Chapter 4

Adjustments, Financial Statements, and the Quality of Earnings

ANSWERS TO QUESTIONS
1. A trial balance is a list of the individual accounts, usually in financial statement order, with their debit or credit balances. It is used to provide a check on the equality of the debits and credits. 2. 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. They update the balance sheet and income statement accounts at the end of the accounting period. The four different types are adjustments for: (1) Deferred revenues -- previously recorded liabilities that need to be adjusted at the end of the period to reflect revenues that have been earned (e.g., Unearned Ticket Revenue must be adjusted for the portion of ticket revenues earned in the current period). (2) Accrued revenues -- revenues that have been earned by the end of the accounting period but which will be collected in a future accounting period (e.g., recording Interest Receivable for interest revenues not yet collected). (3) Deferred 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). (4) Accrued expenses -- expenses that have been incurred by the end of the accounting period but which will be paid in a future accounting period (e.g., recording Accrued Expenses Payable for utilities expense incurred during the period that has not yet been paid). 3. 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. 4. The net income on the income statement is included in determining ending retained earnings on the statement of stockholders’ equity and the balance sheet. The change in the cash account on the balance sheet is analyzed and categorized on the statement of cash flows into cash from operating activities, investing activities, and financing activities. 5. (a) Income statement: (Revenues + Gains) - (Expenses + Losses) = Net Income
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(b) Balance sheet: Assets = Liabilities + Stockholders' Equity (c) Statement of cash flows: Changes in cash for the period = Cash from Operations + Cash from Investing Activities + Cash from Financing Activities (d) Statement of stockholders' equity: Ending Stockholders' Equity = (Beginning Contributed Capital + Stock Issuances - Stock Repurchases) + (Beginning Retained Earnings + Net Income - Dividends Declared) 6. 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, there is no cash being received or paid. 7. Earnings per share = Net Income ÷ weighted average number of shares of stock outstanding during the period. Earnings per share measures the average amount of net income for the year attributable to one share of common stock. 8. Net profit margin = Net income ÷ net sales The net profit margin measures how much of every sales dollar generated during the period is profit. 9. An unadjusted trial balance is prepared after all current transactions have been journalized and posted to the ledger. It does not include the effects of the adjusting entries. The basic purpose of an unadjusted trial balance is to check the equalities of the accounting model (particularly, Debits = Credits) and to provide the data in a form convenient for further processing in the accounting information processing cycle. In contrast, an adjusted trial balance is prepared after the effects of all of the adjusting entries have been applied to the corresponding (prior) unadjusted trial balance amounts. The basic purpose of an adjusted trial balance is to insure that accuracy has been attained in applying the effect of the adjusting entries. The adjusted trial balance provides a second check in the model equalities (primarily Debits = Credits). It also provides data in a form convenient for further processing. 10. Closing entries are made at the end of the accounting period to transfer the balances in the temporary income statement accounts to retained earnings. The closing entries reduce the revenue, gain, expense, and loss 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). 11. (a) Permanent accounts -- balance sheet accounts; that is, the asset, liability, and stockholders’ equity accounts (these are not closed at the end of each period). (b) Temporary accounts -- income statement accounts; that is, revenues, gains, expenses, and losses (these are closed at the end of each period).
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(c) Real accounts -- another name for permanent accounts. (d) Nominal accounts -- another name for temporary accounts. 12. The income statement accounts are closed at the end of the accounting period because, in effect, they are temporary subaccounts 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 subaccounts 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 entity's financial position at the end of the period and are the beginning amounts for the next period. 13. A post-closing trial balance is a listing taken from the ledger after the adjusting and closing 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.

ANSWERS TO MULTIPLE CHOICE
1. b) 6. d) 2. a) 7. a) 3. d) 8. c) 4. c) 9. d) 5. d) 10. b)

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Authors' Recommended Solution Time
(Time in minutes)

Mini-exercises No. Time 1 5 2 5 3 3 4 5 5 5 6 5 7 5 8 5 9 5 10 5 11 5 12 3

Exercises No. Time 1 10 2 10 3 10 4 15 5 10 6 20 7 20 8 20 9 15 10 20 11 10 12 20 13 15 14 15 15 20 16 20 17 20 18 20 19 10 20 15

Problems No. Time 1 15 2 20 3 25 4 20 5 20 6 25 7 30 8 30 9 60

Alternate Problems No. Time 1 15 2 20 3 20 4 20 5 20 6 25 7 30 8 30

Cases and Projects No. Time 1 25 2 25 3 25 4 25 5 25 6 40 7 45 8 35 9 50 10 25 11 *

* Due to the nature of this project, it is very difficult to estimate the amount of time students will need to complete the assignment. 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. For example, when our goal is to sharpen research skills, we devote class time discussing research strategies. When we want the students to focus on a real accounting issue, we offer suggestions about possible companies or industries.

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(1) D.. (4) C. (2) B.400 50 820 660 400 110 80 110 $ 4. (3) D. McGraw-Hill/Irwin Financial Accounting. 5/e © The McGraw-Hill Companies. M4–3. (2) B.MINI-EXERCISES M4–1.900 250 Credit $ 4. (6) C. Inc. 2007 4-5 . 2007 Debit Cash Accounts receivable Inventories Prepaid expenses Buildings and equipment Accumulated depreciation Land Accounts payable Accrued expenses payable Income taxes payable Unearned fees Long-term debt Contributed capital Retained earnings Sales revenue Interest income Cost of sales Salaries expense Rent expense Depreciation expense Interest expense Income taxes expense Totals $ 120 350 610 40 1.300 300 120 2. (8) A. (4) D. (7) B. Puglisi Company Adjusted Trial Balance At June 30.400 $ 200 200 150 30 100 1. (1) A. (3) C. (5) A.900 M4–2.

600 x 6/24).....000 200 M4–5..... − A)........ Deferred expense 2. To record annual depreciation expense.... To record one month of rent revenue earned ($800 ÷ 4 months)......... Balance Sheet Stockholders’ Liabilities Equity –200 +200 NE –900 NE –3.. (a ) 1........ Deferred expense 2..... − SE)........ +SE).000 Net Income +200 –900 –3... 3.. (c ) 1..... Deferred revenue 2.....M4–4..000 McGraw-Hill/Irwin 4-6 © The McGraw-Hill Companies. 900 To record six months of insurance expense ($3............ Assets NE –900 –3.. Accumulated depreciation (+XA... b. c..000 Transaction a........... 200 Rent revenue (+R......000 3...... (b ) 1....... Insurance expense (+E... 900 Prepaid insurance (− A)........ 2007 Solutions Manual ........000 Income Statement Revenues Expenses +200 NE NE +900 NE +3. Depreciation expense (+E........ Inc. Unearned rent revenue (− L). − SE)..

calculated as $5. Accrued expense 2.....500 NE +200 Income Statement Revenues Expenses NE +320 NE +4..... (b ) 1......... (a ) 1.. Wages expense (+E.........M4–6..000 x 12% x 4/12.... 320 Accrued utilities payable (+L).500 +200 200 200 320 McGraw-Hill/Irwin Financial Accounting.............. c.......... Utilities expense (+E... Assets NE NE +200 Balance Sheet Stockholders’ Liabilities Equity +320 –320 +4..... M4–7.. Inc..... (c ) 1.. 4........... Transaction a.. To record utilities expense incurred but not yet paid................ +SE)..............500 –4... calculated as 10 employees x 3 days x $150 each per day.... 4. − SE)......... − SE)...500 To record wages expense incurred but not yet paid. Interest receivable (+A).. b..... Accrued expense 2.. Accrued revenue 2.... Interest revenue (+R. 5/e © The McGraw-Hill Companies. To record interest earned but not yet collected... 2007 4-7 .500 Accrued wages payable (+L)...500 +200 NE Net Income –320 –4..........

900 $ 6.000 33.600 2.400 Work backwards Total Stockholders’ Equity $ 1.33 * calculated as $6.420 21. Inc. 2007 Contributed Capital $ 400 2.000 2. January 1.33 Average number of shares M4–9. MORGAN COMPANY Statement of Stockholders’ Equity For the Year Ended December 31. 2007 Solutions Manual .000 120 300 42. 2007 Share issuance Net income Dividends Balance.100 ÷ [(100 + 500) ÷ 2] = $6.500 * From the trial balance.100 $ 9. Retained Earnings $ 1.000 220 600 9. December 31. 2007 McGraw-Hill/Irwin 4-8 © The McGraw-Hill Companies.000 6. MORGAN COMPANY Income Statement For the Year Ended December 31.000 $ 2.100 0 0 $ 7. 2007 Revenues: Sales revenue Interest revenue Rent revenue Total revenues Costs and expenses: Wages expense Depreciation expense Utilities expense Insurance expense Rent expense Total costs and expenses Pretax income Income tax expense Net Income Earnings per share* $ 42.M4–8.420 9.100 $20..100 6.400 2.000* Balance.100 ÷ 300 = $20.

000) Total Assets Liabilities Current Liabilities: Accounts payable Accrued expenses payable Income taxes payable Unearned rent revenue Total current liabilities Stockholders’ Equity Contributed Capital Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity Req.820 2.M4–10.000 $ 18. Req. 2 The adjustments in M4–4 and M4–6 have no effect on the operating. 2007 4-9 .420 $ 1.000 10..000 120 1. 2007 Assets Current Assets: Cash Accounts receivable Interest receivable Prepaid insurance Total current assets Notes receivable Equipment (net of accumulated depreciation.920 2. $ 1.500 2.400 7.900 600 8.500 $ 18. 5/e © The McGraw-Hill Companies.100 9. 1 MORGAN COMPANY Balance Sheet At December 31.420 3.600 3. investing. and financing activities on the statement of cash flows because no cash is paid or received at the time of the adjusting entries. Inc.800 5. $2.420 McGraw-Hill/Irwin Financial Accounting.

............................100 Net profit margin = Net income ÷ Operating Revenues = $6.....000 220 600 9...... R) Rent revenue (− .....900 36. E) Insurance expense (− ...................900 McGraw-Hill/Irwin 4-10 © The McGraw-Hill Companies.. 2007 Solutions Manual . R) Retained earnings (+SE).100 21... E) Rent expense (− ..600 2.......4% The operating revenue sources for this company are from sales and rent revenue................ Inc...................000 2...000 2..................................... Sales revenue (− ...300 = 14....... Interest revenue is not included in the denominator because it is a nonoperating revenue source....... M4–12....M4–11....................000 120 300 42. R) Interest revenue (− .......................................................................................600 2.........................000 220 600 9.................... Revenues: Sales revenue Interest revenue Rent revenue Total revenues Costs and expenses: Wages expense Depreciation expense Utilities expense Insurance expense Rent expense Income tax expense Total costs and expenses Net Income $ 42...................100 ÷ $42.320 $ 6.......... E) Depreciation expense (− ................ Wages expense (− . E) Income tax expense (− ......... E) 42............ E) Utilities expense (− .......000 120 300 6.......420 21..

273.273. 2007 4-11 .800 1. Inc. McGraw-Hill/Irwin Financial Accounting.590. Inc.400 12.990 $3. the balance in Retained Earnings is determined as the amount in the credit column necessary to make debits equal credits (a “plugged” figure).370 145.564.600 17. 5/e © The McGraw-Hill Companies.000 Credit 18.000 $3.000 25.200 145.000 223.080 18. Darius Consultants.050 5.650 32.EXERCISES E4–1.990 * Since debits are supposed to equal credits in a trial balance..100 86. Unadjusted Trial Balance At September 30.830 25.040 $ 60.000 323.200 10.510 2. 2008 Debit Cash Accounts receivable Supplies Prepaid expenses Investments Building and equipment Accumulated depreciation Land Accounts payable Accrued expenses payable Unearned consulting fees Income taxes payable Notes payable Contributed capital Retained earnings * Consulting fees revenue Investment income Wages and benefits expense Utilities expense Travel expense Rent expense Professional development expense Interest expense Other operating expenses General and administrative expenses Gain on sale of land Totals $ 163.230 23.000 225.990 152.030 160.200 10.000 320.200 188.500 2.

and income tax expense. 3 Temporary accounts that accumulate during the period are closed at the end of the year to the permanent account Retained Earnings. general. cost of services.g. selling. interest revenue. supplies and prepaid expenses such supplies expense. and equipment and Accumulated depreciation Intangible assets (depending on type) Deferred revenue Req. other expenses.E4–2. and administrative expense. Req. loss on investments. service revenue. wages expense) Income tax expense . 2 The following accounts should be reviewed and may need to be adjusted to accrue revenues and expenses at the end of the recent fiscal year: Balance sheet account Related income statement account Other current assets (Interest receivable on the short-term investments) Investment income Accounts receivable Other assets (may contain long-term receivables) Accrued liabilities (Interest payable on short-term note payable0 Accrued liabilities Income tax payable Req.g. McGraw-Hill/Irwin 4-12 © The McGraw-Hill Companies. These include: Product revenue. plant. research and development expense.. insurance as insurance) expense.. Inc.. 1 The following deferred revenues and deferred expenses may need to be adjusted at the end of the recent fiscal year: Balance sheet account Inventory Related income statement account Cost of products Other current assets (may include Various expense accounts (e. rent expense) Property. cost of products. interest expense. 2007 Solutions Manual Depreciation expense Amortization expense Product revenue or service revenue Product revenue or service revenue Interest revenue Interest expense Various expense accounts (e.

...E4–3.. Req.... Interest revenue (+R.. 2008: Interest receivable (+A)........... 6.. 2007 4-13 ........... Req... (a) December 31.........000 To record wages earned by employees during 2008.... McGraw-Hill/Irwin Financial Accounting. 2 (Adjusting entries) Both transactions are accruals because revenue has been earned and expenses incurred but no cash has yet been received or paid.......... 2008: Wage expense (+E.............000 3....... +SE)..... 3.... − SE). which is necessary to conform to accrual accounting and the revenue principle... This entry records the (a) 2008 revenue.. but not yet paid by the company.. The entries above are accruals..000 6.. and (b) 2008 liability.... entry (a) is an accrued expense (incurred but not yet recorded) and entry (b) is an accrued revenue (earned but not yet recorded).... This entry records the (a) 2008 expense......... 3 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...... Req...... 1 The annual reporting period for this company is January 1 through December 31....... In applying the accrual basis of accounting.000 To record interest revenue earned during 2008.......... 5/e © The McGraw-Hill Companies.. Inc.......... but not yet collected.. Wages payable (+L). 2008........ and (b) 2008 receivable............ which is necessary to conform to accrual accounting and the matching principle....... revenues should be recognized when earned and measurable and expenses should be recognized when incurred in generating revenues.. (b) December 31......

.. 1 2007 Income statement: Insurance expense ($7.000 End.... 1...300 1.000 Req..000 75. 75........... 6.....300 To record the expiration of insurance for four months ($325 per month).. 1...000 used..300 or $7...000 + $72.... To record the use of shipping supplies for the year....... Shipping supplies (− A).000 75. Req..000 End..000 AJE 75.. 2007 Solutions Manual ..$1...800 x 20/24) = $6... 11. 2 2007 Balance sheet: Prepaid insurance ($7.....500 Insurance Expense AJE End..........000 Shipping supplies expense (+E..800 x 4/24) = $1..300 used............... 1.000) = $75...300 End...000 Purch..500 Insurance expense (+E..........000 .......500 Shipping supplies (given) = $11..... 14.. McGraw-Hill/Irwin 4-14 © The McGraw-Hill Companies.300 Prepaid insurance (− A)...... Shipping supplies expense: ($14...300 = $6.. Req... − SE).... 3 Adjusting entry (payment debited to Prepaid Insurance): Prepaid Insurance 9/1 7..... − SE)... 4 Adjusting entry (payment debited to Shipping Supplies): Shipping Supplies Beg..800 AJE 1.....800 . Inc.E4–4....$11.... 72... Req......000 Shipping Supplies Expense AJE 75...

. Amount is given...000 Net Income –6............ Unearned rent revenue (− L). 3......... Deferred expense -..................... Rent earned in 2007 ($9......050 g............. McGraw-Hill/Irwin Financial Accounting.....000 850 850 3...200 x 6/24 months) Accrued revenue -.... +SE)........ 750 750 E4–7.............. 1 and 2 a...... − A) Amount is given......300 = $850). Office supplies (− A)...... Rent revenue (+R.....300 NE –75..... Rent receivable (+A).. 1. Accrued revenue -..000 NE –1.......E4–5...000 3........... 1. Prepaid insurance (− A)................... +SE).........300 NE +75....cash paid before expense is incurred... − SE). Amount is given. 5............................. b... Accrued expense -...... − SE)....revenue earned before cash is received....000 E4–6...640 1......cash received before revenue is earned. Repair accounts receivable (+A).000 +3...000 Income Statement Revenues Expenses NE +6.......... 2007 4-15 ...... Supplies used in 2007 ($350 + 800 . − SE)......000 f.......300 E4–4 (b) –75...............expense incurred before cash is paid..... − SE)..................000 NE NE +1........ Rent revenue (+R... Accumulated depreciation. Office supplies expense (+E.......000 x 2/6)................ Repair shop revenue (+R..................... Balance Sheet Stockholders’ Liabilities Equity +6. Deferred expense -....... ($4..................... Depreciation expense (+E..... Wages payable (+L).................. delivery equipment (+XA............000 E4–4 (a) –1.....cash paid before expense is incurred......640 e....................700 3.700 c.............050 1.... Insurance expense (+E...........000 –1.000 +3. Req. +SE).......... 5/e © The McGraw-Hill Companies... Deferred revenue -.................cash paid for equipment before being used...........000 5.......300 –75.revenue earned before cash is collected...000 –6.000 d. ($820 x 2 months) Deferred expense -..... Wages expense (+E.. Transaction Assets E4–3 (a) NE E4–3 (b) +3...000 NE +3........ Inc........

................. Unearned storage revenue (− L)... Service revenue (+R............... Accumulated depreciation....... Depreciation expense (+E.... equipment (+XA. Prepaid advertising (− A)... Supplies used in 2006 ($15..........900 2... 450 450 e..500 2....... 23..... Deferred expense -....... b....600 + $47....... 2.... Inc........ − A) Amount is given........000 f.............................. Wages payable (+L)...expense incurred before cash is paid...........500 . 2.000 principal x .. 1 and 2 a. Accrued revenue -.........400 x 1/6) Accrued expense -............................ Deferred revenue -. Amount is given.cash paid before expense is incurred..... − SE) ....................... +SE)....................900 g.....cash received before revenue is earned....... − SE). 2006 ($150.. Advertising expense (+E..................... Accounts receivable (+A)...... Supplies expense (+E.................... − SE)...100 400 400 c.. 2007 Solutions Manual ......................... Interest expense (+E..........expense incurred before cash is paid....500 McGraw-Hill/Irwin 4-16 © The McGraw-Hill Companies..$12.......................... − SE)....10 x 2/12) 2.... Deferred expense -............................ Storage revenue earned in fiscal year 2006 ($2.... Supplies (− A). +SE).cash paid for equipment before being used...cash paid before expense is incurred.. Amount is given.........000 23... Deferred expense -..........900 d.. Advertising used in fiscal year 2006 ($600 x 9/12)...... Interest incurred from October 1 to November 30.200) Accrued expense -.....................................Req................ Wages expense (+E.......... Interest payable (+L)...100 2............ − SE)........revenue earned before cash is collected..... 50................900 50............... Storage revenue (+R...

100 +400 –2.000 420 Credit Code Amount G $400 I 800 A 900 E 1.000 NE +1. Inc.000 NE –1.000 NE +1. 5/e © The McGraw-Hill Companies.900 NE +450 NE +23.000 +1.900 –2.050 NE +750 Income Statement Revenues Expenses NE +850 NE +3.050 +750 E4–9.050 +750 NE Net Income –850 –3. f. e.500 Income Statement Revenues Expenses +2.000 L 600 B 250 H 220 K 62. g.000 +3.000 –50. c.500 Net Income +2.000 NE +1. i.700 +3.640 –5..900 (g) NE Balance Sheet Stockholders’ Liabilities Equity NE +2.700 +3.E4–8.050 +750 Balance Sheet Stockholders’ Liabilities Equity NE –850 +3. Transaction Assets (a) +2.900 NE –450 NE –23.640 –5. Selected Balance Sheet Amounts at December 31.640 NE NE +5. b. 2007 4-17 . Transaction (a) (b) (c) (d) (e) (f) (g) Assets –850 NE NE +1.900 –450 –23.100 NE +400 NE NE +2.500 E4–10.000 (f) –50.000 –1.000 NE –50.900 +2. d.900 NE +2.000 NE +50. Code N A K O C Q P L K Debit Amount $400 800 900 1.100 –400 +400 +2. h.700 –3.640 NE –5.000 –1.500 –2.700 –3.000 600 250 220 62.100 (b) NE (c) NE (d) –450 (e) –23.900 –2. E4–11. 2007 McGraw-Hill/Irwin Financial Accounting.000 P 420 a.

payables decreased by the $20.500 NE NE + 1.000 Insurance expense (for 6 months..200) 10.500 (b) Additional interest revenue in 2009: $20.000 + 200 + 1.Assets: Equipment (recorded at cost per cost principle) Accumulated depreciation (for one year. Date Note 1: April 1.800 400 300 Selected Income Statement Amounts for the Year Ended December 31.1.000 principal x .200 Office supplies expense (used. E4–13.000 ($20. receivables decreased by the $20. Inc.12 x 1/12 = $200.21. Req. 2009b Note 2: August 1. 2008c January 31.500 +22.000 (a) $20. Cash paid was $21.000 principal + $2.200 + 1.500 + 500 NE .$400 on hand) 1.500 interest receivable accrued in 2008.000 .000 note payable and $1.200 + 20.000 (d) Additional interest expense in 2009: $20.400 .000 (1.200 ($20.000/ NE NE NE NE NE –20.000 note receivable and $1.10 annual interest rate x 9/12 of a year = $1.12 annual interest rate x 5/12 of a year = $1. 2008 December 31.000 + 1. 1 (a) (b) (c) Cash paid on accrued income taxes payable. Cash paid on dividends payable.500 + 500 NE .000 + 20. 2007 Solutions Manual McGraw-Hill/Irwin 4-18 .000 interest for 12 months).21.200 + 1.10 x 3/12 = $500.000 x .500 +500 NE NE NE NE NE NE + 1. Cash received was $22. 2009 d Balance Sheet Income Statement Stockholders’ Net Assets Liabilities Equity Revenues Expenses Income +20.000/ –21.1.000 interest payable accrued in 2008. as given) $ 1. Accrual of additional income tax expense. 2008a March 31. © The McGraw-Hill Companies.000 x . $400 x 18/24 months) $12. 2008 December 31. $400 x 6/24 months) 100 E4–12. $1.000 .000 NE .000 principal x .000 .200 interest for 6 months). as given) Prepaid insurance (remaining coverage.000 principal + $1. as given) Carrying value of equipment (difference) Office supplies (on hand. 2007 Expenses: Depreciation expense (for one year. (c) $20.

Bal. $80 $323 paid End. bal. $48 $171 paid End. bal. 5/e © The McGraw-Hill Companies. + $45 + cash paid = ? = ? = cash paid = ? = ? = cash paid = 297 = = End. Accrual of additional interest expense. 2007 4-19 . bal. Inc.. Req. Bal.(d) (e) (f) Amount of dividends declared for the period. Bal. Cash paid on accrued interest payable. + $43 + (f) Beg. + accrued income taxes $71 + 332 (c) Beg. $51 $303 accrued dividends declared 176 accrued interest expense ? ? McGraw-Hill/Irwin Financial Accounting. 2 Computations: (a) Beg.

..... − SE).... Interest payable (+L).............000 2.... Interest expense (+E.500 U 1............. Interest expense (+E..000 (b) NE O 2. Rent revenue (+R.......500 U 1.. Amount is given... Amount is given................ 2007 Solutions Manual ...................000 O 12...........000 12....equipment (+XA........... 1 Adjusting entries that were or should have been made at December 31: (a) Should have been made...........500 NE U 600 O 600 U 850 NE U 850 2....000 NE O 1..... − SE).. Amount is given..........000 x 12% x 12/12 months) Should have been made... Unearned revenue (− L)........E4–14... − SE)...... +SE).................................................. +SE). 2 Balance Sheet Stockholders’ Transaction Assets Liabilities Equity (a) O 12.....000 (c) NE O 1..... Fee revenue (+R..... 12....................... (b) Should have been made......800 1.000 1....... − A) Amount is given.. − SE) ........800 300 300 600 600 850 850 McGraw-Hill/Irwin 4-20 © The McGraw-Hill Companies..500 (d) O 600 NE O 600 (e) U 850 NE U 850 Income Statement Net Revenues Expenses Income NE U 12..000 NE U 2..................... ($15................. Req. ($15..................................... Insurance expense (+E....... Req........ Rent receivable (+A)................................... Prepaid insurance (− A)... Interest payable (+L) .....000 U 2...000 NE O 12...................... (e) Should have been made.................000 U 2.......000 Accumulated depreciation .. Depreciation expense (+E... (c) Entry already made.....000 x 12% x 2/12 months) (d) Should have been made.......... Inc...

000 (9.600 (4. $17. Items Balances reported Effects of: a. The remaining $3.000 Stockholders’ Equity $50.000 (1.680) $20.000 17.000 accrued and unpaid.000 (9.000) 1.600) 45..000) 71.000) (17.600 15.600 income before taxes x 30% = $4.000 depreciation expense. 2007 4-21 . Wages c. c.000) 1.680 $50.000 (9.800 x 1/3 = $1. McGraw-Hill/Irwin Financial Accounting.920 Total Assets $80. b.600 25. Inc.400 4. Rent revenue Adjusted balances d.000 $71. Given.600 (4.680. Depreciation b. d. Effect of income taxes Correct balances Net Income $40.080 Total Liabilities $30.E4–15. $4. $9.920 Computations: a.600 rent revenue earned.200 in unearned revenue is a liability for two months of occupancy "owed'' to the renter. 5/e © The McGraw-Hill Companies. $15. Given.680) $ 10.000) (17.

....000 22....000 b 50....100 $20.. Req.000 22... Revenues (rent) (+R.........000 (9..000 (10... Rent receivable (+A).000 5.....000 2.000 (5..000 22...000) (6.000) $20.000 $82.. 2 As Prepared Income statement: Revenues Expenses Income tax expense Net income Balance Sheet: Assets Cash Accounts receivable Rent receivable Equipment Accumulated depreciation Liabilities Accounts payable Income taxes payable Stockholders' Equity Contributed capital Retained earnings $98...900 a 2.... +SE)..000 2...000 32...... b..900 6.....000 $10...... − SE). Income taxes payable (+L).....000 6.000 c 40.000) $26...000) (6.....900) (3.000 6.900 40......... − A). Accumulated depreciation (+XA. c..000) $82.000 (15...000 (77.000) McGraw-Hill/Irwin 4-22 © The McGraw-Hill Companies.000 (5.000 6....000 Corrected Amounts $100...000 $10..000) $79. Inc.....000 (72. 5. − SE)......... Expenses (depreciation) (+E.....000 2.900) $16..900 Effects of Adjusting Entries b a c $2..E4–16.000 50. Income tax expense (+E.900) Req....100 $79..900) (9...000) (3.. 2007 Solutions Manual .. 1 a.

.... Req. 1.. g... − SE)....... − SE)........... Interest payable (+L)...... b......000 x ..........000 23...... − SE)........ 5/e © The McGraw-Hill Companies................. Accumulated depreciation (+XA. − A).................... ($20.................. − SE)........ Salaries and wages expense (+E. Maintenance supplies (− A).............. d.......... Maintenance expense (+E.................. f.. c... Depreciation expense (+E..000 1......... Income tax payable (+L)...................................000 310 310 400 400 23. 2007 4-23 ................................. − SE)............. Income tax expense (+E............. − SE)....10 x 3/12) No adjustment is needed because the revenue will not be earned until January (next year)... 1 a....000 500 500 e..... Salaries and wages payable (+L)....... Interest expense (+E... Utilities expense (+E.........E4–17............000 7.... Accrued expenses payable (+L)....................000 7.. McGraw-Hill/Irwin Financial Accounting... Inc.............

000 + $1.400 3. 3 Net profit margin = Net income ÷ Net Sales = $24.000 4.290 ÷ 7. INC. 2007 Solutions Manual .000 82.290 $3.000 500 1.710 31.000 $ 24.3%) in net income.. 2 Income Statement For the Year Ended December 31.000 = 21.000 shares Req.213 (21. Inc.000 x 10% x 3/12) Miscellaneous expenses Total expenses Pretax income Income tax expense Net income Earnings per share: $24. (continued) Req. Derek earns $0. $114.000 9. McGraw-Hill/Irwin 4-24 © The McGraw-Hill Companies.3% The net profit margin indicates that.47 DEREK.000 $28.500 + $310) Maintenance expense ($12.000 + $400) Gas and oil expense Depreciation expense Interest expense ($20.810 13.E4–17. This ratio is higher than the industry average net profit margin of 18%. 2007 Rental revenue Expenses: Salaries and wages ($28. implying that Derek is more profitable and better able to manage its business (in terms of sales price or costs) than the average company in the industry.290 ÷ $114. for every $1 of rental revenues.290 7.000 23.000) Rent expense Utilities expense ($4.

....................................... Income tax payable (+L).... 2 SENECA COMPANY Trial Balance December 31.................. − A) Wages expense (+E....................... Inc.......................... − SE)............... − SE).. 2007 (in thousands of dollars) Unadjusted Debit Credit 38 9 6 80 9 c 5 d 9 76 4 84 32 a b c d 169 5 7 5 9 26 Adjustments Debit Credit a 5 b 7 Adjusted Debit Credit 38 9 1 80 7 9 5 9 76 4 84 58 Cash Accounts receivable Prepaid insurance Machinery Accumulated depreciation Accounts payable Wages payable Income taxes payable Contributed capital Retained earnings Revenues (not detailed) Expenses (not detailed) Totals 169 26 190 190 McGraw-Hill/Irwin Financial Accounting....... Income tax expense (+E............ 2007 4-25 ............. 5/e © The McGraw-Hill Companies............................................................... Wages payable (+L)............. Req.... Accumulated depreciation... 1 (a) (b) (c) (d) Insurance expense (+E..E4–18.. Prepaid insurance (− A)... − SE) .......... Depreciation expense (+E....... machinery (+XA.. 5 5 7 7 5 5 9 9 Req.......... − SE)..

2007 (in thousands of dollars) Contributed Capital $ 0 76 $ 76 Retained Earnings $ 0 26 (4) * $ 22 Total Stockholders' Equity $ 0 76 26 (4) $ 98 Beginning balances. SENECA COMPANY Balance Sheet At December 31. 2007 Solutions Manual . Inc. we can assume the entire amount is due to a dividend declaration. 2007 (in thousands of dollars) Assets Current Assets: Cash Accounts receivable Prepaid insurance ($6 .$5) Total current assets Machinery Accumulated depreciation Total assets Liabilities Current Liabilities: Accounts payable Wages payable Income taxes payable Total current liabilities Stockholders' Equity Contributed capital Retained earnings Total liabilities and stockholders' equity $ 38 9 1 48 80 (7) $121 $ 9 5 9 23 76 22 $121 McGraw-Hill/Irwin 4-26 © The McGraw-Hill Companies.E4–19. Since this is the first year of operations. SENECA COMPANY Income Statement For the Year Ended December 31.50 SENECA COMPANY Statement of Stockholders' Equity For the Year Ended December 31.000 ÷ 4.000 shares) $84 49 35 9 $26 $6.. 2007 (in thousands of dollars) Revenues (not detailed) Expenses ($32 + 5 + 7 + 5) Pretax income Income tax expense Net income EPS ($26. 12/31/2007 * The amount of dividends declared can be inferred because the unadjusted trial balance amount for retained earnings is a negative $4. 1/1/2007 Stock issuance Net income Dividends declared Ending balances.

Retained earnings (+SE)............. 1 The purpose of “closing the books” at the end of the accounting period is to transfer the balance in the temporary accounts to a permanent account (Retained Earnings)........ 5/e © The McGraw-Hill Companies..... Expenses ($32 + $5 + $7 + $5 + $9) (− E).... 3 SENECA COMPANY Post-closing Trial Balance December 31...................... 2007 (in thousands of dollars) Cash Accounts receivable Prepaid insurance Machinery Accumulated depreciation Accounts payable Wages payable Income taxes payable Contributed capital Retained earnings Revenues (not detailed) Expenses (not detailed) Totals Debit 38 9 1 80 Credit 84 58 26 7 9 5 9 76 22 0 0 128 128 McGraw-Hill/Irwin Financial Accounting..... 2 Revenues (− R).......... Req.. Req.. Inc............E4–20....... This also creates a zero balance in each of the temporary accounts for accumulation of activities in the next accounting period..................... Req.... 2007 4-27 .

g. 2 Since debits are supposed to equal credits in a trial balance.PROBLEMS P4–1. and equipment Accumulated depreciation Other assets Accounts payable Accrued expenses payable Long-term debt Other liabilities Contributed capital Retained earnings (deficit) Sales revenue Cost of sales Selling.298 512 349 1. c.. P4–2. b. the balance in Retained Earnings is determined as the amount in the debit column necessary to make debits equal credits (a “plugged” figure). Inc. f.661 2. Deferred revenue Accrued expense Accrued revenue Accrued expense e.243 14. plant. and administrative expenses Research and development expense Other expenses Income tax expense Totals Req.137 1. 2007 Solutions Manual . 1 a.832 252 $ 24. 2006 (in millions of dollars) Debit Cash Marketable securities Accounts receivable Inventories Property. Deferred expense Deferred expense Deferred revenue Accrued expense $ Credit 520 2.094 273 775 $ 806 2. Req. 1 Dell Computer Corporation Adjusted Trial Balance At January 31. d.788 272 38 624 $ 24. h. general. Req.832 McGraw-Hill/Irwin 4-28 © The McGraw-Hill Companies.397 1.781 844 18.

....000 Service revenue (+R......................300 Wages payable (+L).. +SE)........ Inc........200 ÷ 6 months = $1...........400 x 2/12)................. − A) 1............ − SE).000 represents future benefits (an asset) to the company.......... Property tax payable (+L)... Interest expense (+E............. Interest payable (+L)............ c... To recognize revenue earned during the year ($2........ Property tax expense (+E.500 To record depreciation expense to recognize the use of the truck during the year... service truck (+XA. This entry reduces the asset (prepaid insurance) because part of it has been used and only $5........... 2 a... 14.......... $20.............500 Accumulated depreciation....800 Rent revenue (+R................ This entry reduces (debits) the liability for the amount earned and records a revenue.. 1................. 400 Service revenue (+R........ 14....... − SE)....000 x 12% x 3/12 = $600........ d....800 $7.................................. 1...... − SE).................. 400 400 400 f.............. 4.....000 ÷ 12 months = $500 per month x 2 months of coverage...................000 $6............ Amount is given........... 2...300 Wage expense is increased (debited) because this expense was incurred in 2007... 2..........200 per month x 4 months................................................ Depreciation expense (+E............ To accrue interest expense incurred but not paid.... +SE).......... 1.................. 600 600 b.... − SE)....... e...000 Prepaid insurance (− A).. g............P4–2... Insurance expense (+E...000 This entry records an asset for the amount due from customers and recognizes the revenue because it was earned in 2007......... Unearned service revenue (− L)......................... h.......... To record expense incurred but not paid... 5/e © The McGraw-Hill Companies........ +SE)............ McGraw-Hill/Irwin Financial Accounting... A liability (wages payable) is credited because this amount is owed to the employees...... Wage expense (+E............. 2007 4-29 ................. 4.... (continued) Req... Unearned rent revenue (− L).... − SE).. Accounts receivable (+A).......................

.. 1...... Inc......... f........ 800 Accrued expenses payable (+L). e........ d.. 8....... Insurance expense (+E.600 Property tax payable (+L)......... van (+XA.. Req..... − SE)....... Repairs and maintenance expense (+E.............. Accrued revenue Deferred expense Accrued expense Accrued expense b..... A liability (property tax payable) is credited because this amount is owed but will not be paid until 2009........ f....... Amount is given.000 Deferred expense Deferred expense Accrued expense Accrued expense e. c......100 To record depreciation expense to recognize the use of the van during the year...... 2 a.... h. 700 Supplies inventory is decreased (credited) to record the use of supplies during the year because this expense was incurred in 2008.......... Req.... Accounts receivable (+A).... 200 $1............................................................. g. This entry records an asset for the amount due from the customer and recognizes the revenue because it was earned in 2008........................ Property tax expense (+E.....100 Accumulated depreciation... − SE)............ 1 a.. − SE)............................. +SE).. 1. 800 Repairs and maintenance expense is increased (debited) because this expense was incurred in 2008...P4–3....000 Service revenue (+R.......... b.....000 represents future benefits (an asset) to the company.... Inventory of $200 + Purchases $800 – Ending Inventory $300..... − SE)........... − SE)......... Supplies expense (+E... calculated as Beg............. c.. This entry reduces the asset (prepaid insurance) because part of it has been used and only $1......600 Property tax expense is increased (debited) because this expense was incurred in 2008........... McGraw-Hill/Irwin 4-30 © The McGraw-Hill Companies.................... 200 Prepaid insurance (− A)..... 8. A liability (accrued expenses payable) is credited because this amount is owed but will not be paid until 2009. d............. Depreciation expense (+E........... − A) 1....200 ÷ 36 months x 6 months of coverage............... 2007 Solutions Manual ...... 700 Supplies (− A). 1...........

300 –14.... Req..... To accrue interest expense incurred but not paid..500 –400 +400 +400 –400 Income Statement Net Revenues Expenses Income +4..990 P4–4.300 +8....300 –14.. e.......... 9....... 300 300 h......100 -300) Income tax rate x 30% Income tax expense $ 9...000 NE –1... Income tax expense (+E..... g.000 NE +600 –600 NE +1.700 .... − SE)....800 NE +14. Interest payable (+L). Deferred expense Deferred expense Deferred revenue Accrued expense Transaction a. Assets NE NE +2..500 +400 NE +400 NE +400 –400 Deferred revenue Accrued expense Accrued revenue Accrued expense e....000 +600 –600 NE –1.000 –1... c.. d.. 1 a.000 NE +1..000 –1.. c.. $10...000 NE –1.300 NE +2....... g. (continued) g......000 NE +2..800 +4.. h.....500 NE NE McGraw-Hill/Irwin Financial Accounting...000 x 12% x 3/12 = $300. Req... h...... f... b.. 9.500 –1... f.......800 NE +4. 2007 4-31 ... 2 Balance Sheet Stockholders’ Liabilities Equity –4.. 5/e © The McGraw-Hill Companies... d.......990 To accrue income tax expense incurred but not paid: Income before adjustments (given) $30.000 Effect of adjustments (a) through (g) +3...300 (-200 ..... − SE).. Inc...000 -1..300 +2..600 Income before income taxes 33..P4–3....... b................800 -1...990 Income tax payable (+L)...................800 +14.. Interest expense (+E..

600 − 1. Req. d. g. Computations: a.300 = $33. Interest expense accrued for 3 months: $10.100 + 300 − 300 + 9. Accrued revenue: earned in 2008 but not yet collected or recorded. c.600 NE + 8. h. d.P4–5. $800 .Ending inventory. $200 + Purchases. e. payable within 30 days. g. Six months of expired insurance during 2008: $1. c. h. c. 2007 Solutions Manual .000 NE − 1. Accrued revenue Deferred expense Accrued expense Accrued expense McGraw-Hill/Irwin 4-32 © The McGraw-Hill Companies.200 x 6/36 = $200..990 income tax expense. Adjusted income = $30.100 NE NE Balance Sheet Stockholders’ Liabilities Equity NE − 200 NE − 700 + 800 − 800 + 1. Assets − 200 − 700 NE NE + 8.300 x 30% tax rate = $9. Expense incurred during 2008 to be paid during January 2009. f. f.800 -1.000 x 12% x 3/12 = $300. inventory. Inc. f. b.990 Net Income − 200 – 700 − 800 − 1.600 + 8. Req.100 . g.990 − 9. h.000 − 1. Supplies used during 2008: Beg. Property taxes incurred in 2008 to be paid in 2009.990 Deferred expense Deferred expense Accrued expense Accrued expense e. b.000 NE NE + 1.000 -1.100 NE + 300 NE + 9. d.600 + 8. 2 Transaction a. 1 a. b.200 .600 + 8.000 .000 − 1. $300 = $700 used for the period.700 . Depreciation is given.990 Income Statement Revenues Expenses NE + 200 NE + 700 NE + 800 NE + 1. e.100 − 300 − 9.

000 No effect No effect − 1.000 65.000 (4) Rent receivable (b) 16.000 16.500 1.000 1. Maintenance supplies 7.000 − 62.300 9.500 − 8.000 (f) 3..000 4.300 16.000 Bal.000 (a) 16. Maintenance supplies expense 4.000 Account 1. Salaries payable (1) Rent revenue 512.000 +12.000 1. 2007 Balance $528. Unearned rent revenue 8.000 (c) 12.000 4. Rent receivable 5.000 62.000 (3) Maintenance supplies expense Used 9.500 8. 3.P4–6.000 9. Salary expense 3. Receivables from employees 6.000 (b) 528.700 Inferred (a) from renters (c) from renters (d) to employees (e) to employees (g) to employees (i) to suppliers McGraw-Hill/Irwin Financial Accounting.000 (7) Unearned rent revenue 12.000 9.000 (2) Salary expense (e) 62.000 Financial Statement Income statement Income statement Income statement Balance sheet Balance sheet Balance sheet Balance sheet Balance sheet Effect on Cash Flows + $512. Rent revenue 2. 2007 4-33 .000 65.000 3. Inc.000 (5) Receivables from employees (g) 1.500 (8) Salaries payable (d) 4.000 Cash 512.000 (f) 3.300 (6) Maintenance supplies (h) 3.700 12.500 1. 5/e © The McGraw-Hill Companies.000 (i) 8.000 − 4.000 12.300 used (j) 1.

... − SE).......90) per share McGraw-Hill/Irwin 4-34 © The McGraw-Hill Companies.......... 400 Service revenue (+R... To record service fees earned.......700 Amounts after Adjusting Entries $46...700) net loss ÷ 3....... Req.. Accumulated depreciation... Net income of $4...... 2 Amounts before Adjusting Entries Revenues: Service revenue Expenses: Salary expense Depreciation expense Insurance expense Income tax expense Total expense Net income (loss) $46...... 2007 Solutions Manual .. Req. 200 200 8.. 3 Earnings (loss) per share = $(8.700 4.......000 shares = $(2.............................. Insurance expense (+E.. Income taxes payable (+L) .. Income tax expense (+E.. equipment (+XA.......500 200 4.. 2006 Adjusting Entries Accounts receivable (+A).......400 41.. − A) To record depreciation expense... To record income taxes for 2006..... − SE) ......... Inc..............500 8. Prepaid insurance (− .700 55...700) 41......300 Net loss is $8....700 8..... +SE) . This amount is correct because it incorporates the effects of the revenue and matching principles applied to all transactions whose effects extend beyond the period in which the transactions occurred.................10 0 $ (8.......... A) To record insurance expired as an expense....... − SE) ..........700 400 (b) (i) (l) (c) (k) (e) (m) (f) (2) (3) (4) Req.. Depreciation expense (+E..700 $ 4...500 4.P4–7..700 because this amount includes all revenues and all expenses (after the adjusting entries)............. but not collected..400 and revenues of $400 were excluded that should have been recorded in 2006.. 1 (1) December 31..000 41..............300 was not correct because expenses of $13...........

......188 of net income...700 41..000 4.400 = (18....... Wagonblatt actually lost $0....... 2006 Debit 9........................... Salary expense (− E)..........8)% The net profit margin indicates that..500 200 4.........700 80.............. 5 Service revenue (− R)...000 5........200 40....P4–7.. Inc..300 0 0 0 0 0 130.........000 400 400 120......... Req................................700 8.... 4 Net profit margin = Net income ÷ Net Sales = $(8................. for every $1 of service revenues..700) net loss ÷ $46.. Retained earnings (− SE) ..........700 Credit Cash Prepaid insurance Equipment Accounts receivable Accumulated depreciation........... Income tax expense (− E).. This ratio implies that Wagonblatt destroys shareholder value in generating its sales and suggests that better management of its business (in terms of sales price or costs) is required.. (continued) Req............ Req..000 130.................. 2007 4-35 ..000 46.. Depreciation expense (− E)................ 6 Wagonblatt Company Post-closing Trial Balance December 31. equipment Income taxes payable Contributed capital Retained earnings Service revenue Salary expense Depreciation expense Insurance expense Income tax expense Totals McGraw-Hill/Irwin Financial Accounting.... 5/e © The McGraw-Hill Companies. Insurance expense (− E).400 8..

....600 29................................................................ DENIS..... Wages payable (+L) .................................$500) Depreciation expense Wages expense Remaining expenses (not detailed) Total expenses Pretax income Income tax expense Net income Earnings per share ($22....... 500 500 500 500 4.... Income Statement For the Year Ended December 31...000 4. A) Depreciation expense (+E.............................. Inc.....000 900 900 7... − ..... 1 December 31....050 $4....400 7..........350 (d) (e) Req.......... 2007 Adjusting Entries: (a) (b) (c) Supplies expense (+E.......................... 2 ST....000 500 500 4.....P4–8........................$300) Insurance expense ($1.. Req...050 ÷ 5. − SE) .. Income tax expense (+E. A) Wages expense (+E..... INC... − SE)................. A) Insurance expense (+E......350 7.000 shares) $77.350 $22...700 47...... Income taxes payable (+L) .......... − SE) ....... − SE) ............ Prepaid insurance (− ................... 2007 Solutions Manual ......000 900 41.................... 2007 Service revenue Expenses: Supplies expense ($800 ........ Supplies (− ..... Accumulated depreciation..... service trucks (+XA............41 McGraw-Hill/Irwin 4-36 © The McGraw-Hill Companies..... − SE) ..000 ..................

$29....000 13.. 2007 4-37 .... 5/e © The McGraw-Hill Companies.......... long term Total liabilities $ 3..........000 22.......000 31............250 Total assets $89............. 2007 Closing Entry: Service revenue (− R).... Supplies expense (− .. Retained earnings (+SE) . Income tax expense (− .........250 20.. E) 77......200 Stockholders' Equity Contributed capital Retained earnings* Total stockholders' equity Total liabilities and stockholders' equity 28................ Inc.........550 57.500 + Net income..550. (continued) ST..... E) Depreciation expense (− . Balance Sheet At December 31...000 *Unadjusted balance............... Req....750 $89.. service trucks Other assets (not detailed) $60....800 20......... 3 December 31............700 7.........000 Liabilities Current Liabilities: Accounts payable Wages payable Income taxes payable Total current liabilities Note payable... $7..050 = Ending balance.....................050 500 500 4..............000) 11.......000 300 500 73....200 29..000 900 7....000 900 41.....350 McGraw-Hill/Irwin Financial Accounting.. $22......... INC........... 2007 Assets Current Assets: Cash Accounts receivable Supplies Prepaid insurance Total current assets Service trucks Accumulated depreciation.....................000 (16. E) Wages expense (− ......... DENIS.....350 11... E) Insurance expense (− .......P4–8. E) Remaining expenses (not detailed) (− E)....

0 k 8 32 23 CE 6 Income Tax Expense p 8 CE Bal.P4–9. CE Bal. 0 16 12 85 McGraw-Hill/Irwin 4-38 © The McGraw-Hill Companies. 0 Income Taxes Payable p 8 Bal. 0 8 Interest Expense n* 1 CE 1 Bal. Accumulated Depreciation Bal.12 x 10/12 Remaining Expenses e 85 CE Bal. 41 Bal. Inc. 0 * $10. 5 f 24 a 10 e 70 c 40 c 120 g 10 d 3 h 13 f 24 k 17 Bal. 2007 Solutions Manual . 4 g Bal. 12 Notes Payable a 10 Bal. 65 d 3 Bal. 14 b Bal. Req. 12 Contributed Capital Bal. 0 Wages Expense o 12 CE Bal. and 5 T-accounts (in thousands) Accounts Cash Receivable Bal. 68 Depreciation Expense m 6 CE Bal. 1. 3. 3 b 9 Bal. 25 Interest Payable n 1 Bal. 8 Service Revenue c 160 160 Bal. 0 Supplies Expense l 16 CE Bal. 10 14 Accounts Payable h 13 Bal. 6 m 6 Bal. 1 Retained Earnings 17 Bal. 10 Other Assets Bal. 5 e 15 i 18 Bal. Bal. 2. Bal. 12 l i 18 16 Bal. 21 Land 9 9 Equipment 60 60 Supplies Bal. Wages Payable o 12 Bal.000 x ..

.. Supplies (+A)............. Cash (− A)............. k..........000 10.... Service revenues earned during 2008................000 17..000 18.......... Other assets (+A)...... Cash (+A)....................000 3.................................... b........................ Accounts payable (+L)......... Cash (− A)...........000 15........ Cash (+A).. 2008.. Purchased additional assets.... Collected on customers' accounts........ Accounts payable (− L)..... 2007 4-39 ....000 18............ 2 a.................000 10............. Retained earnings (− SE)... Accounts payable (+L).... d............. − SE).............000 9...........000 13................................... Remaining expenses incurred during 2008........ 5/e © The McGraw-Hill Companies............. No entry required.. Cash (+A)..000 70................................ Paid creditors............................. McGraw-Hill/Irwin Financial Accounting... March 1....... h.. i......... Cash (+A)......000 160......000 40............000 24..... Purchased supplies for future use.....000 c..... Purchased land for future building site.. Cash (− A)......... Accounts receivable (− A).................. Land (+A)..............000 9.............................. (continued) Req........................ no revenue earned in 2008..................................... Contributed capital (+SE)...........................................000 10............... Inc....................... Sold capital stock for cash............................... e.....000 120.....000 10....... Accounts receivable (+A)... +SE)..............................000 13...........000 85.......... Cash (− A)............................ 17... Cash (− A).......000 3.......... g............... f................ Remaining expenses (+E.........................P4–9...... j........ Service revenue (+R............. Notes payable (+L)............... Borrowed cash on 12% note.......000 24........................ Declared and paid a cash dividend.....................................

December.000 $0.. Depreciation expense (+E.. − SE)..........................000 40......000 m........000 ÷ 68...................000 1...000 1............ INC... 3 l........... 16...... ($10... − SE)........ 2007 Solutions Manual .. − SE)..000] $160...............000 8.. Wages expense (+E.. Wages payable (+L).... To accrue wages incurred but not paid..000 p..........000 x 12% x 10/12)... n....... o... To record depreciation as given.000 1..... To record supplies used ($30 .....000 12......000 $32.. (continued) Req... McGraw-Hill/Irwin 4-40 © The McGraw-Hill Companies..14)......... To accrue income tax.. Inc....... To accrue interest for March ......000 8........... − SE).000 16. Income taxes payable (+L). Supplies (− A)........... 4 Income Statement For the Year Ended December 31.000 8...47 H & H TOOL........000 6...P4–9.. 2008.. Interest payable (+L)...... Supplies expense (+E............. − A).000 16....... 12..................000 12.......000 6..... Accumulated depreciation (+XA.. − SE).......... 2008 Revenues: Service revenue Expenses: Depreciation expense Interest expense Supplies expense Wages expenses Remaining expenses Pretax income Income tax expense Net income Earnings per share [$32. Req.............. Interest expense (+E.000 6... Income tax expense (+E..000 85....

Inc. 2008 Assets: Current Assets: Cash Accounts receivable Supplies Total current assets Land Equipment Less: Accumulated deprec.000 Total assets $147.000 Retained Earnings $ 8.000 1.000 60.000 (17.000 9. Other assets Liabilities: Current Liabilities: Accounts payable Interest payable Wages payable Income taxes payable Total current liabilities Notes payable Total liabilities Stockholders' Equity: Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity H & H TOOL..000 12.000 $68. December 31. INC. INC.000 10.000 Total Stockholders' Equity $73.000 46.000) 14.000 8.000 (17.000) $23.000 76. 2008 Balance Sheet At December 31. 2008 Additional stock issuance Net income Dividends declared Balance.000 68.000) $91. (continued) Statement of Stockholders' Equity For the Year Ended December 31.000 32.000 21. Balance.000 14.000 91.000 $147.000 3.P4–9.000 (12.000 McGraw-Hill/Irwin Financial Accounting.000 $ 25.000 H & H TOOL. 2007 4-41 .000 3. January 1.000 32. 5/e © The McGraw-Hill Companies. $ 41.000 23. 2008 Contributed Capital $65.000 56.

...000 8....... 2008 Cash from Operating Activities: Cash collected from customers (c + f) Cash paid to suppliers and employees (e +h) Cash provided by operations Cash from Investing Activities: Purchase of land (b) Purchase of other assets (g) Cash used for investing activities Cash from Financing Activities: Borrowing from bank (a) Issuance of stock (d) Payment of dividends (k) Cash used for financing activities Change in cash Beginning cash balance.. 2008 Req....... 5 1 December 31...000 16. E) To close revenues and expenses (temporary accounts).....000) (4...... December 31... E) Wages expense (− ....... E) Supplies expense (− ........ E) Remaining expenses (− ....... 2007 Solutions Manual ...000 12..000 85... E) Interest expense (− ..... 160..000 (9.......000 32.......000) (10.............000 6....... Retained earnings (+SE) ... INC...........000 $144.000 $ 41.....P4–9.....000 1......000) 10... Depreciation expense (− ......... E) Income tax expense (− ........... (continued) Statement of Cash Flows For the Year Ended December 31.000) 38. Inc............000 3....000) (19.......000) 61......000 H & H TOOL.. McGraw-Hill/Irwin 4-42 © The McGraw-Hill Companies..000 (17..... 2008 Closing Entry Service revenue (− R).................................000 (83.... January 1................000 3...... 2008 Ending cash balance..........

5/e © The McGraw-Hill Companies.000 23.000 21.P4–9.000 60.000 25. (continued) Req. $ 12..000 1.000 8. 2007 4-43 .000 10.000 Credit H & H TOOL. Inc.000 $159.000 McGraw-Hill/Irwin Financial Accounting.000 68.000 shares) Retained earnings Service revenue Depreciation expense Income tax expense Interest expense Supplies expense Wages expense Remaining expenses (not detailed) Total Debit $ 41.000 0 0 0 0 0 0 0 $159.000 14. INC.000 14.000 9.000 12. 2008 Cash Accounts receivable Supplies Land Equipment Accumulated depreciation (equipment) Other assets (not detailed) Accounts payable Wages payable Interest payable Income taxes payable Notes payable Contributed capital (68. 6 Post-closing trial balance: Post-Closing Trial Balance At December 31.

(b) Total asset turnover = Sales ÷ Average total assets = $160. generates $1.42 for every dollar of assets.37 This suggests that H & H Tool..20 or 20% This suggests that H & H Tool.000+$91..000+$147. Inc. (c) Net profit margin = Net income ÷ Sales = $32. Inc. Inc.000 = 1. how efficient (total asset turnover) and how effective (net profit margin) H & H Tool’s management is.500 = 1.000 ÷ $160..000 ÷ $112. a comparison across time and a comparison against an industry average or competitors will need to be analyzed to determine how risky (financial leverage ratio). 2007 Solutions Manual . Approximately one-third of the assets are financed with debt and the rest with stockholders’ equity.42 This suggests that H & H Tool. Inc.000 = 0.500 ÷ $82.000)÷ 2]÷ [($73. (continued) Req.P4–9.20 for every dollar in sales that it generates. For all of the ratios. finances its assets primarily with stockholders’ equity..000)÷ 2] = $112. McGraw-Hill/Irwin 4-44 © The McGraw-Hill Companies. 7 (a) Financial leverage = Average total assets ÷ Average stockholders’ equity = [($78. earns $0.

680 9 741 544 51 98 90 1 62 $ 3. Starbucks Corporation Adjusted Trial Balance At September 30. Debit $ 66 51 48 181 19 21 68 1. plant.081 38 56 131 64 40 647 212 1.160 McGraw-Hill/Irwin Financial Accounting.. 2 Since debits are supposed to equal credits in a trial balance. Inc. 2006 (in millions) Cash Short-term investments Accounts receivable Inventories Prepaid expenses Other current assets Long-term investments Property. 5/e © The McGraw-Hill Companies. 2007 4-45 . expenses Interest expense Income tax expense Totals Req. and equipment Accumulated depreciation Other long-lived assets Accounts payable Accrued liabilities Short-term bank debt Long-term liabilities Contributed capital Retained earnings Net revenues Interest income Cost of sales Store operating expenses Other operating expenses Depreciation expense General and admin.ALTERNATE PROBLEMS AP4–1. the balance in Retained Earnings is determined as the amount in the credit column necessary to make debits equal credits (a “plugged” figure).160 Credit $ 321 $ 3.

......... To accrue interest expense incurred but not paid............. Req. 1 a..... 225 Maintenance revenue (+R........ This entry reduces the asset (prepaid insurance) because part of it has been used and the remaining $1........... 900 Wage expense is increased (debited) because this expense was incurred by June 30.......... Accounts receivable (+A)...........................600 Prepaid insurance (− A)............... 2007.......... 900 Wages payable (+L)........... 600 600 f.................. Unearned maintenance revenue (− L)....... Interest payable (+L)......... c...000 3... Unearned service revenue (− L)........... +SE). − SE).............000 This entry records an asset for the amount due from customers and recognizes the revenue because it was earned by June 30.......... A liability (wages payable) is credited because this amount is owed to the employees..200 ÷ 12 months x 2 months............. Property tax payable (+L). Deferred revenue Accrued expense Accrued expense Accrued revenue b.......................................... Accumulated depreciation. 700 To recognize revenue earned during the year...... − SE).......... 500 500 h.... Wage expense (+E... d. 1.....................AP4–2............... 2007 Solutions Manual .................... Depreciation expense (+E.000 Service revenue (+R..... c... 2 a............................. service truck (+XA... 700 Service revenue (+R...600 represents future benefits (an asset) to the company.............................. f...... +SE)......... 2..... g.... − SE).................... 3.. 2.... h. Property tax expense (+E..................... To record expense incurred but not paid........... $450 ÷ 2 months x 1 month............... 2007................. $4. − SE).......600 $3............ This entry reduces (debits) the liability for the amount earned and records a revenue.. Req............. e.......... Inc.... $16.. b...200 ÷ 6 months x 3 months of coverage... − A) Depreciation is given. 1....000 x 9% ÷ 12 months x 5 months = $600..... − SE)............ g.. +SE).......000 225 Deferred expense Accrued expense Deferred revenue Deferred expense e. Insurance expense (+E..... d.... Interest expense (+E. McGraw-Hill/Irwin 4-46 © The McGraw-Hill Companies....

.. − A) Depreciation is given. 2007 4-47 ..... Req........................500 This entry records an asset for the amount due from customers and recognizes the revenue because it was earned in 2008..150 Supplies is decreased (credited) to record the use of supplies during the year because this expense was incurred in 2008....500 Catering revenue (+R. 700 $2..... 5/e © The McGraw-Hill Companies.................... AP4–3........000 represents future benefits (an asset) to the company... This entry reduces the asset (prepaid insurance) because part of it has been used while $1.. 1.... (continued) McGraw-Hill/Irwin Financial Accounting...600 Accumulated depreciation..... − SE)...................... 1 a.... d..... Rent expense (+E......... display counters (+XA......... c. +SE).... Inc... calculated as Beg...................... f............200 ÷ 12 months x 2 months of coverage..........AP4–3...............100 ÷ 3 months x 1 month of coverage. b................... 200 $1..... Supplies expense (+E................................................... − SE)......... 7..... Deferred expense Deferred expense Accrued revenue Accrued expense b....... 1..... Req....... − SE)..... 200 Prepaid insurance (− A).. 600 Accrued expenses payable (+L)............200 – Ending Inventory $400.......... 700 Prepaid rent (− A)...600 Deferred expense Accrued revenue Accrued expense Deferred expense e........150 Supplies (− A)....... Inventory of $350 + Purchases $1.... d............... − SE)... A liability (accrued expenses payable) is credited because this amount is owed but will not be paid until 2009. h....... 2 a.......... − SE)...... 1. Accounts receivable (+A)... g......400 represents future benefits (an asset) to the company...................... f.. c.. This entry reduces the asset (prepaid rent) because part of it has been used while $1. Repairs and maintenance expense (+E..... 7...... 1...... Insurance expense (+E.......... 600 Repairs and maintenance expense is increased (debited) because this expense was incurred in 2008. Depreciation expense (+E........ e.

.000 Deferred expense Accrued expense Deferred revenue Deferred expense e.. Interest income (+R.. Assets –1....... d... 7.......... Income tax expense (+E.... d..000 Income Statement Revenues Expenses NE +1... 7.730 -200 -700 -1.....600 +900 –900 –225 +225 NE –3.. e......500 -600 Income before income taxes 25.............000 AP4–5...... 80 80 h......600 NE NE –3.000 +700 –600 –500 +2. Interest receivable (+A)............. 2007 Solutions Manual ..... b..600 +80) Income tax rate x 30% Income tax expense $ 7. $4... − SE). h..... g..719 To accrue income tax expense incurred but not paid: Income before adjustments (given) $22.. Req.000 –700 +700 +600 –600 +500 –500 NE +2. c....719 AP4–4......... +SE)....000 NE NE NE +2. Req....150 +7....600 NE +900 +225 NE NE +3... h... c.......400 Effect of adjustments (a) through (g) +3........ f.719 Income tax payable (+L)....g........330 (-1. f. Inc..... 1 McGraw-Hill/Irwin 4-48 © The McGraw-Hill Companies..000 NE Net Income –1....600 –900 +225 –3. 1 a.000 x 12% x 2/12 = $80....000 +700 NE NE +600 NE +500 +2....... Req....... g. 2 Balance Sheet Stockholders’ Liabilities Equity NE –1. Deferred revenue Accrued expense Accrued expense Accrued revenue Transaction a. To accrue interest income earned but not yet received... b.....

a. f. McGraw-Hill/Irwin Financial Accounting. Depreciation is given. Expense incurred during 2008 to be paid during January 2009. g. Computations: a.000 x 12% x 2/12 = $80. Interest expense accrued for 2 months: $4.719 Supplies used during 2008: Beg. b.400 . e. 5/e © The McGraw-Hill Companies.150 +7.719 income tax expense.600 +80 NE Balance Sheet Stockholders’ Liabilities Equity NE –1.1.100 x 1/3 = $700. c. Assets –1.150 +7. payable within 30 days. c.500 –600 –200 –700 –1.150 +7. Inventory of $350 + Purchases $1. g. 2 Deferred expense Accrued revenue Accrued expense Deferred expense e. d. d. Adjusted income = $22.500 .150 used for the period.600 NE +80 +7. h.730 x 30% tax rate = $7.500 NE NE +600 NE +200 NE +700 NE +1. g. One month of expired rent during 2008: $2.500 +600 –600 NE –200 NE –700 NE –1.600 +80 –7. b.700 . Inc. f. Accrued revenue: earned in 2008 but not yet collected or recorded. d. h.719 –7. e.200 – Ending Inventory $400 = $1.150 NE +7. b. f.600 -200 .150 + 7. c. Two months of expired insurance during 2008: $1. h. Deferred expense Deferred expense Accrued revenue Accrued expense Income Statement Revenues Expenses NE +1. Req.200 x 2/12 = $200.600 + 80 = $25.1. 2007 4-49 .719 Net Income –1.719 Transaction a..600 +80 NE NE +7.500 NE –200 –700 –1.

....... Depreciation expense (+E... Rent expense (+E..500 8....500 54.................... but not collected...500 78........ Deferred revenue (− .................400 and revenues of $9....... +SE) .. Prepaid rent (− A). − SE) ..000 $ 29........ Inc... To record service fees earned....... − SE) .000 17.................... McGraw-Hill/Irwin 4-50 © The McGraw-Hill Companies..............................100 54.....500 6..... 1 (1) December 31........000 6...000 Net income is $14......... 400 400 17....500 17.........................500 400 6.000 8..AP4–6......500 1.. − A) To record depreciation expense................. 2007 Solutions Manual .500 were excluded that should have been recorded in 2006...500 (b) (j) (m) (c) (l) (e) (g) (j) (n) (f) (2) (3) (4) (5) Req...........100 because this amount includes all revenues and all expenses (after the adjusting entries).. To record service fees earned...... To record income taxes for 2006. Net income of $29....... Req. +SE) ............. This amount is correct because it incorporates the effects of the revenue and matching principles applied to all transactions whose effects extend beyond the period in which the transactions occurred.400 $ 14.. − SE) .000 54... To record rent expired as an expense... Accumulated depreciation (+XA............ 2006 Adjusting Entries Accounts receivable (+A) ........ Income tax expense (+E..... 2 Amounts before Adjusting Entries Revenues: Service revenue Expenses: Salary expense Depreciation expense Rent expense Income tax expense Total expense Net income $83............... L) Service revenue (+R.............500 Service revenue (+R. Income taxes payable (+L) ................. 1......000 was not correct because expenses of $24.000 Amounts after Adjusting Entries $92..

.......000 110. This ratio suggests that Abraham is generally profitable........ 3 Earnings per share = $14. Salary expense (− E).500 8.. Rent expense (− E)..500 Prepaid rent 800 Property........2%) of net income. Req..............82 per share Req.100 54............. and equipment 210... (continued) Req..........000 17. 5/e © The McGraw-Hill Companies. 6 Abraham Company Post-closing Trial Balance December 31.......500 14. 2007 4-51 .....000 Accumulated depreciation Income taxes payable Deferred revenue Contributed capital Retained earnings Service revenue Salary expense 0 Depreciation expense 0 Rent expense 0 Income tax expense 0 Totals 230.....000 35...........500 400 6.... Inc............ 4 Net profit margin = Net income ÷ Net Sales = $14..... 5 Service revenue (− R)......... Abraham made $0..... Income tax expense (− E).000 6... Depreciation expense (− E)..... Retained earnings (+SE)....... for every $1 of service revenues.....000 Accounts receivable 1.....100 ÷ $92...500 = 15.........2% The net profit margin indicates that........300 McGraw-Hill/Irwin Financial Accounting........ plant....152 (15.............................300 92..100 net income ÷ 5... Req.800 0 230................000 shares = $2..... 2006 Debit Cash 18............500 Credit 70.........AP4–6....

AP4–7. Req. 1 December 31, 2007 Adjusting Entries: (a) (b) (c) (d) (e) Depreciation expense (+E, − SE) ................................. 3,000 Accumulated depreciation, equipment (+XA, − A) Insurance expense (+E, − SE) ..................................... Prepaid insurance (− ..................................... A) Wages expense (+E, − SE)........................................... Wages payable (+L) ......................................... Supplies expense (+E, − SE) ....................................... Supplies (− .................................................... A) Income tax expense (+E, − SE) ................................... Income tax payable (+L) .................................. 450 450 1,100 1,100 700 700 2,950 2,950 3,000

Req. 2 AUSTIN CO. Income Statement For the Year Ended December 31, 2007 Service revenue Expenses: Supplies expense ($1,300 balance - $600 on hand) Insurance expense Depreciation expense Wages expense Remaining expenses (not detailed) Total expenses Pretax income Income tax expense Net income Earnings per share ($6,900 ÷ 4,000 shares) $48,000 700 450 3,000 1,100 32,900 38,150 9,850 2,950 $6,900 $1.73

McGraw-Hill/Irwin 4-52

© The McGraw-Hill Companies, Inc., 2007 Solutions Manual

AP4–7. (continued) AUSTIN CO. Balance Sheet At December 31, 2007 Assets Current Assets: Cash Accounts receivable Supplies Prepaid insurance Total current assets Equipment Accumulated depreciation Other assets (not detailed) $19,600 7,000 600 450 27,650 27,000 (15,000) 5,100 Liabilities Current Liabilities: Accounts payable Wages payable Income tax payable Total current liabilities Note payable, long term Total liabilities Stockholders' Equity Contributed capital Retained earnings* Total stockholders' equity Total liabilities and stockholders' equity $ 2,500 1,100 2,950 6,550 5,000 11,550 16,000 17,200 33,200 $44,750

Total assets

$44,750

*Unadjusted balance, $10,300 + Net income, $6,900 = Ending balance, $17,200. Req. 3 December 31, 2007 Closing Entry: Service revenue (− R).................................................... Retained earnings (+SE) ................................. Supplies expense (− ..................................... E) Insurance expense (− ................................... E) Depreciation expense (− ............................... E) Wages expense (− ........................................ E) Remaining expenses (not detailed) (− E)........... Income tax expense (− ................................. E) 48,000 6,900 700 450 3,000 1,100 32,900 2,950

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© The McGraw-Hill Companies, Inc., 2007 4-53

AP4–8. Req. 1, 2, 3, and 5 T-accounts (in thousands) Accounts Cash Receivable Bal. 5 b 18 Bal. 4 g 8 a 20 e 28 d 9 c 5 f 3 d 56 h 11 g 8 k 10 j 3 Bal. 27 Bal. 5 Small Tools Bal. 6 l f 3 Bal. 8 Other Assets Bal. 9 Bal. 9 Equipment 18 18

Bal. i

Supplies 2 l 10

8

Bal.

4

1

b Bal.

Accumulated Depreciation m 2 Bal. 2

Accounts Payable h 11 Bal. 7 e 7 i 10 Bal. 13 Interest Payable n 1 Bal. 1 Contributed Capital Bal. 15 c 5 Bal. 20 Income Tax Expense p 4 CE 4 Bal. 0 o Wages Expense 3 CE Bal. 0 3

Notes Payable a 20 Bal. 20

Wages Payable o 3 Bal. 3 Unearned Revenue j Bal. 3 3

Income Taxes Payable p 4 Bal. 4 Retained Earnings k 10 Bal. CE Bal. 4 11 5

Service Revenue d 65 CE 65 Bal. 0 Depreciation Expense m 2 CE Bal. 0 2

Interest Expense n 1 CE 1 Bal. 0 Remaining Expenses e 35 l 9 CE 44 Bal. 0

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© The McGraw-Hill Companies, Inc., 2007 Solutions Manual

AP4–8. (continued) Req. 2 a. Cash (+A)........................................................... Notes payable (+L)................................... Borrowed cash on 10% note, July 1, 2008. Equipment (+A).................................................. Cash (− A).................................................. Purchased equipment, July 1, 2008 Cash (+A)........................................................... Contributed capital (+SE)......................... Sold capital stock for cash. Cash (+A)........................................................... Accounts receivable (+A)................................... Service revenue (+R, +SE)...................... Service revenues earned during 2008. Remaining expenses (+E, − SE).......................... Accounts payable (+L)............................. Cash (− A).................................................. Remaining expenses incurred during 2008. Small tools (+A).................................................. Cash (− A).................................................. Purchased additional small tools. Cash (+A)........................................................... Accounts receivable (− A).......................... Collected on customers' accounts. Accounts payable (− L)........................................ Cash (− A)................................................. Paid on accounts payable to suppliers. Supplies (+A)...................................................... Accounts payable (+L)............................. Purchased supplies for future use. Cash (+A)........................................................... Unearned revenue (+L)........................... Deposit received for revenue not yet earned. 20,000 20,000 18,000 18,000 5,000 5,000 56,000 9,000 65,000 35,000 7,000 28,000 3,000 3,000 8,000 8,000 11,000 11,000 10,000 10,000 3,000 3,000

b.

c.

d.

e.

f.

g.

h.

i.

j.

McGraw-Hill/Irwin Financial Accounting, 5/e

© The McGraw-Hill Companies, Inc., 2007 4-55

.. 3 l..................000 3............... − SE).........000 m... Retained earnings (− SE).............000 4....000 8... To record depreciation as given...... − SE).. To accrue interest for July ............. Depreciation expense (+E.......................... − SE)... Cash (− A)....... To accrue wages incurred but not paid.............. 2007 Solutions Manual .....000 n..............000 p...000 1.....AP4–8................. Income tax expense (+E.......000 Req...... Wages expense (+E.... Small tools (− A).................. 2008....... Income taxes payable (+L). − SE).... Remaining expenses (+E..... Wages payable (+L)................... To record supplies used ($12 – 4) and small tools used ($9 – 8).... Interest expense (+E.......... Inc.........000 x 10% x 6/12)............. Declared and paid a cash dividend.. Interest payable (+L)........................................000 4........ McGraw-Hill/Irwin 4-56 © The McGraw-Hill Companies........... Supplies (− A)...... o.................. To accrue income tax... (continued) k. − SE).. Accumulated depreciation (+XA............000 1... 3.000 10...... 2.......... ($20.000 1................ 10..............000 2.. 9. − A)...December...........

000 1.000 5. 2007 4-57 .000 Total Stockholders' Equity $19. Inc. Statement of Stockholders' Equity For the Year Ended December 31. January 1. December 31.000) $ 5. 4 Income Statement For the Year Ended December 31.. 5/e © The McGraw-Hill Companies.000 $0. 2008 Revenues: Service revenue Expenses: Depreciation expense Interest expense Wages expense Remaining expenses Pretax income Income tax expense Net income Earnings per share [$11. 2008 McGraw-Hill/Irwin Financial Accounting.000 NEW AGAIN FURNITURE.000 (10.000 ÷ [(15. INC.000 (10.000 5.000+20.000) $25. 2008 Contributed Capital $15. 2008 Additional stock issuance Net income Dividends declared Balance.000 44.000 4.AP4–8.000 $11.63 NEW AGAIN FURNITURE.000 11. Balance.000 3.000 15. (continued) Req.000 Retained Earnings $ 4. INC.000 $20.000)÷ 2] $65 000 2.000 11.

December 31. Balance Sheet At December 31. 2008 $ 67. 2008 Assets: Current Assets: Cash Accounts receivable Supplies Small tools Total current assets Equipment Less: Accum.000 3.000 1. McGraw-Hill/Irwin 4-58 © The McGraw-Hill Companies. depr. Inc.000 4.000 Total assets $69.000 5.000 3. INC.000 5. 2007 Solutions Manual .000 NEW AGAIN FURNITURE.000 25. 2008 Cash from Operating Activities: Cash collected from customers (d + g + j) Cash paid to suppliers and employees (e + h) Cash provided by operations Cash from Investing Activities: Purchase of equipment (b) Purchase of small tools (f) Cash used in investing activities Cash from Financing Activities: Borrowing from bank (a) Issuance of stock (c) Payment of dividends (k) Cash provided by financing activities Change in cash Beginning cash balance.000 Statement of Cash Flows For the Period Ended December 31.000 4. January 1.000) 9.000 44.000 $69.000 Liabilities: Current Liabilities: Accounts payable Notes payable Wages payable Interest payable Income taxes payable Unearned revenue Total current liabilities Stockholders' Equity: Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $13.000) (21.000 $ 27. Other assets $27. 2008 Ending cash balance.000 22.000) 20.000 8. (continued) NEW AGAIN FURNITURE.000 18.000) (3.000 (10.000 20.AP4–8..000 44.000) 15.000 (18. INC.000) 28.000 5.000 20.000 5.000 (39.000 (2.

. 2007 4-59 ...000 $71.......000 5.AP4–8..000 3......... 5/e © The McGraw-Hill Companies.000 5. Retained earnings (+SE) .......000 3...000 NEW AGAIN FURNITURE..000 3........ E) Wages expense (− ... E) Interest expense (− . 2008 Closing Entry Service revenue (− R)....... Inc.000 18....... 2008 Debit $27.......000 2........... Req.... Depreciation expense (− ..000 1......000 20..000 20.......000 44....... E) Income tax expense (− . (continued) Req....000 4.......000 0 0 0 0 0 0 $71...............000 11......... INC.. Post-Closing Trial Balance At December 31. 5 December 31.........000 1.........000 4.... E) Remaining expenses (− .. 6 65....000 8...000 shares) Retained earnings Service revenue Depreciation expense Wages expense Income tax expense Interest expense Remaining expenses (not detailed) Totals Credit $ 2............... E) To close revenues and expenses....000 Account Titles Cash Accounts receivable Supplies Small tools Equipment Accumulated depreciation Other assets (not detailed) Accounts payable Notes payable Wages payable Interest payable Income taxes payable Unearned revenue Contributed capital (20...........000 9........000 4.000 McGraw-Hill/Irwin Financial Accounting.....................000 13...

Inc.AP4–8. Inc.000)÷ 2]÷ [($19. (continued) Req. a comparison across time and a comparison against an industry average or competitors will need to be analyzed to determine how risky (financial leverage ratio).37 This suggests that New Again Furniture.. The company borrowed $1. 7 (a) Financial leverage = Average total assets ÷ Average stockholders’ equity = [($26.000 = 2. finances its assets more with debt than stockholders’ equity. Inc.500 ÷ $22.. (c) Net profit margin = Net income ÷ Sales = $11. earns $0. Inc.000+$25.000 ÷ $47. McGraw-Hill/Irwin 4-60 © The McGraw-Hill Companies.17 for every dollar in sales that it generates. how efficient (total asset turnover) and how effective (net profit margin) New Again Furniture’s management is.37 for every dollar of assets.17 or 17% This suggests that New Again Furniture.000 = 0.500 = 1.16 and utilized $1 of stockholders’ equity to acquire every dollar of assets. generates $1.000)÷ 2] = $47.000 ÷ $65.. For all of the ratios. 2007 Solutions Manual ..000+$69.16 This result suggests that New Again Furniture. (b) Total asset turnover = Sales ÷ Average total assets = $65.

As such. Prepaid rent represents rent that Pacific Sunwear of California has paid in advance to its landlords.67 for 2002. Prepaid Expenses were $19. 1. These accounts are temporary accounts that have been closed to Retained Earnings. 9. $1. The company reported basic earnings per share of $1. The company reported $26. This information is disclosed on the balance sheet.CASES AND PROJECTS FINANCIAL REPORTING AND ANALYSIS CASES CP4–1. McGraw-Hill/Irwin Financial Accounting.41 for fiscal year 2004.826 thousand for unearned (deferred) revenue.647 thousand in currently payable sales taxes at the end of the 2004 fiscal year. 2. Accrued Liabilities would consist of costs that have been incurred by the end of the accounting period but which have not yet been paid. The company’s income statement accounts (revenues. It is an asset. 5. expense.476 thousand was prepaid rent. This information is disclosed in Note 5 regarding accrued liabilities. $12. Prepaid Expenses is an asset account.05 for 2003. 5/e © The McGraw-Hill Companies. and losses) would not have balances on a post-closing trial balance. 7.943 thousand. Deferred rent represents rent that it has collected in advance for which PacSun has an obligation to allow a tenant to use PacSun’s property. 2007 4-61 . Of that amount. Inc.. and $0. 6. Interest Income is related to the company’s short-term investments. 8. The company owed $6. 3. gains. Pacific Sunwear also rents property to tenants. It is not closed at the end of the period. 4. This information is disclosed on the balance sheet. At the end the 2004 fiscal year. it is a permanent account that carries its ending balance into the next accounting period.

2005..059 Sales 2003: Net Profit Margin 847.229. Inc.. Note 15 discloses quarterly information... generating greater sales.024. Management appears to be controlling costs... Retained Earnings.041.456 2004: Net Profit Margin = Net Income = $106... or both. 2007 Solutions Manual ..138 thousand in income taxes in its 2004 fiscal year. but a summary entry for them all would be: Other income (net) .087 Sales 1.904 = 0.. (continued) 10. Other income (net) is an aggregate of many accounts..” 2. The worst quarter ended May 1. was its best quarter in terms of sales at $674.. Pacific Sunwear of California is becoming progressively more profitable each year. The quarter ended January 29. 4. CP4–2.. 3.129 4.. the company’s net profit margin has increased... and most likely this is because most people have very little money to spend on extra clothing in that period... American Eagle paid $121.... Fiscal year 2002: Net Profit Margin (dollars in thousands) = Net Income = $49. 1.077 Sales 1.762 Over the past three years..CP4–1.. as disclosed in note 2 under “Supplemental Disclosures of Cash Flow Information.129 McGraw-Hill/Irwin 4-62 © The McGraw-Hill Companies.000 (this quarter covered Christmas.150 = Net Income = $80.... 2004 (the quarter following Christmas). the biggest part of the year for retailers)...200 = 0..666 = 0.

241 Over the past three years.064 Sales 2003: Net Profit Margin 1.042 Sales 1.801 6. Inc.343 = 0. Fiscal year 5.881. (continued) 4.707 2.113 Sales 1. 2007 4-63 . Accounts and Note Receivable consists of (in thousands): Fabric Construction allowances Sell-offs to non-related parties Taxes Distribution services Sale of Bluenotes Other Total 5. management appears to be controlling costs. generating greater sales.622 = 0.108 = 0. 2002: Net Profit Margin 2.CP4–2.435.432 (dollars are in thousands) = Net Income = $88.923 = Net Income = $59.382. or both. McGraw-Hill/Irwin Financial Accounting. As disclosed in Note 4.584 2.797 $26..015 2.657 2. the company’s net profit margin at first decreased and then the most recent year’s profit margin was almost double that during the 2002 fiscal year. 5/e © The McGraw-Hill Companies.871 6.436 2004: Net Profit Margin = Net Income = $213. In 2004.

1. PacSun expenses its television costs when the advertising becomes publicly available. This might imply that they are more effective.436 3. and sales will eventually decline as their brands lose value. 2.382.241 2.9% Both American Eagle Outfitters and Pacific Sunwear of California are spending less on advertising as a percentage of sales than the average company in their industry. Fiscal Year 2004 2003 2002 American Eagle Outfitters Advertising Expense / Net Sales 41. American Eagle allocates advertising costs for television campaigns over the life of the campaign.2% 44. 4.9% 10.229.. American Eagle Outfitters reported an advertising expense of $41.150 1. 3. Both accounting policies are similar indicating that advertising costs are expensed when the marketing campaigns become publicly available. and note 2 of American Eagle’s annual report).041.CP4–3.456 1. Both firms had a steadily declining balance of advertising costs as a percentage of net sales.900 / 847.400 / 1. 2007 Solutions Manual .2% Pacific Sunwear of California Advertising Expense / Net Sales 11.400 /1. Advertising/Sales = Industry Average 3. (See Note 1 under Advertising Costs).03% American Eagle Outfitters 2.400 / 1.400 / 1.4 million for fiscal 2004 (Note 2 under Advertising Costs). (The policies are disclosed in note 1 of Pacific Sunwear of California’s annual report.2% Pacific Sunwear of California .0% 8.435.1% 44.1% American Eagle Outfitters incurred the higher percentage for fiscal year 2004. Another interpretation is that they are not supporting their brand.923 3. as they are generating more sales per dollar spent on advertising.762 . Pacific Sunwear of California reported $11.800 / 1.4 million of advertising costs during fiscal 2004.881. McGraw-Hill/Irwin 4-64 © The McGraw-Hill Companies. Inc.

042 1.343 = 0. 2002: Net Profit = Net Income Margin Sales 2003: Net Profit = Net Income Margin Sales 2004: Net Profit = Net Income Margin Sales American Eagle Outfitters $88. Inc.666 = 0.241 Pacific Sunwear of California $49.382.762 Both companies show an increase in their profit margins over the 2002-2004 time period. 5/e © The McGraw-Hill Companies.622 = 0. therefore being able to charge a higher price. With the exception of 2003.CP4–3.087 $1. Pacific Sunwear of California shows steadily increasing profit margins over time. 6.150 $80.7% Both companies. (continued) 5. American Eagle has been able to attain a greater profit margin than that for Pacific Sunwear of California.436 $213. American Eagle Outfitters and Pacific Sunwear of California have higher Net Profit Margins than the average company in their industry.059 $847. Net Profit Margin = Industry Average 4.456 $106.229.200 = 0. suggesting a better overall performance. whereas American Eagle showed a dip in its profit margin in 2003.064 1. This is likely due to the strategy that these two companies have pursued.881..3% Pacific Sunwear of California 8. which is to differentiate their clothing in terms of style and quality and appeal to a particular niche market.904 = 0.923 $59.108 = 0.041.52% American Eagle Outfitters 11.113 1.077 $1. McGraw-Hill/Irwin Financial Accounting.435. 2007 4-65 .

Examples include uncertainties as to how much revenue a company will generate from current-period expenditures for research and development. in extreme cases. 2007 Solutions Manual . Examples include the various depreciation methods available to managers and expensing research and development. and net income in particular. to engage in outright fraud. 2 The uncertainties that the author believes are problems in current financial reporting are related to the subjective assumptions about the future (accruals) – revenue recognition and expense matching.” This causes managers to make decisions to meet short-term earnings expectations. employee training. brand building. these uncertainties about the future combined with historical information produce financial statements. Inc. According to the author. or additions to production capacity. that do not tell users what they need to know to make investing and lending decisions. There is also subjectivity in matching expenses with revenues.CP4–4 Req. Req. often at the expense of longterm shareholder value. 1 The author suggests that the root cause of accounting scandals is “a widespread obsession with earnings that drives companies to push accounting standards to the limit and.. McGraw-Hill/Irwin 4-66 © The McGraw-Hill Companies.

service equipment Remaining assets Note payable.000 160.000 313.620) Req. 1 Account Cash Maintenance supplies Service equipment Accumulated depreciation..000 18. and to reduce the supplies account to the amount remaining on hand at the end of 2007. $9. 2007 4-67 . 5/e © The McGraw-Hill Companies.000 220.500 10. To reduce service revenue for cash collected in advance of being earned and to record the liability for those services yet to be performed.000.CP4–5.320 336.500 10. ($214.700 Post-Closing Trial Balance Debit Credit 20. $300.000 500 90. 8% Interest payable Income taxes payable Wages payable Unearned revenue Contributed capital Retained earnings Service revenue Expenses Unadjusted Trial Balance Debit Credit 20.000 9.000.000 + Net income.. computed as $10.020 500 6. $13.000 183.000 214.620 336.380 0 152. Inc. To accrue interest expense for 2007 (the interest is payable in 2008. To record 2007 income tax and the related liability.000 56.320 0 152.000 Ending Retained Earnings = Beg.000 39.000 .000 42.000 56.000 42. $6.500 10.000 27.700 Adjusted Trial Balance Debit Credit 20.000 x 8% = $800) and to record interest payable.000 27.000 56.000 42.000 800 13.000 313. Req.000 200 90. To record 2007 wages of $500 that will be paid in 2008.000 800 13. To record depreciation expense for 2007.020. $9.000 9.000 200 90.020 500 6. 2 (a) (b) (c) (d) (e) (f) To record the amount of supplies used during 2007. McGraw-Hill/Irwin Financial Accounting.183.

620 Req.... 183......020 ? = $13........... Inc.. 2007: Service revenue (from the adjusted trial balance) (− R). 30..170.....600) x $43.020 ? = 30% McGraw-Hill/Irwin 4-68 © The McGraw-Hill Companies......000 Retained earnings (+SE)...........380 Expenses (from the adjusted trial balance) (− E)... 5 Number of shares issued x 8.... 214..000 ? = $7..CP4–5.... 4 Pretax income x ($214......000 x Average issue price = Total issue amount ? = $56.. 2007 Solutions Manual .000 ..00 per share Average income tax rate = Income tax expense ? = $13.400 x Req..... 3 Closing Entry on December 31.. (continued) Req...

Income statement: Depreciation expense...000 McGraw-Hill/Irwin Financial Accounting...... Balance sheet at December 31.. 2. 5/e © The McGraw-Hill Companies.400 Accumulated depreciation (+XA.. An adjusting entry each year over the life of the asset would be recorded to reflect the allocation of the cost of the asset when used to generate revenues: Depreciation expense (+E. 4... Inc.000) as of December 31..... 16...... and (b) to decrease the liability to $8....000 4.000 . Transaction (a): 1. 2...... This is in conformity with the revenue principle... 2007 4-69 .... 2008: Assets: Office equipment Less: Accumulated depreciation* Carrying (book) value *$1.$16.000..400 each year $14.. and two months' rent revenue will be earned in 2009.. 2008--Adjusting entry: Unearned rent revenue (− . as given 3. an adjusting entry must be made to (a) increase the rent revenue account by $16.. Yes. This transaction will affect Shirley’s financial statements for 2 years--2008 and 2009--because four month’s rent revenue was earned in 2008..800 4.000 ($24.... +SE). 2008.200. − SE) 1.. The 2008 income statement should report rent revenue earned of $16. This transaction will affect Shirley’s financial statements for 10 years (from 2006 to 2015) in conformity with the matching principle... − A) 1.200 $ 9. 16..000 = $8.000 liability ($24.400 Transaction (b): 1. because at that date Shirley "owes'' the renter two more months' occupancy for which it has already collected the cash.. December 31. Occupancy was provided for only 4 months in 2008. 3.. $1.000 representing the future occupancy owed (in conformity with the revenue principle)...400 x 3 years = $4.000 x 4/6)..000 L) Rent revenue (+R.. This transaction created an $8.CP4–6...

.......... 2008 is: Accounts receivable (+A)..........500 Note: On January 5....500 as an expense in 2008 (matching principle) and (b) to record the liability which will be paid in 2009. 2........000 ($60........... 2008--Adjusting entry: Wage expense (+E.. 2007 Solutions Manual ..500 Wages payable (+L) .......... 2009..... This adjusting entry is necessary to (a) record the revenue earned (to be reported on the 2008 income statement) and (b) record the related account receivable (an asset to be reported on the 2008 balance sheet).. − SE) .. +SE).. an adjusting entry must be made to (a) record the $7.e......000 (i.... December 31.......500... 2009......... (continued) Transaction (c): 1................. The adjusting entry on December 31...... 45............ the 2009 balance sheet will reflect a reduced cash balance and reduced liability balance...................500 should be reported as wage expense in the 2008 income statement and as a liability on the 2008 balance sheet. On January 5....... Yes............. 45.. This transaction will directly affect Shirley’s financial statements for two years... 45. The 2009 related entry will debit (decrease) wages payable.. Wages Payable..... service revenue of $45. with the expense incurred in 2008 and the cash payment in 2009...000 total price x 3/4 completed) 3.. the liability will be paid.000 Service revenue (+R. 2..000 McGraw-Hill/Irwin 4-70 © The McGraw-Hill Companies........ 15.000 Accounts receivable (− A)....... $7.. Wage expense for 2009 will not include this $7........ 7.500...CP4–6.. 60.... Service revenue is recognized as the service is performed.....000 Service revenue (+R.. the liability.000 x 3/4) should be recorded as earned by Shirley in conformity with the revenue principle.. Inc......500... and credit (decrease) cash... Recognition of revenue earned but not collected by the end of 2008 requires an adjusting entry... The transaction will not directly affect the 2009 income statement (unless the adjusting entry was not made)... Transaction (d): 1. 2009--Completion of the last phase of the service contract and cash collected in full: Cash (+A) ....... $60.. The $7......... February 15. 7...... Therefore...................... +SE).. will be paid.... 3..... Yes........... $7...

− SE) ............................................... Closing entry (from the adjusted trial balance): Revenues (− R)....... − SE) ... +SE)............. − A) To adjust for annual depreciation........... − SE) ..... 1 1 2 2 11 11 3 3 5 5 3 3 (c) (d) (e) (f) Req.... Income taxes payable (+L) .... Wages payable (+L) ................................................. Expenses (wages) (+E.................... Revenues (rent) (+R.................... Prepaid insurance (− .......................... A) To adjust for expired insurance.... To adjust for rent revenue earned but not yet collected........... Unearned rent revenue (− L)..... +SE)........................................................ To adjust for income tax expense.......... Accumulated depreciation.. Income tax expense (− E)...................................... − SE) ............................ Inc................................ Income tax expense (+E............... 2 103 15 83 5 McGraw-Hill/Irwin Financial Accounting.. Revenues (rent) (+R.................... To close the temporary accounts to Retained Earnings for 2006............................ (b) Rent receivable (+A) .................................... To adjust for rent revenue collected but unearned....... To adjust for wages earned but not recorded or paid...........CP4–7..................... Expenses (depreciation) (+E.... Expenses (− E).............................................................................. 5/e © The McGraw-Hill Companies.......... Req............. 1 Adjusting entries: (a) Expenses (insurance) (+E................................. long-lived assets (+XA............................................ 2007 4-71 ...... Retained earnings (+SE) ...................

000) + Net income. borrowing.000 shares (per (a) above) =$15. in addition to certain revenues. 2006.000 total expenses) = 25%. and revenue collected in advance.00 per share.000 revenues $83.report on the balance sheet as a liability (for future occupancy "owed'').000 ÷ 1.report on the balance sheet as an asset. Therefore.6%). Inc. (continued) Req. (j) Net profit margin: $15.000 = $12.000. (g) EPS: $15. (i) The prepaid insurance account reflected a $2.CP4–7.000 contributed capital ÷ 1. were from numerous sources such as the issuance of capital stock.000 x 10% = $2. and dividends to stockholders. 2006. Other possibilities might be (a) a 12-month policy purchased on July 1. it appears that the policy premium was paid on January 1. (c) Ending balance in retained earnings: Unadjusted balance. prepaid insurance. 2007 Solutions Manual . (e) Rent receivable -. 2006.000 shares = $30 per share. and it was prepaid for two years (2006 and 2007).000 was computed on the basis of accrual accounting concepts.000.000 income tax expense ÷ ($103. (d) Average income tax rate: $5. In any case. $(3.000 revenues = 0.. (h) Selling price per share: $30. one-half of the premium has expired. Cash inflows. cash outflows were.146 (14. Revenue is recognized when earned and expenses recorded when incurred regardless of the timing of the respective cash flows. (b) Interest expense: $20. 3 (a) Shares outstanding: 1. (f) Net income of $15.000 net income ÷ $103.000. McGraw-Hill/Irwin 4-72 © The McGraw-Hill Companies. in addition to certain expenses. Similarly. Unearned rent revenue -.000 balance before the adjustment (decrease) of $1. $15. or (b) a 2month policy purchased on December 1. due to numerous transactions such as the purchase of operational and other assets.000 shares (given).

12. Inc.115.125 31.000 Add December 2008 salary ($18.900 29.200 *** Beg.000 Corrected Basis $1. Supplies (d) 3.000 -132.600 11.375 $1.400 No change 0 Given for 2008 (c) 752.500 29. 522.200 See ** below. INC.200 + $1. 2009 ($130. Used McGraw-Hill/Irwin Financial Accounting. Exclude rent for Jan. 2008 Cash Basis Per Crystal’s Statement $1.825 5.000 ÷ 13) (g) 43.625 $ 250.000 120.500 761.$1.400 20.012.115.000 43. 2007 4-73 .800).400 ..000 + 29.000 $1.000 130.012.000 Items Revenues: Spa fees Expenses: Office rent Utilities Telephone Salaries Supplies Miscellaneous Depreciation Total expenses Net income * Explanation of Changes See * below. 5/e © The McGraw-Hill Companies.900 See *** below. Purchases End.600 No change 12.000 ÷ 12) (e) 31.100 $ 362.800 = $11. Income Statement For the Year Ended December 31. 1 CRYSTAL’S DAY SPA AND SALON.825 12. Req.CP4–8.900 Cash collected for spa fees Fees earned in prior years (a) Fees earned in 2008 but not yet collected (b) Fees earned in 2008 ** Add December 2008 bill of $1.400 (f) and subtract the December 2007 bill of $1.800 523.800 paid in 2008 ($12.

is there a long-term noncancellable lease? (f) Characteristics of Crystal’s spa practices. (2) Some other items the parties should consider in the pricing decision: (a) A correct balance sheet at December 31. (g) Expected future cash flows of the business.. 2 Memo to Crystal Mullinex should include the following: (1) Net income was overstated by $112.CP4–8.525). (b) Collectibility of any receivables (if they are to be sold with the business). What is the present value of those expectations? McGraw-Hill/Irwin 4-74 © The McGraw-Hill Companies. 2007 Solutions Manual . (c) Any liabilities of the spa to be assumed by the purchaser. Revenue should be recognized when earned. (continued) Req. 2008.how will they be affected? (e) Adequacy of the rented space -. expenses should be matched against revenue in the period when the services or materials were used (including depreciation expense). Inc.525 because of inappropriate recognition of revenue (overstated by $103. not when the cash is collected. Similarly.000) and expenses (understated by $9. (d) Current employees -.

000 8. Transportation revenue (− +SE) ……… R.600 Income tax expense: $14. Income tax expense (+E. Insurance expense (+E.000 − 7. To record depreciation for one year.200 7..000 8. Req. To record supplies used ($6. Salaries expense (+E.000 2.200 4. − SE)…………………. 1 2007 12/31 (a) Adjusting Entries Supplies expense (+E.200 Credit (b) 2.000 7.200 2.400 Pretax income $14.800 = $4. − SE)………………… Supplies (− A)……………………………….000 + 2.000 2.000 Expenses: $47.200). Income tax payable (+L)…………………… To record 2007 income tax computation: Transportation revenue: $85..650 Debit 4. Unearned transportation revenue (+L)…… To record transportation revenue earned but collected in advance. 2007 4-75 . 2007.000 (c) (d) (e) (f) 3. − A)……. Prepaid insurance (− A)…………………… To record expired insurance at December 31.000 .600 x 25% = $ 3.650 McGraw-Hill/Irwin Financial Accounting.650 3. Depreciation expense (+E. − SE)………………… Accumulated depreciation (+XA.200 + 2.000 = $78. Inc.000 + 8. 5/e © The McGraw-Hill Companies.200 = 63. − SE)………………………… Salaries payable (+L)……………………… To record salaries earned but not paid..000 + 4.CRITICAL THINKING CASES CP4–9.$1. − SE)…………………….

000 2.000 $ 2.800 d e f 2.000 3.200 2.. Inc.000 3. 2007 Solutions Manual .000 73.200 7.200 16.000) 27.000 12.000 3.650 67.000 8.800 40.650 © The McGraw-Hill Companies.000 10.000 (8.200 4.000 $ 9.000 15.000 18.000 $67.650 21.200 7.000 38.000 4.CP4–9.950 $67.000 6.000 17.000 40.000 $82.650 7.000 a b c 8. (continued) Req.000 3.000 35.950 $ 2.000 0 0 0 47.200 18.000 3.800 $ 9.000 2.000 1.950 45.000 Corrected Amounts $ 85. Remaining assets Total assets Liabilities: Current Liabilities: Accounts payable Salaries payable Unearned transportation revenue Income tax payable Total current liabilities Stockholders' Equity Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity McGraw-Hill/Irwin 4-76 Changes Plus Minus e d a b c f 2.000 4.000 8. 2 MAGLIOCHETTI MOVING CORPORATION Corrections to 2007 Financial Statements Amounts Reported 2007 Income Statement: Revenue: Transportation revenue Expenses: Salaries expense Supplies expense Other expenses Insurance expense Depreciation expense Income tax expense Total expenses Net income December 31.000 $ 78.000 0 0 0 9.000 3.000 19.850 35.000 $82.050 $ 10. 2007 Balance Sheet Assets: Current Assets: Cash Receivables Supplies Prepaid insurance Total current assets Equipment Less: Accumulated deprec.000 0 27.000 $ 38.800 2.000 8.200 2.

0% Each of the ratios was affected by inclusion of the adjustments with revenues decreasing and expenses increasing resulting in a lower net income.CP4–9.$10. McGraw-Hill/Irwin Financial Accounting. 2007 4-77 . (continued) Req.000 net income ÷ 85.7% Adjusted -.000 net income ÷ 10. 3 Omission of the adjusting entries caused: (a) Net income to be overstated by $27.000 sales = 44.950 net income ÷ 78..950 net income ÷ 10. Inc.000 shares = $1.000 sales = 14.050.80 per share Adjusted -. 4 (a) Earnings per share: Unadjusted -. 5/e © The McGraw-Hill Companies.$10.095 per share (b) Net profit margin: Unadjusted -. resulting in a significantly lower figure. For earnings per share.$38.000 shares = $3. Req. (b) Total assets to be overstated by $14.200. the numerator net income decreased while the denominator did not. For the net profit margin.$38. the denominator sales was lower but did not decrease more than the reduction in the numerator net income causing a significantly lower percentage.

We require that there be sufficient collateral pledged against the loan before we can consider it.200. Total assets were overstated by $14. all of the expenses were understated and income tax expense had been incorrectly excluded. 2007 Solutions Manual . $82.050 (i.000 . would be compared to those of other start-up companies in the same industry.e.200 (i. The current market value of the equipment may be able to provide additional collateral against which the loan could be secured.950).$67.000.800). however. Inc. The original (unadjusted) financial statements overstated net income for 2007 by $27.. prepaid insurance was overstated by $2. Further.000 loan has been denied. $38.000 of revenue collected in advance that had not been earned in 2007. Our review showed that various adjustments were required to the original set of financial statements provided to us. please provide us the current market values of any assets you would pledge as collateral. This overstatement was caused by incorrectly including $7.7% to 14.$10. A review of key financial ratios indicates that the adjustments caused earnings per share and net profit margin to decline.0%. Regards.000 . 5 (today’s date) To the Stockholders of Magliochetti Moving Corporation: We regret to inform you that your request for a $20. This is a common requirement for small start-up businesses. (your name) Loan Application Department. Supplies was overstated by $4. Your Bank McGraw-Hill/Irwin 4-78 © The McGraw-Hill Companies. (continued) Req.000 because annual depreciation was not properly recognized.. Net profit margin declined from 44. If you would like us to reconsider your application.CP4–9.e. The adjusted ratios. 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. and the net book value of the equipment was overstated by $8..

.000 . 1 Cash from Operations: $18.. 3.000 revenue target based on cash sales: This target is not clearly defined.. b. McGraw-Hill/Irwin Financial Accounting...CP4–10. only generating 87.. Under this assumption. This example demonstrates the need for clear communication of expectations by management. sales revenue earned and received in cash is $3.500 or $18. +SE). 2008 Unearned Subscriptions Revenue ($18.500 3. You may be entitled to a generous bonus due to your strong performance.. 5/e © The McGraw-Hill Companies...500.500 (the accrual accounting basis amount). 3..... Req..000 x 7/36): $3. By this assumption.....500 Unearned subscriptions revenue (− L).... your region far exceeded the company’s target..500 = $14..500 To record the earning of revenue for seven months ($500 per month). If this is the company’s intention of its target. $4.. 2008 ($18.000 in cash subscriptions.500 Req. management may mean any sales revenue earned that has also been received in cash during the period.000 Req....500 End... Req. 2 Subscriptions Revenue for fiscal year ended March 31. 2007 4-79 .500 Subscriptions revenue (+R.. 5 a. You may need to provide an analysis to management regarding this below par performance. Does management mean any cash subscriptions received during the period? Your region generated $18.000 x 29/36) = $14.........000 revenue target based on accrual accounting: This situation is the same as the second assumption under a. On the other hand.. 4 Adjusting entry (cash receipt credited to Unearned Subscriptions Revenue): Unearned Subscriptions Revenue (L) 9/1 18. 3 March 31. 3...000 AJE 3. Inc.. $4.. then your region did not meet the goal.. Your region earned $500 less than expected by the company.500 Subscriptions Revenue (R) AJE End. Req...$3. 14.5% of the target.

2007 Solutions Manual . McGraw-Hill/Irwin 4-80 © The McGraw-Hill Companies.. The solutions to this project will depend on the company and/or accounting period selected for analysis. Inc.FINANCIAL REPORTING AND ANLYSIS PROJECT CP4–11.