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CHAPTER 3

Adjusting the Accounts

ASSIGNMENT CLASSIFICATION TABLE


Brief Problems Problems
Study Objectives Questions Exercises Exercises Set A Set B

1. Explain the time period 1


assumption.

2. Distinguish between the 2, 3, 4


revenue recognition
principle and the matching
principle.

3. Explain the accrual basis of 5, 6 7 1, 2 3, 4, 7 3, 4, 7


accounting.

4. Explain why and distinguish when 7, 8 1


adjusting entries are needed.

5. Identify and distinguish between 9 1 1


the major types of adjusting entries.

6. Identify and prepare adjusting 10, 11, 17, 2, 3, 4, 7, 3, 4, 5, 6, 7, 2, 3, 5, 6, 2, 3, 5, 6,


entries for prepayments. 21, 22 8, 9, *13 8, 9, 10, 11 7, 8, 9, 10, 7, 8, 9, 10,
11 11

7. Identify and prepare adjusting 12, 13, 14, 5, 7, 8, 9 4, 5, 6, 7, 8, 3, 4, 5, 6, 3, 4, 5, 6,


entries for accruals. 15, 16, 17, 9, 10, 11 7, 8, 9, 10, 7, 8, 9, 10,
21, 22 11, *13 11, *13

8. Identify and prepare the adjusting 18, 19, 20, 6, 7, 8, 9 6, 7, 8, 9, 7, 8, 9, 10, 3, 7, 8, 9,


entry for amortization. 21, 22 10, 11 11, *13 10, 11,
*13

9. Describe the nature and 23 10, 11 11, 12 9, 10, 11, 9, 10, 11,
purpose of an adjusted trial *13 *13
balance and prepare.

*10. Identify and prepare adjusting *24 *12, *13 *13 *12, *13 *12, *13
entries for the alternative treatment
of prepayments (Appendix 3A).

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the Appendix to each
chapter.

3-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time
Number Description Level Allotted (min.)

1A Match adjusting entry type. Simple 10-15

2A Prepare original and adjusting journal entries for Moderate 20-25


prepayments.

3A Convert income from cash to accrual basis. Complex 25-35

4A Record transactions on accrual basis; convert revenue to Complex 25-35


cash receipts.

5A Prepare original and adjusting journal entries. Moderate 25-35

6A Prepare adjusting entries. Moderate 25-35

7A Prepare accrual-based income statement from cash- Complex 25-35


based information.

8A Identify effects of adjusting journal entries. Moderate 10-15

9A Prepare adjusting entries, post, and prepare adjusted trial Moderate 50-60
balance.

10A Prepare adjusting entries, post, and prepare adjusted trial Moderate 50-60
balance and financial statements.

11A Prepare adjusting entries and financial statements. Moderate 45-55

*12A Prepare original and adjusting journal entries for Moderate 20-25
prepayments, using alternative treatment.

*13A Prepare adjusting entries, adjusted trial balance and Moderate 55-65
financial statements, using alternative treatment of
prepayments.

1B Match adjusting entry type. Simple 10-15

2B Prepare original and adjusting journal entries for Moderate 20-25


prepayments.

3B Convert income from cash to accrual basis. Complex 25-35

4B Record transactions on accrual basis; convert revenue to Complex 25-35


cash receipts.

5B Prepare original and adjusting journal entries. Moderate 25-35

6B Prepare adjusting entries. Moderate 25-35

7B Prepare accrual-based income statement from cash- Complex 25-35


based information.

8B Identify effects of adjusting journal entries. Moderate 10-15

9B Prepare adjusting entries, post and prepare adjusted trial Moderate 50-60
balance.

3-2
Problem Difficulty Time
Number Description Level Allotted (min.)

10B Prepare adjusting entries, post, and prepare adjusted trial Moderate 50-60
balance and financial statements.

11B Prepare adjusting entries and financial statements. Moderate 45-55

*12B Prepare original and adjusting journal entries for Moderate 20-25
prepayments, using alternative treatment.

*13B Prepare adjusting entries, adjusted trial balance and Moderate 55-65
financial statements, using alternative treatment of
prepayments.

Cumulative Coverage—Chapters 2 to 3 Moderate 90-100

3-3
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material

Study Objectives Knowledge Comprehension Application Analysis Synthesis Evaluation


1. Explain the time period Q3-1
assumption.

2. Distinguish between the Q3-2


revenue recognition Q3-3
principle and the Q3-4
matching principle.

3. Explain the accrual basis Q3-5 BE3-7 P3-3B


of accounting. Q3-6 E3-2 P3-4B
E3-1 P3-3A P3-7B
P3-4A
P3-7A

4. Explain why and Q3-7


distinguish when Q3-8
adjusting entries are BE3-1
needed.

5. Identify and distinguish P3-1A Q3-9


between the major types P3-1B
of adjusting entries.

6. Identify and prepare Q3-10 Q3-17 BE3-2 P3-6A


adjusting entries for Q3-11 Q3-22 BE3-3 P3-7A
prepayments. Q3-21 BE3-8 BE3-4 P3-8A
BE3-9 BE3-7 P3-9A
*BE3-13 P3-10A
E3-3 P3-11A
E3-4 P3-2B
E3-5 P3-3B
E3-6 P3-5B
E3-7 P3-6B
E3-8 P3-7B
E3-9 P3-8B
E3-10 P3-9B
E3-11 P3-10B
P3-2A P3-11B
P3-3A
P3-5A

7. Identify and prepare Q3-12 Q3-17 Q3-15 P3-7A


adjusting entries for Q3-13 Q3-22 Q3-16 P3-8A
accruals. Q3-14 BE3-8 BE3-5 P3-9A
Q3-21 BE3-9 BE3-7 P3-10A
E3-4 P3-11A
E3-5 *P3-13A
E3-6 P3-3B
E3-7 P3-4B
E3-8 P3-5B
E3-9 P3-6B
E3-10 P3-7B
E3-11 P3-8B
P3-3A P3-9B
P3-4A P3-10B
P3-5A P3-11B
P2-6A *P3-13B

8. Identify and prepare the Q3-21 Q3-18 Q3-20 P3-9A


adjusting entry for Q3-19 BE3-6 P3-10A
amortization. Q3-22 BE3-7 P3-11A
BE3-8 E3-6 *P3-13A
3-4
Study Objectives Knowledge Comprehension Application Analysis Synthesis Evaluation
BE3-9 E3-7 P3-3B
E3-8 P3-7B
E3-9 P3-8B
E3-10 P3-9B
E3-11 P3-10B
P3-7A P3-11B
P3-8A *P3-13B

9. Describe the nature and Q3-23 BE3-10 P3-11A


purpose of an adjusted BE3-11 *P3-13A
trial balance and E3-11 P3-9B
prepare. E3-12 P3-10B
P3-9A P3-11B
P3-10A *P3-13B

*10. Identify and prepare *Q3-24 *BE3-12 *P3-13A


adjusting entries for the *BE3-13 *P3-12B
alternative treatment of *E3-13 *P3-13B
prepayments. *P3-12A

Broadening Your BYP3-1 BYP3-2 BYP3-5 BYP3-6 BYP3-7


Perspective BYP3-3
BYP3-4
Cumulative Coverage

3-5
ANSWERS TO QUESTIONS

01. (a) Under the time period assumption, an accountant is required to


determine the relevance of each business transaction to specific
accounting periods, and its effects on those periods.
(b) An accounting time period of one year in length is referred to as a
fiscal year. A fiscal year that extends from January 1 to December
31 is referred to as a calendar year. Accounting periods of less
than one year are called interim periods.

2. The two generally accepted accounting principles that pertain to


adjusting the accounts are:

1. The revenue recognition principle, which states that revenue


should be recognized in the time period in which it is earned.
2. The matching principle, which states that efforts (expenses)
should be matched with accomplishments (revenues).

03. The law firm should recognize the revenue in April. The revenue
recognition principle states that revenue should be recognized in the
accounting period in which it is earned (i.e., when the work is done).

04. Expenses of $4,500 ($2,000 + $2,500) should be deducted from the


revenues in April. Under the matching principle, efforts (expenses)
should be matched with accomplishments (revenues).

05. Information presented on an accrual basis is useful because it reveals


relationships that are likely to be important in predicting future
results. To illustrate, under accrual accounting, revenues are
recognized when earned so they can be related to the economic
environment in which they occur. Trends in revenues are thus more
meaningful.

06. The balance in total owner’s equity should not equal the balance in the
cash account. Owner’s equity reflects the net amount the owners have
invested in the company, which comprises total assets–not just cash–
net of liabilities.

3-6
Questions Chapter 3 (Continued)

07. No, adjusting entries are required by the revenue recognition and
matching principles.

08. A trial balance may not contain up-to-date information for financial
statements because:

1. Some events are not journalized daily because it is unnecessary


and inefficient to do so.
2. The expiration of some costs occurs with the passage of time
rather than as a result of recurring daily transactions.
3. Some items may be unrecorded because the transaction data are
not known.

09. The three categories of adjusting entries are prepayments, accruals,


and estimates. Prepayments consist of transactions in which the cash
is exchanged in advance resulting in prepaid expenses and unearned
revenues. Accruals consist of transactions in which the cash will be
exchanged later, resulting in accrued revenues and accrued expenses.
Because we don’t always know what will happen in the future,
estimates are required. One example of an estimate is the allocation of
the cost of a capital asset over its estimated useful life.

10. If the original purchase was recorded as an asset, then in the adjusting
entry expenses are debited (to increase them) and assets are credited
(to decrease them).

11. In the adjusting entry, liabilities are debited (to decrease them) and
revenues are credited (to increase them).

12. It may have credited unearned revenue or accounts receivable.

13. Asset and revenue. An asset (a receivable) is debited and revenue is


credited.

14. Utilities Expense is debited and Accounts Payable (a liability) is


credited.

3-7
Questions Chapter 3 (Continued)

15. On the income statement, net income was understated $300. Prior to
adjustment, revenues are understated by $900 and expenses are
understated by $600. The impact on net income is $300 ($900 – $600).
On the balance sheet, accounts receivable are understated by $900,
accounts payable are understated by $600, and owner’s equity
understated by $300 (see net income).

16. The entry is:

Jan. 9 Salaries Payable............................................... 1,700


Salaries Expense............................................. 3,300
Cash............................................................ 5,000

17. (a) Accrued revenues.


(b) Unearned revenues.
(c) Accrued expenses.
(d) Accrued expenses, prepaid expenses, or estimates (amortization).
(e) Prepaid expenses or estimates (amortization).
(f) Accrued revenues or unearned revenues.

18. No. Amortization is the process of allocating the cost of an asset to


expense over its useful life in a rational and systematic manner.
Amortization results in the presentation of the book value of the asset,
not its market value.

19. Amortization expense is an expense account whose normal balance is


a debit. This account shows the cost that has expired during the
current accounting period. Accumulated amortization is a contra asset
account whose normal balance is a credit. The balance in this account
is the total of all the amortization that has been recognized from the
date of acquisition to the balance sheet date.

*20. Equipment............................................$12,000
Less: Accumulated amortization..... 7,000
Net book value................................... 5,000

3-8
Questions Chapter 3 (Continued)

21. (a) Salaries Payable is credited.


(b) Accumulated Amortization is credited.
(c) Interest Expense is debited.
(d) Supplies Expense is debited.
(e) Service Revenue is credited.
(f) Service Revenue is credited.

22. Disagree. An adjusting entry affects only one balance sheet account
and one income statement account.

23. Financial statements can be prepared from an adjusted trial balance


because the balances of all accounts have been adjusted to show the
effects of all financial events that have occurred during the
accounting period.

*24. For Supplies Expense: expenses are overstated and assets (prepaid
expense) are understated. The adjusting entry is:

Assets (Supplies).................................................................. XX
Expenses (Supplies Expense)....................................... XX

For Rent Revenue: revenues are overstated and liabilities (unearned


revenues) are understated. The adjusting entry is:

Revenues (Rent Revenue).................................................... XX


Liabilities (Unearned Rent)............................................ XX

3-9
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 3-1

1. Prepaid Insurance—to recognize insurance expired (expenses) during


the period.

2. Accumulated Amortization—to allocate the cost of the capital asset to


expense over the period it benefits.

3. Unearned Revenue—to account for Unearned Revenue received in


advance that was earned (revenues) during the period.

4. Interest Payable—to recognize interest expense accrued but unpaid


on notes payable.

5. Rent Receivable—to recognize rent earned (revenues) but not yet


collected.

BRIEF EXERCISE 3-2

Dec. 31 Advertising Supplies Expense................................ 7,200


Advertising Supplies........................................ 7,200

Advertising Supplies Advertising Supplies Expense


12/31 8,700 12/31 7,200 12/31 7,200
Balance 1,500

3-10
BRIEF EXERCISE 3-3

July 1 Prepaid Insurance......................................... 10,000


Cash........................................................ 10,000

Dec. 31 Insurance Expense ($10,000 x 6/24 mos.). . . 2,500


Prepaid Insurance.................................. 2,500

Cash
7/1 10,000

Prepaid Insurance Insurance Expense


7/1 10,000 12/31 2,500 12/31 2,500
12/31 Bal. 7,500

BRIEF EXERCISE 3-4

July 1 Cash......................................................................... 10,000


Unearned Insurance Revenue........................ 10,000

Dec. 31 Unearned Insurance Revenue................................ 2,500


Insurance Revenue ($10,000 x 6/24 mos.)..... 2,500

Cash
7/1 10,000

Unearned Insurance Revenue Insurance Revenue


12/31 2,500 7/1 10,000 12/31 2,500
12/31 Bal. 7,500

3-11
BRIEF EXERCISE 3-5

1. Dec. 31 Interest Receivable.......................................... 300


Interest Revenue...................................... 300

2. 31 Accounts Receivable....................................... 1,400


Service Revenue...................................... 1,400

3. 31 Salaries Expense............................................. 900


Salaries Payable...................................... 900

BRIEF EXERCISE 3-6

Dec. 31 Amortization Expense—Equipment...................... 5,000


Accumulated Amortization—
Equipment.................................................... 5,000

Amortization Expense—Equipment Accum. Amortization—Equipment


12/31 5,000 12/31 5,000

TAI WOO COMPANY


Balance Sheet (Partial)
December 31

Capital assets
Equipment................................................................$25,000
Less: Accumulated amortization........................... 005,000 $20,000

3-12
BRIEF EXERCISE 3-7

Transaction Cash Net Income

(a) Purchased supplies on hand for cash -$100 $ 0


(b) Recorded the use of supplies 0 -50
(c) Performed services on account 0 +1,000
(d) Received from customers payment of their
account +800 0
(e) Purchased office equipment for cash -500 0
(f) Recorded amortization of office equipment 0 -50

BRIEF EXERCISE 3-8

(a) (b)
Type of Account Status of Accounts
Adjustment Relationship Before Adjustment

1. Prepaid Assets and Expenses Assets (Supplies) Overstated


Expenses Expenses (Supplies Expense)
Understated

2. Accrued Assets and Revenues Assets (Accounts Receivable)


Revenues Understated
Revenues (Service Revenue)
Understated

3. Accrued Expenses and Expenses (Interest Expense)


Expenses Liabilities Understated
Liabilities (Interest Payable) Understated

Liabilities (Unearned Rent) Overstated


4. Unearned Liabilities and Revenues (Rent Earned) Understated
Revenues Revenues
Expenses (Amortization Expense)
5. Amortization Expenses and Assets Understated
(contra account) Assets (Capital Assets) Overstated

3-13
BRIEF EXERCISE 3-9
(a) (b)
Account Type of Adjustment Related Account
Accounts Receivable Accrued Revenues Service Revenue

Prepaid Insurance Prepaid Expenses Insurance Expense

Equipment Estimates Amortization


Expense/Accum.
Amortization

Supplies Prepaid Expenses Supplies Expense

Interest Payable Accrued Expenses Interest Expense

Unearned Service
Revenue Unearned Revenues Revenue Earned

Interest Receivable Accrued Revenues Interest Revenue

Rent Payable Accrued Expenses Rent Expense

BRIEF EXERCISE 3-10

KLAR COMPANY
Income Statement
For the Year Ended December 31, 2003

Revenues
Service revenue........................................................ $38,400
Expenses
Salaries expense...................................................... $13,000
Rent expense............................................................ 4,000
Insurance expense................................................... 2,000
Amortization expense.............................................. 001,000
Supplies expense..................................................... 500
Total expenses.................................................. 020,500
Net income....................................................................... $17,900

3-14
BRIEF EXERCISE 3-11

KLAR COMPANY
Statement of Owner's Equity
For the Year Ended December 31, 2003

S. Klar, Capital, January 1..................................................................... $15,600


Add: Net income.................................................................................. 017,900
33,500
Less: Drawings..................................................................................... 006,000
S. Klar, Capital, December 31............................................................... $27,500

*BRIEF EXERCISE 3-12

(a)

Dec. 31 Advertising Supplies............................................... 1,500


Advertising Supplies Expense........................ 1,500

Advertising Supplies Advertising Supplies Expense


12/31 1,500 12/31 8,700 12/31 1,500
12/31 Bal. 7,200

(b) The adjusted balances are the same. It does not matter whether the
original entry is recorded to an asset or an expenses account as long
as the adjustment is done correctly.

3-15
*BRIEF EXERCISE 3-13
(a)

May 1 Cash.......................................................................... 600


Unearned Rental Revenue............................... 600

May 31 Unearned Rental Revenue....................................... 600


Rental Revenue................................................ 600

(b)

May 1 Cash.......................................................................... 600


Rental Revenue................................................ 600

May 31 No adjustment required

(c) The ending balances are the same under either alternative.

3-16
SOLUTIONS TO EXERCISES
EXERCISE 3-1

(a) Accrual basis accounting records the events that change an entity’s
financial statements in the periods in which the events occur, rather
than in the periods in which the entity receives or pays cash. That is,
revenue is recognized when it is earned. Expenses are recognized
when services or goods are used or consumed in the production of
revenue. Information presented on an accrual basis is useful because
it reveals relationships that are likely to be important in predicting
future results.

Conversely, under the cash basis of accounting, revenue is recorded


only when cash is received, and an expense is recognized only when
cash is paid. As a result, the cash basis of accounting often leads to
misleading financial statements.

(b) The government is not using either the cash or accrual basis of
accounting. It is using some other basis that is not a generally
accepted accounting policy. The government may believe it is
appropriate because the commitment to spend the funds has been
made.

(c) Dear Member of Parliament,

It is my understanding that the Federal government is making


changes in the method of accounting it uses and is switching from
the cash basis of accounting to the accrual basis. I understand in
2001 accrual accounting is fully in use.

The government is to be commended for this change. The use of full


accrual accounting will provide a more accurate reflection of the true
costs of services that government provides and a more complete
reflection of its assets and liabilities. This will result in improved
information for decision makers and citizens.

Sincerely,

ACCOUNTING STUDENT

3-17
EXERCISE 3-2

(a)
Cash Accrual
Revenue $22,000 $26,000
Expenses
Operating 13,500 15,000
Insurance 2,500 0000000
Net income $ 6,000 $ 11,000

(b) The accrual basis provides the most useful information for decision
making as it reflects transactions in the period in which they occur and
properly matches revenue and expenses.

EXERCISE 3-3

(a) 1. Prepaid Rent............................................................. 20,000


Cash.................................................................... 20,000
To record payment of rent for January 1-
May 31, 2002.

2. Security Deposit....................................................... 5,000


Cash.................................................................... 5,000
To record payment of security deposit.

3. Prepaid Rent............................................................. 30,000


Cash.................................................................... 30,000
To record payment of rent for June 1-
November 30, 2002.

4. No entry required.

(b) Rent Expense................................................................ 55,000


Prepaid Rent........................................................ 50,000
Rent Payable........................................................ 5,000

See (c) for calculations.

3-18
EXERCISE 3-3 (Continued)

(c) Rent expense:

$20,000 January 1 – May 31 ($4,000 x 5 mos.)


30,000 June 1 – November 30 ($5,000 x 6 mos.)
5,000 December 1 – December 31 ($5,000 x 1 mos. accrual)
$55,000

(d) Balance sheet amounts with respect to rent:

Assets
Security deposit, $5,000

Liabilities
Rent payable, $5,000 (for the month of December)

3-19
EXERCISE 3-4

(a) July 10 Supplies............................................................ 200


Cash.......................................................... 200

14 Cash.................................................................. 3,000
Service Revenue...................................... 3,000

15 Salaries Expense.............................................. 1,200


Cash.......................................................... 1,200

20 Cash.................................................................. 700
Unearned Service Revenue..................... 700

(b) July 31 Supplies Expense............................................ 500


Supplies.................................................... 500

31 Accounts Receivable....................................... 500


Service Revenue...................................... 500

31 Salaries Expense............................................. 1,200


Salaries Payable...................................... 1,200

31 Unearned Service Revenue............................ 900


Service Revenue...................................... 900

3-20
EXERCISE 3-5

Answer Calculation

(a) Supplies balance = $800 Supplies expense $950)


Add: Supplies (1/31/03)  700)
Less: Supplies purchased (850)
Supplies (12/31/02) $800)

(b) Total premium = $4,800 Total premium = Monthly premium X


12; $400 X 12 = $4,800

Purchase date = Aug. 1, 2002 Purchase date: On Jan. 31, there are
6 months coverage remaining ($400
X 6). Thus, the purchase date was 6
months earlier on Aug. 1, 2002.

(c) Salaries payable = $1,500 Cash paid $2,500


Salaries payable (1/31/03)    800
 3,300
Less: Salaries expense  1,800
Salaries payable (12/31/02) $1,500

(d) Unearned revenue = $1,150 Service revenue $2,000


Unearned revenue (1/31/03)    750
 2,750
Cash received in Jan.  1,600
Unearned revenue (12/31/02) $1,150

3-21
EXERCISE 3-6

(a) (b)
Type of Accounts
Item Adjustment Before Adjustment

1. Accrued Assets (Accounts Receivable) Understated


Revenues Revenues (Service Revenue) Understated

2. Prepaid Assets (Store Supplies) Overstated


Expenses Expenses (Store Supplies Expenses) Understated

3. Accrued Expenses (Utility Expense) Understated


Expenses Liabilities (Accounts Payable) Understated

4. Unearned Liabilities (Unearned Service Revenue) Overstated


Revenues Revenues (Service Revenue) Understated

5. Accrued Expenses (Salaries Expense) Understated


Expenses Liabilities (Salaries Payable) Understated

6. Prepaid Assets (Prepaid Insurance) Overstated


Expenses Expenses (Insurance Expense) Understated

7. Amortization Assets (Capital Assets) Overstated


Expenses (Amortization Expense) Understated

3-22
EXERCISE 3-7

1. Mar. 31 Amortization Expense ($400 × 3)...................... 1,200


Accumulated Amortization—
Equipment............................................... 1,200

2. 31 Unearned Rent Revenue................................... 3,100


Rent Revenue ($9,300 × 1/3)...................... 3,100

3. 31 Interest Expense................................................ 500


Interest Payable.......................................... 500

4. 31 Supplies Expense.............................................. 1,950


Supplies ($2,800 – $850)............................ 1,950

5. 31 Insurance Expense ($300 × 3)........................... 900


Prepaid Insurance...................................... 900

EXERCISE 3-8

1. Jan. 31 Accounts Receivable......................................... 750


Service Revenue........................................ 750

2. 31 Utilities Expense................................................ 520


Utilities Payable.......................................... 520

3. 31 Amortization Expense....................................... 1,000


Accumulated Amortization—
Dental Equipment.................................... 1,000

31 Interest Expense................................................ 250


Interest Payable.......................................... 250

4. 31 Insurance Expense ($12,000 ÷ 12).................... 1,000


Prepaid Insurance...................................... 1,000

5. 31 Supplies Expense ($1,600 – $500).................... 1,100


Supplies...................................................... 1,100

3-23
EXERCISE 3-9

1. Oct. 31 Advertising Supplies Expense.......................... 1,100


Advertising Supplies ($2,500 – $1,400).... 1,100

2. 31 Insurance Expense............................................ 100


Prepaid Insurance...................................... 100

3. 31 Amortization Expense....................................... 50
Accumulated Amortization—
Office Equipment.................................... 50

4. 31 Unearned Service Revenue............................... 600


Service Revenue........................................ 600

5. 31 Accounts Receivable......................................... 300


Service Revenue........................................ 300

6. 31 Interest Expense................................................ 70
Interest Payable.......................................... 70

7. 31 Salaries Expense............................................... 1,500


Salaries Payable......................................... 1,500

3-24
EXERCISE 3-10

Aug. 31 Accounts Receivable.............................................. 600


Service Revenue.............................................. 600

31 Office Supplies Expense......................................... 1,600


Office Supplies................................................ 1,600

31 Insurance Expense.................................................. 1,500


Prepaid Insurance........................................... 1,500

31 Amortization Expense............................................. 1,200


Accumulated Amortization—Office
Equipment..................................................... 1,200

31 Salaries Expense..................................................... 1,100


Salaries Payable.............................................. 1,100

31 Unearned Rent Revenue......................................... 800


Rent Revenue................................................... 800

3-25
EXERCISE 3-11

(a) July 31 Insurance Expense.......................................... 300


Prepaid Insurance.................................... 300

31 Supplies........................................................... 500
Supplies Expense.................................... 500

31 Amortization Expense..................................... 150


Accumulated Amortization— Equipment 150

31 Wages Expense............................................... 300


Wages Payable......................................... 300

31 Accounts Receivable....................................... 900


Service Revenue...................................... 900

(b)
VIRMANI CO.
Income Statement
For the Month Ended July 31, 2003

Revenues
Service revenue ($5,500 + $900)...................... $6,400
Expenses
Wages expense ($2,300 + $300)...................... $2,600
Supplies expense ($1,200 – $500)................... 700
Utilities expense............................................... 600
Insurance expense........................................... 300
Amortization expense...................................... 0,150
Total expenses.......................................... 04,350
Net income............................................................... $2,050

3-26
EXERCISE 3-12

LIM COMPANY
Income Statement
For the Year Ended August 31, 2003

Revenues
Service revenue............................................................................ $34,600
Rent revenue................................................................................. 011,800
Total revenues....................................................................... 46,400
Expenses
Salaries expense........................................................ $18,100
Rent expense.............................................................. 15,000
Office supplies expense............................................. 1,600
Insurance expense..................................................... 1,500
Amortization expense................................................ 01,200
Total expenses....................................................................... 037,400
Net income............................................................................................ $ 9,000

LIM COMPANY
Statement of Owner's Equity
For the Year Ended August 31, 2003

E. Lim, Capital, August 1, 2002............................................................. $15,600


Add: Net income.................................................................................. 009,000
E. Lim, Capital, August 31, 2003........................................................... $24,600

3-27
EXERCISE 3-12 (Continued)

LIM COMPANY
Balance Sheet
August 31, 2003

Assets
Cash....................................................................................................... $10,400
Accounts receivable............................................................................. 9,400
Office supplies...................................................................................... 700
Prepaid insurance................................................................................. 2,500
Office equipment............................................................... $14,000
Less: Accumulated amortization—office equipment.... 004,800 009,200
Total assets............................................................................ $32,200

Liabilities and Owner's Equity

Liabilities
Accounts payable......................................................................... $05,800
Salaries payable............................................................................ 1,100
Unearned rent revenue................................................................. 700
Total liabilities....................................................................... 7,600

Owner's equity
E. Lim, Capital............................................................................... 024,600
Total liabilities and owner's equity....................................... $32,200

3-28
*EXERCISE 3-13

(a) Jan. 02 Insurance Expense.......................................... 2,400


Cash.......................................................... 2,400

10 Supplies Expense............................................ 1,700


Cash.......................................................... 1,700

15 Cash.................................................................. 5,100
Service Revenue...................................... 5,100

Insurance Expense Supplies Expense


1/2 2,400 1/10 1,700

Cash Service Revenue


1/15 5,100 1/2 2,400 1/15 5,100
1/10 1,700

(b) Jan. 31 Prepaid Insurance ($200 × 11 months)........... 2,200


Insurance Expense.................................. 2,200

31 Supplies............................................................ 800
Supplies Expense.................................... 800

31 Service Revenue.............................................. 3,600


Unearned Service Revenue..................... 3,600

3-29
*EXERCISE 3-13 (Continued)

(b) (Continued)

Cash Service Revenue


1/15 5,100 1/2 2,400 1/31 3,600 1/15 5,100
1/10 1,700
Bal. 1,000 Bal. 1,500

Insurance Expense Supplies Expense


1/2 2,400 1/31 2,200 1/10 1,700 1/31 800
Bal. 200 Bal. 900

Unearned Service
Prepaid Insurance Supplies Revenue
1/31 2,200 1/31 800 1/31 3,600

(c) Cash................................................................................................ $1,000


Prepaid insurance.......................................................................... 2,200
Supplies.......................................................................................... 800
Unearned service revenue............................................................ 3,600
Service revenue............................................................................. 1,500
Insurance expense......................................................................... 200
Supplies expense........................................................................... 900

3-30
SOLUTIONS TO PROBLEMS

PROBLEM 3-1A

3 (a) Record interest on note payable.


4 (b) Record interest on note receivable.
5 (c) Allocate cost of capital asset over its useful life.
4 (d) Record revenue that has been earned but not billed or
collected.
2 (e) Record revenue that has been earned that was previously
received in advance.
(f) Record hiring of employees.
3 (g) Record salaries owed.
1 (h) Record supplies used.

3-31
PROBLEM 3-2A

1. Jan. 1 Office Supplies............................................... 4,500


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

Dec. 31 Supplies Expense ($4,500 – $900)................. 3,600


Office Supplies....................................... 3,600

2. Sept. 1 Prepaid Insurance.......................................... 3,600


Cash........................................................ 3,600

Dec. 31 Insurance Expense ($3,600 ÷ 12 x 4)............. 1,200


Prepaid Insurance.................................. 1,200

3. Nov. 15 Cash................................................................ 1,200


Unearned Service Revenue................... 1,200

Dec. 31 Unearned Service Revenue .......................... 1,200


Service Revenue..................................... 1,200

4. Dec. 15 Cash................................................................ 460


Unearned Rent Revenue........................ 460

Dec. 31 Unearned Rent Revenue ($460 ÷ 2)............... 230


Rent Revenue.......................................... 230

3-32
PROBLEM 3-3A

Students may find this to be a fairly challenging problem, so here are a few
points that should help:

•Under the CASH BASIS, revenues are recorded when they are
collected (received in cash), even if they were earned (the sale was
made) earlier;
•Under the ACCRUAL BASIS of accounting, revenues are recorded
when they are earned (the sale is made)–even if the cash is not
collected until later, or is received prior to the revenue being
earned.
•Under the CASH BASIS, expenses are recorded when the cash is
paid out; and
•Under the ACCRUAL BASIS of accounting, expenses are recorded
when the cost has “expired” or been “used up”, which is not always
in the same time period as when the cash is paid out.

For example,

•Under the CASH BASIS, Supplies are recorded as expenses as


soon as they are purchased and paid for;

• Under the ACCRUAL BASIS of accounting, Supplies are not


recorded as expenses until they have been used up. While the
supplies are still on hand, they are recorded as assets because they
have future benefits;

•Under the CASH BASIS, amounts such as Unpaid Wages Owing at


the end of 2002 would not be considered expenses until they are
actually paid out–in 2003; and

•Under the ACCRUAL BASIS of accounting, Unpaid Wages Owing


at the end of 2002 would be considered expenses in 2002, because
the cost was incurred or “used up” during 2002–even though the
cash will not be paid out until 2003.

3-33
PROBLEM 3-3A (Continued)

$35,190 Cash basis income

+3,400 Accounts Receivable arise from sales that have been


made, thus revenue must be recognized.

-2,500 Accounts Receivable collected in 2003 from sales that


were made (and revenue that was earned) in 2002.

+1,300 Supplies are not recorded as expenses until used up).

-1,160 Supplies from 2002 that were used up (and an expense


incurred) in 2003.

-1,200 Which is an expense because the cost was incurred


during 2003.

+2,400 For 2002 wages expense that were paid in 2003.

-1,440 Which is an expense because the cost was incurred


during 2003.

+1,600 For 2002 expenses that were paid in cash in 2003.

$37,590 Accrual basis income

3-34
PROBLEM 3-4A

(a)

1. Cash.......................................................................... 9,000
Fees Receivable................................................ 9,000

2. Unearned Fees Revenue............................................. 22,000


Fees Revenue.................................................... 22,000

3. Cash.............................................................................. 30,000
Unearned Fees Revenue.................................. 30,000

Unearned Fees Revenue ($30,000 – $17,000)............ 13,000


Fees Revenue.................................................... 13,000

4. Fees Receivable........................................................... 118,000


Fees Revenue ($153,000 – $22,000 – $13,000)118,000

5. Cash.............................................................................. 106,000
Fees Receivable ($118,000 – $12,000)............. 106,000

(b) Cash received with respect to fees = $9,000 + $106,000 + $30,000 =


$145,000

T accounts (not required)


Unearned Fees Revenue
Fees Receivable 22,000
9,000 (2) 22,000 (3) 30,000
(4) 118,000 (1) 9,000 (3) 13,000
(5) 106,000 17,000
12,000
Cash
Fees Revenue (1) 9
(2) 22,000 ,000
(3) 13,000 (3) 30,000
(4) 118,000 (5) 106,000
153,000 145,000

3-35
PROBLEM 3-5A

1. (a) July 1 Office Supplies............................................ 1,560


Cash........................................................ 1,560

(b) Dec. 31 Supplies Expense ($1,560 + $640 – $740). . 1,460


Office Supplies....................................... 1,460

2. (a) Jan. 1 Cash.............................................................. 10,000


Note Payable........................................... 10,000

(b) Dec. 31 Interest Expense.......................................... 600


Interest Payable ($10,000 X 6%)............ 600

3. (b) Dec. 31 Telephone Expense..................................... 400


Accounts Payable................................... 400

4. (a) Jan. 1 Truck............................................................. 18,000


Cash........................................................ 18,000

(b) Dec. 31 Amortization Expense................................. 3,600


Accumulated Amortization–Truck......... 3,600

5. (a) Dec. 26 Wages Expense........................................... 3,000


Cash........................................................ 3,000

(b) Dec. 31 Wages Expense........................................... 1,800


Wages Payable ($3,000 ÷ 5 x 3)............. 1,800

Note to Instructors: The January 3, 2003 journal entry follows for


information:

Jan. 3 Wages Expense........................................... 1,200


Wages Payable............................................ 1,800
Cash........................................................ 3,000

3-36
PROBLEM 3-6A

1. Dec. 31 Advertising Expense......................................... 5,200


Prepaid Advertising................................... 5,200

A650 – $6,000 / 12 = $500 per month


for 8 months = $4,000
B974 – $7,200 / 24 = $300 per month
for 4 months = 0 1,200
$5,200

2. Dec. 31 Unearned Rent Revenue................................... 108,000


Rent Revenue............................................. 108,000

5 × $4,000 × 2 = $ 40,000
4 × $8,500 × 2 = 68,000
Total rent earned $108,000

Note that the $369,000 balance in Unearned Rent Revenue includes the
security deposits.

3. Dec. 31 Interest Expense................................................ 3,733


Interest Payable.......................................... 3,733

$80,000 × 8% × 7/12 mos. = $3,733

4. Dec. 31 Salaries Expense............................................... 2,000


Salaries Payable......................................... 2,000

5 x $700 x 2/5 days = $1,400


3 x $500 x 2/5 days = 600
Total $2,000

3-37
PROBLEM 3-7A

EXOTIC DESIGNS
Income Statement
For the Year Ended December 31, 2003

Revenues
Design revenue ($61,500 + (6) $3,800)............ $65,300
Expenses
Wage expense ($18,400 + (5) $400)................. $18,800
Supplies expense ($12,200 – (2) $1,800).........    10,400
Rent expense ($9,600 – (3) $600).....................    9,000
Automobile expense [(7) 12,000 X $0.30)]......  3,600

Advertising expense........................................    3,600


Amortization expense ($18,400 ÷ (1) 10)........    1,840
Telephone expense..........................................    980
Insurance expense ($1,800 ÷ (4) 2)..................    900
Total expenses..........................................  49,120
Net income............................................................... $16,180

EXOTIC DESIGNS
Balance Sheet
December 31, 2003

Assets
Cash.......................................................................... $ 2,520
Prepaid insurance ($1,800 ÷ 2 (4))...........................    900
Rent deposit.............................................................. 600
Accounts receivable (6)........................................... 3,800
Supplies (2)...............................................................    1,800
Equipment................................................................. $18,400
Less: Accumulated amortization—equipment......   1,840   16,560
Total assets....................................................... $26,180

Liabilities and Owner’s Equity


Liabilities
Wages payable (5)........................................... $   400

Accounts payable ((7) $12,000 X $0.30).......     3,600


Total liabilities.......................................... 4,000
Owner’s equity
3-38
Smith, Capital ($30,000 - $16,120 - $24,000). .    22,180
Total liabilities and owner’s equity......... $26,180

3-39
PROBLEM 3-8A

Balance Sheet Income Statement


Adj. Owner’s Net
Entry Assets = Liabilities + Equity Revenues - Expenses = Income
1. $500 O NA $500 O NA $500 U $500 O
2. $200 O NA $200 O NA $200 U $200 O
3. NA $750 O $750 U $750 U NA $750 U
4. NA $500 U $500 O NA $500 U $500 O
5. $100 U NA $100 U $100 U NA $100 U
6. $1,200 O NA $1,200 O NA $1,200 U $1,200 O

3-40
PROBLEM 3-9A

(a) 1. June 30 Insurance Expense ($7,200 × 1/12)........... 600


Prepaid Insurance.............................. 600

2. 30 Amortization Expense—Office
Equipment............................................... 50
Accumulated Amortization—
Office Equipment............................. 50

30 Amortization Expense—Buses................. 2,300


Accum. Amortization—Buses........... 2,300

3. 30 Interest Expense........................................ 300


Interest Payable.................................. 300

4. 30 Unearned Fees Revenue............................ 6,000


Fees Earned ($1,500 × 4).................... 6,000

5. 30 Salaries Expense........................................ 1,200


Salaries Payable ($400 × 3)................ 1,200

6. 30 Accounts Receivable................................. 1,200


Fees Earned........................................ 1,200

7. 30 Advertising Expense.................................. 500


Accounts Payable............................... 500

3-41
PROBLEM 3-9A (Continued)

(b)
Cash
Date Explanation Ref. Debit Credit Balance
June 30 Balance  3,000

Accounts Receivable
Date Explanation Ref. Debit Credit Balance
June 30 J2 1,200 1,200

Prepaid Insurance
Date Explanation Ref. Debit Credit Balance
June 30 Balance  007,200
30 J2 0,600 006,600

Office Equipment
Date Explanation Ref. Debit Credit Balance
June 30 Balance  001,800

Accumulated Amortization—Office Equipment


Date Explanation Ref. Debit Credit Balance
June 30 J2 0,050 000,050

Buses
Date Explanation Ref. Debit Credit Balance
June 30 Balance  140,000

3-42
PROBLEM 3-9A (Continued)

(b) (Continued)

Accumulated Amortization—Buses
Date Explanation Ref. Debit Credit Balance
June 30 J2 2,300 002,300

Notes Payable
Date Explanation Ref. Debit Credit Balance

June 30 Balance 62,000

Accounts Payable
Date Explanation Ref. Debit Credit Balance
June 30 J2 0, 500 0,5500

Interest Payable
Date Explanation Ref. Debit Credit Balance
June 30 J2 0,300 000,300

Salaries Payable
Date Explanation Ref. Debit Credit Balance
June 30 J2 1,200 001,200

Unearned Fees
Date Explanation Ref. Debit Credit Balance
June 30 Balance  15,000
30 J2 6,000 9,000

3-43
PROBLEM 3-9A (Continued)

(b) (Continued)

Eldon Kaplan, Capital


Date Explanation Ref. Debit Credit Balance
June 30 Balance  70,000

Fees Earned
Date Explanation Ref. Debit Credit Balance
June 30 Balance  15,900
30 J2 6,000 21,900
30 J2 1,200 23,100

Salaries Expense
Date Explanation Ref. Debit Credit Balance
June 30 Balance  09,000
30 J2 1,200 10,200

Advertising Expense
Date Explanation Ref. Debit Credit Balance
June 30 Balance  00,800
30 J2 500 1,300

Gas and Oil Expense


Date Explanation Ref. Debit Credit Balance
June 30 Balance  1,100

3-44
PROBLEM 3-9A (Continued)

(b) (Continued)

Insurance Expense
Date Explanation Ref. Debit Credit Balance
June 30 J2 0,600 0,600

Amortization Expense—Office Equipment


Date Explanation Ref. Debit Credit Balance
June 30 J2 0,050 0,050

Amortization Expense—Buses
Date Explanation Ref. Debit Credit Balance
June 30 J2 2,300 2,300

Interest Expense
Date Explanation Ref. Debit Credit Balance
June 30 J2 0,300 0,300

3-45
PROBLEM 3-9A (Continued)

(c) ATLANTIC TOURS


Adjusted Trial Balance
June 30, 2003

Debit Credit

Cash.......................................................................... $ 3,000
Accounts Receivable............................................... 1,200
Prepaid Insurance.................................................... 6,600
Office Equipment..................................................... 1,800
Accumulated Amortization—Office
Equipment.............................................................. $ 50
Buses........................................................................ 140,000
Accumulated Amortization—Buses........................ 2,300
Notes Payable........................................................... 62,000
Accounts Payable.................................................... 500
Interest Payable........................................................ 300
Salaries Payable....................................................... 1,200
Unearned Fees......................................................... 9,000
Eldon Kaplan, Capital.............................................. 70,000
Fees Earned.............................................................. 23,100
Salaries Expense...................................................... 10,200
Advertising Expense................................................ 1,300
Gas and Oil Expense................................................ 1,100
Insurance Expense................................................... 600
Amortization Expense—Office Equipment............. 50
Amortization Expense—Buses............................... 2,300
Interest Expense...................................................... 300 0000000
$ 168,450 $168,450

3-46
PROBLEM 3-10A

(a) 1. Aug. 31 Insurance Expense ($450 × 3)................... 1,350


Prepaid Insurance.............................. 1,350

2. 31 Supplies Expense ($3,300 – $1,000)......... 2,300


Supplies.............................................. 2,300

3. 31 Amortization Expense—Cottages
($6,250 × 1/4) ......................................... 1,562
Accum. Amort.—Cottages................. 1,562

31 Amortization Expense—Furniture
($5,200 × 1/4) ......................................... 1,300
Accum. Amort.—Furniture................. 1,300

4. 31 Unearned Rent Revenue............................ 5,000


Rent Revenue..................................... 5,000

5. 31 Salaries Expense........................................ 400


Salaries Payable................................. 400

6. 31 Accounts Receivable................................. 800


Rent Revenue..................................... 800

7. 31 Interest Expense........................................ 533


Interest Payable [($80,000 × 8%) × 1/12] 533

3-47
PROBLEM 3-10A (Continued)

(b)

Cash
Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  19,600

Accounts Receivable
Date Explanation Ref. Debit Credit Balance
Aug. 31 J1 800 00,800

Prepaid Insurance
Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  005,400
31 J1 0,1,350 004,050

Supplies
Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  003,300
31 J1 2,300 001,000

Land
Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  025,000

Cottages
Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  125,000

3-48
PROBLEM 3-10A (Continued)

(b) (Continued)

Accumulated Amortization—Cottages
Date Explanation Ref. Debit Credit Balance
Aug. 31 J1 1,562 001,562

Furniture
Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  026,000

Accumulated Amortization—Furniture
Date Explanation Ref. Debit Credit Balance
Aug. 31 J1 1,300 000,1,300

Accounts Payable
Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  006,500

Unearned Rent Revenue


Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  006,800
31 J1 5,000 001,800

Salaries Payable
Date Explanation Ref. Debit Credit Balance
Aug. 31 J1 400 000,400

Interest Payable
Date Explanation Ref. Debit Credit Balance
Aug. 31 J1 0,533 000,533

3-49
PROBLEM 3-10A (Continued)

(b) (Continued)

Mortgage Payable
Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  080,000

Keath Yhap, Capital


Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  100,000

Keath Yhap, Drawings


Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  05,000

Rent Revenue
Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  80,000
31 J1 5,000 85,000
31 J1 0,800 85,800

Salaries Expense
Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  51,000
31 J1 400 51,400

Utilities Expense
Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  09,400

3-50
PROBLEM 3-10A (Continued)

(b) (Continued)

Repair Expense
Date Explanation Ref. Debit Credit Balance
Aug. 31 Balance  03,600

Insurance Expense
Date Explanation Ref. Debit Credit Balance
Aug. 31 J1 1,350 00,11,350

Supplies Expense
Date Explanation Ref. Debit Credit Balance
Aug. 31 J1 2,300 2,300

Amortization Expense—Cottages
Date Explanation Ref. Debit Credit Balance
Aug. 31 J1 1,562 1,562

Amortization Expense—Furniture
Date Explanation Ref. Debit Credit Balance
Aug. 31 J1 0,11,300 0,1,300

Interest Expense
Date Explanation Ref. Debit Credit Balance
Aug. 31 J1 0,533 0,533

3-51
PROBLEM 3-10A (Continued)

(c)
HIGHLAND COVE RESORT
Adjusted Trial Balance
August 31, 2003

Debit Credit
Cash.......................................................................... $ 19,600
Accounts Receivable............................................... 800
Prepaid Insurance.................................................... 4,050
Supplies.................................................................... 1,000
Land.......................................................................... 25,000
Cottages.................................................................... 125,000
Accumulated Amortization—Cottages................... $ 1,562
Furniture................................................................... 26,000
Accumulated Amortization—Furniture................... 1,300
Accounts Payable.................................................... 6,500
Unearned Rent Revenue.......................................... 1,800
Salaries Payable....................................................... 400
Interest Payable........................................................ 533
Mortgage Payable..................................................... 80,000
Keath Yhap, Capital.................................................. 100,000
Keath Yhap, Drawings............................................. 5,000
Rent Revenue........................................................... 85,800
Salaries Expense...................................................... 51,400
Utilities Expense...................................................... 9,400
Repair Expense........................................................ 3,600
Insurance Expense................................................... 1,350
Supplies Expense..................................................... 2,300
Amortization Expense—Cottages........................... 1,562
Amortization Expense—Furniture.......................... 1,300
Interest Expense...................................................... 000 0533 0000 000
$277,895 $277,895

3-52
PROBLEM 3-10A (Continued)

(d) HIGHLAND COVE RESORT


Income Statement
For the Three Months Ended August 31, 2003

Revenues
Rent revenue...................................................... $ 85,800
Expenses
Salaries expense................................................ $ 51,400
Utilities expense................................................ 9,400
Repair expense.................................................. 3,600
Supplies expense.............................................. 2,300
Amortization expense—cottages..................... 1,562
Insurance expense............................................ 1,350
Interest expense................................................ 533
Amortization expense—furniture..................... 1,300
Total expenses........................................... 71,445
Net income................................................................ $ 14,355

HIGHLAND COVE RESORT


Statement of Owner's Equity
For the Three Months Ended August 31, 2003

Keath Yhap, Capital, June 1........................................................ $ 0


Add: Investment by owner........................................................ 100,000
Net income........................................................................ 0 14,355
114,355
Less: Drawings........................................................................... 0 05,000
Keath Yhap, Capital, August 31.................................................. $109,355

3-53
PROBLEM 3-10A (Continued)

(d) (Continued)

HIGHLAND COVE RESORT


Balance Sheet
August 31, 2003

Assets

Cash.......................................................................... $ 19,600
Accounts receivable................................................ 800
Prepaid insurance.................................................... 4,050
Supplies.................................................................... 1,000
Land.......................................................................... 25,000
Cottages.................................................................... $125,000
Less: Accumulated amortization—cottages......... 1,562 123,438
Furniture................................................................... 26,000
Less: Accumulated amortization—furniture......... 1,300 24,700
Total assets............................................... $ 198,588

Liabilities and Owner's Equity

Liabilities
Accounts payable............................................. $ 6,500
Salaries payable............................................... 400
Interest payable................................................ 533
Unearned rent revenue..................................... 1,800
Mortgage payable............................................. 80,000
Total liabilities........................................... 89,233

Owner's equity
Keath Yhap, Capital.......................................... 109,355
Total liabilities and owner's equity.......... $198,588

3-54
PROBLEM 3-11A

(a) Dec. 31 Accounts Receivable........................................ 1,500


Advertising Revenue................................ 1,500

31 Art Supplies Expense....................................... 3,400


Art Supplies............................................... 3,400

31 Insurance Expense........................................... 850


Prepaid Insurance..................................... 850

31 Amortization Expense...................................... 7,000


Accumulated Amortization....................... 7,000

31 Interest Expense............................................... 150


Interest Payable........................................ 150

31 Unearned Advertising Revenue....................... 1,400


Advertising Revenue................................ 1,400

31 Salaries Expense.............................................. 1,300


Salaries Payable........................................ 1,300

3-55
PROBLEM 3-11A (Continued)

(b) YOUNT ADVERTISING AGENCY


Income Statement
For the Year Ended December 31, 2002

Revenues
Advertising revenue.............................................. $61,500
Expenses
Salaries expense................................................... $11,300
Amortization expense........................................... 7,000
Rent expense......................................................... 4,000
Art supplies expense............................................ 3,400
Insurance expense................................................ 850
Interest expense.................................................... 000500
Total expenses............................................... 27,050
Net income................................................................... $34,450

YOUNT ADVERTISING AGENCY


Statement of Owner's Equity
For the Year Ended December 31, 2002

T. Yount, Capital, January 1.......................................................... $25,500


Add: Net income.......................................................................... 34,450
59,950
Less: Drawings............................................................................. 12,000
T. Yount, Capital, December 31.................................................... $47,950

3-56
PROBLEM 3-11A (Continued)

(b) (Continued)

YOUNT ADVERTISING AGENCY


Balance Sheet
December 31, 2002

Assets

Cash................................................................................ $11,000
Accounts receivable....................................................... 21,500
Art supplies..................................................................... 5,000
Prepaid insurance.......................................................... 2,500
Printing equipment......................................................... $60,000
Less: Accumulated amortization
—Printing equipment 35,000 25,000
Total assets........................................................ $65,000

Liabilities and Owner's Equity

Liabilities
Notes payable......................................................... $ 5,000
Accounts payable................................................... 5,000
Interest payable...................................................... 150
Unearned advertising revenue.............................. 5,600
Salaries payable..................................................... 1,300
Total liabilities................................................. 17,050

Owner's equity
T. Yount, Capital....................................................... 47,950
Total liabilities and owner's equity.............. $65,000

3-57
PROBLEM 3-11A (Continued)

(c) $5,000 x ? x 10/12 mos. = $500

$500 interest for 10 months is equivalent to $600 interest for 12


months.

$600 / $5,000 = 12% interest per year

(d) Salaries Expense, $11,300 less Salaries Payable on 12/31/02, $1,300 =


$10,000 payment made for 2002 salaries. Total Payments, $13,500 –
$10,000 = $3,500 Salaries Payable on 12/31/01

Salaries Payable
12/31/01 3,500
Payments 13,500 Expense 11,300
12/31/02 1,300

3-58
*PROBLEM 3-12A

1. Jan. 1 Supplies Expense........................................... 4,500


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

Dec. 31 Office Supplies .............................................. 900


Office Supplies Expense........................ 900

2. Sept. 1 Insurance Expense......................................... 3,600


Cash........................................................ 3,600

Dec. 31 Prepaid Insurance ($3,600 ÷ 12 x 8)............. 2,400


Insurance Expense................................. 2,400

3. Nov. 15 Cash................................................................ 1,200


Service Revenue..................................... 1,200

Dec. 31 No entry required

4. Dec. 15 Cash................................................................ 460


Rental Revenue....................................... 460

Dec. 31 Rental Revenue ($460 ÷ 2)............................. 230


Unearned Rental Revenue..................... 230

3-59
*PROBLEM 3-13A

(a) 1. June 30 Supplies...................................................... 1,500


Supplies Expense............................... 1,500

2. 30 Interest Expense ($17,000 × 8% × 5/12). . . 567


Interest Payable................................. 567

3. 30 Prepaid Insurance ($1,800 x 8/12)............. 1,200


Insurance Expense............................ 1,200

4. 30 Consulting Revenue................................... 1,000


Unearned Consulting Revenue......... 1,000

5. 30 Accounts Receivable................................. 2,000


Graphic Revenue................................ 2,000

6. 30 Amortization Expense ($9,000 ÷ 2)........... 4,500


Accumulated Amortization—
Equipment........................................ 4,500

3-60
*PROBLEM 3-13A (Continued)

(b) GLOBAL GRAPHICS COMPANY


Adjusted Trial Balance
June 30, 2003

Debit Credit
Cash.......................................................................... $ 9,500
Accounts Receivable ($14,000 + $2,000)................ 16,000
Supplies.................................................................... 1,500
Prepaid Insurance.................................................... 1,200
Equipment................................................................. 45,000
Accumulated Amortization...................................... $ 4,500
Notes Payable........................................................... 17,000
Accounts Payable.................................................... 9,000
Interest Payable........................................................ 567
Unearned Consulting Revenue............................... 1,000
Jill Batke, Capital..................................................... 25,000
Graphic Revenue ($52,100 + $2,000)....................... 54,100
Consulting Revenue ($5,000 – $1,000).................... 4,000
Salaries Expense...................................................... 30,000
Supplies Expense ($2,700 – $1,500)........................ 1,200
Advertising Expense................................................ 1,900
Rent Expense........................................................... 1,500
Utilities Expense...................................................... 1,700
Amortization Expense.............................................. 4,500
Insurance Expense ($1,800 – $1,200)...................... 600
Interest Expense...................................................... 567
$ 115,167 $
115,167

3-61
*PROBLEM 3-13A (Continued)

(c) GLOBAL GRAPHICS COMPANY


Income Statement
For the Six Months Ended June 30, 2003

Revenues
Graphic revenue................................................... $54,100
Consulting revenue.............................................. 4,000
Total revenues............................................... 58,100
Expenses
Salaries expense.................................................. $30,000
Advertising expense............................................ 1,900
Utilities expense................................................... 1,700
Rent expense........................................................ 1,500
Supplies expense................................................. 1,200
Amortization expense.......................................... 4,500
Interest expense................................................... 567
Insurance expense............................................... 600
Total expenses.............................................. 41,967
Net income................................................................... $16,133

GLOBAL GRAPHICS COMPANY


Statement of Owner's Equity
For the Six Months Ended June 30, 2003

Jill Batke, Capital, January 1........................................................ $ 0


Add: Investment by owner.......................................................... 25,000
Net income.......................................................................... 16,133
Jill Batke, Capital, June 30............................................................ $41,133

3-62
*PROBLEM 3-13A (Continued)

(c) (Continued)

GLOBAL GRAPHICS COMPANY


Balance Sheet
June 30, 2003

Assets
Cash........................................................................... $ 9,500
Accounts receivable................................................. 16,000
Supplies..................................................................... 1,500
Prepaid insurance..................................................... 1,200
Equipment................................................................. $45,000
Less: Accumulated amortization............................ 4,500 40,500
Total assets...................................................... $68,700

Liabilities and Owner's Equity

Liabilities
Notes payable.............................................................. $17,000
Accounts payable....................................................... 9,000
Interest payable........................................................... 567
Unearned consulting revenue.................................... 1,000
Total liabilities..................................................... 27,567

Owner's equity
Jill Batke, Capital........................................................ 41,133
Total liabilities and owner's equity.................... $68,700

3-63
PROBLEM 3-1B

3 (a) Record interest on overdue account payable.


4 (b) Record interest earned on overdue account receivable.
5 (c) Allocate cost of equipment over its useful life.
4 (d) Record revenue owed by customers for services provided.
2 (e) Record fees that have been earned that were previously
received in advance.
(f) Record signing of lease for rental space.
3 (g) Record property taxes due.
1 (h) Record expiration of rent at the end of the month.

3-64
PROBLEM 3-2B

1. Jan. 1 Office Supplies............................................... 2,800


Cash........................................................ 2,800

Dec. 31 Supplies Expense ($2,800 – $500)................. 2,300


Office Supplies....................................... 2,300

2. Aug. 1 Prepaid Insurance.......................................... 3,600


Cash........................................................ 3,600

Dec. 31 Insurance Expense ($3,600 ÷ 12 x 5)............. 1,500


Prepaid Insurance.................................. 1,500

3. Nov. 15 Cash................................................................ 1,200


Unearned Service Revenue................... 1,200

Dec. 31 Unearned Service Revenue ($400 x 2).......... 800


Service Revenue..................................... 800

4. Dec. 15 Prepaid Rent................................................... 4,500


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

Dec. 31 No entry required

3-65
PROBLEM 3-3B

$43,900 Cash basis earnings.


Accounts receivable arise from sales that have been made,
+3,600 thus revenue must be recognized for balance outstanding at
the end of the current year.
Accounts receivable collected in current year, for sales
- 2,700
made in previous year must be deducted from earnings.
Prepaid expenses at year end should be set up as an asset
+1,550
rather than expensed, this increases earnings.
Prepaid expenses at the end of the previous year should be
- 1,310
expensed this year, this decreases earnings.
Accounts payable owing at the end of the current year
- 1,500
should be accrued, thus reducing earnings.
Accounts payable owed at the end of the previous year
+2,200 should not be deducted from the current year’s earnings,
thus increasing earnings.
Unearned revenue at the end of the current year should be
- 1,360
accrued, thus reducing earnings.
Unearned revenue at the end of the previous year should not
+1,500 be deducted from the current year’s income, thus increasing
earnings.
Amortization expense is equal to the increase in
- 2,000 accumulated amortization from 2001 to 2002 ($22,000 -
$20,000 = $2,000)
$43,880 Accrual basis income.

3-66
PROBLEM 3-4B
(a)

1. Cash ................................................................ 11,000


Dues Receivable.................................... 11,000

2. Unearned Ticket Revenue.............................. 25,000


Ticket Revenue...................................... 25,000

3. Cash ................................................................ 35,000


Unearned Ticket Revenue..................... 35,000

Unearned Ticket Revenue ($35,000- $20,000) 15,000


Ticket Revenue...................................... 15,000

4. Dues Receivable............................................. 148,000


Dues Revenue ....................................... 148,000

5. Cash ................................................................ 133,000


Dues Receivable ($148,000 – $15,000). 133,000

Dues Receivable 20,000


2001 Bal. 11,000
4. 148,000 1. 11,000 Dues Revenue
5. 133,000 4. 148,000
2002 Bal. 15,000
2002 Bal.
Unearned Ticket Revenue 148,000
2001 Bal. 25,000
2. 25,000 3. 35,000 Ticket Revenue
3. 15,000 2. 25,000
2002 Bal. 3. 15,000
2002 Bal. 50,000

(b) Cash received with respect to dues and tickets:

1. Collection of 2001 dues $ 11,000


3. Sale of tickets 35,000
5. Collection of 2002 dues 133,000
$179,000

3-67
PROBLEM 3-5B

1. (a) Jan. 31 Supplies........................................................ ,500


Cash....................................................... 1,500

(b) Dec. 31 Supplies Expense ($300 + $1,500 – $500). . 1,300


Office Supplies...................................... 1,300

2. (a) June 1 Cash.............................................................. 4,000


Note Payable......................................... 4,000

(b) Dec. 31 Interest Expense.......................................... 187


Interest Payable ($4,000 X 8% x 7/12).. 187

3. (b) Dec. 31 Utilities Expense.......................................... 1,400


Accounts Payable................................. 1,400

4. (a) Jan. 1 Truck............................................................. 38,000


Cash....................................................... 38,000

(b) Dec. 31 Amortization Expense................................. 10,000


Accumulated Amortization – Truck..... 10,000

5. Dec. 31 Wages Expense ($3,000 x 2/12* days)........ 500


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

*See errata note.

Note to Instructors: The January 11, 2003 journal entry follows for
information:

Jan. 11 Wages Expense ($3,000 x 10/12 days)....... 2,500


Wages Payable ($3,000 x 1/12 days).......... 500
Cash....................................................... 3,000

Errata Note: Advise students to see errata sheet


if they have the first printing of the text. In
transaction #5, December 31 falls on a Tuesday,
not Thursday, in 2002. December 28 falls on a
Saturday. No adjusting entry has been recorded ..................
for the period from December 30 through
December 31. Assume a six-day (Monday
through Saturday) work week.
PROBLEM 3-6B

(a) Prepaid Insurance – before adjustments

A2958 – $ 5,800
B4564 – 9,600
$15,400

(b)
1. Dec. 31 Insurance Expense........................... 5,300
Prepaid Insurance.................... 5,300

Prepaid Insurance—balance after adjustment


($15,400 - $5,300 = $10,100)
A2958 – $5,800 ÷ 24 = $242 per month
for 12 months = $ 2,900
B4564 – $9,600 ÷ 24 = $400 per month
for 18 months = 0 7,200
$10,100
Insurance Expense
A2958 – $5,800 ÷ 24 = $242 per month
for 12 months = $2,900
B4564 – $9,600 ÷ 24 = $400 per month
for 6 months = 2,400
$5,300
PROBLEM 3-6B (Continued)

(b) (Continued)

2. Dec. 31 Unearned Subscription Revenue..... 7,000


Rent Subscription Revenue.... 7,000

Subscription Revenue Earned


October 200 x $50 x 3/12 = $2,500
November 300 x $50 x 2/12 = 2,500
December 480 x $50 x 1/12 = 2,000
$7,000

Unearned Subscription Revenue ($49,000 - $7,000 = $42,000)


October 200 x $50 x 9/12 = $ 7,500
November 300 x $50 x 10/12 = 12,500
December 480 x $50 x 11/12 = 22,000
$42,000

3. Dec. 31 Salaries Expense..........................3,060


Salaries Payable.................. 3,060

5 x $600 x 3/5 days = $1,800


3 x $700 x 3/5 days = 1,260
Total $3,060
PROBLEM 3-7B
(a)
THE RADICAL EDGE
Income Statement
For the Six Months Ended April 30, 2003

Revenues
Repair services ($32,150 + $650)..................... $32,800
Expenses
Wages expense ($2,600 + $120)...................... $2,720
Rent expense ($1,225 - $175)...........................    1,050
Advertising expense........................................    375
Amortization expense ($9,200 ÷ (i) 8 x 6/12 ).    575
Utilities expense...............................................    970
Total expenses..........................................   5,690
Net income............................................................... $27,110

(b)
THE RADICAL EDGE
Balance Sheet
April 30, 2003

Assets

Cash......................................................................... $37,780
Rent deposit............................................................ 175
Accounts receivable .............................................. 650
Equipment............................................................... $9,200
Less: Accumulated amortization—equip.............   575 8,625
Total assets...................................................... $47,230

Liabilities and Owner’s Equity

Liabilities
Wages payable............................................... $   120

Owner’s equity
Charron, Capital ($20,000 + $27,110)............   47,110
Total liabilities and owner’s equity........ $47,230
PROBLEM 3-8B

Balance Sheet Income Statement


Adj.
Owner’s Net
Entry Assets = Liabilities + Revenues - Expenses =
Equity Income
1. $300 O NA $300 O NA $300 U $300 O
2. $1,000 O NA $1,000 O NA $1,000 U $1,000 O
3. NA $750 O $750 U $750 U NA $750 U
4. $2,000 U NA $2,000 U $2,000 U NA $2,000 U
5. NA $250 U $250 O NA $250 U $250 O
6. $1,000 O NA $1,000 O NA $1,000 U $1,000 O
PROBLEM 3-9B

(a) 1. Dec. 31 Accounts Receivable................................. 2,500


Service Revenue................................. 2,500

2. 31 Insurance Expense ($3,600 × 1/2)............. 1,800


Prepaid Insurance.............................. 1,800

3. 31 Amortization Expense—Automobiles...... 15,000


Accumulated Amortization—
Automobiles..................................... 15,000

4. 31 Interest Expense........................................ 5,400


Interest Payable.................................. 5,400

5. 31 Unearned Service Revenue....................... 1,000


Service Revenue ................................ 1,000

6. 31 Salaries Expense........................................ 1,500


Salaries Payable ($500 × 3)................ 1,500

7. 31 Repair Expense.......................................... 650


Accounts Payable............................... 650
PROBLEM 3-9B (Continued)

(b)
Cash
Date Explanation Ref. Debit Credit Balance
Dec. 31 Balance  12,400

Accounts Receivable
Date Explanation Ref. Debit Credit Balance
Dec. 31 Balance  3,200
31 J2 2,500 5,700

Prepaid Insurance
Date Explanation Ref. Debit Credit Balance
Dec. 31 Balance  003,600
31 J2 0,1,800 001,800

Automobiles
Date Explanation Ref. Debit Credit Balance
Dec. 31 Balance  0058,000

Accumulated Amortization—Automobiles
Date Explanation Ref. Debit Credit Balance
Dec. 31 J2 0,015,000 0015,000

Notes Payable
Date Explanation Ref. Debit Credit Balance
Dec. 31 Balance  45,000
PROBLEM 3-9B (Continued)

(b) (Continued)

Accounts Payable
Date Explanation Ref. Debit Credit Balance
Dec. 31 J2 0, 650 0,5650

Interest Payable
Date Explanation Ref. Debit Credit Balance
Dec. 31 J2 0,5,400 000,5,400

Salaries Payable
Date Explanation Ref. Debit Credit Balance
Dec. 31 J2 1,500 001,500

Unearned Revenue
Date Explanation Ref. Debit Credit Balance
Dec. 31 Balance  2,500
31 J2 1,000 1,500

C. Orosco, Capital
Date Explanation Ref. Debit Credit Balance
Dec. 31 Balance  18,000

Service Revenue
Date Explanation Ref. Debit Credit Balance
Dec. 31 Balance  84,000
31 J2 2,500 86,500
31 J2 1,000 87,500
PROBLEM 3-9B (Continued)

(b) (Continued)

Salaries Expense
Date Explanation Ref. Debit Credit Balance
Dec. 31 Balance  057,000
31 J2 1,500 58,500

Repair Expense
Date Explanation Ref. Debit Credit Balance
Dec. 31 Balance  00,6,000
31 J2 650 6,650

Gas and Oil Expense


Date Explanation Ref. Debit Credit Balance
Dec. 31 Balance  9,300

Insurance Expense
Date Explanation Ref. Debit Credit Balance
Dec. 31 J2 0,1,800 0,11,800

Amortization Expense—Automobiles
Date Explanation Ref. Debit Credit Balance
Dec. 31 J2 0,015,000 0,15,000

Interest Expense
Date Explanation Ref. Debit Credit Balance
Dec. 31 J2 05,400 05,400
PROBLEM 3-9B (Continued)

(c) OROSCO SECURITY SERVICE


Adjusted Trial Balance
December 31, 2002

Debit Credit

Cash.......................................................................... $ 12,400
Accounts Receivable............................................... 5,700
Prepaid Insurance.................................................... 1,800
Automobiles............................................................. 58,000
................................................................................... $ 15,000
Amortization—Automobiles.................................... 45,000
Notes Payable........................................................... 5,400
Interest Payable........................................................ 650
Accounts Payable.................................................... 1,500
Salaries Payable....................................................... 1,500
Unearned Revenue................................................... 18,000
C. Orosco, Capital.................................................... 87,500
Service Revenue...................................................... 58,500
Salaries Expense...................................................... 6,650
Repair Expense........................................................ 9,300
Gas and Oil Expense................................................ 1,800
Insurance Expense................................................... 15,000
Amortization Expense—Automobiles.................... 0005,400 0000000
Interest Expense...................................................... $174,550 $174,550
PROBLEM 3-10B

(a) 1. May 31 Insurance Expense ($1,800 x 1/12)........... 150


Prepaid Insurance.............................. 150

2. 31 Supplies Expense ($1,900 – $1,000)......... 900


Supplies.............................................. 900

3. 31 Amortization Expense—Lodge
($3,500 × 1/12) ....................................... 292
Accum. Amort.—Lodge...................... 292

31 Amortization Expense—Furniture
($3,360 × 1/12)....................................... 280
Accum. Amort.—Furniture................. 280

4. 31 Interest Expense........................................ 233


Interest Payable ($35,000 × 8% × 1/12) 233

5. 31 Unearned Rent Revenue............................ 1,500


Rent Revenue..................................... 1,500

6. 31 Accounts Receivable................................. 800


Rent Revenue..................................... 800

7. 31 Salaries Expense........................................ 300


Salaries Payable................................. 300
PROBLEM 3-10B (Continued)

(b)

Cash
Date Explanation Ref. Debit Credit Balance
May 31 Balance  2,500

Accounts Receivable
Date Explanation Ref. Debit Credit Balance
May 31 J1 800 00,800

Prepaid Insurance
Date Explanation Ref. Debit Credit Balance
May 31 Balance  001,800
31 J1 0, 150 001,650

Supplies
Date Explanation Ref. Debit Credit Balance
May 31 Balance  001,900
31 J1 900 001,000

Land
Date Explanation Ref. Debit Credit Balance
May 31 Balance  015,000

Lodge
Date Explanation Ref. Debit Credit Balance
May 31 Balance  70,000
PROBLEM 3-10B (Continued)

(b) (Continued)

Accumulated Amortization—Lodge
Date Explanation Ref. Debit Credit Balance
May 31 J1 292 292

Furniture
Date Explanation Ref. Debit Credit Balance
May 31 Balance  016,800

Accumulated Amortization—Furniture
Date Explanation Ref. Debit Credit Balance
May 31 J1 280 000,280

Accounts Payable
Date Explanation Ref. Debit Credit Balance
May 31 Balance  004,700

Unearned Rent Revenue


Date Explanation Ref. Debit Credit Balance
May 31 Balance  003,600
31 J1 1,500 002,100

Salaries Payable
Date Explanation Ref. Debit Credit Balance
May 31 J1 300 000,300
PROBLEM 3-10B (Continued)

(b) (Continued)

Interest Payable
Date Explanation Ref. Debit Credit Balance
May 31 J1 0,233 0,233

Mortgage Payable
Date Explanation Ref. Debit Credit Balance
May 31 Balance  035,000

Sara Sutton, Capital


Date Explanation Ref. Debit Credit Balance
May 31 Balance  60,000

Rent Revenue
Date Explanation Ref. Debit Credit Balance
May 31 Balance  9,200
31 J1 1,500 10,700
31 J1 0,800 11,500

Salaries Expense
Date Explanation Ref. Debit Credit Balance
May 31 Balance  3,000
31 J1 300 3,300

Utilities Expense
Date Explanation Ref. Debit Credit Balance
May 31 Balance  01,000
PROBLEM 3-10B (Continued)

(b) (Continued)

Advertising Expense
Date Explanation Ref. Debit Credit Balance
May 31 Balance  0 500

Insurance Expense
Date Explanation Ref. Debit Credit Balance
May 31 J1 150 150

Supplies Expense
Date Explanation Ref. Debit Credit Balance
May 31 J1 900 900

Amortization Expense—Lodge
Date Explanation Ref. Debit Credit Balance
May 31 J1 292 292

Amortization Expense—Furniture
Date Explanation Ref. Debit Credit Balance
May 31 J1 0,280 0280

Interest Expense
Date Explanation Ref. Debit Credit Balance
May 31 J1 0,233 0233
PROBLEM 3-10B (Continued)

(c)
SUPER MOTEL
Adjusted Trial Balance
May 31, 2003

Debit Credit
Cash.......................................................................... $ 2,500
Accounts Receivable............................................... 800
Prepaid Insurance.................................................... 1,650
Supplies.................................................................... 1,000
Land.......................................................................... 15,000
Lodge........................................................................ 70,000
Accumulated Amortization—Lodge........................ $ 292
Furniture................................................................... 16,800
Accumulated Amortization—Furniture................... 280
Accounts Payable.................................................... 4,700
Unearned Rent Revenue.......................................... 2,100
Salaries Payable....................................................... 300
Interest Payable........................................................ 233
Mortgage Payable..................................................... 35,000
Sara Sutton, Capital................................................. 60,000
Rent Revenue........................................................... 11,500
Salaries Expense...................................................... 3,300
Utilities Expense...................................................... 1,000
Advertising Expense................................................ 500
Insurance Expense................................................... 150
Supplies Expense..................................................... 900
Amortization Expense—Lodge............................... 292
Amortization Expense—Furniture.......................... 280
Interest Expense...................................................... 00 00233 0000 000
$114,405 $114,405
PROBLEM 3-10B (Continued)

(d) SUPER MOTEL


Income Statement
For the Month Ended May 31, 2003

Revenues
Rent revenue.................................................... $11,500
Expenses
Salaries expense............................................. $3,300
Utilities expense.............................................. 1,000
Advertising expense....................................... 500
Supplies expense............................................ 900
Amortization expense—lodge........................ 292
Insurance expense.......................................... 150
Interest expense.............................................. 233
Amortization expense—furniture................... 280
Total expenses......................................... 6,655
Net income................................................................ $ 4,845

SUPER MOTEL
Statement of Owner's Equity
For the Month Ended May 31, 2003

Sara Sutton, Capital, May 1......................................................... $ 0


Add: Investment by owner......................................................... 60,000
Net income......................................................................... 4,845
64,845
Less: Drawings........................................................................... 0
Sara Sutton, Capital, May 31....................................................... $64,845
PROBLEM 3-10B (Continued)

(d) (Continued)

SUPER MOTEL
Balance Sheet
May 31, 2003

Assets

Cash.......................................................................... $ 2,500
Accounts receivable................................................ 800
Prepaid insurance.................................................... 1,650
Supplies.................................................................... 1,000
Land.......................................................................... 15,000
Cottages.................................................................... $70,000
Less: Accumulated amortization—cottages......... 000292 69,708
Furniture................................................................... 16,800
Less: Accumulated amortization—furniture......... 000280 0016,520
Total assets...................................................... $107,178

Liabilities and Owner's Equity

Liabilities
Accounts payable............................................. $ 4,700
Salaries payable............................................... 300
Interest payable................................................ 233
Unearned revenue............................................ 2,100
Mortgage payable............................................. 0035,000
Total liabilities........................................... 42,333

Owner's equity
Sara Sutton, Capital......................................... 0064,845
Total liabilities and owner's equity.......... $107,178
PROBLEM 3-11B

(a) Sept. 30 Accounts Receivable..................................... 600


Commission Revenue............................ 600

30 Rent Expense................................................. 600


Prepaid Rent........................................... 600

30 Supplies Expense........................................... 200


Supplies.................................................. 200

30 Amortization Expense.................................... 350


Accum. Amortization—Equipment........ 350

30 Interest Expense............................................  50


Interest Payable......................................  50

30 Unearned Rent Revenue................................ 300


Rent Revenue.......................................... 300

30 Salaries Expense............................................ 400


Salaries Payable..................................... 400
PROBLEM 3-11B (Continued)

(b) IRABU CO.


Income Statement
For the Quarter Ended September 30, 2003

Revenues
Commission revenue....................................... $14,600
Rent revenue....................................................     700
Total revenues..........................................  15,300
Expenses
Salaries expense.............................................. $9,400
Rent expense....................................................  1,500
Utilities expense...............................................    510
Amortization expense......................................    350
Supplies expense.............................................    200
Interest expense...............................................     50
Total expenses..........................................  12,010
Net income........................................................ $ 3,290

IRABU CO.
Statement of Owner’s Equity
For the Quarter Ended September 30, 2003

Yosuke Irabu, Capital, July 1....................................................... $    0


Add: Investment........................................................................ 14,000
Net income........................................................................   3,290
 17,290
Less: Drawings...........................................................................     600
Yosuke Irabu, Capital, September 30......................................... $16,690
PROBLEM 3-11B (Continued)

(b) (Continued)

IRABU CO.
Balance Sheet
September 30, 2003

Assets

Cash........................................................................ $ 6,700
Accounts receivable...............................................   1,000
Prepaid rent............................................................     900
Supplies..................................................................   1,000
Equipment............................................................... $15,000
Less: Accum. amortization—equipment.............     350  14,650
Total assets..................................................... $24,250

Liabilities and Owner’s Equity

Liabilities
Notes payable................................................. $ 5,000
Accounts payable...........................................   1,510
Salaries payable..............................................     400
Interest payable..............................................      50
Unearned rent revenue...................................     600
Total liabilities......................................... 7,560

Owner’s equity
Yosuke Irabu, Capital.....................................  16,690
Total liabilities and owners’ equity........ $24,250

(c) Interest of 12% per year equals a monthly rate of 1%; monthly interest
is $50 ($5,000 X 1%). Since total interest expense is $50, the note has
been outstanding one month.
*PROBLEM 3-12B

1. Jan. 1 Supplies Expense........................................... 2,800


Cash........................................................ 2,800

Dec. 31 Office Supplies............................................... 500


Supplies Expense................................... 500

2. Aug. 1 Insurance Expense......................................... 3,600


Cash........................................................ 3,600

Dec. 31 Prepaid Insurance ($3,600 ÷ 12 x 7).............. 2,100


Insurance Expense................................. 2,100

3. Nov. 15 Cash................................................................ 1,200


Service Revenue..................................... 1,200

Dec. 31 Service Revenue ........................................... 400


Unearned Service Revenue................... 400

4. Dec. 15 Rent Expense................................................. 4,500


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

Dec. 31 Prepaid Rent................................................... 4,500


Rent Expense.......................................... 4,500
*PROBLEM 3-13B

(a) 1. Dec. 31 Supplies...................................................... 1,800


Supplies Expense ($3,300 - $1,500)... 1,800

2. 31 Interest Expense ($18,000 × 10% × 2/12). 300


Interest Payable................................. 300

3. 31 Prepaid Insurance ($2,100 x 8/12)............. 1,400


Insurance Expense............................ 1,400

4. 31 Consulting Fees Earned............................ 1,600


Unearned Consulting Fees................ 1,600

5. 31 Amortization Expense ($2,200 ÷ 2)........... 1,100


Accumulated Amortization—
Equipment........................................ 1,100

6. 31 Utilities Expense........................................ 200


Accounts Payable.............................. 200
*PROBLEM 3-13B (Continued)

(b) ROYAL GRAPHICS COMPANY


Adjusted Trial Balance
December 31, 2002

Debit Credit
Cash.......................................................................... $ 8,600
Accounts Receivable .............................................. 13,000
Supplies.................................................................... 1,800
Prepaid Insurance.................................................... 1,400
Equipment................................................................. 48,000
Accumulated Amortization...................................... $ 1,100
Notes Payable........................................................... 18,000
Accounts Payable ($11,000 + $200)........................ 11,200
Interest Payable........................................................ 300
Unearned Consulting Fees...................................... 1,600
Jan Bejar, Capital..................................................... 22,000
Graphic Fees Earned............................................... 55,500
Consulting Fees Earned ($7,600 – $1,600)............. 6,000
Salaries Expense...................................................... 33,000
Supplies Expense ($3,300 – $1,800)........................ 1,500
Advertising Expense................................................ 1,700
Rent Expense........................................................... 2,500
Utilities Expense ($1,900 + $200)............................ 2,100
Amortization Expense.............................................. 1,100
Insurance Expense ($2,100 – $1,400)...................... 700
Interest Expense...................................................... 00 00300 00 0000
$115,700 $115,700
*PROBLEM 3-13B (Continued)

(c) ROYAL GRAPHICS COMPANY


Income Statement
For the Six Months Ended December 31, 2002

Revenues
Graphic fees earned............................................ $55,500
Consulting fees earned....................................... 6,000
Total revenues............................................. 61,500
Expenses
Salaries expense................................................. $33,000
Advertising expense........................................... 1,700
Utilities expense.................................................. 2,100
Rent expense....................................................... 2,500
Supplies expense................................................ 1,500
Amortization expense......................................... 1,100
Interest expense.................................................. 300
Insurance expense.............................................. 000700
Total expenses............................................. 42,900
Net income................................................................... $18,600

ROYAL GRAPHICS COMPANY


Statement of Owner's Equity
For the Six Months Ended December 31, 2002

Jan Bejar, Capital, July 1............................................................... $ 0


Add: Investment by owner............................................................ 22,000
Net income............................................................................ 18,600
Jan Bejar, Capital, December 31.................................................. $40,600
*PROBLEM 3-13B (Continued)

(c) (Continued)

ROYAL GRAPHICS COMPANY


Balance Sheet
December 31, 2002

Assets
Cash............................................................................ $ 8,600
Accounts receivable................................................... 13,000
Supplies...................................................................... 1,800
Prepaid insurance...................................................... 1,400
Equipment................................................................... $48,000
Less: Accumulated amortization.............................. 001,100 46,900
Total assets.................................................. $71,700

Liabilities and Owner's Equity

Liabilities
Notes payable.............................................................. $18,000
Accounts payable....................................................... 11,200
Interest payable........................................................... 300
Unearned consulting fees.......................................... 1,600
Total liabilities..................................................... 31,100

Owner's equity
Jan Bejar, Capital........................................................ 40,600
Total liabilities and owner's equity.................... $71,700
CUMULATIVE COVERAGE: CHAPTERS 2 TO 3

(a), (c), & (e)

Cash No. 101


Date Explanation Ref. Debit Credit Balance
Sept. 1 Balance  04,880
8 J102 1,200 03,680
10 J102 1,200 04,880
12 J102 3,400 08,280
20 J102 6,000 02,280
22 J102 0,500 01,780
25 J102 1,200 0 580
29 J102 0,650 01,230

Accounts Receivable No. 112


Date Explanation Ref. Debit Credit Balance
Sept. 1 Balance  03,520
10 J102 1,200 02,320
27 J102 1,000 03,320

Supplies No. 126


Date Explanation Ref. Debit Credit Balance
Sept. 1 Balance  01,000
17 J102 1,500 02,500
30 Adj. entry J103 500 02,000

Store Equipment No. 153


Date Explanation Ref. Debit Credit Balance
Sept. 1 Balance  15,000
15 J102 3,000 18,000
CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)

(a), (c), & (e) (Continued)

Accumulated Amortization—Store Equipment No. 154


Date Explanation Ref. Debit Credit Balance
Sept. 1 Balance  01,500
30 Adj. entry J103 0,300 01,800

Accounts Payable No. 201


Date Explanation Ref. Debit Credit Balance
Sept. 1 Balance  03,400
15 J102 3,000 06,400
17 J102 1,500 07,900
20 J102 6,000 01,900

Unearned Service Revenue No. 209


Date Explanation Ref. Debit Credit Balance
Sept. 1 Balance  00,400
29 J102 0,650 01,050
30 Adj. entry J103 300 00,750

Salaries Payable No. 212


Date Explanation Ref. Debit Credit Balance
Sept. 1 Balance  00,500
8 J102 0,500 00,000
30 Adj. entry J103 500 00,500

R. Pitre, Capital No. 301


Date Explanation Ref. Debit Credit Balance
Sept. 1 Balance  18,600
CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)

(a), (c), & (e) (Continued)

Service Revenue No. 400


Date Explanation Ref. Debit Credit Balance
Sept. 12 J102 3,400 3,400
27 J102 1,000 4,400
30 Adj. entry J103 0,300 4,700

Amortization Expense No. 711


Date Explanation Ref. Debit Credit Balance
Sept. 30 Adj. entry J103 0,300 0,3300

Supplies Expense No. 631


Date Explanation Ref. Debit Credit Balance
Sept. 30 Adj. entry J103 0,500 0,500

Salaries Expense No. 726


Date Explanation Ref. Debit Credit Balance
Sept. 8 J102 0,700 0,700
20 J102 1,200 1,900
30 Adj. entry J103 0,500 2,400

Rent Expense No. 729


Date Explanation Ref. Debit Credit Balance
Sept. 22 J102 0,500 0,500
CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)

(b)

GENERAL JOURNAL J102


Date Account Titles and Explanation Ref. Debit Credit
Sept. 8 Salaries Payable 212 0,500
Salaries Expense 726 0,700
Cash 101 1,200

10 Cash 101 1,200


Accounts Receivable 112 1,200

12 Cash 101 3,400


Service Revenue 400 3,400

15 Store Equipment 153 3,000


Accounts Payable 201 3,000

17 Supplies 126 1,500


Accounts Payable 201 1,500

20 Accounts Payable 201 6,000


Cash 101 6,000

22 Rent Expense 729 0,500


Cash 101 0,500

25 Salaries Expense 726 1,200


Cash 101 1,200

27 Accounts Receivable 112 0,1,000


Service Revenue 400 0,1,000

29 Cash 101 0,650


Unearned Service Revenue 209 0,650
CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)

(d) & (f) PITRE EQUIPMENT REPAIR


Unadjusted and Adjusted Trial Balances
September 30, 2003
Unadjusted Adjusted
Dr. Cr. Dr. Cr.
Cash................................................. $ 1,230 $ 1,230
Accounts Receivable...................... 3,320 3,320
Supplies........................................... 2,500 2,000
Store Equipment............................. 18,000 18,000
Accumulated Amortization............. $ 1,500 $ 1,800
Accounts Payable........................... 1,900 1,900
Unearned Service Revenue............ 1,050 750
Salaries Payable.............................. 500
R. Pitre, Capital............................... 18,600 18,600
Service Revenue............................. 4,400 4,700
Amortization Expense.................... 300
Supplies Expense........................... 500
Salaries Expense............................. 1,900 2,400
Rent Expense.................................. 500 500
$27,450 $ 27,450 $28,250 $ 28,250

(e) GENERAL JOURNAL J103


Date Account Titles and Explanation Ref. Debit Credit

1. Sept. 30 Supplies Expense................................... 631 500


Supplies ($2,500 – $2,000).............. 126 500

2. 30 Salaries Expense.................................... 726 500


Salaries Payable............................. 212 500

3. 30 Amortization Expense........................... 711 300


Accumulated Amortization—
Store Equipment.......................... 154 300

4. 30 Unearned Service Revenue.................. 209 300


Service Revenue............................. 400 300
CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)

(g) PITRE EQUIPMENT REPAIR


Income Statement
For the Month Ended September 30, 2003

Revenues
Service revenue................................................. $4,700
Expenses
Salaries expense................................................ $2,400
Supplies expense............................................... 500
Rent expense...................................................... 500
Amortization expense........................................ 300
Total expenses................................................... 3,700
Net income............................................................... $1,000

PITRE EQUIPMENT REPAIR


Statement of Owner's Equity
For the Month Ended September 30, 2003

R. Pitre, Capital, September 1.................................................. $18,600


Add: Net income..................................................................... 1,000
R. Pitre, Capital, September 30................................................ $19,600
CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)

(g) (Continued)

PITRE EQUIPMENT REPAIR


Balance Sheet
September 30, 2003

Assets

Cash..................................................................... $ 1,230
Accounts receivable........................................... 3,320
Supplies.............................................................. 2,000
Store equipment................................................. $18,000
Less: Accumulated amortization—store
equipment........................................................... 1,800 16,200
Total assets................................................ $22,750

Liabilities and Owner's Equity

Liabilities
Accounts payable............................................................ $01,900
Salaries payable.............................................................. 500
Unearned service revenue.............................................. 00 0750
Total liabilities............................................................. 3,150

Owner's equity
R. Pitre, Capital................................................................ 019,600
Total liabilities and owner's equity................................ $22,750
BYP 3-1 FINANCIAL REPORTING PROBLEM

(a) The title The Second Cup used for its income statement is
“Consolidated Statement of Operations and Deficit.”

(b) The types of revenues reported include Franchise Revenue, Sales from
Corporate Stores, and Product Sales.

(c) For competitive reasons, The Second Cup does not want to disclose
details of its operating costs and expenses. Most of the items shown on
its income statement are minimum required disclosures (many of which
are related to non-typical events rather than regular operations).

(d) Prepayments: Prepaid Expenses and Sundry Assets are reported on the
balance sheet ($419,000). In adjusting this account the other side of the
entry would be an expense account, for example insurance expense.
Deferred Financing Charges are also reported ($125,000). The other
account involved in adjustments to this account would likely be interest
expense.

(e) Accruals: Accrued revenues might include Income Taxes Receivable


($1,150,000) and Future Income Taxes ($295,000). The other account
use in preparing adjustments for this account would be a reduction of
income taxes expense. Accounts Receivable ($2,294,000) may also
include some accrued revenue amounts. Accrued expenses are
included in the line Accounts Payable and Accrued Liabilities
($2,718,000). The other accounts used in preparing adjustments for this
account would be expense accounts.
BYP 3-2 INTERPRETING FINANCIAL STATEMENTS

COTT CORPORATION

(a) (in millions)


1997 Prepaid Contract Costs................................ 29,743
Cash......................................................... 29,743

(b) (in millions)


1997 Amortization Expense.................................. 26,349
Accumulated Amortization
(or Prepaid Contract Costs)................... 26,349

(c) I think it should be recorded as an expense not a reduction of sales


revenue. All expenses are incurred to earn revenue–this item should
not be treated any differently than other expenses.

(d) 1. Cott may have made this change from capitalizing to expensing
these cost because of uncertainty relating to the future benefit of
the costs.

[The company states, in its 1999 Annual report, that “this change in
accounting policy reflected the maturing of the company’s
operations in the industry and its relationships with customers.”]

2. (in millions)

1997 Contract Costs Expense.............................. 29,743


Cash......................................................... 29,743
BYP 3-3 INTERPRETING FINANCIAL STATEMENTS

(a) The company is recording its legal expenses using an accrued


expense account.

(b) All of the adjustments are accrued expense adjustments, which


decrease net income.

(c) The accrued interest would have been recorded as follows:

Interest Expense..................................... 18,000


Interest Payable.............................. 18,000
BYP 3-4 ACCOUNTING ON THE WEB

Due to the frequency of change with regard to information available on the


world wide web, the Accounting on the Web cases are updated as required.
Their suggested solutions are also updated whenever necessary, and can
be found on-line in the Instructor Resources section of our home page
[www.wiley.com/canada/weygandt2].
BYP 3-5 COLLABORATIVE LEARNING ACTIVITY

(a) RV WORLD
Income Statement
For the Quarter Ended March 31, 2003

Revenues
Rental fees ($95,000 – $30,000)............................................ $65,000
Expenses
Wages expense [$29,800 + ($400 × 2)]................ $30,600
Advertising expense ($5,200 + $110).................. 5,310
Supplies expense ($5,200 – $1,300).................... 3,900
Repair expense ($4,000 + $260)........................... 4,260
Insurance expense ($7,200 × 3/12)...................... 1,800
Utilities expense ($900 + $180)............................ 1,080
Amortization expense.......................................... 800
Interest expense ($12,000 × 8% × 3/12)............... 00,240
Total expenses............................................................... 047,990
Net income..................................................................................... $17,010

(b) (1) The generally accepted accounting principles pertaining to the


income statement that were not recognized by Michel were the
revenue recognition principle and the matching principle.
The revenue recognition principle states that revenue is
recognized when it is earned. The fees of $30,000 for summer
rentals have not been earned and, therefore, should not be reported
in income for the quarter ended March 31.
The matching principle dictates that efforts (expenses) be
matched with accomplishments (revenues). This means that the
expenses should include amounts incurred in March but not paid
until April, and any other costs related to the operations of the
business during the period January – March.

(2) The difference in expenses was $7,290 ($47,990 – $40,700). The


overstatement of revenues ($30,000) plus the understatement of
expenses ($7,290) equals the difference in reported income of
$37,290 ($54,300 – $17,010).
BYP 3-6 COMMUNICATION ACTIVITY

Memorandum

To: Mary Lee Virgil


From: Student
Date:
Re: Adjusting Journal Entries

Upon reviewing the accounts of your company at the end of the year, I
discovered that adjusting entries were not made.

Adjusting entries are made at the end of the accounting period to ensure
that the revenue recognition and matching principles required under
generally accepted accounting principles are followed. The use of adjusting
entries makes it possible to report on the balance sheet the appropriate
assets, liabilities, and owner's equity at the statement date, and to report on
the income statement the proper revenue, expense, and net income (or loss)
for the year.

Adjusting entries are needed because the trial balance may not contain an
up-to-date and complete record of transactions and events, for the following
reasons:

1. Some events are not journalized daily because it is inexpedient to


do so. Examples are the use of supplies and the earning of wages
by employees.

2. The expiration of some costs is not journalized during the


accounting period because these costs expire with the passage of
time, rather than as a result of recurring daily transactions.
Examples of such costs are building and equipment deterioration,
rent, and insurance.
BYP 3-6 (Continued)

3. Some expenses, such as the cost of utility service and property


taxes, may be unrecorded because the bills for the costs have not
been received.

There are five types of adjusting entries:

1. Prepaid expenses—expenses paid in cash and recorded as assets


until they are used.

2. Unearned revenues—revenues received in cash and recorded as


liabilities until they are earned.

3. Accrued revenues—revenues earned but not yet received in cash


or recorded.

4. Accrued expenses—expenses incurred but not yet paid in cash or


recorded.

5. Amortization—allocation of the cost of capital assets to expense,


over their estimated useful lives.

I will be happy to answer any questions you may have on adjusting entries.
BYP 3-7 ETHICS CASE

(a) The stakeholders in this situation are:

• Carole Chiasson, controller


• The president of Die Hard Company
• The external users of Die Hard’s financial information

(b) 1. It is unethical for the president to place pressure on Carole to


misstate net earnings by requesting her to prepare incorrect
adjusting entries.

2. It is customary for adjusting entries to be dated as of the balance


sheet date although the entries are prepared at a later date. Carole
did nothing unethical by dating the adjusting entries December 31.

(c) Carole can accrue revenues and defer expenses through the
preparation of adjusting entries and be ethical so long as the entries
reflect economic reality. Intentionally misrepresenting the company’s
financial condition and its results of operations is unethical (it is also
illegal).