal. 1
Accumulated Accounts
Equipment (A) Depreciation– Payable (L)
Equipment (xA)
Bal 80 Bal. 0 Bal. 9
b 4
Salaries and Wages Income Tax Common Stock

Payable (L) Payable (L) (SE)
c 7 d 9
Retained Sales Supplies

Earnings (SE) Revenue (R) Expenses (E)

Education.
E4–16 (continued)
Req. 2 (continued)
Salaries and Wages Depreciation Insurance

Expense (E) Expense (E) Expense (E)
c 7 b 4 a 5
Income Tax
Expense (E)
Bal. 0
d 9
Bal. 9
MINT CLEANING INC.

December 31
(in thousands of dollars)

Cash $ 38
Prepaid Insurance 1
Equipment 80
Accounts Payable 9
Salaries and Wages Payable 7
Common Stock 76
Retained Earnings 4
Sales Revenue 80
Supplies Expenses 26
Insurance Expense 5
Totals $ 189 $189
Req. 3
Without adjusting journal entries, net income would have been overstated by $25
(because expenses for $5 + 4 + 7 + 9 = 25 would not have been recorded).

Education.
E4–17
MINT CLEANING INC.
Income Statement
Sales Revenue $ 80
Supplies Expenses 26
Insurance Expense 5
Total Expenses 61
Net Income $ 19
MINT CLEANING INC.

Beginning Balance, 1/1/2015 $ 4

Add: Net Income 19
Subtract: Dividends 0
Ending Balance, 12/31/2015 $ 23
MINT CLEANING INC.

Balance Sheet
At December 31
Assets Liabilities
Cash $ 38 Accounts Payable $ 9
Accounts Receivable 9 Salaries and Wages Payable 7
Prepaid Insurance 1 Income Tax Payable 9
Total Current Assets 48 Total Current Liabilities 25
Equipment $80 Stockholders' Equity

Accum. Depn–Equip. (4) Common Stock 76
Equipment, Net 76 Retained Earnings 23
Total Assets $ 124 Stockholders' Equity $ 124

Education.
E4–18
Sales Revenue (R) ................................................... 80

Supplies Expenses (E) .................................. 26
Salaries and Wages Expense (E) .................. 17
Depreciation Expense (E) .............................. 4
Insurance Expense (E) .................................. 5
Income Tax Expense (E) ............................... 9
Retained Earnings (+SE) ................................. 19
E4–19
Event a
(1) On January 22, 2015, MSM received $24,000 cash from customers for
one–year subscriptions to the magazine for February 2015 – January 2016.
(2) Assets = Liabilities + Stockholders’ Equity

Cash +24,000 Unearned
Revenue +24,000
(3) Account Names Debit Credit

Cash (+A) 24,000
Unearned Revenue (+R, +SE) 24,000
(4) Cash Unearned Revenue
24,000 24,000

Education.
E4–19 (continued)
Event b
(1) MSM received utilities services on account at a cost of $3,000.

Accounts Utilities
Payable +3,000 Expense (+E) –3,000

Utilities Expense (+E, –SE) 3,000
Accounts Payable (+L) 3,000
(4) Accounts Payable Utilities Expense
3,000 3,000
Event c
MSM provided $2,000 of subscriptions for which it had previously

(1) received payment.

Unearned Revenue Subscription Revenue
–2,000 (+R) +2,000

Unearned Revenue (–L) 2,000
Subscription Revenue (+R, +SE) 2,000
(4) Unearned Revenue Subscription Revenue

2,000 2,000
E4–19 (continued)
Education.
Event d
(1) On March 31, 2015, MSM recorded an adjusting entry for the month’s
depreciation of $10,000.

Accumulated Depreciation
Depreciation–Equipment Expense (+E) –10,000
(+xA) –10,000

Depreciation Expense (+E, –SE) 10,000
Accumulated Depreciation– 10,000
Equipment (+xA, –A)
(4) Accumulated Depreciation– Depreciation Expense

Equipment
10,000 10,000
Event e
(1) On April 1, MSM paid $5,000 rent in advance of obtaining its benefits.

Cash –5,000
Prepaid Rent +5,000

Prepaid Rent (+A) 5,000
Cash (–A) 5,000
(4) Cash Prepaid Rent
5,000 5,000

Education.
E4–19 (continued)
Event f
(1) On April 30, 2015, MSM billed customers for $10,000 of advertising
services provided on account.

Accounts Service
Receivable +10,000 Revenue (+R) +10,000

Accounts Receivable (+A) 10,000
(4) Accounts Receivable Service Revenue
10,000 10,000

Education.
ANSWERS TO COACHED PROBLEMS
CP4–1
Req. 1
ROLLCOM, INC.
At September 30, 2015

Cash $ 80,300
Supplies 35,200
Equipment 90,700
Common Stock 94,800
Sales Revenue 325,600
Rent Expense 164,200
Salaries and Wages Expenses 128,700
Office Expense 6,300
Totals $ 582,400 $ 582,400
No. The amount to be reported for Retained Earnings on the balance sheet would be
the amount calculated for ending Retained Earnings on the statement of retained
earnings. The $99,900 in the adjusted trial balance does not yet include the revenues
and expenses for the year ended September 30, 2015.
Req. 2
Sales Revenue (R)..................................................... 325,600

Rent Expense (E)............................................... 164,200
Salaries and Wages Expenses (E) 128,700
Office Expense (E) ............................................. 6,300
Income Tax Expense (E) ................................... 10,500
Retained Earnings (+SE) ..................................... 15,900

Education.
CP4–1 (continued)
Req. 3
ROLLCOM, INC.
Post–closing Trial Balance

Cash $ 80,300
Supplies 35,200
Equipment 90,700
Common Stock 94,800
Retained Earnings* 115,800
Sales Revenue 0
Rent Expense 0
Salaries and Wages Expenses 0
Office Expense 0
Totals $ 272,700 $ 272,700
* Post–closing Retained Earnings = Unadjusted Balance + Effects of Closing Entry

= $99,900+ $15,900 = $115,800

Education.
CP4–2
Req. 1

a. Interest +700 Interest 700
=
b. Unearned 3,200 Rent +3,200
=
Revenue Revenue (+R)
c. Accounts +3,300 Service +3,300
=
Receivable Revenue (+R)
d. Prepaid 700 = Insurance 700
e. Salaries +1,100 Salaries and 1,100
and Wages
=
Wages Expense (+E)
Payable
f. Accumulated 1,000 Depreciation 1,000
=
–Equipment
(+xA)
g. Income Tax +9,000* Income Tax 9,000
=
* Income tax expense incurred but not paid:

Income before income taxes 30,000
Income tax rate x 30%
Income tax expense $ 9,000

Education.
CP4–2 (continued)
Req. 2
a. Interest Expense (+E, SE)…………………………. 700

Interest Payable (+L)………………………… 700
To accrue interest expense incurred but not paid.
b. Unearned Revenue (L) ............................................. 3,200

Rent Revenue (+R, +SE) .................................. 3,200
$4,800 ÷ 6 months = $800 per month x 4 months. This entry reduces (debits) the
liability for the amount earned and records the revenue.
c. Accounts Receivable (+A) .......................................... 3,300

This entry records an asset for the amount due from customers and recognizes the
revenue because it was earned in 2015.
d. Insurance Expense (+E, SE) .................................... 700

Prepaid Insurance (A) .................................... 700
$4,200 ÷ 12 months = $350 per month x 2 months of coverage. This entry reduces the
asset (Prepaid Insurance) because part of it has been used and only $3,500 represents
future benefits (an asset) to the company.
e. Salaries and Wages Expense (+E, SE) .................... 1,100

Salaries and Wages Payable (+L) .................... 1,100
Salaries and Wages Expense is increased (debited) because this expense was
incurred in 2015. A liability (Salaries and Wages Payable) is credited because this
amount is owed to the employees.
f. Depreciation Expense (+E, SE)................................. 1,000

To record depreciation for the truck for the year (amount is given).
g. Income Tax Expense (+E, SE) .................................. 9,000

Income Tax Payable (+L) .................................... 9,000
To accrue income tax expense incurred but not paid:


Education.
CP4–3
Assets Liabilities Stockholders’ Equity

a. NE Interest Payable +700 Interest Expense (+E) 700
b. NE Unearned Rent Revenue (+R) +3,200
Revenue –3,200
c. Accounts NE Service Revenue (+R) +3,300
Receivable +3,300
d. Prepaid Insurance –700 NE Insurance Expense (+E) –700
e. NE Salaries and Salaries and Wages
Wages Expense (+E) –1,100
Payable +1,100
f. Acc. Depn.–Equip. NE Depreciation Expense (+E) –1,000
(+xA) –1,000
g. NE Income Tax Income Tax Expense (+E) –9,000
Payable +9,000
CP4–4
Req. 1
GOLF ACADEMY, INC.

Unadjusted Income Statement

Interest Expense 0
Net Income $ 13,000

Education.
CP4–4 (continued)
Req. 2
The pairs of accounts that require adjustment include:
Adj. Balance sheet account Related income statement account Amount

(1) Supplies Supplies Expense -/+ $ 400
(2) Unearned Revenue Service Revenue -/+ 3,000
(3) Salaries and Wages Payable Salaries and Wages Expense +/+ 200
(4) Interest Payable Interest Expense +/+ 100
(5) Income Tax Payable Income Tax Expense +/+
4,590
Adj. Explanation
(1) Adjust to supplies count ($600 - $200 = $400 used up).

(2) $3,000 was earned so that amount should be moved into Service
Revenue, leaving $500 unearned.
(3) Owe employees $100/ day for two days of work ($200 = $100 x 2).
(4) Interest owed on note payable (given).
(5) Adjusted income before tax x Tax rate = ($54,500 – 36,300 – 2,800 – 100)
x 30% = $4,590.

Education.
CP4–4 (continued)
Req. 3
a) Supplies Expense (+E, –SE) 400

Supplies (–A) 400
b) Unearned Revenue (–L) 3,000

c) Salaries and Wages Expense (+E, –SE) 200

Salaries and Wages Payable (+L) 200
d) Interest Expense (+E, –SE) 100

Interest Payable (+L) 100
e) Income Tax Expense (+E, –SE) 4,590

Income Tax Payable (+L) 4,590
Req. 4
GOLF ACADEMY, INC.

Income Statement

Net Income $ 10,710
The adjustments in requirement 3 caused Net Income to decrease from $13,000 to

$10,710, which is a difference of $2,290.

Education.
ANSWERS TO GROUP A PROBLEMS
PA4–1
Req. 1
STARBOOKS CORPORATION

Cash $ 300
Supplies 500
Prepaid Rent 100
Equipment 3,200
Note Payable (short–term) 500
Note Payable (long–term) 200
Common Stock 200
Interest Revenue 100
Rent Expense 400
Totals $ 10,400 $ 10,400

Education.
PA4–1 (continued)
No. The amount to be reported for retained earnings on the balance sheet would be
the amount reported on the statement of retained earnings. The $1,500 in the adjusted
trial balance does not yet include the net income generated by Starbooks for the year
ended September 30, 2015.
Req. 2
Service Revenue (R) ............................................ 6,200
Interest Revenue (R) ............................................ 100
Travel Expense (E) ..................................... 2,600
Salaries and Wages Expense (E) ............... 2,200
Rent Expenses (E) ..................................... 400
Depreciation Expense (E) ........................... 300
Supplies Expense (E) ................................. 200
Income Tax Expense (E) ............................ 300
Retained Earnings (+SE) .............................. 300
Req. 3
STARBOOKS CORPORATION
Post–closing Trial Balance

Cash $ 300
Supplies 500
Prepaid Rent 100
Equipment 3,200
Note Payable (short–term) 500
Note Payable (long–term) 200
Common Stock 200
Service Revenue 0
Interest Revenue 0
Travel Expense 0
Rent Expense 0
Supplies Expense 0
Totals $ 4,400 $ 4,400

Education.
PA4–2
Req. 1
a. Insurance Expense (+E, SE) .................................... 150
Prepaid Insurance (A) .................................... 150
$600 x 6/24 months of coverage. This entry reduces the asset (Prepaid
Insurance), because part of it has been used and only $450 represents future
benefits (an asset) to the company.
b. Supplies Expense (+E, SE) ...................................... 700

Supplies (A) .................................................... 700
The Supplies account is decreased (credited) to record the use of supplies during
the year, because this expense was incurred in 2015, calculated as
Unadjusted balance of $1,000 – Ending balance of $300.
c. Repairs and Maintenance Expense (+E, SE) ........... 800

Accounts Payable (+L)...................................... 800
Repairs and Maintenance Expense is increased (debited) because this expense
was incurred in 2015. A liability (accounts payable) is credited, because this
amount is owed but will not be paid until 2016.
d. Accounts Receivable (+A) .......................................... 7,950

This entry records an asset for the amount due from customers and recognizes the
revenue, because it was earned in 2015.
e. Depreciation Expense (+E, SE)................................. 2,750

To record depreciation on van for six months (amount is given).
f. Interest Expense (+E, SE) ......................................... 500

Interest Payable (+L) ........................................... 500
To accrue interest expense incurred but not paid (given).
g. Income Tax Expense (+E, SE) .................................. 9,000

Income Tax Payable (+L) .................................... 9,000


Education.
PA4–2 (continued)
Req. 2
Without adjustments, Brokeback’s net income would have been overstated by $5,950
(i.e., the net effect of understated revenues of $7,950 and understated expenses of
$13,900 = $150 + 700 + 800 + 2,750 + 500 + 9,000).
PA4–3
Transaction Assets Liabilities Stockholders’ Equity

a.  150 NE Insurance Expense (+E)  150
b.  700 NE Supplies Expense (+E)  700
c. NE + 800 Repairs & Maintenance Expense (+E)  800
d. + 7,950 NE Service Revenue (+R) + 7,950
e.  2,750 NE Depreciation Expense (+E)  2,750
f. NE + 500 Interest Expense (+E)  500
g. NE + 9,000 Income Tax Expense (+E)  9,000
Computations:
a. Six months of prepaid insurance expired during 2015: $600 x 6/24 = $150.
b. Supplies used: Beg. $1,000 – Ending $300 = $700 used for the period.
c. Expense incurred during 2015, to be paid during January 2016.
d. Accrued revenue: earned in 2015, but not yet collected or recorded; payable
within 30 days.
e. Depreciation is given.
f. Interest expense is given.
g. Income before income taxes = $30,000 x 30% tax rate = $9,000 income tax
expense.

Education.
PA4–4
Req. 1
VAL’S HAIR EMPORIUM

Unadjusted Income Statement (preliminary)
Service Revenue $75,800

Rent Expense 20,000
Net Income $9,700
Req. 2

(1) Supplies Supplies Expense -/+ $3,000
(2) Prepaid Rent Rent Expense -/+ 4,000
(3) Accounts Payable Utilities Expense +/+ 450
(5) Income Taxes Payable Income Tax Expense +/+ 450
Adj. Explanation
(1) Based on supplies count ($4,300 - $1,300 = $3,000 used).
(2) Two months of rent at $2,000/month have been used so $4,000 is expensed.
(3) Additional $450 for utility services must be added to previously recorded
amount.
(4) Owe stylists $150 in wages (given).
(5) Adjusted income before tax x Tax rate =
[($75,800 – 29,250 – 12,650 – 24,000 – 7,800) x 30% = $630.

Education.
PA4–4 (continued)
Req. 3
a) Supplies Expense (+E, –SE) 3,000

Supplies (–A) 3,000
b) Rent Expense (+E, –SE) 4,000

Prepaid Rent (–A) 4,000
c) Utilities Expense (+E, –SE) 450

Accounts Payable (+L) 450
d) Salaries and Wages Expense (+E, –SE) 150

e) Income Tax Expense (+E, –SE) 630

Income Tax Payable (+L) 630
Req. 4
VAL’S HAIR EMPORIUM

Income Statement

Rent Expense 24,000
Net Income $ 1,470
The adjustments in requirement 3 caused the net income to decrease from $9,700 to

Education.
ANSWERS TO GROUP B PROBLEMS
PB4–1
Req. 1
REGIS CORPORATION
At June 30, 2013
(in millions)

Cash $ 200
Inventories 140
Prepaid Rent 80
Equipment 770
Software 240
Accounts Payable 70
Notes Payable (short–term) 140
Notes Payable (long–term) 160
Common Stock 350
Rent Expense 530
Office Expenses 230
Interest Expense 20
Amortization Expense 10
Totals $ 3,510 $ 3,510
No. The amount to be reported for Retained Earnings on the balance sheet would be
the amount reported on the statement of retained earnings. The $500 in the adjusted
trial balance does not yet include the revenues and expenses for the year ended
June 30, 2013.

Education.
PB4–1 (continued)
Req. 2
Service Revenue (R) ................................................... 2,040

Salaries and Wages Expense (E) ...................... 900
Rent Expense (E) .............................................. 530
Office Expenses (E) .......................................... 230
Supplies Expenses (E) ...................................... 230
Depreciation Expense (E) ................................. 80
Interest Expense (E) .......................................... 20
Amortization Expense (E) .................................. 10
Income Tax Expense (E) ................................... 10
Retained Earnings (+SE) .................................... 30
Req. 3
REGIS CORPORATION
Post–Closing Trial Balance
At June 30, 2013
(in millions)
Cash $ 200
Inventories 140
Prepaid Rent 80
Equipment 770
Software 240
Accounts Payable 70
Notes Payable (long–term) 160
Common Stock 350
Service Revenue 0
Rent Expense 0
Office Expenses 0
Supplies Expense 0
Interest Expense 0
Totals $ 1,500 $ 1,500

Education.
PB4–2
Req. 1

a. Accounts +2,000 Service +2,000
Receivable = Revenue
(+R)
b. Prepaid 1,600 = Insurance 1,600
c. Salaries and +900 Salaries and 900
= Wages Wages
d. Unearned 225 Service +225
= Revenue Revenue
(+R)
e. Accumulated 1,500 Depreciation 1,500
=
–Equipment
(+xA)
f. Unearned 700 Service +700
= Revenue Revenue
(+R)
g. Interest +600 Interest 600
=
h. Income Taxes +6,000 * Income Tax 6,000
=
*$6,000 = $20,000 x 0.30
Req. 2
a. Accounts Receivable (+A) .................................................. 2,000

Service Revenue (+R, +SE) ..................................... 2,000
This entry records an asset for the amount due from customers and recognizes
revenue because it was earned during the fiscal year.
b. Insurance Expense (+E, SE) ............................................ 1,600
Prepaid Insurance (A) ............................................ 1,600
$3,200 x 3/6 months of coverage. This entry reduces the asset (Prepaid Insurance)
because part of it has been used, and the remaining $1,600 represents future benefits
(an asset) to the company.
c. Salaries and Wages Expense (+E, SE)............................ 900
Salaries and Wages Payable (+L)............................ 900
Salaries and Wages Expense is increased (debited), because this expense was
incurred. A liability (Salaries and Wages Payable) is credited, because this amount is
owed to the employees.

Education.
PB4–2 (continued)
Req. 2 (continued)
d. Unearned Revenue (L)..................................................... 225

Service Revenue (+R, +SE) ..................................... 225
$450 x 1/2. This entry reduces (debits) the liability for the amount earned and records
the revenue.
e. Depreciation Expense (+E, SE) ....................................... 1,500
Accumulated Depreciation–Equipment (+xA, A) .... 1,500
To record depreciation for the truck for the year (amount is given).
f. Unearned Revenue (L) .................................................... 700

Service Revenue (+R, +SE) ...................................... 700
To recognize revenue earned during the year, $4,200 ÷ 12 months x 2 months.
g. Interest Expense (+E, SE) ................................................. 600

Interest Payable (+L) ................................................. 600
To accrue interest expense incurred but not paid.
h. Income Tax Expense (+E, SE) .......................................... 6,000

Income Tax Payable (+L) ........................................... 6,000

PB4–3
Transaction Assets Liabilities Stockholders’ Equity

a. +2,000 NE Service Revenue (+R) +2,000
b. –1,600 NE Insurance Expense (+E) –1,600
c. NE +900 Salaries and Wages Expense (+E) –900
d. NE –225 Service Revenue (+R) +225
e. –1,500 NE Depreciation Expense (+E) –1,500
f. NE –700 Service Revenue (+R) +700
g. NE +600 Interest Expense (+E) –600
h. NE +6,000 Income Tax Expense (+E) –6,000

Education.
PB4–4
Req. 1
LEARN TO PLAY, INC.

Unadjusted Income Statement

Interest Expense 0
Net Income $ 6,600
Req. 2

(1) Supplies Supplies Expense -/+ $ 100
(2) Unearned Revenue Service Revenue -/+ 500
(4) Interest Payable Interest Expense +/+ 100
(5) Income Tax Payable Income Tax Expense +/+ 2,040
Adj. Explanation
(1) Based on supplies count ($300 recorded - $200 on hand = $100 used up).
(2) $500 was earned in December so that amount is moved into Service Revenue.
(3) Owe employee $50/day for two days of work ($100 = $50 x 2 days).
(4) Interest owing on note payable (given).
(5) Adjusted Income before Tax x Tax Rate =
($26,000 – 18,200 – 900 – 100) x 30% = $2,040
PB4–4 (continued)
Education.
Req. 3
a) Supplies Expense (+E, –SE) 100

Supplies (–A) 100
b) Unearned Revenue (–L) 500

c) Salaries and Wages Expense (+E, –SE) 100

d) Interest Expense (+E, –SE) 100

e) Income Tax Expense (+E, –SE) 2,040

Income Tax Payable (+L) 2,040
Req. 4
LEARN TO PLAY, INC.

Income Statement

Net Income $ 4,760
The adjustments in requirement 3 caused the net income to decrease from $6,600 to

Education.
ANSWERS TO COMPREHENSIVE PROBLEMS
C4–1
Req. 1
1/3 Cash (+A) 10,000

Common Stock (+SE) 10,000
1/4 Equipment (+A) 10,000

Cash (–A) 2,000
Note Payable (long–term) (+L) 8,000
1/5 no entry – bookings represent a mere exchange of promises
1/10–20 Accounts Receivable (+A) 10,000

1/22 Cash (+A) 7,500

Accounts Receivable (–A) 7,500
1/24 Cash (+A) 1,250

1/27 Travel Expense (+E, –SE) 3,140

Cash (–A) 3,140
1/28 Salaries and Wages Expense (+E, –SE) 2,400

Cash (–A) 2,400
1/31 Salaries and Wages Expense (+E, –SE) 800

1/31 Depreciation Expense (+E, –SE) 100

Accumulated Depreciation–Equipment (+xA, –A) 100
1/31 Interest Expense (+E, –SE) 60

1/31 Income Tax Expense (+E, –SE) 525


Education.
C4–1 (continued)
Req. 2 Req. 3
Accounts RunHeavy Corporation

Cash (A) Receivable (A) Equipment (A) Trial Balance
January 31
0 0 0
10,000 2,000 Debits Credits
7,500 3,140 10,000 7,500 10,000 Cash 11,210
1,250 2,400 Accts Receivable 2,500
11,210 2,500 10,000 Equipment 10,000
Accumulated Dep’n. 100
Accumulated Unearned Unearned Revenue 1,250
Salaries and Wages
Depreciation– Revenue (L)
Payable 800
Equipment (xA) Interest Payable 60
0 0 Income Tax Payable 525
100 1,250 Note Payable (long–term) 8,000
100 1,250 Common Stock 10,000
Retained Earnings 0
Salaries and Interest Income Tax Service Revenue 10,000
Wages Payable (L) Payable (L)
Salaries and Wages
Payable (L) Expense 3,200
0 0 0 Interest Expense 60
800 60 525 Depreciation Expense 100
800 60 525 Income Tax Expense 525
TOTALS 30,735 30,735
Common Stock Retained
Note Payable (SE) Earnings (SE)
(long–term) (L)
0 0 0
8,000 10,000
8,000 10,000 0
Service Travel Salaries and

Revenue (R) Expense (E) Wages
Expense (E)
0 0 0
10,000 3,140 2,400
800
10,000 3,140 3,200
Interest Depreciation Income Tax

0 0 0
60 100 525
60 100 525
C4–1 (continued)
Education.
Req. 3
RunHeavy Corporation
RunHeavy Corporation
Balance Sheet
Income Statement
January 31
For the Month Ended January 31
ASSETS
REVENUES
Current Assets
Service Revenue $10,000
Cash 11,210
Total Revenue 10,000
EXPENSES
Salaries and Wages
Equipment 10,000
Expense 3,200
Accumulated Depreciation–Equipment (100)
Travel Expenses 3,140
Equipment, net of Accumulated Depreciation 9,900
TOTAL ASSETS $23,610
Interest Expense 60
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
NET INCOME $2,975
Unearned Revenue $1,250
Interest Payable 60
Total Current Liabilities 2,635
Note Payable (long–term) 8,000
Total Liabilities 10,635
Common Stock 10,000
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $23,610

Education.
C4–2
Req. 1, 3, 5, and 8 (T–accounts)

Accounts
Cash (A) Receivable(A) Supplies (A)
3/1 12 3/2 9 12/8 40 12/10 24 10/5 18
4/3 23 7/4 10 30
12/8 120 11/6 13 12/31(12) 20
12/10 24 12/9 85
Bal. 65 Bal. 21 Bal. 10
Accumulated
Land(A) Equipment (A) Depreciation–Equip
(xA)
Beg. 0 Bal. 60 Bal. 6
3/2 9 12/31(13) 6
Accumulated
Software (A) Amortization (xA)
Bal. 15 Bal. 5
7/4 10 12/31(11) 5
Bal. 25 Bal. 10
Accounts Payable (L) Notes Payable (L)

Bal. 5 Beg. 0
11/6 13 10/5 18 3/1 12
Bal. 10 Bal. 12
Income Tax
Salaries and Wages Interest Payable (L) Payable (L)
Payable (L)
Beg. 0 Beg. 0 Beg. 0
12/31(15) 12 12/31(14) 1 12/31(16) 8

(SE) Earnings (SE)
Bal. 71 Bal. 8
4/3 23 CE1 23
Bal. 94 Bal. 31

Education.
C4–2 (continued)
Service Depreciation Amortization Expense

Revenue (R) Expense (E) (E)
12/8 160 12/31(13) 6 12/31(11) 5
CE1 160 CE1 6 CE1 5
Income Tax Interest Salaries and Wages

12/31(16) 8 12/31(14) 1 12/9 85
12/31(15) 12
97
CE1 8 CE1 1 CE1 97
Supplies Expense
(E)
Beg. 0
12/31(12) 20
CE1
20
Bal. 0

Education.
C4–2 (continued)
Req. 2
1. Cash (+A) ............................................................... 12

Notes Payable (short–term) (+L) .................. 12
Borrowed cash on note.
2. Land (+A)................................................................ 9
Cash (A) ..................................................... 9
Purchased land for future building site.
3. Cash (+A) ............................................................... 23
Common Stock (+SE) ................................... 23
Issued common stock for cash.
4. Software (+A) .......................................................... 10
Cash (A) ...................................................... 10
Purchased additional software.
5. Supplies (+A) .......................................................... 18
Accounts Payable (+L).................................. 18
Purchased supplies for future use.
6. Accounts Payable (L) ............................................ 13
Cash (A) ...................................................... 13
Paid creditors.
7. No entry required; no revenue earned in 2015.
8. Cash (+A) ............................................................... 120
Accounts Receivable (+A) ...................................... 40
Service Revenue (+R, +SE).......................... 160
Service revenues earned during 2015.
9. Salaries and Wages Expense (+E, SE) 85
Cash (A) ..................................................... 85
Salaries and Wages Expense incurred during 2015.
10. Cash (+A) ............................................................... 24
Accounts Receivable (A)............................. 24
Collected on customers' accounts.

Education.
C4–2 (continued)
Req. 3
H & H TOOL, INC.
Unadjusted Trial Balance
(in thousands)

Cash $ 65
Supplies 30
Land 9
Equipment 60
Software 25
Accounts Payable 10
Interest Payable
Income Taxes Payable
Common Stock 94
Retained Earnings 8
Service Revenue 160
Supplies Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Total $ 295 $ 295

Education.
C4–2 (continued)
Req. 4
11. Amortization Expense (+E, –SE) ................................. 5

Accumulated Amort (+xA, A). .......................... 5
To record amortization as given.
12. Supplies Expense (+E, SE) ...................................... 20

Supplies (A) ..................................................... 20
To record supplies used ($12 + $18  $10).
13. Depreciation Expense (+E, SE) ................................ 6

Accum. Depn–Equip. (+xA, A) ......................... 6
To record depreciation as given.
14. Interest Expense (+E, SE) ........................................ 1

Interest Payable (+L) .......................................... 1
To accrue interest for March – December, 2015.
15. Salaries and Wages Expense (+E, SE) .................... 12

Salaries and Wages Payable (+L) ..................... 12
To accrue wages incurred but not paid.
16. Income Tax Expense (+E, SE) ................................. 8

Income Tax Payable (+L) .................................. 8
To accrue income tax.

Education.
C4–2 (continued)
Req. 5
H & H TOOL, INC.
(in thousands)

Cash $ 65
Supplies 10
Land 9
Equipment 60
Software 25
Accounts Payable 10
Notes Payable 12
Interest Payable 1
Common Stock 94
Retained Earnings 8
Service Revenue 160
Supplies Expense 20
Interest Expense 1
Total $ 327 $ 327

Education.
C4–2 (continued)
Req. 6
H & H TOOL, INC.
Income Statement
(in thousands)
Revenues:
Service Revenue $ 160
Expenses:
Supplies Expense 20
Interest Expense 1
Total Expenses 137
Net Income $ 23
H & H TOOL, INC.

(in thousands)
Balance, January 1, 2015 $ 8

Add: Net Income 23
Balance, December 31, 2015 $ 31

Education.
C4–2 (continued)
Req. 6 (continued)
H & H TOOL, INC.

Balance Sheet
(in thousands)
Assets: Liabilities:
Current Assets: Current Liabilities:
Accounts Receivable 21 Notes Payable (short–term) 12
Supplies 10 Salaries and Wages Payable 12
Total Current Assets 96 Interest Payable 1
Land 9 Total Current Liabilities 43
Equipment $ 60
Accumulated Dep’n. (12) 48 Stockholders' Equity:
Common Stock $ 94
Software 25 Retained Earnings 31
Accumulated Amortization (10) 15 Total Stockholders’ Equity 125

Education.
C4–2 (continued)
Req. 7
Service Revenue (R) ............................................ 160

Salaries and Wages Expense (E) ............... 97
Supplies Expense (E) ................................. 20
Depreciation Expense (E) ........................... 6
Amortization Expense (–E) 5
Income Tax Expense (E) ............................ 8
Interest Expense (E) ................................... 1
Retained Earnings (+SE) .............................. 23
Req. 8
H & H TOOL, INC.
(in thousands)

Cash $ 65
Supplies 10
Land 9
Equipment 60
Software 25
Accounts Payable 10
Interest Payable 1
Common Stock 94
Dividends 0
Service Revenue 0
Supplies Expense 0
Interest Expense 0
Total $ 190 $ 190

Education.
C4–2 (continued)
Req. 9
H&H Tool, Inc., generated net income of $23 (thousand) during 2015. This represents
a net profit margin of 14.4% ($23 ÷ $160 = 0.144). The company is financed primarily
by stockholders’ equity, with stockholders’ equity providing financing for $125
(thousand) of total assets and liabilities providing financing of $43 (thousand). Its
current ratio is 2.23 ($96 ÷ 43).
C4–3

Accounts
Cash (A) Receivable (A) Supplies (A)
Bal. 7 7/2 25 Bal. 3 Bal. 3
7/1 22 7/4 3 12/6 8 7/5 7
7/3 5 12/7 30 12/8 9 10
12/6 47 12/9 10 12/31(12) 7
12/8 9
12/10 3
Accumulated
Equipment (A) Depreciation (xA)
Bal. 8 Bal. 1
7/2 25 12/31(13) 4
Bal. 33 Bal. 5
Accumulated
Bal. 5 Bal. 1
7/4 3 12/31(11) 1
Bal. 8 Bal. 2
Accounts Notes Payable (L) Salaries and Wages

Payable (L) Payable (L)
12/9 10 7/5 7 7/1 22 12/31(15) 3
Income Taxes Unearned

Interest Payable (L) Payable (L) Revenue (L)
12/31(14) 1 12/31(16) 4 12/10 3

Education.
C4–3 (continued)
Req. 1, 3, 5, and 8 (T–accounts continued)

(SE) Earnings (SE)
Bal. 15 Bal. 4
7/3 5 CE1 5
Bal. 20 Bal. 9
Income Tax Amortization

Service Revenue (R) Expense (E) Expense (E)
12/6 55 12/31(16) 4 0
CE1 55 CE1 4 12/31(11) 1 CE1 1
Bal. 0 Bal. 0
Bal. 0
Interest Depreciation Salaries and Wages

12/31(14) 1 12/31(13) 4 12/7 30
CE1 1 CE1 4 12/31(15) 3
CE1 33
Supplies
Expense (E)
12/31(12) 7
CE1 7
Bal. 0

Education.
C4–3 (continued)
Req. 2
1. Cash (+A) ............................................................... 22

Note Payable (short–term) (+L) .................... 22
2. Equipment (+A) ...................................................... 25

Cash (A) ..................................................... 25
Purchased equipment.
3. Cash (+A) ............................................................... 5

Common Stock (+SE)................................... 5
4. Software (+A) ......................................................... 3

Cash (A) ..................................................... 3
Purchased additional software.
5. Supplies (+A).......................................................... 7
Accounts Payable (+L) ................................. 7
Purchased supplies for future use.
6. Cash (+A) ............................................................... 47

Accounts Receivable (+A) ...................................... 8
Service Revenue (+R, +SE) ......................... 55
Service revenues earned.
7. Salaries and Wages Expense (+E, SE) ............... 30

Cash (A) ..................................................... 30
Salaries and wages expenses incurred.
8. Cash (+A) ............................................................... 9

Accounts Receivable (A) ............................ 9
9. Accounts Payable (L) ........................................... 10

Cash (A) .................................................... 10
Paid on accounts payable.
10. Cash (+A) ............................................................... 3

Unearned Revenue (+L) .............................. 3
Deposit received for revenue not yet earned.

Education.
C4–3 (continued)
Req. 3
NORTHLAND PHYSICAL THERAPY
(in thousands)

Cash $ 25
Supplies 10
Equipment 33
Software 8
Accounts Payable 2
Interest Payable
Income Taxes Payable
Unearned Revenue 3
Common Stock 20
Retained Earnings 4
Service Revenue 55
Supplies Expense
Depreciation Expense
Amortization Expense
Interest Expense
Income Tax Expense
Totals $ 108 $ 108

Education.
C4–3 (continued)
Req. 4
11. Amortization Expense (+E, –SE) ...................... 1

Accumulated Amortization (+xA, –A) ..... 1
To record amortization for the year (amount is given).
12. Supplies Expense (+E, –SE) ........................... 7

Supplies (–A) .......................................... 7
To record supplies used ($10 – 3).
13. Depreciation Expense (+E, –SE) ..................... 4

Accum. Depn–Equip. (+xA, –A) .............. 4
To record depreciation for the year (amount is given).
14. Interest Expense (+E, SE) ............................. 1

Interest Payable (+L) .............................. 1
To accrue interest for July – December, 2015.
15. Salaries and Wages Expense (+E, SE) ......... 3

Salaries and Wages Payable (+L) .......... 3
To accrue wages incurred but not paid.
16. Income Tax Expense (+E, SE)....................... 4

Income Taxes Payable (+L) .................... 4

Education.
C4–3 (continued)
Req. 5
(in thousands)

Cash $ 25
Supplies 3
Equipment 33
Software 8
Accounts Payable 2
Interest Payable 1
Unearned Revenue 3
Common Stock 20
Retained Earnings 4
Service Revenue 55
Supplies Expense 7
Interest Expense 1
Totals $ 121 $ 121

Education.
C4–3 (continued)
Req. 6
Income Statement
(in thousands)
Revenues:
Expenses:
Supplies Expense 7
Interest Expense 1
Total Expenses 50
Net Income $ 5

(in thousands)

Add: Net Income 5
Subtract: Dividends 0

Education.
C4–3 (continued)
Req. 6 (continued)

Balance Sheet
(in thousands)
Equipment $ 33 Unearned Revenue 3
Accumulated Depn. (5) 28 Total Current Liabilities 35
Stockholders' Equity:
Common Stock 20
Accumulated Amortn. (2) 6 Total Stockholders' Equity 29
Req. 7
Service Revenue (R) ...................................... 55

Salaries and Wages Expense (E) ............ 33
Supplies Expense (E) ............................... 7
Depreciation Expense (E) ........................ 4
Amortization Expense (E) ........................ 1
Interest Expense (E) ................................ 1
Income Tax Expense (E) ......................... 4
Retained Earnings (+SE) ........................... 5

Education.
C4–3 (continued)
Req. 8

(in thousands)

Cash $ 25
Supplies 3
Equipment 33
Software 8
Accounts Payable 2
Interest Payable 1
Unearned Revenue 3
Common Stock 20
Retained Earnings 9
Service Revenue 0
Supplies Expense 0
Interest Expense 0
Totals $ 71 $ 71
Req. 9
The business generated $5 (thousand) in net income during 2015. Its net profit margin
was 9.1% ($5 ÷ 55 = 0.091). The company is financed primarily by liabilities, with
liabilities providing financing for $35 (thousand) of total assets and stockholders’ equity
providing financing of $29 (thousand). Its current ratio is 0.86 ($30 ÷ 35).

Education.
C4–4

Accounts
Cash (A) Receivable (A) Supplies (A)
Beg. 5 7/2 18 Beg. 4 Beg. 2
7/1 21 8/4 3 12/6 9 12/8 8 9/5 10
7/3 5 12/7 35 12
12/6 56 12/9 11 12/31(12) 8
12/8 8
12/10 3
Accumulated
Equipment (A) Depreciation–
Equipment (xA)
Beg. 6 Beg. 0
7/2 18 12/31(13) 2
8/4 3
Bal. 27 Bal. 2
Accumulated
Beg. 12 Beg. 3
12/31(11) 3
Bal. 12 Bal. 6
Accounts Notes Payable

Payable (L) (short–term) (L)
Beg. 7 Beg. 0
12/9 11 9/5 10 7/1 21
Bal. 6 Bal. 21
Salaries and Wages Interest Income Tax

Payable (L) Payable (L) Payable (L)
12/31(15) 3 12/31(14) 1 12/31(16) 4
Unearned Common Stock

Revenue (L) (SE)
Beg. 0 Bal. 15
12/10 3 7/3 5
Bal. 3 Bal. 20

Education.
C4–4 (continued)
Retained Service
Earnings (SE) Revenue (R)
Beg. 4 Beg. 0
CE1 9 CE1 65 12/6 65
Bal. 13 Bal. 0
Income Tax Interest Depreciation

12/31(16) 4 12/31(14) 1 12/31(13) 2
CE1 4 CE1 1 CE1 2
Supplies Salaries and Wages Amortization

Expenses (E) Expense (E) Expense (E)
12/31(12) 8 12/7 35 12/31(11) 3
CE1 8 12/31(15) 3 CE1 38 CE1 3

Education.
C4–4 (continued)
Req. 2
1. Cash (+A) ......................................................... 21

Notes Payable (short–term) (+L) ............ 21
2. Equipment (+A) ................................................ 18

Cash (A) ............................................... 18
Purchased equipment.
3. Cash (+A) ......................................................... 5

Common Stock (+SE)............................. 5
4. Equipment (+A) ................................................ 3

Cash (A) ............................................... 3
Purchased additional equipment.
5. Supplies (+A) .................................................... 10

Accounts Payable (+L) .......................... 10
Purchased supplies on account.
6. Cash (+A) ......................................................... 56

Accounts Receivable (+A) ................................ 9
Service Revenue (+R, +SE) ................... 65
Service revenues earned.
7. Salaries and Wages Expense (+E, SE) .......... 35

Cash (A) ............................................... 35
Salaries and wages expense incurred.
8. Cash (+A) ......................................................... 8

Accounts Receivable (A) ...................... 8
9. Accounts Payable (L) ..................................... 11

Cash (A) .............................................. 11
Paid on accounts payable.
10. Cash (+A)......................................................... 3

Unearned Revenue (+L) ....................... 3
Received customer deposit before doing work.

Education.
C4–4 (continued)
Req. 3
LAZY SOFA FURNITURE, INC.
(in thousands)

Cash $ 31
Supplies 12
Equipment 27
Software 12
Accounts Payable 6
Interest Payable 0
Unearned Revenue 3
Common Stock 20
Retained Earnings 4
Service Revenue 65
Supplies Expenses 0
Interest Expense 0
Totals $ 122 $ 122

Education.
C4–4 (continued)
Req. 4
11 Amortization Expense (+E, –SE) ...................... 3

Accumulated Amortization (xA,–A) ......... 3
To record amortization for the year (amount is
given).
12 Supplies Expenses (+E, SE) .......................... 8

Supplies (A) ........................................... 8
To record supplies used–up ($12 – 4).
13 Depreciation Expense (+E, SE) ...................... 2

Accum. Depn–Equip. (+xA, A) ............... 2
To record depreciation for the year (amount is given).
14 Interest Expense (+E, SE) .............................. 1

Interest Payable (+L) ............................... 1
To accrue interest for July – December, 2015.
15 Salaries and Wages Expense (+E, SE) .......... 3

Salaries and Wages Payable (+L) ........... 3
To accrue salaries and wages incurred but not
paid.
16 Income Tax Expense (+E, SE) ....................... 4

Income Tax Payable (+L) ........................ 4

Education.
C4–4 (continued)
Req. 5
(in thousands)

Cash $ 31
Supplies 4
Equipment 27
Software 12
Accounts Payable 6
Interest Payable 1
Unearned Revenue 3
Common Stock 20
Retained Earnings 4
Service Revenue 65
Supplies Expenses 8
Interest Expense 1
Totals $ 135 $ 135

Education.
C4–4 (continued)
Req. 6
Income Statement
(in thousands)
Revenues:
Expenses:
Supplies Expenses 8
Interest Expense 1
Total Expenses 56
Net Income $ 9

(in thousands)

Add: Net Income 9

Education.
C4–4 (continued)
Req. 6 (continued)

Balance Sheet
(in thousands)
Equipment $ 27 Unearned Revenue 3
Accum. Depn–Equip. (2) 25 Total Current Liabilities 38
Common Stock 20
Accum. Amort. (6) 6 Total Stockholders' Equity 33
Req. 7
Service Revenue (R) ...................................... 65

Salaries and Wages Expense (E) ......... 38
Supplies Expense (E) ........................... 8
Depreciation Expense (E) ..................... 2
Amortization Expense (E) ..................... 3
Income Tax Expense (E) ...................... 4
Interest Expense (E) ............................. 1
Retained Earnings (+SE) ........................ 9

Education.
C4–4 (continued)
Req. 8

(in thousands)

Cash $ 31
Supplies 4
Equipment 27
Software 12
Accounts Payable 6
Notes Payable 21
Interest Payable 1
Unearned Revenue 3
Common Stock 20
Service Revenue 0
Supplies Expenses 0
Interest Expense 0
Totals $ 79 $ 79
Req. 9
Lazy Sofa Furniture, Inc., generated $9 (thousand) in net income during 2015. The
company is financed primarily by liabilities, with liabilities providing financing for $38
(thousand) of total assets and stockholders’ equity providing financing of $33
(thousand).

Education.
C4–5
Req. 1
a) Cash (+A) 2,000

b) Salaries and Wages Expense (+E, –SE) 1,000
Cash (–A) 900
c) Accounts Receivable (+A) 750
d) Salaries and Wages Expense (+E, –SE) 200
Cash (–A) 200
e) Cash (+A) 200
Accounts Receivable (–A) 200
f) Cash (+A) 250
Unearned Revenue (+L) 250
g) Depreciation Expense (+E, –SE) 100
Accum. Depreciation–Equip.(+xA, –A) 100
h) Interest Expense (+E, –SE) 40
i) Supplies Expense (+E, –SE) 60
Supplies (–A) 60
j) Income Tax Expense (+E, –SE) 405
Income Tax Calculation for j):

Revenue ($2,000 + 750) – Expenses ($1,200 + 100 + 60 + 40) = $1,350 x 30% = $405.

Education.
C4–5 (continued)
Req. 2
House of Tutors, Incorporated House of Tutors, Incorporated

Income Statement Statement of Retained Earnings
For the Month Ended September 30 For the Month Ended September 30
Service Revenue $2,750 Retained Earnings, Beginning $ 820

Net Income 945
Expenses Dividends (0)
Retained Earnings, Ending $1,765
Supplies Expense 60
Interest Expense 40
NET INCOME $ 945
Notes:
1. Service Revenue includes amounts from a) and c) in Req. 1.
2. Salaries and wages expense includes amounts from b) and d) in Req. 1.
3. All other temporary account balances derive from only one journal entry in Req. 1.

Education.
C4–5 (continued)
Req. 3
House of Tutors, Incorporated
Balance Sheet
September 30
ASSETS
Current Assets
Cash $ 2,050
Supplies 40
Equipment 12,000
Accumulated Depreciation–Equipment (1,300)
Equipment, net of
Accumulated Depreciation 10,700
Total Assets $ 13,560
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts Payable $ 60
Interest Payable 80
Total Current Liabilities 895
Note Payable (long–term) 8,000

Common Stock 2,900

Total Liabilities and Stockholders’ Equity $ 13,560
Notes:
1. Cash = $700 beg. bal. +/– amounts from journal entries a), b), d), e), and f).
2. Accounts receivable includes beg. bal. +/– amounts from journal entries c) and e).
3. All other balance sheet account balances include beg. bal. +/– only one journal entry.

Education.
C4–6
Req. 1
Jan. 1) Prepaid Insurance (+A) 5,700

Cash (–A) 5,700
2) Prepaid Rent (+A) 4,200
Cash (–A) 4,200
3) Cash (+A) 30,000
Note Payable (+L) 30,000
4) Equipment (+A) 24,000
Cash (–A) 24,000
5) Cash (+A) 6,000
Common Stock (+SE) 6,000
6) Supplies (+A) 1,000
Accounts Payable (+L) 1,000
7) Cash (+A) 600
Accounts Receivable (–A) 600
8) Accounts Payable (–L) 400
Cash (–A) 400
9) Accounts Receivable (+A) 10,400
10) Cash (+A) 7,600
16) Salaries and Wages Expense (+E, –SE) 2,200
Cash (–A) 2,200
20) Cash (+A) 3,500
25) Cash (+A) 4,500
Accounts Receivable (–A) 4,500

Education.
C4–6 (continued)
Req. 2
Cash (A) Accounts Receivable (A) Supplies (A) Prepaid Insurance (A)
Beg. 10,900 Beg. 800 Beg. 400 Beg. 0
5,700 (1) (9)10,400 600 (7) (6) 1,000 (1) 5,700
4,200 (2) 4,500 (25) Bal. 1,400 Bal. 5,700
(3) 30,000 24,000 (4) Bal. 6,100
(5) 6,000 Prepaid Rent (A) Equipment (A) Accum. Depreciation (xA)
(7) 600 400 (8) Beg. 0 Beg. 0 0 Beg.
(10) 7,600 2,200 (16) (2) 4,200 (4) 24,000
(20) 3,500 Bal. 4,200 Bal. 24,000
(25) 4,500
Bal. 26,600
Accounts Payable (L) Unearned Revenue (L) Notes Payable (L) Interest Payable (L)
500 Beg. 0 Beg. 0 Beg. 0 Beg.
(8) 400 1,000 (6) 3,500 (20) 30,000 (3)
1,100 Bal. 3,500 Bal. 30,000 Bal.
Salaries and Wages Retained

Payable (L) Common Stock (SE) Earnings (SE)
0 Beg. 11,000 Beg. 600 Beg.
6,000 (5)
17,000 Bal.
Salaries and Wages

Service Revenue (R) Expense (E) Utilities Expense (E) Supplies Expense (E)
0 Beg. Beg. 0 Beg. 0 Beg. 0
10,400 (9) (16) 2,200
7,600 (10) Bal. 2,200
18,000 Bal.
Interest Expense (E) Insurance Expense (E) Rent Expense (E) Depreciation Expense (E)
Beg. 0 Beg. 0 Beg. 0 Beg. 0

Education.
C4–6 (continued)
Req. 2 (continued)
FAST DELIVERIES, INC.

January 31

Cash $ 26,600
Supplies 1,400
Prepaid Rent 4,200
Equipment 24,000
Notes Payable 30,000
Interest Payable 0
Common Stock 17,000
Supplies Expenses 0
Interest Expense 0
Totals $ 70,200 $ 70,200

Education.
C4–6 (continued)
Req. 3
Jan. 31a) Utilities Expense (+E, –SE) 1,200

Accounts Payable (–A) 1,200
31b) Supplies Expense (+E, –SE) 1,150
Supplies (–A) 1,150
($1,400 unadjusted – $1,150 AJE = $250 on hand)
31c) Unearned Revenue (–L) 2,100
($3,500 x 0.60 = $2,100 now earned)
31d) Interest Expense (+E, –SE) 150
($30,000 x .06 x 1/12 = $150)
31e) Depreciation Expense (+E, –SE) 500
Accumulate Depreciation—Equipment (+xA, –A) 500
($24,000 x ¼ x 1/12 = $500)
31f) Salaries and Wages Expense (+E, –SE) 2,200
Salaries and Wages Payable (+L) 2,200
31g) Insurance Expense (+E, –SE) 475
Prepaid Insurance (–A) 475
($5,700 x 1/12 = $475)
Rent Expense (+E, –SE) 350
Prepaid Rent (–A) 350
($4,200 x 1/12 = $475)

Education.
C4–6 (continued)
Req. 4
Cash (A) Accounts Receivable (A) Supplies (A) Prepaid Insurance (A)
Bal. 26,600 Bal. 6,100 Bal. 1,400 Bal. 5,700
1,150 (31b) 475 (31g)
Adj. 250 Adj. 5,225
Prepaid Rent (A) Equipment (A) Acc. Depreciation (xA)

Bal. 4,200 Bal. 24,000 0 Beg.
350 (31g) 500 (31e)
Adj. 3,850 500 Adj.
Accounts Payable (L) Unearned Revenue (L) Notes Payable (L) Interest Payable (L)
1,100 Bal. 3,500 Bal. 30,000 Bal. 0 Beg.
1,200 (31a) 31c) 2,100 150 (31d)
2,300 Adj. 1,400 Adj. 150 Adj.
Salaries and Wages Retained

Payable (L) Common Stock (SE) Earnings (SE)
0 Beg. 17,000 Bal. 600 Bal.
2,200 (31f)
2,200 Adj.
Salaries and Wages

Service Revenue (R) Expense (E) Utilities Expense (E) Supplies Expense (E)
18,000 Bal. Bal. 2,200 Beg. 0 Beg. 0
2,100 (31c) (31f) 2,200 31a) 1,200 31b) 1,150
20,100 Adj. Adj. 4,400 Adj. 1,200 Adj. 1,150
Interest Expense (E) Insurance Expense (E) Rent Expense (E) Depn. Expense (E)
Beg. 0 Beg. 0 Beg. 0 Beg. 0
(31d) 150 (31g) 475 (31g) 350 (31e) 500
Adj. 150 Adj. 475 Adj. 350 Adj. 500

Education.
C4–6 (continued)
Req. 4 (continued)
FAST DELIVERIES, INC.

January 31

Cash $ 26,600
Supplies 250
Prepaid Rent 3,850
Equipment 24,000
Salaries and Wages Payable 2,200
Interest Payable 150
Notes Payable 30,000
Common Stock 17,000
Salaries and Wages Expenses 4,400
Supplies Expenses 1,150
Insurance Expense 475
Rent Expense 350
Totals $ 74,250 $ 74,250

Education.
C4–6 (continued)
Req. 5
Fast Deliveries, Inc. Fast Deliveries, Inc.

Income Statement Statement of Retained Earnings
For the month ended January 31 For the month ended January 31
Service Revenue $20,100 Retained earnings, beginning of period $ 600

Expenses Add: Net Income 11,875
Salaries and Wages 4,400 Less: Dividends 0
Utilities 1,200 Retained earnings, end of period $
12,475
Supplies 1,150
Depreciation 500
Insurance 475
Rent 350
Interest 150
Net income $11,875
Fast Deliveries, Inc.

Balance Sheet
At January 31
ASSETS LIABILITIES
Cash $ 26,600 Accounts Payable $ 2,300
Accounts Receivable 6,100 Unearned Revenue 1,400
Supplies 250 Salaries and Wages Payable 2,200
Prepaid Rent 3,850 Interest Payable 150
Prepaid Insurance 5,225 Total Current Liabilities 6,050
Total Current Assets 42,025 Notes Payable 30,000
Equipment 24,000 STOCKHOLDERS’ EQUITY
Accumulated Depreciation 500 Common Stock 17,000
Equipment, net 23,500 Retained Earnings 12,475
Total Assets $ 65,525 Total Liabilities and Stockholders’ Equity $ 65,525

Education.
ANSWERS TO SKILLS DEVELOPMENT CASES
S4–1
1. A
2. D
3. B
S4–2
Req. 1
The Home Depot had $865,000,000 in Advertising Expense whereas Lowe’s had
$811,000,000 in Advertising Expenses for fiscal 2013 (as reported in Note 1).
Req. 2
Lowe’s owes $785,000,000 for salaries and wages at its year–end. This is less than
what Home Depot owed at its year–end ($1,428,000,000). The difference between the
two companies’ liabilities could be explained by the number of employees that each
company hires, the rate of pay that the employees receive, or the number of days for
which wages are owed. As any of these factors increases, so does the amount of the
liability.
S4–3
The solutions to this project will depend on the company and/or accounting period
selected for analysis.

Education.
S4–4
Req.1
Large adjustments are not necessarily improper, but they are suspicious especially
when they account for over half the net income of a quarter (such as 1999 Q3 and 2000
Q1).
Req. 2
To capitalize an expense is to record its cost as an asset rather than an expense. It is

appropriate to capitalize a cost if it produces a probable future economic benefit.
Although generally beneficial, the benefits of some marketing activities are not easily
measured, so most marketing costs are expensed when incurred.
Req.3
1999 (Q3)
Bonus Expense (+E, SE) ................................ 7.6 M
Bonus Payable (+L) ................................ 7.6 M
1999 (Q4)
Bonus Payable (L) .......................................... 7.6 M
Bonus Expense (E,+SE) ........................ 7.6 M
2000 (Q1)
Bonus Expense (+E, SE) ................................ 7.6 M
Cash (A) ............................................... 7.6 M
The expense recognition (“matching”) principle is violated when expenses are recorded
at the time of payment rather than at the time they are incurred.

Education.
S4–5
The change in estimated depreciation expense will increase net income this year but
some depreciation will now extend into next year, decreasing net income then.
Although it’s true that GAAP requires the use of estimates in certain instances (such as
depreciation), the estimates should be fair and unbiased. Given the increasing
competition from online products, we must question whether DVD demand would
extend as long as 15 months. This does not seem to be a fair estimate of the period
over which revenues will be generated. Given the CFO’s motivation for changing the
estimate, we must question whether the estimate is unbiased.
The bank will rely on the company’s reported financial condition to assess the
appropriate terms of the new loan (e.g., interest rate, loan period, loan security).
Existing and potential investors will rely on the financial statements to make investment
decisions. If the proposed change is made and the earnings targets are met, these
financial statement users may be misled into judging the company as more successful
than it otherwise would have been without the change in estimate.
It is possible that these users would use their knowledge about accounting to
understand the reasons the company was able to meet its earnings target. If they were
to do this, they might “see through” the manipulation of the accounting estimate and
realize that the company had not actually met their expectations for financial
performance (and definitely failed to meet their expectations for honest and transparent
financial reporting). If this occurred, the CFO’s “solution” could backfire and cause the
company more harm than if she were to report the financial results fairly and without
bias.
This potentially dishonest and unethical behavior on the part of a senior member of
management should be brought to the attention of the company’s independent board of
directors. The assistant accountant could raise the issue through an anonymous “tips”
line that many companies have established or, failing that, could arrange to meet with
the chair of the ethics or audit subcommittees of the board of directors.

Education.
S4–6
Req.1
(a) Supplies Expense (+E, SE)………………… 4,200

Supplies (A)………………………………. 4,200
To record supplies used ($6,000  $1,800 = $4,200).
(b) Insurance Expense (+E, SE)……………………. 2,000

Prepaid Insurance (A)…………………… 2,000
To record expired insurance at December 31.
(c) Depreciation Expense (+E, SE)………………… 8,000

Accum. Depn–Equip (+xA, A)……. 8,000
To record depreciation for one year.
(d) Salaries and Wages Expense (+E,SE)………… 2,200

Salaries and Wages Payable (+L)………… 2,200
To record salaries and wages earned but not paid.
(e) Service Revenue (R, SE)..………… 7,000

Unearned Revenue (+L) …………….. 7,000
To record service revenue not earned but
collected in advance, previously recorded as earned.
(f) Income Tax Expense (+E, SE)…………………... 3,650

Income Tax Payable (+L)…………………… 3,650
To record income taxes.
Computation:
Service revenue: $85,000  7,000 = $78,000
Expenses: $47,000 + 4,200 + 2,000 + 8,000 + 2,200 = 63,400
Net income before taxes $14,600
Income tax expense: $14,600 x 25% = $ 3,650

Education.
S4–6 (continued)
Req. 2
PIRATE PETE MOVING CORPORATION
Corrections to the Financial Statements
Amounts Changes Correct

Reported Plus Minus Amounts
Income Statement:
Revenue:
Service Revenue $ 85,000 e 7,000 $ 78,000
Expenses:
Salaries and Wages Expense 17,000 d 2,200 19,200
Supplies Expense 12,000 a 4,200 16,200
Other Expenses 18,000 18,000
Insurance Expense 0 b 2,000 2,000
Depreciation Expense 0 c 8,000 8,000
Income Tax Expense 0 f 3,650 3,650
Total Expenses 47,000 67,050
Net Income $ 38,000 $ 10,950
December 31 Balance Sheet

Assets:
Current Assets:
Cash $ 2,000 $ 2,000
Receivables 3,000 3,000
Supplies 6,000 a 4,200 1,800
Prepaid Insurance 4,000 b 2,000 2,000
Total Current Assets 15,000 8,800
Equipment 40,000 40,000
Accumulated Depn. 0 c 8,000 (8,000)
Remaining Assets 27,000 27,000
Total Assets $ 82,000 $ 67,800
Liabilities:
Current Liabilities:
Accounts Payable $ 9,000 $ 9,000
Salaries and Wages Payable 0 d 2,200 2,200
Unearned Revenue 0 e 7,000 7,000
Income Tax Payable 0 f 3,650 3,650
Total Current Liabilities 9,000 21,850
Common Stock 35,000 35,000
Retained Earnings 38,000 10,950
Total Stockholders' Equity 73,000 45,950
Total Liab. and Stockholders' Equity $ 82,000 $ 67,800

Education.
S4–6 (continued)
Req.3
(a) Decrease Net Income by $27,050.

(b) Decrease Total Assets by $14,200.
Req. 4
(today’s date)
To the Stockholders of Pirate Pete Moving Corporation:
We regret to inform you that your request for a $20,000 loan has been denied.
Our review showed that various adjustments were required to the original set of
financial statements provided to us. The original (unadjusted) financial statements
overstated net income for the year by $27,050 (i.e., $38,000  $10,950). This
overstatement was caused by incorrectly including $7,000 of revenue collected in
advance that had not been earned. Further, the expenses were understated and
income tax expense had not been included.
Total assets were overstated by $14,200 (i.e., $82,000  $67,800). Supplies were
overstated by $4,200, prepaid insurance was overstated by $2,000, and the net book
value of the equipment was overstated by $8,000 because annual depreciation was not
properly recognized.
We require that there be sufficient collateral pledged against the loan before we can
consider it. The current market value of the equipment may be able to provide
additional collateral against which the loan could be secured. Your personal
investments may also be considered viable collateral if you are willing to sign an
agreement pledging these assets as collateral for the loan. This is a common
requirement for small start–up businesses.
If you would like us to reconsider your application, please provide us the current market
values of any assets you would pledge as collateral.
Regards,
(your name)
Loan Application Department

Your Bank

Education.
S4–7

Education.
S4–7 (continued)

Education.
S4–7 (continued)

Education.
ANSWERS TO CONTINUING CASE
CC–4
Req. 1
a) Deferral b) Deferral c) Accrual
d) Deferral e) Deferral f) Deferral
Req. 2
a) Prepaid Rent (+A)………………………………….. 4,800

Cash (–A)………………………………………… 4,800
b) Building (+A)…………........................................... 47,000
Cash (–A)………………………………………… 47,000
c) This requires an accrual adjustment (see requirement 3).
d) Prepaid Insurance (+A)……………………………. 3,000
Cash (–A)………………………………………… 3,000
e) Supplies (+A)……………………………………….. 2,000
Accounts Payable (+L)………………………… 2,000
f) Cash (+A)…………………………………………… 90
Unearned Revenue (+L)………………………. 90
Req. 3
a) Rent Expense (+E, –SE)………………………….. 2,400

Prepaid Rent (–A)……………………………… 2,400
(4/8 x $4,800)
b) Depreciation Expense (+E, –SE)…………………. 2,000

Accum. Depn.–Equip. (+xA, –A)……………… 2,000
c) Salaries and Wages Expense (+E, –SE).…….….. 2,000

Salaries and Wages Payable (+L)………..….. 2,000
($1,000 x 2)
d) Insurance Expense (+E, –SE)……………………. 1,750

Prepaid Insurance (–A)………………………... 1,750
(7/12 x 3,000)
e) Supplies Expense (+E, –SE)……………………... 1,300

Supplies (–A)…………………………………… 1,300
($2,000 – $700)
f) Unearned Revenue (–L)………………………….. 90

Service Revenue (+R, +SE)………………….. 90

Education.

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3. The two different types of adjusting journal entries are:

(1) Deferral adjustments:

Fundamentals of Financial Accounting, 5/e 4–1

4. Adjusting entries have no effect on cash. For unearned revenues and

5. A contra–asset is an account related to an asset that is an offset or reduction to the

6. Depreciation expense is reported on the income statement. It indicates the amount

7. An adjusted trial balance is a list of the individual accounts, usually in financial

9. Balance sheet accounts at January 31:

Fundamentals of Financial Accounting, 5/e 4–2

Fundamentals of Financial Accounting, 5/e 4–3

1/31 Rent Expense (+E, SE)........................................ 3,000

2/28 Rent Expense (+E, SE)........................................ 3,000

3/31 Rent Expense (+E, SE)........................................ 3,000

11. (a) Income statement: Revenues  Expenses = Net Income

Fundamentals of Financial Accounting, 5/e 4–4

(1) to correctly state retained earnings, and

Fundamentals of Financial Accounting, 5/e 4–5

Fundamentals of Financial Accounting, 5/e 4–6

Fundamentals of Financial Accounting, 5/e 4–7

M4–3 (1) B (2) A (3) A (4) A (5) B

(1) Supplies Expense (+E –SE) 400

(2) Interest Receivable (+A) 250

(3) Salaries and Wages Expense (+E, –SE) 3,600

(4) Accounts Receivable (+A) 1,000

(5) Unearned Revenue (–L) 600

Fundamentals of Financial Accounting, 5/e 4–8

a $2,400 ÷ 3 months = $800 per month

a. Unearned Revenue (L).......................................................... 800

b. Insurance Expense (+E, SE) ................................................. 50

c. Depreciation Expense (+E, SE) ............................................ 400

b $3,000 = 10 employees x 3 days x $100 per day

(b) Salaries and Wages Expense (+E, SE) ........... 3,000

(c) Interest Receivable (+A) .................................... 100

Oct. 31 AJE Rent Expense (+E –SE) 2,000

Oct. 31 AJE Unearned Revenue (–L) 8,000

Oct. 31 AJE Insurance Expense (+E –SE) 1,000

Jan. 31 AJE Unearned Revenue (–L) 1,000

Jan. 31 AJE Supplies Expense (+E –SE) 200

Jan. 31 AJE Unearned Revenue (–L) 1,000

(a) Prepaid Insurance (+A)...................................... 2,275

(b) Service Revenue (R, SE)............................... 1,000

(c) Income Tax Expense (+E, SE) ........................ 2,000

Calculations for (a) and (b):

($2,275 = $2,340 x 35/36 months remaining; $65 used up)

Calculation for (c): $10,000 x 20% = 10,000 x 0.20 = $2,000

Fundamentals of Financial Accounting, 5/e 4–11

Account Financial Classification? Normal dr or cr

Account Titles Debit Credit

Fundamentals of Financial Accounting, 5/e 4–12

Net Income $ 4,910

Balance, January 1 $ 1,000

Fundamentals of Financial Accounting, 5/e 4–13

Sales Revenue (R) ............................................... 42,030

Retained Earnings (SE)…………………………. 300

Fundamentals of Financial Accounting, 5/e 4–14

Supplies Expense (+E, SE) ....................................... 1,300

Supplies (A) Supplies Expense (E)

Depreciation Expense (+E, SE) ......................................... 6,000

Accumulated Depreciation– Depreciation Expense (E)

Insurance Expense (+E, SE) ..................................... 1,800

Prepaid Insurance (A) Insurance Expense (E)

Unearned Revenue (L) .............................................. 2,500