Friedlan4e SM Ch03

CHAPTER 3
The Accounting Cycle

QUESTIONS
Q3-1.
Much more judgement is required for accrual accounting than for cash accounting because there
is greater uncertainty at the time events are recorded in the accounting system. There is no
uncertainty around the point in time when the cash is paid or collected. Accrual accounting
records economic events, not cash flows. When an economic event occurs can be ambiguous. Its
less certain when revenue has been earned than when cash is received. It can also be unclear
what expenses were incurred to earn revenue (matching) whereas the amount of cash expended is
rarely ambiguous.
Q3-2.
Closing entries are made to reset balances in the temporary (income statement) accounts to zero
so that the entity can record the transactions and accumulate information pertaining only to the
following period. The effect of the closing entry is to transfer balances in the temporary accounts
to retained earnings (in a corporation) or owners equity (proprietorship). Closing entries are
made after the end of the reporting period, when financial statements are prepared.
Q3-3.
If the temporary accounts were not closed on December 31, 2017, retained earnings would be
understated by $100,000 on the 2017balance sheet and income would be overstated by $100,000
in 2018. The individual accounts on the income statements would be misstated by the amount in
those accounts at the end of the previous period.
Q3-4.
Adjusting entries are necessary in accrual accounting because recognition of revenues and
expenses does not always correspond with cash flows. Some economic changes may occur that
should be reflected under accrual accounting but that are not triggered by exchanges with
external parties. As a result adjusting entries are needed to reflect these changes. Adjusting
entries are not required in a cash accounting system because recording is triggered only by the
exchange of cash, and so revenues and expenses always correspond with cash flows.
Q3-5.
Transactional journal entries are triggered by exchanges between an entity and an external party.
Adjusting entries are necessary to reflect economic changes that are not triggered by an exchange
with an external party but that should be captured by the accounting system.
John Friedlan, Financial Accounting: A Critical Approach, 4th edition

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Page 3-1
Copyright 2013 McGraw-Hill Ryerson Ltd.
Q3-6.
The four types are:
Deferred expense/prepaid
expense:
Deferred revenue:
Accrued Expense/Accrued
liability:
Accrued Revenue/Accrued
asset:
Needed to ensure that expenses that are paid before the

benefits are received are recognized as expenses when the
benefits are received.
Needed to ensure that revenues that are collected before
they are earned are recognized when they are earned.
Needed to ensure that expenses that are incurred before
they are paid are recognized in the period when they are
incurred.
Needed to ensure that revenues that are earned before they
are collected are recognized in the period when they are
earned.
Q3-7.
The following table indicates the impacts if the particular entry was not made:
Deferred
Deferred
Accrued
Accrued
expense/prepaid
revenue
Expense/Accrued
Revenue/Accrued
expense:
liability:
asset:
Assets
Overstated
No effect
No effect
Understated
Liabilities
No effect
Overstated
Understated
No effect
Owners
Overstated
Understated
Overstated
Understated
equity
Revenue
No effect
Understated
No effect
Understated
Expenses
Understated
No effect
Understated
No effect
Net income
Overstated
Understated
Overstated
Understated
Q3-8.
Adjusting entries have to be made when the financial statements are prepared to ensure that all
appropriate economic events are properly reflected in the financial statements. Even though
many of the economic changes reflected by adjusting entries (depreciation, earning of interest,
etc.) happen throughout the accounting period, there is no need to record these changes until the
financial statements are actually prepared.
Q3-9.
The terms simply refer to whether the balance in an account has increased or decreased. A debit
refers to an increase in an asset or expense or a decrease in a liability, owners equity, or
revenue. A credit refers to a decrease in an asset or expense or an increase in a liability, owners
equity, or revenue.

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Q3-10.
A contra-asset account is used to accumulate subtractions from a related asset account (such as
an account to accumulate the depreciation of property, plant, and equipment). Its used so that
the amount originally recorded for the asset can be readily determined. If subtractions were made
directly to the original asset, it would be time-consuming to determine the amount originally
recorded for the asset and the amount that had been deducted against the asset. (Note that contraliability accounts also exist but these were not discussed in the chapter.)
Q3-11.
A dividend is a distribution of earnings to the shareholders of a corporation. Earnings are
accumulated in a corporations retained earnings account so when earnings are distributed, the
retained earnings account is decreased. Since a dividend decreases the amount a shareholder has
invested in the corporation (by distributing assets of the corporation to shareholders), a debit
must be made to retained earnings (owners equity) to reduce the amount by which the owners
investment has decreased (which is the amount of the dividend). A dividend is not an expense
and is not reported on the income statement.
Q3-12.
On the balance sheet of the customer, there will be an increase in liabilities (accounts payable) of
$1,000. There will also be an increase in assets of $1,000 (inventory, supplies, property, plant,
and equipment, etc.) (This assumes the merchandise has not been used as of the balance sheet
date). On the balance sheet of the selling company there will be an increase in assets (accounts
receivable) of $1,000. The salewould increase revenue on the sellers income statement by
$1,000. When the closing entryis prepared the sale would flow through to the balance sheet and
retained earnings would increase by $1,000. Inventory would decrease by the cost of the
inventory sold and cost of goods sold would increase by that amount.
Q3-13.
Permanent accounts are balance sheet accounts.The balances in these accounts carry forward
from period to period.Temporary accounts are income statement accounts and are closed at the
end of each accounting period to bring their balance to zero.This is done so that the amounts
reported on the income statement reflect only the economic events that occurred in the current
fiscal period. The balance in the temporary accounts is closed to retained earnings,which is a
permanent account.
Q3-14.
Recording of transactions can require judgement as it may not be apparent when and where an
economic event should be recorded (for example, revenue recognition). Adjusting journal entries
also require judgement as many of the adjustments are based on the judgement of management.
Management has some flexibility in determining how much to adjust the various accounts by.
Posting of entries, preparation of the trial balance, and the posting of closing entries require the
least amount of judgement as the amounts related to these items are indicated in the original
journal entries.

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Q3-15.
Dividends are not treated as an expense because they are not a cost of doing business. When
dividends are paid, the profit of the company is being distributed to shareholders. Retained
earnings (owners equity) decrease to reflect the assets being distributed to the owners.
Q3-16.
At the end of a fiscal period revenue and expenses are closed to retained earnings (an equity
account). Revenue increases retained earnings, while expenses decrease retained earnings. This
is because revenue represents an inflow of wealth to the entity.Expenses represent an outflow of
wealth as they represent costs the entity must incur to operate.
Q3-17.
The bank credits your account since from the perspective of the bank, the amount that you have
on deposit is a liability and an increase in a liability is a credit. The bank views your deposit as a
liability since it owes you the money you have on deposit.
Q3-18.
An executory contract is an exchange of promises where one party promises to supply goods or
services and the other party promises to pay for them, but neither side has yet fulfilled its side of
the bargain. Under IFRS (and ASPE) these arrangements are not usually recorded in the
accounting system.
Q3-19.
The things that must be known are:
1. Which elements of the accounting equation are affected?
2. Which specific asset, liability, owners equity, revenue, and expense accounts are affected?
3. How the accounts are affecteddoes the amount in each account increase or decrease?
4. By how much has each specific asset, liability, owners equity, revenue, and expense account
increased or decreased?
Q3-20.
Dividing accounts into sub-accounts provides detailed information about the different types of
assets, liabilities, owners equity, revenues, and expenses. Without such detail it would not be
possible, for example, to tell the amount the entity is owed by customers, the amount it paid for
its buildings, and the amount it owes to suppliers. Also, it couldnt determine the different types
of expenses it incurred and the amounts. Without the detail provided by sub-accounts it would be
very difficult to obtain much useful information from the financial statements.
Q3-21.
The number of accounts is determined by the information needs of management and financial
reporting requirements. There are no rules inIFRS or ASPE that specify the exact accounts an
entity should keep, although they do specify that certain information must be provided, which
requires that information be accumulated separately. Constraints such as tax law will require an
entity to have certain information and this will lead an entity to organize its accounting system to
accumulate that information.

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Q3-22.
Under accrual accounting its not always clear when an economic event takes place. As a result
judgement must be exercised by the managers to determine when, how, and how much should be
recorded in the financial statements. Revenue recognition and matching of expenses are not
always straightforward, requiring that judgement be exercised based on the facts of the specific
situation. Under accrual accounting its not always clear when (and sometimes how much)
revenue should be recognized and what and how much expenses should be matched to the
revenue. The implication of choices in recognizing revenues and expenses is that alternative
choices could result in different amounts of revenues and/or expenses, and, as a result, income
could vary depending on the accounting choices that are made. As well the amount of assets,
liabilities, and owners equity could be affected by the accounting choices managers make.
While different ways of measuring economic activity in the financial statements has no effect on
the actual economic activity of the entity, different ways of measuring economic activity can
have economic consequences for stakeholders (amount of taxes the entity pays, the amount of
bonus managers receive, etc.) and the perceptions of users of financial statements regarding the
profitability and financial health of the company could be changed.
Q3-23.
The fact that all economic events are not captured by an accounting system means that the
information provided by the system is not comprehensive or complete. As a result, users of the
financial statements may have false beliefs about the future profitability and financial health of
the company and may draw incorrect conclusions. Of course, if a stakeholder is aware of the
information, regardless of whether its captured by the accounting system, the stakeholder may
be able to adjust the accounting information to reflect that knowledge. For example, if a major
customer declares bankruptcy, the companys bank may be aware of the event and its
implications for the company. A small investor may not be aware of either the event or its
implications and purchase shares at a higher price than if the information was known.
Q3-24.
Many examples could be provided. Some examples are the signing of a large contract with a
customer that does not come into effect until a later period, an improving economy, or a
favourable mention in the media, changes in tax laws, new senior executives, and increases in the
market value of assets.

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Q3-25.
The steps of the accounting cycle are:
An economic event happens, which must be recorded as a transaction.
Prepare the journal entry, which is recording the transaction in the general journal.
Post the journal entry to the general ledger, which is recording the amounts in the journal
entry in the appropriate specific accounts in the general ledger.
Prepare and post the adjusting journal entries, which results in the necessary adjustments to
the related accounts.
Prepare the trial balance, which is a listing of any debit and credit balances in all the accounts
in the general ledger.
Prepare the financial statements from the information in the trial balance.
Prepare and post-closing entries to reduce the balances in temporary accounts to zero.
Prepare the post-closing trial balance, which is a listing of the debit and credit balances in the
permanent accounts in the general ledger (balances in the temporary accounts are zero).
Q3-26.
A T-account is a device used to represent a general ledger account for teaching purposes. A Taccount is set up to record the transactions and economic events that affect each asset, liability,
equity, revenue, or expense account.
Q3-27.
Posting a journal entry to the general ledger is the process of transferring each line of a journal
entry to the corresponding account in the general ledger. Posting updates the balance in the
account to reflect the effect of the transaction or economic event recorded in the journal entry.
Q3-28.
A trial balance is a listing of all the accounts in the general ledger with their balances. The
purpose is to ensure that the debits equal the credits and to provide a summary of the balances in
each account. Some errors would result in the trial balance having debit and credit totals that are
unequal. Other errors, such as posting the same entry twice or not posting it at all, or entries
made to an incorrect account, would not be evident simply by examining the trial balance.
Q3-29.
Cross-referencing transactions from the journal to the general ledger facilitates the tracing of
transactions through the accounting system at a later time.
Q3-30.
Information in the general ledger is organized by account. Each account represents a specific
type of asset, liability, equity, revenue, or expense. The general journal is a chronological listing
of entries made to the accounting system. By examining the general ledger one could see all the
entries that affected each account. For example, by looking at the cash account one could see all
the entries to cash. To find the entries to cash in the general journal, it would be necessary to
track through the ledger those transactions specifically involving cash.

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Q3-31.
Bookkeeping is the process of recording financial transactions and maintaining financial records.
Bookkeeping is only part of the entire accounting process. Accounting involves much more,
including the design and management of information systems, decisions involving how to
account for and report an entitys economic activity and interpretation/analysis of financial
information.

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Page 3-7
EXERCISES
E3-1.
a. adjusting entry
b. transactional entry
c. adjusting entry
d. adjusting entry
e. no entry
f. transactional entry
g. adjusting entry
h. transactional entry
i. transactional entry
j. transactional entry
k. adjusting entry
E3-2.
There are many possible answers that is acceptable (one example provided)
a)
Asset increases, asset decreases A customer pays an amount owing (pays an
account receivable).
b)
Asset increases, liability increases Borrow money from bank
c)
Asset increases, shareholders equity increases A shareholder purchases shares in
the corporation for cash.
d)
Asset increases, revenue increases A customer purchases merchandise for cash or
on credit.
e)
Liability decreases, asset decreases Cash used to pay off amounts owed to suppliers
f)
Asset decreases, expense increase - Pay employees for work they have done for the
business
g)
Liability decrease, revenue increase Performed work for customer where customer
paid for the work in advance
h)
Asset decreases, shareholders equity decreases Pay cash dividends
i)
Liability increase, expense increase Accrue an expense at the end of a period (e.g.
for utilities or warranty costs)
j)
Asset decreases, revenue decreases A dissatisfied customer returns merchandise for
a refund

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Page 3-8
E3-3.
a.
Balance before closing entry on
December 31, 2017
Closing entry
Closing entry
Balance after closing entry on
December 31, 2017
Retained earnings
$13,750,000
5,125,000
(3,225,000)
15,650,000
Revenue
$5,125,000
(5,125,000)
-
Expenses
($3,225,000)
3,225,000
-
b.
Dr.
Revenue
5,125,000
Cr.
Expenses
3,225,000
Cr.
Retained earnings
1,900,000
c. The primary purposes of closing entries are to reset the balances in the temporary (income
statement) accounts to zero and to transfer the amounts in those accounts to retained
earnings.
d. Net income for 2018would be overstated by $1,900,000 because all revenues and expenses
from 2017would be included in 2018revenues and expenses.

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E3-4.
a.
Retained
Earnings
Balance
on August
31, 2016,
before
closing
entry
225,720
Closing
(76,200)
Closing
(22,740)
Closing
($15,450)
Closing
($9,675)
Closing
($9,420)
Closing
($4,500)
Closing
($3,315)
Closing
($30,390)
Balance
on August
31, 2016,
after
closing
entry
54,030
Sales
Cost of
sales
225,720
(76,200)
Selling
andmarketing
(22,740)
General
andadministrative
($15,450)
Research and
development
($9,675)
Depreciation.
($9,420)
Interest
Other
Income
taxes
($4,500)
($3,315)
($30,390)
(225,720)
76,200
22,740
$15,450
$9,675
$9,420
$4,500
$3,315
$30,390
$0
$0
$0

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$0
$0
$0
$0
$0
$0
Page 3-10
b.
DR
CR
Sales
Cost of Sales
225,720
Selling and marketing

General and administrative
Research and development
Depreciation.
Interest
Other
Income taxes
Retained Earnings
76,200
22,740
15,450
9,675
9,420
4,500
3,315
30,390
54,030
c. The primary purposes of closing entries are to reset the balances in the temporary accounts to
zero and to transfer the amounts in those accounts to the retained earnings account.
d. Net income for 2017would be overstated by $54,030 because all revenues and expenses from
2016would be included in the 2017 revenues and expenses.
E3-5.
a.
b.
c.
d.
e.
f.
g.
h.
i.
Increase assets, increase liabilities

Decrease assets, decrease retained earnings (increase in expenses)
No impact (cash increases, accounts receivable decreases)
Decrease assets, decrease liabilities
Decrease assets, decrease retained earnings (increase in expenses)
No impact (cash decreases, prepaid insurance increases)
Increase assets, increase liabilities
Increase liabilities, decrease retained earnings (increase in expenses)
Increase assets, increase retained earnings (increase inrevenue)
E3-6.
a. debit
b. credit
c. credit
d. credit
e. debit
f. credit
g. credit
h. debit

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E3-7.
a. credit
b. debit
c. credit
d. debit
e. debit
f. debit
g. credit
h. debit
E3-8.
a. Deferred expense/prepaid expense since cash is paid for the supplies before they are
expensed (supplies are expensed as they are used).
b. Accrued expense/accrued liability assuming Beulah received some advertising services in
December, that portion would be accrued and expensed regardless of the fact it wont be paid
until next year.
c. Deferred expense/prepaid expense since cash is paid before the expense is recognized.
d. Deferred revenue since cash is received before the revenue is recognized (not recognized
until gift card is actually used to purchase goods/services.
e. Accrued expense/accrued liabilitysince the bonus expense is recognized in the period in
which its earned, not when the bonus is actually paid out in cash to management.
f. Accrued revenue/accrued asset since the revenues must be recognized (royalties have been
earned prior to the year-end) before the cash is received.
g. Accrued expense/accrued liability since the expense must be recognized before the cash is
paid (loan has been outstanding during the period so that interest must be accrued as it will
eventually have to be paid).

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E3-9.
Cash
a.
b.
c.
d.
e.
f.
g.
Assets =
Accounts
Inventory
Receivable
($25,000)
($15,000)
$100,000
($1,000,000)
Automobile
$25,000
$25,000
Liabilities
Loan
Dividends
Payable
Payable
Common
shares
+ Owners Equity
Retained
Sales
Earnings
$10,000
$100,000
$1,000,000
($1,000,000)
($1,000,000)
$300
($1,000,000)
($1,000,000)
$300
($200)
h.
$300
$1,000
($200)
$300
($200)
i.
Cost of
sales
($200)
($1,000)

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E3-10.
a.
b.
c.
d.
e.
f.
g.
Dr.
Dr.
Dr.
Dr.
Dr.
Dr.
Dr.
Dr.
h.
Dr.
Dr.
i.
Dr.
Automobile (assets +)
Cr.
Cash (assets -)
25,000
Automobile (assets +)
Cr.
Cash (assets -)
Cr.
Loan payable
(liabilities +)
25,000
Cash (assets +)
Cr.
Common shares
(owners equity +)
Retained earnings
(owners equity -)
Cr.
Cash (assets -)
25,000
15,000
10,000
100,000
100,000
1,000,000
1,000,000
Retained earnings
1,000,000
(owners equity -)
Cr.
Dividends payable
(liabilities +)
Dividends payable
(liabilities -)
Cr.
Cash (assets -)
1,000,000
1,000,000
1,000,000
Cash (assets +)
300
Cr.
Sales
(revenue +, owners equity +)
Cost of sales
(expenses +, owners equity -)
Cr.
Inventory (assets -)
200
200
Accounts receivable (assets +) 300

Cr.
Sales
Cost of sales
(expenses +, owners equity -)
Cr.
Inventory (assets -)
300
300
200
Cash (assets +)
1,000
Cr.
Accounts receivable (assets -)

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200
1,000
Page 3-14
Cash
a
b
25,000
15,000
c 100,000
d
f
g 300
1,000,000
1,000,000
Accounts receivable
h 300
i.
1,000
i 1,000
Automobile
a 25,000
b 25,000
Inventory
g
h
200
200
Loan Payable
b
10,000
Retained Earnings
d 1,000,000
e 1,000,000
Dividends Payable
e
f 1,000,000
1,000,000
Sales
g
h

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300
300
Common Stock
c
100,000
Cost of sales
g 200
h 200
Page 3-15
E3-11.
Trans
a
b
c
d
e
f
g*
h
i
j
Cash
Assets
Accounts
receivable
(=)
Building
Real estate
Liabilities
Accounts
payable
Bank Loan
Wages
payable
Unearned
revenue
Partners Equity
Partners
Revenue
Equity
5,000
Other
expenses
5,000
425,000
(425,000)
(2,500)
50,000
18,000
(2,500)
50,000
18,000
25,000
7,000
3,700
(1,500)
(+)
Wage
expense
(25,000)
7,000
(3,700)
(1,500)
g*: There is no impact on the financial statements at this time.

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E3-12.
Trans
a
Accounts receivable
DR
5,000
Revenue
Building
5,000
425,000
Real estate
c
Accounts payable
425,000
2,500
Cash
d
Cash
Cash
2,500
50,000
Partners equity
50,000
18,000
Bank loan
f
Wage expense
18,000
25,000
Wages payable
g
h
No entry
Cash
25,000
7,000
Unearned revenue
i
Cash
Other expenses
CR
7,000
3,700
Accounts receivable
3,700
1,500
Cash

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1,500
Page 3-17
Cash
c
d
e
h
i
j
2,500
50,000
18,000
7,000
3,700
a
i
Accounts receivable
5,000
3,700
Real estate
425,000
1,500
Bank loan
18,000
Wages payable
25,000
Wage expense
f 25,000
Accounts payable
2,500
Partners equity
50,000
Building
425,000
Unearned revenue
7,000
Revenue
5,000
Other expenses
j 1,500
E3-13.
a. Equipment was purchasedfor cash.
b. Goods/services were provided to a customer on credit.
c. Common shares of a corporation were issued for cash.
d. Land was purchased in exchange for a note.
e. Salary earned by employees but not paid was accrued at the end of the period.
f. A company provided goods/services to customers that had been paid for in a previous period.
g. The company paid a supplier the amount owed.
h. Insurance that was originally paid in advance is expensed when the insurance period is over.
i. Interest has been earned but will not be paid until the next accounting periodis accrued at the
end of the period.

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E3-14.
a. Equipment was purchased in part for cash and the remainder in exchanged for a note payable.
b. A bank loan is received in cash from the bank.
c. Land was sold for cash and an amount that is to be receivedmore than one year from the date
of the sale.
d. The company made a rental payment for a specified period before that period actually begins
(prepayment of rent to be used in the future).
e. Dividends have been declared and will be paid in the future.
f. Shares of a corporation were issued in exchange for a patent.
g. Cash of $35,000 was received for $10,000 in goods/services to be provided in the future and
$25,000 of goods/services already provided.
h. As a result of selling products with a warranty, the estimated cost of providing warranty
service is accrued when the products are sold to match the cost with the revenue earned.
E3-15.
Trans
1 Accounts receivable
DR
10,000
Revenue
To record a sale on credit.

2 Cash
10,000
8,000
Accounts receivable
To record collection of cash from a customer.
3 Inventory
15,000
Accounts payable
To record the purchase of inventory on credit.
4 Accounts payable
11,000
Cash
To record payment to a supplier
5 Cash
25,000
Common shares
To record the sale of the companys shares for cash.
6 Equipment
52,000
Cash
Accounts payable
To record purchase of equipment partially for cash and partially on credit.
7 Cash
75,000
Bank loan
To record a bank loan.
8 Cost of goods sold
4,000
Inventory
To record the expensing of inventory.

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CR
8,000
15,000
11,000
25,000
21,000
31,000
75,000
4,000
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E3-16.
Trans
1 Salaries expense
Cash
To record salary expense paid in cash.
2 Depreciation expense
Accumulated depreciation
To record depreciation expense.
3 Cash
Unearned revenue
To record unearned revenue
4 Unearned revenue
Revenue
To recognize previously unearned revenue.
5 Retained earnings
Cash
To record declaration and payment of a dividend.
6 Utilities expense
Accrued liabilities
To accrue a utility expense.
7 Bank loan
Interest expense
Cash
To record repayment of a bank loan and interest

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DR
31,000
CR
31,000
15,000
15,000
11,000
11,000
6,000
6,000
50,000
50,000
8,000
8,000
18,000
2,000
20,000
Page 3-20
E3-17.
a-c.
Assets
Date
Trans
Cash
Sept 1
Sept 3
Sept 3-20
Sept 21
Sept 25
Sept&Oct
Beg
1
2
3
4
5
6
Sept&Oct
(10,000)
Sept&Oct
Sept&Oct
Sept&Oct
Sept&Oct
8
9
10
11
(2,000)
(2,700)
30,000
Accounts
Receivable
Supplies
125,000
(3,000)
(20,000)
(75,000)
Prepaid
rent
(=)
Renovation
Equipment
Wages
payable
Shareholder Equity
(+)
Common
shares
Retained
earnings
Revenues
Supplies
Rent
Expenses
Wages
Utilities
20,000
125,000
50,000
5,000
52,500
105,000
1,200
(11,200)
(2,000)
(2,700)
(30,000)
(3,900)
(3,900)
(1,500)
(1,500)
adj
(4,167)
94,800
94,800
Depreciation
125,000
5,000
52,500
Liabilities
Accounts
payable
3,000
adj
adj
Balance
Closing
Entries
Ending
Balance
Accumulated
depreciation
22,500
22,500
1,100
1,100
1,500
1,500
20,000
20,000

Solutions Manual
125,000
125,000
(1,111)
(5,278)
(5,278)
(4,167)
52,300
52,300
1,200
1,200
125,000
125,000
105,000
(3,900)
(1,500)
(11,200)
(2,000)
(1,111)
(5,278)
81,122
(105,000)
3,900
1,500
11,200
2,000
5,278
81,122
Page 3-21
d.
Fitness for All Ltd.
Balance Sheet
As of October 31, 2017
Assets
Current Assets
Cash
Accounts receivable
Supplies
Prepaid rent
Renovations
Equipment
Total
Liabilities and Shareholders Equity
Current Liabilities
Accounts payable
Wages payable
$ 94,800
22,500
1,100
1,500
119,900
20,000
125,000
(5,278)
$259,622
$ 52,300
1,200
53,500
Common shares
Retained Earnings
125,000
81,122
206,122
Total Liabilities and Shareholders Equity $259,622
Fitness for All Ltd.
Income Statement and Statement of Retained Earnings
For the two months ended October 31, 2017
Sales
$ 105,000*
Expenses
Rent expense
$ 1,500
Wages expense
11,200
Utilities expense
2,000
Supplies expense
3,900
Depreciation expense
5,278**
Total expenses
23,878
Net income
81,122
Retained earnings on September 1, 2017
0
Retained earnings on October 31, 2017
$ 81,122
*The full amount of memberships was recognized in the Octoberincome statement. It would
have been reasonable to recognize two months of revenue ($17,500), which would have resulted

Solutions Manual
Page 3-22
in a dramatically different income statement (probably a more realistic one). In this case net
income and ending retained earnings would have been $-6,378.
**The renovations are depreciated over three years, the period of the lease ($20,000/36months *
2 months = $1,111) and the equipment is depreciated over five years ($125,000/60 months * 2
months).
E3-18.
a. Under cash accounting, $120,000($600 * 200) would be recorded as revenue for the year
ended December 31, 2017. The reason for this is that each memberhas to pay the entire $600 in
cash up front.
b. Under accrual accounting, only $40,000 ($200 * 200) would be recorded as revenue for the
year ended December 31, 2017, The reason for this is that members pay $600 for the use of the
gym for a period of three years or $200 for each year $600/3 years). Accrual accounting seeks to
record revenue on the basis as its earned, it does not matter when cash is received.
c. Under cash accounting, ending retained earnings would include $120,000 of revenue instead
of the $40,000 recognized under accrual accounting. Disregarding expenses (as we do not know
what they are), retained earnings would be $80,000 higher under cash accounting. Under accrual
accounting, there would be an unearned revenue liability of $80,000 on December 31, 2017,
representing the cash collected from members but not recognized as revenue. This liability would
not exist under cash accounting. Cash would increase by $120,000 under both methods.
d. Cash and accrual accounting each provide different measures of the revenues of the company.
Accrual accounting isa more relevant measure of revenue from an economic perspective because
it reflects the amount Saanich has earned providing service to members.Revenue under cash
accounting represents the amount of cash collected in the period. This depiction does not capture
the economic activity of Saanich as well as accrual accounting but it does reflect an important
aspect of operations; cash inflows. Care has to be taking in concluding a particular method is
always more relevant than another. Its likely that accrual accounting will be more relevant for
most stakeholders and uses of financial information, but probably not all.
E3-19.
a. Dr. Depreciation Expense
Cr. Accumulated Depreciation
b. Dr. Interest Receivable
Cr. Interest Revenue
c. Dr. Consulting Expense
Cr. Accounts Payable
d. Dr. Unearned Revenue
Cr. Revenue

Solutions Manual
$25,000
$25,000
$5,000
$5,000
$10,000
$10,000
$6,000
$6,000
Page 3-23
E3-20.
a
Date
12-Sep
Type
Trans
DR
25,000
Loan Receivable
CR
Cash
31-Dec
Adj
25,000
Interest Receivable
490
Interest Revenue
490
$750*(111/170 days)
1-Mar
Trans
Cash
25,750
Interest Revenue
Loan Receivable
Interest Receivable
260
25,000
490
Interest revenue = $750 - $490 = $260

b
31-Dec
Adj
Wages Expense
4,500
Wages Payable
15-Jan
Trans
Wages Expense
Wages Payable
4,500
4,500
4,500
Cash
c
10-Jul
Trans
9,000
Cash
10,000
Unearned revenue
31-Dec
Adj
Unearned revenue
10,000
5,000
Revenue
5,000
10,000/10 months*5 months

d
2-Nov
Trans
Inventory
32,000
Cash
31-Dec
Adj
32,000
Inventory loss
5,000
Inventory
30-Jun
Trans
5,000
Building
10,000,000
Cash
31-Dec
Adj
10,000,000
Depreciation Expense
200,000
Accumulated Depreciation
(10,000,000/25)*(6/12)

Solutions Manual
Page 3-24
200,000
E3-21.
Date
a
Type
31-Jul Adj
DR
Accounts Receivable
60,000
Royalty revenue
Dec 31 Trans
Cash
60,000
60,000
Accounts Receivable
b
15-Feb Trans
Advance payment for inventory
60,000
100,000
Cash
31-Jul Adj
Inventory
100,000
60,000
Advance payment for

inventory
c
31-Jul Adj
Utilities expense
60,000
5,000
Utilities payable
8-Sept Trans
Utilities payable
5,000
5,000
Cash
d
During yr Trans
Cash
5,000
50,000
Unearned Revenue
31-Jul Adj
Unearned Revenue
50,000
30,000
Revenue
e
1-Mar Trans
Cash
30,000
100,000
Bank Loan
31-Jul Adj
CR
Interest expense
100,000
2,917
Interest Payable
2,917
$7,000 * (5/12) = $2,917

28-Feb
Interest Payable
Interest Expense
2,917
4,083
Cash
7,000
Interest expense = $7,000 - $2,917

f
1-Dec Trans
Prepaid Insurance
12,000
Cash
31-Jul Adj
Insurance Expense
12,000
8,000
Prepaid Insurance
$12,000*(8/12) = $8,000

Solutions Manual
Page 3-25
8,000
E3-22.
a.
Dr.
Depreciation Expense
70,000
(expense +, owners equity -)
Cr.
70,000
(Contra-asset +)
The entity recorded a $70,000 depreciation expense to reflect consumption of depreciable
assets.
b.
Dr.
Unearned Revenue
5,000
(liability -)
Cr.
Revenue
5,000
The entity performed services for customers that had paid deposits in advance.
c.
Dr.
d.
Dr.
e.
Dr.
f.
Dr.
g.
Dr.
Interest receivable (asset +)

4,000
Cr.
Interest revenue
4,000
The entity earned interest of $4,000on an investment or bank deposit in the current period
but the interest will not be paid until after the year end.
Interestexpense
5,000
Cr.
Interest payable (liability +)
5,000
Interest on a loan accrued but does not have to be paid until after the year-end.
Insuranceexpense
6,000
Cr.
Prepaid insurance (asset -)
6,000
The entity used up some of its insurance that it had paid for in advance. When an entity
purchased insurance in advance, it records it as an asset and expenses it when it uses it
up.
Supplies expense
14,000
Cr.
Supplies Inventory (asset -)
14,000
A supplies inventory count revealed that $14,000 of supplies previously purchased had
been used up and therefore have to be expensed.
Utilities expense
9,000
Cr.
Utilitiespayable (liability +)
9,000
Utilities consumed have been estimated (accrued) as the entity has used utilities but will
not be billed until after the year-end.

Solutions Manual
Page 3-26
E3-23.
Charnys Ltd.
Income Statement
For the year ended December 31, 2016
Sales
Interest revenue
Total revenue
650,000
3,000
653,000
Expenses
Cost of goods sold
Wage expense
Advertising expense
Selling and administrative expense
Interest expense
Rent expense
Miscellaneous expense
Income tax expense
Total expenses
Net income
225,000
125,000
35,000
25,000
32,000
12,500
18,000
9,500
59,000
541,000
112,000
E3-24.
a. Net income would be overstated because expenses would be understated (no depreciation
expense). The adjusting entry would record adepreciation expense and an increase in a
contra-asset.
b. Net income would be understated because earned revenue isnt recorded. The adjusting
entry would record an increase in revenue and an increase in an asset.
c. Net income would be understated because earned revenue isnt recorded. The adjusting
entry would record an increase in revenue and a decrease in the unearned revenue liability.
d. Net income would be overstatedbecause expenses would be understated (no insurance
expense). The adjusting entry would record an increase in insurance expense and a decrease
in the asset prepaid insurance.
e. Net income would be overstatedbecause expenses would be understated (no interest
expense). The adjusting entry would record an increase in interest expense and an increase in
interest payable.
f. Net income would be overstatedbecause expenses would be understated (understated wage
expense). The adjusting entry would record an increase in wage expense and an increase in
wages payable.

Solutions Manual
Page 3-27
E3-25.
a. Expenses will be understated, owners equity will be overstated, and assets will be
overstated. The adjusting entry would record an expense and increase a contra-asset
account (accumulated depreciation) which would increase expenses and decrease assets.
b. Revenue will be understated, owners equity will be understated, and assets would be
understated. The adjusting entry would record revenue, which increases owners equity
as well as a receivable, which increases assets.
c. Revenue and owners equity will be understated, liabilities will be overstated.
Recognizing revenue would decrease the unearned revenue liability and increase revenue
and owners equity.
d. Assets and owners equity will be overstated, expenses will be understated. An adjusting
entry would reduce prepaid insurance and recognize the reduction as an expense which
decreases owners equity.
e. Liabilities and expenses will be understated; owners equity will be overstated. An
adjusting entry would recognize the portion of interest that is owed which will create a
liability and recognize an expense.
f. Liabilities and expenses will be understated; owners equity will be overstated. An
adjusting entry would recognize the wages that are owed to employees and the related
wage expense.

Solutions Manual
Page 3-28
E3-26.
Reversal of
transactions:
Cash
Beginning
a
b
Accounts
receivable
Equipment
Unearned
revenue
15-Mar
(20,000)
20-Mar
(10,000)
100,000
25,000
150,000
During
110,000
(110,000)
During
(32,000)
During
4,500
During
(8,000)
Wage
expense
Other
expenses
80,000
175,000
(90,000)
Ending
balance
125,000
Sales
(10,000)
During
31-Mar
Bank
loan
Ending
Accounts
payable
(90,000)
32,000
4,500
8,000
125,000
Beginning
balance
?
145,500
Changes to cash
during March
(20,500)

Solutions Manual
Page 3-29
E3-27.
Trans
Opening bal
Collections
Additions
Ending bal
Date
1-Nov
During
During
30-Nov
Cash
410,000
410,000
Accounts
receivable
Sales
350,000
(410,000)
440,000 440,000
380,000 440,000
Ending balance = Beginning balance + Increases Decreases

380,000
350,000
?
410,000
Credit sales =
440,000
Amount of credit sales during November were $440,000.
E3-28.
Trans
Date
Cash
Supplies Accounts payable
Opening bal
1-Jun
150,000
Purchases
During
760,000
760,000
Payments
During 730,000
(730,000)
Ending bal
30-Jun
180,000
Ending balance = Beginning balance Payments + Purchases

180,000
150,000
?
760,000
Amount paid to suppliers =
730,000
Amount of payments during June was $730,000.
.
E3-29.
Ending accounts receivable = Beginning accounts receivable
+ Transactions that increase accounts receivable
Transactions that decrease accounts receivable
Ending accounts receivable = $20,000 + $150,000 $152,000
= $18,000

Solutions Manual
Page 3-30
E3-30.
a.
Dr.
Inventory(asset +)
Cr.
Cost of sales (expenses +, owners equity -)
15,000
15,000
b.
Dr.
Revenue (revenue -, shareholders equity -)
Cr.
Common shares (shareholders equity +)
200,000
200,000
c.
Dr.
Equipment (asset +)
10,000
Cr.
Computer expense (expenses -, owners equity +)
10,000
d.
Dr.
Revenue(revenue -, shareholders equity -)
Cr.
Accounts receivable (asset -)
3,000
3,000
E3-31.
Note: the following responses address only the impact on the current period financial statements.
If the error was not corrected:
a. Expenses would be overstated meaning net income and shareholders equity would be
understated. Also, assets would be understated.
b. Revenue would be overstated so net income would be overstated. Common shares would be
understated but no overall effect to shareholders equity (because retained earnings would be
overstated).
c. Assets would be understated because these computers were expensed immediately. Expenses
would be overstated meaning net income and shareholders equity would be understated.
d. Revenue would be overstated meaning net income and shareholders equity would be
overstated. Assets would also be overstated as the balance paid would still be in accounts
receivable.
E3-32.
a.
Dr.
Revenue (OE-, R-)
Cr.
Bank Loan (L +)
b.
c.
d.
175,000
175,000
Dr.
Prepaid Rent (A+)
Cr.
Rent Expense (OE+, E-)
15,000
Dr.
Retained Earnings (OE-)
Cr.
Dividend Expense (E -, OE+)
50,000
Dr.
Long-term debt (L -)
Cr.
Interest Expense (OE+, E-)

Solutions Manual
15,000
50,000
100,000
100,000
Page 3-31
E3-33.
Note: the following responses address only the impact on the current period financial statements.
If the error was not corrected:
a. Revenue would be overstated sonet income and shareholders equity would be overstated.
Liabilities would be understated.
b. Expenses would be overstated sonet income and shareholders equity would be understated.
Assets would be understated as the rent should have been recorded as a prepaid asset.
c. Expenses would be overstated so net income would be understated. Overall shareholders
equity would be unaffected as the dividend expense and to the failure to debit retained
earnings offset.
d. Expenses would be overstated so net income and shareholders equity would be understated.
Liabilities would be overstated because long-term debt hasnt been debited.

Solutions Manual
Page 3-32
E3-34.
Kuskonook Inc.
Balance Sheet
As of December 31, 2017
Assets
Current Assets:
Cash
Accounts receivable
Inventory
Loan receivable
Prepaid assets
Long-term loan receivable

Property, plant and equipment
Intangible Assets
Total Assets
$25,000
125,000
224,000
48,000
18,000
440,000
110,000
5,825,000
(825,000)
1,000,000
$6,550,000

Current Liabilities
Bank loan payable
Accounts payable and accrued liabilities
Salaries and commissions payable
Income taxes payable
Interest payable
Unearned Revenue
Dividends Payable
Note payable - current portion
Note payable
$150,000
200,000
29,000
15,000
12,000
100,000
18,000
300,000
824,000
2,100,000
Common shares
Retained earnings
Total Liabilities and Shareholders Equity
1,250,000
2,376,000
3,626,000
$6,550,000
Kuskonook Inc.
Income Statement
Revenue
Cost of goods sold
Gross margin
Expenses
Selling, general and administrative expense
Salaries and commissions expense
Interest expense
Income tax expense
Other expense
Total expenses
Net income
$6,650,000
2,445,000
4,205,000
$725,000
950,000
180,000
250,000
350,000
182,000
Retained earnings at the beginning of the year

Retained earnings at the end of the year

Solutions Manual
2,637,000
1,568,000
808,000
$2,376,000
Page 3-33
E3-35.
Closing Entry December 31, 2017:
DR
6,650,000
Revenue
Cost of sales
Interest expense
Selling, general, and administrative expense
Other expenses
Income tax expense
Retained earnings
Kuskonook Inc.
Post-closing Trial Balance
December 31, 2017
Account
Debit
Credit
Accounts receivable
125,000
Cash
25,000
Intangible Assets
1,000,000
Inventory
224,000
Loan receivable
48,000
Long-term loan receivable
110,000
Prepaid assets
18,000
Property, plant and equipment
5,825,000
Accounts payable and accrued liabilities
200,000
825,000
Bank loan payable
150,000
Common shares
1,250,000
Dividends Payable
18,000
Income taxes payable
15,000
Interest payable
12,000
Note payable - current portion
300,000
Note payable
2,100,000
Retained earnings
2,376,000
29,000
Unearned Revenue
100,000
Revenue
0
Cost of sales
0
0
Income tax expense
0
Interest expense
0
Other expenses
0
Selling, general, and administrative
expense
0
0
7,375,000 7,375,000

Solutions Manual
CR
2,445,000
250,000
180,000
725,000
950,000
182,000
350,000
1,568,000
Page 3-34
E3-36.
a.
Cash
Inventory
Prepaid
rent
Prepaid
advertising
Furniture and
fixtures
Accounts
payable
Loan
payable
Owners'
equity
Sept
Opening
10,000
7,000
15-Oct
(2,000)
(3,000)
29-Oct (10,000)
(500)
Total
1,500
10,000
7,000
2,000
3,000
22,000
22,000
12,000
2,000
500
500
3,000
12,000
7,000
b.
Assets
Cash
Inventory
Prepaid rent
Prepaid advertising
Furniture and fixtures
Total assets
Denis' Great Gifts

Balance Sheet
As of October 31 2017
Liabilities
$1,500
Accounts payable
22,000
Loan payable
2,000
500
Owners' equity
3,000
$29,000
Total liabilities and owners' equity

Solutions Manual
$12,000
7,000
10,000
$29,000
Page 3-35
10,000
E3-37.
Cash
Sept Opening
Accounts
receivable
Inventory
Prepaid
rent
Prepaid
advertising
Furniture
and
fixtures
Accounts
payable
Wages
payable
Loan
payable
10,000
(2,000)
Nov-Dec
50,800
Nov-Dec
(12,000)
Nov-Dec
(8,250)
22,000
Rent
expense
Utilities
expense
Depreciation
expense
12,000
500
22,000
2,000
500
3,000
12,000
7,000
10,000
1,200
52,000
(12,000)
10,000
Nov-Dec
Nov-Dec
Advertising
expense
3,000
(500)
1,500
Wage
Expense
2,000
(10,000)
Total
Cost of
sales
7,000
(3,000)
29-Oct
Revenue
10,000
7,000
15-Oct
Owners'
equity
1,750
(31,400)
(31,400)
(3,000)
400
(3,400)
Nov-Dec
Nov-Dec
(1,500)
(500)
(2,000)
Nov-Dec
500
Nov-Dec
(500)
(2,000)
(2,000)
Nov-Dec
(1,000)*
(1,000)
27,550
1,200
600
2,000
2,250
400
7,000
27,550
1,200
600
2,000
2,250
400
7,000
Closing
10,000
52,000
(31,400)
(3,400)
(2,000)
(2,000)
(500)
(1,000)
11,700
(52,000)
31,400
3,400
2,000
2,000
500
1,000
21,700
*Depreciation expense assumes straight-line depreciation over three years. Other reasonable assumptions are possible.

Solutions Manual
Page 3-36
a.
Denis' Great Gifts
Income Sheet
As of December 31
(Prepared using the cash basis)
Revenue ($52,000 - $1,200)
Cost of sales ($22,000 +$10,000 - $1,750)
Gross margin
Expenses:
Wage expense
$ 3,000
Advertising ($500 + $1,500)
2,000
Rent expense
2,000
Total Expenses
Net income
$50,800
30,250
20,550
7,000
$13,550
Denis' Great Gifts

Income Sheet
As of December 31
(Prepared using the accrual basis)
Revenue
$52,000
Cost of sales ($22,000 +$10,000 - $600)
31,400
Gross margin
20,600
Expenses:
Wage expense
$3,400
Advertising ($500 + $1,500)
2,000
Utilities expense
500
Rent expense
2,000
Depreciation expense*
1,000
Total Expenses
8,900
Net income
$ 11,700
*Different assumptions are possible for depreciation. The solution assumes
a three-year life for the depreciable assets. Its a good and important habit
for students to develop to recognize the need to fill in missing information.
b. The two income statements are different because two different bases of accounting methods
were used to determine net income. Cash accounting only recognizes cash transactions. Revenue
is recognized only when cash is received thus the accounts receivable of $1,200 is not included
as Revenue. The cost of sales does not include the accounts payable because its not paid and
goods paid for are expensed, not goods sold.
Accrual accounting tries to recognize the economic events of an entity over a set period.
Revenue is recognized,as its earned when performance occurs, not when cash is collected. Cost
of sales is determined by how much the cost of inventory was sold during November and
December, not the amount paid for inventory during the period. This takes into account not just
all the inventory purchased in this time but also the amount of inventory left over at the end.
With accrual accounting all expenses incurred during the two months are recognized regardless
Solutions Manual
Page 3-37
of whether they have been paid or not. Regardless of the accounting method used the real
economic performance of the entity was the same. What differs is the accounting representation
of that activity.
c.
Assets
Cash
Accounts receivable
Inventory
Prepaid rent
Prepaid advertising
Total assets
Denis' Great Gifts

Balance Sheet
As of December 31 2017
Liabilities
$27,550
Accounts payable
1,200
Wages payable
600
Loan payable
0
0
Owners' equity
2,000
$31,350
Total liabilities and owners' equity
$2,250
400
7,000
21,700
$31,350
Denis is $11,700 better off than he was two months ago (on an accrual basis). Its difficult to say
for sure how he did but almost $6,000 a month in income seems pretty good. From the balance
sheet you can see Denis has more than enough cash to pay off his liabilities and has significant
amount remaining in his account. It would be helpful to evaluate this business if a similar
business could be found to compare results with. ItsDenis first year in business so these
statements can be used to compare future years and help analyze those years. He could compare
the gross margin percentage of his business with other retail stores to get an idea of how hes
doing. Otherwise, the costs seem reasonable for the size of business (his profit margin percentage
is 22.5%). Additional non-financial information would be helpful such as interviewing Denis and
obtaining information such as how many hours he worked and how stressful was the ordeal. Its
very difficult to assess performance with only a single income statement. In regards to Denis
inventory, its likely of little value unless Denis plans to operate a Christmas business next year.
As the Christmas season is over there is likely little demand for these products and as a result the
$600 remaining in inventory may need to be written down to reflect its market value. Similarly,
it might be appropriate to write down the furniture and fixtures to what they could be sold for
unless Denis is planning to use them again.

Solutions Manual
Page 3-38
PROBLEMS
P3-1.
a. Given Transaction Entry
January 2, 2017
Dr. Insurance Expense (E+, OE -) $15,000
Cr. Cash (A-)
$15,000
Adjusting Entry
June 30, 2017
Dr. Prepaid Insurance (A+)
$11,250
Cr. Insurance Expense (E-, OE+)
$11,250
$15,000/24 months * 18 months remaining
b. Given Transaction Entry
April 1, 2017
Dr. Cash (A+)
Cr.
Revenue (R+, OE +)
25,000
25,000
Adjusting Entry
June 30, 2017
Dr. Revenue (R-, OE-)
15,000
Cr. Unearned revenue (L+)
15,000
[$25,000/5 months *3 months remaining = $15,000] Revenue should not have been initially
recognized.
c. Given Transaction Entry

March 1, 2017
Dr.
Investment certificate (A+)
Cr.
Cash (A-)
Dr.
Interest receivable (A+)
Cr.
Interest revenue (R+, OE+)
100,000
100,000
6,000
6,000
Adjusting
Dr.
Interest revenue (R-, OE-)

4,000
Cr.
Interest receivable (A-)
4,000
[$6,000/12 months * 8 months remaining] Revenue should not have been initially recognized.

Solutions Manual
Page 3-39
P3-2.
a. Given Transaction Entry
April 1, 2016
Dr.
Prepaid rent (A+)
Cr.
Cash (A-)
25,000
25,000
Adjusting Entry
December 31, 2016
Dr.
Rent expense (E+, OE -)
9,375
Cr.
Prepaid rent (A-)
9,375
[$25,000/24 months * 9 months]
The initial entry was correct. No correction required in the adjusting entry.
b. Given Transaction Entry
November 1, 2016
Dr.
Cash (A+)
Cr.
Revenue (R+, OE+)
10,000
10,000
December 31, 2016

Dr.
Revenue (R-, OE-)
10,000
Cr.
Unearned revenue ) (L+)
10,000
No revenue should have been recognized as goods will not be delivered until 2017.
c. Given Transaction Entry
July 2, 2016
Dr.
Equipment expense (E+, OE -)
Cr.
Cash (A-)
50,000
50,000
December 31, 2016

Dr.
Equipment (A+)
50,000
Cr.
Equipment expense (E-, OE +)
50,000
Original transactional entry should have debited equipment (asset) rather than an
expense
Another entry required (Adjusting) to record depreciation:
December 31, 2016
Dr.
Depreciation expense (E+, OE -)
Cr.
(contra asset +)
[$50,000/5 years * 6/12]

Solutions Manual
5,000
5,000
Page 3-40
P3-3.
a.
Aug 20
Sept 30
Dr.
Prepaid rent (asset +)

Cr.
Cash (asset -)
Transactional entry
1,000
1,000
Dr.
Rent expense
1,000
(expense +, partners equity -)
Cr.
Prepaid rent (asset -)
1,000
Adjusting entry
On the September 1 balance sheet there would be an asset called prepaid rent for $1,000.
On the September 30 income statement a rent expense of $1,000 would appear.
b.
Sept 30
Dr.
Rent expense
1,000
Cr.
Rent Payable (liability +)
1,000
Adjusting entry
Nothing would appear on the September 1 financial statements, but a liability would appear on
the September 30 balance sheet and an expense would appear on the income statement.
c.
Aug 20
Sept 15
Sept 30
Dr.

Cr.
Cash (asset -)
Transactional entry
1,000
Dr.
1,000

Cr.
Cash (asset -)
Transactional entry
1,000
1,000
Dr.
Rent expense
1,000
Cr.
1,000
Adjusting entry
There would be an asset called prepaid rent of $1,000 on the September 1 and September 30
balance sheets and a $1,000 rent expense would appear on the September 30 income statement.
d.
Sept 15
Sept 30
Dr.

Cr.
Cash (asset -)
Transactional entry
1,000
Dr.
1,000
Rent expense

Solutions Manual
1,000
Page 3-41

Cr.
Adjusting entry
1,000
A $1,000 rent expense would appear on the September 30 income statement. Students could also
elect to charge the payment directly to expense when its incurred on September 15 since it
covers the rent for the current month.
P3-4.
a.
Aug 20
Dr.
Sept 30
Dr.
Cash (asset +)
1,000
Cr.
Unearned Revenue (liability +) 1,000
Transactional entry
Unearned Revenue (liability -) 1,000
Cr.
Rental revenue
1,000
(revenue +, shareholders equity +)
Adjusting entry
On the September 1 balance sheet, there would be a liability called unearned revenue for $1,000.
On the September 30 income statement revenue for $1,000 would appear.
b.
Sept 30
Dr.
Rent receivable (asset +)

1,000
Cr.
Rental revenue
1,000
Adjusting entry
Nothing would appear on the September 1 financial statements, but an asset, rent receivable,
would appear on the September 30 balance sheet and revenue would appear on the income
statement.
c.
Aug 20
Dr.
Sept 15
Dr.
Sept 30
Dr.
Cash (asset +)
1,000
Cr.
Unearned revenue (liability +) 1,000
Transactional entry
Cash (asset +)
1,000
Cr.
Transactional entry
Unearned revenue (liability -) 1,000
Cr.
Rental revenue
1,000
Adjusting entry

Solutions Manual
Page 3-42
There would be an unearned revenue liability of $1,000 on the September 1 and September 30
balance sheets and $1,000 of revenue would appear on the September 30 income statement.
d.
Sept 15
Dr.
Sept 30
Dr.
Cash (asset +)
1,000
Cr.
Transactional entry
Unearned revenue (liability -) 1,000
Cr.
Rental revenue
1,000
Adjusting entry
Revenue would appear on the September 30 income statement. Students could also elect to post
the cash receipt directly to rental revenue when its received on September 15 since it covers the
rent for the current month.
P3-5.
a. Cayley should recognize the sale of gift cards as unearned revenue. The balance in this
account should be (at January 31, 2017):
Unredeemed amount on February 1, 2016
Plus: Gift card purchases during year
Less: Gift card redemptions during year
Balance, January 31, 2017:
$110,000
370,000
(325,000)
$155,000
b. The $155,000 should be recorded as a liability (unearned revenue) on the balance sheet.
Cayley Gifts has an obligation to sacrifice resources (inventory) in the future when
customers redeem their gift cards. Cayley can only recognize revenue when gift cards are
redeemed because that is when goods are provided to customers. Until they are
redeemed, they are a liability because Cayley received the cash for the gift cards but has
not delivered any goods; They owe customers goods in the future (present obligation
involving a future sacrifice).
c. If there was a solid basis for saying that about 5 percent of gift cards go unredeemed, then
Cayley should reduce its liability by 5 percent. Financial statements should report the
expected amount of the liability, which is estimated to be 95 percent of the amount of gift
cards outstanding. If Cayley does not adjust its unearned revenue balance related to gift
cards that never will be redeemed, its liabilities would be overstated.When a customer
does not redeem a gift card, Cayley effectively gets money for doing nothing as no goods
are provided to customers. Unredeemed gift cards are good for Cayley since the money
received is a windfallno sacrifice of inventory is required. However, a large proportion
of gift cards not being redeemed may indicate a problem with the attractiveness of the
gift cards (maybe people cant find anything to buy).

Solutions Manual
Page 3-43
P3-6
Cash
Beginning
Credit sales
Collection of receivables
Collection of advances
Ending
355,000
12,000
367,000
Accounts
receivable
75,000
393,000
(355,000)
Unearned
revenue
10,000
(7,000)
113,000
Revenue
400,000
12,000
15,000
This is a tricky question. The yellow boxes in the spreadsheet show the information that was
given. The key is recognizing that to get the unearned revenue account to balance there has to be
a reduction (debit) of $7,000. When unearned revenue is debited, revenue would be credited. As
a result the amount of credit sales is $393,000 because $7,000 of the revenue is from unearned
revenue.
P3-7.
Situation
a.
b.
c.
d.
e.
Assets
Overstated
NE
NE
NE
NE
Liabilities
NE
Understated
Understated
Understated
NE
Owners
Equity
Overstated
Overstated
Overstated
Overstated
NE
Revenues
NE
Overstated
NE
NE
NE
Expenses
Understated
NE
Understated
Understated
NE
Explanations:
a. Assets are overstated because accumulated depreciation was not increased. Expenses are
understated and therefore owners equity is overstated because no expense was recorded.
b. Liabilities are understated because the obligation to provide admission to games in the future
is not recorded. Revenue and owners equity are overstated because revenue that was not
earned is included in income.
c. Liabilities are understated because the amount owed to the water supplier is not recorded.
Expenses are understated because the cost of water is not recorded. Owners equity is
overstated because expenses are understated.
d. Liabilities are understated because the interest owed at the balance sheet date is not recorded.
Expenses are understated since the cost of borrowing the money for the period is not
recorded and, therefore, income is overstated. As a result, owners equity is overstated.
e. Cash will be understated since the cash account was credited for less than the amount paid
and capital assets will be overstated by an equal amount. As a result the accounting equation
is in balance but individual assets are not correct.

Solutions Manual
Page 3-44
P3-8
Situation
a.
b.
c.
d.
e.
Assets
Liabilities
Owners
Equity
Revenues
Expenses
Overstated
NE
NE
Understated
Understated
NE
Understated
Understated
NE
NE
Overstated
Overstated
Overstated
Understated
Understated
NE
Overstated
NE
Understated
NE
Understated
NE
Understated
NE
Overstated
Explanations:
a. Due to the failure to record an adjusting entry, the balance in prepaid insurance was not
reduced to reflect the use of the asset and so assets are overstated. Expenses are understated
because the adjusting entry was required to record the insurance expense. As a result of the
understatement of expenses, owners equity is overstated.
b. Because the liability for the services to be provided in 2018 was not recorded, the liabilities
are understated. Since the revenue is inappropriately included in 2017, revenues are
overstated in 2017 as is owners equity.
c. Liabilities are understated because the amount owed for electricity is not reported. Expenses
are understated because the cost of electricity is not recorded and therefore owners equity is
overstated.
d. Assets are understated because the interest that has been earned is not reported. Interest
revenue is understated since the interest earned by lending the money for the period is not
recorded and therefore owners equity is understated.
e. Cash will be understated since the cash account was credited by an amount greater than the
amount paid. The net effect is that total assets will be understated by the amount of the error
and expenses will overstated by the same amount. As a result, owners equity will be
understated.
P3-9.
`
Current ratio
Debt-to-equity
ratio
Profit margin
Current assets/
Total debt/
Net income/
Current
Total equity
Sales
liabilities
a.
Decrease
No effect
No effect
CA b.
Increase
Increase
No effect
CA+
L+
c.
Increase
Decrease
Increase*
CA+
OE+
NI+, Sales+
d.
Decrease
Increase
Decrease
L+
L+, OENIe.
Increase
Decrease
No effect
CA+
OE+
*Ignores the impact of any costs associated with the sale.

Solutions Manual
Return on
Equity
Net income/
Shareholders
equity
No effect
No effect
Increase
NI+, OE+
Decrease
NI-, OEDecrease
OE+
Page 3-45
P3-10.
Current ratio
Debt-to-equity
ratio
Profit margin
Return on
Equity
Total debt/
Total equity
Net income/
Sales
a.
Current assets/
Current
liabilities
No effect
No effect
No effect
Net income/
Shareholders
equity
No effect
Decrease
CAIncrease
CA-, CLDecrease
CA-
Increase
OEDecrease
LIncrease
OE-
Decrease
NINo effect
Decrease
NI-, OENo effect
No effect
Increase
OE-
Current ratio
Debt-to-equity
ratio
Profit margin
Return on
Equity
Current assets/
Current
liabilities
No effect
Total debt/
Total equity
Net income/
Sales
Increase
OEDecrease
L-,OE+
Decrease
OE+
Increase
L+, OEIncrease
OE-
Decrease
NIIncrease
NI+,Sales+
Increase
NI+
Decrease
NIDecrease
NI-
Net income/
Shareholders
equity (opening)
Decrease
NIIncrease
NI+
Increase
NI+
Decrease
NIDecrease
NI-
b.
c.
d.
P3-11.
`
a.
b.
c.
d.
e.
Increase
CLIncrease
CA+
Decrease
CL+
Decrease
CA-

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Page 3-46
P3-12
`
a.
b.
c.
d.
e.
Current ratio
Debt-to-equity
ratio
Profit margin
Return on
Equity
Current assets/
Current
liabilities
No effect
Understated
Understated
Overstated
Overstated
Total debt/
Total equity
Net income/
Sales
Understated
Overstated
Overstated
Understated
Understated
Overstated
Understated
Understated
Overstated
Overstated
Net income/
Shareholders
equity (opening)
Overstated
Understated
Understated
Overstated
Overstated
P3-13.
a. During July there was $5,900 of supplies available for use ($2,000 + $3,900). At the end
of the month there was $900 on hand so the amount of supplies used and the expense on
the income statement for July would be $5,000 ($5,900 $900). This will reduce retained
earnings on the balance sheet by $5,000 and supplies, an asset on the balance sheet, will
be reduced by the same amount to $900 at the end of July.
b. No revenue should be reported in July because no work has been performed. On the
balance sheet, the cash received will be in the asset section. Also, $2,000 would appear as
unearned revenue (a liability) as Woking Ltd. has a present obligation to provide services
in the future.
c. For the month of July, $2,000 ($14,000/7 months) should be reported as a rent expense
for the use of the equipment. Also, prepaid assets on the balance sheet would be reduced
by $2,000. The balance in prepaid assets on the balance sheet at the end of July would be
$6,000. Retained earnings would decrease by $2,000.
d. For the month of July, $2,000 should be reported as an expense as this relates to services
used by Woking during the month. The other $500 would appear as an expense in the
month of June. The $500 would have been reported on the balance sheet on July 1 as an
account payable. When paid accounts payable would have decreased by $500. Retained
earnings would fall by $2,000 as a result of this transaction. Cash would have decreased
by $2,500.
e. The payment in June would have been recorded as unearned revenue (a liability) on the
balance sheet. For the month of July, $3,000 should be reported as revenue ($5,000*60
percent) as this amount relates to the work that was actually done in July. In the month of
July, the unearned revenue balance in the liability section of the balance sheet would be
reduced by $3,000. Also, retained earnings (equity) would increase by $3,000 as a result
of the work performed.
f. For July, $3,000 would be reported as wages expense as this is the amount that was
earned by Wokings employees. At the beginning of July there would have been wages
payable (liability) of $1,100, which would be removed when paid in July. The $600 owed
to employees at the end of July would appear as wages payable on the balance sheet at
the end of July. Retained earnings (equity) would decrease by $3,000. The cash paid to
employees during the month would decrease the cash balance by $3,500.

Solutions Manual
Page 3-47
P3-14.
Paul's Dogs
a.
Assets
Date
1-Apr
8-Apr
beg
beg
during
August
during
end
during
during
15Aug
5-Sep
Trans
Beg
a
b
c
d
e
f
g
h
i
j
k
l
Cash
Accounts
receivable
Inventory
2,000
(1,000)
(300)
(250)
15,750
(=)
Prepaid
licence
Capital
assets
Accum.
deprn.
(375)
(1,000)
a
b
c
d
e
f
g
h
i
j
(1,500)
(500)
k
l
1,500
250
1,115
(8,525)
8,525
(7,775)
Adj-m
Adj-n
Balance
(375)
4,300
1,115
750
(125)
125
Owners
Equity
Loan
500
75
(500)
adj
2,000
k
l
(1,500)
Cost of Sales
Maintenance
Expenses
Wages
Other
Depreciation
75
Licence
(300)
15,750
1,115
(7,775)
(450)
(1,000)
(375)
adj
(375)
500
16,865
End Bal
6,840
7,340
(16,865)
0
Closing Entry-o

Solutions Manual
a
b
c
d
e
f
g
h
i
j
Sales
adj
adj
1,500
Shareholder Equity
(+)
Wages
payable
(7,775)
(300)
(450)
(1,000)
(375)
7,775
300
450
0
1,000
0
375
0
(125)
(125)
125
0
Page 3-48
b. Explanations for entries (some of these explanations may be more detailed than would be
expected from a student at this point in the book):
a. To record the contribution of cash to the business by the owner. Cash increases
because cash has been received and owners capital increases because the owner has
made an investment.
b. To record the purchase of the cart for cash and a promise to pay later. The cart is an
asset because it will provide future benefit to the business over the next three or four
years. According to IFRS/ASPE, capital assets increase by the cost of the cart. Paul
paid $1,000 to his friend so cash decreases by $1,000 and he promised to pay the
remainder, $500 later. The promise to pay is an obligation or liability. Notice that the
asset account increases by the full cost of the cart, not just the amount paid in cash.
c. To record amount paid to repair the cart. The cost of repairing the cart reduces cash
by $300 because Paul paid for the repairs in cash. There are actually two ways the
cost of repairs could have been treated. The spreadsheet treats the cost as an expense.
This makes sense because repairs are considered a cost of doing business and are
expensed as incurred. The $300 could also be classified as an asset. If the cost was
necessary to get the asset in shape to use (perhaps without the repairs it was not
usable) then the cost could be treated as an asset and included in capital assets. In that
case the cost of the repairs would have to be depreciated.
d. To record purchase of the license for $250. The license is an asset because it provides
the benefit of allowing Paul to operate his business for two years. As a result the asset
account license increases and cash decreases. The cost of the license has to be
amortized over the two years.
e. To record sales during the summer. Cash increases by the amount sold as does the
account sales.
f. To record sales at the tournament. This is also a sales transaction, but its on credit.
Paul recorded the sales when the hot dogs were provided, but cash will be coming
later when the organizers pay the bill. Therefore, an asset accounts receivable is
recorded to reflect the amount of money owing.
g. To record the purchase of supplies for cash. The supplies are assets until they are
sold, so when the purchase is made the inventory account increases. The supplies
were paid for in cash so the cash account decreases.
h. To record the cost of supplies used. During the summer Paul used up $7,775 of his
supplies. That means that at the end of the summer he had inventory of $750
remaining. Therefore the entry reduces the inventory account by $7,775 to reflect the
supplies used and an expense called cost of sales is recorded to reflect the amount
of inventory used to generate the sales recorded. There is another aspect of this
question that some students might have considered. Is the remaining inventory really
worth anything at the end of the summer?
i. To record the cost of wages. Paul agreed to pay his brother to operate the cart. Since
the wages relate to work done during the current summer, they are accounted for as
expenses. The full amount is expensed in the period and the amount owing ($75) is
recorded as a liability.
j. To record other expense incurred. Expenses are costs of doing business and are
recorded in the period they help earn revenue. Paul paid $1,000 for things to help run
the business (we dont know exactly what). As a result, cash decreases and an

Solutions Manual
Page 3-49
k.
l.
m.
n.
o.
expense is recorded, which is a decrease in owners equity because some of the

owners assets (his cash) are being paid to the suppliers.
To record cash withdrawn from the business. When an owner removes assets from the
entity, owners equity decreases. The owner is taking his/her wealth that is reflected
in ownership of the entity and transferring that wealth to him/herself. Thus the
ownership interest decreases (the owner owns less) and assets, in this case cash,
decrease.
To record payment of the amount owing to the friend. Paul paid his friend $500 so
cash decreases. The loan liability also decreases because Paul has fulfilled his
obligation to the friend.
To record deprecation of the cart. The cart will contribute to Pauls business for three
or four years. The first year of use has passed so part of the cost of the cart is
expensed or depreciated to reflect its usage. The cost of assets that contribute to
earning revenue over a number of periods is expensed over the period that it will be
contributing. Notice there is some judgement here. The solution based the calculation
on an estimated four-year life ($375 = $1,500/4). It would have also been reasonable
to use three years. Estimating the life of an asset is an educated guess. Some
accountants would say that using the three-year period is more appropriate because
its conservative. More will be said about this later in the book.
To record amortization of the license. The license has a two-year life, meaning Paul
can use it for two summers. One summer has passed so half of the license has been
used up. Its possible the amortization of the license may be subtracted out of the
prepaid license column as opposed to the accumulated amortization column; either
way is acceptable.
The closing entry resets the temporary income statement accounts to zero and records
the balance in retained earnings.
c.
Pauls Dogs
Balance Sheet
As of September 10
Assets
Cash
Accounts receivables
Inventory
License (net of amortization)
Cart
Total assets
$4,300
1,115
750
125
1,500
(375)
$7,415
Liabilities and Equity

Wages payable
Owner's capital
Total liabilities and equity
$75
7,340
$7,415
Pauls Dogs
Income Statement
For the period ended September 10
Sales
Expenses
$16,865

Solutions Manual
Page 3-50
Cost of sales
License expense
Wage expense
Other expenses
Maintenance expense
Income
7,775
375
125
450
1,000
300
$6,840
Pauls Dogs
Statement of Owners Equity
Owners equity at beginning
Investment by owner
Net income
Less drawings
Owners equity at end
$0
2,000
6,840
(1,500)
$7,340
d. (This is a sample answer rather than the right one. Good answers should have addressed
some of these issues, but the discussion could have approached them from different
perspectives)
The financial statements provide a useful summary of how Pauls Dogs did during the
summer. It provides Paul with information that will allow him to assess whether he should do
it again next summer. If he wants to do something else, he will have information that he
could show to the next owner of the cart. The income statement offers some detail on the
costs Paul incurred operating his business and could be the starting point for looking at how
he could do even better next summer.
The balance sheet tells Paul the resources he has on hand at the end of the summer. The
information might be somewhat misleading because one has to wonder whether all the $750
of non-perishable inventory would keep for the entire winter. Napkins and plastic cutlery
would but condiments might have to be replaced. The balance sheet also reminds Paul that he
is owed $1,115, but given that this is from a single group, he probably would remember
anyway. The closing balance of cash lets Paul know how much extra cash he has in addition
to his initial investment. The wages payable reminds him that he owes his brother $75, but
his brother would probably remind him if he forgot.
The format of these statements is quite simple, probably suitable for the situation.
e. (This is a sample answer rather than the right one. Good answers should have addressed
perspectives)
The statements suggest that Paul had a fairly successful summer. $6,840 for a summer job is
pretty good although from the statements we cant tell how much Paul worked to earn the
Solutions Manual
Page 3-51
money (on an hourly basis he may have earned a relatively small amount). Its interesting to
see that even though Pauls income is $6,840, on a cash basis he is only $3,800 better off (he
invested $2,000 and now has $4,300 plus the withdrawal of $1,500). The cash position will
improve once he collects the $1,115 that is owed to him. The difference between income and
the increase in cash is the investment that had to be made in the cart, license, and inventory.
These amounts did not affect income during the year but did cost cash.
There seems to be a large amount of inventory on hand at the end of the year. Will it be
usable next year? If some has to be disposed of (like condiments), the cost of the amounts
thrown away should be expensed this year since they really are a cost of doing business this
year.
The statements dont tell Paul anything about the market value of the cart. He needs to know
what he could sell the cart for if he wants complete information about whether he should
continue in business or sell the cart and get cash for it. The book value of the cart simply tells
how much the cart cost less the amount depreciated (really not a very useful number). The
statements also do not tell whether the license could be sold.
In examining the performance of Pauls business, its difficult to fully assess it because there
is no basis of comparison. In predicting how Paul would do next year one might wonder
whether it will be necessary to spend $300 on repairs. It would be useful to find out how
other vendors do.
Its possible to do some ratio analysis such as profit margin and return on equity. The current
ratio and debt to equity would not be relevant because the debt is too small. (Profit margin =
.41) (Return on equity = 1.86). However, we dont have benchmarks to compare these ratios
with.
Questions remain on how good Pauls locations were, how much food was wasted, whether Paul
priced his products well, etc. This information is not available in the financial statements.

Solutions Manual
Page 3-52
P3-15.
a.
Dr.
Cash
Cr.
b.
Dr.
c.
Dr.
d.
Dr.
e.
Dr.
f.
Dr.
g.
Dr.
h.
Dr.
i.
Dr.
j.
Dr.
k.
Dr.
l.
Dr.
2,000
Owners equity
2,000
Capital assets (cart)

Cr.
Cash
Loan
1,500
Repairs Expense
Cr.
Cash
300
Prepaid License
Cr.
Cash
250
Cash
Cr.
15,750
1,000
500
300
250
Sales
15,750
Accounts Receivable
Cr.
Sales
1,115
Inventory
Cr.
Cash
8,525
Cost of sales
Cr.
Inventory
7,775
Wage expense
Cr.
Cash
Wages payable
1,115
8,525
7,775
450
375
75
Other expenses
Cr.
Cash
1,000
Owners Capital
Cr.
Cash
1,500
Loan
Cr.
Cash
500
1,000
1,500
500

Solutions Manual
Page 3-53
m.
Dr.
375
Cr.
n.
Dr.
License expense
Cr.
Prepaid license
Part B & C
Cash
a. 2,000
e. 15,750
b. 1,000
c. 300
d. 250
g. 8,525
i. 375
j. 1,000
k. 1,500
l. 500
375
125
125
Accounts
receivables
f. 1,115
1,115
Inventory
g. 8,525
h. 7,775
750
4,300
License
d. 250
Cart
b. 1,500
Accumulated
depreciation
m. 375
n. 125
125
l. 500
1,500
375
Loan
b. 500
Wages payable
i. 75
75
Owners Capital
k. 1,500
a. 2,000
Sales
e. 15,750
f. 1,115
16,865
500

Solutions Manual
Page 3-54
Cost of Sales
h. 7,775
7,775
Other Expense
j. 1,000
1,000
Repairs Expense
c. 300
Wage Expense
i. 450
300
450
Depreciationexpens
e (cart)
m. 375
License expense
n. 125
375
125
Part D
Pauls Dogs
Trial Balance
September 10
Cash
Accounts receivable
Inventory
License
Cart
Wages payable
Owners equity
Sales
Cost of sales
Repairs expense
Wage expense
License expense
Other expense
Debits
$ 4,300
1,115
750
125
1,500
Credits
$375
75
500
16,865
7,775
300
450
125
1,000
375
$ 17,815

Solutions Manual
$ 17,815
Page 3-55
Part E.
Pauls Dogs
Balance Sheet
As of September 10
Assets
Cash
Inventory
Cart
Total assets
$4,300
1,115
750
125
1,500
(375)
$7,415
Liabilities and Equity

Wages payable
Owner's capital
Total liabilities and equity
$75
7,340
$7,415
Pauls Dogs
Income Statement
Sales
Expenses
Cost of sales
License expense
Wage expense
Other expenses
Maintenance expense
Income
$16,865
7,775
375
125
450
1,000
300
$6,840
Pauls Dogs
Statement of Owners Equity
Owners equity at beginning
Investment by owner
Net income
Less drawings
Owners equity at end
$0
2,000
6,840
(1,500)
$7,340

Solutions Manual
Page 3-56
Part F
(o.) Closing entry
Dr.
Sales
Cr.
Cost of sales
Wage expense
Other expense
Repairs expense
License expense
Owners capital
Owners Capital
k. 1,500
16,865
7,775
375
450
1,000
300
125
6,840
Sales
a. 2,000
500
o. 6,840
Other Expense
e. 15,750
f. 1,115
j. 1,000
16,865
1,000
o. 16,865
o. 1,000
7,340
Cost of Sales
h. 7,775
Repairs Expense
c. 300
7,775
0
Wage Expense
i. 450
300
o. 7,775
450
o. 300
0
Depreciation
Expense (cart)
m. 375
375
o. 450
0
o. 375
0
License
Expense
n. 125
125
o. 125
0
Part G
Pauls Dogs
Post-closing Trial Balance
As of September 10
Cash
Inventory
Cart
Wages payable
Owners capital
Debits
$ 4,300
1,115
750
125
1,500
$ 7,790
Solutions Manual
Credits
$375
75
7,340
$ 7,790
Page 3-57
(This is a sample answer rather than the right one. Good answers should have addressed
perspectives)
The financial statements provide a useful summary of how Pauls Dogs did during the
summer. It provides Paul with information that will allow him to assess whether he should do
it again next summer. If he wants to do something else, he will have information that he
could show to the next owner of the cart. The income statement offers some detail on the
costs Paul incurred operating his business and could be the starting point for looking at how
he could do even better next summer.
The balance sheet tells Paul the resources he has on hand at the end of the summer. The
information might be somewhat misleading because one has to wonder whether all the $750
of non-perishable inventory would keep for the entire winter. Napkins and plastic cutlery
would but condiments might have to be replaced. The balance sheet also reminds Paul that he
is owed $1,115, but given that this is from a single group, he probably would remember
anyway. The closing balance of cash lets Paul know how much extra cash he has in addition
to his initial investment. The wages payable reminds him that he owes his brother $75, but
his brother would probably remind him if he forgot.
The format of these statements is quite simple, probably suitable for the situation.
i. (This is a sample answer rather than the right one. Good answers should have addressed
perspectives)
The statements suggest that Paul had a fairly successful summer. $6,840 for a summer job is
pretty good although from the statements we cant tell how much Paul worked to earn the
money (on an hourly basis he may have earned a relatively small amount). Its interesting to
see that even though Pauls income is $6,840, on a cash basis he is only $3,800 better off (he
invested $2,000 and now has $4,300 plus the withdrawal of $1,500). The cash position will
improve once he collects the $1,115 that is owed to him. The difference between income and
the increase in cash is the investment that had to be made in the cart, license, and inventory.
These amounts did not affect income during the year but did cost cash.
There seems to be a large amount of inventory on hand at the end of the year. Will it be
usable next year? If some has to be disposed of (like condiments), the cost of the amounts
thrown away should be expensed this year since they really are a cost of doing business this
year.
The statements dont tell Paul anything about the market value of the cart. He needs to know
what he could sell the cart for if he wants complete information about whether he should
continue in business or sell the cart and get cash for it. The book value of the cart simply tells
how much the cart cost less the amount depreciated (really not a very useful number). The
statements also do not tell whether the license could be sold.

Solutions Manual
Page 3-58
In examining the performance of Pauls business, its difficult to fully assess it because there
is no basis of comparison. In predicting how Paul would do next year one might wonder
whether it will be necessary to spend $300 on repairs. It would be useful to find out how
other vendors do.
Its possible to do some ratio analysis such as profit margin and return on equity. The current
ratio and debt to equity would not be relevant because the debt is too small. (Profit margin =
.41) (Return on equity = 1.86). However, we dont have benchmarks to compare these ratios
with.
Questions remain on how good Pauls locations were, how much food was wasted, whether Paul
priced his products well, etc. This information is not available in the financial statements.

Solutions Manual
Page 3-59
P3-16.
Assets
(=)
Liabilities
(+)
Shareholder Equity
Long-term
Date
Trans
Cash
Accounts
receivable
Inventory
Prepaid
Assets
PPE
Accum.
depreciation.
Accounts
Payable
Curr.
portion
of note
Wages
Payable
Interest
Payable
Cost of Expenses
Common
shares
Note
Retained
earnings
Cost of
sales
Sales
Rent
Wages
Other
Depreciation
Interest
Utilities
Beg
7/04/17
i.
20,000
8/01/17
ii.
(3,000)
8/04/17
iii.
(12,000)
8/10/17
During
August
iv.
20,000
v.
(7,000)
9/01/17
vi.
(1,600)
11/01/17
vii.
(3,000)
12/18/17
viii.
During
ix.
During
ix.
During
x.
42,000
During
xi.
(11,200)
During
xii.
(1,200)
xii.
xii.
During
xiii.
(9,500)
xiii.
xiii.
During
xiv.
(5,000)
xiv.
adj.
xv.
adj.
xvi.
3,000
22,000
i.
i.
ii.
ii.
iii.
iv.
7,000
1,600
3,000
10,000
v.
vi.
vii.
vii.
viii.
18,000
ix.
ix.
(17,200)
ix.
ix.
x.
x.
xi.
xi.
xv.
(1,933)
(400)
xviii
adj.
xix.
(4,000)
xix.
adj.
xx.
10,500
300
800
800
3,200
3,200
29,000
29,000
(1,933)
(1,933)
710

Solutions Manual
(1,200)
(9,500)
(5,000)
(846)
(1,933)
xvii
(710)
xviii
(400)
xix.
500
10,846
(11,200)
xvi.
xx.
300
(17,200)
42,000
xv.
xvii
xvii
300
xiv.
846
xvi.
xviii
10,500
iv.
vi.
adj.
End Balance
10,000
viii.
300
(18,000)
iii.
v.
adj.
End Balance
10,000
20,000
10,846
10,000
10,000
500
500
(4,000)
xx.
710
xxi.
10,000
Closing
Entry
710
10,000
(500)
20,000
(5,000)
42,300
(17,200)
(4,846)
(11,700)
(9,900)
(1,933)
(710)
(1,200)
(5,189)
(42,300)
17,200
4,846
11,700
9,900
1,933
710
1,200
(10,189)
Page 3-60
2. Explanations for entries (some of these explanations may be more detailed than would be
expected from a student at this point in the book):
i. To record the contribution of $20,000 to the corporation by the owner. Cash increases
because cash has been received and common shares increases because the owner has
made an investment.
ii. To record the payment of rent in advance.Cash decreases as it has been used up in
prepaying the rent. Prepaid rent (an asset) increases. Prepaid rent is an asset because it
represents a future benefit (the right to use the rented space in the future which will
help generate revenues for Cookie.
iii. To record the purchase of capital assets. The oven, refrigerator, display cases, etc. are
capital assets (PPE) and this account increases. These items are capital assets as they
will contribute to the revenue generating process for more than one accounting
period. Cash decreases by $12,000 as this amount was used to pay partially for the
items. Accounts payable (a liability) increases as Cookie has the obligation to pay the
final $10,000 owing on February 15, 2018.
iv. To record the acquisition of a loan. Cash increases by $20,000, the amount of the
loan. Liabilities increase by the same amount. One part of the liability is current as
$10,000 is due within one year (current portion of note payable). The other portion
the note is long-term as its not due within one year (Long-term note payable).
v. To record repairs and renovations to the shop. Since the work is necessary to ready
the shop for business the $7,000 is capitalized and will be depreciated over its useful
life. (For purposes of the question these costs will be depreciated over five years (the
lives of the other capital assets) but the period would more likely be different, perhaps
the period of the lease.)
vi. To record the purchase of insurance. Cash decreases as it has been used up in paying
for the insurance. Prepaid insurance an asset, increases. Prepaid insurance is an asset
because the insurance policy represents a future benefit, insurance coverage. None of
the insurance has been used up at this point so it remains an asset until used up.
vii. To record the payment of $3,000 of rent in advance. Cash decreases as it has been
used up in prepaying for the rent. Prepaid rent (an asset) increases. Prepaid rent is an
asset because it represents a future benefit (the right to use the rented space in the
future which will help generate revenues for Cookie.
viii. To record $300 in revenue for Cookie. Accounts receivable (an asset) increases as
Cookie has the right to receive money from the university in January 2018. Revenue
increases as Cookie has performed and earned catering services.
ix. To record the cost of supplies purchased and used in the period. During the summer,
Cookie used up $17,200 of its supplies. That means that at the end of the year they
had inventory of $800 remaining. Usually, the inventory is recorded as its purchased.
This entry just records the $800 of inventory remaining and simply expenses the
$17,200 of inventory used up.
x. To record sales during the year. Cash increases as all sales were for cash. Revenue
increases as this represents goods sold and services performed by Cookie during the
period.
xi. To record the payment of employee wages. Cash decreases by $11,200 as cash was
used up in paying for the wages. Wages expense increases by the same amount as the
employees earned these wages during the year. Wages is an expense as it represents
an economic sacrifice to earn revenue.
Solutions Manual
Page 3-61
To record the payment of utilities. Cash decreases as it was paid. Utilities expense
increases as utilities represent an economic sacrifice in order to earn revenue in the
period.
xiii. To record other expense incurred. Expenses are costs of doing business and are
recorded in the period they help earn revenue. Cookie paid $9,500 for things to help
run the business (we dont know exactly what). As a result, cash decreases and an
expense is recorded, which is a decrease in owners equity because some of the
owners assets (his cash) are being paid to the suppliers.
xiv. To record a cash dividend paid to the owner. When an owner removes assets from the
entity, shareholders equity decreases. The owner is taking his wealth that is in the
entity and transferring that wealth to himself. Thus the ownership interest decreases
(the owner owns less) and assets, in this case cash, decrease.
xv. To adjust for the portion of rent payable as a result of Cookies sales. Accounts
payable (a liability) increases as Cookie has the obligation to pay 2 % of sales
(2%*$42,300 = $846). Rent expense increases as this represents an economic
sacrifice in order to earn revenue.
xvi. To record depreciation of the equipment and renovations. The equipment and
renovations will contribute to Cookie for an estimated five years from its purchase
date. The cost of assets that contribute to earning revenue over a number of periods is
expensed over the period that it will be contributing. Its assumed that the asset began
to be used on September 1st. Depreciation for September-December is calculated as:
[($29,000/5)*4/12] = $1,933.
xvii. To accrue the interest payable on the loan. Interest payable (a liability) increases as
Cookie has the obligation to pay the interest accrued on January 31. Interest expense
increases as the interest accrued represents an economic sacrifice of earning revenue.
Its necessary to accrue the interest as even though it will not be paid until the next
fiscal year because the interest from the inception of the loan until December 31
relates to the 2017 fiscal year .Calculation: $20,000 * 9% *144 days/365 days = $710.
xviii. To adjust the balance of prepaid insurance. Prepaid Insurance (an asset) decreases as
some of the insurance that was prepaid has been used up. The portion of insurance
used up becomes an expense (other expense) as the cost of insurance represents an
economic sacrifice to earn revenue.
xix. To adjust the balance of prepaid rent. Prepaid rent (an asset) decreases as some of the
rent that was prepaid has been used up ($4,000) from September December. The
portion of rent used up becomes an expense (rent expense) as the use of rent
represents an economic sacrifice of earning revenue.
xx. To accrue wages earned but not paid during the current period. A corresponding
liability is recognized as Cookie has the obligation to pay these wages to the
employees
xxi. The closing entry resets the temporary income statement accounts to zero and records
the balance as a reduction to retained earnings since the business recorded a loss
(shareholders equity decreases).
xii.

Solutions Manual
Page 3-62
c)
Cookie Dough Inc.
Balance Sheet
Assets
Current Assets:
Cash
Accounts receivable
Inventory
Prepaid assets
$10,500
300
800
3,200
Total current assets

Non-current assets:
Property, plant, and equipment
$10,846
10,000
710
500
22,050
14,800
29,000
(1,933)
$41,867
Total Assets

Current Liabilities
Accounts payable
Current portion of note payable
Interest payable
Wages payable
Total Current Liabilities
Long-term note payable
Total Liabilities
10,000
32,056
Shareholders Equity
Common shares
Retained earnings
20,000
(10,189)
$41,867
Cookie Dough Inc.

Income Statement
For the year Ended December 31, 2017
Sales
Cost of Sales
Gross margin
Expenses:
Rent
Wages
Other
Depreciation
Interest
Utilities
Total Expenses
Net Income
$42,300
17,200
25,100
$4,846
11,700
9,900
1,933
710
1,200
30,289
($5,189)

Solutions Manual
Page 3-63
d. Cookies Cash Information:

Beginning Cash Balance (after initial investment)
Ending Cash Balance
Overall Decrease in Cash Balance
$20,000
$10,500
$9,500
As we can see, after Ernests initial investment of $20,000, his cash balance has declined by
$9,500. It would be good to analyze where the cash went by examining cash from operations,
cash from investing activities and cash from financing activities (after the initial investment):
Cash used by operations (sales, purchase of insurance/goods/utilities, etc.) ($5,500)
Cash from financing (Loan minus payment of dividends)
$15,000
Cash for investing (Purchase of equipment, renovations)
($19,000)
Overall Decrease in Cash Flow
$9,500
Its evident that the decrease in cash is due to the negative cash from operations and investing
activities. Expenditures on PPE were necessary to get the business going and will not have to
be incurred for the next few years. The loan covered most of these costs. However, Cookie
failed to generate positive cash from day to day operations which is definitely not a good
sign. Cookie still has a cash buffer in the event cash from operations do not become positive.
However, the balance owed on the equipment is due in February so the company could be in
trouble. Also, a $10,000 loan payment is due in August so Ernest should probably start
looking for financing. Ernest has to hope that sales improve so that he can begin generating
cash to meet Cookies requirements. Paying the dividend might not have been the best idea.
Notice that Cookies cash from operations (-$5,500) is lower than its net income for the
period (-$5,189). The reason why these two figures are different is because the income
statement captures events that do not always involve cash. For example, the $500 of wages
owed to employees would be classified as wages expense because even though the wages
have not been paid, the employees have worked the hours and have earned the right to be
paid. This $500 does not affect cash flow as the amount has not been paid at the time of the
preparation of the financial statements. Also, the $300 Ernest expects to be paid for the
holiday party he catered for one of the faculties would be recognized as revenue on the
income statement. The reason is that even though Ernest has not been paid, he has performed
the work or, in other words, he has effectively earned the revenue. This $300 would not
affect cash flow until the amount is actually paid. There is also $800 of inventory on hand
that has been paid for.
e. (This is a sample answer rather than the right one. Good answers should have addressed
perspectives)
The income statement suggests that Cookiedid not have a successful four months. The
income statement showed the company posting a loss of $5,189 on his business before he
even paid himself anything. Its common for businesses in their first year of operations to
post a loss. Still, Ernest would likely be discouraged by these results. He could have worked
elsewhere and earned a steady paycheque. Its clear that if Ernest is to continue to operate
Solutions Manual
Page 3-64
this business, some changes needed or he would no longer be able to meet his personal needs
nor have the ability to pay off his debts.
One would definitely want to warn Ernest about his cash situation. At the end of the season,
he had $10,500 in cash on hand. However, in the coming year, Cookie has many debts
coming due. On February 15, payment is expected for the remaining $10,000 owing on all
the equipment Cookie purchased to start his business. Also, Cookie must pay the lender
$10,000 on August 1st of the coming year. He also has interest to pay, some wages to pay off,
etc. In total, Ernest had current liabilities amounting to $22,050 with only $14,800 in current
assets to meet those obligations. I would definitely highlight to Ernest the necessity of
keeping control over his cash flow situation. Its imperative for him to generate more cash
from operations to be able to pay off his current liabilities and keep his business financially
healthy, or invest additional cash.
In examining the performance of Ernests business, its difficult to fully assess it because
there is no basis of comparison. I would want to investigate how similar stores performed and
especially note what made other stores successful. Ernest may have to review his pricing, the
amount of hours his store is open and many other factors.
P3-17.
a.
i.
Dr.
ii.
Dr.
iii.
Dr
iv.
Dr.
v.
Dr.
vi.
Dr.
Cash
Cr.
20,000
Common shares
Prepaid assets (rent)

Cr.
Cash
20,000
3,000
3,000

Cr.
Cash
Accounts payable
Cash
Cr.
22,000
12,000
10,000
20,000
Note payable-current
10,000
Note payable-non-current
10,000
Property, plant, and equipment (renovations)

Cr.
Cash
Prepaid assets (insurance)
7,000
7,000
1,600

Solutions Manual
Page 3-65
Cr.
vii.
Dr.
viii.
Dr.
ix.
Dr.
Dr.
x.
Dr.
xi.
Dr.
xii.
Dr.
xiii.
Dr.
xiv.
Dr.
Cash
1,600
Prepaid assets (rent)

Cr.
Cash
3,000
Accounts receivable
Cr.
Revenue
300
Inventory
Cr.
Cash
18,000
Cost of sales
Cr.
Inventory
17,200
Cash
Cr.
42,000
3,000
300
18,000
17,200
Sales
Wage expense
Cr.
Cash
42,000
11,200
Utilities expense
Cr.
Cash
1,200
Other expenses
Cr.
Cash
9,500
Retained earnings
Cr.
Cash
5,000
Adjusting entries:
xv.
Dr.
Rent expense
Cr.
Accounts payable
xvi.
Dr.
xvii.
Dr.
11,200
1,200
9,500
5,000
846
846
1,933
Cr.
Accumulated depreciation 1,933
Interest expense
710

Solutions Manual
Page 3-66
Cr.
Interest payable
xviii.
Dr.
Other expenses (insurance)
Cr. Prepaid assets
xix.
Dr.
xx.
Dr.
710
400
400
Rent expense
Cr.
Prepaid assets
4,000
Wage expense
Cr.
Wages payable
500
4,000
500

Solutions Manual
Page 3-67
Part b&c
Cash
i. 20,000 ii. 3,000
iv. 20,000 iii.12,000
x. 42,000 v. 7,000
vi. 1,600
vii. 3,000
ix. 18,000
xi. 11,200
xii. 1,200
xiii. 9,500
xiv 5,000
10,500
Accounts receivable
viii. 300
Prepaid assets
(rent/insurance)
ii. 3,000
xviii. 400
vi. 1,600 xix. 4,000
vii. 3,000
Property, plant, and

equipment
iii.22,000
v. 7,000
3,200
300
Inventory
ix. 18,000
ix. 17,200
800
Accumulated
depreciation
xvi.1,933
29,000
1,933
Accounts payable
iii.10,000
xv. 846
10,846
Wages payable
xx. 500
Note payablecurrent
iv.10,000
500
10,000
Interest payable
xvii. 710
710
Note payablenoncurrent
iv. 10,000
10,000
Common shares
i. 20,000
20,000
Retained earnings
xiv.5,000
5,000
Cost of sales
Solutions Manual
Sales
viii.
300
x.
42,000
42,300
Wage expense
Page 3-68
ix. 17,200
xi. 11,200
xx. 500
11,700
17,200
Other expense
(including insurance)
xiii. 9,500
xviii. 400
9,900
Rent expense
xiv. 846
xix 4,000
4,846
Depreciation
expense
xvi.1,933
Utilities expense
xii.
1,933
1,200
1,200
Interest expense
xvi. xvii.
710 710
710
Part d
Cookie Dough Inc.
Trial Balance
December 31,2017
Cash
Accounts receivable
Inventory
Prepaid assets
Wages payable
Interest payable
Accounts payable
Note payable-current portion
Note payable-long-term portion
Common shares
Retained earnings
Sales
Cost of sales
Rent expense
Utilities expense
Interest expense
Wage expense
Other expense
Debits
$ 10,500
300
800
3,200
29,000
Credits
$1,933
500
710
10,846
10,000
10,000
20,000
5,000
42,300
17,200
4,846
1,200
710
11,700
9,900
1,933
$ 96,289
$ 96,289
Part e.
Solutions Manual
Page 3-69
Cookie Dough Inc.

Balance Sheet
Assets
Current Assets:
Cash
Accounts receivable
Inventory
Prepaid assets
$10,500
300
800
3,200

Non-current assets:
$10,846
10,000
710
500
22,056
14,800
29,000
(1,933)
$41,867
Total Assets

Current Liabilities
Accounts payable
Current portion of note payable
Interest payable
Wages payable
Long-term debt
Total Liabilities
10,000
32,056
Shareholders Equity
Common shares
Retained earnings
20,000
(10,189)
$41,867
Cookie Dough Inc.

Income Statement
For the year Ended December 31, 2017
Sales
Cost of Sales
Gross margin
Expenses:
Rent
Wages
Other
Depreciation
Interest
Utilities
Total Expenses
Net Income
$42,300
17,200
25,100
$4,846
11,700
9,900
1,933
710
1,200
30,289
($5,189)
Closing Journal Entry:

Dr.
Sales
42,300
Dr.
Owners capital
5,189
Cr.
Cost of Sales
17,200
Cr.
Rent expense
4,846
Cr.
Wages expense
11,700
Cr.
Other expense
9,900
Cr.
Depreciation expense 1,933
Cr.
Interest expense
710
Cr.
Utilities expense
1,200

Solutions Manual
Page 3-70
Common shares
i. 20,000
Retained earnings
Sales
xiv. 5,000
5,000
xxi. 5,189
20,000
Cost of sales
ix. 17,200
Interest expense
xxi. 9,900
Wage expense
710
xvi. 1,933
11,700
xxi. 710
1,933
xxi. 11,700
Rent expense
9,900
xi. 11,200
xx. 500
xxi. 17,200
xiv. 846
xviii4,000
42,300
10,189
xiii. 9,500
xviii. 400
xxi. 42,300
xvii. 710
17,200
Other expense
viii. 300
x. 42,000
xxi. 1,933
Utilities expense
xii. 1,200
4,846
1,200
xxi. 4,846
xxi.
1,200
Part f.
Cookie Dough Inc.
Trial Balance (post-closing)
December 27,2017
Cash
Accounts receivable
Inventory
Prepaid Assets
Wages payable
Interest Payable
Accounts payable
Note payable-current
Notes payable-noncurrent
Common shares
Retained earnings
Debits
$ 10,500
300
800
3,200
29,000
Credits
$1,933
500
710
10,846
10,000
10,000
20,000
10,189
$ 53,989

Solutions Manual
$ 53,989
Page 3-71
g. Cookies Cash Information:

Beginning Cash Balance (after initial investment)
Ending Cash Balance
Overall Decrease in Cash Balance
$20,000
$10,500
$9,500
As we can see, after Ernests initial investment of $20,000, his cash balance has declined by
$11,500. It would be good to analyze where the cash went by examining cash from
operations, cash from investing activities and cash from financing activities (after the initial
investment):
Cash used by operations (sales, purchase of insurance/goods/utilities, etc.) ($5,500)
Cash from financing (Loan minus payment of dividends)
$15,000
Cash for investing (Purchase of equipment, renovations)
($19,000)
Overall Decrease in Cash Flow
$9,500
Its evident that the decrease in cash is due to the negative cash from operations and investing
activities. Expenditures on PPE were necessary to get the business going and will not have to
be incurred for the next few years. The loan covered most of these costs. However, Cookie
failed to generate positive cash from day to day operations which is definitely not a good
sign. Cookie still has a cash buffer in the event cash from operations do not become positive.
However, the balance owed on the equipment is due in February so the company could be in
trouble. Also, a $10,000 loan payment is due in August so Ernest should probably start
looking for financing. Ernest has to hope that sales improve so that he can begin generating
cash to meet Cookies requirements. Paying the dividend might not have been the best idea.
Notice that Cookies cash from operations (-$5,500) is lower than its net income for the
period (-$5,189). The reason why these two figures are different is because the income
statement captures events that do not always involve cash. For example, the $500 of wages
owed to employees would be classified as wages expense because even though the wages
have not been paid, the employees have worked the hours and have earned the right to be
paid. This $500 does not affect cash flow as the amount has not been paid at the time of the
preparation of the financial statements. Also, the $300 Ernest expects to be paid for the
holiday party he catered for one of the faculties would be recognized as revenue on the
income statement. The reason is that even though Ernest has not been paid, he has performed
the work or, in other words, he has effectively earned the revenue. This $300 would not
affect cash flow until the amount is actually paid. There is also $800 of inventory on hand
that has been paid for.
h. (This is a sample answer rather than the right one. Good answers should have addressed
perspectives)
The income statement suggests that Cookie did not have a successful four months. The
income statement showed the company posting a loss of $5,189 on his business before he
even paid himself anything. Its common for businesses in their first year of operations to
post a loss. Still, Ernest would likely be discouraged by these results. He could have worked
Solutions Manual
Page 3-72
elsewhere and earned a steady paycheque. Its clear that if Ernest is to continue to operate
this business, some changes needed or he would no longer be able to meet his personal needs
nor have the ability to pay off his debts.
One would definitely want to warn Ernest about his cash situation. At the end of the season,
he had $10,500 in cash on hand. However, in the coming year, Cookie has many debts
coming due. On February 15, payment is expected for the remaining $10,000 owing on all
the equipment Cookie purchased to start his business. Also, Cookie must pay the lender
$10,000 on August 1st of the coming year. He also has interest to pay, some wages to pay off,
etc. In total, Ernest had current liabilities amounting to $22,050 with only $14,800 in current
assets to meet those obligations. I would definitely highlight to Ernest the necessity of
keeping control over his cash flow situation. Its imperative for him to generate more cash
from operations to be able to pay off his current liabilities and keep his business financially
healthy, or invest additional cash.
In examining the performance of Ernests business, its difficult to fully assess it because
there is no basis of comparison. I would want to investigate how similar stores performed and
especially note what made other stores successful. Ernest may have to review his pricing, the
amount of hours his store is open and many other factors.

Solutions Manual
Page 3-73
P3-18.
a.
Assets
Date
Trans
Open
Cash
1,987,500
Accountsreceivable
Inventory
62,500
210,000
18,750,000
Bankloan
Accountspayable
Wagespayable
Taxespayable
Interestpayable
Unearned
revenue
Current
portionLTD
(4,875,000)
225,000
181,250
21,250
115,000
31,250
1,218,750
937,500
(1,625,000)
During
ii
5,701,250
625,000
ii
During
iia
614,000
(614,000)
iia
May
iii
1,310,000
4,750,000
vi
June
via
During
vii
During
During
June
During
(937,500)
(563,000)
35,250
via
1,125,000
vii
756,000
vi
(1,125,000)
(31,250)
viii
viii
(750,000)
ix
1,969,000
(1,938,000)
ix
(1,938,000)
(765,000)
During
xii
(115,000)
xii
During
xiia
(64,000)
xiia
xiiadj
x
xi
(115,000)
xiiiadj
(1,563,000)
xiv
xii
xiia
xiiadj
42,000
xiiadj
xiiiadj
xiiiadj
xiv
2,183,250
via
vii
756,000
(750,000)
Bal
iii
(937,500)
xi
June
iia
vi
(375,000)
During
1,250,000
(21,250)
xi
June
4,706,250
i
ii
1,310,000
ix
ix
Commonshares
7,326,250
(1,218,750)
(1,062,000)
viii
viii
Longtermdebt
1,875,000
iii
v-adj
During
(+)
Accumulateddepreciation
During
Liabilities
(=)
Property,
plant,
and
equipment
73,500
201,000
23,500,000
(6,438,000)
xiv
225,000
218,250
35,250
42,000
1,310,000
1,125,000
8,076,250
5,956,250
Closing
End Bal

Solutions Manual
Page 3-74
5,956,250
b.
i.Purchasing an arena increases property, plant, and equipment. Issuing stock to help finance the
purchase increases the balance in common shares and taking out a loan to pay for the remainder
of the purchase increases the amount of long-term debt.
ii. The renting of ice as well as pro-shop and restaurant sales represents the earning of revenue
for SIR. The amount paid on credit increases SIRs accounts receivable.When cash is collected,
cash will increase and accounts receivable will decrease. Its assumed that unearned revenue
outstanding at the beginning of the year is recognized in full during 2017.
iii. The deposit represents a liability (unearned revenue) as the company has been paid for a
service that its obligated to provide in the future. Revenue will be recognized when the ice time
is used beginning in September.
iv. A line of credit does not impact the financial statements until money is borrowed. Simply
having credit available does not represent a liability.
v. The $1,076,000 represents the total wage expense for the year as this number reflects the
amount employees earned this fiscal year.The $1,062,000 payment includes the $21,250 owed to
employees at the end of fiscal 2016. An adjusting entry of $35,250 is required to accrue the
amount earned by employees during 2017 but unpaid at the end of the year..
vi. Paying $937,500 decreases the current portion of long-term debt.The $1,125,000 which must
be paid in the next year must be reclassified as a current liability.
vii. The $563,000 payment reduces cash and the interest payable liability. The difference
between the amount paid and the opening balance in the interest payable account ($31,250)
represents the interest expense related to this fiscal year ($531,750).
viii. The purchase of goods increases inventory by $756,000.Since these items were purchased
on credit, accounts payable increases ($756,000).Subsequent cash payments reduce the liability
(and cash balance) by $750,000.
ix. SIR incurred $1,969,000 in maintenance expenses during the year.By the end of the year
$1,938,000 had been paid and $31,000 was outstanding.
x. Products sold decrease inventory and increase cost of sales.
xi. Additional expenses will increase the other expense balance and decrease the cash balance.
xii. The repayment of taxes owing from fiscal 2016reduces the taxes payable liability and the
cash balance.Paying $64,000 in instalments increases the tax expense for 2017 and decreases the
cash balance. The additional $42,000 owed also represents a tax expense this year but since itis
unpaid, the amount owing is recorded as a liability.
xiii. Depreciation matches a portion of the cost of property, plant, and equipment against the
revenues that they help generate.
xiv. This is a barter transaction. SIR has provided ice time worth $26,000.This is recorded as a
revenue as its reflective of the amount that SIR would have earned had cash been
exchanged.The services SIR received represent an expense as SIR had to give up an economic
resource (ice time) in order to receive the services.
Closing: The closing entry resets the temporary income statement accounts to zero and records
the balance in retained earnings.

Solutions Manual
Page 3-75
c.
Superstar Ice Rinks Inc.
Balance Sheet
As of June 30, 2017
Assets
Current Assets:
Cash
Accounts receivable
Inventory
$2,183,250
73,500
201,000
2,457,750

Current Liabilities
Bank loan
Accounts payable
Wages payable
Taxes payable
Unearned revenue
$225,000
218,250
35,250
42,000
1,310,000
Current portion of long-term debt
1,125,000
23,500,000
2,955,500
(6,438,000)
Long-term debt
Total Liabilities
Shareholders Equity
Common shares
Retained earnings
Total Assets
$19,519,750
8,076,250
11,031,750
5,956,250
2,531,750
$19,519,750

Income Statement
For the year Ended June 30, 2017
Sales
Cost of sales
Gross margin
Expenses:
Wage expense
Interest expense
Maintenance
expense
Other expenses
Tax expense
Total Expenses
Net Income
$7,571,000
765,000
6,806,000
$1,076,000
531,750
1,969,000
401,000
106,000
1,563,000
5,646,750
$1,159,250
d.
(This is a sample answer rather than the right one. Good answers should have addressed some of
these issues, but the discussion could have approached them from different perspectives)
REPORT TO SHAREHOLDERS OF SUPERSTAR ICE RINKS
Dear shareholders:
The statements suggest that SIR had a fairly successful year earning a profit of $1,159,250.
This represents a profit margin of 15.3 percent which appears to be a goodsign.However, this
information is difficult to interpret as we have not been provided with income statements
from prior years or industry data.To determine whether or not SIR was truly successful this

Solutions Manual
Page 3-76
year, one would want to compare the current earnings and profit margin to earnings and
profit margins from prior years and from industry.
SIRs cash balance has increased from $1,987,500 to $2,183,250, slightly higher than last
year. However, having this much cash on hand might not be beneficial.SIR could use this
money to pay down their debts and reduce interest charges or invest in expanding the
company.Its also possible that SIR feels they will need to have this cash readily available for
future activities and its not necessarily a bad thing.After all, its better to have too much cash
than not enough.
Additionally, SIRs current ratio has remained the same as last year at 0.83.This means that it
has $1 in current liabilities for every $0.83 in current assets. The stability of the current ratio
is positive and suggests the company is able to operate effectively even though current
liabilities exceed current assets. To have a better idea of the situation it will be necessary to
know the terms of the bank loan. If in fact there is no requirement to pay the loan in the short
term, the liquidity position is stronger.
SIRs debt-to-equity ratio has improved since last year, decreasing from 1.65 to 1.30. This is
due to equity increasing (net income plus new shares) faster than liabilities..
Other expenses were quite high, $401,000 and more information regarding these expenses
would be useful.
P3-19.
Journal entries: a, c, f
DR
i
ii
iia
CR

Long-term debt
CommonShares
Cash
4,750,000
Cash
Accounts receivable
Unearned revenue
Sales
5,701,250
625,000
1,218,750
Cash
1,875,000
1,250,000
1,625,000
7,545,000
614,000
Accounts receivable
iii
Cash
614,000
1,310,000
Unearnedrevenue
v
Wage expense
Wages payable
Cash

Solutions Manual
1,310,000
1,040,750
21,250
1,062,000
Page 3-77
v adj
vi
via
vii
viii
Wage expense
Wages payable
Long-term debt-current portion
Cash
Long-term debt
Long-term debtcurrent
35,250
35,250
937,500
937,500
1,125,000
1,125,000
Interest expense
Interest payable
Cash
531,750
31,250
Inventory
756,000
563,000
Accounts payable
viii
ix
ix
xi
xii
xiia
Accounts payable
Cash
756,000
750,000
750,000
Maintenance expense
Accounts payable
1,969,000
Accounts payable
Cash
1,938,000
1,969,000
1,938,000
Cost of sales
Inventory
765,000
Other expenses
Cash
375,000
Taxes payable
Cash
115,000
Tax expense
765,000
375,000
115,000
64,000
Cash
xiiadj
Tax expense
64,000
42,000
Taxes payable

Solutions Manual
42,000
Page 3-78
xiiiadj
xiv
1,563,000
1,563,000
Other expenses
Sales
26,000
26,000
Closing entry
Revenue
7,571,000
Cost of sales
Wage expense
Interest expense
Maintenance expense
Other expenses
Tax expense
Retained earnings
765,000
1,076,000
531,750
1,969,000
401,000
106,000
1,563,000
1,159,250
T-accounts: b, c, f
open
i
ii
iia
iii
v
vi
vii
viii
ix
xi
xii
xiia
end bal
open
vi
via
Cash
1,987,500
1,625,000
5,701,250
614,000
1,310,000
1,062,000
937,500
563,000
750,000
1,938,000
375,000
115,000
64,000
2,183,250
Current portion LTD

937,500
937,500
1,125,000
open
ii
iia
end bal
Accounts receivable
62,500
625,000
614,000
73,500
Bank loan
open
end bal
open
xii
xiiadj
end bal
225,000
225,000
Taxes payable
115,000
115,000
42,000
42,000
open
vii
x
end bal
Accounts payable
open
181,250
viii
756,000
viii
750,000
ix
1,969,000
ix 1,938,000
end bal
218,250
Interest payable
open
31,250
vii
31,250
end bal
0
7,326,250
1,875,000
1,125,000

Solutions Manual
end
end
end
LTD
open
i
via
Inventory
210,000
756,000
765,000
201,000
open
i
end bal
Commonshares
4,706,000
1,250,000
5,956,250
Page 3-79
pre-c
end bal
1,125,000
ii
Revenue
7,545,000
xiv
preclose
cls
end bal
ix
preclose
cls
end bal
end bal
8,076,250
Cost of sales
x 765,000
preclose 765,000
26,000
7,571,000
cls
end bal
7,571,000
765,000
0
Maintenance expense
1,969,000
xi
1,969,000
xiv
preclose
cls
end bal
1,969,000
0
Other expense
375,000
26,000
401,000
401,000
0
end
Wage expense
v 1,040,750
vadj
35,250
preclose 1,076,000
cls
1,076,000
end bal 0
xiia
xiiadj
preclose
cls
end bal
Tax expense
64,000
42,000
Pre-Close Trial Balance

As of June 30, 2017
CR
2,183,250
73,500
201,000
23,500,000
6,438,000
225,000
218,250
35,250
42,000
0
1,310,000
1,125,000
8,076,250
5,956,250
1,372,500
7,571,000
765,000
1,076,000

Solutions Manual
pre-c
106,000
Cash
Accounts receivable
Inventory
Bank loan
Accounts payable
Wages payable
Taxes payable
Interest payable
Unearned revenue
Current portion LTD
LTD
Common shares
Retained earnings
Revenue
Cost of sales
Wage expense
end
106,000
d.
DR
pre-c
Page 3-80
end
Interest expense
Maintenance expense
Other expense
Tax expense
531,750
1,969,000
401,000
106,000
1,563,000
32,369,500 32,369,500
e.
Balance Sheet
As of June 30, 2017
Assets
Current Assets:
Cash
Accounts receivable
Inventory
$2,183,250
73,500
201,000
2,457,750

Total Assets
23,500,000
(6,438,000)
$19,519,750

Current Liabilities
Bank loan
Accounts payable
Wages payable
Taxes payable
Unearned revenue
$225,000
218,250
35,250
42,000
1,310,000
Current portion of long-term debt
1,125,000
2,955,500
8,076,250
11,031,750

Long-term debt
Total Liabilities
Shareholders Equity
Common shares
Retained earnings
5,956,250
2,531,750
$19,519,750

Income Statement
For the year Ended June 30, 2017
Revenue
Cost of sales
Gross margin
Expenses:
Wage expense
Interest expense
Maintenance expense
Other expenses
Tax expense
Total Expenses
Net Income
$7,571,000
765,000
6,806,000
$1,076,000
531,750
1,969,000
401,000
106,000
1,563,000
5,646,750
$1,159,250
g.
Post-Close Trial Balance
As of June 30

Solutions Manual
Page 3-81
Cash
Accounts receivable
Inventory
Property, plant, and
equipment
Bank loan
Accounts payable
Wages payable
Taxes payable
Interest payable
Unearned revenue
Current portion LTD
LTD
Common shares
Retained earnings
Debits
2,183,250
73,500
201,000
Credits
23,500,000
6,438,000
225,000
218,250
35,250
42,000
0
1,310,000
1,125,000
8,076,250
5,956,250
2,531,750
25,957,750
25,957,750
h.
(This is a sample answer rather than the right one. Good answers should have addressed some of
these issues, but the discussion could have approached them from different perspectives)
The statements suggest that SIR had a fairly successful year earning a profit of $1,159,250.
This represents a profit margin of 15.3% which appears to be a good sign. However, this
information is difficult to interpret as we have not been provided with income statements
from prior years or industry data. To determine whether or not SIR was truly successful this
year, one would want to compare the current earnings and profit margin to earnings and
profit margins from prior years and from industry.
SIRs cash balance has increased from $1,987,500 to $2,183,250 which shows that SIR is
able to collect its receivables and is not experiencing difficulties with their cash flow. This is
a very significant increase in cash flow which is a positive sign. However, having this much
cash on hand might not be beneficial. SIR could use this money to pay down their debts and
reduce interest charges or invest in expanding the company. Its also possible that SIR feels
they will need to have this cash readily available for future activities and its not necessarily a
bad thing. After all, its better to have too much cash than not enough.
Additionally, SIRs current ratio is the same as last year at 0.83. This means that for every $1
in current liabilities it has $0.83 in current assets. The stability of the current ratio is positive
and suggests the company is able to operate even though current liabilities exceed current
assets. To have a better idea of the situation it will be necessary to know the terms of the
bank loan. If in fact there is no requirement to pay the loan in the short term, the liquidity
position is stronger

Solutions Manual
Page 3-82
The company still has a large portion of unearned revenue sitting in its liability account from
a prior year. Information on this would be useful to determine if this should have been
recognized in the current year or if this work is still going to be performed in the future. If the
contract has fallen through, SIR would likely need to refund their customers the amount paid
for in advance.
Other expenses were quite high, $401,000 and more information regarding these expenses
would be useful.

Solutions Manual
Page 3-83
P3-20.
Majestic Trucking Inc. - December 31, 2017
Assets
Date
Trans
Cash
Beg
during
during
ii
31-Dec-17
77,340
Accounts
receivable
81,500
Prepaid
assets
18,000
Liabilities
(=)
Capital
assets
Accumulated
depreciation
465,000
(201,700)
1,065,225
Accounts
payable
Accruedliability
42,220
Interest
payable
11,900
Wages
payable
Taxespayable
Unearnedrevenue
Longtermnote
10,000
15,000
27,000
140,000
i
ii
iiadj
Sh
(+)
Common
shares
Retained
earnings
80,000
114,020
i
275,000
iiadj
10,000
Fuel
Maintenance
1,065,225
ii
(275,000)
iiadj
(10,000)
during
iii
(117,000)
iii
during
iv
(475,000)
iv
(10,000)
iv
(46
ivadj
27,500
ivadj
(2
31-Dec-17
ivadj
during
1,075,000
during
vi
(250,000)
during
vii
(15,000)
vii
during
viia
(11,000)
viia
31-Dec-17
(1,075,000)
vi
viiadj
viiadj
viii
viii
during
ix
during
x
xii
31-Dec-17
(98,000)
98,000
xiadj
during
(48,000)
(21,000)
xiiadj
iii
during
31-Dec-17
8,000
Revenues
v
(250,000)
vi
(15,000)
vii
viia
12,000
viiadj
(27,000)
viii
ix
ix
xiadj
xiadj
21,000
xii
xii
(15,000)
xiiadj
xiiadj
2-Jan-17
xiii
(11,900)
xiii
2-Jan-17
xiiia
(20,000)
xiiia
31-Dec-17
xiiiadj
(11,900)
xiiiadj
10,200
(75,000)
xiv
xiv
xv
(55,000)
xv
xv
24,000
563,000
(249,700)
75,220
10,000
10,200
27,500
12,000
120,000
(55,000)
80,000
Closing
Ending balances
3,440
71,725
24,000
563,000
(249,700)

Solutions Manual
75,220
10,000
10,200
xiiiadj
xiv
71,725
(11,000)
xiiia
during
3,440
27,000
xiii
(20,000)
during
End Balance
(125,000)
27,500
12,000
120,000
80,000
48,020
1,092,225
(285,000)
(125,000)
29,525
(1,092,225)
285,000
125,000
77,545
Page 3-84
(48
48
b. Explanations for entries (Note that transactional and adjusting entries are separated on the
spreadsheet. The numbering matches the items listed in the question and on the spreadsheet.):
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
To record revenue during the year. Accounts receivable increase and revenue increases
in the amount of the years credit sales. (In practice each revenue transaction or each
days revenue would be entered separately into the spreadsheet. In these textbook
examples, they are entered as a single economic event.)
To record the purchase and use of fuel during the year. Assuming that there was no fuel
in inventory at the beginning or end of the year, the expense for the year is the total of
the fuel purchased plus an additional $10,000 of fuel that must be accrued because it
was received but not yet billed or paid for. The accrued liabilities increase reflects the
amount that is owed by the company for the fuel. (Its unlikely that Majestic would keep
track of fuel in its trucks so its likely expensed as purchased.)
To record maintenance expense for the year. The costs that were incurred for
maintenance are an expense of the period, and the portion that is not yet paid is a
liability. Maintenance keeps the vehicles operating as intended and does not usually
improve them, so its usually treated as an expense.
To record wage expense for fiscal 2017, payments to employees in fiscal 2017, and
accrual of wages payable at the end of fiscal 2017. The company paid $475,000 to
employees during the year for wages, of which $465,000 pertained to fiscal 2017 and
$10,000 was owing at the end of fiscal 2016. Additionally, the employees earned
$27,500 that was not paid at year-end, which is an increase in wages payable. This
amount is expensed even though it has not been paid as of the end of the year.
To record the collection of cash from customers. The collection of $1,075,000 is an
increase in cash and a decrease in the amount owed to the company by customers
(accounts receivable).
To record payments made to suppliers. The amount paid to suppliers is a decrease in
cash and a decrease in the amount owed to Majestics suppliers (accounts payable).
To record payment of taxes owing at the end of fiscal 2016 and to record the tax
expense for 2017. This entry has three components. The first is payment of taxes owing
at the end of fiscal 2016. The amounts paid for previous years taxes reduce taxes
payable and are not an expense of the current period. The expense pertaining to this
amount was recorded in fiscal 2016. The second component is payment of instalments
pertaining to fiscal 2017. This is a transactional entry because cash is paid to
government. The third component is an accrual of the amount of tax that is owing at the
end of fiscal 2017. This is an adjusting entry. Note that the amounts relating to the
current period are expensed in fiscal 2017 regardless of whether they are paid or not.
The company paid $26,000 to governments for income taxes, of which $15,000 is a
reduction of taxes payable, and $11,000 relates to taxes payable for the current period.
The last $12,000 is an increase in taxes payable to accrue taxes that are an expense of
2017 but will not be paid until 2018.
To record fulfillment of the liability to provide service to customers who paid in
advance.
To record the cost of work performed by company employees for personal use of the
shareholders. Work performed by company employees on personal work at owners

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Page 3-85
x.
xi.
xii.
xiii.
xiv.
xv.
xvi.
cottages can be considered a dividend to the shareholders and retained earnings is

reduced by the cost of the work done. Since this work has been originally
inappropriately recorded as a wages expense, that amount must be subtracted from the
wages expense account. It would also be reasonable to treat the work done by
employees as a receivable from the shareholders. The solution uses the dividend
treatment. Some students may consider the work done by the employees as being over
and above the amounts earned by them as described in item iv.
To record the purchase of a new truck. The purchase of the truck increases the balance
in capital assets and decreases cash.
To record depreciation expense for fiscal 2017. The depreciation expense of $48,000
increases the balance in accumulated depreciation.
To record the purchase of insurance in fiscal 2017 (transactional) and to record the use
of insurance purchased in a previous period (adjusting). The payment of $21,000
increases the asset prepaid insurance and the receipt of insurance benefits of $15,000
decreases prepaid insurance.
To record repayment of $20,000 owing on the long-term notes payable, payment of
$11,900 in interest accrued in fiscal 2016, and to accrue the interest expense for fiscal
2017. The $11,900 payment represents the expense of the previous period that was paid
on January 2, 2017. The expense for the current year must be accrued, and is 8.5 % of
$120,000 ($140,000 - $20,000) or $10,200. The $20,000 reduces the long-term notes
payable. The payment of the interest relating to 2016 reduces the liability interest
payable. The accrual of the interest expense for 2017 increases the liability by $10,200.
To record other cash expenses incurred during fiscal 2017. The payment of $75,000 for
other expenses decreases cash and increases other expenses.
To record payment of dividends to shareholders. The payment of $55,000 to
shareholders reduces both retained earnings and cash.
The Closing entry resets the temporary income statement accounts to zero and records
the balance in the retained earnings.
Majestic Trucking Inc.
Balance Sheet
As at December 31, 2017
Assets
Cash
Accounts receivable
Prepaid insurance
Capital assets
$3,440
71,725
24,000
99,165
563,000
(249,700)
Liabilities and shareholders equity

Accounts payable
Taxes payable
Wages payable
Interest payable
Accrued liabilities
Long-term notes payable
Total Assets
$412,465
$75,220
12,000
27,500
10,200
10,000
134,920
120,000
Common shares
80,000
Retained earnings
77,545
Total liabilities and shareholders equity $412,465

Solutions Manual
Page 3-86

Income Statement
Revenue
Expenses
Wage expense
Fuel expense
Maintenance expense
Other expense
Insurance expense
Interest expense
Income before taxes
Tax expense
Net Income
$1,092,225
$481,500
285,000
125,000
75,000
48,000
15,000
10,200
1,039,700
52,525
23,000
$29,525

Statement of Retained Earnings
Retained earnings, December 31, 2016
Net income
Dividends
$114,020
29,525
(66,000)
$77,545
d. (The first part of this question is very wide open and there are many comments that could be
made. Issues that could be raised include profitability of Majestic, its liquidity, the limitations
of the statements, cash flow, comments on specific items on the balance sheet and income
statements, and additional information required. Below is an example of a response that
could be provided.)
As a lender, I am concerned about being paid the principal and interest owed to me and, in
the event that Majestic is unable to pay the loan, that there is security available to protect my
investment. From the information provided, Majestic does not appear to be an attractive
candidate for a loan. To begin with, the company is not that profitable. It made just less than
$30,000 on over $1 million in revenue. Second, the cash position of the company is very
weak, with only $3,440 on hand at the end of 2017. The amount of cash on hand has
decreased dramatically since the beginning of the year. In addition, the companys current
ratio is well below 1 (0.73), suggesting that the company may have trouble meeting its
existing current obligations. The current ratio at the end of 2017 is significantly lower than
Solutions Manual
Page 3-87
the ratio at the end of 2016 (1.67). This suggests a deteriorating financial position. That said,
Majestic was able to reduce its long-term debt and purchase new equipment for cash during
the year. Also, Majestic does seem to be generating positive cash from operations, however,
additional information would be required to assess its cash flow. A major concern is the
circumstances in the industry. The trucking business is highly competitive and its not clear
at this point how efficient Majestic is (additional information will be necessary to evaluate
this). In addition, expanding in a competitive industry can be risky since its not clear that
Majestic will be able to utilize the new vehicles to adequate capacity. In sum, lending money
to Majestic may be too much of a risk at this point. While the amount of the loan is relatively
small, the company survival may be in doubt. Perhaps if the shareholders would be willing to
provide personal guarantees to protect my investment, I would be more willing to support a
loan.
Some questions (of course there are others one could ask):
1. Are all accounts receivable collectable? Is there an allowance for uncollectables?
2. When must the long-term notes be repaid?
3. What are other expenses? This item is large and not well described. Does it contain
recurring costs only or are there unusual items?
4. Do you have a statement showing Majestics cash flow?
5. Do you have statements from earlier years that I could use for comparative purposes?
6. Are there any transactions with individuals or companies owned or controlled by
Majestics owners or senior managers?
7. How much will each new vehicle cost?
8. How much revenue can a new vehicle generate?
9. What interest rate do you expect to pay on the loan?
10. To what extent do you expect the new vehicles to be used once they have been acquired?
11. Do you have guaranteed new business for the new vehicles?
12. What is the condition of existing vehicles? How much will it cost to upgrade the fleet?
13. How much are the managers being paid? What is the basis of their compensation?
P3-21.
a. and c.
i.
Dr.
ii.
Dr.
Dr.
iii.
Dr.
Accounts receivable
Cr.
Revenue
1,065,225
Fuel expense
Cr.
Accounts payable
275,000
275,000
Fuel expense
Cr.
Accrued liabilities
10,000
Maintenance expense
Cr.
Cash
125,000
117,000

Solutions Manual
1,065,225
10,000
Page 3-88
Accounts Payable
iv.
Dr.
Dr.
v.
Dr.
vi.
Dr.
vii.
Dr.
Dr.
Dr.
viii.
Dr.
ix.
Dr.
x.
Dr.
xi.
Dr.
xii.
Dr.
8,000
Wage expense
Wage payable
Cr.
Cash
465,000
10,000
475,000
Wage expense
Cr.
Wages payable
27,500
Cash
Cr.
1,075,000
1,075,000
Accounts receivable
27,500
Accounts payable
Cr.
Cash
250,000
250,000
Taxes payable
Cr.
Cash
15,000
Tax expense
Cr.
Cash
11,000
Tax expense
Cr.
Taxes payable
12,000
Deposits
Cr.
Sales
27,000
Retained earnings
Cr.
Wage expense
11,000
Capital assets
Cr.
Cash
98,000
Depreciationexpense
Cr.
48,000
Prepaid insurance
Cr.
Cash
21,000

Solutions Manual
15,000
11,000
12,000
27,000
11,000
98,000
48,000
21,000
Page 3-89
Dr.
xiii.
Dr.
Dr.
Dr.
xiv.
Dr.
xv.
Dr.
Insurance expense
Cr.
Prepaid insurance
15,000
Interest payable
Cr.
Cash
11,900
Interest expense
Cr.
Interest payable
10,200

Cr.
Cash
20,000
Other expense
Cr.
Cash
75,000
Retained earnings
Cr.
Cash
55,000
15,000
11,900
10,200
20,000
75,000
55,000
b., c., f.
(Note: O denotes the opening balance in an account.)
Cash
O 77,340
iii. 117,000
iv. 475,000
Accounts receivable
O 81,500
i. 1,065,225
v. 1,075,000
Prepaid insurance
O 18,000
xii. 21,000
xii. 15,000
v. 1,075,000
vi. 250,000
vii. 15,000
vii. 11,000
x. 98,000
xii. 21,000
xiii.11,900
xiii.20,000
xiv. 75,000
xv. 55,000
71,725
24,000
3,440

Solutions Manual
Page 3-90
Capital assets
O 465,000
x. 98,000
O 201,700
xi. 48,000
563,000
249,700
Accounts payable
O 42,220
vi. 250,000
ii. 275,000
iii. 8,000
75,220
Taxes payable
O 15,000
vii. 15,000
vii. 12,000
12,000
Wages payable
O 10,000
iv. 10,000
iv. 27,500
27,500
Interest payable
O 11,900
xiii. 11,900 xiii. 10,200
Accrued liabilities
ii. 10,000

O 140,000
xiii. 20,000
10,200
10,000
120,000
Common shares
O 80,000
Retained earnings
O 114,020
xv. 55,000
ix. 11,000
cl. 29,525
77,545
Revenue
i. 1,065,225
viii. 27,000
1,092,225
cl. 1,092,225
0
80,000
Wage expense
iv. 465,000
ix. 11,000
iv. 27,500
481,500
cl. 481,500
0
Fuel expense
ii. 275,000
ii. 10,000
285,000
cl. 285,000
0

Solutions Manual
Deposits
O 27,000
viii. 27,000
0
Maintenance expense
iii. 125,000
125,000
cl. 125,000
0
Page 3-91
Other expense
xiv. 75,000
75,000
Depreciationexpense
xi. 48,000
48,000
cl. 75,000
15,000
cl. 48,000
Interest expense
xiii. 10,200
10,200
cl. 10,200
0
Insurance expense
xii. 15,000
cl. 15,000
0
Tax expense
vii. 11,000
vii. 12,000
23,000
cl. 23,000
0
d. (trial balance)
Trial Balance
December 31, 2017
Cash
Accounts receivable
Prepaid insurance
Capital assets
Accumulated amortization
Accounts payable
Taxes payable
Wages payable
Interest payable
Accrued liabilities
Deposits
Common shares
Retained earnings
Debits
$3,440
71,725
24,000
563,000
$249,700
75,220
12,000
27,500
10,200
10,000
0
120,000
80,000
48,020
1,092,225
Revenue
Wage expense
Fuel expense
Maintenance expense
Other expense
Amortization expense
Insurance expense
Interest expense
Tax expense
Credits
481,500
285,000
125,000
75,000
48,000
15,000
10,200
23,000
$1,724,865
$1,724,865

Solutions Manual
Page 3-92
e. (financial statements)
Balance Sheet
As at December 31, 2017
Assets
Cash
Accounts receivable
Prepaid insurance
Capital assets
$3,440
71,725
24,000
99,165
563,000
(249,700)
Liabilities and shareholders equity

Accounts payable
Taxes payable
Wages payable
Interest payable
Accrued liabilities
Total Assets
$412,465
$75,220
12,000
27,500
10,200
10,000
134,920
120,000
Common shares
80,000
Retained earnings
77,545
Total liabilities and shareholders equity $412,465

Income Statement
Revenue
Expenses
Wage expense
Fuel expense
Maintenance expense
Other expense
Insurance expense
Interest expense
Income before taxes
Tax expense
Net Income
$1,092,225
$481,500
285,000
125,000
75,000
48,000
15,000
10,200
1,039,700
52,525
23,000
$29,525

Net income
Dividends
$114,020
29,525
(66,000)
$77,545

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Page 3-93
f. (Closing entry)
Dr. Revenue
Cr.
Wage expense
Fuel expense
Maintenance expense
Other expense
Amortization expense
Insurance expense
Interest expense
Tax expense
Retained earnings
1,092,225
481,500
285,000
125,000
75,000
48,000
15,000
10,200
23,000
29,525
g. (Post-closing trial balance)

Post-Closing Trial Balance
December 31, 2017
Cash
Accounts receivable
Prepaid insurance
Capital assets
Accumulated amortization
Accounts payable
Taxes payable
Wages payable
Interest payable
Accrued liabilities
Deposits
Common shares
Retained earnings
Debits
$3,440
71,725
24,000
563,000
$662,165
Credits
$249,700
75,220
12,000
27,500
10,200
10,000
0
120,000
80,000
77,545
$662,165
h. (The first part of this question is very wide open and there are many comments that could be
made. Issues that could be raised include profitability of Majestic, its liquidity, the limitations
of the statements, cash flow, comments on specific items on the balance sheet and income
could be provided.)
As a lender, I am concerned about being paid the principal and interest owed to me and, in
the event that Majestic is unable to pay the loan, that there is security available to protect my
investment. From the information provided, Majestic does not appear to be an attractive
candidate for a loan. To begin with, the company is not that profitable. It made just less than
$30,000 on over $1 million in revenue. Second, the cash position of the company is very
Solutions Manual
Page 3-94
weak, with only $3,440 on hand at the end of 2017. The amount of cash on hand has
decreased dramatically since the beginning of the year. In addition, the companys current
ratio is well below 1 (0.73), suggesting that the company may have trouble meeting its
existing current obligations. The current ratio at the end of 2017 is significantly lower than
the ratio at the end of 2016 (1.67). This suggests a deteriorating financial position. That said,
Majestic was able to reduce its long-term debt and purchase new equipment for cash during
the year. Also, Majestic does seem to be generating positive cash from operations, however,
additional information would be required to assess its cash flow. A major concern is the
circumstances in the industry. The trucking business is highly competitive and its not clear
at this point how efficient Majestic is (additional information will be necessary to evaluate
this). In addition, expanding in a competitive industry can be risky since its not clear that
Majestic will be able to utilize the new vehicles to adequate capacity. In sum, lending money
to Majestic may be too much of a risk at this point. While the amount of the loan is relatively
small, the company survival may be in doubt. Perhaps if the shareholders would be willing to
provide personal guarantees to protect my investment, I would be more willing to support a
loan.
Some questions (of course there are others one could ask):
2. When must the long-term notes be repaid?
4. Do you have a statement showing Majestics cash flow?
5. Do you have statements from earlier years that I could use for comparative purposes?
6. Are there any transactions with individuals or companies owned or controlled by
Majestics owners or senior managers?
7. How much will each new vehicle cost?
8. How much revenue can a new vehicle generate?
9. What interest rate do you expect to pay on the loan?
10. To what extent do you expect the new vehicles to be used once they have been acquired?
11. Do you have guaranteed new business for the new vehicles?
12. What is the condition of existing vehicles? How much will it cost to upgrade the fleet?
13. How much are the managers being paid? What is the basis of their compensation?

Solutions Manual
Page 3-95
P3-22.
a.
Appliance Town Ltd (ATL) - August 31, 2017
Assets
(=)
Liabilities
(+)
Shareholder Equity
Expen
Date
Trans
Beg
Cash
60,000
Accountsreceivable
246,000
i
ii
1,550,000
31-Aug-
893,000
Prepaids
28,000
Capitalassets
Accumulateddepreciation
380,000
(80,000)
Accounts
payable
iv
(400,000)
iv-adj
(15,000)
vii
viia
viiadj
ix
31-Aug-17
ix-adj
1-Jul-17
ixb
31-Aug-17
ix-adj
31-Aug-17
ix-adj
15,000
(42,000)
42,000
48,000
(9,000)
50,000
xii
(44,000)
(40,000)
vii
viia
24,000
vii-adj
viii
ix-adj
ix-adj
9,000
xii
(9,000)
xii
1-Sep-16
xiiia
xiiiadj
(40,000)
xiiia
xiiiadj
13,600
xiv
(450,000)
Bal
63,000
xiii
(40,000)
xiiia
xiii-adj
xiv
(124,000)
(9,000)
xi
(17,000)
430,000
(16,000)
ix-adj
xiii
32,000
ix-adj
xi
(17,000)
1,094,000
(42,000)
ixb
xiii
646,000
(28,000)
ix
1-Sep-16
31-Aug-17
(1,490,000)
vi6
20,000
ixb
ixadj
ixadj
(16,000)
(50,000)
(1,200,000)
ix
ixadj
(42,000)
(48,000)
2,700,000
viii
ixadj
(28,000)
xiv
1,030,000
9,000
13,600
15,000
24,000
20,000
160,000
(450,
220,000
Closing
EndBal

Solutions Manual
Oth
20,000
x
xi
Salaries and
commissions
Rent
iv
ivadj
(40,000)
(30,000)
1-Jan-17
520,000
Cost of
sales
ii
vii
viia
viii
220,000
RevenuesSales
iii
vi
Beg
Retained
earnings
ii
(1,200,000)
200,000
Common
shares
iii
(750,000)
40,000
Long-termnotes
payable
(1,490,000)
vi
ix-adj
Unearned
revenue
530,000
(400,000)
17,000
Taxes
payable
1,700,000
750,000
31-Aug-17
Wages
payable
vii-adj
Interest
payable
Beg
iv-adj
31-Aug-17
Accrued
rent
1,700,000
1,150,000
iii
iv
Inventory
220,000
511,000
2,700,000
(1,490,000)
(95,000)
(415,000)
(450,
138,400
(2,700,000)
1,490,000
95
,000
415,000
450
649,400
Page 3-96
b. Explanations for entries (Note that transactional and adjusting entries are separated on the
spreadsheet. The numbering matches the items listed in the question and on the spreadsheet.):
i. To record the purchase of inventory on credit. The appliances are ATLs
inventory and the amount owed is accounts payable.
ii. To record sales of appliances to customers. Sales are recorded when goods are
delivered to the customer so sales are recorded regardless of whether cash is
collected. Amounts owed by customers are classified as accounts receivable.
iii. To record the cost of inventory sold during the year. (As will be discussed in
Chapter 8, whether this is an adjusting or a transactional entry depends on how
ATL accounts for its inventory.)
iv. To record wages earned by employees during the year. The amount actually paid
to employees is a transactional entry and the amount owed at the end of the fiscal
year has to be accrued and so is an adjusting entry. The amount earned by
employees during the year is wages expense for the period regardless of whether
the employees have been paid or not.
v. To record amounts collected from customers. The amount collected from
customers on account reduces accounts receivable and increases cash.
vi. To record amounts paid to suppliers. The amounts paid to suppliers reduce
accounts payable and decrease cash.
vii. To record payment of taxes owing at the end of fiscal 2016 and to record the tax
expense for 2017. This entry has three components. The first is payment of taxes
owing at the end of fiscal 2016. The amounts paid for previous years taxes
reduce taxes payable and is not an expense of the current period. The expense
pertaining to this amount was recorded in fiscal 2016. The second component is
payment of instalments pertaining to fiscal 2017. This is a transactional entry
because cash is paid to government. The third component is an accrual of the
amount of tax that is owing at the end of fiscal 2017. This is an adjusting entry.
Note that the amounts relating to the current period are expensed in fiscal 2017
regardless of whether they are paid or not.
viii.
To record cash deposits from customers. The amounts received on deposit
are a liability. The liability represents the obligation to deliver appliances in the
future.
ix. To record rent payments and rent expense, and to accrue amounts owing at the
end of fiscal 2017. The amount in beginning prepaid on August 31, 2016 was paid
on July 1, 2016 and represents four months rent at $7,000 per month. During
fiscal 2017 ATL made payments of $42,000 and $48,000 to the property owner
for rent. During fiscal 2017 ATL incurred rent expense of $86,000 (10 months *
$7,000 + 2 months * $8,000). Prepaids must be reduced by this amount. The
ending balance in prepaids should be $32,000 (4 months * $8,000). An additional
$9,000 is accrued for the portion of sales that must be paid to the property owner
at year-end (2% * $2,700,000 * 2 months/12 months). This assumes sales are
made evenly throughout the year. Only two months is accrued because the new
lease went into effect on July 1, 2017.
x. To record the cost of appliance the shareholder took for his own use as a dividend.
The cost of the appliances that are taken for Wilfreds home are effectively a
withdrawal from the company and are considered dividends, which reduce
retained earnings. Alternative treatments include recording the appliances Wilfred
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Page 3-97
took for his personal use as a receivable (Wilfred will repay HAEL for the cost of
the appliances) or as salary. All three treatments are valid. The solution presented
assumes a dividend.
xi. To record the purchase of capital assets for cash. The furniture and fixtures are
considered capital assets because they will contribute to operations for several
periods.
xii. To record the depreciation expense. The depreciation expense results in an
increase in the accumulated depreciation account.
xiii.
To record repayment of $40,000 owing on the long-term notes payable,
payment of $17,000 in interest accrued in fiscal 2016, and to accrue the interest
expense for fiscal 2017. The $17,000 payment represents the expense of the
previous period that was paid on September 1, 2016. The expense for the current
year must be accrued, and is 8.5% of $160,000 ($200,000 - $40,000). The
$40,000 reduces the long-term notes payable.
xiv.
To record other cash expenses incurred during fiscal 2017.
Closing: The closing entry resets the temporary income statement accounts to zero and
records the balance in the retained earnings.
c.
Appliance Town Ltd (ATL)
Balance Sheet
As of August 31, 2017
Assets
Current Assets:
Cash
Accounts receivable
Inventory
Prepaid rent
$63,000
646,000
1,094,000
32,000
1,835,000
Non-current assets:
Capital Assets
430,000
Accumulated amortized
Total Assets
(124,000)
$2,141,000

Current Liabilities
Accounts payable
Rent royalty payable
Interest payable
Wages payable
Taxes payable
Unearned revenue
$1,030,000
9,000
13,600
15,000
24,000
20,000

Long-term debt
1,111,600
160,000
Total Liabilities
1,271,600
Shareholders Equity
Common shares
Retained earnings
Total Liabilities and Shareholders
Equity

Solutions Manual
220,000
649,400
$2,141,000
Page 3-98
Appliance Town Ltd.

Income Statement
For the year Ended August 31, 2017
Sales
Cost of Sales
Gross margin
Expenses:
Rent
Salaries and commissions
Other
Depreciation
Interest
Tax
Total Expenses
$2,700,000
1,490,000
1,210,000
$95,000
415,000
450,000
44,000
13,600
54,000
Net Income
1,071,600
$138,400
Appliance Town Ltd.

R/E at beginning of period
$520,000
Net Income
138,400
Less Dividends
(9,000)
$649,400
R/E at end of period
d. (The first part of this question is very wide open and there are many comments that could be
made. Issues that could be raised include profitability of ATL, its liquidity, the limitations of
the statements, cash flow, comments on specific items on the balance sheet and income
could be provided.)
The desirability of investing in ATL is to earn a reasonable return given the risk of the
investment. I would be concerned about the short-term liquidity of ATLis its situation
strong enough to survive or is any investment I make really an infusion of capital to help it
survive in the short term? ATL earned a profit of $138,400 in fiscal 2017, which represents a
profit margin percentage of 5.1. However, ATLs cash position is not strong. The company
only has $63,000 of cash, although this is comparable with the amount of cash on hand at the
end of last year. The major area of concern is the very large increase in accounts receivable
since the end of last year. Since I have not been given a comparative income statement for
2016 I cannot tell whether the increase is due to a significant growth in sales or more
generous credit terms. If its the latter, or if the economy has significantly weakened, then the
collectability of the receivables must be questioned. Inventory has also increased, which
raises the question of whether that inventory can be sold. Again, there is the question of the
reason for the increase. ATLs current ratio seems reasonable (1.65), but its significantly
lower than last years 2.09. Also, the current ratio assumes the receivables are collectable and
the inventory can be sold. The amount of accounts payable is quite large. That account seems
to mainly pertain to inventory and the amount owing is almost equal to the amount of
inventory. I wonder if ATL is having trouble paying its bills. ATLs debt-to-equity ratio has
Solutions Manual
Page 3-99
increased from 1.06 to 1.46, despite having reduced the amount of long-term debt by $40,000
or 20 percent. The increase reflects the significant increase in current liabilities, mainly
accounts payable.
Some questions (there are others that could be asked):
1. What will the margins on the new products be compared with the existing product line
(trying to figure out future profitability)?
2. What is in the inventory account? Is all the inventory saleable? Are there any old, out of
date items that will be difficult to sell?
4. When must the long-term debt be repaid?
6. Do you have a statement showing ATLs cash flow?
7. Do you have statements from early years that I could use for comparative purposes?
8. Who are the users of the financial statements you have prepared?
9. What type of investment in capital assets and inventory will be necessary to expand the
product line?
10. What is the condition of existing furniture and fixtures? Do these need to be replaced
soon?
11. What revenue is expected from the new product line?
12. How much do you want to sell an interest in ATL for and what proportion of the
company do you want to sell?
P3-23.
a. and c.
i) Dr. Inventory
1,700,000
Cr. Accounts payable
`
1,700,000
ii)Dr. Cash
1,550,000
Accounts receivable
1,150,000
Cr. Sales
2,700,000
iii) Dr. Cost of sales
Cr. Inventory
1,490,000
iv) Dr. Salaries and commissionsexpense

Cr. Cash
1,490,000
400,000
400,000
iv-adj) Dr. Salaries and commissionsexpense

Cr. Salaries and commissionspayable
15,000
15,000
v) Dr. Cash
750,000
Cr. Accounts receivable 750,000
Solutions Manual
Page 3-100
vi) Dr. Accounts payable

Cr. Cash
1,200,000
1,200,000
vii) Dr.
Taxes payable
Cr. Cash
40,000
viia) Dr. Taxes expense

Cr. Cash
30,000
40,000
30,000
vii-adj.) Dr. Taxes expense

Cr. Taxes payable
24,000
24,000
viii) Dr. Cash

20,000
Cr. Unearned revenue
20,000
ix-adj) Dr. Rent expense

28,000
Cr. Prepaid rent
28,000
ix) Dr. Prepaid rent
Cr. Cash
42,000
42,000

42,000
Cr. Prepaid rent
42,000
ixb)
Dr. Prepaid rent

Cr. Cash
48,000

Cr. Prepaid rent
16,000
ix-adj)
9,000
Dr. Rent expense

Cr. Accrued rent
48,000
16,000
9,000
x) Dr. Retained earnings

Cr. Inventory
9,000
xi) Dr. Capital assets

Cr. Cash
50,000
9,000
50,000
xii) Dr. Depreciation expense

44,000
Cr. Accumulated depreciation
44,000
xiii) Dr. Interest payable
Cr. Cash
17,000
xiiia) Dr. Long-term note
40,000
17,000

Solutions Manual
Page 3-101
Cr. Cash
40,000
xiii-adj.) Dr. Interest expense 13,600

Cr. Interest payable 13,600
xiv) Dr. Other expenses
Cr. Cash
450,000
450,000
b and c.
Cash
Beg
2
5
8
Bal
60,000
1,550,000
750,000
20,000
4
6
7
7a
9
400,000
1,200,000
40,000
30,000
42,000
9b
Beg
2
Bal
646,000
48,000
Beg
28,000
11
50,000
42,000
13
17,000
9b
48,000
Bal
32,000
13a
40,000
14
450,000
750,000
Beg
1
Bal
Prepaid assets
9adj
9adj
9adj
Inventory
893,000
1,700,000
3
10
1,094,000
1,490,000
9,000
Capital assets
28,000
Beg
380,000
11
50,000
Bal
430,000
42,000
16,000
63,000
Beg
80,000
13
Accounts receivable
246,000
1,150,000
5
12
44,000
Bal
124,000
Interest payable
Beg
1317,000
adj
Bal
17,000
13,600
Accounts payable
Beg
6
1,200,000
Bal
1,030,000
Bal
Bal
Unearned Revenue
1,700,000
Salaries and commissionspayable

Beg
4adj
15,000
13,600
Beg
Accrued rent
Beg
9adj 9,000
530,000
15,000
Long-term note
20,000
Beg
13a
Taxes payable
Beg
740,000
adj
Bal
9,000
40,000
24,000
24,000
Common shares
200,000
Beg
220,000
40,000

Solutions Manual
Page 3-102
Bal
20,000
R/E
10
520,000
Bal
Bal
2,700,000
1,490,000
Bal
511,000
Bal
2,700,000
Bal
1,490,000
220,000
Cost of sales
9,000
28,000
42,000
16,000
Salaries and commissionsexpense

4
4adj
Bal
400,000
Other expense
14
450,000
Bal
450,000
15,000
415,000
9,000
95,000
Depreciationexpense
12
160,000
Sales
Beg
Rent expense
9adj
9adj
9adj
9adj
Bal
Bal
44,000
44,000
Interest expense
13adj
Bal
13,600
13,600

Solutions Manual
Tax expense
7a
7adj
30,000
Bal
54,000
24,000
Page 3-103
d.
Appliance Town Ltd.
Trial Balance
August 31, 2017
Debits
63,000
646,000
1,094,000
32,000
430,000
Cash
Accounts receivable
Inventory
Prepaids
Accounts payable
Taxes payable
Interest payable
Accrued rent payable
Deposits
Common shares
Retained earnings
Sales
Credits
124,000
1,030,000
24,000
13,600
9,000
15,000
20,000
160,000
220,000
511,000
2,700,000
Cost of sales
Rent expense
Interest expense
Tax expense
Other expenses
1,490,000
415,000
95,000
44,000
13,600
54,000
450,000
4,826,600
4,826,600
e.
Appliance Town Ltd (ATL)
Balance Sheet
As of August 31, 2017
Assets
Current Assets:
Cash
Accounts receivable
Inventory
Prepaid rent
$63,000
646,000
1,094,000
32,000
1,835,000
Non-current assets:
Capital Assets
430,000
Total Assets
(124,000)
$2,141,000

Current Liabilities
Accounts payable
Rent royalty payable
Interest payable
Salaries and commissionspayable
Taxes payable
Unearned revenue
$1,030,000
9,000
13,600
15,000
24,000
20,000

Long-term debt
1,156,600
160,000
Total Liabilities
1,271,600
Shareholders Equity
Common shares
Retained earnings
Total Liabilities and Shareholders
Equity

Solutions Manual
220,000
649,400
$2,141,000
Page 3-104
Appliance Town Ltd.

Income Statement
Sales
Cost of Sales
$2,700,000
1,490,000
Gross margin
Expenses:
Rent
Salaries and commissions
Other
Depreciation
Interest
Tax
Total Expenses
1,210,000
$95,000
415,000
450,000
44,000
13,600
54,000
1,071,600
$138,400
Net Income
Appliance Town Ltd.
Retained earnings at beginning of period
$520,000
Net Income
138,400
Less Dividends
(9,000)
Retained earningsat end of period
$649,400
f.
Dr.
Sales
Cr.
Cr.
Cr.
Cr.
Cr.
Cr.
Cr.
Cr.
2,700,000
Cost of Sales
Rent Expense
Wage expense
Other expense
Interest expense
Tax expense
Retained Earnings
1,490,000
95,000
415,000
450,000
44,000
13,600
54,000
138,400
Retained earnings
Beg
10
Sales
520,000
Cost of sales
2
1,490,000
9,000
Bal
Bal
close
Bal
511,000
close
9-adj
9-adj
28,000
42,000
9-adj
16,000
2,700,000
Bal
1,490,000
2,700,000
138,400
close
Bal
Bal
1,4
649,400
Rent expense
9-adj
2,700,000
Wages expense
4
4-adj
Bal
Other expense
400,000
15,000
14
415,000
9,000

Solutions Manual
Bal
close
450,000
450,000
415,000
Page 3-105
close
Bal
95,000
Bal
close
Bal
Bal
Interest expense
13adj
44,000
44,000
Bal
close
Bal
95,000
Depreciationexpense
12
Bal
13,600
7a
7adj
13,600
44,000
Bal
close
Tax expense
Bal
30,000
24,000
54,000
13,600
close
Bal
g.
Appliance Town Ltd.
Post Closing Trial Balance
August 31, 2017
Cash
Accounts receivable
Inventory
Prepaids
Accounts payable
Taxes payable
Interest payable
Accrued rent payable
Deposits
Common shares
Retained earnings
Debits
63,000
646,000
1,094,000
32,000
430,000
Credits
124,000
1,030,000
24,000
13,600
9,000
15,000
20,000
160,000
220,000
649,400
2,265,000
2,265,000
h.
(The first part of this question is very wide open and there are many comments that could be
made. Issues that could be raised include profitability of ATL, its liquidity, the limitations of
the statements, cash flow, comments on specific items on the balance sheet and income
could be provided.)
The desirability of investing in ATL is to earn a reasonable return given the risk of the
investment. I would be concerned about the short-term liquidity of ATLis its situation
strong enough to survive or is any investment I make really an infusion of capital to help it
survive in the short term? ATL earned a profit of $138,400 in fiscal 2017, which represents a
profit margin percentage of 5.1. However, ATLs cash position is not strong. The company
only has $63,000 of cash, although this is comparable with the amount of cash on hand at the
end of last year. The major area of concern is the very large increase in accounts receivable
since the end of last year. Since I have not been given a comparative income statement for
Solutions Manual
Page 3-106
2016 I cannot tell whether the increase is due to a significant growth in sales or more
generous credit terms. If its the latter, or if the economy has significantly weakened, then the
collectability of the receivables must be questioned. Inventory has also increased, which
raises the question of whether that inventory can be sold. Again, there is the question of the
reason for the increase. ATLs current ratio seems reasonable (1.65), but its significantly
lower than last years 2.09. Also, the current ratio assumes the receivables are collectable and
the inventory can be sold. The amount of accounts payable is quite large. That account seems
to mainly pertain to inventory and the amount owing is almost equal to the amount of
inventory. I wonder if ATL is having trouble paying its bills. ATLs debt-to-equity ratio has
increased from 1.06 to 1.46, despite having reduced the amount of long-term debt by $40,000
or 20 percent. The increase reflects the significant increase in current liabilities, mainly
accounts payable.
Some questions (there are others that could be asked):
1. What will the margins on the new products be compared with the existing product line
(trying to figure out future profitability)?
2. What is in the inventory account? Is all the inventory saleable? Are there any old, out of
date items that will be difficult to sell?
4. When must the long-term debt be repaid?
6. Do you have a statement showing ATLs cash flow?
7. Do you have statements from early years that I could use for comparative purposes?
8. Who are the users of the financial statements you have prepared?
9. What type of investment in capital assets and inventory will be necessary to expand the
product line?
10. What is the condition of existing furniture and fixtures? Do these need to be replaced
soon?
11. What revenue is expected from the new product line?
12. How much do you want to sell an interest in ATL for and what proportion of the
company do you want to sell?

Solutions Manual
Page 3-107
P3-24.
1) Dr. Royalty Revenue receivable
Cr.
Royalty revenue
$10,000
$10,000
2) Dr. Rent expense

Cr.
Prepaid rent
$2,000
3) Dr. Depreciation expense

Cr.
$8,000
4) Dr. Unearned revenue

Cr.
Services revenue
$8,000
5) Dr. Wages expense

Cr.
Wages payable
$4,000
$2,000
$8,000
$8,000
$4,000
P3-25.
1) Dr. Cost of goods sold
Cr.
Inventory
$180,000
$180,000
2) Dr. Insurance expense

Cr.
Prepaid insurance
$10,000
$10,000
3) Dr. Depreciation expense

$25,000
Cr.
Accumulated depreciation $25,000
4) Dr. Salaries expense
Cr.
Salaries payable
$12,000
$12,000
5) Dr. Unearned revenue

Cr.
Revenue
$35,000
$35,000
6) Dr. Interest expense

Cr.
Interest payable
$6,000

Solutions Manual
$6,000
Page 3-108
P3-26.
Situation
a.
b.
c.
d.
e.
Assets
Overstated
Understated
Overstated
NE
NE
Liabilities
NE
NE
NE
Overstated
Understated
Owners Equity
Overstated
Understated
Overstated
Understated
Overstated
Net Income
Overstated
Understated
Overstated
Understated
Overstated
Explanations:
a. The necessary adjusting entry would be a debit to depreciation expense (OE-, E+) and a
credit to accumulated depreciation (A-). Failure to record the depreciation would result in an
understatement of accumulated depreciation and an overstatement of total assets and owners
equity. Since the depreciation expense is understated, net income is overstated.
b. The necessary adjusting entry would be a debit to interest receivable (A+) and a credit to
interest revenue (OE+, R+). Failure to record the entry would understate the asset, understate
owners equity, and understate revenue and net income.
c. The necessary adjusting entry would be a debit to insurance expense (OE-, E+) and a credit
to prepaid assets (A-). Failure to record the entry would result in prepaids being too high thus
overstating assets and not recording the expense will result in overstating owners equity and
net income.
d. The necessary adjusting entry would be a debit to unearned revenue (L-) and a credit to
revenue (OE+, R+). Failure to record the entry would overstate total liabilities and would
understate owners equity and revenue.
e. The necessary adjusting entry would be a debit to wage expense (OE-, E+) and a credit to
accrued liabilities or wages payable (L+). An expense will be missed thus overstating net
income and owners equity and a liability will be overlooked thus understating liabilities.
P3-27.
Situation
a.
b.
c.
d.
e.
Assets
NE
NE
Overstated
Understated
NE
Liabilities
Overstated
Understated
NE
NE
Understated
Owners Equity
Understated
Overstated
Overstated
Understated
Overstated
Net Income
Understated
Overstated
Overstated
Understated
Overstated
Explanations:
a. The necessary adjusting entry would be a debit to unearned revenue (L-) and a credit to
revenue (OE+, R+). Failure to record the entry would result in an overstatement of liabilities.
Since revenue is understated, net income and owners equity are understated.
b. The necessary adjusting entry would be a debit to interest expense (OE-, E+) and a credit to
interest payable (L+). Failure to record the entry would understate liabilities and overstate
owners equity, and net income.
c. The necessary adjusting entry would be debit rent expense (OE-, E+)and credit to prepaid
rent (A-). Failure to record the entry would overstate assets. Expenses would be understated
so, owners equity, and net income would be overstated.
Solutions Manual
Page 3-109
d. The necessary adjusting entry would be a debit to rent receivable (A+) and a credit to rent
revenue (OE+, R+). Failure to record the entry would understate assets and revenue thus also
understating owners equity and net income.
e. The necessary adjusting entry would be a debit to rent expense (OE-, E+) and a credit to rent
payable (L+). Failure to record the entry would understate liabilities and expenses and
thereby overstate net income and owners equity.
P3-28.
a. Otiss friend told him that his measure of profit was incorrect because part of the resources
that were consumed to earn the revenue of the year was the use of the cart. The cart has a
limited life, which is reduced after its used to sell beverages. This interpretation is correct
under accrual accounting, where the matching concept is applied and expenses are matched
to revenues. However, given that Otis has already spent the $12,000 for the cart (a sunk cost),
a reasonable measure of how well off he is may be the amount of cash he has in hand at the
end of the year.
b. The depreciation expense for 2017 would be one-sixth of the cost or $2,000. Net income
would be $7,000 ($22,000 - $13,000 - $2,000).
c. If the cart were depreciated over three years the depreciation expense for 2017 would be onethird of the cost or $4,000. In that case net income would be $5,000 ($22,000 - $13,000 $4,000). If the cart were depreciated over 10 years, the depreciation expense for 2017 would
be one-tenth of the cost or $1,200. In that case net income would be $7,800 ($22,000 $13,000 - $1,200).
d.
Net Income
Cash basis (what

Otis calculated)
$9,000
Depreciate cart
over six years
$7,000
Depreciatecart
over three years
$5,000
Depreciatecart over
10 years
$7,800
e. Simply comparing the numbers would say that the higher the net income, the better the
company is doing. But wait a minute! Arent we talking about the identical company in each
case with just a different estimate of the useful life of the cart (or ignoring the cost of the cart
in the case of the cash basis)? The greater the depreciation expense that is recorded for the
cart, the lower the net income and the less profitable the business appears to be. However, the
actual economic performance of the company is not affected by the estimate, only the
measurement of that performance is.
f. The actual cost of using the cart will depend on how many years its is used and the amount
for which the cart can be sold when its no longer needed. This information will only be
known with certainty when the cart is sold. Any calculation of depreciation cost in the
meantime is only an estimate based on an assumption and does not affect the actual cost. The
actual economic performance of The Corner Coffee Cart is not affected by the estimate of the
life of the cart. However, the representation of the economic performance in the financial
statements is affected by the estimate.
g. Its not possible to know in advance. The correct number of years will only be known
when the decision to stop using the cart is actually made (that is, the cart can no longer be
used or its not economic to use it). Its not possible to know the number of years with
certainty. In virtually all situations, the estimated life of an asset is an educated guess by the
Solutions Manual
Page 3-110
managers. There will be a reasonable range in which it will not be possible to make a strong
argument against the choice. However, the choice will have an effect on net income and
other measures in the financial statements.
P3-29.
a.
MTL
Income Statement
April 30, 2017
Revenue ($410,000 - $50,000 - $100,000 10,000)

Expenses
Cost of books
Rent ($14,000 2,000)
Wages ($42,000 +1,100)
Utilities
Advertising
General and administrative
Depreciation
Write-down (books)
Interest ($50,000*.08)
Net Income
$250,000
109,000
12,000
43,100
5,000
11,000
15,000
5,000
5,000
4,000
$40,900
MTL
Balance Sheet
April 30, 2017
Assets
Cash
Prepaid Rent
Inventory (books) ($199,000 109,000 5,000)
Furniture & fixtures
Total Assets
Liabilities & Owners Equity
Bank Loan
Unearned Revenue
Wages Payable
Interest Payable
Common shares
Retained Earnings
Total Liabilities & Equity
$99,000
2,000
85,000
25,000
(5,000)
$206,000
$50,000
10,000
1,100
4,000
100,000
40,900
$206,000
b.
The first income statement prepared by Arjuns bookkeeper was prepared on the cash basis and the one in
Part a was prepared under accrual accounting. Cash accounting only captures economic events that
involve the exchange of cash. For MTL it shows the cash collected and spent for all purposes during the
year, without consideration for what or when the cash flow was for. The cash income statement
Solutions Manual
Page 3-111
showshow MTL came to have $99,000 of cash on hand at the end of the year. Certain events like the bank
loan and Arjuns capital contribution were recorded as revenue when these items are balance sheet
items (bank loan is a liability and Arjuns capital contribution is equity) under accrual accounting.
The income statement prepared under accrual accounting captures economic events that do not always
involve the exchange of cash. When we examine the accrual accounting income statement in Part a, there
are many differences. The amount of revenue does not include the cash received from the bank loan and
Arjuns contribution. It only includes sales that took place during the year so the $10,000 received in
advance from the student association isnt recorded as revenue since it has not been earned yet (MTL has
not begun acquiring the books for this transaction as of yet).
There are also differences in the amount of expenses recorded. Rent expense is $2,000 less under accrual
accounting because the two months of rent prepaid for the next fiscal year (May and June) are not
expensedbecause MTL has not used these months yet. These will be expensedin fiscal 2018, when the
spaced is used by MTL. This $2,000 appears as an asset (prepaid rent) on the balance sheet. Also, the cost
of books only includes the books sold up until the year end. The remainder are reported as an asset called
inventory on the balance sheet.The full cost of the furniture and fixtures isnt expensed in the year but
instead is spread over their useful lives. Since its expected they will list five years there is a depreciation
expense of $5,000. The wages employees earned but not paid during the year ($1,100) is expensed during
the year. The unpaid amount is a liability on the balance sheet. Finally, the books that cannot be sold have
to be expensed in the year since they cannot be considered assets, so they represent a cost to the company
in the year.
The income statement prepared under accrual accounting provides a more comprehensive economic view
of the performance of MTL because it looks beyond the flow of cash. The cash based income statement
shows the cash inflows and outflows of the entity.
c.
Using the information concerning MTLs cash flows and accrual accounting information can tell us much
about the performance of the business. MTL currently has $99,000 of cash on hand. However, $150,000
of this cash was generated through financing (bank loan and Arjuns contribution). If we ignore those
inflows of cash, Arjun had a combined negative cash outflow from other activities ($49,000) which is a
bit of a concern. However, he had to purchase a large start-up supply of books as well as furniture and
fixtures. Arjun still has a large supply of books on hand ($85,000). If Arjun can sell all these books in the
next fiscal year, his cash flow situation will improve. However, with the information provided,, its hard
to tell how many of these books can be sold and at what cost. Clearly, this is a business that requires a
large investment in inventory to ensure that the books students want are available, so monitoring cash is
important.
From an accrual accounting perspective, Arjuns net income was $40,900. This means MMLs revenues
exceeded its expenses by $40,900. This is a positive sign for a start-up company. However, its hard to
tell how successful Arjuns business was given the fact we do not have comparative information of
similar business for benchmarking purposes. Arjuns profit margin was 16.4 % ($40,900 / $250,000).
Again, its hard to tell what this figure means given the lack of comparative information from similar
businesses.
Arjun needs to continue to monitor his cash situation given the fact his cash from operations was
negative. We are also unsure when his bank loan needs to be repaid so more information about this
obligation is necessary to assess Arjuns financial situation.

Solutions Manual
Page 3-112
USING FINANCIAL STATEMENTS

Reitmans
FS3-1.
Most accounts on the balance could be adjusted. Trade and other receivables would have to be
adjusted for uncollectible amounts. Marketable securities and derivative financial assets would
require adjustments to the fair market value. Income taxes recoverable would have to be adjusted
for new estimates of any amount that might be recovered. Inventory might have to be adjusted
for goods sold or for obsolete or unusable items.Inventories would have to be adjusted for
obsolete and stolen items. Prepaid expenses would have to be adjusted to reflect the consumption
of amounts paid for in advance (for example, rent or insurance). Property, plant, and equipment
must be depreciated and perhaps written down for impairment. Intangible assets might have to be
adjusted to their fair market value. On the liabilities side, liabilities have to be accrued to reflect
expenses incurred but not recorded and deferred income taxes would require adjustment.
FS3-2.
a. Reitmans recognizes its revenue when a customer purchases and takes delivery of the
merchandise.
b. For the fiscal year ended January 28, 2012, deferred revenue arises from 1) loyalty points and
awards granted under loyalty programs with attributed amount of $10,979, and 2)
unredeemed gift cards which accounted for $11,299. (Amounts are in thousands of dollars)
c. Deferred revenue is a liability because there has been a transaction with a customer and the
creation of an obligation to provide merchandise in the future when the customer redeems the
loyalty points or gift cards. At the point of redemption Reitmans has settled the obligation by
providing merchandise to the customer.
d. Dr. Cash (asset +)
$100
Cr. Deferred revenue (liability +)
100
e. The resulting journal entry would be as follows:
Dr. Cash (asset +)
Dr. Deferred revenue (liability -)
Cr. Revenue (revenue +)
FS3-3.
In thousands of dollars
a. Profit margin ratio
= Net Income/Sales
b. Return on equity
= Net Income/Shareholders equity
c. Current ratio
= Current assets/Current liabilities
d. Debt-to-equity ratio
= Total liabilities/Shareholders equity
e. Gross margin ratio
= Gross margin/Sales
$55
100
155
2010
$88,985/1,059,000
= 8.40%
88,985/512,800
=17.35%
389,005/91,309
=4.26
(91,309+55,248)/512,800
=28.58%
708,329/1,059,000
=66.89%

Solutions Manual
2011
$47,539/1,019,397
=4.66%
47,539/492,852
=9.65%
366,983/89,132
=4.12
(89,132+51,877)/492,852
=28.61%
656,064/1,019,397
=64.36%
Page 3-113
FS3-4.
The closing journal entry for the year ended December 31, 2011is (amounts in thousands):
Dr. Sales
$1,019,397
Dr. Finance income
5,562
Cr. Cost of goods sold
363,333
Cr. Selling and distribution expenses
547,367
Cr. Administrative expenses
46,878
Cr. Finance costs
1,509
Cr. Income taxes
18,333
Cr. Retained earnings
47,539
FS3-5. (Amounts in thousands)
Trade and other receivables amount on December 31, 2011 was $3,033. The amount is small
with respect to other accounts because the majority of transactions and revenue generated by the
company is from customers that pay cash at their retail stores, so there would not be a receivable
set up.
FS3-6.(Amounts in thousands)
Reitmans reports $184,221 for property and equipment on December 31, 2011. The major capital
assets would be buildings where the stores are located (although most stores are rented), the
shelves and cash registers required to sell merchandise in stores, and costs to furnish and
decorate the stores. Reitmans needs to invest in such amount to be able to operate their stores and
create a suitable environment for shoppers. Store design, decorations, etc. are important to the
success of a retail business.
FS3-7.
The current ratio is 4.26, suggesting that its current assets are four times that of current liabilities,
and the debt-to-equity ratio is less than 0.5, indicating that Reitmans is primarily financed by
equity. Also, the cash balance at the end of 2011 is more than $196 million relative to
outstanding trade payables of $63 million. Both the ratios and numbers on the financial
statements reflect that the business is in good financial health, so Reitmans would be able to
meet the vendor payables. Therefore as a supplier, I would extend credit to Reitmans.
FS3-8.
Judgments, estimates, and assumptions are necessary for Reitmans when preparing financial
statements since it has to comply with accrual accounting under IFRS, to reflect the impact of
uncertainties and future events that will affect the financial statements. For example, trade and
other receivables require estimates on any uncollectible amounts, the obsolescence of inventories
has to be judged, and property and equipment should also be subject to professional judgments
regarding impairment and useful life.
FS3-9.(Amounts in thousands)
Reitmans reports $63,875 for trade and other payables on December 31, 2011. Reitmans owes
money to suppliers, related parties, property owners, employees, and so on; it also includes
provision for sales returns. Circumstances that would explain why money would be owed to

Solutions Manual
Page 3-114
these entities include: purchases on credit, timing of payroll; sales credit for returned
merchandise and outstanding amounts owing for leases and rent.

Solutions Manual
Page 3-115

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CHAPTER 3

The Accounting Cycle

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Needed to ensure that expenses that are paid before the

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Selling and marketing

Increase assets, increase liabilities

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Accounts receivable (assets +) 300

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

g*: There is no impact on the financial statements at this time.

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

To record a sale on credit.

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Interest revenue = $750 - $490 = $260

10,000/10 months*5 months

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Advance payment for inventory

Advance payment for

$7,000 * (5/12) = $2,917

Interest expense = $7,000 - $2,917

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Interest receivable (asset +)

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Ending balance = Beginning balance + Increases Decreases

Ending balance = Beginning balance Payments + Purchases

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Long-term loan receivable

Liabilities and Shareholders Equity

Retained earnings at the beginning of the year

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Denis' Great Gifts

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Denis' Great Gifts

Denis' Great Gifts

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

c. Given Transaction Entry

Interest revenue (R-, OE-)