Chapter 3
Adjusting Accounts for Financial
Statements
Learning Objectives – coverage by question
Miniexercises
Exercises
Problems
Cases
LO1 – Identify the major steps
in the accounting cycle.
LO2 – Review the process of
journalizing and posting
transactions.
21, 22, 23, 25,
LO3 – Describe the adjusting
process and illustrate adjusting
entries.
23, 24, 25, 29,
32, 33, 34, 35,
30
36, 38
LO4 – Prepare financial
statements from adjusted
accounts.
29, 30
33, 35, 36, 38
40, 41, 42, 46,
47, 52, 54
55, 56, 57, 58
40, 41, 42, 43,
46, 47, 48, 49,
55, 56, 57, 58
52, 53, 54
40, 41, 42, 44,
26
39
47, 49, 50, 53,
55, 58
54
42, 44, 45, 46,
LO5 – Describe the process of
closing temporary accounts.
27, 28, 30
31, 33, 37, 39
49, 50, 51, 52,
55
53, 54
LO6 – Analyzing
changes in
balance sheet accounts.
Solutions Manual, Chapter 3
25, 29
32, 34, 35, 36,
38
53
56
©Cambridge Business Publishers, 2011
3-1
QUESTIONS
Q3-1 The five major steps in the accounting cycle are
1. Analyze business activity using transaction analysis based on the related
source documents.
2. Record results of the transaction analysis chronologically in the general
journal and create a trial balance.
3. Adjust the recorded data to update all accounts for expense and revenue
recognition not previously recognized.
4. Report the adjusted financial data in the form of financial statements.
5. Close the books by posting the adjusting and closing entries, which “zero
out” the temporary accounts.
Q3-2 The fiscal year is the annual accounting period adopted by a firm. A firm
using a fiscal year ending on December 31 is on a calendar-year basis.
Q3-3 Examples of source documents that underlie business transactions are
invoices sent to customers, invoices received from suppliers, bank checks,
bank deposit slips, cash receipt forms, and written contracts.
Q3-4 A general journal is a book of original entry that may be used for the initial
recording of any type of transaction. It contains space for dates and for
accounts to be debited and credited, columns for the amounts of the debits
and credits, and a posting reference column for numbers of the accounts that
are posted.
Q3-5 When entries are posted, the page number and identifying initials of the
appropriate journal are placed next to the amounts in the appropriate
accounts. The account number is entered beside the related amount posted
in the journal's posting reference column. This procedure enables interested
users to trace amounts in the ledger back to the originating journal entry and
permits us to know which entries have been posted.
Q3-6 A compound journal entry is a journal entry containing more than one debit
entry or one credit entry.
Q3-7 A chart of accounts is a list of the accounts appearing in the general ledger,
with the account numbering system indicated. Normally the accounts are
classified as asset, liability, owners' equity, revenue, and expense accounts,
and often the numbering system identifies the account classification. For
example, a coding system might assign the numbers 100–199 to assets, 200–
299 to liabilities, and so on.
©Cambridge Business Publishers, 2011
3-2
Financial Accounting, 3rdEdition
Q3-8 Many of the transactions reflected in the accounting records through the first
two steps of the accounting cycle affect the net income of more than one
period. Therefore, adjustments to the account balances are ordinarily
necessary at the end of each accounting period to record the proper amount
of revenue and to match expenses with revenue properly. This process is
also intended to achieve a more accurate picture of financial position by
adjusting balance sheet amounts to show unexpired costs, up-to-date
amounts of obligations, and so on.
Q3-9 1. Allocating assets to expense to reflect expenses incurred during the
period. Example: Recording supplies used by debiting Supplies Expense
and crediting Supplies.
2. Allocating payments received in advance by crediting the revenue account
to reflect revenues earned during the period. Example: Recording service
fees earned by debiting Unearned Service Fees and crediting Service Fees
Earned.
3. Accruing expenses to reflect expenses incurred during the period that are
not yet paid or recorded. Example: Recording unpaid wages by debiting
Wages Expense and crediting Wages Payable.
4. Accruing revenues to reflect revenues earned during the period that are
not yet received or recorded. Example: Recording commissions earned by
debiting Commissions Receivable and crediting Commissions Earned.
Q3-10
Q3-11
Jan. 31 Insurance expense (+E, -SE)
Prepaid insurance (-A)
To record insurance expense for January ($1,872/24 = $78).
78
78
A contra account is an account that is related to, and deducted from,
another account when financial statements are prepared or when book
values are computed. Accumulated depreciation is deducted from the cost
of a depreciable asset in computing and portraying the asset's book value.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-3
Q3-12
The building is five years old by the end of 2011, so the accumulated
depreciation of $800,000 represents five years of depreciation at an annual
rate of $160,000 ($800,000/5). If the annual depreciation is $160,000, then
the expected life of the building must be 25 years.
At the end of 2018, the building will be twelve years old, and the
accumulated depreciation will be 12×$160,000, or $1,920,000. The book
value of the building (defined as original cost less accumulated
depreciation) will be $2,080,000.
Q3-13
(a) Jan. 1
Cash (+A)
9,720
Subscriptions received in advance (+L)
To record receipt of two-year subscriptions.
(b) Jan. 31 Subscriptions received in advance (-L)
405
Subscriptions revenue (+R,+SE)
To record subscription revenue earned during
January ($9,720/24 = $405).
Q3-14
Q3-15
Jan. 31
Jan. 31
Wages expense (+E, -SE)
Wages payable (+L)
To record unpaid wages for Jan. 30–31
[($475/5)  2 = $190].
190
Interest receivable (+A)
Interest income (+R,+SE)
To record interest earned during January.
360
9,720
405
190
360
Q3-16
The temporary accounts—sometimes called nominal accounts—are closed
at year-end. They consist principally of the income statement accounts
(expense and revenue accounts). (The Income Summary account and the
Dividend account are also closed if they are used.)
Q3-17
Step 1) Close revenue accounts: Debit each revenue account for an amount
equal to its balance, and credit the Retained Earnings account for
the total of revenues.
Step 2) Close expense accounts: Credit each expense account for an
amount equal to its balance, and debit the Retained Earnings
account for the total of expenses.
Q3-18
A post-closing trial balance ensures that an equality of debits and credits
has been maintained throughout the adjusting and closing procedures and
that the general ledger is in balance to start the next period. Only balance
sheet accounts appear in a post-closing trial balance. Depreciation Expense
and Supplies Expense are temporary accounts that should have been
closed and should not appear in the post-closing trial balance.
©Cambridge Business Publishers, 2011
3-4
Financial Accounting, 3rdEdition
Q3-19
The cost principle and the matching concept support Dehning's handling of
its catalog costs. Prepaid Catalog Costs is an asset account that is initially
recorded at the amount that the catalogs cost Dehning. This is consistent
with the cost principle that states that assets are initially recorded at the
amounts paid to acquire the assets. The catalogs help Dehning generate
sales revenues. The matching concept states that the catalog costs should
be matched as expenses with the revenues they help generate. Dehning
does this by expensing the catalog costs over their estimated useful lives.
Q3-20
(a) Supplies Expense ($825 + $260  $630 = $455) for the period is omitted
from the income statement, overstating net income by $455 (ignoring
taxes).
(b) Both Supplies and Owners' Equity are overstated by $455 on the
January 31 balance sheet (again, before considering taxes).
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-5
Mini Exercises
M3-21 (45 mintes)
a.
Balance Sheet
Transaction
June 1. Invested
$12,000 cash.
June 2. Paid $950
cash for June
rent.
June 3. Purchased
$6,400 of office
equipment on
account.
June 6. Purchased
$3,800 of
supplies; $1,800
cash, $2,000 on
account.
June 11. $4,700 billed
for services.
June 17. Collected
$3,250 on
accounts.
June 19. Paid $3,000
on office
equipment
account.
June 25. Paid cash
dividend of $900.
June 30. Paid $350
utilities.
Cash
Noncash
LiabilContrib.
+
=
+
+
Asset
Assets
ities
Capital
+12,000
+12,000
=
Cash
Common
Income Statement
Earned
Capital
Net
Revenues - Expenses =
Income
-
=
Stock
-950
-950
Cash
+6,400
+6,400
Office
Equipment
Accounts
Payable
=
-1,800
+3,800
+2,000
Cash
Supplies
Accounts
Payable
=
+4,700
Accounts
Receivable
+3,250
-3,250
Cash
Accounts
Receivable
=
-3,000
Cash
Accounts
Payable
=
Cash
TOTALS
5,750
+4,700
Service Fees
Earned
-900
Retained
Earnings
=
Retained
Earnings
=
Retained
Earnings
-350
Cash
-2,500
+4,700
Retained
Earnings
=
-350
June 30. Paid $2,500
salaries.
-
=
-3,000
-900
+950
Retained
Earnings
=
+ 11,650
= 5,400
©Cambridge Business Publishers, 2011
3-6
+ 12,000 +
0
4,700
-950
=
-
=
-
=
-
=
-
=
-
=
-
=
-
-2,500
Cash
Rent
Expense
+4,700
+350
Utilities
Expense
-350
=
+2,500
-2,500
-
Salaries
Expense
=
-
3,800
=
900
Financial Accounting, 3rdEdition
b.
June
1
2
3
6
11
17
19
25
30
30
Cash (+A)
Common stock (+SE)
Owner invested cash for stock.
12,000
12,000
Rent expense (+E, -SE)
Cash (-A)
Paid June rent.
950
950
Office equipment (+A)
Accounts payable (+L)
Purchased office equipment on account.
6,400
Supplies (+A)
Cash (-A)
Accounts payable (+L)
Purchased $3,800 of supplies; paid $1,800 down
with balance due in 30 days.
3,800
Accounts receivable (+A)
Service fees earned (+R,+SE)
Billed clients for services.
4,700
Cash (+A)
Accounts receivable (-A)
Collections from clients on account.
3,250
Accounts payable (-L)
Cash (-A)
Payment on account.
3,000
6,400
1,800
2,000
4,700
3,250
3,000
Retained earnings (-SE)
Cash (-A)
Issued dividends.
900
Utilities expense (+E, -SE)
Cash (-A)
Paid utilities bill for June.
350
Salaries expense (+E, -SE)
Cash (-A)
Paid salaries for June.
2,500
Solutions Manual, Chapter 3
900
350
2,500
©Cambridge Business Publishers, 2011
3-7
c.
+
June 1
17
+
June 11
-
-
Cash (A)
12,000
950
3,250
1,800
3,000
900
350
2,500
June 2
6
19
25
30
30
Accounts Receivable (A) 4,700 3,250
June 17
Common Stock (SE)
12,000
+
June 1
Service Fees Earned (R)
+
4,700
June 11
©Cambridge Business Publishers, 2011
3-8
+
June 6
+
June 3
Supplies (A)
3,800
Office Equipment (A)
6,400
Accounts Payable (L)
June 19
3,000 6,400
2,000
-
-
+
June 3
June 6
Retained Earnings (SE)
June 25
900
+
+
June 2
Rent Expense (E)
950
-
+
June 30
Utilities Expense (E)
350
-
+
June 30
Salaries Expense (E)
2,500
-
Financial Accounting, 3rdEdition
M3-22 (45 minutes)
a.
Balance Sheet
Transaction
April 1. Invested
$9,000 in cash.
April 2. Paid $2,850
cash for lease.
April 3. Borrowed
$10,000.
April 3. Purchased
$5,500 equipment
for $2,500 cash
with rest on
account.
April 4. Paid $4,300
cash for supplies.
April 7. Paid $350
cash for ad.
Cash
Noncash
LiabilContrib.
+
=
+
+
Asset
Assets
ities
Capital
+9,000
+9,000
=
Cash
Common
Income Statement
Earned
Capital
Net
Revenues - Expenses =
Income
-
=
-
=
-
=
-
=
-
=
Stock
-2,850
+2,850
Cash
Prepaid Van
Lease
=
+10,000
+10,000
=
Cash
Note
Payable
-2,500
+5,500
+3,000
Cash
Equipment
Accounts
Payable
=
-4,300
+4,300
Cash
Supplies
-350
-350
=
Retained
Earnings
+3,500
+3,500
+3,500
Accounts
Receivable
=
Retained
Earnings
Cleaning
Fees
Earned
Cash
April 21. Billed
$3,500 for
services
=
April 23. Paid $3,000
cash on account.
-3,000
April 28. Collected
$2,300 on
account.
April 29. Paid $1,000
cash dividend.
+2,300
-2,300
Cash
Accounts
Receivable
April 30. Paid $1,750
cash for wages.
-1,750
-
-3,000
= Accounts
Cash
+350
Ad.
Expense
=
-350
+3,500
-
=
-
=
-
=
-
=
Payable
-1,000
Cash
-995
TOTALS
4,555
-1,000
=
Retained
Earnings
=
Retained
Earnings
=
Retained
Earnings
-1,750
Cash
April 30. Paid $995
cash for gas.
=
+1,750
Wages
Expense
-
Van Fuel
Expense
=
-
3,095
=
-995
Cash
+ 13,850
Solutions Manual, Chapter 3
= 10,000 + 9,000 +
-595
-1,750
-
=
+995
3,500
-995
405
©Cambridge Business Publishers, 2011
3-9
b.
April 1
2
3
3
4
7
21
23
28
29
Cash (+A)
Common stock (+SE)
Owner invested cash for stock.
9,000
Prepaid van lease (+A)
Cash (-A)
Paid six months' lease on van.
2,850
Cash (+A)
Notes payable (+L)
Borrowed money from bank for one year at
10% interest.
10,000
Equipment (+A)
Cash (-A)
Accounts payable (+L)
Purchased $5,500 of equipment; paid $2,500 down
with balance due in 30 days.
5,500
Supplies (+A)
Cash (-A)
Purchased supplies for cash.
4,300
Advertising expense (+E, -SE)
Cash (-A)
Paid for April advertising.
350
Accounts receivable (+A)
Cleaning fees earned (+R, +SE)
Billed customers for services.
3,500
Accounts payable (-L)
Cash (-A)
Payment on account.
3,000
Cash (+A)
Accounts receivable (-A)
Collections from customers on account.
2,300
Retained earnings (-SE)
Cash (-A)
Issued cash dividends.
1,000
©Cambridge Business Publishers, 2011
3-10
9,000
2,850
10,000
2,500
3,000
4,300
350
3,500
3,000
2,300
1,000
Financial Accounting, 3rdEdition
30
30
Wages expense (+E, -SE)
Cash (-A)
Paid wages for April.
1,750
1,750
Van fuel expense (+E, -SE)
Cash (-A)
Paid for gasoline used in April.
995
995
c.
+
April 1
3
28
+
April 4
Cash (A)
9,000
2,850
April 2
10,000
2,500
3
2,300
4,300
4
350
7
3,000
23
1,000
29
1,750
30
995
30
Supplies(A)
4,300
Accounts Payable (L)
April 23
3,000
3,000
-
Common Stock (SE)
9,000
-
Solutions Manual, Chapter 3
+
April 2
Prepaid Van Lease (A)
2,850
+
April 3
-
+
April 3
+
April 1
+
Advertising Expense (E)
April 7
350
+
Van Fuel Expense (E)
April 30
995
+
Accounts Receivable (A) April 21
3,500
2,300 April 28
-
Equipment (A)
5,500
-
-
Notes Payable (L)
10,000
+
April 3
- Retained Earnings (SE)
April 29
1,000
-
+
April 30
+
Cleaning Fees Earned (R) +
3,500 April 21
Wages Expense (E)
1,750
-
-
©Cambridge Business Publishers, 2011
3-11
M3-23 (20 minutes)
a.
Balance Sheet
Transaction
1. Received $20,100
in advance for
contract work.
Jan.
Cash
Noncash
LiabilContrib.
+
=
+
+
Asset
Assets
ities
Capital
+20,100
+20,100
Unearned
Cash
=
Income Statement
Earned
Capital
Net
Revenues - Expenses =
Income
-
Service
Fees
1
Cash (+A)
Unearned service fees (+L)
To record fee received in advance.
=
20,100
20,100
b.
Balance Sheet
Cash
Asset
Transaction
2. Adjusting entry for
work completed
by Jan. 31.
Jan.
31
Noncash
LiabilContrib.
+
=
+
+
Assets
ities
Capital
-3,350
= Unearned
Service
Fees
Income Statement
Earned
Capital
+3,350
Retained
Earnings
Net
Revenues - Expenses =
Income
+3,350
+3,350
Service
=
Fees
Unearned service fees (-L)
Service fees (+R, +SE)
To reflect January service fees earned on
contract ($20,100/6 = $3,350).
3,350
3,350
c.
Balance Sheet
Cash
Asset
Transaction
3. Adjusting entry for
fees earned but
not billed.
Jan.
31
Noncash
LiabilContrib.
+
=
+
+
Assets
ities
Capital
+570
Fees
=
Receivable
Income Statement
Earned
Capital
+570
Retained
Earnings
Fees receivable (+A)
Service fees (+R, +SE)
To record unbilled service fees earned
at January 31.
©Cambridge Business Publishers, 2011
3-12
Net
Revenues - Expenses =
Income
+570
+570
Service
=
Fees
570
570
Financial Accounting, 3rdEdition
M3-24 (15 minutes)
1.
Balance Sheet
Cash
Asset
Transaction
1. Adjusting entry for
prepaid
insurance.
Jan.
Income Statement
Noncash
LiabilContrib.
+
=
+
+
Assets
ities
Capital
-185
Prepaid
=
Insurance
31
Earned
Capital
-185
Retained
Earnings
Net
Revenues - Expenses =
Income
+185
-185
- Insurance =
Expense
Insurance expense (+E, -SE)
Prepaid insurance (-A)
To record January insurance expense
($6,660/36 = $185).
185
185
2.
Balance Sheet
Cash
Asset
Transaction
2. Adjusting entry for
supplies used.
Jan.
31
Income Statement
Noncash
LiabilContrib.
+
=
+
+
Assets
ities
Capital
-1,080
Supplies =
Earned
Capital
-1,080
Retained
Earnings
Net
Revenues - Expenses =
Income
+1,080
-1,080
- Supplies =
Expense
Supplies expense (+E, -SE)
Supplies (-A)
To record January supplies expense
($1,930  $850 = $1,080).
1,080
1,080
3.
Balance Sheet
Transaction
Cash
Asset
Noncash
+ Assets
3. Adjusting
entry for
depreciation
of
equipment.
Jan.
31
-
Contra
Assets
-
+62
Accumulated
Depreciation
Liabil=
ities
Income Statement
+
Contrib.
Capital
+
Earned
Capital
Revenues
-62
Solutions Manual, Chapter 3
-
Retained
Earnings
Depreciation expense—Equipment (+E, -SE)
Accumulated depreciation—Equipment (+XA, -A)
To record January depreciation on office
equipment ($5,952/96 = $62).
-
Expenses
=
Net
Income
+62
=
-62
Depreciation
Expense
62
62
©Cambridge Business Publishers, 2011
3-13
4.
Balance Sheet
Cash
Asset
Transaction
4. Adjusting entry for
rent.
Jan. 31
+
Noncash
LiabilContrib.
=
+
+
Assets
ities
Capital
-875
= Unearned
Rent
Revenue
Income Statement
Earned
Capital
+875
Retained
Earnings
Net
Revenues - Expenses =
Income
+875
+875
Rent
=
Revenue
Unearned rent revenue (-L)
Rent revenue (+R, +SE)
To record portion of advance rent earned
in January.
875
875
5.
Balance Sheet
Cash
Asset
Transaction
5. Adjusting entry for
accrued salaries.
Jan.
31
Noncash
LiabilContrib.
+
=
+
+
Assets
ities
Capital
+490
= Salaries
Payable
Income Statement
Earned
Capital
-490
Retained
Earnings
Salaries expense (+E, -SE)
Salaries payable (+L)
To record accrued salaries at January 31.
©Cambridge Business Publishers, 2011
3-14
Revenues - Expenses =
+490
-
Salaries
Expense
Net
Income
-490
=
490
490
Financial Accounting, 3rdEdition
M3-25 (10 minutes)
(All amounts in $ millions.)
a.
Income Statement
Balance Sheet
Cash
Asset
Transaction
Noncash
Contrib.
+
= Liabilities +
+
Assets
Capital
+2,913.49
+2,913.49
Inventory purchases
(total).
Inventory
=
Earned
Capital
Revenues - Expenses =
Accounts
Payable
-
Net
Income
=
Inventories (+A)……………………….. 2,913.49
Accounts payable (+L)…………….. 2,913.49
To record total purchases made at various dates.
b. Beginning AP balance + Purchases – Payments = Ending AP balance, or
$2,980.13 = $365.75 + $2,913.49 - $299.11 = Payments.
c.
Income Statement
Balance Sheet
Cash
Asset
Transaction
+
Adjusting entry for
cost of goods sold
for 2009.
Noncash
Assets
-2,946.08
Inventory
= Liabilities +
Contrib.
+
Capital
=
Earned
Capital
-2,946.08
Retained
Earnings
Revenues
-
-
Expenses
= Net Income
+2,946.08 = -2,946.08
Cost of
Goods Sold
Beginning Inv balance + Purchases – Cost of goods sold = Ending Inv balance, or
$2,946.08 = $887.36 + $2,913.49 – $854.77 = COGS
*
Cost of goods sold (+E, -SE)…………………...
2,946.08
Inventories (-A)…………………………………
2,946.08
To record cost of goods sold for the year ended 1/31/2009.
M3-26 (15 minutes)
Architect Services Company
Statement of Stockholders’ Equity
For Year Ended December 31, 2011
Common
Retained
Stock
Earnings
Balance at December 31, 2010 ............$30,000
Stock issuance ..................................... 6,000
Dividends .............................................
Net income ........................................... _____
Balance at December 31, 2011 ............$36,000
Solutions Manual, Chapter 3
$18,000
(9,700)
29,900
$38,200
Total
Stockholders’
Equity
$48,000
6,000
(9,700)
29,900
$74,200
©Cambridge Business Publishers, 2011
3-15
M3-27 (5 minutes)
Ending balance = Beginning balance + Credit from closing revenue – Debit from
closing expenses: $137,600 = $99,000 + $347,400 - $308,800
M3-28 (15 minutes)
a.
Date 2010 Description
Debit
Dec. 31
84,900
31
Commissions revenue (-R)
Retained earnings (+SE)
To close the revenue account.
Retained earnings (-SE)
Wages expense (-E)
Insurance expense (-E)
Utilities expense (-E)
Depreciation expense (-E)
To close the expense accounts.
Credit
84,900
55,900
36,000
1,900
8,200
9,800
Closing the revenue and expense accounts into retained earnings has the effect of
increasing the retained earnings balance by an amount equal to net income
(revenue minus expenses). The balance of Smith’s Retained Earnings after closing
entries are posted is
$101,100 credit ($72,100 + $29,000).
b.
+
Bal.
Bal.
+
Bal.
Bal.
+
Bal.
Bal.
Wages Expense (E) 36,000 36,000 (2)Dec. 31
0
Insurance Expense (E) 1,900
1,900 (2)Dec. 31
0
Depreciation Expense (E) 9,800
9,800 (2)Dec. 31
0
©Cambridge Business Publishers, 2011
3-16
+
Bal.
Bal.
Utilities Expense (E)
8,200
8,200 (2) Dec. 31
0
- Commissions Revenue (R) +
(1)Dec. 31
84,000
84,900
Bal.
0
Bal.
- Retained Earnings (SE) +
(2)Dec. 31
55,900
72,100 Bal.
84,900 (1)Dec.31
101,100 Bal. Dec.31
Financial Accounting, 3rdEdition
M3-29 (20 minutes)
(All amounts in $ millions.)
a.
Balance Sheet
Cash
Asset
Transaction
+
Purchase of inventory
on account.
Noncash
Contrib.
= Liabilities +
+
Assets
Capital
+3,385.90
+3,385.90
Merchandise = Accounts
Inventory
Income Statement
Earned
Capital
Net
Revenues - Expenses =
Income
-
=
Payable
Merchandise inventory (+A).................................................. 3,385.90
Accounts payable (+L) ......................................................
3,385.90
To recognize the purchase of merchandise inventory on account.
b.
Beginning AP balance + Purchases – Payments = Ending AP balance, or $3,470.97 =
$831.67 + $3,385.90 - $746.60 = Payments.
c.
Balance Sheet
Cash
Asset
Transaction
Recognize cost of
goods sold.
Noncash
Liabil+
=
Assets
ities
-3,540.60
Merchandise =
inventory
Contrib.
+
+
Capital
Income Statement
Earned
Capital
-3,540.60
Retained
Earnings
Net
Revenues - Expenses =
Income
+3,540.60
-3,540.60
=
Cost of
Cost of goods sold (+E,-SE) ................................................. 3,540.60*
Merchandise inventory (-A) ..............................................
Goods Sold
3,540.60
To recognize the cost of goods sold.
*
Beginning Inv balance + Purchases – Cost of goods sold = Ending Inv balance, or
$3,540.60 = $1,358.17 + $3,385.90 - $1,203.47 = COGS
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-17
M3-30 (10 minutes)
a.
Balance Sheet
Transaction
Cash
Asset
a. Dec. 31 Interest
earned.
Dec. 31
b.
Dec. 31
Noncash
LiabilContrib.
+
=
+
+
Assets
ities
Capital
+600
=
Interest
Receivable
Income Statement
Earned
Capital
+600
Retained
Earnings
Net
Revenues - Expenses =
Income
+600
+600
=
Interest
Income
Interest receivable (+A)
Interest income (+R, +SE)
To record accrued interest income.
600
600
Interest income (-R)
Retained earnings (+SE)
To close the Interest Income account.
2,400
2,400
c.
Balance Sheet
Transaction
c. 1/31 Receipt of
$900 interest.
2011
Jan. 31
Cash
Asset
+900
Cash
+
Noncash
LiabilContrib.
=
+
+
Assets
ities
Capital
-600
=
Interest
Receivable
Cash (+A)
Interest income (+R, +SE)
Interest receivable (-A)
To record cash receipt of interest.
©Cambridge Business Publishers, 2011
3-18
Income Statement
Earned
Capital
+ 300
Retained
Earnings
Revenues - Expenses =
+300
Interest
Income
-
Net
Income
+300
=
900
300
600
Financial Accounting, 3rdEdition
Exercises
E3-31 (30 minutes)
a.
Dec. 31
31
Service fees earned (-R,-SE)
Retained earnings (+SE)
To close the revenue account.
80,300
Retained earnings (-SE)
Rent expense (-E)
Salaries expense (-E)
Supplies expense (-E)
Depreciation expense (-E)
To close the expense accounts.
82,300
80,300
20,800
45,700
5,600
10,200
b.
+
Bal.
Bal.
Rent Expense (E)
20,800
20,800
0
+
(2)
Bal.
Bal.
+
Bal.
Bal.
+
Bal.
Bal.
(2)
Salaries Expense (E)
45,700
45,700
0
Retained Earnings (SE)
82,300
67,000
80,300
65,000
(2)
(1)
Supplies Expense (E)
5,600
5,600
0
Depreciation Expense (E)
10,200
10,200
0
Service Fees Earned (R)
80,300
80,300
0
(2)
(2)
+
Bal.
Bal.
+
Bal.
(1)
Bal.
Brooks Consulting earned a loss during the period (expenses exceeded
revenues by $2,000), so the ending retained earnings is lower than that
beginning retained earnings (even if no dividends were paid).
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-19
E3-32 (30 minutes)
a.
Balance Sheet
Transaction
Cash
Asset
1. Adjusting entry
for depreciation:
equipment.
2. Adjusting entry
for supplies
expense.
3. Adjusting entry
for utilities
expense.
4. Adjusting entry
for rent expense.
Noncash
+ Assets
-1,890
Supplies
=
-700
Prepaid
Rent
5. Adjusting entry
for premium
revenues.
6. Adjusting entry
for wage
expense.
7. Adjusting entry
for interest
earned.
TOTALS
b.
1.
Income Statement
Contra
= Liabilities +
Assets
+610
=
- Accumulated
Depreciation
=
-
Contrib.
Capital
+
+390
Utilities
Payable
=
=
-468
Unearned
Premium
Revenue
=
+965
Wages
Payable
=
-
-
0
+300
Interest
Receivable
+
-2,290
-
610
=
887
+
0
+
Earned
Capital
-610
Retained
Earnings
-1,890
Retained
Earnings
-390
Retained
Earnings
-700
Retained
Earnings
+468
Retained
Earnings
Revenues
-
Expenses
-
+468
Premium
Revenue
-965
Retained
Earnings
+300
Retained
Earnings
-3,787
Depreciation expense—Equipment (+E,-SE)
Accumulated depreciation—Equip (+XA)
+610
Depreciation
Expense
+1,890
Supplies
Expense
+390
Utilities
Expense
+700
Rent
Expense
-
-
+300
Interest
Income
768
+965
Wage
Expense
-
-
4,555
610
610
To record depreciation for the period.
2.
Supplies expense (+E,-SE)
Supplies (-A)
1,890
Utilities expense (+E, - SE)
Utilities payable (+L)
390
To record supplies expense for the period ($2,990  $1,100 = $1,890).
3.
1,890
390
To record accrued utilities expense.
4.
Rent expense (+E,-SE)
Prepaid rent (-A)
700
700
To record rent expense for the month ($2,800/4 = $700).
5.
Unearned premium revenue (-L)
Premium revenue (+R,+SE)
468
Wages expense (+E,-SE)
Wages payable (+L)
965
468
To record premium revenue earned [($624/12)  9 = $468].
6.
965
To record accrued wages at the end of the period.
©Cambridge Business Publishers, 2011
3-20
Financial Accounting, 3rdEdition
Net
Income
=
-610
=
=
-1,890
=
-390
=
-700
=
+468
=
-965
=
+300
=
-3,787
7.
Interest receivable (+A)
Interest income (+R,+SE)
300
300
To accrue interest earned but not yet received.
E3-33 (15 minutes)
a.
Balance Sheet
Cash
Asset
Transaction
+
Noncash
Assets
a. Adjusting entry for
salaries expense.
= Liabilities +
Income Statement
Contrib.
+
Capital
+4,700
= Salaries
Payable
2010
Dec. 31
Earned
Capital
-4,700
Retained
Earnings
Salaries expense (+E,-SE)
Salaries payable (+L)
To record accrued salaries payable.
Revenues -
Expenses
=
-
+4,700
Salaries
Expense
=
Net
Income
-4,700
4,700
4,700
b.
31
Retained earnings (-RE)
Salaries expense (-E)
250,000
250,000
To close the Salaries Expense account.
c.
Balance Sheet
Cash
Asset
-12,000
Cash
Transaction
c. Paid salaries.
2011
Jan.
7
+
Noncash
Assets
= Liabilities +
Income Statement
Contrib.
+
Capital
-4,700
= Salaries
Payable
Salaries payable (-L)
Salaries expense (+E,-SE)
Cash (-A)
Earned
Capital
-7,300
Retained
Earnings
Revenues -
Expenses
=
+7,300
Salary
Expense
=
Net
Income
-7,300
4,700
7,300
12,000
To record payment of salaries.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-21
E3-34 (20 minutes)
a. Balance, January 1 = $960 + $800  $620 = $1,140.
b. Amount of premium = $82  12 = $984.
Therefore, five months' premium ($984  $574 = $410) has expired by January
31. The policy has been in effect since September 1, 2010.
The policy term began on September 1 of the previous year.
c. Wages paid in January = $3,200  $500 = $2,700.
d. Monthly depreciation expense = $8,700/60 months = $145.
Fields has owned the truck for 18 months ($2,610/$145 = 18).
E3-35 (30 minutes)
a.
Balance Sheet
Cash
Asset
Transaction
+
1. 7/31 Adjusting
entry for rent
expense.
2. 7/31 Adjusting
entry for ad.
expense.
3. 7/31 Adjusting
entry for supplies
expense.
4. 7/31 Adjusting
entry for fees
revenue.
5. 7/31 Adjusting
entry for fees
revenue.
TOTALS
31
=
Liabilities
+
Income Statement
Contrib.
+
Capital
-475
Prepaid
Rent
+
Earned
Capital
Revenues -
Retained
Earnings
=
Retained
Earnings
-1,900
-1,900
Retained
Earnings
+800
+800
Retained
Earnings
Refinish.
Revenue
-210
+1,900
-1,900
+300
+300
Retained
Earnings
Refinish.
Revenue
-
-1,485
1,100
-
+
=
+800
-300
0
Supplies
Expense
-
Unearned
Refinish.
Fees
+
-475
=
+210
- Advertising =
-
Fees
Receivable
-300
Rent
Expense
Net
Income
Expense
+800
=
=
+475
-
- 210
Supplies
-1,785
Expenses
-475
=
-210
Prepaid
Advertising
0
b.
July
Noncash
Assets
=
+300
=
2,585
Rent expense (+E,-SE)
Prepaid rent (-A)
=
-1,485
475
475
To record July rent expense ($5,700/12 = $475).
31
Advertising expense (+E,-SE)
Prepaid advertising (-A)
210
210
To record July advertising expense ($630/3 = $210).
31
Supplies expense (+E,-SE)
Supplies (-A)
1,900
To record supplies expense for July ($3,000  $1,100 = $1,900).
©Cambridge Business Publishers, 2011
3-22
1,900
Financial Accounting, 3rdEdition
31
Fees receivable (+A)
Refinishing fees revenue (+R,+SE)
800
800
To record unbilled revenue earned during July.
31
Unearned refinishing fees (-L)
Refinishing fees revenue (+R,+SE)
300
300
To record portion of advance fees earned in July ($600/2 = $300).
c.
Bal.
Bal.
+ Prepaid Rent (A) 5,700
475
(1)
5,225
Bal.
Bal.
+ Prepaid Advertising (A) 630
210
420
(4)
+ Fees Receivable (A) 800
+ Supplies (A) 3,000
1,900
Bal.
Bal.
(2)
1,100
- Unearned Finishing Fees (L) +
(5)
300
600
Bal.
300
Bal.
- Refinishing Fees Revenue (R) +
2,500 Bal.
800 (4)
300 (5)
3,600 Bal.
+
Supplies Expense (E)
1,900
(3)
+
(2)
(1)
-
Advertising Expense(E) 210
+
Solutions Manual, Chapter 3
(3)
Rent Expense (E)
475
-
©Cambridge Business Publishers, 2011
3-23
E3-36 (15 minutes)
(All amounts in $ thousands.)
a.
Cash
Asset
Transaction
+
Recognize cost of
goods sold.
Noncash
Assets
-242,265
Inventory
Balance Sheet
LiabilContrib.
=
+
+
ities
Capital
Income Statement
Earned
Capital
Revenues -
-242,265
=
Retained
Earnings
-
Expenses
= Net Income
+242,265 = -242,265
Cost of
Goods Sold
Cost of goods sold (+E,-SE) ................................................. 242,265*
Inventory (-A) ....................................................................
242,265
To recognize the cost of goods sold.
*Beginning Inv balance + Cost of acquisition – Cost of goods sold = Ending Inv
balance, so $242,265 = $110,596 + $178,519 - $46,850 = COGS
b.
Beginning compensation payable + Compensation expense – Compensation
paid = Ending compensation payable, so
$10,070 + $40,000 – Payments
= $10,204
Payments = $39,866
E3-37 (30 minutes)
a.
Dec. 31
Service fees earned (-R)
Interest income (-R)
Retained earnings (+SE)
92,500
2,200
94,700
To close the revenue accounts.
31
Retained earnings (-SE)
Salaries expense (-E)
Advertising expense (-E)
Depreciation expense (-E)
Income tax expense (-E)
64,700
41,800
4,300
8,700
9,900
To close the expense accounts.
b.
(2)
- Retained Earnings (SE) +
64,700 42,700
Bal.
94,700
(1)
72,700
Bal.
(1)
(1)
©Cambridge Business Publishers, 2011
3-24
- Service Fees Earned (R) +
92,500
92,500
Bal.
0
Bal.
- Interest Income (R) +
2,200
2,200
Bal.
0
Bal.
Financial Accounting, 3rdEdition
+ Salaries Expense (E) Bal.
41,800 41,800
(2)
Bal.
0
+ Depreciation Expense (E) Bal.
8,700
8,700
(2)
Bal.
0
Bal.
Bal.
Bal.
Bal.
+ Advertising Expense (E) 4,300
4,300
0
+ Income Tax Expense(E) 9,900
9,900
0
(2)
(2)
E3-38 (15 minutes)
a.
Balance Sheet
Cash
Asset
Transaction
(1) Collect
deposits from
customers.
(2) Recognize
income on
completed
customer orders.
(1)
Noncash
+
Assets
+200,000
=
Liabilities
Income Statement
+
Contrib.
+
Capital
Earned
Capital
Revenues -
+200,000
= Customer
Cash
Expenses
= Net Income
-
=
-
=
Deposits
+458,671
-215,606
= Customer
Cash
+674,277 +674,277
Retained
Earnings
Deposits
Sales
Revenue
Cash (+A) ………………………………………………………
Customer deposits liability* (+L) ………………………
+674,277
200,000
200,000
To record unearned customer deposits.
(2)
Customer deposits liability* (-L) ...........................................
Cash (+A)………………………………………………………
Sales revenue (+R, +SE) ...................................................
215,606 **
458,671
674,277
To record sales revenue and recognized deposits earned.
* Also sometimes called Unearned Customer Deposits
** $47,297 + $200,000 – Deposits earned = $31,691; Deposits earned = $215,606.
b.
Transaction
Recognize cost
of goods sold.
Cash
Asset
+
Noncash
Assets
-326,935
Inventory
Balance Sheet
LiabilContrib.
=
+
+
ities
Capital
=
Income Statement
Earned
Capital
Revenues -
-326,935
Retained
Earnings
Expenses
=
Net Income
+326,935
- Cost of Goods =
-326,935
Sold
Cost of goods sold (+E,-SE) ..................................................
Inventory (-A) .....................................................................
326,935 ***
326,935
To recognize the cost of goods sold.
***$186,265 + $297,189 – Cost of goods sold = $156,519; Cost of goods sold = $326,935
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-25
E3-39 (40 minutes)
a.
Solomon Corporation
Income Statement
For Year Ended December 31, 2011
Service fees earned ..............................................................................
$71,000
Rent expense ........................................................................................
(18,000)
Salaries expense ..................................................................................
(37,100)
Depreciation expense……………………………………..
(7,000)
Net income ............................................................................................
$8,900
Solomon Corporation
Statement of Stockholders’ Equity
For Year Ended December 31, 2011
Common
Retained
Stock
Earnings
Balance at December 31, 2010 ............
Stock issuance .....................................
Dividends .............................................
Net income...........................................
Balance at December 31, 2011 ............
$43,000
$20,600*
_____
$43,000
(8,000)
8,900
$21,500
Total
Stockholders’
Equity
$63,600
(8,000)
8,900
$64,500
*12,600 + 8,000 The dividend was paid and debited to retained earnings prior to the end of the period.
Solomon Corporation
Balance Sheet
December 31, 2011
Assets
Cash
Accounts receivable
Equipment
Less:Accumulated
depreciation
Liabilities
$ 4,000 Notes payable
6,500
Total Liabilities
$ 78,000
14,000
Total Assets
©Cambridge Business Publishers, 2011
3-26
64,000
$ 10,000
10,000
Owners’ Equity
Common stock
Retained earnings
$74,500 Total Liabilities and Owners’ Equity
43,000
21,500
$74,500
Financial Accounting, 3rdEdition
b.
1.
2.
3.
4.
Service fees earned (-R) ....................................................... 71,000
Retained earnings (+SE) ..................................................
71,000
Retained earnings (-SE) ....................................................... 18,000
Rent expense (-E) .............................................................
18,000
Retained earnings (-SE) ....................................................... 37,100
Salaries expense (-E) .......................................................
37,100
Retained earnings (-SE) .......................................................
Depreciation expense (-E) ..............................................
7,000
7,000
The cash dividend has already been paid and is already reflected in the
adjusted trial balance.
c. Only the T-accounts affected by closing process are shown here.
+ Depreciation Expense (E) Bal.
7,000
7,000
(4)
Bal
0
Bal.
Bal.
+ Salaries Expense (E) 37,100 37,100
0
(1)
+
(3)
Bal.
Bal
(2-4)
Solutions Manual, Chapter 3
- Service Fees Earned (R) +
71,000
71,000
Bal.
0
Bal.
Rent Expense (E) 18,000
18,000
0
- Retained Earnings (SE) +
62,100
12,600
71,000
21,500
(2)
Bal.
(1)
Bal.
©Cambridge Business Publishers, 2011
3-27
PROBLEMS
P3-40 (90 minutes)
a.
+
Cash (A)
Apr. 1
5
18
Bal.
11,500
1,800
4,900
-
2,880
6,100
1,000
675
100
2,500
+
Apr. 1
2
2
29
30
30
Accounts Receivable (A)
Apr. 12
30
Bal.
5,500 4,900
4,000
4,600
+
Apr. 5
Supplies (A)
1,200
1,200 800 (d)
400
Unadj. bal.
4,945
Adj. bal.
+
Apr. 1
Prepaid Insurance (A)
2,880
Unadj. bal.
2,880 120 (d)
Adj bal.
2,760
+
Apr. 2
Bal.
-
+
Apr. 30
Equipment (A)
3,100
3,100
Adj. Bal.
+
Apr. 30
Bal.
Advertising Expense (E)
100
100
+
Insurance Expense (E)
Apr. 30
(d) 120
Adj. Bal.
120
©Cambridge Business Publishers, 2011
3-28
Apr. 18
Apr. 30
+
Apr. 30
-
Apr. 2
Bal.
-
Roofing Fees Earned (R)
+
5,500
Apr. 12
4,000
30
9,500 Unadj. bal.
450 (d)
30
9,950
Adj. Bal.
Supplies Expense (E)
(d) 800
800
-
-
-
Accounts Payable (L)
2,100
1,200
3,300
-
+
Apr. 2
5
Bal.
-
Unearned Roofing Fees (L) +
1,800
Apr. 5
Apr. 30 (d) 450 1,800 Unadj. bal
1,350 Adj. Bal
-
-
Trucks (A)
6,100
6,100
Common Stock (SE)
11,500
11,500
+
Apr. 1
Bal.
+
Apr. 29
Bal.
Fuel Expense (E)
675
675
-
+
Apr. 30
Bal.
Wages Expense (E)
2,500
2,500
-
Financial Accounting, 3rdEdition
+ Depreciation Expense – Equip. (E) Apr. 30
(d)
35
Adj. Bal.
35
- Accumulated Deprec. – Equip. (XA) +
35 (d) Apr. 30
35
Adj. Bal.
+ Depreciation Expense - Trucks (E) Apr. 30
(d) 125
Adj. Bal.
125
- Accumulated Deprec. – Trucks (XA) +
125 (d) Apr. 30
125
Adj. Bal
b.
Balance Sheet
Cash
Asset
Transaction
Noncash
+
Assets
Apr. 1. Cash received +11,500
Cash
for stock.
-2,880
+2,880
Cash
Prepaid
Insurance
Apr. 2. Purchase truck
for cash.
Apr. 2. Purchase
equipment.
-6,100
+ 6,100
Cash
Truck
-1,000
+3,100
Cash
Equipment
Apr. 12. Bill customers
for services.
+ 1,200
Supplies
Expenses
=
-
=
=
-
=
=
-
=
-
=
-
=
-
=
-
=
-
=
Common
Stock
+2,100
= Accounts
+1,200
= Accounts
Payable
Net
Income
+1,800
=
Unearned
Roofing
Fees
+5,500
Accounts
Receivable
Apr. 18. Collected cash +4,900
Cash
on account.
Apr. 29. Paid cash for
fuel.
-675
Apr. 30. Paid cash for
ads.
-100
Totals
Revenues -
Payable
Apr. 5. Purchase
supplies on
account.
Apr. 5. Cash in
+1,800
advance for roofing Cash
repairs.
Apr. 30. Bill customers
for services.
Earned
Capital
+11,500
=
Apr. 1. Purchase
liability insurance.
Apr. 30. paid cash
wages.
= Liabilities +
Income Statement
Contrib.
+
Capital
-4,900
Accounts
Receivable
+5,500
=
+5,500
Retained Roofing Fees
Earnings
Revenue
=
+5,500
-675
Cash
+675
=
Retained
Earnings
-
=
Retained
Earnings
=
Retained
Earnings
+4,000
+4,000
=
Retained
Earnings
Roofing fees
Earned
-
6,225
9,500
-
-100
Cash
-2,500
Cash
-2,500
+4,000
Accounts
Receivable
4,945 + 17,880
Solutions Manual, Chapter 3
= 5,100
+ 11,500 +
Fuel
Expense
-675
=
+100
- Ad. Expense =
-100
+2,500
-2,500
-
Wages
Expense
=
+4,000
=
3,275
=
6,225
©Cambridge Business Publishers, 2011
3-29
Date 2010
Apr.
1
1
2
2
5
5
12
18
29
30
30
30
Description
Debit
Cash (+A)
Common stock (+SE)
Owner invested cash.
11,500
Prepaid insurance (+A)
Cash (-A)
Paid two-year premium on liability insurance policy.
2,880
Trucks (+A)
Cash (-A)
Purchased used truck for $6,100 cash.
6,100
2,880
6,100
Equipment (+A)
3,100
Cash (-A)
Accounts payable (+L)
Purchased ladders and other equipment, $1,000 down with
$2,100 balance due in 30 days.
Supplies (+A)
Accounts payable (+L)
Purchased supplies on account.
1,200
Cash (+A)
Unearned roofing fees (+L)
Received advance payment for services.
1,800
Accounts receivable (+A)
Roofing fees earned (+R,+SE)
Billed customers for services.
5,500
Cash (+A)
Accounts receivable (-A)
Collection on account from customers.
4,900
1,000
2,100
1,200
1,800
5,500
4,900
Fuel expense (+E,-SE)
Cash (-A)
Paid truck fuel bill for April.
675
Advertising expense (+E,-SE)
Cash (-A)
Paid for April newspaper advertising.
100
675
100
Wages expense (+E, -SE)
Cash (-A)
Paid wages.
2,500
Accounts receivable (+A)
Roofing fees earned (+R, +SE)
Billed customeers for services.
4,000
©Cambridge Business Publishers, 2011
3-30
Credit
11,500
2,500
4,000
Financial Accounting, 3rdEdition
c.
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Trucks
Equipment
Accounts Payable
Unearned Roofing Fees
Common Stock
Roofing Fees Earned
Fuel Expense
Advertising Expense
Wages Expense
Lougee ROOFING SERVICE
UNADJUSTED TRIAL BALANCE
APRIL 30, 2010
Debit
$ 4,945
4,600
1,200
2,880
6,100
3,100
Credit
$ 3,300
1,800
11,500
9,500
675
100
2,500
$26,100
$26,100
d.
Balance Sheet
Transaction
Cash
Asset
Noncash
+ Assets
1. Recognize one
month of
insurance
expense.
2. Recognize
supplies
expense .
3. Recognize
depreciation
expense –
Trucks.
4. Recognize
depreciation
expense on
equipment.
5. Recognize
roofing fees
earned.
Totals
-120
-
Contra
Assets
-
Income Statement
= Liabilities +
Contrib.
Capital
+
=
-
=
+125
=
-
+35
-
Solutions Manual, Chapter 3
-
-125
=
-
160
-
=
-35
-
-450
+450
+450
Retained
Earnings
Roofing Fees
Earned
-630
450
+
0
+
+120
=
-120
=
-800
=
-125
=
-35
=
+450
=
-630
+800
+125
+35
Depreciation
Expense
Unearned
Roofing
Fees
-450
Net
Income
Depreciation
Expense
Retained
Earnings
=
=
Supplies
Expense
Retained
Earnings
Accumulated
Depreciation
Expenses
Insurance
Expense
-800
Accumulated
Depreciation
-920
-
Retained
Earnings
-
+
-
Retained
Earnings
Supplies
0
Revenues
-120
Prepaid
Insurance
-800
Earned
Capital
-
-
1,080
©Cambridge Business Publishers, 2011
3-31
Date 2010
April 30
Description
Insurance expense (+E,-SE)
Prepaid insurance (-A)
Debit
120
Credit
120
To record April insurance expense ($2,880/24 months = $120).
30
Supplies expense (+E,-SE)
Supplies (-A)
800
Depreciation expense—Trucks (+E,-SE)
Accumulated depreciation—Trucks (+XA,-A)
125
800
To record April supplies expense ($1,200  $400 = $800).
30
125
To record April depreciation on trucks.
30
Depreciation expense—Equipment (+E,-SE)
Accumulated depreciation—Equipment (+XA,-A)
35
35
To record April depreciation on equipment.
30
Unearned roofing fees (-L)
Roofing fees earned (+R,+SE)
450
450
To record portion of advance payment earned in April
($1,800/4 = $450).
©Cambridge Business Publishers, 2011
3-32
Financial Accounting, 3rdEdition
P3-41 (40 minutes)
SnapShot Company
UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2010
a.
Debit
$2,150
3,800
12,600
2,970
4,250
22,800
Cash
Accounts Receivable
Prepaid Rent
Prepaid Insurance
Supplies
Equipment
Accounts Payable
Unearned Photography Fees
Common Stock
Photography Fees Earned
Wages Expense
Utilities Expense
Credit
$1,910
2,600
24,000
34,480
11,000
3,420
$62,990
______
$62,990
b.
Balance Sheet
Transaction
Cash
Asset
1. Fees earned
but not
received.
2. Recognize
depreciation
expense for
one year.
3. Recognize
utilities
expense.
4. Recognize
rent
expense for
year.
5. Recognize
photo
revenues.
6. Recognize
insurance
expense.
7. Recognize
supplies
expense.
8. Recognize
wages
expense.
Totals
Noncash
+ Assets
-
Contra
Assets
Income Statement
= Liabilities +
Contrib.
Capital
+
+925
Fees
Receivable
-
-
+2,280
Accumulated
Depreciation
+925
+925
Retained
Earnings
Photography
Fees Earned
=
Retained
Earnings
-
Expenses
+2,280
-
Depreciation
Expense
-
Utilities
Expense
-400
-6,300
+6,300
Prepaid
Rent
Retained
Earnings
Rent
Expense
=
-
-2,600
= Unearned
Photo Fees
-990
Prepaid
Insurance
+ -9,095
Solutions Manual, Chapter 3
+2,600
+2,600
Photography
Fee Earned
Retained
Earnings
-
=
Retained
Earnings
-
=
-
2,280
+375
-375
Retained
Earnings
= -1,825
+
0
+
-9,550
-6,300
=
=
+990
-990
-
Insurance
Expense
-
Supplies
Expense
-
Wages
Expense
=
-
13,075
= -9,550
-2,730
Wages
Payable
-400
=
+2,600
-
-990
=
-2,730
Supplies
-
Retained
Earnings
-
-2,280
=
+400
Retained
Earnings
=
+2,730
-2,730
=
+375
3,525
Net
Income
=
-6,300
-
=
+925
-
-2,280
Payable
0
Revenues
=
+400
= Utilities
-
Earned
Capital
-375
©Cambridge Business Publishers, 2011
3-33
Date 2010
Dec. 31
Description
Fees receivable (+A)
Photography fees earned (+R, +SE)
Debit
925
`
Credit
925
To record revenue earned but not billed.
31
Depreciation expense (+E,-SE)
Accum. depreciation—Equipment (+XA, -A)
2,280
2,280
To record depreciation for the year
($22,800/10 years = $2,280).
31
Utilities expense (+E, -SE)
Utilities payable (+L)
400
400
To record estimated December utilities expense.
31
Rent expense (+E, -SE)
Prepaid rent (-A)
6,300
6,300
To record rent expense for the year
($12,600/2 years = $6,300).
31
Unearned photography fees (-L)
Photography fees earned (+R, +SE)
2,600
2,600
To record advance payments earned during the year.
31
Insurance expense (+E, -SE)
Prepaid insurance (-A)
990
990
To record insurance expense for the year
($2,970/3 years = $990).
31
Supplies expense (+E,-SE)
Supplies (-A)
2,730
2,730
To record supplies expense for the year
($4,250  $1,520 = $2,730).
31
Wages expense (+E, -SE)
Wages payable(+L)
375
375
To record unpaid wages at December 31.
©Cambridge Business Publishers, 2011
3-34
Financial Accounting, 3rdEdition
c.
+ Cash (A) 2,150
Adj. bal.
2,150
+ Accounts Receivable (A) Unadj. bal.
3,800
Adj. bal.
3,800
+ Fees Receivable (A) Dec. 31
(1) 925
Adj. bal.
925
+ Prepaid Rent (A) Unadj. bal. 12,600 6,300 (4)
Dec.31
Adj. bal.
6,300
+ Prepaid Insurance (A) Unadj. bal.
Dec.31
2,970 990 (6)
Adj. bal.
1,980
+ Supplies (A) Unadj. bal.
Dec.31
4,250 2,730 (7)
Adj. bal.
1,520
Unadj. bal.
+ Equipment (A) Unadj. bal. 22,800
Adj. bal.
22,800
- Accum. Depreciation – Equip. (XA) +
Dec.31
2,280 (2)
Adj. Bal.
2,280
+ Supplies Expense (E) (7) 2,730
Adj. bal.
2,730
+ Insurance Expense (E) Dec. 31
(6) 990
Adj. bal.
990
Dec. 31
Solutions Manual, Chapter 3
- Accounts Payable (L) +
Unadj. bal.
1,910
Adj. bal.
1,910
- Unearned Photo Fees (L) +
Unadj. bal.
Dec.31
(5) 2,600 2,600
Adj. bal.
0
- Utilities Payable (L) +
Dec.31
400 (3)
Adj. bal.
400
- Wages Payable (L) +
Dec.31
375 (8)
Adj. bal.
375
- Common Stock (SE) +
Unadj. bal.
24,000
Adj. bal.
24,000
- Photo Fees Earned (R) +
Unadj. bal
34,480
Dec.31
925 (1)
Dec.31
2,600 (5)
Adj. bal.
38,005
+ Wages Expense (E) Unadj. bal.
11,000
Dec.31
(8) 375
Adj. Bal.
11,375
+ Utilities Expense (E) Unadj. bal.
3,420
Dec.31
(3) 400
Adj. Bal.
3,820
+ Depreciation Expense – Equip. (E) Dec.31
(2) 2,280
Adj. Bal.
2,280
+ Rent Expense (E) Dec.31
(4) 6,300
Adj. Bal.
6,300
©Cambridge Business Publishers, 2011
3-35
P3-42 (90 minutes)
a.
Balance Sheet
Transaction
Cash
Asset
1. Recognize
rent expense.
-
Contra
Assets
-775
Prepaid
Rent
2. To recognize
supplies
expense.
3. To recognize
depreciation
expense.
4. To recognize
wages
expense.
5. To recognize
utilities
expense.
6. To recognize
fees earned.
Totals
Noncash
+ Assets
Income Statement
+
Contrib.
Capital
+
=
=
Net
Income
-
+775
=
-775
-
=
510
+
0
+
+74
=
-74
+210
=
-210
=
-300
=
+380
Wages
Expense
-300
=
74
-
Retained
Earnings
-
= -1,700
Depreciation
Expense
-210
Utilities
Payable
+380
-
Retained
Earnings
= +300
+1,700
Supplies
Expense
-74
Wages
Payable
-
Date 2011
June 30
=
Retained
Earnings
= +210
-
Expenses
Retained
Earnings
-
+ -2,095
-
Rent
Expense
-1,700
-
Depreciation
0
Revenues
Retained
Earnings
+74
=
- Accumulated
Accounts
Receivable
Earned
Capital
-775
-
-1,700
Supplies
Liabil=
ities
+300
Utilities
Expense
+380
+380
Retained
Earnings
Service Fees
Earned
-2,679
380
Description
Rent expense (+E, -SE)
Prepaid rent (-A)
-
Debit
775
3,059
= -2,679
Credit
775
To record June rent expense ($3,100/4 months = $775).
30
Supplies expense (+E, -SE)
Supplies (-A)
1,700
1,700
To record June supplies expense (2,520  $820 = $1,700).
30
Depreciation expense—Equip (+E, -SE)
Accum. depreciation—Equipment (+XA, -A)
74
74
To record June depreciation ($4,440/60 months = $74).
30
Wages expense (+E, -SE)
Wages payable (+L)
210
210
To record unpaid wages at June 30.
30
Utilities expense (+E, -SE)
Utilities payable (+L)
300
300
To record estimated June utilities expense.
30
Accounts receivable (+A)
Service fees earned (+R, +SE)
380
380
To record fees earned but not billed in June.
©Cambridge Business Publishers, 2011
3-36
Financial Accounting, 3rdEdition
b.
+ Cash (A) 1,180
Adj. bal.
1,180
+ Accounts Receivable (A) Unadj. bal
450
Jun. 30
(6) 380
Adj. bal.
830
- Accounts Payable (L) +
Unadj. bal
760
Adj. bal.
760
- Wages Payable (L) +
Jun.30
210 (4)
Adj. bal.
210
Unadj. bal
- Utilities Payable (L) +
Jun.30
300 (5)
Adj. bal.
300
- Retained Earnings (SE) +
Unadj. bal.
5,300
+ Prepaid Rent (A) Unadj. bal
3,100 775 (1)
Jun.30
Adj. bal.
2,325
+ Rent Expense (E) (1) 775
Adj. bal.
775
- Common Stock (SE) +
Unadj. bal
2,000
Adj. bal.
2,000
Jun.30
Unadj. bal
Adj. bal.
Unadj. bal
Adj. bal.
+ Supplies (A) 2,520 1,700 (2)
820
Jun.30
+ Equipment (A) 4,440
4,440
- Accum. Depreciation – Equip.(XA) +
74 (3) Jun.30
Adj. Bal.
74
+ Supplies Expense (E) (2) 1,700
Adj. bal.
1,700
Jun. 30
Solutions Manual, Chapter 3
- Service Fees Earned (R) +
4,650 Unadj. bal
380 (6) Jun.30
Adj. bal.
5,030
+ Wages Expense (E) Unadj. bal
1,020
Jun.30
(4) 210
Adj. bal.
1,230
+ Utilities Expense (E) Jun.30
(5) 300
Adj. bal.
300
+ Depreciation Expense - EQPT (E) (3) 74
Adj. bal.
74
Jun.30
©Cambridge Business Publishers, 2011
3-37
c.
Murdock Carpet Cleaners
Income Statement
For Year Ended June 30, 2011
Revenues
Service fees…………………………………….….
$5,030
Expenses
Rent expense……………………………………….
$ 775
Wages expense…………………………………….
1,230
Supplies expense………………………………….
1,700
Utilities expense…………………………………...
300
Depreciation expense…………………………….
74
Total expenses…………………………………….
4,079
Net income…………………………………………………
$ 951
Murdock Carpet Cleaners
BALANCE SHEET
June 30, 2011
Assets
Cash
Accounts receivable
Supplies
Prepaid rent
Equipment
Less: Accumulated
depreciation
Liabilities
$ 1,180 Accounts payable
830 Wages payable
$ 760
210
820 Utilities payable
2,325
Total Liabilities
$ 4,440
74
Total Assets
©Cambridge Business Publishers, 2011
3-38
4,366
300
1,270
Owners’ Equity
Common stock
Retained earnings
$9,521 Total Liabilities and Owners’ Equity
2,000
6,251
$9,521
Financial Accounting, 3rdEdition
d.
1.
2.
3.
4.
5.
6.
1.
2.
3.
4.
5.
Bal.
Retained earnings (-SE) ......................................................
Rent expense (-E) .............................................................
775
Retained earnings (-SE) .......................................................
Supplies expense (-E) ......................................................
1,700
Retained earnings (-SE) .......................................................
Wages expense (-E) .........................................................
1,230
Retained earnings (-SE) .......................................................
Utilities expense (-E ) .......................................................
300
Retained earnings (-SE) .......................................................
Depreciation expense (-E) ...............................................
74
Service fees earned (-R) .......................................................
Retained earnings (+SE) ..................................................
5,030
- Retained Earnings (SE) +
5,300
Bal.
775
1,700
1,230
300
74 5,030
6.
6,251
Bal.
+ Wages Expense(E) 1,230 1,230
0
+ Depreciation Expense (E) Bal.
74 74
0
Solutions Manual, Chapter 3
3.
5.
Bal.
775
1,700
1,230
300
74
5,030
+ Rent Expense (E) 775 775
0
+ Supplies Expense (E) Bal.
1,700 1,700
0
Bal.
6.
1.
2.
+ Utilities Expense (E) 300 300
4.
0
- Service Fees Earned (R) +
5,030 5,030
Bal.
0
©Cambridge Business Publishers, 2011
3-39
P 3-43 (30 minutes)
a.
Balance Sheet
Transaction
Cash
Asset
+
Noncash
Assets
-
1. Accrue salary
expense.
-
2. Accrue
interest
expense.
3. Accrue fees
receivable.
-
+900
-
Liabil=
ities
= +720
Salaries
Payable
= +200
Interest
Payable
=
Income Statement
+
Contrib.
Capital
+
-400
-
-
=
+900
Printing
Revenue
-
=
+2,175
=
-
2,175
©Cambridge Business Publishers, 2011
3-40
+38
+38
Retained
Earnings
Interest
Revenue
+
-3,017
=
-200
=
+900
=
-400
=
-300
=
-160
=
+38
=
-2,175
+200
+400
+300
+160
-
-
-2,175
0
-720
Rent
Expense
Retained
Earnings
= 1,080 +
=
Ad. Expense
-
-160
Retained
Earnings
+720
Maintenance
Expense
-
Rent
Payable
Net
Income
-
-
-300
Accumulated
Depreciation
+238
+900
Retained
Earnings
+160
=
Interest
Expense
Retained
Earnings
-
+
-
-400
=
Expenses
Salaries
Expense
Retained
Earnings
Interest
Receivable
0
-
-200
=
-
+38
-
Retained
Earnings
Prepaid
Advertising
6. Accrue rent
expanse.
Revenues
-720
Prepaid
Maintenance
-300
Earned
Capital
Retained
Earnings
Fees
Receivable
4. Accrue
maintenance
expense.
5. Accrue ad.
Expense.
7. Accrue
interest
revenue.
8. Accrue
depreciation
expense.
Totals
Contra
Assets
+2,175
Depreciation
Expense
938
-
3,955
= -3,017
Financial Accounting, 3rdEdition
b.
Date
Dec 31
31
31
31
31
31
31
31
Description
Debit
Salaries expense (+E, -SE)
720
Salaries payable (+L)
To accrue salaries at December 31 ($1,800  2/5 = $720).
Interest expense (+E, -SE)
Interest payable (+L)
To accrue interest expense at December 31.
200
Fees receivable (+A)
Printing revenue (+R, +SE)
To record revenue earned but not yet billed.
900
Maintenance expense (+E ,-SE)
Prepaid maintenance (-A)
To record December maintenance expense.
400
Advertising expense (+E, -SE)
Prepaid advertising (-A)
To record December advertising expense
($900  1/3 = $300).
300
Rent expense (+E, -SE)
Rent payable (+L)
To accrue one-half month's rent expense
[(400  $0.80)/2 = $160].
160
720
200
900
400
300
160
Interest receivable (+A)
Interest income (+R, +SE)
To accrue interest earned in December.
38
38
Depreciation expense—Equipment (+E, -SE)
Accum. depreciation—Equipment (+XA)
To record annual depreciation on equipment.
Solutions Manual, Chapter 3
Credit
2,175
2,175
©Cambridge Business Publishers, 2011
3-41
P3-44 (40 minutes)
TRUEMAN CONSULTING INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2010
a.
Revenue
Service fees earned
Expenses
Rent expense
Salaries expense
Supplies expense
Insurance expense
Depreciation expense—Equipment
Interest expense
Total Expenses
Net Income
$58,400
$12,000
33,400
4,700
3,250
720
630
54,700
$ 3,700
TRUEMAN CONSULTING INC.
STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2010
Common
Retained
Stock
Earnings
Balance at December 31, 2009 ............
Stock issuance .......................................
Total Stockholders’
Equity
$1,000
$3,305
$4,305
Net income .............................................
_____
3,700
3,700
Balance at December 31, 2010 ............
$1,000
$7,005
$8,005
Dividends................................................
©Cambridge Business Publishers, 2011
3-42
Financial Accounting, 3rdEdition
TRUEMAN CONSULTING
BALANCE SHEET
DECEMBER 31, 2010
Assets
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Less: Accumulated
depreciation
Total Assets
Liabilities
$ 2,700 Accounts payable
3,270 Long-term notes payable
3,060
1,500
$ 6,400
1,080
$ 845
7,000
Total Liabilities
7,845
Owners’ Equity
5,320 Common stock
$15,850
1,000
Retained earnings
Total Liabilities and Owners’ Equity
7,005
$15,850
b.
Date 2010 Description
Dec. 31
Service fees earned (-R)
Retained earnings (+SE)
To close the revenue account.
31
Retained earnings (-SE)
Rent expense (-E)
Salaries expense(-E)
Supplies expense (-E)
Insurance expense (-E)
Depreciation expense—Equip (-E)
Interest expense (-E)
To close the expense accounts.
Solutions Manual, Chapter 3
Debit
58,400
Credit
58,400
54,700
12,000
33,400
4,700
3,250
720
630
©Cambridge Business Publishers, 2011
3-43
P3-45 (30 minutes)
a.
Date 2010
Dec. 31
31
Description
Service fees earned (-R)
Miscellaneous income (-R)
Retained earnings (+SE)
To close the revenue accounts.
Debit
97,200
4,200
Retained earnings (-SE)
Salaries expense (-E)
Rent expense (-E)
Insurance expense (-E)
Depreciation expense (-E)
Income tax expense (-E)
To close the expense accounts.
74,800
Credit
101,400
42,800
13,400
1,800
8,000
8,800
b. After the closing entries are posted, Retained Earnings has a $45,700 credit
balance ($19,100 + $26,600 net income).
c.
Wilson Company
Post-Closing Trial Balance
December 31, 2010
Debit
Cash
Accounts Receivable
Prepaid Insurance
Equipment
Accumulated Depreciation
Accounts Payable
Income Tax Payable
Common Stock
Retained Earnings
©Cambridge Business Publishers, 2011
3-44
Credit
$8,500
8,000
3,600
72,000
______
$92,100
$12,000
600
8,800
25,000
45,700
$92,100
Financial Accounting, 3rdEdition
P3-46 (30 minutes)
a.
Balance Sheet
Transaction
Cash
Asset
+
1. Recognize
Advertising
expense.
2. Accrue wage
expense.
Noncash
Assets
Liabilities
+
-400
Prepaid
Advertising
4. Recognize
service fees
earned.
+1,300
-1,300
Wages
Payable*
Retained
Earnings
-2,400
+2,400
Retained
Earnings
+1,000
0
+
Rent
Receivable
=
-540
=
-1,100
+
0
+
Advertising
Expense
Wages
Expense
-
Insurance
Expense
-1,300
=
+1,140
-1,140
=
+2,400
+2,400
Service Fees Earned
+1,000
+1,000
Retained
Earnings
Rental
Income
-
560
3,400
-
=
+1,000
=
2,840
=
*Assumes wages earned had not been accrued or recognized yet as an expense.
Date 2010
Dec. 31
Description
Advertising expense (+E, -SE)
Prepaid advertising (-A)
Debit
400
Wages expense (+E, -SE)
Wages payable (+L)
Credit
400
To record advertising expense ($1,200  $800 = $400).
31
1,300
1,300
To record accrued wages.
31
Insurance expense (+E, -SE)
Prepaid insurance (-A)
1,140
Unearned service fees (-L)
Service fees earned (+R, +SE)
2,400
1,140
To record insurance expense ($3,420  $2,280 = $1,140).
31
2,400
To recognize unearned fees as earned
($5,400  $3,000 = $2,400).
31
Rent receivable (+A)
Rental income (R, +SE)
1,000
1,000
To record rent earned but not yet recorded.
Solutions Manual, Chapter 3
Net
Income
-400
=
+1,300
-
-1,140
Unearned
Service Fees
=
Expenses
+400
-
Retained
Earnings
=
=
5. Recognize
rent revenue.
Revenues -
Retained
Earnings
-1,140
Prepaid
Insurance
Earned
Capital
-400
=
=
3. Recognize
insurance
expense.
Totals
=
Income Statement
Contrib.
+
Capital
©Cambridge Business Publishers, 2011
3-45
560
b.
Cash
Asset
Transaction
1. Pay
-2,400
wages of
Cash
$2,400.
2. Receipt of +1,000
$1,000 rent
Cash
revenue.
Date 2011
Jan. 4
+
Noncash
Assets
Balance Sheet
LiabilContrib.
=
+
+
ities
Capital
=
Income Statement
Earned
Capital
-1,300
-1,100
Wages
Payable
Retained
Earnings
Revenues -
Expenses
=
+1,100
-
Wages
Expense
Net
Income
-1,100
=
-1,000
=
Rent
Receivable
Description
Wages payable (-L)
Wages expense (+E, -SE)
Cash (-A)
-
=
Debit
1,300
1,100
Credit
2,400
To record payment of wages.
4
Cash (+A)
Rent receivable (-A)
1,000
1,000
To record collection of rent.
©Cambridge Business Publishers, 2011
3-46
Financial Accounting, 3rdEdition
P3-47 (90 minutes)
a, b and d. For part d, the adjusting entries are indicated by the numbers 1-5. The
unadjusted trial balance required in part c is calculated before the adjusting entries
are made.
6/1
6/2
6/30
+ Cash (A) 24,000
4,400
6,400
875
7,800
930
3,600
1,240
520
3,600
1,500
21,535
6/1
6/2
6/2
6/12
6/15
6/18
6/26
6/30
5.
6/10
6/28
+ Accounts Receivable (A) 5,800
7,800
6/30
5,200
3,200
6/2
+ Prepaid Advertising (A) 930
310
620
6/1
+ Office Supplies (A) 2,840
1,310
1,530
6/1
4.
1.
+ Office Equipment (A) 11,040
- Acc. Depreciation – Off. Equip (XA) +
115
3.
4.
+ Advertising Expense (E) 310
Solutions Manual, Chapter 3
- Accounts Payable (L) +
9,480
6/1
- Salaries Payable (L) +
725
2.
- Unearned Service Fees (L) +
3,200
6,400
6/2
3,200
- Common Stock (SE) +
24,000
6/30
1.
6/15
6/1
- Retained Earnings(SE) +
1,500
+ Supplies Expense (E) 1,310
+ Travel Expense (E) 1,240
3.
+ Depreciation Expense(E) 115
6/2
+ Rent Expense (E) 875
©Cambridge Business Publishers, 2011
3-47
+ Salaries Expenses (E) 6/12
6/26
2.
6/18
- Service Fees Earned (R) +
3,600
3,600
725
7,925
5,800
5,200
3,200
14,200
6/10
6/28
5.
+ Postage Expense (E) 520
b.
Balance Sheet
Cash
Asset
Transaction
+
Noncash
Assets
=
Liabilities
6/1. Investment for
common stock.
+24,000
6/1. Purchase of
assets for cash
& on account.
-4,400
+ 11,040
+9,480
Cash
Office
Equipment
Accounts
Payable
+
Income Statement
Contrib.
Capital
+
Earned
Capital
Revenues -
Expenses
=
Net
Income
+24,000
=
Cash
=
Common
Stock
-
=
-
=
+2,840
Supplies
6/2. Pay rent $875.
-875
-875
=
Cash
6/2.Purchase $930
of advertising in
advance.
6/2Signed research
contract.
-930
Cash
6/12. Paid salaries.
6/18. Paid postage.
+5,800
+5,800
=
Retained
Earnings
Service Fees
Earned
=
Retained
Earnings
=
Retained
Earnings
=
Retained
Earnings
=
Retained
Earnings
+5,200
+5,200
=
Retained
Earnings
Service
Fees
Earned
-3,600
-1,240
=
-
=
-
=
+5,800
+3,600
-
-1,240
Cash
-520
+5,200
+7,800
-7,800
Cash
Acts. Rec.
=
-1,500
-1,500
Cash
Retained
Earnings
©Cambridge Business Publishers, 2011
3-48
-3,600
=
+1,240
Travel
Expense
-
Postage
Expense
-1,240
=
+520
-3,600
Accounts
Receivable
Salaries
Expense
-
-520
-3,600
6/28. Bill customers
for services.
-
-3,600
Cash
6/30. Collect
service fees.
6/30. Cash dividend
paid.
Unearned
Service Fees
+5,800
Accounts
Receivable
Cash
6/26. Paid salaries.
-875
=
+6,400
=
Cash
Cash
6/15. Paid travel
expenses.
Rent
Expense
+930
=
Prepaid
Advertising
+6,400
6/10. Bill customers
for services.
+875
-
Retained
Earnings
-520
=
+3,600
-
Salaries
Expense
-3,600
=
+5,200
-
=
-
=
-
Financial Accounting, 3rdEdition
Date 2010 Description
June 1 Cash (+A)
Common stock (+SE)
Debit
24,000
Credit
24,000
Owner invested cash for common stock.
1 Office equipment (+A)
Office supplies (+A)
Cash (-A)
Accounts payable (+L)
11,040
2,840
4,400
9,480
Purchased equipment and supplies;
$4,400 cash paid with the remainder due in 60 days.
2 Rent expense (+E, -SE)
Cash (-A)
875
875
Paid June rent.
2 Prepaid advertising (+A)
Cash (-A)
930
930
Paid three months' advertising in advance.
2 Cash (+A)
Unearned service fees (+L)
6,400
6,400
Received two months' fees in advance on six-month contract.
10 Accounts receivable (+A)
Service fees earned (+R, +SE)
5,800
5,800
Billed customers for services.
12 Salaries expense (+E, -SE)
Cash (-A)
3,600
3,600
Paid two weeks' salaries to employees.
15 Travel expense (+E, -SE)
Cash (-A)
1,240
1,240
Paid business travel expenses.
18 Postage expense (+E, -SE)
Cash (-A)
520
520
Paid postage for questionnaire mailing.
26 Salaries expense (+E, -SE)
Cash (-A)
3,600
3,600
Paid two weeks' salaries to employees.
28 Accounts receivable (+A)
Service fees earned (+R, +SE)
5,200
5,200
Billed customers for services.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-49
30 Cash (+A)
Accounts receivable (-A)
7,800
7,800
Collections from customers on account.
30 Retained earnings (-SE)
Cash (-A)
1,500
1,500
Declared and paid dividends.
c.
MARKET-PROBE
UNADJUSTED TRIAL BALANCE
JUNE 30, 2010
Debit
$21,535
3,200
2,840
930
11,040
Cash
Accounts Receivable
Office Supplies
Prepaid Advertising
Office Equipment
Accounts Payable
Unearned Service Fees
Common Stock
Retained Earnings*
Service Fees Earned
Salaries Expense
Rent Expense
Travel Expense
Postage Expense
Credit
$9,480
6,400
24,000
1,500
11,000
7,200
875
1,240
520
______
$50,880
$50,880
* The negative (debit) balance in Retained Earnings reflects the dividend paid.
d.
Balance Sheet
Transaction
a. Recognize
supplies
expense.
b. Recognize
salaries
expense.
c. Accrue
depreciation
expense.
d. Recognize
advertising
expense.
e. Recognize
earned
service fees.
Cash
Asset
Noncash
+ Assets
-
Contra
Assets
-1,310
Office
Supplies
= Liabilities
=
Revenues
-
-
Retained
Earnings
=
+115
+725
-725
Salaries
Payable
Retained
Earnings
=
=
©Cambridge Business Publishers, 2011
3-50
+1,310
=
Net
Income
= -1,310
+725
=
-725
=
-115
=
-310
Salaries
Expense
-
+115
Depreciation
Expense
-310
-
Retained
Earnings
=
-
-
Retained
Earnings
-
Expenses
Supplies
Expense
-115
Accumulated
Depreciation
-310
Prepaid
Advertising
Earned
Capital
-1,310
-
-
Income Statement
Contrib.
+
+
Capital
+310
Advertising
Expense
-3,200
+3,200
+3,200
Unearned
Service Fees
Retained
Earnings
Service Fees
Earned
-
= +3,200
Financial Accounting, 3rdEdition
Date 2010
Description
June
Supplies expense (+E, -SE)
Office supplies (-A)
30
Debit
Credit
1,310
1,310
To record supplies used during June
($2,840  $1,530 = $1,310).
30
Salaries expense (+E, -SE)
Salaries payable (+L)
725
725
To record unpaid salaries at June 30.
30
Depreciation expense—Office equipment (+E, -SE)
Accum. deprec. Off. equipment (+XA, -A)
115
115
To record June depreciation ($11,040/96 mo. = $115).
30
Advertising expense (+E, -SE)
Prepaid advertising (-A)
310
310
To record one month's advertising expense.
30
Unearned service fees (-L)
Service fees earned (+R, +SE)
3,200
3,200
To record one month's fees earned, received in advance.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-51
P3-48 (40 minutes)
DELIVERALL
UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2010
a.
Debit
$ 2,300
5,120
1,680
6,270
42,240
Cash
Accounts Receivable
Prepaid Advertising
Supplies
Equipment
Notes Payable
Accounts Payable
Common Stock
Mailing Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Credit
$7,500
2,700
9,530
86,000
38,800
6,300
3,020
$105,730
________
$105,730
b.
Balance Sheet
Transaction
1. Recognize
advertising
expense.
2. Recognize
depreciation
expense.
3. Recognize
utilities
expense.
4. Accrue wages
expense.
5. Recognize
supplies
expense.
6. Accrue interest
expense.
7. Recognize rent
expense*.
Cash
Asset
Noncash
+ Assets
-
Contra
Assets
-1,540
Liabil=
ities
=
Prepaid
Advertising
=
+
Revenues
-
-1,540
Retained
Earnings
=
=
-
-325
Retained
Earnings
-1,200
Wages
Payable
Retained
Earnings
=
-4,750
Retained
Earnings
=
=
-
-450
Retained
Earnings
-430
Retained
Earnings
= -5,280
+325
=
+1,200
= -1,200
+4,750
= -4,750
+450
=
-450
+430
=
-430
Rent
Expense
*(1/2%  $86,000 = $430). The rent for the year ($6,300 = $525 x 12) has already been
recognized in the accounts. See the beginning balances given in the problem statement.
©Cambridge Business Publishers, 2011
3-52
-325
Interest
Expense
-
+430
Accounts
Payable
+5,280
Supplies
Expense
-
+450
Interest
Payable
= -1,540
Wages
Expense
-
-4,750
-
Net
Income
Utilities
Expense
-
+1,200
+1,540
=
Depreciation
Expense
-
+325
Accounts
Payable
Expenses
Advertising
Expense
-
-5,280
Accumulated
Depreciation
-
Supplies
+
Earned
Capital
Retained
Earnings
+5,280
-
Income Statement
Contrib.
Capital
Financial Accounting, 3rdEdition
Date 2010
Dec. 31
Description
Advertising expense (+E, -SE)
Prepaid advertising (-A)
Debit
1,540
Credit
1,540
To record 11 months' advertising expense
($1,680  11/12 = $1,540).
31
Depreciation expense (+E, -SE)
Accumulated depreciation (+XA, -A)
5,280
5,280
To record depreciation for the year
($42,240/8 years = $5,280).
.
31
Utilities expense (+E, -SE)
Accounts payable (+L)
325
325
To record estimated December utilities expense.
31
Wages expense (+E, -SE)
Wages payable (+L)
1,200
1,200
To record unpaid wages at December 31.
31
Supplies expense (+E, -SE)
Supplies (-A)
4,750
4,750
To record supplies expense for the year
($6,270  $1,520 = $4,750).
31
Interest expense (+E, -SE)
Interest payable (+L)
450
450
To record accrual of interest expense at Dec. 31.
31
Rent expense (+E, -SE)
Accounts payable (+L)
430
430
To record additional rent owed under lease
(1/2%  $86,000 = $430).
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-53
c.
Only the T-accounts needed to enter the adjustments are provided.
- Accounts Payable (L) +
2,700
325
430
Bal.
3.
7.
+ Prepaid Advertising (A) Bal.
1,680 1,540
Bal.
- Accumulated Depreciation–Equip (XA) +
5,280
2.
1.
+ Supplies (A) 6,270 4,750
6.
Bal.
7.
+ Rent Expense (E) 6,300
430
- Wages Payable (L) +
1,200
4.
Bal.
4.
+ Wages Expense (E) 38,800
1,200
Bal.
3.
+ Utilities Expense (E) 3,020
325
5.
+ Supplies Expense (E) 4,750
2.
6.
+ Interest Expense (E) 450
©Cambridge Business Publishers, 2011
3-54
5.
+Advertising Expense (E) 1,540
- Interest Payable (L) +
450
+ Depreciation Expense (E) 5,280
1.
Financial Accounting, 3rdEdition
P3-49 (60 minutes)
a.
Balance Sheet
Transaction
Cash
Asset
1. Recognize rent
expense.
Noncash
+ Assets
Contra
Assets
-
2. Recognize
supplies
expense.
3. Accrue
depreciation
expense.
4. Accrue wages
payable.
=
=
=
Net
Income
-
+795
=
-795
=
-1,980
=
-335
=
-560
=
-390
=
+500
-
-
Retained
Earnings
=
=
=
-
+560
-560
Wages
Payable
Retained
Earnings
+390
-390
Accounts
Payable
Retained
Earnings
+335
Depreciation
Expense
-
+560
Wages
Expense
-
+390
Utilities
Expense
-500
+500
+500
Unearned
Service
Revenue
Retained
Earnings
Service
Revenue
Debit
Rent expense (+E, -SE)
Prepaid rent (-A)
+1,980
Supplies
Expense
-335
Accumulated
Depreciation
-
31
Expenses
Rent
Expense
-1,980
Date 2010 Description
Mar.
-
Retained
Earnings
+335
5. Recognize
utilities
expense.
6. Recognize
service
revenue.
Revenues
Retained
Earnings
-
-
Earned
Capital
-795
-
-1,980
Supplies
+
=
-795
Prepaid
Rent
= Liabilities
Income Statement
Contrib.
+
Capital
-
Credit
795
795
To record March rent expense ($4,770/6 months = $795).
31
Supplies expense (+E, -SE)
Supplies (-A)
1,980
1,980
To record March supplies expense ($3,700$1,720 = $1,980).
31
Depreciation expense—Equipment (+E, -SE)
Accumulated depreciation—Equipment (+XA, -A)
335
335
To record March depreciation ($36,180/108 months = $335).
31
Wages expense (+E, -SE)
Wages payable (+L)
560
560
To record unpaid wages at March 31.
31
Utilities expense (+E, -SE)
Accounts payable (+L)
390
390
To record estimated March utilities expense.
31
Unearned service revenue (-L)
Service revenue (+R, +SE)
500
500
To record revenue received in advance that was earned in March.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-55
b.
Not all the T-accounts given are needed to enter the adjustments required. Also,
the closing entries required in part d are referenced by 1c, 2c etc.
- Accounts Payable (L) +
2,510
390
2,900
Bal.
5.
Bal.
- Acc Depreciation - Equipment (XA) +
335
3.
6c.
3.
5.
1c.
2c.
3c.
4c.
5c.
-Service Revenue(R) +
12,860 12,360
500
+Depreciation Expense (E) 335
335
Bal.
6.
3c.
+ Utilities Expense (E) 390
390
5c.
- Retained Earnings (SE) +
795
1,980
335
4,460
390
12,860
4,900
6c.
7c.
©Cambridge Business Publishers, 2011
3-56
Bal.
Bal.
+ Prepaid Rent (A) 4,770
795
3,975
1.
+ Supplies (A) Bal.
3,700
1,980
2.
Bal.
1,720
- Unearned Service Revenue (L) +
6.
500
1,000
Bal.
500
Bal.
1.
+ Rent Expense (E) 795
795
1c.
2.
+ Supplies Expense (E) 1,980
1,980
2c.
+Wages Expense (E) 3,900
560
4,460
4c.
- Wages Payable (L) +
560
4.
Bal.
4.
Financial Accounting, 3rdEdition
c.
Wheel Place Company
Income Statement
For Month Ended March 31, 2010
Service revenue……………………………………….……...
$12,860
Expenses:
Utilities expense…………….…………………..…………
$390
Supplies expense…………..………………………………
1,980
Wages expense……………..…………………………..…
4,460
Depreciation expense………………………………….…
335
Rent expense……………………………………………...
795
Net income …………………………………………………...
7,960
$4,900
Wheel Place Company
BALANCE SHEET
March 31, 2010
Assets
Cash
Accounts receivable
Supplies
Prepaid rent
Equipment
Less:Accumulated
depreciation
Total Assets
Solutions Manual, Chapter 3
Liabilities
$ 1,900 Accounts payable
3,820 Wages payable
1,720 Unearned service revenue
3,975
Total Liabilities
$ 36,180
335
35,845
$ 2,900
560
500
3,960
Owners’ Equity
Common stock
Retained earnings
$47,260 Total Liabilities and Owners’ Equity
38,400
4,900
$47,260
©Cambridge Business Publishers, 2011
3-57
d.
1c.
2c.
3c.
4c.
5c.
6c.
Retained earnings (-SE) ....................................................
Rent expense (-E) ..........................................................
795
795
Retained earnings (-SE) .................................................... 1,980
Supplies expense (-E) ...................................................
Retained earnings (-SE) ....................................................
Depreciation expense (-E) ............................................
335
335
Retained earnings (-SE) .................................................... 4,460
Wages expense (-E) ......................................................
Retained earnings (-SE) ....................................................
Utilities expense (-E) .....................................................
1,980
4,460
390
Service revenue (-R) ......................................................... 12,860
Retained earnings (+SE) ...............................................
390
12,860
The closing journal entries are shown in the T-accounts in part a.
©Cambridge Business Publishers, 2011
3-58
Financial Accounting, 3rdEdition
P3-50 (30 minutes)
a.
TRAILS, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2010
Revenues
Subscription revenue
Advertising revenue
Total revenues
Expenses
Salaries expense
Printing and mailing expense
Rent expense
Supplies expense
Insurance expense
Depreciation expense
Income tax expense
Total expenses
Net income
$ 168,300
49,700
$218,000
100,230
85,600
8,800
6,100
1,860
5,500
1,600
209,690
$8,310
Trails, Inc.
Statement of Stockholders’ Equity
For Year Ended December 31, 2010
$25,000
$23,220
Total
Stockholders’
Equity
$48,220
_____
$25,000
8,310
$31,530
8,310
$56,530
Common
Stock
Balance at December 31, 2009 ............
Stock issuance ...................................
Dividends ............................................
Net income .........................................
Balance at December 31, 2010 ............
Solutions Manual, Chapter 3
Retained
Earnings
©Cambridge Business Publishers, 2011
3-59
TRAILS, INC.
BALANCE SHEET
DECEMBER 31, 2010
Assets
Cash
Accounts receivable
Supplies
Prepaid insurance
Office equipment
$66,000
Less:
Accum. depreciation
11,000
Total assets
$3,400
8,600
4,200
930
Liabilities
Accounts payable
Unearned subscription revenue
Salaries payable
Total liabilities
$ 2, 100
10,000
3,500
15,600
Stockholders' equity
55,000
$72,130
Common stock
Retained earnings
Total stockholders' equity
Total liabilities and
stockholders' equity
$25,000
31,530
56,530
$72,130
b.
Date 2010 Description
Dec. 31
Subscription revenue (-R)
Advertising revenue (-R)
Retained earnings (+SE)
Debit
168,300
49,700
Credit
218,000
To close the revenue accounts.
31
Retained earnings (-SE)
Salaries expense (-E)
Printing and mailing expense (-E)
Rent expense (-E)
Supplies expense (-E)
Insurance expense (-E)
Depreciation expense (-E)
Income tax expense (-E)
209,690
100,230
85,600
8,800
6,100
1,860
5,500
1,600
To close the expense accounts.
©Cambridge Business Publishers, 2011
3-60
Financial Accounting, 3rdEdition
P3-51 (30 minutes)
a.
Date 2010 Description
Dec. 31
Service fees earned (-R)
Retained earnings (+SE)
Debit
72,500
Credit
72,500
To close the revenue account.
31
Retained earnings (-SE)
Wages expense (-E)
Rent expense (-E)
Insurance expense (-E)
Supplies expense (-E)
Advertising expense(-E)
Depreciation expense—Trucks(-E)
Depreciation expense—Equipment (-E)
58,800
29,800
10,200
2,900
5,100
6,000
4,000
800
To close the expense accounts.
b. The balance in Retained Earnings after closing entries are posted is $29,250
credit ($15,550 + $13,700).
c.
Mayflower MOVING SERVICE
POST-CLOSING TRIAL BALANCE
DECEMBER 31, 2010
Debit
Cash
$ 3,800
Accounts Receivable
5,250
Supplies
2,300
Prepaid Advertising
3,000
Trucks
28,300
Accumulated Depreciation—Trucks
Equipment
7,600
Accumulated Depreciation—Equipment
Accounts Payable
Unearned Service Fees
Common Stock
Retained Earnings
______
$50,250
Solutions Manual, Chapter 3
Credit
$10,000
2,100
1,200
2,700
5,000
29,250
$50,250
©Cambridge Business Publishers, 2011
3-61
P3-52 (20 minutes)
a.
Balance Sheet
Cash
Asset
Transaction
1. Recognize
maintenance
expense.
2. Recognize
supplies expense.
+
Noncash
Assets
=
Liabilities
+
Income Statement
Contrib.
+
Capital
-1,800
-
Maintenance
Expense
-
Supplies
Expense
+4,500
+4,500
= Unearned
Commission Fees
Retained
Earnings
Commission
Fees Earned
+2,800
+2,800
=
Retained
Earnings
Commission
Fees Earned
=
+913
-913
Rent
Payable
Retained
Earnings
=
=
+5,200
Retained
Earnings
+2,800
Fees
Receivable
Expenses
-5,200
=
-4,500
4. Earned but
unbilled
commission fees.
5. Rent expense.
-
+1,800
Retained
Earnings
-5,200
3. Accrue earned
commissions.
Revenues
-1,800
=
Prepaid
Maintenance
Supplies
Earned
Capital
Date 2010 Description
Dec. 31 Maintenance expense (+E, -SE)
Prepaid maintenance (-A)
-5,200
=
+4,500
-
=
-
=
+2,800
+913
-
-913
Rent
Expense
Debit
1,800
=
Credit
1,800
To record four months' maintenance expense
[($2,700/6)  4 = $1,800].
31 Supplies expense (+E, -SE)
Supplies (-A)
5,200
31 Unearned commission fees (-L)
Commission fees earned (+R, +SE)
4,500
5,200
To record supplies expense ($8,400  $3,200 = $5,200).
4,500
To transfer fees earned from unearned fees
($8,500  $4,000 = $4,500).
31 Fees receivable (+A)
Commission fees earned (+R, +SE)
2,800
2,800
To record fees earned but not yet billed.
31 Rent expense (+E, -SE)
Rent payable (+L)
913
913
To record additional 2008 rent
[1%  ($84,000 + $4,500 + $2,800) = $913].
©Cambridge Business Publishers, 2011
3-62
Net
Income
-1,800
Financial Accounting, 3rdEdition
b.
Balance Sheet
Cash
Asset
Transaction
+
Noncash
Assets
1/10. Billing of
commission fees
earned.
=
Liabilities
Income Statement
+
Contrib.
Capital
-2,800
Fees
Receivable
+4,600
+
Earned
Capital
Revenues - Expenses =
Net
Income
+1,800
+1,800
+1,800
Retained Commission
Earnings
Fees
Earned
=
=
Accounts
Receivable
1/10. Payment of
additional rent in
cash.
2011
Jan. 10
-913
Cash
-913
= Rent Payable
-
Accounts receivable (+A)
Fees receivable (-A)
Commision fees earned (+R, +SE)
=
4,600
2,800
1,800
To record billings on Jan. 10, 2011.
10
Rent payable (-L)
Cash (-A)
913
913
To record payment of contingent rent from 2010.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-63
P3-53 (60 minutes)
a.
Balance Sheet
Transaction
Cash
Asset
1. Cash sales.
+145,850
Noncash
+ Assets
=
=
Income Statement
Contrib.
+
+
Capital
Earned
Capital
Revenues
-
+145,850 +145,850
-
Retained
Earnings
=
+2,500
Inventories -
=
-77,300
Cash
+200
Cash
Prepaid
Rent
+76,200
-73,700
Accounts
Payable
Retained
Earnings
=
Net
Income
=
+145,850
=
-73,700
Sales
Revenue
-
+73,700
Cost of
Sales
-
-77,300
=
-23,800
-
Retained
Earnings
=
-12,500
Expenses
=
Accounts
Payable
-
-24,000
Cash
Liabilities
-
Cash
2. Record
inventory
purchased
and used.
3. Recognize
recent
payments on
A/P.
4. Recognize
rent paid
and rent
expense.
5. Recognize
wage expense
and wages
paid.
6. Recognize
depreciation
expense.
-
Contra
Assets
-
+250
-12,750
Wages
Payable
Retained
Earnings
+1,700
=
- Accumulated
Depreciation
-1,700
Retained
Earnings
+23,800
=
-23,800
=
-12,750
=
-1,700
Rent
Expense
-
+12,750
Wages
Expense
-
+1,700
Depreciation
Expense
1. Cash (+A) ............................................................................................
145,850
Sales revenue (+R,+SE) ....................................................................
145,850
2. Inventories (+A) .................................................................................
2,500
Cost of goods sold (+E, -SE) ...........................................................
73,700*
Accounts payable (+L) .....................................................................
76,200
Or, make two separate entries with the same net effect:
Inventory (+A) ....................................................................................
76,200
Accounts payable (+L) .....................................................................
76,200
Cost of goods sold (+E, -SE) ...........................................................
73,700*
Inventory (-A) .....................................................................................
73,700
*73,700 = 12,000 +76,200 – 14,500.
3. Accounts payable (-L) .......................................................................
77,300*
Cash (-A) .............................................................................................
77,300
*77,300 = 5,200 +76,200 – 4,100.
4. Prepaid rent (+A) ................................................................................
200*
Rent expense (+E, -SE) .....................................................................
23,800*
Cash (-A) .............................................................................................
24,000
*23,800 = 3,800 + (24,000 ÷12)(10) and 200 = 24,000 – 3,800 – (24,000 ÷12)(10). The rent
expense for the first two months of the year is $3,800. But the rate for March 1, 2011
through February 29, 2012 is $2,000 per month. So, for the last ten months of 2011, the
rent expense is $20,000, making the total rent expense $23,800 for 2011.
©Cambridge Business Publishers, 2011
3-64
Financial Accounting, 3rdEdition
5.
Wages expense (+E,-SE) ..................................................................
12,750*
Cash (-A) .............................................................................................
12,500
Wages payable (+L) ........................................................................... 250
* 12,750 = 12,500 + (350 – 100).
6.
Depreciation expense (+E,-SE) ........................................................
1,700
Acc. depreciation – Equipment (+XA, -A) .......................................1,700
b, d. The closing entries required in part d are also included here and indicated
by the letter d before the relevent entry.
+ Cash (A) Bal.
1.
Bal.
8,500
145,850
77,300
24,000
12,500
3.
4.
5.
Bal.
2.
Bal.
40,550
Bal.
Bal.
Bal.
4.
+ Equipment (A) 7,500
7,500
Bal.
- Accumulated Depreciation Equip.(XA) +
Bal.
3,000
6.
1,700
Bal.
4,700
3.
d.
-Accounts Payable (L)+
5,200
77,300
76,200
4,100
-Sales Revenue (R)+
145,850
145,850
0
4.
Bal.
+Rent Expense (E)23,800
23,800
0
Solutions Manual, Chapter 3
-Owners’ Equity (SE)+
23,500
33,900
57,400
Bal.
Bal.
+ Prepaid Rent (A) 3,800
200
4,000
- Wages Payable (L) +
100 Bal.
250 5.
350 Bal.
Bal.
2.
1.
+ Inventories (A) 12,000
2,500
14,500
2.
Bal.
6.
d.
Bal.
Bal.
d.
Bal.
+Cost of Goods Sold (E)73,700
73,700
d.
0
+Depreciation Expense(E)1,700
1,700
d.
0
©Cambridge Business Publishers, 2011
3-65
5.
Bal.
+Wages Expense (E)12,750
12,750
0
d.
c, d. Part c is easier to complete if the closing entries required in part d are
journalized and entered in the T-accounts. The appropriate T-account entries
for part d have been made earlier and indicated by the letter d.
Sales revenue (-R)
..................................................................................
145,85
0
Cost of goods sold (-E) ...........................................................................
Rent expense (-E) ...................................................................................
Wages expense (-E) ................................................................................
Depreciation expense (-E) .......................................................................
Owners’ equity ........................................................................................
73,700
23,800
12,750
1,700
33,900
To close temporary revenue and expense accounts.
Fischer Card Shop
Income Statement
For the Year ended December 31, 2011
Sales revenue
Cost of goods sold
Gross profit
Other expenses:
Rent expense
Wages expense
Depreciation expense
Total other expenses
Net income
$145,850
73,700
72,150
$23,800
12,750
1,700
38,250
$33,900
Fischer Card Shop
Balance Sheets
As of December 31,
Assets:
Cash
Inventories
Prepaid rent
Total current assets
Equipment
Accumulated depreciation
Equipment, net
Total assets
Liabilities and owners’ equity:
Accounts payable
Wages payable
Total liabilities
Owners’ equity
©Cambridge Business Publishers, 2011
3-66
2010
2011
$ 8,500
12,000
3,800
24,300
7,500
(3,000)
4,500
$ 28,800
$ 40,550
14,500
4,000
59,050
7,500
(4,700)
2,800
$ 61,850
$ 5,200
100
5,300
23,500
$ 4,100
350
4,450
57,400
Financial Accounting, 3rdEdition
Total liabilities and owners’ equity
P3-54 (120 minutes)
$ 28,800
$ 61,850
a, b. The T-accounts follow the journal entries and the FSET.
Cash
Asset
Transaction
12/1. Investment for
common stock.
12/2. Rent paid in
cash.
12/2. Purchase
supplies on
account.
12/3. Office
equipment
bought for 4,700
cash and rest on
account.
12/8. Paid for
supplies.
Noncash
Assets
Balance Sheet
Contrib.
+
Capital
= Liabilities
+20,000
+1,080
Supplies
+3,000
Net
Income
=
+1,200
-
Retained
Earnings
Rent
Expense
-1,200
=
-
=
-
=
-
=
+4,800
Office
Accounts
Equipment = Payable
-1,080
= Accounts
Payable
-900
+900
=
Retained
Earnings
+3,000
+3,000
=
Retained
Earnings
Consulting
Revenue
=
Retained
Earnings
+7,200
+7,200
=
Fees
Receivable
Retained
Earnings
Consulting
Revenue
=
Retained
Earnings
Cash
Cash
-900
-
+7,200
-1,800
Cash
Solutions Manual, Chapter 3
Wages
Expense
-900
=
+3,000
-
-900
Cash
12/30. Bill clients for
consulting.
=
+1,080
+9,500
Cash
12/20. Received cash
for consulting
services.
12/28. Paid wages in
cash.
Expenses
-
= Accounts
Payable
-1,080
-900
Revenues -
-1,200
=
Cash
Cash
Earned
Capital
Common
Stock
-1,200
-4,700
Income Statement
+
+20,000
=
Cash
12/14. Paid wages in
cash.
I2/30. Paid cash
dividends.
+
=
+900
-
Wages
Expense
-900
=
+7,200
-
=
-
=
-1,800
©Cambridge Business Publishers, 2011
3-67
b.
Date 2010 Description
Dec. 1 Cash (+A)
Common stock (+SE)
Debit
20,000
Credit
20,000
Invested $20,000 cash in the business.
2
Rent expense (+E, -SE)
Cash (-A)
1,200
1,200
Paid rent for December.
2
Supplies (+A)
Accounts payable (+L)
1,080
1,080
Purchased various supplies on account.
3
Office equipment (+A)
Cash (-A)
Accounts payable (+L)
9,500
4,700
4,800
Purchased $9,500 of office equipment, $4,700 cash
down payment and balance due in 30 days.
8
Accounts payable (-L)
Cash (-A)
1,080
1,080
Payment on account.
14
Wages expense (+E, -SE)
Cash (-A)
900
900
Paid assistant's wages.
20
Cash (+A)
Consulting revenue (+R, +SE)
3,000
3,000
Cash received for services.
28
Wages expense (+E, -SE)
Cash (-A)
900
900
Paid assistant's wages.
30
31
Fees receivable (+A)
Consulting revenue (+R, +SE)
Billed customers for services.
7,200
Retained earnings (-SE)
Cash (-A)
1,800
7,200
1,800
Issued and paid $1,800 in dividends.
©Cambridge Business Publishers, 2011
3-68
Financial Accounting, 3rdEdition
The adjusting entries requested in part d are included and are denoted by the letter
d followed by a number 1 through 5. The closing entries requested in part g are
indicated by the letter g.
+
12/1
12/20
Bal.
Cash (A)
20,000
1,200
3,000
4,700
1,080
900
900
1,800
12,420
12/2
12/3
12/8
12/14
12/28
12/31
-Wages Payable(L) +
2d.
-Accumulated Depreciation+
Office Equipment (XA)
120
12/8
- Accounts Payable (L) +
1,080 1,080
4,800
4,800
- Retained Earnings (SE)+
12/31
1,800 12,450
g.
3,760
6,890
g.
3d.
Bal.
Solutions Manual, Chapter 3
12/3
+Office Equipment (A) 9,500
d1
270
-Common Stock(SE)+
3d.
12/2
12/3
Bal.
g.
Bal.
-Consulting Revenue(R)+
3,000
12/20
7,200
12/30
12,450 2,250
4d.
Bal.
0
+Depreciation Expense(E)120 120
0
12/2
Bal.
+Supplies(A)1,080 370
710
g.
20,000
12/2
Bal.
+Rent Expense (E) 1,200 1,200
0
12/14
12/28
2d.
Bal.
+ Wages Expense (E) 900 2,070
900
270
0
12/30
4d.
Bal.
+Fees Receivable (A)7,200
2,250
9,450
1d.
Bal.
+ Supplies Expense (E) 370 370
0
12/1
g.
g.
g.
©Cambridge Business Publishers, 2011
3-69
c.
Rhoades TAX Services
UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2010
Debit
$12,420
7,200
1,080
9,500
Cash
Fees Receivable
Supplies
Office Equipment
Accounts Payable
Common Stock
Retained Earnings (Dividend)
Consulting Revenue
Wages Expense
Rent Expense
Credit
$4,800
20,000
1,800
10,200
1,800
1,200
$35,000
______
$35,000
d.
Balance Sheet
Transaction
Cash
Asset
1. Record
supplies
expense.
2. Accrue wages
expense.
Noncash
+ Assets
-
Contra
Assets
+120
-
+
Earned
Capital
Revenues
-
-370
Retained
Earnings
=
-270
Retained
Earnings
=
=
Date 2010
Description
Dec. 31 Supplies expense (+E, -SE)
Supplies (-A)
-
-120
Wages expense (+E, -SE)
Wages payable (+L)
Net
Income
+370
=
-370
=
-270
=
-120
+270
+120
Depreciation
Expense
+2,250
+2,250
Retained
Earnings
Consulting
Revenue
-
Debit
370
= +2,250
Credit
370
To record December supplies expense ($1,080  $710).
31
=
Wages
Expense
Retained
Earnings
-
Expenses
Supplies
Expense
-
+270
Wages
Payable
Accumulated
Depreciation
+2,250
Fees
Receivable
+
-
-
3. Record
depreciation
expense.
4. Recognize
accrued
consulting
fees.
Income Statement
Contrib.
Capital
=
-370
Supplies
=
Liabilities
270
270
To reflect unpaid wages at December 31.
31
Depreciation expense (+E, -SE)
Accumulated depreciation (+XA, -A)
120
120
To record December depreciation.
©Cambridge Business Publishers, 2011
3-70
Financial Accounting, 3rdEdition
31
Fees receivable (+A)
Consulting revenue (+R, +SE)
2,250
2,250
To record unbilled service revenue (30  $75).
e.
Cash
Fees Receivable
Supplies
Office Equipment
Accumulated Depreciation
Accounts Payable
Wages Payable
Common Stock
Retained Earnings
Consulting Revenue
Supplies Expense
Wages Expense
Rent Expense
Depreciation Expense
RHOADES TAX SERVICES
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2010
Debit
$12,420
9,450
710
9,500
Credit
$120
4,800
270
20,000
1,800
12,450
370
2,070
1,200
120
$37,640
______
$37,640
f.
RHOADES TAX SERVICES
INCOME STATEMENT
FOR THE MONTH OF DECEMBER 2010
Revenue
Consulting revenue
Expenses
Wages expense
Rent expense
Supplies expense
Depreciation expense
Total expenses
Net income
Solutions Manual, Chapter 3
$12,450
$ 2,070
1,200
370
120
3,760
$ 8,690
©Cambridge Business Publishers, 2011
3-71
Rhoades TAX Services
STATEMENT OF Stockholders’ EQUITY
FOR THE MONTH OF DECEMBER 2010
Common
Retained
Stock
Earnings
Balance at December 1, 2010 ..............
Stock issuance .....................................
$0
20,000
Total
Stockholders’
Equity
$0
Dividends .............................................
Net income ...........................................
_____
(1,800)
8,690
Balance at December 31, 2010 ............
$20,000
$6,890
$0
20,000
(1,800)
8,690
$26,890
Rhoades TAX Services
BALANCE SHEET
DECEMBER 31, 2010
Assets
Cash
Fees receivable
Supplies
Total current assets
Office equipment
$ 9,500
Less:
Accum. depreciation
120
Total assets
©Cambridge Business Publishers, 2011
3-72
Liabilities and Equity
$12,420 Accounts payable
9,450 Wages payable
710 Total liabilities
22,580
Stockholders’ equity
Common stock
9,380
Retained earnings
Total liabilities and stockholders’
$31,960
equity
$ 4,800
270
5,070
20,000
6,890
$31,960
Financial Accounting, 3rdEdition
g.
Date 2010
Description
Dec. 31 Consulting revenue (-R)
Retained earnings (+SE)
Debit
12,450
Credit
12,450
To close the revenue account.
31
Retained earnings (-SE)
Wages expense (-E)
Rent expense (-E)
Supplies expense (-E)
Depreciation expense (-E)
3,760
2,070
1,200
370
120
To close the expense accounts.
h.
Cash
Fees Receivable
Supplies
Office Equipment
Accumulated Depreciation
Accounts Payable
Wages Payable
Retained Earnings
Common Stock
Rhoades TAX Services
POST-CLOSING TRIAL BALANCE
DECEMBER 31,2010
Debit
$12,420
9,450
710
9,500
$32,080
Solutions Manual, Chapter 3
Credit
$ 120
4,800
270
6,890
20,000
$32,080
©Cambridge Business Publishers, 2011
3-73
CASES
C3-55 (90 minutes)
a1. Entries in the FSET are first shown for the initial deposits and checks. These are
entries 1- 8. Entries a - f are the adjusting entries that would be made at the end of
the three months. The expenditures for rent and salaries are assumed to have been
initially debited to expense accounts.
Balance Sheet
Income Statement
Noncash
Cash
Asset + Assets
+50,000
Cash
-
+81,000
Cash
-
+10,000
Cash
-
-24,000
Cash
-
5. Purchased
equipment.
-25,000
Cash
+25,000
Equipment -
=
-
=
6. Purchased
inventory.
-62,000
Cash
+62,000
Inventory
=
-
=
7. Paid salaries.
-6,000
Cash
-
-13,000
Cash
-
Transaction
1. Investment for
common
stock.
2. Collections
from
customers.
3. Bank
borrowing.
4. Rent expense.
8. Paid other
expenses.
= +10,000
Loans
Payable
=
+12,000
Prepaid
Rent
c. Accrue salaries
expense.
=
=
= +3,000
Salaries
Payable
=
-41,000
Inventory
Earned
Capital
Revenues
+81,000
Sales
Revenue
-24,000
Retained
Earnings
-
Expenses
=
-
=
-
=
-
=
-
+24,000
Rent
Expanse
=
Net
Income
+81,000
-24,000
-
=
b. Adjust rent
expense.
Contrib.
+
+
Capital
+50,000
Investment
+81,000
Retained
Earnings
=
+9,000
A/R
e. Accrue
depreciation
expense.
f. Accrue interest
expense*.
Liabil=
ities
=
=
a. Recognize
credit sales.
d. Recognize cost
of goods sold.
-
Contra
Assets
-
-
+1,250
Accumulated
Depreciation
=
=
-
©Cambridge Business Publishers, 2011
3-74
+300
Interest
Payable
-6,000
Retained
Earnings
-13,000
Retained
Earnings
+9,000
Retained
Earnings
+12,000
Retained
Earnings
-3,000
Retained
Earnings
-41,000
Retained
Earnings
-1,250
Retained
Earnings
-300
Retained
Earnings
-
-
+9,000
Sales
Revenue
+6,000
Salaries
Expense
+13,000
Misc.
Expenses
-
-
-
-
-
-
-12,000
Rent
Expense
+3,000
Salaries
Expense
+41,000
Cost of
Goods Sold
+1,250
Deprec.
Expense
+300
Interest
Expense
=
-6,000
=
-13,000
=
+9,000
=
+12,000
=
-3,000
=
-41,000
=
-1,250
=
-300
Financial Accounting, 3rdEdition
a2. Journal entries are shown only for the adjustments a-f.
a.
Accounts receivable (+A)
Sales revenue (+R, +SE)
9,000
9,000
To recognize sales on account.
b.
Prepaid rent (+A)
Rent expense (-E, +SE)
12,000
12,000
To recognize remaining prepaid rent and correct rent expense.
c.
Salaries expense (+E, -SE)
Salaries payable (+L)
3,000
3,000
To recognize unpaid salaries earned during September.
d.
Cost of goods sold (+E, -SE)
Merchandise inventory (-A)
41,000
41,000
To recognize cost of sales; ($62,000 - $21,000).
e.
Depreciation expense (+E, -SE)
Accumulated depreciation (+XA, -A)
1,250
1,250
To accrue depreciation on the fixtures and equipment
($25,000/60)(3).
f.
Interest expense (+E, -SE)
Interest payable (+L)
300
300
To accrue interest on bank loan assumed taken out 7/1/2008.
($10,000)(0.12)(1/4).
b.
T-accounts: The opening balances shown are the amounts in the accounts
prior to the entry of the adjustments described in items a through f. The cash
balance represents the deposits made, $141,000, less the checks drawn,
$130,000.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-75
+ Cash (A) 11,000
Bal.
+ Merchandise Inventory (A) Bal.
62,000
41,000
d.
+ Prepaid Rent (A) 12,000
b.
+ Equipment (A) 25,000
Bal.
- Accumulated Deprec.-Equip. (XA) +
1,250
e.
- Salaries Payable (L) +
3,000
c.
+ Accounts Receivable (A) 9,000
- Owners’ Equity (SE) +
50,000
Bal.
- Sales Revenue (R) +
81,000
9,000
Bal.
a.
d.
+ Cost of Goods Sold (E) 41,000
Bal.
+ Rent Expense (E) 24,000
12,000
b.
e.
+ Depreciation Expense (E) 1,250
Bal.
+ Other Expense (E) 13,000
a.
+
Bal.
c.
+
f.
- Bank Loan Payable (L) +
10,000
Salaries Expense (E)
6,000
3,000
-
Interest Expense (E)
300
-
©Cambridge Business Publishers, 2011
3-76
-
Interest Payable (L)
300
Bal.
+
f.
Financial Accounting, 3rdEdition
c.
Seaside Surf Shop
Income Statement
July 1, 2010 to September 30 ,2010
Sales revenue
Cost of goods sold
Gross margin
Expenses:
Rent expense
Salaries expense
Depreciation expense
Interest expense
Misc. expenses
Net income
$90,000
41,000
49,000
$12,000
9,000
1,250
300
13,000
35,550
$13,450
Seaside Surf Shop
Balance Sheet
September 30, 2010
Assets
Current assets
Cash
Accounts receivable
Inventory
Prepaid rent
Total current assets
$11,000
9,000
21,000
12,000
53,000
Fixtures and equipment, net
Total assets
23,750
$76,750
Liabilities and owners’ equity
Current liabilities
Salaries payable
Bank loan payable
Interest payable
Total current liabilities
Owners’ equity*
Total liabilities and owners’ equity
$3,000
10,000
300
13,300
63,450
$76,750
*$50,000 + $13,450
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-77
d.
Chapter 1 introduced the return on equity ratio as a simple performance measure
that can be used to evaluate how well this new business is doing. The return on
equity is calculated as the ratio of net income to average total equity. In this
case, the return on equity for the three-month period was 23.7% = $13,450 /
[($50,000+ $63,430)/2]. This is a very good return for a three-month period and
equates to 95% annualized. However, the favorable performance evaluation
should be tempered by a few caveats:
(1) Because this business appears to be a sole proprietorship, any “salary”
paid to the owner is not deducted from net income. Instead, cash
payments to the owner are treated as dividends (or withdrawals). As a
consequence, any services provided by the owner to the business would
not be reflected among the expenses reported in the income statement,
and net income would be overstated.
(2) No expense is reported in the income statement for income taxes. This is
consistent with the business being a sole proprietorship, in which income
taxes are levied against the owner as an individual taxpayer. Again, this
makes “net” income appear to be larger than it otherwise might be.
(3) Retail businesses are notoriously seasonal. That is, sales (and profits)
fluctuate from season to season. A business such as this one would likely
have its highest sales in the second and third quarters. This seasonality
must be considered when we try to annualize quarterly results like these.
Once the business has operated for a year or two, the owner would likely
have a better idea about how seasonal fluctuations affect sales and returns
and would be better able to interpret quarterly performance measures.
(4) Finally, Seaside’s cash position is precarious. The firm has burned through
most of the $60 thousand cash raised to begin the business and is likely to
have trouble replacing its inventory as well as paying its bills. Perhaps they
can convince lenders to come to their rescue. If not, the firm will not last
another three months.
©Cambridge Business Publishers, 2011
3-78
Financial Accounting, 3rdEdition
C3-56 (15 minutes)
a.
The following analysis shows how the relevant information affects total assets,
liabilities, and owners’ equity of the firm:
Per Original balance sheet
Percentage of debt and equity
1.
Recognition of insurance expense
($4,500  1/2 = $2,250)
2.
Depreciation correction
(5%  $68,500 = $3,425)
3.
(No adjustment required)
4.
Unbilled services performed
5.
Advance consulting fee earned
($11,300  1/2 = $5,650)
6.
Recognition of supplies expense
($13,200  $4,800 = $8,400)
Revised totals
Percentage of debt and equity
Assets
$88,500
Liabilities
$45,900
51.9%
Owners’
Equity
$42,600
48.1%
(2,250)
(2,250)
3,425
3,425
6,000
6,000
(5,650)
(8,400)
$87,275
______
$40,250
46.1%
5,650
(8,400)
$47,025
53.9%
Revised debt-to-equity ratio: $40,250/$47,025 = 0.86
Original debt-to-equity ratio: $45,900/$42,600 = 1.08
b.
Apparently, the loan agreement has not been violated.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2011
3-79
C3-57 (30 minutes)
Discussion of this case may consider the following ethical considerations facing
Javetz:
1. Balancing the long-run interests of the firm (securing the international contract)
against the short-run requirement to present accurately the financial data of the
company for the current year (recording $150,000 adjusting entry).
2. Compromising the confidentiality of the contract negotiations (by disclosing the
contract negotiations to additional persons) versus compromising her
professional responsibilities (by omitting a significant year-end adjusting entry).
3. Jeopardizing her position with the firm (by revealing information the president
wants kept secret) versus risking possible future legal action by parties relying
on the firm's financial statements (by not revealing a significant accrued
expense and accrued liability in the financial statements).
Discussion of this case should also note that outside auditors frequently access
confidential data and disclosing the contract negotiations to the auditor should not
represent a significant breach of confidentiality. Perhaps Javetz can achieve a
reasonable solution to her dilemma by suggesting that an adjusting entry be
recorded and described in very general terms (for example, labeling the liability
Payable to Consultants and indicating it is for marketing research and
development). Such an adjustment would permit the disclosure of the significant
liability without revealing important details to anyone else within or outside the
company.
©Cambridge Business Publishers, 2011
3-80
Financial Accounting, 3rdEdition
C3-58 (30 minutes)
a,b,c and d.
FSET:
Balance Sheet
Transaction
a1. Recognize
prepaid catalog
costs.
Cash
Asset
+
-62,550
+62,550
Cash
Prepaid
Catalog
Costs
a2. Advertising
credits
received.
Contrib.
= Liabilities +
Capital
+ 849
-62,138
Prepaid
Catalog
Costs
c. Recognize
expiration of
advertising
credits.
Cash
d2. Recognize
sales using gift
certificates.
Solutions Manual, Chapter 3
+
Revenues -
+849
+849
Retained
Earnings
Advertising
Credits
Revenue
Retained
Earnings
Advertising
Credits
=
Receivable
Retained
Earnings
Expenses
=
-
=
-
=
Net
Income
+849
-62,138
=
-336
+19,175
Income Statement
Earned
Capital
=
Advertising =
Credits
Receivable
b. Recognize
advertising
expense.
d1. Sales of gift
certificates.
Noncash
Assets
+62,138
-
-336
Catalog
Expenses
-62,138
=
+336
Expense:
- Expiration
of
Advertising
Credits
-336
=
+19,175
Unearned
Gift
=
Certificate
Revenues
-
- 18,230
+18,230
+18,230
Unearned
Gift
=
Certificate
Revenues
Retained
Earnings
Gift
Certificate
Revenues
=
+18,230
-
=
©Cambridge Business Publishers, 2011
3-81
Journal Entries:
a1. Prepaid catalog costs (+A)
Cash (-A)
62,550
62,550
To record catalog printing costs.
a2. Advertising credits receivable (+A)
Advertising credits revenue (+R, +SE)
849
849
To recognize advertising credits earned.
b.
Catalog expense (+E, -SE)
Prepaid catalog costs (-A)
62,138
62,138
To regognize catalog expense ($3,894 + $62,550 - $4,306).
c.
Advertising credit expiration expense (+E, -SE)
Advertising credits receivable (-A)
336
336
To record the expiration of advertising credits ($21 + $849 - $534).
Advertising credits expire either because they were used to advertise or, if there
was a time limitation to their use, the time limit expired.
d1. Cash (+A)
Unearned gift certificate revenues (+L)
19,175
19,175
To recognize gift certificates sold but not yet redeemed.
d2. Unearned gift certificate revenues (-L)
Gift certificate revenues (+R, +SE)
18,230
18,230
To recognize revenues based on redeemed gift certificates
($6,108 +$19,175 - $7,053).
©Cambridge Business Publishers, 2011
3-82
Financial Accounting, 3rdEdition