HWChap003 ANS

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

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Chapter 3 Adjusting Accounts and Preparing Financial Statements

QUESTIONS

1. The cash basis of accounting reports revenues when cash is received while the accrual basis reports revenues when they are earned. The cash basis reports expenses when cash is paid while the accrual basis reports expenses when they are incurred and matched with revenues they generated.

2. The accrual basis of accounting generally provides a better indication of company performance and financial condition than does the cash basis. Also, the accrual basis increases the comparability of financial statements from one period to the next. Thus, business decision makers generally prefer the accrual basis.

3. Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year.

4. A prepaid expense is an item paid for in advance of receiving its benefits. As such, it is reported as an asset on the balance sheet.

5. Long-term tangible plant assets such as equipment, buildings, and machinery lead to adjustments for depreciation. Generally, land is the only long-term tangible plant asset that does not require depreciation.

6. The Accumulated Depreciation contra asset account is used for depreciation. It provides financial statement users with additional information about the relative age of the assets. Without the contra account information, the reader would not be able to tell whether the assets are new or in need of replacement.

7. Unearned revenue refers to cash received in advance of providing products and services. Another name for unearned revenue is deferred revenue. It is reported as a liability on the balance sheet.

8. Accrued revenue is revenue that is earned but is not yet received in cash (and/or other assets) and the customer has not been billed prior to the end of the period. Therefore, end-of-period adjustments are made to record accrued revenue. Examples are interest income that has been earned but not collected and revenues from services performed that are neither collected nor billed.

9.A If prepaid expenses are initially recorded with debits to expense accounts, then the prepaid expenses asset accounts are debited in the adjusting entries.


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10. For Research In Motion, all of the accounts under the category of Property and Equipment (except for Land), require adjusting entries. The expense related to the Depreciation Expense account would be understated on the income statement if Research In Motion fails to adjust these asset accounts. If the adjusting entries are not made, net income would be overstated. Note: Students might also correctly identify accounts receivable (for bad debts), Intangible assets (for amortization), Inventories (for shrinkage), and Short- and Long-term investments (for fair value) as needing adjustment.

11. Nokia reports 1,867 EUR (000,000s) for property, plant and equipment. For its adjusting entry, it would need to record Depreciation Expense (debit) on the plant and equipment and Accumulated Depreciation (credit) as the contra to the Property, plant and equipment account.

12. The accrued wages would be reported as part of the liability ―Other Accrued Liabilities‖ on Palm’s balance sheet.


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QUICK STUDIES

Quick Study 3-1 (10 minutes) a. UR Unearned revenue b. PE Prepaid expenses (Depreciation) c. AE Accrued expenses d. AR Accrued revenue e. PE Prepaid expenses Quick Study 3-2 (10 minutes) a. Insurance Expense ....................................................... 1,800 Prepaid Insurance ................................................. 1,800 To record 6-month insurance coverage expired.

b. Supplies Expense ......................................................... 2,700 Supplies .................................................................. 2,700 To record supplies used during the year. ($1,000 + $3,000 – [?] = $1,300)

Quick Study 3-3 (10 minutes) a. Depreciation Expense—Equipment ............................ 5,000 Accumulated Depreciation—Equipment ............. 5,000 To record depreciation expense for the year.

($30,000 - $5,000) / 5 years = $5,000


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b. No depreciation adjustments are made for land as it is expected to last

indefinitely. Quick Study 3-4 (15 minutes) a. Unearned Revenue ........................................................ 15,000 Legal Revenue ....................................................... 15,000 To recognize legal revenue earned (20,000 x 3/4).

b. Unearned Subscription Revenue ................................ 2,400 Subscription Revenue ........................................... 2,400 To recognize subscription revenue earned. [100 x ($48 / 12 month) x 6 months]


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Quick Study 3-5 (10 minutes) Salaries Expense ........................................................... 400 Salaries Payable .................................................... 400 To record salaries incurred but not yet paid. [One student earns, $100 x 4 days, M-R]

Quick Study 3-6 (15 minutes) Accounts Debited and Credited Financial Statement

a. Debit Unearned Revenue Balance Sheet Credit Revenue Earned Income Statement b. Debit Depreciation Expense Income Statement Credit Accumulated Depreciation Balance Sheet c. Debit Wages Expense Income Statement Credit Wages Payable Balance Sheet d. Debit Accounts Receivable Balance Sheet Credit Revenue Earned Income Statement e. Debit Insurance Expense Income Statement Credit Prepaid Insurance Balance Sheet


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Quick Study 3-7 (10 minutes) Cash Accounting: Revenues (cash receipts) ...................................................... $33,000 Expenses (cash payments: $22,500 - $2,250 + $3,750) ...... 24,000 Net income ............................................................................. $ 9,000 Accrual Accounting: Revenues (earned) ................................................................ $39,000 Expenses (incurred) .............................................................. 22,500 Net income .............................................................................. $16,500 Quick Study 3-8 (10 minutes) The answer is c. Explanation: The debit balance in Prepaid Insurance was reduced by $400, implying a $400 debit to Insurance Expense. The credit balance in Interest Payable increased by $800, which implies an $800 debit to Interest Expense.


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Quick Study 3-9 (15 minutes) The answer is 2. Explanation: Insurance premium error: Understates expenses (and overstates assets) by .......... $1,600 Accrued salaries error: Understates expenses (and understates liabilities) by .... 1,000 Combination of errors:

Understates expenses by ..................................................... $2,600 Overstates assets by ............................................................. $1,600 Understates liabilities by ...................................................... $1,000

Quick Study 3-10 (15 minutes) Adjusting entry Debit Credit

1. Accrue salaries expense b d

2. Adjust the Unearned Services Revenue account to recognize earned revenue

g c

3. Record the earning of services revenue for which cash will be received the following period

h c

Quick Study 3-11 (10 minutes) Profit margin = $37,925 / $390,000 = 9.7% Interpretation: For each one dollar that Yang Company records as revenue, it earns 9.7 cents in net income. Yang’s 9.7% is markedly lower than the competitors’ average profit margin of 15%. Thus, it must improve performance. Quick Study 3-12A (5 minutes)

The answer is d.

Quick Study 3-13 (10 minutes)

a. Under IFRS, financial statements normally present assets from least

liquid to most liquid. b. Under IFRS, financial statements normally present liabilities from

furthest from maturity to nearest to maturity.


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EXERCISES Exercise 3-1 (10 minutes) 1. B 4. F

2. E 5. D

3. C 6. A Exercise 3-2 (30 minutes) a. Unearned Fee Revenue .................................................... 10,000 Fee Revenue .................................................................. 10,000 To record earned portion of fee received in advance. b. Wages Expense ................................................................. 9,000 Wages Payable .............................................................. 9,000 To record wages accrued but not yet paid. c. Depreciation Expense—Equipment ................................ 19,127 Accumulated Depreciation—Equipment..................... 19,127 To record depreciation expense for the year. d. Office Supplies Expense .................................................. 5,242 Office Supplies

* ............................................................. 5,242

To record office supplies used ($480 + $5,349 - $587). e. Insurance Expense ........................................................... 2,800 Prepaid Insurance

** ....................................................... 2,800

To record insurance coverage expired ($5,000 - $2,200). f. Interest Receivable ......................................................... 750 Interest Revenue ........................................................ 750 To record interest earned but not yet received. g. Interest Expense ............................................................. 3,500 Interest Payable........................................................... 3,500 To record interest incurred but not yet paid.

Notes:

Office Supplies* Prepaid Insurance**

Beg. Bal. 480 Beg. Bal. 5,000 Purch. 5,349

? Used ? Used

End. Bal. 587 End. Bal. 2,200


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Exercise 3-3 (25 minutes) a. Depreciation Expense—Equipment ................................ 16,000 Accumulated Depreciation—Equipment..................... 16,000 To record depreciation expense for the year.

b. Insurance Expense ........................................................... 5,960 Prepaid Insurance

* ........................................................ 5,960

To record insurance coverage that expired ($7,000 - $1,040).

c. Office Supplies Expense .................................................. 2,626 Office Supplies

** ............................................................ 2,626

To record office supplies used ($300 + $2,680 - $354).

d. Unearned Fee Revenue .................................................... 5,000 Fee Revenue .................................................................. 5,000 To record earned portion of fee received in advance

($10,000 x 1/2).

e. Insurance Expense ........................................................... 4,600 Prepaid Insurance ......................................................... 4,600 To record insurance coverage that expired.

f. Wages Expense ................................................................. 4,000 Wages Payable .............................................................. 4,000 To record wages accrued but not yet paid.

Notes:

Prepaid Insurance* Office Supplies**

Bal. Bal. 7,000 Beg. Bal. 300 Purch. 2,680 ? Used ? Used

End. Bal. 1,040 End. Bal. 354


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Exercise 3-4 (25 minutes)

a. Apr. 30 Legal Fees Expense ........................................... 2,500 Legal Fees Payable ..................................... 2,500 To record accrued legal fees.

May 12 Legal Fees Payable ............................................ 2,500 Cash ............................................................. 2,500 To pay accrued legal fees.

b. Apr. 30 Interest Expense ................................................ 2,080 Interest Payable .......................................... 2,080 To record accrued interest expense (9.6% x

$780,000 x 10/360) or ($6,240 x 10/30).

May 20 Interest Payable .................................................. 2,080 Interest Expense ................................................. 4,160 Cash ............................................................ 6,240 To record payment of accrued and current

interest expense (9.6% x $780,000 x 20/360).

c. Apr. 30 Salaries Expense ................................................. 3,600 Salaries Payable.......................................... 3,600 To record accrued salaries ($9,000 x 2/5 week).

May 3 Salaries Payable ................................................. 3,600 Salaries Expense ................................................ 5,400 Cash ............................................................. 9,000 To record payment of accrued and

current salaries ($9,000 x 3/5 week).


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Exercise 3-5 (15 minutes) a. $ 1,650

b. $ 5,700

c. $10,080

d. $ 1,375 Proof:

(a) (b) (c) (d)

Supplies available – prior year-end ......... $ 300 $1,600 $ 1,360 $1,375

Supplies purchased in current year ........ 2,100 5,400 10,080 6,000

Total supplies available ............................ 2,400 7,000 11,440 7,375

Supplies available – current year-end ..... (750) (5,700) (1,840) (800)

Supplies expense for current year........... $1,650 $1,300 $ 9,600 $6,575

Exercise 3-6 (15 minutes) a. Adjusting entry:

2011

Dec. 31 Wages Expense.............................................................. 500

Wages Payable ...................................................... 500 To record accrued wages for one day.

(5 workers x $100 x 1 day)

b. Payday entry: 2012 Jan. 4 Wages Expense.............................................................. 1,500

Wages Payable ............................................................... 500

Cash ........................................................................ 2,000 To record accrued and current wages.


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Exercise 3-7 (25 minutes) Dec. 31 Accounts Receivable .............................................. 1,800 Fees Earned ..................................................... 1,800 To record earned but unbilled fees

(30% x $6,000). 31 Unearned Fees ......................................................... 4,200 Fees Earned ..................................................... 4,200 To record earned fees collected in

advance (70% x $6,000). 31 Depreciation Expense—Computers ...................... 1,500 Accumulated Depreciation—Computers ...... 1,500 To record depreciation on computers.

31 Depreciation Expense—Office Furniture .............. 1,750 Accumulated Depreciation—Office Furniture ... 1,750 To record depreciation on office furniture.

31 Salaries Expense ..................................................... 2,450 Salaries Payable.............................................. 2,450 To record accrued salaries.

31 Insurance Expense .................................................. 1,300 Prepaid Insurance ........................................... 1,300 To record expired prepaid insurance.

31 Office Supplies Expense ......................................... 480 Office Supplies ................................................ 480 To record use of office supplies.

31 Utilities Expense ...................................................... 70 Utilities Payable .............................................. 70 To record incurred and unpaid utility costs.


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Balance Sheet Insurance Asset using Insurance Expense using

Accrual Basis*

Cash Basis

Accrual Basis**

Cash Basis

Dec. 31, 2009 ................... $11,700 $0 2009 .................................. $ 4,500 $16,200

Dec. 31, 2010 ................... 6,300 0 2010 .................................. 5,400 0

Dec. 31, 2011 ................... 900 0 2011 .................................. 5,400 0

Dec. 31, 2012 ................... 0 0 2012 .................................. 900 0

Total ................................. $16,200 $16,200

EXPLANATIONS: *Accrual asset balance equals months left in the policy x $450 per month (monthly cost is computed as $450, from $16,200 divided by 36 months).

Months Left Balance

12/31/2009 .... 26 $11,700 12/31/2010 .... 14 6,300 12/31/2011 .... 2 900 12/31/2012 .... 0 0 **Accrual insurance expense equals months covered in the year x $450 per month.

Months Covered Expense

2009 .................................. 10 $ 4,500 2010 .................................. 12 5,400 2011 .................................. 12 5,400 2012 .................................. 2 900 $16,200


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a. $5,390 / $44,830 = 12.0%

b. $87,644 / $398,954 = 22.0%

c. $93,385 / $257,082 = 36.3%

d. $55,234 / $1,458,999 = 3.8%

e. $70,158 / $435,925 = 16.1%

Analysis and Interpretation: Company c has the highest profitability according to the profit margin ratio. Company c earns 36.3 cents in net income for each one dollar of net sales recorded.

Exercise 3-10A (25 minutes) a. Initial credit recorded in the Unearned Fees account:

July 1 Cash ....................................................................... 2,000 Unearned Fees .............................................. 2,000 Received fees for work to be done.

6 Cash ....................................................................... 8,400 Unearned Fees .............................................. 8,400 Received fees for work to be done.

12 Unearned Fees ...................................................... 2,000 Fees Earned ................................................... 2,000


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Completed work for customer.

18 Cash ....................................................................... 7,500 Unearned Fees .............................................. 7,500 Received fees for work to be done.

27 Unearned Fees ...................................................... 8,400 Fees Earned ................................................... 8,400 Completed work for customer.

31 No adjusting entries required. b. Initial credit recorded in the Fees Earned account:

July 1 Cash ....................................................................... 2,000 Fees Earned ................................................... 2,000 Received fees for work to be done.

6 Cash ....................................................................... 8,400 Fees Earned ................................................... 8,400 Received fees for work to be done.

12 No entry required.

18 Cash ....................................................................... 7,500 Fees Earned ................................................... 7,500 Received fees for work to be done.

27 No entry required.

31 Fees Earned .......................................................... 7,500 Unearned Fees .............................................. 7,500 Adjusted to reflect unearned fees for unfinished job.


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Exercise 3-10A - (Continued)

c. Under the first method (and using entries from a):

Unearned Fees = $2,000 + $8,400 - $2,000 + $7,500 - $8,400 = $7,500 Fees Earned = $2,000 + $8,400 = $10,400 Under the second method (and using entries from b):

Unearned Fees = $7,500 Fees Earned = $2,000 + $8,400 + $7,500 - $7,500 = $10,400

[Note: Both procedures yield identical results in the financial statements.]

Exercise 3-11A (30 minutes) a. Dec. 1 Supplies Expense ............................................ 3,000 Cash .......................................................... 3,000 Purchased supplies.

b. Dec. 2 Insurance Expense .......................................... 1,440 Cash .......................................................... 1,440 Paid insurance premiums.

c. Dec. 15 Cash .................................................................. 12,000 Remodeling Fees Earned ........................ 12,000 Received fees for work to be done.

d. Dec. 28 Cash .................................................................. 3,600 Remodeling Fees Earned ........................ 3,600 Received fees for work to be done.


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e. Dec. 31 Supplies ............................................................. 1,920 Supplies Expense .................................... 1,920 Adjust expenses for unused supplies.

f. Dec. 31 Prepaid Insurance ($1,440 - $240).................. 1,200 Insurance Expense .................................. 1,200 Adjust expenses for unexpired coverage.

g. Dec. 31 Remodeling Fees Earned .............................. 9,300 Unearned Remodeling Fees ................... 9,300 Adjusted revenues for unfinished

projects ($12,000 + $3,600 - $6,300).


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adidas AG Balance Sheet

December 31, 2009 (Euros in millions)

Assets Noncurrent assets

Intangible assets ................................................... € 2,980

Tangible and other assets .................................... 1,410

Total noncurrent assets ........................................ 4,390

Current assets

Other current assets ............................................. 486

Inventories ............................................................. 1,471

Receivables and financial assets ........................ 1,753

Cash and cash equivalents .................................. 775

Total current assets .............................................. 4,485

Total assets .............................................................. € 8,875

Equity

Total equity .............................................................. € 3,776

Liabilities Total noncurrent liabilities ..................................... 2,263

Total current liabilities ............................................ 2,836

Total liabilities ......................................................... 5,099

Total equity and liabilities ...................................... € 8,875


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PROBLEM SET A Problem 3-1A (35 minutes) Part 1

Adjustment (a)

Dec. 31 Office Supplies Expense ............................. 12,760 Office Supplies ...................................... 12,760 To record cost of supplies used ($3,000 + $12,400 - $2,640).

Adjustment (b)

31 Insurance Expense ....................................... 12,312 Prepaid Insurance ................................. 12,312 To record annual insurance coverage expense.

Policy Cost per Month Months Active in 2011 2011 Cost

A $660 ($15,840/24 mo.) 12 $ 7,920 B 363 ($13,068/36 mo.) 9 3,267 C 225 ($ 2,700 /12 mo.) 5 1,125

Total $12,312

Adjustment (c)

31 Salaries Expense (2 days x $2,100) ............ 4,200 Salaries Payable.................................... 4,200 To record accrued but unpaid wages.

Adjustment (d)

31 Depreciation Expense—Building ................ 27,000 Accumulated Depreciation—Building 27,000 To record annual depreciation expense [($855,000 -$45,000) / 30 years = $27,000].

Adjustment (e)

31 Rent Receivable ............................................ 2,400 Rent Earned ........................................... 2,400 To record earned but unpaid Dec. rent.

Adjustment (f) 31 Unearned Rent .............................................. 4,350 Rent Earned ........................................... 4,350 To record the amount of rent earned for

November and December (2 x 2,175).


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Problem 3-1A (Continued)

Part 2 Cash Payment for (c)

Jan. 6 Salaries Payable ........................................... 4,200 Salaries Expense* ........................................ 6,300 Cash ....................................................... 10,500 To record payment of accrued and

current salaries. *(3 days x $2,100)

Cash Payment for (e)

15 Cash ............................................................... 4,800 Rent Receivable .................................... 2,400 Rent Earned ........................................... 2,400 To record past due rent for two months.

Problem 3-2A (10 minutes) 1. G 5. G 9. F

2. E 6. C 10. D

3. I 7. H 11. A

4. B 8. E 12. D


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Problem 3-3A (90 minutes) Parts 1 and 2

Cash Equipment Unadj. Bal. 26,000 Unadj. Bal. 70,000

Accounts Receivable

Accumulated Depreciation— Equipment

Unadj. Bal. 0 Unadj. Bal. 16,000 (f) 7,500 (c) 12,000 Adj. Bal. 7,500 Adj. Bal. 28,000

Teaching Supplies Accounts Payable Unadj. Bal. 10,000 Unadj. Bal. 36,000 (b) 7,400 Adj. Bal. 2,600 Salaries Payable

Unadj. Bal. 0

Prepaid Insurance (g) 400 Unadj. Bal. 15,000 Adj. Bal. 400 (a) 3,000 Adj. Bal. 12,000 Unearned Training Fees

Unadj. Bal. 11,000

Prepaid Rent (e) 4,400 Unadj. Bal. 2,000 Adj. Bal. 6,600 (h) 2,000 Adj. Bal. 0 T. Watson, Capital

Unadj. Bal. 63,600

Professional Library Unadj. Bal. 30,000 T. Watson, Withdrawals

Unadj. Bal. 40,000

Accumulated Depreciation— Professional Library

Unadj. Bal. 9,000 (d) 6,000 Adj. Bal. 15,000


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Tuition Fees Earned Rent Expense Unadj. Bal. 102,000 Unadj. Bal. 22,000 (f) 7,500 (h) 2,000

Adj. Bal. 109,500 Adj. Bal. 24,000

Training Fees Earned Teaching Supplies Expense

Unadj. Bal. 38,000 Unadj. Bal. 0 (e) 4,400 (b) 7,400

Adj. Bal. 42,400 Adj. Bal. 7,400

Depreciation Expense— Professional Library

Advertising Expense

Unadj. Bal. 0 Unadj. Bal. 7,000 (d) 6,000 Adj. Bal. 6,000

Depreciation Expense— Equipment

Utilities Expense

Unadj. Bal. 0 Unadj. Bal. 5,600 (c) 12,000 Adj. Bal. 12,000

Salaries Expense Unadj. Bal. 48,000 (g) 400 Adj. Bal. 48,400

Insurance Expense Unadj. Bal. 0 (a) 3,000 Adj. Bal. 3,000


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Part 2

Adjustment (a) Dec. 31 Insurance Expense ...................................................... 3,000 Prepaid Insurance .................................................. 3,000 To record the insurance expired.

Adjustment (b)

31 Teaching Supplies Expense ....................................... 7,400 Teaching Supplies ................................................. 7,400 To record supplies used ($10,000-$2,600).

Adjustment (c)

31 Depreciation Expense—Equipment ........................... 12,000 Accumulated Depreciation—Equipment .................... 12,000 To record equipment depreciation.

Adjustment (d)

31 Depreciation Expense—Profess. Library .................. 6,000 Accumul. Depreciation—Profess. Library ................ 6,000 To record professional library depreciation.

Adjustment (e)

31 Unearned Training Fees .............................................. 4,400 Training Fees Earned ............................................ 4,400 To record training fees earned that were

collected in advance.

Adjustment (f)

31 Accounts Receivable ................................................... 7,500 Tuition Fees Earned............................................... 7,500 To record tuition earned ($3,000 x 2 1/2 months).

Adjustment (g)

31 Salaries Expense ......................................................... 400 Salaries Payable..................................................... 400 To record accrued salaries (2 days x $100 x 2).

Adjustment (h)

31 Rent Expense ............................................................... 2,000 Prepaid Rent ........................................................... 2,000 To record expiration of prepaid rent.


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Problem 3-3A (Continued) Part 3

Watson Technical Institute Adjusted Trial Balance

December 31, 2011

Debit Credit

Cash .......................................................................... $ 26,000

Accounts receivable ................................................ 7,500

Teaching supplies ................................................... 2,600

Prepaid insurance .................................................... 12,000

Prepaid rent .............................................................. 0

Professional library ................................................. 30,000

Accumulated depreciation—Professional library ... $ 15,000

Equipment ................................................................ 70,000

Accumulated depreciation—Equipment ................ 28,000

Accounts payable .................................................... 36,000

Salaries payable ....................................................... 400

Unearned training fees ............................................ 6,600

T. Watson, Capital .................................................... 63,600

T. Watson, Withdrawals .......................................... 40,000

Tuition fees earned .................................................. 109,500

Training fees earned ................................................ 42,400

Depreciation expense—Professional library ........ 6,000

Depreciation expense—Equipment ....................... 12,000

Salaries expense ..................................................... 48,400

Insurance expense .................................................. 3,000

Rent expense ............................................................ 24,000

Teaching supplies expense .................................... 7,400

Advertising expense ................................................ 7,000

Utilities expense....................................................... 5,600 _______

Totals ........................................................................ $301,500 $301,500


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Problem 3-3A (Continued) Part 4

WATSON TECHNICAL INSTITUTE Income Statement

For Year Ended December 31, 2011

Revenues Tuition fees earned ............................................ $109,500 Training fees earned .......................................... 42,400 Total revenues .................................................... $151,900 Expenses Depreciation expense—Professional library ... 6,000 Depreciation expense—Equipment .................. 12,000 Salaries expense ................................................ 48,400 Insurance expense ............................................. 3,000 Rent expense ...................................................... 24,000 Teaching supplies expense ............................... 7,400 Advertising expense .......................................... 7,000 Utilities expense ................................................. 5,600 Total expenses ................................................... 113,400 Net income ............................................................ $ 38,500

WATSON TECHNICAL INSTITUTE Statement of Owner’s Equity

For Year Ended December 31, 2011 T. Watson, Capital, December 31, 2010 .............. $ 63,600 Plus: Net income .................................................. 38,500 102,100 Less: Owner withdrawals .................................... 40,000 T. Watson, Capital, December 31, 2011 .............. $ 62,100


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Problem 3-3A (Concluded)

WATSON TECHNICAL INSTITUTE Balance Sheet

December 31, 2011

Assets Cash ................................................................................. $ 26,000 Accounts receivable ...................................................... 7,500 Teaching supplies .......................................................... 2,600 Prepaid insurance .......................................................... 12,000 Professional library ........................................................ $30,000 Accumulated depreciation—Professional library ....... (15,000) 15,000 Equipment ....................................................................... 70,000 Accumulated depreciation—Equipment ...................... (28,000) 42,000 Total assets ..................................................................... $105,100 Liabilities Accounts payable ........................................................... $ 36,000 Salaries payable ............................................................. 400 Unearned training fees .................................................. 6,600 Total liabilities ................................................................ 43,000 Equity T. Watson, Capital .......................................................... 62,100 Total liabilities and equity ............................................. $105,100


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Problem 3-4A (45 minutes) — Part 1

Account

Unadjusted Trial Balance

Adjustments

Adjusted Trial Balance

Cash ............................................. $ 27,000 $ 27,000

Accounts receivable ............... 12,000 (a) 10,460 22,460

Office supplies .......................... 18,000 (b) 15,000 3,000

Prepaid insurance ................... 7,320 (c) 2,440 4,880

Office equipment ..................... 92,000 92,000

Accumulated depreciation —Office equipment ..............

$ 12,000

(d)

6,000

$ 18,000

Accounts payable ................... 9,300 (e) 900 10,200

Interest payable ........................ (f) 800 800

Salaries payable ....................... (g) 6,600 6,600

Unearned consulting fees .... 16,000 (h) 1,700 14,300

Long-term notes payable ..... 44,000 44,000

J. Winner, Capital ..................... 28,420 28,420

J. Winner, Withdrawals .......... 10,000 10,000

Consulting fees earned .......................................

156,000

(a) (h)

10,460 1,700

168,160

Depreciation expense— Office equipment ...................

(d)

6,000

6,000

Salaries expense ..................... 71,000 (g) 6,600 77,600

Interest expense....................... 1,400 (f) 800 2,200

Insurance expense ................. (c) 2,440 2,440

Rent expense ............................ 13,200 13,200

Office supplies expense........ (b) 15,000 15,000

Advertising expense .............. 13,800 _______ (e) 900 ______ 14,700 _______

Totals ........................................... $265,720 $265,720 $43,900 $43,900 $290,480 $290,480

Adjustment description:

(a) Earned but uncollected revenues.

(b) Cost of consumed office supplies.

(c) Cost of expired insurance coverage.

(d) Depreciation expense on office equipment.

(e) Incurred but unpaid advertising expense.

(f) Incurred but unpaid interest expense.

(g) Incurred but unpaid salaries expense.

(h) Earned revenues previously received in advance.


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Problem 3-4A Part 2

JJW COMPANY Income Statement

For Year Ended July 31, 2011

Revenues

Consulting fees earned ................................ $168,160

Expenses

Depreciation expense—Office equipment .. $ 6,000

Salaries expense .......................................... 77,600

Interest expense ........................................... 2,200

Insurance expense ....................................... 2,440

Rent expense ................................................ 13,200

Office supplies expense .............................. 15,000

Advertising expense .................................... 14,700

Total expenses .............................................. 131,140

Net income ....................................................... $ 37,020


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JJW COMPANY Statement of Owner’s Equity For Year Ended July 31, 2011

J. Winner, Capital, July 31, 2010 .................... $28,420

Plus: Net income ............................................. 37,020

65,440

Less: Owner withdrawals ............................... 10,000

J. Winner, Capital, July 31, 2011 .................... $55,440


Part 2 (concluded)

JJW COMPANY Balance Sheet July 31, 2011

Assets

Cash ............................................................................. $ 27,000

Accounts receivable .................................................. 22,460

Office supplies ............................................................ 3,000

Prepaid insurance ...................................................... 4,880

Office equipment ........................................................ $92,000

Accumulated depreciation—Office equipment ....... (18,000) 74,000

Total assets ................................................................. $131,340

Liabilities

Accounts payable ....................................................... $ 10,200

Interest payable .......................................................... 800

Salaries payable ......................................................... 6,600

Unearned consulting fees ......................................... 14,300

Long-term notes payable ........................................... 44,000

Total liabilities ............................................................ 75,900

Equity

J. Winner, Capital ....................................................... 55,440

Total liabilities and equity ......................................... $131,340


3-30

Problem 3-5A (50 minutes)

Part 1

CALLAHAY COMPANY Income Statement

For Year Ended December 31, 2011 Revenues

Fees earned .............................................. $420,000

Interest earned .......................................... 16,000

Total revenues .......................................... $436,000

Expenses

Depreciation expense—Automobiles ..... 18,000

Depreciation expense—Equipment ........ 10,000

Salaries expense ...................................... 180,000

Wages expense ........................................ 32,000

Interest expense ....................................... 24,000

Office supplies expense .......................... 26,000

Advertising expense ................................ 50,000

Repairs expense—Automobiles ............. 16,800

Total expenses ......................................... 356,800

Net income .................................................. $ 79,200


3-31

CALLAHAY COMPANY Statement of Owner's Equity

For Year Ended December 31, 2011 J. Callahay, Capital, December 31, 2010 .. $247,800

Plus: Net income ....................................... 79,200

327,000

Less: Withdrawals by owner .................... 38,000

J. Callahay, Capital, December 31, 2011 .. $289,000


Part 1 (concluded)

CALLAHAY COMPANY Balance Sheet

December 31, 2011

Assets

Cash ........................................................................ $ 22,000

Accounts receivable .............................................. 44,000

Interest receivable.................................................. 10,000

Notes receivable (due in 90 days) ........................ 160,000

Office supplies ....................................................... 8,000

Automobiles ........................................................... $160,000

Accumulated depreciation—Automobiles ........... (42,000) 118,000

Equipment ............................................................... 130,000

Accumulated depreciation—Equipment .............. (10,000) 120,000

Land ......................................................................... 70,000

Total assets ............................................................ $552,000

Liabilities

Accounts payable .................................................. $ 88,000

Interest payable ...................................................... 12,000

Salaries payable ..................................................... 11,000

Unearned fees ........................................................ 22,000

Long-term notes payable ...................................... 130,000

Total liabilities ........................................................ 263,000

Owner’s Equity

J. Callahay, Capital ................................................ 289,000


3-32

Total liabilities and equity ..................................... $552,000

Part 2 Profit margin = $79,200 / $436,000 = 18.2% Problem 3-6AA (40 minutes) Part 1 Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.

Nov. 1 Prepaid Advertising ....................................... 1,500 Cash .......................................................... 1,500 Paid for future advertising.

1 Prepaid Insurance ........................................... 2,160 Cash .......................................................... 2,160 Paid insurance for one year.

30 Cash .................................................................. 3,300 Unearned Service Fees ........................... 3,300 Received fees in advance.

Dec. 1 Prepaid Consulting Fees ............................... 2,700 Cash .......................................................... 2,700 Paid for future consulting.

15 Cash .................................................................. 7,650 Unearned Service Fees ........................... 7,650 Received fees in advance.

31 Advertising Expense ....................................... 600 Prepaid Advertising ................................ 600 To adjust prepaid advertising ($1,500-$900).

31 Insurance Expense .......................................... 360 Prepaid Insurance .................................... 360 To adjust prepaid insurance ($2,160 x 2/12).


3-33

31...........................................Unearned Service Fees 2,100

Service Fees Earned ................................ 2,100 To adjust unearned service fees

($3,300-$1,200).

31 Consulting Fees Expense .............................. 900 Prepaid Consulting Fees ......................... 900 To adjust prepaid consulting fees

($2,700 x 1/3).

31 Unearned Service Fees .................................. 3,000 Service Fees Earned ................................ 3,000 To adjust unearned service fees.


3-34

Problem 3-6AA (Continued)

Part 2

Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.

Nov.1 Advertising Expense ....................................... 1,500 Cash .......................................................... 1,500 Paid for future advertising.

1 Insurance Expense .......................................... 2,160 Cash .......................................................... 2,160 Paid insurance for one year.

30 Cash .................................................................. 3,300 Service Fees Earned ................................ 3,300 Received fees in advance.

Dec. 1 Consulting Fees Expense ............................... 2,700 Cash .......................................................... 2,700 Paid for future consulting.

15 Cash .................................................................. 7,650 Service Fees Earned ................................ 7,650 Received fees in advance.

31 Prepaid Advertising ........................................ 900 Advertising Expense ............................... 900 To adjust for prepaid advertising.

31 Prepaid Insurance ........................................... 1,800 Insurance Expense .................................. 1,800 To adjust for prepaid insurance.

31 Service Fees Earned ....................................... 1,200 Unearned Service Fees ........................... 1,200 To adjust for unearned service fees.

31 Prepaid Consulting Fees ................................ 1,800 Consulting Fees Expense ....................... 1,800 To adjust for prepaid consulting fees.

31 Service Fees Earned ....................................... 4,650 Unearned Service Fees ........................... 4,650 To adjust for unearned service fees.


3-35

Problem 3-6AA (Concluded) Part 3 There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following:

Advertising expense for two months ..................................... $ 600

Prepaid advertising as of December 31 ................................. 900

Insurance expense for two months ........................................ 360

Prepaid insurance as of December 31 ................................... 1,800

Consulting fees expense (1/3 of total paid) ........................... 900

Prepaid consulting fees ........................................................... 1,800

Service fees earned for two months ($2,100 + $3,000) ......... 5,100

Unearned service fees at 12/31 ($1,200 + $4,650) ................. 5,850

When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.


3-36

PROBLEM SET B Problem 3-1B (30 minutes) Part 1

Adjustment (a)

Oct. 31 Office Supplies Expense ....................................... 3,450 Office Supplies ................................................ 3,450 To record cost of supplies used ($500 + $3,650 - $700).

Adjustment (b)

31 Insurance Expense ................................................. 2,675 Prepaid Insurance ........................................... 2,675 To record annual insurance coverage expense.

Policy

Cost per Month

Months Active in 2011

2011 Expense

A $125 ($3,000/24 mo.) 12 $1,500 B 100 ($3,600/36 mo.) 9 900 C 55 ( $660 / 12 mo.) 5 275

Total $2,675

Adjustment (c)

31 Salaries Expense .................................................... 800 Salaries Payable.............................................. 800 To record accrued but unpaid wages (1 day x $800).

Adjustment (d)

31 Depreciation Expense—Building .......................... 5,400 Accumulated Depreciation—Building .......... 5,400 To record annual depreciation [($155,000-$20,000) / 25 years = $5,400].


3-37

Problem 3-1B (Concluded)

Adjustment (e)

Oct. 31 Rent Receivable ...................................................... 600 Rent Earned ..................................................... 600 To record earned but unpaid Oct. rent.

Adjustment (f)

31 Unearned Rent ........................................................ 1,050 Rent Earned ..................................................... 1,050 To record rent earned for September

and October (2 x $525).

Part 2 Cash Payment for (c)

Nov. 7 Salaries Payable ..................................................... 800 Salaries Expense* .................................................. 3,200 Cash ................................................................. 4,000 To record payment of accrued and

current salaries. *(4 days x $800)

Cash Payment for (e)

15 Cash ......................................................................... 1,200 Rent Receivable .............................................. 600 Rent Earned ..................................................... 600 To record past due rent for two months.


3-38

Problem 3-2B (15 minutes) 1. E 5. D 9. F

2. H 6. B 10. I

3. G 7. F 11. A

4. C 8. I 12. B

Problem 3-3B (90 minutes) Parts 1 and 2

Cash Accounts Payable Unadj. Bal. 50,000 Unadj. Bal. 12,200

Accounts Receivable Salaries Payable Unadj. Bal. 0 Unadj. Bal. 0 (f) 5,500 (g) 540 Adj. Bal. 5,500 Adj. Bal. 540

Teaching Supplies Unearned Training Fees Unadj. Bal. 60,000 Unadj. Bal. 27,600 (b) 57,500 (e) 9,200 Adj. Bal. 2,500 Adj. Bal. 18,400

Prepaid Insurance M. Alcorn, Capital Unadj. Bal. 18,000 Unadj. Bal. 68,500 (a) 6,400 Adj. Bal. 11,600

M. Alcorn, Withdrawals

Prepaid Rent Unadj. Bal. 20,000 Unadj. Bal. 2,600 (h) 2,600 Adj. Bal. 0

Professional Library Unadj. Bal. 10,000

Accumulated Depreciation— Professional Library

Unadj. Bal. 1,500 (d) 2,000


3-39

Adj. Bal. 3,500

Equipment Unadj. Bal. 30,000

Accumulated Depreciation— Equipment

Unadj. Bal. 16,000 (c) 4,000

Adj. Bal. 20,000


3-40

Problem 3-3B (Continued) Parts 1 and 2

Tuition Fees Earned Advertising Expense Unadj. Bal. 105,000 Unadj. Bal. 18,000 (f) 5,500

Adj. Bal. 110,500

Training Fees Earned Utilities Expense

Unadj. Bal. 62,000 Unadj. Bal. 12,400 (e) 9,200

Adj. Bal. 71,200

Depreciation Expense— Professional Library

Unadj. Bal. 0 (d) 2,000 Adj. Bal. 2,000

Depreciation Expense— Equipment

Unadj. Bal. 0 (c) 4,000 Adj. Bal. 4,000

Salaries Expense Unadj. Bal. 43,200 (g) 540 Adj. Bal. 43,740

Insurance Expense Unadj. Bal. 0 (a) 6,400 Adj. Bal. 6,400

Rent Expense Unadj. Bal. 28,600 (h) 2,600 Adj. Bal. 31,200

Teaching Supplies Expense Unadj. Bal. 0 (b) 57,500 Adj. Bal. 57,500


3-41

Problem 3-3B (Continued) Part 2

Adjustment (a)

Dec. 31 Insurance Expense ................................................ 6,400 Prepaid Insurance .......................................... 6,400 To record the insurance expired.

Adjustment (b)

31 Teaching Supplies Expense ................................. 57,500 Teaching Supplies ......................................... 57,500 To record the cost of supplies used

($60,000-$2,500).

Adjustment (c)

31 Depreciation Expense—Equipment..................... 4,000 Accumulated Depreciation—Equipment ..... 4,000 To record equipment depreciation.

Adjustment (d)

31 Depreciation Expense—Professional Library .... 2,000 Accumulated Depreciation— Professional Library ............................. 2,000 To record professional library depreciation.

Adjustment (e)

31 Unearned Training Fees ....................................... 9,200 Training Fees Earned .................................... 9,200 To record training fees earned that were

collected in advance.

Adjustment (f)

31 Accounts Receivable ............................................ 5,500 Tuition Fees Earned....................................... 5,500 To record tuition earned ($2,200 x 2 1/2 mo).

Adjustment (g)

31 Salaries Expense ................................................... 540 Salaries Payable............................................. 540 To accrue salaries expense (3 days x $180).

Adjustment (h)

31 Rent Expense ........................................................ 2,600 Prepaid Rent ................................................... 2,600 To record expiration of prepaid rent.


3-42


ALCORN INSTITUTE Adjusted Trial Balance

December 31, 2011

Debit Credit

Cash ........................................................................................... $ 50,000

Accounts receivable ............................................................... 5,500

Teaching supplies ................................................................... 2,500

Prepaid insurance ................................................................... 11,600

Prepaid rent .............................................................................. 0

Professional library ................................................................. 10,000

Accumulated depreciation—Professional library ............ $ 3,500

Equipment ................................................................................ 30,000

Accumulated depreciation—Equipment ............................ 20,000

Accounts payable ................................................................... 12,200

Salaries payable ...................................................................... 540

Unearned training fees ........................................................... 18,400

M. Alcorn, Capital .................................................................... 68,500

M. Alcorn, Withdrawals .......................................................... 20,000

Tuition fees earned ................................................................. 110,500

Training fees earned ............................................................... 71,200

Depreciation expense—Professional library ..................... 2,000

Depreciation expense—Equipment .................................... 4,000

Salaries expense ..................................................................... 43,740

Insurance expense .................................................................. 6,400

Rent expense ........................................................................... 31,200

Teaching supplies expense .................................................. 57,500

Advertising expense ............................................................... 18,000

Utilities expense ...................................................................... 12,400 _______

Totals ......................................................................................... $304,840 $304,840


3-43


ALCORN INSTITUTE Income Statement


Revenues

Tuition fees earned ................................................... $110,500

Training fees earned ................................................. 71,200

Total revenues ........................................................... $181,700

Expenses

Depreciation expense—Professional library .......... 2,000

Depreciation expense—Equipment ......................... 4,000

Salaries expense ....................................................... 43,740

Insurance expense .................................................... 6,400

Rent expense ............................................................. 31,200

Teaching supplies expense ...................................... 57,500

Advertising expense ................................................. 18,000

Utilities expense ........................................................ 12,400

Total expenses .......................................................... 175,240

Net income ................................................................... $ 6,460

ALCORN INSTITUTE Statement of Owner’s Equity

For Year Ended December 31, 2011 M. Alcorn, Capital, December 31, 2010 .............. $68,500

Plus: Net income .................................................. 6,460

74,960

Less: Owner withdrawals .................................... 20,000

M. Alcorn, Capital, December 31, 2011 .............. $54,960


3-44


ALCORN INSTITUTE Balance Sheet

December 31, 2011

Assets Cash .............................................................................. $50,000

Accounts receivable ................................................... 5,500

Teaching supplies ....................................................... 2,500

Prepaid insurance ....................................................... 11,600

Professional library ..................................................... $10,000

Accumulated depreciation—Professional library .......... (3,500) 6,500

Equipment .................................................................... 30,000

Accumulated depreciation—Equipment ................... (20,000) 10,000

Total assets .................................................................. $86,100

Liabilities

Accounts payable ........................................................ $12,200

Salaries payable .......................................................... 540

Unearned training fees ............................................... 18,400

Total liabilities ............................................................. 31,140

Equity

M. Alcorn, Capital ........................................................ 54,960

Total liabilities and equity .......................................... $86,100


3-45

Problem 3-4B (45 minutes) — Part 1

Account

Unadjusted Trial Balance

Adjustments

Adjusted Trial Balance

Cash ................................................ $ 48,000 $ 48,000

Accounts receivable .................. 70,000 (a) 6,660 76,660

Office supplies ............................. 30,000 (b) 23,000 7,000

Prepaid insurance ....................... 13,200 (c) 4,600 8,600

Office equipment ......................... 150,000 150,000

Accumulated depreciation— Office equipment .............................

$ 30,000 (d) 10,000 $ 40,000

Accounts payable ....................... 36,000 (e) 6,000 42,000

Interest payable............................ (f) 1,600 1,600

Salaries payable .......................... (g) 11,200 11,200

Unearned consulting fees ........ 30,000 (h) 12,200 17,800

Long-term notes payable ......... 80,000 80,000

D. Chen, Capital ........................... 70,200 70,200

D. Chen, Withdrawals ................ 10,000 10,000

Consulting fees earned ............ 264,000

(a) (h)

6,660 12,200

282,860

Depreciation expense— Office equipment ......................

(d)

10,000

10,000

Salaries expense ......................... 115,600 (g) 11,200 126,800

Interest expense .......................... 6,400 (f) 1,600 8,000

Insurance expense .................... (c) 4,600 4,600

Rent expense ............................... 24,000 24,000

Office supplies expense ........... (b) 23,000 23,000

Advertising expense .................. 43,000 _______ (e) 6 ,000 ______ 49,000 _______

Totals ............................................... $510,200 $510,200 $75,260 $75,260 $545,660 $545,660

Adjustment Descriptions:

(a) Earned but uncollected revenues.

(b) Cost of consumed office supplies.

(c) Cost of expired insurance coverage.

(d) Depreciation expense on office equipment.

(e) Incurred but unpaid advertising expense.

(f) Incurred but unpaid interest expense.

(g) Incurred but unpaid salaries expense.

(h) Earned revenues previously received in advance.


3-46

Problem 3-4B

Part 2

DAXU CONSULTING COMPANY Income Statement


Consulting fees earned ..................................... $282,860

Expenses

Depreciation expense—Office equipment ....... $ 10,000

Salaries expense ............................................... 126,800

Interest expense ................................................ 8,000

Insurance expense ............................................ 4,600

Rent expense ..................................................... 24,000

Office supplies expense ................................... 23,000

Advertising expense ......................................... 49,000

Total expenses ................................................... 245,400

Net income ............................................................ $ 37,460

DAXU CONSULTING COMPANY Statement of Owner’s Equity


D. Chen, Capital, December 31, 2010 ................. $ 70,200

Plus: Net income .................................................. 37,460

107,660

Less: Owner withdrawals .................................... 10,000

D. Chen, Capital, December 31, 2011 ................. $ 97,660


3-47


Part 2 (concluded)

DAXU CONSULTING COMPANY Balance Sheet

December 31, 2011

Assets

Cash ................................................................................ $ 48,000

Accounts receivable ..................................................... 76,660

Office supplies ............................................................... 7,000

Prepaid insurance ......................................................... 8,600

Office equipment ........................................................... $150,000

Accumulated depreciation—Office equipment .......... (40,000) 110,000

Total assets .................................................................... $250,260

Liabilities

Accounts payable .......................................................... $ 42,000

Interest payable ............................................................. 1,600

Salaries payable ............................................................ 11,200

Unearned consulting fees ............................................ 17,800

Long-term notes payable .............................................. 80,000

Total liabilities ............................................................... 152,600

Equity

D. Chen, Capital ............................................................. 97,660

Total liabilities and equity ............................................ $250,260


3-48

Problem 3-5B (50 minutes)

Part 1

LIGHTNING COURIER Income Statement


Delivery fees earned ..................................... $580,000

Interest earned ............................................... 24,000

Total revenues ............................................... $604,000

Expenses

Depreciation expense—Trucks .................... 24,000

Depreciation expense—Equipment ............. 46,000

Salaries expense ........................................... 64,000

Wages expense ............................................. 290,000

Interest expense ............................................ 25,000

Office supplies expense ............................... 33,000

Advertising expense ..................................... 26,400

Repairs expense—Trucks ............................ 34,600

Total expenses .............................................. 543,000

Net income ....................................................... $ 61,000

LIGHTNING COURIER Statement of Owner's Equity


J. Hallam, Capital, December 31, 2010 .......... $115,000

Plus : Net income ........................................... 61,000

176,000

Less: Withdrawals by owner ......................... 40,000

J. Hallam, Capital, December 31, 2011 .......... $136,000


3-49

Problem 3-5B (Concluded) Part 1 (concluded)

LIGHTNING COURIER Balance Sheet

December 31, 2011

Assets

Cash ...................................................................... $ 48,000

Accounts receivable ............................................ 110,000

Interest receivable ................................................ 6,000

Notes receivable (due in 90 days)......................... 200,000

Office supplies ..................................................... 12,000

Trucks ................................................................... $124,000

Accumulated depreciation—Trucks ................... (48,000) 76,000

Equipment ............................................................. 260,000

Accumulated depreciation—Equipment ............ (190,000) 70,000

Land ....................................................................... 90,000

Total assets .......................................................... $612,000

Liabilities

Accounts payable ................................................ $124,000

Interest payable .................................................... 22,000

Salaries payable ................................................... 30,000

Unearned delivery fees ........................................ 110,000

Long-term notes payable .................................... 190,000

Total liabilities ...................................................... 476,000

Equity

J. Hallam, Capital ................................................. 136,000

Total liabilities and equity ................................... $612,000


3-50

Part 2 Profit margin = $61,000 / $604,000 = 10.1% Problem 3-6BA (40 minutes) Part 1 Method that records prepaid expenses and unearned revenues in balance sheet accounts:

Apr. 1 Prepaid Consulting Fees ..................................... 3,450 Cash ............................................................... 3,450 Paid for future consulting services.

1 Prepaid Insurance ................................................ 2,700 Cash ............................................................... 2,700 Paid insurance for one year.

30 Cash ....................................................................... 7,500 Unearned Service Fees ................................ 7,500 Received fees in advance.

May 1 Prepaid Advertising ............................................. 3,450 Cash ............................................................... 3,450 Paid for future advertising.

23 Cash ..................................................................... 9,450 Unearned Service Fees ............................... 9,450 Received fees in advance.

31 Consulting Fees Expense .................................... 1,500 Prepaid Consulting Fees .............................. 1,500 To adjust prepaid consulting fees.

31 Insurance Expense ............................................... 450 Prepaid Insurance ......................................... 450 To adjust prepaid insurance.

31 Unearned Service Fees ....................................... 3,900 Service Fees Earned ..................................... 3,900 To adjust unearned service fees.

31 Advertising Expense ............................................ 2,400 Prepaid Advertising ...................................... 2,400 To adjust prepaid advertising.

31 Unearned Service Fees ........................................ 4,500


3-51

................................................Service Fees Earned

................................................4,500

To adjust unearned service fees. Problem 3-6B

A (Continued)

Part 2 Method that records prepaid expenses and unearned revenues in income statement accounts:

Apr. 1 Consulting Fees Expense ................................. 3,450 Cash ............................................................. 3,450 Paid for future consulting services.

1 Insurance Expense ............................................. 2,700 Cash ............................................................. 2,700 Paid insurance for one year.

30 Cash ..................................................................... 7,500 Service Fees Earned ................................... 7,500 Received fees in advance.

May 1 Advertising Expense .......................................... 3,450 Cash ............................................................. 3,450 Paid for future advertising.

23 Cash ..................................................................... 9,450 Service Fees Earned ................................... 9,450 Received fees in advance.

31 Prepaid Consulting Fees ................................... 1,950 Consulting Fees Expense .......................... 1,950 To adjust for prepaid consulting fees.

31 Prepaid Insurance ............................................. 2,250 Insurance Expense ..................................... 2,250 To adjust for prepaid insurance.

31 Service Fees Earned .......................................... 3,600 Unearned Service Fees ............................. 3,600 To adjust for unearned service fees.

31 Prepaid Advertising ........................................... 1,050 Advertising Expense .................................. 1,050 To adjust for prepaid advertising.

31 Service Fees Earned .......................................... 4,950 Unearned Service Fees ............................. 4,950 To adjust for unearned service fees.


3-52

Problem 3-6BA (Concluded)

Part 3 There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following:

Prepaid consulting fees as of May 31 ......................................... $ 1,950

Consulting fees expense for two months .................................. 1,500

Insurance expense for two months ............................................ 450

Prepaid insurance as of May 31 .................................................. 2,250

Unearned service fees as of May 31 ($3,600 + $4,950) ............. 8,550

Service fees earned for two months ($3,900 + $4,500) ............. 8,400

Prepaid advertising as of May 31 ................................................ 1,050

Advertising expense for two months.......................................... 2,400

When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.


3-53

SERIAL PROBLEM – SP 3

Serial Problem, Business Solutions (180 minutes) — Part 1

<Note: The general ledger is displayed at the end of Part 6>

Journal entries

Dec. 2 Advertising Expense .................................. 655 1,025 Cash .....................................................101 1,025 Paid share of mall advertising costs.

3 Repairs Expense–Computer ..................... 684 500 Cash .....................................................101 500 Repaired the computer.

4 Cash ............................................................. 101 3,950 Accounts Receivable ..........................106 3,950 Collected accounts receivable.

10 Wages Expense .......................................... 623 750 Cash .....................................................101 750 Paid employee for part-time work.

14 Cash ............................................................. 101 1,500 Unearned Computer Services Revenue ...236 1,500

Received advance on work to be performed.

15 Computer Supplies .................................... 126 1,100 Accounts Payable ...............................201 1,100 Purchased supplies on credit. 16 No entry recorded in the journal.

20 Cash ............................................................. 101 5,625 Computer Services Revenue .............403 5,625 Collected cash revenue from customer.

28 Cash ............................................................. 101 3,000 Accounts Receivable ..........................106 3,000 Collected accounts receivable.

29 Mileage Expense ........................................ 676 192 Cash .....................................................101 192 Reimbursed Rey for mileage.

31 S. Rey, Withdrawals ................................... 302 1,500 Cash .....................................................101 1,500 Paid cash for owner withdrawal.


3-54

Serial Problem, SP 3 (Continued)

Part 2

Adjusting entries

Dec. 31 Computer Supplies Expense .........................652 3,065 Computer Supplies .................................126 3,065 Adjustment for supplies used (supplies

balance less cost of supplies available).

31 Insurance Expense .........................................637 555 Prepaid Insurance ...................................128 555 Adjustment for expired insurance (1/4

of $2,220 original prepaid amount).

31 Wages Expense ..............................................623 500 Wages Payable ........................................210 500 Adjustment for accrued wages.

31 Depreciation Expense–Computer Equip .......613 1,250 Accumulated Depreciation— Computer Equipment ...........................168 1,250 Adjustment for computer equipment depreciation:

Cost ......................................................... $20,000 Predicted life ........................................... 4 years Annual depreciation (cost/life) ............... $5,000 Expense for three months ...................... $1,250

31 Depreciation Expense—Office Equip ............612 400 Accumulated Depreciation— Office Equipment ..................................164 400 Adjustment for office equipment depreciation:

Cost ......................................................... $8,000 Predicted life ........................................... 5 years Annual depreciation (cost/life) ............... $1,600 Expense for three months ...................... $400

31 Rent Expense ..................................................640 2,475 Prepaid Rent ............................................131 2,475 Adjustment for expired rent (3/4 of

$3,300 original prepaid amount).


3-55


Part 3

BUSINESS SOLUTIONS Adjusted Trial Balance

December 31, 2011 Debit Credit

Cash ........................................................................... $ 48,372

Accounts receivable ................................................. 5,668

Computer supplies ................................................... 580

Prepaid insurance ..................................................... 1,665

Prepaid rent ............................................................... 825

Office equipment ...................................................... 8,000

Accumulated depreciation—Office equipment ....... $ 400

Computer equipment ................................................ 20,000

Accumulated depreciation—Computer equipment 1,250

Accounts payable ..................................................... 1,100

Wages payable .......................................................... 500

Unearned computer services revenue ................... 1,500

S. Rey, Capital ............................................................ 73,000

S. Rey, Withdrawals ................................................... 7,100

Computer services revenue ..................................... 31,284

Depreciation expense—Office equipment .............. 400

Depreciation expense—Computer equipment ........ 1,250

Wages expense ......................................................... 3,875

Insurance expense ................................................... 555

Rent expense ............................................................ 2,475

Computer supplies expense .................................... 3,065

Advertising expense .................................................. 2,753

Mileage expense ....................................................... 896

Miscellaneous expenses .......................................... 250

Repairs expense—Computer ................................... 1,305 _______

Totals .......................................................................... $109,034 $109,034


3-56


Part 4

BUSINESS SOLUTIONS Income Statement

For Three Months Ended December 31, 2011 Revenue Computer services revenue ....................................... $31,284

Expenses

Depreciation expense—Office equipment ............... $ 400

Depreciation expense—Computer equipment ......... 1,250

Wages expense ........................................................... 3,875

Insurance expense ..................................................... 555

Rent expense .............................................................. 2,475

Computer supplies expense ...................................... 3,065

Advertising expense ................................................... 2,753

Mileage expense ......................................................... 896

Miscellaneous expenses ............................................ 250

Repairs expense—Computer ..................................... 1,305

Total expenses ............................................................ 16,824

Net income .................................................................... $14,460

Part 5

BUSINESS SOLUTIONS Statement of Owner’s Equity

For Three Months Ended December 31, 2011 S. Rey, Capital, October 1, 2011 .................................. $73,000

Plus: Net income .......................................................... 14,460

87,460

Less: Withdrawals ........................................................ 7,100

S. Rey, Capital, December 31, 2011 ............................ $80,360


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Part 6

BUSINESS SOLUTIONS Balance Sheet

December 31, 2011 Assets Cash ................................................................................ $ 48,372

Accounts receivable ..................................................... 5,668

Computer supplies ........................................................ 580

Prepaid insurance ......................................................... 1,665

Prepaid rent ................................................................... 825

Office equipment ........................................................... $ 8,000 Accumulated depreciation–Office equipment ............. (400) 7,600

Computer equipment ..................................................... 20,000 Accumulated depreciation–Computer equipment ...... (1,250) 18,750

Total assets ..................................................................... $ 83,460 Liabilities Accounts payable ........................................................... $ 1,100

Wages payable ............................................................... 500

Unearned computer services revenue ......................... 1,500

Total liabilities ................................................................ 3,100 Equity S. Rey, Capital ................................................................ 80,360

Total liabilities and equity ............................................. $ 83,460


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Serial Problem, SP 3 (Continued) [Note: Ledger includes all entries from prior three months. The Working Papers shorten

the solution by showing account balances as of November 30.] General Ledger

Cash Acct. No. 101

Date Explanation PR Debit Credit Balance

Oct. 1 45,000 45,000 2 3,300 41,700 5 2,220 39,480 8 1,420 38,060 15 4,800 42,860 17 805 42,055 20 1,728 40,327 22 1,400 41,727 31 875 40,852 31 3,600 37,252 Nov. 1 320 36,932 2 4,633 41,565 5 1,125 40,440 18 2,208 42,648 22 250 42,398 28 384 42,014 30 1,750 40,264 30 2,000 38,264 Dec. 2 1,025 37,239 3 500 36,739 4 3,950 40,689 10 750 39,939 14 1,500 41,439 20 5,625 47,064 28 3,000 50,064 29 192 49,872 31 1,500 48,372


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Accounts Receivable Acct. No. 106


Oct. 6 4,800 4,800 12 1,400 6,200 15 4,800 1,400 22 1,400 0 28 5,208 5,208 Nov. 8 5,668 10,876 18 2,208 8,668 24 3,950 12,618 Dec. 4 3,950 8,668 28 3,000 5,668

Computer Supplies

Acct. No. 126


Oct. 3 1,420 1,420 Nov. 5 1,125 2,545 Dec. 15 1,100 3,645 31 3,065 580

Prepaid Insurance Acct. No. 128


Oct. 5 2,220 2,220 Dec. 31 555 1,665

Prepaid Rent Acct. No. 131


Oct. 2 3,300 3,300 Dec. 31 2,475 825

Office Equipment Acct. No. 163


Oct. 1 8,000 8,000 Accumulated Depreciation—Office Equipment Acct. No. 164


Dec. 31 400 400


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Computer Equipment Acct. No. 167


Oct. 1 20,000 20,000

Accumulated Depreciation—Computer Equipment Acct. No. 168


Dec. 31 1,250 1,250

Accounts Payable Acct. No. 201


Oct. 3 1,420 1,420 8 1,420 0 Dec. 15 1,100 1,100

Wages Payable Acct. No. 210


Dec. 31 500 500 Unearned Computer Services Revenue Acct. No. 236


Dec. 14 1,500 1,500

S. Rey, Capital Acct. No. 301


Oct. 1 73,000 73,000

S. Rey, Withdrawals Acct. No. 302


Oct. 31 3,600 3,600 Nov. 30 2,000 5,600 Dec. 31 1,500 7,100


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Computer Services Revenue Acct. No. 403


Oct. 6 4,800 4,800 12 1,400 6,200 28 5,208 11,408 Nov. 2 4,633 16,041 8 5,668 21,709 24 3,950 25,659 Dec. 20 5,625 31,284

Depreciation Expense—Office Equipment Acct. No. 612


Dec. 31 400 400 Depreciation Expense—Computer Equipment Acct. No. 613


Dec. 31 1,250 1,250

Wages Expense Acct. No. 623


Oct. 31 875 875 Nov. 30 1,750 2,625 Dec. 10 750 3,375 31 500 3,875

Insurance Expense Acct. No. 637


Dec. 31 555 555


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Serial Problem, SP 3 (Concluded)

Rent Expense Acct. No. 640


Dec. 31 2,475 2,475

Computer Supplies Expense Acct. No. 652


Dec. 31 3,065 3,065

Advertising Expense Acct. No. 655


Oct. 20 1,728 1,728 Dec. 2 1,025 2,753

Mileage Expense Acct. No. 676


Nov. 1 320 320 28 384 704 Dec. 29 192 896

Miscellaneous Expense Acct. No. 677


Nov. 22 250 250

Repairs Expense—Computer Acct. No. 684


Oct. 17 805 805 Dec. 3 500 1,305


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Reporting in Action — BTN 3-1 1. The revenue recognition principle requires that revenue be recorded

when realized or realizable and earned, not before and not after. Most companies earn revenue when they provide services and products to customers.

2. Research In Motion provides information on revenue recognition in its footnote 1 titled ―Research In Motion Limited and Summary of Significant Accounting Policies.‖ They report that ―Revenue from the sales of Blackberry devices is recognized when title is transferred to the customer and all significant contractual obligations that affect the customer’s final acceptance have been fulfilled. For hardware products for which software is deemed not to be incidental, the Company recognizes revenue in accordance with industry specific software revenue recognition guidance.‖ Research In Motion also explains how it estimates accruals for price protection commitments, incentive programs, warranties and royalties related to sales of Blackberry devices.

3. For fiscal year-end February 28, 2009, the profit margin is ($ millions): $1,893 / $11,065 = 0.171 = 17.1% For fiscal year-end February 27, 2010, the profit margin is ($ millions): $2,457 / $14,953 = 0.164 = 16.4%

4. Solution depends on the financial statements accessed.


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Comparative Analysis — BTN 3-2 1. Research In Motion Current year, profit margin = $2,457 / $14,953 = 16.4% Prior year, profit margin = $1,893 / $11,065 = 17.1% Apple Current year, profit margin = $8,235 / $42,905 = 19.2% Prior year, profit margin = $6,119 / $37,491 = 16.3% 2. Apple is more successful on the basis of profit margin in the current

year relative to Research In Motion, but Research In Motion is more successful based on the prior year profit margin. Research In Motion’s profit margin declined in the current year while Apple’s increased. In the current year, Research In Motion earned an average of 16.4 cents on each dollar while Apple earned 19.2 cents on each dollar.

Ethics Challenge — BTN 3-3 1. GAAP requires that annual deprecation be accumulated in a contra-

asset account, called Accumulated Depreciation. While property, plant, and equipment is often shown at its net value on the balance sheet (as with Research In Motion’s balance sheet in Appendix A) the cost of property, plant, and equipment along with its related accumulated depreciation are reported in the footnotes. Thus, Bergez is correct with her journal entry recommendation.

2. One strength of Welch’s method would be the ease of preparing the

balance sheet. The property, plant, and equipment balance in the adjusted trial balance would be directly transferable to the balance sheet when the preparer desired to show the amount at net. Welch’s approach carries weaknesses in that financial statement users would not be able to ascertain the original cost of the equipment or be able to know how much of the original cost had been allocated to depreciation to date.

3. While both approaches would lead to the same total assets on the

balance sheet, GAAP requires Bergez’s approach. As a professional, Bergez is required to uphold the standards of her profession and, thus, the decision is an ethical one for her.


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Communicating in Practice — BTN 3-4 This communication activity has no set solution. A class discussion of the ratios can be conducted with emphasis on (1) return and profitability by industries and (2) a contrast of debt financing between industries.

Taking It to the Net — BTN 3-5 1. The Gap’s main brands (stores) are The Gap, Old Navy, and Banana

Republic. It also has Piperlime and Athleta brands. 2. The Gap’s fiscal year-end is January 30, 2010. It appears that The Gap’s

fiscal year-end is consistently set as of the Saturday closest to January 31 – meaning it falls in the last week of January or first week of February.

3. Net sales for the year ended January 30, 2010, are $14,197 million. 4. Net income for the year ended January 30, 2010, is $1,102 million. 5. Profit margin = $1,102 million / $14,197 million = 7.76% 6. The company probably chose a fiscal year-end as the end of January or

early February to have it be consistent with their natural year. For many retailers, the highest amount of sales is in November and December (with some residual in January including sales returns).


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Teamwork in Action — BTN 3-6

Note that there is no specific solution to this activity. Still, the presentation of each expert team should reflect the following summary points:

Before Adjusting Balance Sheet Income Statement Type Account Account Adjusting Entry

Prepaid expense Asset overstated Expense understated Dr. Expense Cr. Asset* Unearned revenues Liability overstated Revenue understated Dr. Liability Cr. Revenue

Accrued Expenses Liability understated Expense understated Dr. Expense

Cr. Liability Accrued Revenues Asset understated Revenue understated Dr. Asset Cr. Revenue

* For depreciation, one would Credit the Accumulated Depreciation contra account.

Some implementation notes: This activity allows all students to be actively involved in the learning process. Encourage students to take the opportunity to ask questions in the small group environment the learning team provides. Encourage the better students to serve as experts on unearned revenues. The instructor’s observation of and reactions to expert teams’ development of presentation material as well as the delivery to learning teams will have a significant impact on the effectiveness of this activity.


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Entrepreneurial Decision — BTN 3-7 1. a. To record the collection of cash from sale of the gift certificate in

advance of delivery of merchandise to the customer:

Cash ..................................................................... 300 Unearned revenue....................................... 300 b. To record the delivery of merchandise to the customer when he/she

uses the gift certificate:

Unearned revenue .............................................. 300 Revenue earned .......................................... 300 2. Carrying less inventory would allows Cheezburger Network to save the

costs of carrying that added inventory; such as warehousing costs, insurance, theft/damage, and other potential losses. Saving these costs can increase income. By increasing income (via lower costs), profit margin should increase.

3. If it carries additional inventory, Cheezburger Network can potentially

sell more merchandise and increase its profits. This might further fuel increased sales as additional customers might be attracted to its products. On the other hand, carrying inventory has risks. The most important risk for a company like Cheezburger Network is that of inventory obsolescence. Consumer tastes and trends are constantly changing, and by carrying less inventory, the business can be more flexible in quickly responding with products consistent with those changing consumer trends.


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Hitting the Road — BTN 3-8 There is no formal solution to this field activity. The instructor may wish to tally students’ findings to see what companies were selected, who responded, what was the response time, etc. The instructor can also periodically ask students to bring in examples from their selected companies at certain times, and then compare and contrast them with the examples in the book.

Global Decision — BTN 3-9 1. Nokia’s Note 1 (Accounting Principles - Revenue Recognition) reports

that ―Sales from the majority of the Group are recognized when the significant risks and rewards of ownership have transferred to the buyer, continuing managerial involvement usually associated with ownership and effective control have ceased, the amount of revenue can be measured reliably, it is probable that economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured reliably.‖ Subsequent text and paragraphs provide more details for revenue recognition for specific sub-categories of revenues.

2. Profit margin = 260 EUR / 40,984 EUR = 0.6% (EUR in millions)

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