accounting principles, fifth canadian editiondhseagles.kpdsb.on.ca/~rbeatty/resources/bat4m0/... ·...

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition

Solutions Manual 4-1 Chapter 4

© 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.

CHAPTER 4

Completion of the Accounting Cycle

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

Brief Exercises

Exercises

Problems Set A

1. Prepare closing entries and a post-closing trial balance.

1, 2 ,3, 4, 5

1, 2, 3, 4, 6

1, 2, 3, 4, 5, 6, *12, *13

1, 2, 3, 4, 6, *10

2. Explain the steps in the accounting cycle including optional steps.

6, 7, 8, 9 5, 6 4, 5 3, 4

3. Prepare correcting entries.

9, 10, 11, 12

7, 8 6, 7 5

4. Prepare a classified balance sheet.

13, 14, 15, 16, 17

9, 10 8, 9, 10 1, 2, 3, 4, 6

5. Illustrate measures used to evaluate liquidity.

18, 19, 20 11, 12 9, 10, 6, 7

*6. Prepare a work sheet (Appendix 4A).

*21, *22, *23

*13, *14 11, *8, *9

*7. Prepare reversing entries (Appendix 4B).

*24, *25 *15, *16 *12, *13, *10, *11

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




ASSIGNMENT CHARACTERISTICS TABLE

Problem Number

Description

Difficulty Level

Time Allotted (min.)

1A Prepare financial statements, closing entries and post-closing trial balance.

Simple 70-80

2A Prepare adjusting entries, adjusted trial balance, financial statements and closing entries.

Simple 60-70

3A Complete all steps in the accounting cycle. Moderate 90-120

4A Prepare adjusting entries, adjusted trial balance, financial statements and closing entries.

Simple 60-70

5A Analyze errors and prepare corrections.

Moderate 60-70

6A Calculate capital account balance; prepare classified balance sheet and liquidity ratios.

Moderate 30-40

7A Calculate current assets and liabilities, working capital, current ratio, and acid-test ratio; comment on liquidity.

Moderate 30-35

*8A Prepare work sheet.

Moderate 50-60

*9A Prepare work sheet. Moderate 50-60

*10A Prepare and post adjusting, closing, reversing, and cash transaction entries.

Moderate 40-50

*11A Prepare adjusting, reversing and subsequent cash entries.

Simple 40-50




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

Study Objective

Knowledge

Comprehension

Application

Analysis

Synthesis

Evaluation

1. Prepare closing entries and a post-closing trial balance.

BE4-1 Q4-1 Q4-2 Q4-3 Q4-4 Q4-5

BE4-2 BE4-3 BE4-4 BE4-6 E4-1 E4-2 E4-3 E4-4 E4-5 E4-6 *E4-12

P4-1A P4-2A P4-3A P4-4A P4-6A *P4-10A

2. Explain the steps in the accounting cycle including optional steps.

BE4-5 Q4-8

Q4-6 Q4-7 Q4-9

BE4-6 E4-4 E4-5

P4-3A P4-4A

3. Prepare correcting entries.

Q4-10 Q4-9 Q4-11 Q4-12

BE4-7 BE4-8 E4-6 E4-7

P4-5A

4. Prepare a classified balance sheet.

Q4-17

Q4-13 Q4-14 Q4-15 Q4-16 Q4-17

BE4-9 BE4-10 E4-8 E4-9 P4-1A P4-2A P4-3A

P4-4A P4-6A

E4-9 E4-10 P4-7A

5. Illustrate measures used to evaluate liquidity.

BE4-11 Q4-18 Q4-19 Q4-20

BE4-12 P4-6A

E4-9 E4-10 P4-7A

*6. Prepare a work sheet (Appendix 4A).

*Q4-21 *Q4-22 *Q4-23

*BE4-13 *BE4-14 *E4-11

*P4-8A *P4-9A

*7. Prepare reversing entries (Appendix 4B).

*Q4-24 *Q4-25

*BE4-15 *BE4-16 *E4-12 *E4-13

*P4-10A *P4-11A

Broadening Your Perspective

BYP4-1 BYP4-2

Continuing Cookie Chronicle Cumulative Coverage

BYP4-4

BYP4-3




ANSWERS TO QUESTIONS 1. Permanent accounts are those accounts that appear on the balance sheet

and are never closed at the end of the annual accounting year. Temporary accounts, on the other hand, get closed at the end of the year and the net result of the closing entries updates the owner’s equity account Capital, a permanent account on the balance sheet.

2. Closing entries are made at the end of an accounting period after preparation of the financial statements to: a. transfer revenue, expense, and drawings account balances to the

owner’s capital account, and b. reset these temporary account balances to zero.

3. The Income Summary account is used to avoid having a lot of detailed

entries on the permanent owner’s capital account. The summary data posted to the Income Summary account are the totals of revenue and expense accounts. If an Income Summary account was not used, the owner’s capital account would be credited when closing the individual revenue accounts and it would be debited when closing the individual expense accounts.

4. The drawings account is not closed with the expense accounts because it

is not part of profit. Drawings represent the distribution of profit to the owner and are not used to calculated profit. Drawings are reported on the statement of owner’s equity, not the income statement. The drawings account is closed in a separate entry and not with expenses because it is closed to the capital account, not the Income Summary account.

5. (1) The balance in Income Summary, immediately before the closing entry

to transfer its balance to the owner’s capital account, should equal the profit (or loss) reported in the income statement. (2) All temporary accounts (revenues, expenses, owner’s drawings, and Income Summary) should have zero balances. (3) The balance in the capital account should equal the ending balance reported in the statement of owner’s equity and balance sheet.




QUESTIONS (Continued) 6. Analyzing business transactions is a critical and necessary step in the

accounting cycle because at this step, we determine whether or not the business’s financial position has changed. Through this analysis, we determine which accounts have been changed and whether the accounts involved have increased or decreased at an amount that can be measured.

7. (1) The purpose of the unadjusted trial balance is to prove that the ledger

is mathematically accurate. It is used primarily when scrutinizing account balances to decide which accounts need adjustments at the end of the accounting cycle.

(2) The purpose of the adjusted trial balance is also to prove that the

ledger is mathematically accurate following the posting of adjusting journal entries. The adjusted trial balance is then used to prepare all of the financial statements at the end of the accounting cycle.

(3) Finally, the purpose of the post-closing trial balance is to prove the

equality of the permanent account balances that are carried forward to the next accounting period. The post-closing trial balance provides evidence that the closing entries have been prepared and posted properly to the accounts and it also shows that the accounting equation is in balance at the end of the accounting period and the beginning of the next accounting period.

8. a) Daily: Analyze transactions and journalize transactions. b) Periodic: Post to ledger, prepare a trial balance, journalize and post

adjusting entries, prepare an adjusted trial balance, prepare financial statements.

c) Fiscal year end: Journalize and post closing entries, prepare a post closing trial balance.

9. Correcting entries differ from reversing entries because they (1) are not a

required part of the accounting cycle if no errors have been made, (2) may be made at any time, and (3) may affect any combination of accounts. Reversing entries are an optional step in the accounting cycle. Reversing entries will always affect an income statement and a balance sheet account. They are used to simplify the recording of subsequent transactions related to the adjustments.




QUESTIONS (Continued) 10.

Adjusting Entries Correcting Entries

Are they a specific step in the accounting cycle? (Yes, no)

Yes No

When are they journalized?

At the end of the fiscal period.

When the error is discovered.

What types of accounts do they affect?

Assets, contra-assets, liabilities, revenues, expenses

All types of accounts.

11. Correcting entries are necessary. Without correcting entries, the accounts

in the ledger would be incorrect. The information reported on the financial statements would also be incorrect. Christopher’s suggestion of erasing or removing previously recorded incorrect entries and replacing them with correct entries is not acceptable. Allowing entries to be erased would hamper the accounting cycle. The preparers and users of the accounting information could not rely on the completeness and accuracy of the entries used to reflect the transactions of the business. Correcting entries leave behind a proper trail of the original incorrect journal entry and the entry recorded for the correction of the error.

12. In order to properly correct for entry errors, it is important to identify which

accounts should have been involved in the transaction and which accounts were used to record the transaction. As well, it is important to determine if the amounts that have been recorded are correct. Once the correct and incorrect entries have been arrived at, the correcting entry can be recorded. The accounts that are not in error can be omitted in the correcting entry. An alternative is to reverse the incorrect entry and to then record the correct entry.

13. Current assets are normally cash and other assets that will be converted

to cash, sold, or used up within one year from the balance sheet date. Current liabilities are obligations that are expected to be settled within one year from the balance sheet date or in the company’s operating cycle. On the other hand, non-current assets are assets that will not be converted to cash, sold, or used by the business within one year of the balance sheet date or within its operating cycle. Basically that means that non-current assets are everything not classified as a current asset. Non-current liabilities are obligations that are expected to be paid after one year or longer.

14. A company’s operating cycle is the average time it takes to go from

starting with cash and ending with cash in producing revenues.




QUESTIONS (Continued) 15. Current assets for a Canadian company are listed in liquidity order on the

balance sheet. The accounts listed will appear in the following order: cash, short-term investments, accounts receivable, inventory, supplies and lastly, prepaid insurance.

16. Long-term investments are assets that can be realized in cash. However,

the conversion is not expected within one year. They include shares (equity) and bonds (debt) of other companies. Property, plant, and equipment assets are resources that have a physical substance, are used in the business, and are not intended for resale. Intangible asset are similar to property, plant, and equipment, but lack physical substance. Finally, goodwill is separate from intangibles because it does not exist on its own and can only exist along with the business to which it relates.

* 17. There are alternative methods of presentation that can be followed in the

preparation of a balance sheet. The differences in balance sheet presentation when following IFRS, as compared with ASPE, are not significant. The content of the balance sheet is the same as to amounts and key sub-totals, but the sequence of the major categories of the elements in the balance sheet may change.

The traditional Canadian standards call for the presentation of assets in

the balance sheet to follow the order: current assets (in decreasing liquidity order), long-term investments, property, plant, and equipment, intangible assets, and goodwill. Current liabilities, long-term debt and owners’ or shareholders’ equity then complete the balance sheet.

For the IFRS format, the presentation often follows this sequence: non-

current assets, including property, plant, and equipment and then intangible assets, current assets (in increasing liquidity order), shareholders’ equity, non-current liabilities and current liabilities. But public Canadian companies will still have the choice to follow the traditional conventions.

18. Liquidity is the ability of a company to pay its obligations that become due

within the next year. One measure of liquidity is working capital. Other measures include the current and acid-test ratios.

19. Ratios should never be interpreted or compared without considering

certain factors: (1) general economic and industry conditions, (2) other specific financial information about the company over time, and (3) the the ratios for other companies in the same or related industries.




QUESTIONS (Continued)

20. The acid-test ratio is a measure of the company’s immediate short-term liquidity. The acid-test ratio is calculated by dividing the sum of cash, short-term investments and accounts receivable by current liabilities. The current ratio is a measure of the short-term debt-paying ability that is determined by dividing all current assets by current liabilities.

*21. To calculate the income on a work sheet, each of the financial statement columns must be totalled. The profit or loss for the period is then found by calculating the difference between the totals of the two income statement columns. If a company has profit, the amount is entered in the income statement debit column and the balance sheet credit column. If the company has a loss, the amount is entered in the credit column on the income statement and in the debit column on the balance sheet.

*22. It is still necessary to journalize and post adjusting entries that have been

made on the work sheet because the work sheet is not part of the company’s permanent accounting records. The general ledger and journal must contain all of the adjusting data. If this were not done, balances for the start of the next year would be incorrect.

*23. The work sheet is a convenient and efficient tool for completing some of

the steps 4-6 (trial balance, adjusting entries, adjusted trial balance) and for assisting with step 7 (prepare financial statements) in the accounting cycle.

*24. A reversing entry is an optional entry that is the exact opposite, both in

amount and in account titles, of an adjusting entry for an accrual. Reversing entries are prepared at the beginning of the accounting period and are used to simplify the recording of subsequent transactions related to the accrual adjustments.

*25. It is helpful to use reversing entries for accruals because then the payment

can be processed in the normal manner without having to check if there has been an accrual, i.e., all cash payments can be debited to the appropriate expense account. The use of reversing entries does not change the amounts reported in the financial statements. It simply makes it easier to record transactions in the next accounting period.




SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 4-1 1. (NC) Accounts payable 2. (NC) Accounts receivable 3. (C) Depreciation expense 4. (C) Operating expenses 5. (NC) Unearned revenue 6. (C) Interest expense 7. (NC) S. Young, capital 8. (NC) Notes payable 9. (C) Rent revenue 10. (NC) Prepaid expenses 11. (NC) Equipment 12. (C) S. Young, drawings 13. (NC) Accumulated depreciation 14. (NC) Supplies




BRIEF EXERCISE 4-2 (a) Service Revenue ............................................................. $38,500 Expenses Insurance Expense ........................................ $2,750 Rent Expense ................................................. 8,000 Supplies Expense .......................................... 1,500 Total expenses ....................................................... 12,250 Profit ................................................................................. $26,250 (b) Nov. 30 Service Revenue ................................. 38,500 Income Summary ........................... 38,500 30 Income Summary ............................... 12,250

Insurance Expense ........................ 2,750 Rent Expense ................................. 8,000 Supplies Expense .......................... 1,500 30 Income Summary ............................... 26,250 L. Wilfrid, Capital ........................... 26,250 30 L. Wilfrid, Capital ................................ 29,000

L. Wilfrid, Drawings ....................... 29,000 (c) The closing balance of the L. Wilfrid, Capital account at

November 30, 2014 is $39,250 calculated as follows:

L. Wilfrid, Capital

29,000

42,000 26,250

Bal. 39,250




BRIEF EXERCISE 4-3 (a) Oct 31 Service Revenue ................................. 130,000 Income Summary ........................... 130,000 31 Income Summary ............................... 105,000

Maintenance Expense ................... 23,000 Rent Expense ................................. 10,000 Salaries Expense ........................... 72,000 31 Income Summary ............................... 25,000 N. Mosquera, Capital ..................... 25,000 31 N. Mosquera, Capital .......................... 45,000

N. Mosquera, Drawings ................. 45,000 (b)

Income Summary

105,000 130,000

25,000

25,000

0

N. Mosquera, Capital N. Mosquera, Drawings

45,000

65,000 25,000

45,000 45,000

45,000 0

Service Revenue Maintenance Expense

130,000

130,000 23,000 23,000

0 0

Rent Expense Salaries Expense

10,000 10,000

72,000 72,000

0 0




BRIEF EXERCISE 4-4

MOSQUERA GOLF CLUB Post-Closing Trial Balance

October 31, 2014 Debit Credit Cash .................................................................... $ 7,500 Prepaid expenses ............................................... 3,000 Equipment........................................................... 65,000 Accumulated depreciation—equipment ........... $15,000 Accounts payable............................................... 14,000 Unearned revenue .............................................. 1,500 N. Mosquera, capital .......................................... 45,000 $75,500 $75,500

BRIEF EXERCISE 4-5 The proper sequencing of the required steps in the accounting cycle is as follows: 1. Analyze business transactions 2. Journalize the transactions 3. Post to the ledger accounts 4. Prepare a trial balance 5. Journalize and post the adjusting entries 6. Prepare an adjusted trial balance 7. Prepare the financial statements 8. Journalize and post the closing entries 9. Prepare a post-closing trial balance Filling in the blanks, the answers are 9, 6, 1, 4, 2, 8, 7, 5, 3.




BRIEF EXERCISE 4-6 (a) April 15 Supplies .......................................... 1,850 Cash ............................................. 1,850 (b)

Supplies Supplies Expense

Apr. 15 1,850 (c) Mar. 31 Supplies Expense ............................ 1,450 Supplies ....................................... 1,450

Supplies Supplies Expense

Apr. 15 1,850 Mar.31 1,450 Mar. 31 1,450

Bal. 400

(d) Mar. 31 Income Summary ............................. 1,450 Supplies Expense ....................... 1,450

Income Summary Supplies Expense

Mar. 31 1,450 Mar.31 1,450 Mar. 31 1,450

Bal. 0




BRIEF EXERCISE 4-7

Balance Sheet Income Statement

Assets Liabilities Owner's Equity Revenue Expenses Profit

1. O NE O O NE O

2. NE O U U NE U

3. NE NE O/U NE O U

4. O O NE NE NE NE

BRIEF EXERCISE 4-8 1. Service Revenue ................................... 750 Accounts Receivable ..................... 750

2. Unearned Revenue ................................ 600 Service Revenue ............................. 600

3. Roch Hébert, Drawings ......................... 500 Salary Expense ............................... 500

4. Accounts Payable ($280 × 2) ................ 560 Cash ................................................ 560




BRIEF EXERCISE 4-9

DARIUS COMPANY Balance Sheet

December 31, 2014

______________________________________________________

(a) Current assets Cash ............................................................................... $ 16,400 Short-term investments ................................................ 8,200 Accounts receivable ..................................................... 14,500 Merchandise inventory ................................................. 9,000 Supplies......................................................................... 4,200 Prepaid insurance ......................................................... 1,600 Total current assets ................................................. $53,900 (b) Long-term investments Notes receivable (due February 1, 2016) ......... $ 5,500 Property, plant, and equipment Vehicles .............................................................. 22,500 Intangible assets Patents .................................................................. 3,900 Goodwill .................................................................... 9,250 Unearned revenue of $2,900 is classified as a current liability.




BRIEF EXERCISE 4-10

ODOM COMPANY Balance Sheet

December 31, 2014

______________________________________________________

(a) Non-current assets Property, plant, and equipment Land .................................................. $85,000 Buildings ...................................... $125,000 Less: Accumulated depreciation ... 37,400 87,600 Equipment ........................................ 43,000 Less: Accumulated depreciation .. 25,800 17,200 $189,800 Intangible assets Patents .......................................................................... 12,300 Goodwill ............................................................................ 5,520

(b) Current assets Supplies......................................................................... $ 2,900 Merchandise inventory ................................................. 14,000 Notes receivable (due April 1, 2015) ............................ 7,800 The notes payable of $28,000 is classified as a non-current liability.

BRIEF EXERCISE 4-11 Working capital = Current assets − Current liabilities Big: Working capital = $1,000,000 − $900,000 = $100,000 Small: Working capital = $200,000 − $100,000 = $100,000

Current ratio = Current assets ÷ Current liabilities Big River: Current ratio = $1,000,000 ÷ $900,000 = 1.11:1 Small Fry: Current ratio = $200,000 ÷ $100,000 = 2.00:1

The working capital is the same for both companies but Small Fry Company’s current ratio is much stronger. The current ratio is more relevant.




BRIEF EXERCISE 4-12 (a) (1) Working capital = Current assets − Current liabilities Working capital 2013 = $33,510 − $24,800 = $8,710 Working capital 2014 = $35,100 − $24,460 = $10,640 (2) Current ratio = Current assets ÷ Current liabilities Current ratio 2013 = $33,510 ÷ $24,800 = 1.35:1 Current ratio 2014 = $35,100 ÷ $24,460 = 1.43:1 (3) Acid-test ratio = (Cash + Accounts Receivable + Short-term Investments) ÷ Current liabilities Acid-test ratio 2013 = $20,430 ÷ $24,800 = 0.82:1 Acid-test ratio 2014 = $22,680 ÷ $24,460 = 0.93:1 (b) All three measures of Drew Co.’s liquidity show

improvement in 2014 compared to 2013.

*BRIEF EXERCISE 4-13

Income Statement Balance Sheet Dr. Cr. Dr. Cr. Totals 75,000 95,500 191,000 170,500 Profit 20,500 20,500 Totals 95,500 95,500 191,000 191,000




*BRIEF EXERCISE 4-14

Income Statement Balance Sheet Dr. Cr. Dr. Cr. Totals 53,875 43,425 55,550 66,000 Loss 10,450 10,450 Totals 53,875 53,875 66,000 66,000




*BRIEF EXERCISE 4-15 (a)

Dec. 31 Salaries Expense .................................. 1,700

Salaries Payable ............................... 1,700

To accrue salaries at year-end

(b)

Dec. 31 Income Summary .................................. 1,700

Salaries Expense.............................. 1,700

Closing entry

(c)

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

Salaries Expense.............................. 1,700

To reverse Dec. 31 accrual.

4 Salaries Expense ................................. 3,000

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

To record Jan. 4 payment of salary.




*BRIEF EXERCISE 4-15 (Continued)

(d) Salaries Expense

Date Explanation Ref. Debit Credit Balance

Dec. 31 Accrual 1,700 1,700 Dr. 31 Closing entry 1,700 0 Jan. 1 Reversing entry 1,700 1,700 Cr. 4 Payment of salary 3,000 1,300 Dr.

Salaries Payable


Dec. 31 Accrual 1,700 1,700 Jan. 1 Reversing entry 1,700 0 The balances after posting the entries are a debit of $1,300 in Salaries Expense and $0 in Salaries Payable.




*BRIEF EXERCISE 4-16 (a)

Dec. 31 Interest Receivable ............................... 1,125

Interest Revenue .............................. 1,125

To accrue interest at year-end

($90,000 × 5% × 3/12 = $1,125)

(b)

Jan.1 Interest Revenue ................................... 1,125

Interest Receivable .......................... 1,125

To record reversing entry

Mar. 1 Cash ...................................................... 91,875

Notes Receivable ............................. 90,000

Interest Revenue .............................. 1,875

To record collection of note and interest ($90,000 × 5% × 5/12 = $1,875)




SOLUTIONS TO EXERCISES

EXERCISE 4-1 (a) When we look at the L. Welker, Capital account we know

that the entry on the debit side of the account does not represent a loss for the month since the amount of this entry corresponds to the closing entry from the L. Welker, Drawings account. The entry on the credit side of the L. Welker, Capital account provides the amount of the profit for the year in the amount of $3,700, which corresponds to the closing entry that would be coming from the Income Summary account.

(b) Total owner’s equity at May 31 corresponds to the L.

Welker, Capital account balance of $12,200. (c) May 31 Service Revenue .................... 16,800 Income Summary ............... 16,800 31 Income Summary ................... 13,100 Advertising Expense ......... 1,300 Rent Expense ..................... 3,000 Salaries Expense ............... 8,800 31 Income Summary ................... 3,700 L. Welker, Capital ............... 3,700 31 L. Welker, Capital ................... 2,500 L. Welker, Drawings ........... 2,500 (d)

Income Summary


May 31 Close Revenues 16,800 16,800 31 Close Expenses 13,100 3,700 31 Closing entry 3,700 0




EXERCISE 4-2 (a)

VICTOIRE ESTHETICS Statement of Owner's Equity

Month Ended August 31, 2014 B. Victoire, capital, August 1, 2014 ................................ $ 9,000 Add: Investment .............................................................. 2,000 Profit ....................................................................... 7,000 18,000 Less: Drawings ............................................................... 4,700 B. Victoire, capital, August 31, 2014 .............................. $13,300 (b) Aug. 31 Income Summary ................... 7,000 B. Victoire, Capital ............. 7,000 31 B. Victoire, Capital .................. 4,700 B. Victoire, Drawings ......... 4,700




EXERCISE 4-2 (Continued) (b) (Continued)

Income Summary


Aug. 31 Balance 7,000 Cr 31 Closing entry 7,000 0

B. Victoire, Drawings


Aug. 31 Balance 4,700 31 Closing entry 4,700 0

B. Victoire, Capital


Aug. 31 Balance 11,000 31 Closing entry 7,000 18,000 31 Closing entry 4,700 13,300




EXERCISE 4-3 (a) Aug. 31 Service Revenue .................... 35,900 Interest Revenue .................... 400 Income Summary ............... 36,300 31 Income Summary ................... 22,745 Depreciation Expense ....... 9,300 Insurance Expense ............ 4,100 Interest Expense ................ 1,500 Supplies Expense .............. 7,845 31 Income Summary ................... 13,555 T. Williams, Capital ............ 13,555 31 T. Williams, Capital ................. 18,500 T. Williams, Drawings ........ 18,500




EXERCISE 4-3 (Continued) (b)

Income Summary

Clos. 22,745 Clos. 36,300

Clos. 13,555

Bal. 13,555

Bal. 0

T. Williams, Capital T. Williams, Drawings

Clos. 18,500

Bal. 85,500 Clos. 13,555

Bal. 18,500 Clos. 18,500

Bal. 80,555 Bal. 0

Service Revenue Interest Revenue

Clos. 35,900 Bal. 35,900 Clos. 400 Bal. 400

Bal. 0 Bal. 0

Depreciation Expense Interest Expense

Bal. 9,300 Clos. 9,300 Bal. 1,500 Clos. 1,500

Bal. 0 Bal. 0

Insurance Expense Supplies Expense

Bal. 4,100 Clos. 4,100 Bal. 7,845 Clos. 7,845

Bal. 0 Bal. 0




EXERCISE 4-3 (Continued) (c)

ALPINE BOWLING LANES Post-Closing Trial Balance

August 31, 2014

Debit Credit Cash ................................................................. $ 17,940 Accounts receivable ....................................... 10,980 Prepaid insurance ........................................... 820 Supplies ........................................................... 740 Debt investments ............................................ 10,000 Equipment........................................................ 93,000 Accumulated depreciation—equipment ........ $ 18,600 Accounts payable............................................ 8,200 Unearned revenue ........................................... 980 Notes payable .................................................. 25,000 Interest payable ............................................... 145 T. Williams, capital .......................................... _______ 80,555 $133,480 $133,480




EXERCISE 4-4 (a) Apr. 2 Cash ................................................ 4,000 Tim Sasse, Capital ..................... 4,000 6 Supplies .......................................... 1,500 Cash ............................................ 1,500 15 Cash ................................................ 600 Service Revenue ........................ 600 25 Cash ................................................ 2,200 Unearned Revenue .................... 2,200 (b) (c) and (e)

Cash Supplies

Apr. 2 4,000 Apr. 6 1,500 Apr. 6 1,500 Apr. 30 700

Apr. 15 600 Apr.30 800 Apr. 25 2,200

Bal. 5,300

Unearned Revenue Service Revenue

Apr.30 800 Apr. 25 2,200 Apr. 15 600

Bal. 1,400 Apr. 30 600 Apr. 30 800

Clos. 2,000 Bal. 2,000

Bal. 0

Accounts Receivable Supplies Expense

Apr. 30 600 Apr. 30 700 Clos. 700

Bal. 0

Income Summary Tim Sasse, Capital

Clos. 700 Clos. 2,000 Apr. 2 4,000 Clos. 1,300 Clos. 1,300

Bal. 0 Bal. 5,300




EXERCISE 4-4 (Continued) (c) (Continued) Apr. 30 Accounts Receivable ..................... 600 Service Revenue ........................ 600 30 Supplies Expense ........................... 700 Supplies ...................................... 700 ($1,500 – $800 = $700) 30 Unearned Revenue ......................... 800 Service Revenue ....................... 800 (d)

SASSE ROOF REPAIRS Adjusted Trial Balance

April 30, 2014

Debit Credit Cash ................................................................. $ 5,300 Accounts receivable ....................................... 600 Supplies ........................................................... 800 Unearned revenue ........................................... $ 1,400 Tim Sasse, capital ........................................... 4,000 Service revenue ............................................... 2,000 Supplies expense ............................................ 700 _ $7,400 $7,400 (e) Apr. 30 Service Revenues................... 2,000 Income Summary ............... 2,000 30 Income Summary ................... 700 Supplies Expense .............. 700 30 Income Summary ................... 1,300 Tim Sasse, Capital ............. 1,300




EXERCISE 4-5 (a) Dec. 31 Accounts Receivable ............. 1,440 Service Revenue ................ 1,440 31 Insurance Expense ................. 4,340 Prepaid Insurance .............. 4,340 ($7,440 ÷ 12 × 7 = $4,340) 31 Depreciation Expense ............ 2,780 Accumulated Depreciation —Equipment ...................... 2,780 31 Supplies Expense................... 4,510 Supplies.............................. 4,510 ($5,260 – $750 = $4,510) 31 Interest Receivable ................. 120 Interest Revenue ................ 120 [($12,000 × 4%) ÷ 12 × 3 = $120] (b) Dec. 31 Service Revenue .................... 113,740 Interest Revenue .................... 120 Income Summary ............... 113,860 ($112,300 + $1,440 = $113,740) 31 Income Summary ................... 51,030 Insurance Expense ............ 4,340 Salaries Expense ............... 39,400 Depreciation Expense ....... 2,780 Supplies Expense .............. 4,510 31 Income Summary ................... 62,830 H. Duguay, Capital ............. 62,830 31 H. Duguay, Capital .................. 53,500 H. Duguay, Drawings ......... 53,500




EXERCISE 4-6 (a) 1. Accounts Payable ($1,750 − $750) ............. 1,000 Cash ......................................................... 1,000 2. Supplies ....................................................... 860 Accounts Payable ................................... 860 3. L. Choi, Drawings ........................................ 400 Salaries Expense .................................... 400 4. Service Revenue.......................................... 700 Accounts Receivable .............................. 700 5. Unearned Revenue ...................................... 350 Service Revenue ..................................... 350 (b)

Balance Sheet Income Statement

Assets Liabilities Owner's Equity Revenue Expenses Profit

1. O O NE NE NE NE

2. U U NE NE NE NE

3. NE NE O/U NE O U

4. O NE O O NE O

5. NE O U U NE U




EXERCISE 4-7 (a) 1. Cash ................................................... 625 Supplies ...................................... 625 Salaries Expense............................... 625 Cash ............................................ 625 2. Cash ................................................... 2,000 Short-Term Investments ............ 2,000 Cash ................................................... 2,000 T. D’Addario, Capital .................. 2,000 3. Accounts Receivable ........................ 870 Cash ............................................ 870 Cash ................................................... 780 Accounts Receivable ................. 780 4. Cash ................................................... 440 Supplies ...................................... 440 Accounts Payable ............................. 440 Cash ............................................ 440 5. Accounts Payable ............................. 3,500 Equipment Expense ................... 3,500 Equipment ......................................... 3,500 Notes Payable ............................. 3,500




EXERCISE 4-7 (Continued) (b) 1. Salaries Expense............................... 625 Supplies ...................................... 625 2. Cash ................................................... 4,000 Short-Term Investments ............ 2,000 T. D’Addario, Capital .................. 2,000 3. Accounts Receivable ($870 − $780) . 90 Cash ............................................ 90 4. Accounts Payable ............................. 440 Supplies ...................................... 440 5. Accounts Payable ............................. 3,500 Equipment ......................................... 3,500 Equipment Expense ................... 3,500 Notes Payable ............................. 3,500




EXERCISE 4-8 (a)

DONATELLO COMPANY Income Statement

Year Ended July 31, 2014 Revenues Service revenue ............................................. $75,000 Interest revenue ............................................. _ 320 Total revenues ........................................... $75,320 Expenses Depreciation expense .................................... 2,850 Rent expense ................................................. 18,550 Salaries expense ............................................ 36,050 Supplies expense .......................................... 20,850 Interest expense ............................................ 3,000 Total expenses .......................................... 81,300 Loss .................................................................... $ 5,980

DONATELLO COMPANY

Statement of Owner's Equity Year Ended July 31, 2014

B. Donatello, capital, August 1, 2013 ($28,285 – $5,000) $23,285 Add: Investment ............................................................. 5,000 28,285 Less: Loss ......................................................... $ 5,980 Drawings.................................................. 16,500 0 22,480 B. Donatello, capital, July 31, 2014 ................................ $ 5,805




EXERCISE 4-8 (Continued) (b)

DONATELLO COMPANY Balance Sheet July 31, 2014

Assets

Current assets Cash ............................................................................. $ 4,650 Accounts receivable ................................................... 11,400 Supplies....................................................................... 750 Prepaid rent ................................................................. 500 Total current assets ............................................... 17,300 Long-term investments Debt investment .......................................................... 8,000 Property, plant, and equipment Equipment ...................................................... $19,950 Less: Accumulated depreciation .................. 5,700 14,250 Patents ............................................................................. 18,300 Total assets ............................................................ $57,850

Liabilities and Owner's Equity

Current liabilities Accounts payable ....................................................... $ 4,245 Interest payable .......................................................... 750 Unearned revenue ...................................................... 2,050 Total current liabilities ........................................... 7,045 Long-term liability Notes payable ............................................................. 45,000 Total liabilities ........................................................ 52,045 Owner's equity B. Donatello, capital ................................................... 5,805 Total liabilities and owner's equity ....................... $57,850




EXERCISE 4-9 (a)

JPC ENTERPRISES Balance Sheet

December 31, 2014

Assets Current assets Cash ............................................................................. $ 16,500 Accounts receivable ................................................... 197,000 Merchandise inventory ............................................... 173,200 Supplies....................................................................... 10,100 Prepaid expenses ....................................................... 6,900 Total current assets ............................................... 403,700 Long-term investments Equity investments ......................... $ 45,800 Debt investments ............................ 62,600 Notes receivable ............................. 34,700 Total long-term investments ................................. 143,100 Property, plant, and equipment Land ................................................. $105,600 Building ........................................... $256,300 Less: Accumulated depreciation ... 79,900 176,400 Equipment ....................................... 92,100 Less: Accumulated depreciation ... 71,100 21,000 303,000 Licences ........................................................................... 58,300 Goodwill ........................................................................... 36,000 Total assets ................................................................. $944,100




EXERCISE 4-9 (Continued) (a) (Continued)

Liabilities and Owner's Equity Current liabilities Accounts payable ...................................................... $210,100 Salaries payable......................................................... 28,700 Interest payable ......................................................... 16,500 Unearned revenue ..................................................... 27,400 Notes payable ............................................................ 55,000 Current portion of mortgage payable ....................... 17,250 Total current liabilities .......................................... 354,950 Long-term liabilities Mortgage payable ($230,000 – $17,250) .................... 212,750 Total liabilities ........................................................ 567,700 Owner's equity J. Chrowder, capital .................................................... 376,400 Total liabilities and owner's equity ....................... $944,100 (b) Working capital = Current Assets – Current Liabilities $403,700 − $354,950 = $48,750 Current Ratio = Current Assets ÷ Current Liabilities $403,700 ÷ $354,950 = 1.14:1 Acid-test ratio = (Cash + Accounts receivable + Short-

term investments) ÷ Current liabilities

= ($16,500 + $197,000) ÷ $354,950 = $213,500 ÷ $354,950 = 0.60:1 (c) The company's liquidity is not satisfactory, it’s very poor.

There is insufficient cash to pay for accounts payable and salaries payable that are likely due within days. Some of the investments might have to be sold to meet these obligations on time.




EXERCISE 4-10 (a) Working Capital = Current Assets − Current Liabilities Fiscal years ending: Jan. 2, 2010: $2,441,973 − $1,706,541 = $735,432 Jan. 1, 2011: $2,542,820 − $1,527,567 = $1,015,253 Dec. 31, 2011: $2,695,647 − $1,776,238 = $919,409 Current Ratio = Current Assets ÷ Current Liabilities Jan. 2, 2010: $2,441,973 ÷ $1,706,541 = 1.43:1 Jan. 1, 2011: $2,542,820 ÷ $1,527,567 = 1.66:1 Dec. 31, 2011: $2,695,647 ÷ $1,776,238 = 1.52:1 Acid-test ratio = (Cash + Accounts receivable) ÷ Current Liabilities

Jan. 2, 2010: ($44,391 + $470,935) ÷ $1,706,541 = 0.30:1 Jan. 1, 2011: ($64,354 + $432,089) ÷ $1,527,567 = 0.32:1 Dec. 31, 2011: ($118,566 + $493,338) ÷ $1,776,238 = 0.34:1 (b) Shoppers Drug Mart’s short-term debt-paying ability

(current ratio) has deteriorated in the fiscal year ending December 31, 2011 compared to the previous fiscal year. The immediately preceding year was a vast improvement from its preceding fiscal year ending January 2, 1010. On the other, Shopper’s immediate short-term liquidity (acid-test ratio) has improved steadily over the last two years. The excess of the current assets over the current liabilities (working capital) is substantial at each fiscal year-end.




*EXERCISE 4-11 SWIFT CREEK ENGINEERING

Work Sheet Year Ended December 31, 2014

Unadjusted Trial Balance

Adjustments Adjusted Trial Balance

Income Statement Balance Sheet

Account Titles

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Cash 8,450

8,450

8,450

Accounts receivable 6,250

1,440 7,690

7,690

Interest receivable

120 120

120

Supplies 5,260

4,510 750

750

Prepaid insurance 7,440

4,340 3,100

3,100

Notes receivable 12,000

12,000

12,000

Equipment 27,800

27,800

27,800

Accum. deprec.—equip.

8,340

2,780

11,120

11,120

Accounts payable

4,560

4,560

4,560

H. Duguay, capital

34,900

34,900

34,900

H. Duguay, draw. 53,500

53,500

53,500

Service revenue

112,300 1,440

113,740

113,740

Interest revenue

120

120

120

Depr. expense

2,780 2,780

2,780

Insurance expense

4,340 4,340

4,340

Salaries expense

39,400

39,400

39,400

Supplies expense

4,510 4,510

4,510

Totals

160,100

160,100 13,190 13,190 164,440

164,440

51,030

113,860 113,410 50,580

Profit

62,830

______ ______ 62,830

Totals

113,860

113,860 113,410 113,410


Solutions Manual 4-40 Chapter 4 © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.

*EXERCISE 4-12 (a) (1) Dec.31 Accounts Receivable .................... 4,400 Service Revenue ....................... 4,400 31 Interest Expense ............................ 1,500 Interest Payable ........................ 1,500 (2) Dec.31 Service Revenue ............................ 96,400 Income Summary .................... 96,400 31 Income Summary .......................... 9,300 Interest Expense ....................... 9,300 31 Income Summary .......................... 87,100 I. Masterson, Capital ................. 87,100 (b) Jan. 1 Service Revenue ............................ 4,400 Accounts Receivable ................ 4,400 1 Interest Payable ............................. 1,500 Interest Expense ....................... 1,500 (c) Jan. 10 Cash ............................................... 6,200 Service Revenue ....................... 6,200 31 Interest Expense ............................ 2,235 Cash ........................................... 2,235



*EXERCISE 4-12 (Continued)

(a), (b) and (c)

Cash


Dec. 31 Unadjusted balance 7,600 Jan. 10 6,200 13,800 31 2,235 11,565

Accounts Receivable


Dec. 31 Unadjusted balance 24,000 31 Adjusting entry 4,400 28,400 Jan. 1 Reversing entry 4,400 24,000

Interest Payable


Dec. 31 Unadjusted balance 0 31 Adjusting entry 1,500 1,500 Jan. 1 Reversing entry 1,500 0

I. Masterson, Capital


Dec. 31 Unadjusted balance 48,000 31 Closing entry 87,100 135,100



*EXERCISE 4-12 (Continued)

(a), (b), and (c) (Continued)

Income Summary


Dec. 31 Closing entry 96,400 96,400 31 Closing entry 9,300 87,100 31 Closing entry 87,100 0

Service Revenue


Dec. 31 Unadjusted balance 92,000 31 Adjusting entry 4,400 96,400 31 Closing entry 96,400 0 Jan. 1 Reversing entry 4,400 4,400 Dr. 10 6,200 1,800

Interest Expense


Dec. 31 Unadjusted balance 7,800 31 Adjusting entry 1,500 9,300 31 Closing entry 9,300 0 Jan. 1 Reversing entry 1,500 1,500 Cr. 31 2,235 735



*EXERCISE 4-13 (a) It would be useful to prepare reversing entries for adjustment 1,

4, and 6. (b) (1) May 1 Service Revenue .......................... 600 Accounts Receivable .............. 600 (4) May 1 Interest Payable ........................... 545 Interest Expense ...................... 545 (6) May 1 Property Tax Payable .................. 1,304 Property Tax Expense ............. 1,304 ($3,912 ÷ 12 × 4) (c) Reversing entries are useful for these adjustments because it

simplifies the recording of future transactions. Without reversing entries, transactions 1, 4, and 6 would require compound journal entries. If reversing entries are prepared, the future transactions can be recorded with simple journal entries. You will not have to remember what has gone before. The use of reversing entries does not change the amounts reported in the financial statements. It simply makes it easier to record future transactions. Since there are no future transactions related to items 2, 3, and 5, there is nothing to be gained by reversing these entries.



SOLUTIONS TO PROBLEMS

PROBLEM 4-1A

(a) Revenues Service revenue ........................................... $124,300 Interest revenue .......................................... 1,500 $125,800 Expenses Depreciation expense ................................. 9,850 Insurance expense ...................................... 4,500 Interest expense .......................................... 3,960 Salaries expense ......................................... 30,000 Supplies expense ........................................ 5,700 Utilities expense .......................................... 5,400 59,410 Profit ................................................................................. $66,390

(b)

MARINE FISHING CENTRE Statement of Owner's Equity Year Ended March 31, 2014

______________________________________________________

R. Falkner, capital, April 1, 2013 ($165,300 − $2,300) .............................................. $ 163,000 Add: Investment ........................................... $ 2,300 Profit ..................................................... 66,390 68,690 231,690 Less: Drawings .............................................................. 46,200 R. Falkner, capital, March 31, 2014 ................................. $ 185,490



PROBLEM 4-1A (Continued) (c)

MARINE FISHING CENTRE Balance Sheet March 31, 2014

______________________________________________________

Assets Current assets Cash ............................................................................... $ 7,720 Interest receivable ......................................................... 750 Supplies ......................................................................... 1,425 Total current assets .................................................. 9,895 Long-term debt investment ............................................... 30,000 Property, plant, and equipment Land ................................................. $46,800 Building ......................................... $186,900 Less: Accumulated depreciation .. 31,150 155,750 Equipment........................................ 36,200 Less: Accumulated depreciation . 18,100 18,100 220,650 Total assets ...................................................................... $260,545


Current liabilities Accounts payable........................................................ $5,875 Interest payable ........................................................... 990 Unearned revenue ....................................................... 2,190 Current portion of notes payable ............................... 6,000 Total current liabilities ............................................ 15,055 Long-term liabilities Notes payable .............................................................. 60,000 Total liabilities ......................................................... 75,055 Owner's equity R. Falkner, capital........................................................ 185,490 Total liabilities and owner's equity ........................ $260,545



PROBLEM 4-1A (Continued) (d)

GENERAL JOURNAL

Date

Account Titles and Explanation

Debit

Credit

Mar. 31 Service Revenue ............................... 124,300 Interest Revenue ................................ 1,500 Income Summary ......................... 125,800 31 Income Summary .............................. 59,410 Depreciation expense ................... 9,850 Insurance expense ........................ 4,500 Interest expense ............................ 3,960 Salaries expense ........................... 30,000 Supplies expense .......................... 5,700 Utilities expense ............................ 5,400 31 Income Summary .............................. 66,390 R. Falkner, Capital ........................ 66,390 31 R. Falkner, Capital ............................. 46,200 R. Falkner, Drawings .................... 46,200



PROBLEM 4-1A (Continued) (e)

Income Summary

Clos. 59,410 Clos. 125,800

Clos. 66,390

Bal. 66,390

Bal. 0

R. Falkner, Capital R. Falkner, Drawings

Clos. 46,200

Bal. 165,300 Clos. 66,390

Bal. 46,200 Clos. 46,200

Bal. 185,490 Bal. 0

Service Revenue Interest Revenue

Clos. 124,300 Bal. 124,300 Clos. 1,500 Bal. 1,500

Bal. 0 Bal. 0

Depreciation Expense Insurance Expense

Bal. 9,850 Clos. 9,850 Bal. 4,500 Clos. 4,500

Bal. 0 Bal. 0

Interest Expense Salaries Expense

Clos. 3,960 Bal. 3,960 Bal. 30,000 Clos. 30,000

Bal. 0

Bal. 0

Supplies Expense Utilities Expense

Bal. 5,700 Clos. 5,700 Bal. 5,400 Clos. 5,400

Bal. 0 Bal. 0



PROBLEM 4-1A (Continued) (f)

MARINE FISHING CENTRE Post-Closing Trial Balance

March 31, 2014

Debit Credit Cash ................................................................... $ 7,720 Interest receivable ............................................. 750 Supplies .............................................................. 1,425 Debt investments ............................................... 30,000 Land .................................................................... 46,800 Building .............................................................. 186,900 Accumulated depreciation—building .............. $ 31,150 Equipment ......................................................... 36,200 Accumulated depreciation—equipment .......... 18,100 Accounts payable ............................................. 5,875 Interest payable ................................................. 990 Unearned revenue ............................................. 2,190 Notes payable .................................................... 66,000 R. Falkner, capital ............................................. 185,490 $309,795 $309,795 The balance in the R. Falkner, capital account after the closing entries have been posted will be $185,490 as shown in the above adjusted trial balance. This balance corresponds to the ending balance on the statement of owner’s equity in part (b) above.



PROBLEM 4-1A (Continued) Taking It Further: When deciding how to present financial information on the classified balance sheet, Marine Fishing Centre could show the presentation as was followed in part (c) above but it also had the alternative to prepare the classified balance sheet following the International Financial Reporting Standards (IFRS). If it followed IFRS, the statement would likely have been titled Statement of Financial Position. The content of the balance sheet would have been the same as to amounts and key sub-totals as in part (c) above but the sequence of the major categories of the elements in the balance sheet would have changed. For the IFRS format, the presentation follows the following sequence: long-term assets, including properly plant and equipment and then intangible assets, current assets (in increasing liquidity order), shareholders’ equity, non-current liabilities and current liabilities.



PROBLEM 4-2A

(a)

GENERAL JOURNAL

Date


Debit

Credit

Jan. 31 Accounts Receivable ........................ 1,550 Service Revenue ........................... 1,550 31 Insurance Expense ($6,420 × 11/12) . 5,885 Prepaid Insurance ........................ 5,885 31 Supplies Expense ($5,240 − $580) .... 4,660 Supplies ........................................ 4,660 31 Depreciation Expense ....................... 3,800 Accumulated Depreciation— Building ($90,000 ÷ 45) .................. 2,000 Accumulated Depreciation— Equipment ($27,000 ÷ 15) .............. 1,800 31 Salaries Expense .............................. 1,520 Salaries Payable ........................... 1,520 31 Interest Expense ($102,000 × 6% × 1/12) 510 Interest Payable ............................ 510 31 Unearned Revenue ........................... 850 Service Revenue ........................... 850



PROBLEM 4-2A (Continued) (b)

SPARTAN CYCLE REPAIR SHOP Adjusted Trial Balance

January 31, 2014

Debit Credit Cash ................................................................... $ 3,200 Accounts receivable ($6,630 + $1,550) ............. 8,180 Prepaid insurance ($6,420 − $5,885) ................. 535 Supplies ($5,240 − $4,660) ................................. 580 Land .................................................................... 50,000 Building .............................................................. 90,000 Accumulated depreciation—building ($11,000 + $2,000) ........................................... $ 13,000 Equipment ......................................................... 27,000 Accumulated depreciation—equipment ($4,500 + $1,800) ............................................. 6,300 Accounts payable ............................................. 6,400 Interest payable ................................................. 510 Salaries payable ................................................. 1,520 Unearned revenue ($1,950 − $850) ................... 1,100 Mortgage payable .............................................. 102,000 H. Dude, capital ................................................. 61,000 H. Dude, drawings ............................................. 101,100 Service revenue ($235,550 + $1,550 + $850) .... 237,950 Depreciation expense ........................................ 3,800 Insurance expense ............................................ 5,885 Interest expense ($5,610 + $510) ...................... 6,120 Salaries expense ($115,200 + $1,520) ............... 116,720 Supplies expense .............................................. 4,660 Utilities expense ................................................ 12,000 _______ $429,780 $429,780




SPARTAN CYCLE REPAIR SHOP Income Statement

Year Ended January 31, 2014 Service revenue ............................................................... $237,950 Expenses Salaries expense ......................................... $116,720 Utilities expense .......................................... 12,000 Interest expense .......................................... 6,120 Insurance expense ...................................... 5,885 Supplies expense ........................................ 4,660 Depreciation expense ................................. 3,800 Total expenses ........................................................ 149,185 Profit ................................................................................. $ 88,765

SPARTAN CYCLE REPAIR SHOP Statement of Owner's Equity Year Ended January 31, 2014

______________________________________________________

H. Dude, capital, February 1, 2013 ($61,000 − $5,000) ... $ 56,000 Add: Investment ............................................ $ 5,000 Profit ..................................................... 88,765 93,765 149,765 Less: Drawings .............................................................. 101,100 H. Dude, capital, January 31, 2014 .................................. $ 48,665



PROBLEM 4-2A (Continued) (c) (Continued)

SPARTAN CYCLE REPAIR SHOP Balance Sheet

January 31, 2014

Assets Current assets Cash ............................................................................... $ 3,200 Accounts receivable ..................................................... 8,180 Prepaid insurance ......................................................... 535 Supplies ......................................................................... 580 Total current assets .................................................. 12,495 Property, plant, and equipment Land ................................................. $50,000 Building ............................................ $90,000 Less: Accumulated depreciation ... 13,000 77,000 Equipment........................................ $27,000 Less: Accumulated depreciation .. 6,300 20,700 147,700 Total assets ........................................................................ $160,195

Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ $ 06,400 Salaries payable .......................................................... 1,520 Interest payable ........................................................... 510 Unearned revenue ....................................................... 1,100 Current portion of mortgage payable ........................ 4,500 Total current liabilities ............................................ 14,030 Long-term liabilities Mortgage payable ........................................................ 97,500 Total liabilities ......................................................... 111,530 Owner's equity H. Dude, capital ........................................................... 48,665 Total liabilities and owner's equity ........................ $160,195




GENERAL JOURNAL

Date


Debit

Credit

Jan 31 Service Revenue ................................ 237,950 Income Summary .......................... 237,950 31 Income Summary ............................... 149,185 Salaries Expense ........................... 116,720 Utilities Expense ............................ 12,000 Interest Expense ............................ 6,120 Insurance Expense ........................ 5,885 Supplies Expense .......................... 4,660 Depreciation Expense ................... 3,800 31 Income Summary ............................... 88,765 H. Dude, Capital ............................. 88,765 31 H. Dude, Capital ................................. 101,100 H. Dude, Drawings ......................... 101,100 Taking It Further: Likely the reason that Henry had to invest $5,000 cash into the business in November of 2013 is because during the year he withdrew $101,100 cash when the business’ profit was only $88,765. Henry should be concerned that his capital balance is diminishing and he should try to reduce his drawings in the coming year.



PROBLEM 4-3A

(a)

GENERAL JOURNAL

J1 Date


Debit

Credit

July 1 Cash .................................................... 20,000 L. Chang, Capital ........................... 20,000 1 Equipment .......................................... 25,000 Cash ............................................... 5,000 Notes Payable ................................ 20,000 3 Supplies .............................................. 2,100 Accounts Payable ......................... 2,100 5 Prepaid Insurance .............................. 1,800 Cash ............................................... 1,800 12 Accounts Receivable ......................... 4,500 Service Revenue ............................ 4,500 18 Accounts Payable .............................. 1,400 Cash ............................................... 1,400 20 Salaries Expense ............................... 2,000 Cash ............................................... 2,000 21 Cash .................................................... 3,400 Accounts Receivable .................... 3,400 25 Accounts Receivable ......................... 9,000 Service Revenue ............................ 9,000



PROBLEM 4-3A (Continued) (a) (Continued) July 31 Fuel Expense ...................................... 550 Cash ............................................... 550 31 L. Chang, Drawings ........................... 1,600 Cash ............................................... 1,600 (a), (c), and (f)

Cash

Date

Explanation

Ref.

Debit

Credit

Balance

July 1 1 5 18 20 21 31 31

J1 J1 J1 J1 J1 J1 J1 J1

20,000

3,400

5,000 1,800 1,400 2,000

550

1,600

20,000 15,000 13,200 11,800 9,800

13,200 12,650 11,050

Accounts Receivable

Date

Explanation

Ref.

Debit

Credit

Balance

July 12 21 25 31

Adjusting

J1 J1 J1 J2

4,500

9,000 1,500

3,400

4,500 1,100

10,100 11,600



PROBLEM 4-3A (Continued) (a), (c) and (f) (Continued)

Supplies

Date

Explanation

Ref.

Debit

Credit

Balance

July 3 31

Adjusting

J1 J2

2,100

1,400

2,100

700

Prepaid Insurance

Date

Explanation

Ref.

Debit

Credit

Balance

July 5 31

Adjusting

J1 J2

1,800

150

1,800 1,650

Equipment


July 1

J1

25,000

25,000

Accumulated Depreciation—Equipment

Date

Explanation

Ref.

Debit

Credit

Balance

July 31

Adjusting

J2

521

521




Accounts Payable

Date

Explanation

Ref.

Debit

Credit

Balance

July 3 18

J1 J1

1,400

2,100

2,100

700

Salaries Payable

Date

Explanation

Ref.

Debit

Credit

Balance

July 31

Adjusting

J2

800

800

Interest Payable

Date

Explanation

Ref.

Debit

Credit

Balance

July 31

Adjusting

J2

92

92

Notes Payable

Date

Explanation

Ref.

Debit

Credit

Balance

July 1

J1

20,000

20,000



PROBLEM 4-3A (Continued)

(a), (c) and (f) (Continued)

L. Chang, Capital

Date

Explanation

Ref.

Debit

Credit

Balance

July 1 31 31

Closing Closing

J1 J3 J3

1,600

20,000 9,487

20,000 29,487 27,887

L. Chang, Drawings

Date

Explanation

Ref.

Debit

Credit

Balance

July 31 31

Closing

J1 J3

1,600

1,600

1,600 0

Income Summary

Date

Explanation

Ref.

Debit

Credit

Balance

July 31 31 31

Closing Closing Closing

J3 J3 J3

5,513 9,487

15,000

15,000 9,487

0

Service Revenue

Date

Explanation

Ref.

Debit

Credit

Balance

July 12 25 31 31

Adjusting Closing

J1 J1 J2 J3

15,000

4,500 9,000 1,500

4,500

13,500 15,000

0




Fuel Expense

Date

Explanation

Ref.

Debit

Credit

Balance

July 31 31

Closing

J1 J3

550

550

550

0

Salaries Expense

Date

Explanation

Ref.

Debit

Credit

Balance

July 20 31 31

Adjusting Closing

J1 J2 J3

2,000

800

2,800

2,000 2,800

0

Supplies Expense

Date

Explanation

Ref.

Debit

Credit

Balance

July 31 31

Adjusting Closing

J2 J3

1,400

1,400

1,400

0

Depreciation Expense

Date

Explanation

Ref.

Debit

Credit

Balance

July 31 31

Adjusting Closing

J2 J3

521

521

521

0




Insurance Expense

Date

Explanation

Ref.

Debit

Credit

Balance

July 31 31

Adjusting Closing

J2 J3

150

150

150

0

Interest Expense

Date

Explanation

Ref.

Debit

Credit

Balance

July 31 31

Adjusting Closing

J2 J3

92

92

92 0

(b)

LEE’S WINDOW WASHING

Trial Balance

July 31, 2014

Debit Credit

Cash .................................................................... $11,050

Accounts receivable .......................................... 10,100

Supplies .............................................................. 2,100

Prepaid insurance .............................................. 1,800

Equipment .......................................................... 25,000

Accounts payable .............................................. $ 700



Notes payable .................................................... 20,000

L. Chang, capital ................................................ 20,000

L. Chang, drawings ............................................ 1,600

Service revenue ................................................. 13,500

Fuel expense ...................................................... 550

Salaries expense ................................................ 2,000

Totals ............................................................. $54,200 $54,200




(c)

GENERAL JOURNAL

J2 Date


Debit

Credit

July 31 Accounts Receivable ......................... 1,500 Service Revenue ............................ 1,500 31 Depreciation Expense ....................... 521 Accumulated Depreciation —Equipment .................................. 521 ($25,000 ÷ 4 years) × 1/12 31 Insurance Expense ............................ 150 Prepaid Insurance ......................... 150 ($1,800 ÷ 12) 31 Supplies Expense .............................. 1,400 Supplies ......................................... 1,400 ($2,100 − $700) 31 Salaries Expense ............................... 800 Salaries Payable ............................ 800 31 Interest Expense ................................ 92 Interest Payable ............................. 92 ($20,000 × 5.5% × 1/12)




(d)

LEE’S WINDOW WASHING

Adjusted Trial Balance

July 31, 2014

Debit Credit

Cash .................................................................... $11,050


Supplies .............................................................. 700


Equipment .......................................................... 25,000

Accumulated depreciation—equipment ........... $ 521

Accounts payable .............................................. 700

Salaries payable ................................................. 800

Interest payable ................................................. 92

Notes payable .................................................... 20,000

L. Chang, capital ................................................ 20,000

L. Chang, drawings ............................................ 1,600

Service revenue ................................................. 15,000




Depreciation expense ........................................ 521

Fuel expense ...................................................... 550

Insurance expense ............................................ 150

Interest expense ................................................ 92


Supplies expense .............................................. 1,400 ______ Totals ............................................................. $57,113 $57,113




(e) LEE’S WINDOW WASHING

Income Statement Month Ended July 31, 2014

Revenues Service revenue ........................................................... $15,000 Expenses Depreciation expense ................................... $ 521 Fuel expense ................................................. 550 Insurance expense ........................................ 150 Interest expense ............................................ 92 Salaries expense ........................................... 2,800 Supplies expense .......................................... 1,400 Total expenses ........................................................ 5,513 Profit ................................................................................. $9,487

LEE’S WINDOW WASHING Statement of Owner's Equity Month Ended July 31, 2014

L. Chang, capital, July 1 .................................................. $ 0 Add: Investments ............................................. $20,000 Profit ........................................................ 9,487 29,487 29,487 Less: Drawings ............................................................... 1,600 L. Chang, capital, July 31 ................................................ $27,887



PROBLEM 4-3A (Continued) (e) (Continued)

LEE’S WINDOW WASHING Balance Sheet July 31, 2014

Assets

Current assets Cash ............................................................................. $11,050 Accounts receivable ................................................... 11,600 Supplies ....................................................................... 700 Prepaid insurance ....................................................... 1,650 Total current assets ................................................ 25,000 Property, plant, and equipment Equipment...................................................... $25,000 Less: Accumulated depreciation ................ 521 24,479 Total assets ............................................................. $49,479


Current liabilities Accounts payable........................................................ $ 700 Salaries payable .......................................................... 800 Interest payable ........................................................... 92 Notes payable, current portion................................... 5,000 Total current liabilities ............................................ 6,592 Long term liabilities Notes payable .............................................................. 15,000 Total liabilities .................................................................. 21,592 Owner's equity L. Chang, capital ......................................................... 27,887 Total liabilities and owner's equity ........................ $49,479



PROBLEM 4-3A (Continued) (f)

GENERAL JOURNAL

J3 Date


Debit

Credit

July 31 Service Revenue ................................ 15,000 Income Summary .......................... 15,000 31 Income Summary ............................... 5,513 Depreciation Expense .................. 521 Fuel Expense ................................. 550 Insurance Expense ........................ 150 Interest Expense ............................ 92 Salaries Expense ........................... 2,800 Supplies Expense .......................... 1,400 31 Income Summary ............................... 9,487 L. Chang, Capital ........................... 9,487 31 L. Chang, Capital ................................ 1,600 L. Chang, Drawings ....................... 1,600



PROBLEM 4-3A (Continued) (g)

LEE’S WINDOW WASHING Post-Closing Trial Balance

July 31, 2014

Debit Credit

Cash ................................................................... $ 11,050


Supplies .............................................................. 700


Equipment .......................................................... 25,000

Accumulated depreciation—equipment ........... $ 521

Accounts payable .............................................. 700


Interest payable ................................................. 92

Notes payable .................................................... 20,000

L. Chang, capital ................................................ 27,887

$50,000 $50,000

Taking It Further:

Lee’s Window Washing will need to record adjusting journal entries every month if it wishes to prepare financial statement each month. Closing entries, on the other hand, are done only at the end of the fiscal year.



PROBLEM 4-4A

(a)

GENERAL JOURNAL

J2 Date


Debit

Credit

Oct. 31 Depreciation Expense ....................... 25,750 Accumulated Depreciation —Equipment .................................. 12,000 ($120,000 ÷ 10 years) Accumulated Depreciation —Vehicles ...................................... 13,750 ($110,000 ÷ 8 years) 31 Supplies Expense .............................. 24,000 Supplies ......................................... 24,000 ($26,000 − $2,000) 31 Unearned Revenue ............................ 4,000 Service Revenue ............................ 4,000 ($5,000 − $1,000) 31 Interest Receivable ............................ 400 Interest Revenue ........................... 400 ($20,000 × 4% × 6/12) 31 Salaries Expense ............................... 2,550 Salaries Payable ............................ 2,550



PROBLEM 4-4A (Continued) (a) (Continued)

SILVER RIDGE PLUMBING Adjusted Trial Balance

October 31, 2014

Debit Credit

Cash .................................................................. $ 15,420

Interest receivable ........................................... 400

Supplies ($26,000 – $24,000) ........................... 2,000

Debt investments ............................................. 20,000

Equipment ........................................................ 120,000

Accumulated depreciation—equipment ......... $ 54,000 *

Vehicles ............................................................ 110,000

Accumulated depreciation—vehicles ............. 61,875 **

Accounts payable ............................................ 7,950

Salaries payable ............................................... 2,550

Unearned revenue ........................................... 1,000 Notes payable .................................................. 55,000 H. Burke, capital ............................................... 75,750 H. Burke, drawings .......................................... 36,000 Service revenue ($200,125 + $4,000) .............. 204,125 Interest revenue ($400 + $400) ........................ 800 Depreciation expense ...................................... 25,750 Fuel expense .................................................... 28,038 Insurance expense .......................................... 9,500 Interest expense .............................................. 3,392



PROBLEM 4-4A (Continued) Rent expense ................................................... 21,000 Salaries expense ($45,000 + $2,550) ............... 47,550 Supplies expense ............................................ 24,000 _______ $463,050 $463,050 * $42,000 + $11,000 = $54,000 ** $48,125 + $13,750 = $61,875 (b) Revenues

Service revenue ........................................... $204,125 Interest ......................................................... 800 $204,925

Expenses Depreciation expense ................................. 25,750 Fuel expense ............................................... 28,038 Insurance expense ...................................... 9,500 Interest expense .......................................... 3,392 Rent expense ............................................... 21,000 Salaries expense ......................................... 47,550 Supplies expense ........................................ 24,000 159,230

Profit ................................................................. $45,695 (c)

SILVER RIDGE PLUMBING Statement of Owner's Equity Year Ended October 31, 2014

H. Burke, capital, November 1, 2013 ............................... $73,750 * Add: Investments ............................................. $ 2,000 Profit ........................................................ 45,695 47,695 121,445 Less: Drawings ............................................................... 36,000 H. Burke, capital, October 31, 2014 ................................ $85,445 * $75,750 – $2,000 = $73,750



PROBLEM 4-4A (Continued) (c) (Continued)

SILVER RIDGE PLUMBING Balance Sheet

October 31, 2014

Assets Current assets Cash ...................................................................................... $ 15,420 Interest receivable ................................................................ 400 Supplies ................................................................................ 2,000 Total current assets ......................................................... 17,820 Debt investments ...................................................................... 20,000 Property, plant, and equipment Equipment........................................ $120,000 Less: Accumulated depreciation ... 54,000 $66,000 Vehicles ........................................... $ 110,000 Less: Accumulated depreciation ... 61,875 48,125 114,125 Total assets ............................................................. $151,945

Liabilities and Owner's Equity Current liabilities Accounts payable................................................................. $ 7,950 Salaries payable ................................................................... 2,550 Unearned revenue ................................................................ 1,000 Current portion of notes payable ........................................ 10,000 Total current liabilities ..................................................... 21,500 Long-term liabilities Notes payable ....................................................................... 45,000 Total liabilities .................................................................. 66,500 Owner's equity H. Burke, capital ................................................................... 85,445 Total liabilities and owner's equity ................................. $151,945




GENERAL JOURNAL

Date


Debit

Credit

Oct. 31 Service Revenue ................................ 204,125 Interest Revenue ................................ 800 Income Summary .......................... 204,925 31 Income Summary ............................... 159,230 Depreciation expense ................... 25,750 Fuel expense ................................. 28,038 Insurance expense ........................ 9,500 Interest expense ............................ 3,392 Rent expense ................................. 21,000 Salaries expense ........................... 47,550 Supplies expense .......................... 24,000 31 Income Summary .............................. 45,695 H. Burke, Capital ........................... 45,695 31 H. Burke, Capital ............................... 36,000 H. Burke, Drawings ...................... 36,000



PROBLEM 4-4A (Continued) (d) (Continued)

Income Summary

Clos. 159,230 Clos. 204,925

Clos. 45,695

Bal. 45,695

Bal. 0

H. Burke, Capital H. Burke, Drawings

Clos. 36,000

Bal. 75,750 Clos. 45,695

Bal. 36,000 Clos. 36,000

Bal. 85,445 Bal. 0 The ending balance in the capital account after the closing entries have been posted is $85,445. This is the same as the ending balance on the statement of owner’s equity. Taking It Further:

Although the amount of the investment of $2,000 made by the owner H. Burke was correctly recorded as an increase to the capital account during the year, you will need to know the amount of the transaction in order to show it properly in the statement of owner’s equity. The investment of $2,000 will appear as an addition to the opening balance at November 1, 2013 along with the profit for the year.



PROBLEM 4-5A

(a)

(1) INCORRECT ENTRY (2) CORRECT ENTRY (3) CORRECTING ENTRY

1. Salaries Expense 2,100 Cash 2,100

Salaries Expense 1,250 Salaries Payable 650

Cash 1,900

Salaries Payable 650 Cash ($2,100 – $1,900) 200

Salaries Expense 850 ($2,100–$1,250)

2. Salaries Expense 2,400 Cash 2,400

S. Morris, Drawings 2,400 Cash 2,400

S. Morris, Drawings 2,400 Salaries Expense 2,400

3. Rent Payable 950

Cash 950 Rent Expense 950 Cash 950

Rent Expense 950 Rent Payable 950

4. Accounts Payable 740 Cash 740

Accounts Payable 470 Cash 470

Cash ($740–$470) 270 Accounts Payable 270

5. Miscellaneous Exp. 95 Cash 95

Advertising Exp. 195 Cash 195

Advertising Exp. 195 Miscellaneous Expense 95 Cash 100



PROBLEM 4-5A (Continued) (a) Continued

(1) INCORRECT ENTRY

(2) CORRECT ENTRY

(3) CORRECTING ENTRY

6. Equipment 460 Accounts Payable 460

Repair Expense 460 Cash 460

Repair Expense 460 Equipment 460

Accounts Payable 460

Cash 460

7. Accounts Rec. 1,250 Unearned Revenue 1,250

Accounts Receivable 1,250 Service Revenue 1,250

Unearned Revenue 1,250 Service Revenue 1,250

8. No entry

Depr. Expense 183 Accum. Depr.—Equip 183 [($11,460 − $460) ÷ 5 ÷ 12]

Depr. Expense 183 Accum. Depr.—Equip 183




EDGEMONT ENTERTAINMENT INSTALLATIONS Trial Balance April 30, 2014

Debit Credit Cash ($4,010 + $200 + $270 − $100 – $460)....... $ 3,920 Accounts receivable .......................................... 3,225 Supplies .............................................................. 3,800 Equipment ($11,460 − $460) .............................. 11,000 Accumulated depreciation ($2,200 + $183) ...... $ 2,383 Accounts payable ($2,275 + $270 − $460) ........ 2,085 Salaries payable ($650 − $650) ......................... 0 Rent payable (−$950 + $950) .............................. 0 Unearned revenue ($1,250 − $1,250) ................. 0 S. Morris, capital ................................................ 17,700 S. Morris, drawings ($0 + $2,400) ...................... 2,400 Service revenue ($7,950 + $1,250) ..................... 9,200 Salaries expense ($7,400 − $850 − $2,400) ...... 4,150 Advertising expense ($585 + $195) ................... 780 Depreciation expense ($0 + $183) ................... 183 Miscellaneous expense ($595 – $95) ................ 500 Rent expense ($0 + $950) .................................. 950 Repair expense ($0 + $460) .............................. 460 ______ $31,368 $31,368



PROBLEM 4-5A (Continued) Taking It Further: Error 2 would have the following effects on the financial statements: Income statement: Salary expense overstated by $2,400 Profit understated by $2,400 Statement of owner’s equity: Drawing understated by $2,400 Profit understated by $2,400 While it is true that S. Morris’ capital account balance reported on the balance sheet is not affected, other financial statements, including the income statement and the statement of owner’s equity are affected as described above. This error might alarm creditors, for example, who feel that the expenses for salaries are too high. Creditors are also very concerned about how much an owner withdraws from the business.



PROBLEM 4-6A

(a) Although not required, the closing entries would be:

GENERAL JOURNAL

Date


Debit

Credit

Dec. 31 Service Revenue ................................. 65,000 Interest Revenue ................................ 1,100 Income Summary .......................... 66,100 31 Income Summary .............................. 16,700 Depreciation Expense ................... 10,000 Insurance Expense ........................ 1,500 Interest Expense ............................ 2,800 Supplies Expense .......................... 2,400 31 Income Summary .............................. 49,400 F. Dunder, Capital ......................... 49,400 31 F. Dunder, Capital .............................. 33,000 F. Dunder, Drawings ..................... 33,000

F. Dunder, Capital

Dec. 31, 2013 14,100 July 18 3,200

Closing 33,000 Bal. 17,300 Closing 49,400

Dec. 31, 2014 33,700




DUNDER TOUR COMPANY Balance Sheet

December 31, 2014

Assets Current assets Cas Marcie ousside .................................................... $ 4,500 Short-term investments .............................................. 2,700 Accounts receivable ................................................... 3,500 Interest receivable ...................................................... 100 Supplies....................................................................... 3,100 Prepaid insurance ....................................................... 2,900 Total current assets ............................................... 16,800 Long-term Investment Notes receivable ......................................................... 18,400 Property, plant, and equipment Equipment ...................................................... $50,000 Less: Accumulated depreciation ................. 15,000 35,000 Intangible asset Patents ........................................................................ 15,000 Total assets ............................................................ $85,200

Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... $ 7,300 Interest payable .......................................................... 700 Unearned revenue ...................................................... 3,500 Current portion of notes payable .............................. 3,000 Total current liabilities ........................................... 14,500 Long-term liabilities Notes payable ............................................................. 37,000 Total liabilities ........................................................ 51,500 Owner's equity F. Dunder, capital ........................................................ 33,700 Total liabilities and owner's equity ....................... $85,200




December 31, 2014 December 31, 2013

Working Capital

$16,800 − $14,500 = $2,300

$17,400 − $22,300 = ($4,900)

Current Ratio

$16,800 ÷ $14,500 = 1.16:1

$17,400 ÷ $22,300 = 0.78:1

(d)

December 31, 2014 December 31, 2013

Acid-test Ratio

$10,800* ÷ $14,500 = 0.74:1

$15,600 ÷ $22,300 = 0.70:1

*$10,800 = $4,500 + $2,700 + $3,500 + $100 Taking It Further: Although the acid-test ratio shows very little change, the working capital and current ratios both show a substantial improvement in 2014 over 2013. In 2013, the working capital was negative and the current ratio less than 1, indicating that the company did not have sufficient current assets to cover current liabilities. In 2014, the company had a positive working capital amount of $2,300 and a current ratio of greater than 1. Dunder Tour Company’s liquidity has improved.



PROBLEM 4-7A

(a) Amounts in thousands

Dec. 24, 2011

June 25, 2011

Dec. 25, 2010

Cash and cash equivalents $31,803 $28,698 $25,406

Accounts receivable 1,686 391 385

Acid-test assets 33,489 29,089 25,791

Inventories 36,789 28,964 41,163

Prepaid expenses 426 901 381

Current assets $70,704

$58,954

$67,335

Payables and accruals $16,010 $11,024 $19,650

Income taxes payable 583 278 1,097

Other current liabilities 3,586 1,536 3,659

Current liabilities $20,179

$12,838

$24,406

(b)

Amounts in thousands

Dec. 24, 2011 June 25, 2011 Dec. 25, 2010

Working Capital

$70,704 − $20,179 = $50,525

$58,954 − $12,838 = $46,116

$67,335 − $24,406 = $42,929

Current Ratio

$70,704 ÷ $20,179 = 3.50:1

$58,954 ÷ $12,838 = 4.59:1

$67,335 ÷

$24,406 = 2.76:1

Acid-test Ratio

$33,489 ÷ $20,179 = 1.66:1

$29,089 ÷ $12,838 = 2.27:1

$25,791 ÷

$24,406 = 1.06:1



PROBLEM 4-7A (Continued) (c) The acid-test ratio is a measure of the company’s

immediate short-term liquidity. The current ratio is a measure of the short-term debt-paying ability. Finally, working capital is the excess of current assets over current liabilities. If the amount is negative, the term used is a working capital deficiency.

Danier Leather demonstrates very strong short-term

liquidity and debt-paying ability at each point in time. Any current ratio in excess of 2:1 or acid-test ratio in excess of 1:1 is considered very strong. Although each ratio has deteriorated in the period from June 25, 2011 to December 24, 2011, they remain very strong.

Taking It Further: The different points in time used in the ratio comparison will be affected by the seasonality of Danier’s retail operations. When considering the types of product sold by Danier Leather, one would expect to have reduced amounts of inventory in the summer months, as is revealed in the balances given in part (a). Correspondingly, the accounts payable would be reduced in the summer months as well. The current and acid-test ratios of June 25, 2011 are consequently stronger than those calculated at the December 25, 2010 and December 24, 2011 dates.



*PROBLEM 4-8A

SPARTAN CYCLE REPAIR SHOP

Work Sheet Year Ended January 31, 2014

Account Titles Trial Balance

Adjustments Adjusted Trial

Balance Income

Statement

Balance Sheet Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Cash 3,200 3,200 3,200 Accounts receivable 6,630

(1) 1,550

8,180

8,180

Prepaid insurance 6,420

(2) 5,885

535

535

Supplies 5,240 (3) 4,660 580 580 Land 50,000 50,000 50,000 Building 90,000 90,000 90,000 Accum. deprec.— building 11,000

(4) 2,000

13,000

13,000 Equipment 27,000 27,000 27,000 Accum. deprec.— equipment 4,500

(4) 1,800

6,300

6,300

Accounts payable 6,400

6,400

6,400

Interest payable (6) 510 510 510



*PROBLEM 4-8A (Continued)

Account Titles Trial Balance


Balance Income

Statement

Balance Sheet Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Salaries payable (5) 1,520 1,520 1,520 Unearned revenue 1,950

(7) 850

1,100

1,100

Mortgage payable 102,000

102,000

102,000

H. Dude, capital 61,000 61,000 61,000 H. Dude, drawings 101,100

101,100

101,100

Service revenue 235,550

(1) 1,550 (7) 850

237,950

237,950

Deprec. exp. (4) 3,800 3,800 3,800 Insurance exp. (2) 5,885 5,885 5,885 Interest exp. 5,610 (6) 510 6,120 6,120 Salaries exp. 115,200 (5) 1,520 116,720 116,720

Supplies exp. (3) 4,660 4,660 4,660

Utilities exp. 12,000 _ 12,000 12,000 Totals 422,400 422,400 18,775 18,775 429,780 429,780 149,185 237,950 280,595 191,830 Profit 88,765 88,765 Totals 237,950 237,950 280,595 280,595

Taking It Further: Adjusting entries must be recorded in a journal and posted to the general ledger. Otherwise, the account balances will not agree with the financial statements.



*PROBLEM 4-9A

SILVER RIDGE PLUMBING

Worksheet

Year Ended October 31, 2014

Trial Balance


Balance Income

Statement

Balance Sheet

Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Cash 15,420 15,420 15,420 Interest receivable

(4) 400

400

400

Supplies 26,000 (2)24,000 2,000 2,000 Debt

investments 20,000

20,000

20,000 Equipment 120,000 120,000 120,000 Accum. deprec.– equipment 42,000

(1)12,000

54,000

54,000

Vehicle 110,000 110,000 110,000 Accum.deprec.– vehicle 48,125 (1)13,750 61,875

61,875

Accounts payable

7,950

7,950

7,950

Salaries payable (5)2,550 2,550 2,550 Unearned revenue 5,000 (3)4,000 1,000 1,000



*PROBLEM 4-9A (Continued)

Trial Balance


Balance Income

Statement

Balance Sheet

Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Notes payable 55,000

55,000

55,000 A. Nazari, capital 75,750 75,750 75,750 A. Nazari, drawings 36,000

36,000

36,000

Service revenue

200,125

(3)4,000

204,125

204,125

Interest revenue 400 (4) 400 800 800 Deprec. exp. (1)25,750 25,750 25,750 Fuel exp. 28,038 28,038 28,038 Insurance exp. 9,500 9,500 9,500 Interest exp. 3,392 3,392 3,392 Rent exp. 21,000 21,000 21,000

Salaries exp. 45,000 (5) 2,550 47,550 47,550

Supplies exp. (2)24,000 24,000 24,000 Totals 434,350 434,350 56,700 56,700 463,050 463,050 159,230 204,925 303,820 258,125 Profit 45,695 45,695 Totals 204,925 204,925 303,820 303,820



*PROBLEM 4-9A (Continued) Taking It Further: The preparation of the work sheet is optional because it is not part of the company’s books but basically a tool for accountants in the preparation of financial statements. Since all of the adjustments recorded on the worksheet ultimately get recorded in the general ledger, the preparation of the work sheet is not absolutely necessary. Adjusting entries can be posted as they are recorded in the journal to arrive at the adjusted trial balance and financial statements.



*PROBLEM 4-10A

(b)

GENERAL JOURNAL

J2 Date


Debit

Credit

Sept. 30 Interest Receivable ............................. 875 Interest Revenue ............................ 875 ($50,000 × 3.5% × 6/12) 30 Salaries Expense ................................ 2,400 Salaries Payable ............................ 2,400 30 Interest Expense ................................. 667 Interest Payable ............................. 667 ($80,000 × 5% × 2/12) 30 Depreciation Expense ........................ 4,250 Accumulated Depreciation ............ 4,250



*PROBLEM 4-10A (Continued) (a) and (b)

Interest Receivable

Interest Revenue

Sept. 30 875 Sept. 30 875

Bal. 875 Bal. 875

Salaries Payable Salaries Expense

Sept. 30 2,400 Sept. 30 Bal. 153,000 2,400

Bal. 2,400 Bal. 155,400

Interest Payable Interest Expense

Sept. 30 667

Sept.30 3,333 667

Bal. 667 Bal. 4,000

Accumulated Depreciation Depreciation Expense

Sept. 30 Bal. 4,250

Sept. 30 4,250

4,250 Bal. 4,250

Bal. 8,500 (c)

GENERAL JOURNAL

Date


Debit

Credit

Sept. 30 Interest Revenue ............................... 875 Income Summary .......................... 875 30 Income Summary .............................. 163,650 Salaries expense ............................ 155,400 Interest expense ............................ 4,000 Depreciation expense .................... 4,250



*PROBLEM 4-10A (Continued) (c) (Continued)

Interest Receivable

Interest Revenue

Sept. 30 875 Sept. 30 875

Bal. 875 Clos. 875 Bal. 875

Bal. 0


Sept. 30 2,400 Sept. 30 Bal. 153,000 2,400

Bal. 2,400 Bal. 155,400 Clos. 155,400

Bal. 0


Sept. 30 667

Sept.30 3,333 667

Bal. 667 Bal. 4,000 Clos. 4,000

Bal. 0

Accumulated Depreciation Depreciation Expense

Sept. 30 Bal. 4,250

Sept. 30 4,250

4,250 Bal. 4,250 Clos. 4,250

Bal. 8,500 Bal. 0



*PROBLEM 4-10A (Continued) (d)

GENERAL JOURNAL

Date


Debit

Credit

Oct. 1 Interest Revenue ................................ 875 Interest Receivable ....................... 875 1 Salaries Payable ................................. 2,400 Salaries Expense ........................... 2,400 1 Interest Payable .................................. 667 Interest Expense ............................ 667

Interest Receivable

Interest Revenue

Sept. 30 875 Sept. 30 875

Bal. 875 Rev. 875

Clos. 875 Bal. 0

Bal. 0 Rev. 875


Sept. 30 2,400 Sept. 30 Bal. 153,000 2,400

Rev. 2,400 Bal. 155,400 Clos. 155,400

Bal. 0 Bal. 0 Rev. 2,400

Bal. 2,400


Sept. 30 667

Sept.30 3,333 667

Rev. 667 Bal. 4,000 Clos. 4,000

Bal. 0 Bal. 0 Rev. 667

Bal. 667



*PROBLEM 4-10A (Continued) (e)

GENERAL JOURNAL

Date


Debit

Credit

Oct. 1 Cash .................................................... 875 Interest Revenue ............................ 875 2 Salaries Expense ................................ 3,000 Cash ................................................ 3,000 31 Interest Expense ................................. 1,000 Cash ................................................ 4,000



*PROBLEM 4-10A (Continued) (e) (Continued)

Interest Receivable

Interest Revenue

Sept. 30 875 Sept. 30 875

Bal. 875 Rev. 875

Clos. 875 Bal. 0

Bal. 0 Rev. 875 Oct. 1 875

Bal. 0


Sept. 30 2,400 Sept. 30 Bal. 153,000 2,400

Rev. 2,400 Bal. 155,400 Clos. 155,400

Bal. 0 Oct. 2 3,000 Rev. 2,400

Bal. 600


Sept. 30 667

Sept.30 3,333 667

Rev. 667 Bal. 4,000 Clos. 4,000

Bal. 0 Oct. 31 1,000 Rev. 667

Bal. 333 Taking It Further: Reversing entries can be useful because they simplify the recording of cash transactions after the fiscal year end. It is not necessary to look at the previous year’s adjusting entries to decide how to record a cash transaction after the year end.



*PROBLEM 4-11A

(a) May 31 Accounts Receivable ............................. 750 Service Revenue ................................ 750 31 Supplies Expense ($2,910 – $765) ......... 2,145 Supplies .............................................. 2,145 31 Depreciation Expense ($115,000 ÷ 10) .. 11,500 Accumulated Depreciation—Equipment 11,500 31 Salaries Expense .................................... 1,390 Salaries Payable ................................ 1,390 31 Interest Expense ($60,000 × 6% × 1/12) 300 Interest Payable ................................. 300 31 Unearned Revenue ................................. 800 Service Revenue ($1,500 − $700) ...... 800 (b) June 1 Service Revenue ..................................... 750 Accounts Receivable ......................... 750 1 Salaries Payable ..................................... 1,390 Salaries Expense ............................... 1,390 1 Interest Payable ...................................... 300 Interest Expense ................................ 300



*PROBLEM 4-11A (Continued) (c) June 1 Interest Expense ($60,000 × 6% × 1/12) 300 Cash .................................................... 300 3 Salaries Expense .................................... 1,980 Cash .................................................... 1,980 19 Cash ($750 + $1,150) .............................. 1,900 Service Revenue ................................ 1,900 (d) June 1 Interest Payable ...................................... 300 Cash ($60,000 × 6% × 1/12)................ 300 3 Salaries Expense .................................... 590 Salaries Payable ..................................... 1,390 Cash .................................................... 1,980 19 Cash ($750 + $1,150) .............................. 1,900 Accounts Receivable ......................... 750 Service Revenue ................................ 1,150 Taking It Further: Reversing entries should only be used for adjusting journal entries that are accruals: accrued revenues and accrued expenses. Reversing prepayment adjusting entries would not provide the objective achieved through their use.



CONTINUING COOKIE CHRONICLE

(a)

COOKIE CREATIONS Income Statement

Two Months Ended December 31, 2013 Revenue .............................................................. $ 1,225 Expenses Advertising expense ...................................... $ 325 Telephone expense ....................................... 174 Supplies expense .......................................... 103 Depreciation expense .................................... 78 Salaries expense ............................................ 48 Interest expense ............................................ 8 Total expenses ....................................................... 736 Profit ................................................................................. $ 489 (b)

COOKIE CREATIONS Statement of Owner's Equity

Two Months Ended December 31, 2013

N. Koebel, capital, November 1 ...................................... $ 0 Add: Investments .......................................................... 1,450 Profit ..................................................................... 489 1,939 Less: Drawings............................................................... 0 N. Koebel, capital, December 31 .................................... $1,939



CONTINUING COOKIE CHRONICLE (Continued) (b) (Continued)

COOKIE CREATIONS Balance Sheet

December 31, 2013

Assets

Current assets Cash ............................................................................. $2,929 Accounts receivable ................................................... 675 Supplies....................................................................... 95 Total current assets ............................................... 3,699 Property, plant, and equipment Equipment ...................................................... $1,550 Less: Accumulated depreciation ................. 78 1,472 Total assets ............................................... $5,171


Current liabilities Accounts payable ....................................................... $ 76 Salaries payable.......................................................... 48 Interest payable .......................................................... 8 Unearned revenue ...................................................... 100 Notes payable ............................................................. 3,000 Total current liabilities ........................................... 3,232 Owner's equity N. Koebel, capital ........................................................ 1,939 Total liabilities and owner's equity ....................... $5,171



CONTINUING COOKIE CHRONICLE (Continued) (c)

1. Working Capital $3,699 – $3,232 = $ 467

2. Current Ratio = $3,699

= 1.14:1 $3,232

3. Acid-test ratio = $2,929 + $675

= 1.12:1 $3,232

Cookie Creation’s liquidity at December 31, 2013 is moderately strong. (d)

GENERAL JOURNAL

J4 Date


Debit

Credit

2013 Dec. 31 Revenue ............................................. 1,225 Income Summary .......................... 1,225 31 Income Summary .............................. 736 Advertising Expense .................... 325 Depreciation Expense .................. 78 Interest Expense ........................... 8 Salaries Expense .......................... 48 Supplies Expense ......................... 103 Telephone Expense ...................... 174 31 Income Summary .............................. 489 N. Koebel, Capital ......................... 489



CONTINUING COOKIE CHRONICLE (Continued) (e)

COOKIE CREATIONS Post-Closing Trial Balance

December 31, 2013 Account Debit Credit Cash .................................................................... $2,929 Accounts receivable .......................................... 675 Supplies .............................................................. 95 Equipment........................................................... 1,550 Accumulated depreciation—equipment ........... $ 78 Accounts payable............................................... 76 Salaries payable ................................................. 48 Interest payable .................................................. 8 Unearned revenue .............................................. 100 Notes payable ..................................................... 3,000 N. Koebel, capital ............................................... _ ____ 1,939 $5,249 $5,249 (f) Expenses would have been overstated by $1,472 ($1,550 - $78). Profit would be understated by $1,472. Assets and N. Koebel, capital would be understated by $1,472.



CUMULATIVE COVERAGE–CHAPTERS 2 TO 4 (b)

GENERAL JOURNAL

J1 Date


Debit

Credit

Sept. 1 Cash .................................................... 10,000 Notes Payable ................................ 10,000 2 Rent Expense ..................................... 500 Cash ................................................ 500 8 Salaries Expense ................................ 1,050 Cash ................................................ 1,050 12 Cash .................................................... 1,500 Accounts Receivable ..................... 1,500 15 Cash .................................................... 5,700 Service Revenue ............................ 5,700 17 Supplies .............................................. 1,300 Accounts Payable .......................... 1,300 20 Accounts Payable .............................. 2,300 Cash ................................................ 2,300 21 Telephone Expense ............................ 200 Cash ................................................ 200 22 Salaries Expense ................................ 1,050 Cash ................................................ 1,050 27 Accounts Receivable ......................... 900 Service Revenue ............................ 900



CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (b) (Continued) Sept. 29 Cash .................................................... 550 Unearned Revenue ........................ 550 30 J. Alou, Drawings ............................... 800 Cash ................................................ 800 (a), (c), (e) and (h)

Cash

Aug. 31 2,790 Sept. 1 10,000 Sept. 2 500 Sept. 8 1,050 Sept. 12 1,500 Sept. 15 5,700 Sept. 20 2,300 Sept. 21 200 Sept. 22 1,050 Sept. 29 550 Sept. 30 800

Bal. 14,640

Accounts Receivable

Aug. 31 7,910 Sept. 12 1,500 Sept. 27 900

Bal. 7,310

Supplies

Aug. 31 8,500 Sept. 17 1,300

Bal. 9,800 Sept. 30 8,800

Bal. 1,000



CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (a), (c), (e) and (h) (Continued)

Equipment

Aug. 31 9,000

Accumulated Depreciation—Equipment

Aug. 31 1,800 Sept. 30 1,800

Bal. 3,600

Accounts Payable

Aug. 31 3,100 Sept. 17 1,300 Sept. 20 2,300

Bal. 2,100

Unearned Revenue

Aug. 31 400 Sept. 29 550

Bal. 950 Sept. 30 500

Bal. 450

Salaries Payable

Sept. 30 630

Interest Payable

Sept. 30 42

Notes Payable

Sept. 1 10,000




J. Alou, Capital

Aug. 31 21,200 Sept. 30 10,328 Sept. 30 16,400

Bal. 15,128

J. Alou, Drawings

Aug. 31 15,600 Sept. 30 800

Bal. 16,400 Sept. 30 16,400

Bal. 0

Income Summary

Sept. 30 46,372 Sept. 30 56,700 Sept. 30 10,328

Bal. 0

Service Revenue

Aug. 31 49,600 Sept. 15 5,700 Sept. 27 900

Bal. 56,200 Sept. 30 500

Sept. 30 56,700 Bal. 56,700

Bal. 0

Rent Expense

Aug. 31 5,500 Sept. 2 500

Bal. 6,000 Sept. 30 6,000

Bal. 0




Salaries Expense

Aug. 31 24,570 Sept. 8 1,050 Sept. 22 1,050

Bal. 26,670 Sept. 30 630

Bal. 27,300 Sept. 30 27,300

Bal. 0

Telephone Expense

Aug. 31 2,230 Sept. 21 200

Bal. 2,430 Sept. 30 2,430

Bal. 0

Supplies Expense

Sept. 30 8,800 Sept. 30 8,800

Bal. 0

Depreciation Expense

Sept. 30 1,800 Sept. 30 1,800

Bal. 0

Interest Expense

Sept. 30 42 Sept. 30 42

Bal. 0



CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (d)

ALOU EQUIPMENT REPAIR

Unadjusted Trial Balance

September 30, 2014

Debit Credit

Cash ....................................................................$ 14,640


Supplies .............................................................. 9,800

Equipment........................................................... 9,000

Accumulated depreciation—equipment ........... $ 1,800

Accounts payable............................................... 2,100

Unearned revenue .............................................. 950

Notes payable ..................................................... 10,000

J. Alou, capital .................................................... 21,200

J. Alou, drawings................................................ 16,400

Service revenue .................................................. 56,200

Rent expense ...................................................... 6,000


Telephone expense ............................................ 2,430 ____

Totals .............................................................. $92,250 $92,250



CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (e)

GENERAL JOURNAL

J2 Date


Debit

Credit

Sept. 30 Supplies Expense ............................... 8,800 Supplies .......................................... 8,800 ($9,800 – $1,000) 30 Salaries Expense ................................ 630 Salaries Payable ............................ 630 30 Depreciation Expense ........................ 1,800 Accumulated Depreciation —Equipment ................................... 1,800 ($9,000 ÷ 5 years) 30 Unearned Revenue ............................. 500 Service Revenue ............................ 500 ($950 – $450) 30 Interest Expense ................................. 42 Interest Payable ............................. 42 ($10,000 × 5% × 1/12)



CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued)

(f)

ALOU EQUIPMENT REPAIR

Adjusted Trial Balance

September 30, 2014

Debit Credit

Cash .................................................................... $14,640


Supplies .............................................................. 1,000

Equipment........................................................... 9,000





Interest payable .................................................. 42

Notes payable ..................................................... 10,000

J. Alou, capital .................................................... 21,200

J. Alou, drawings................................................ 16,400

Service revenue .................................................. 56,700




Depreciation expense ........................................ 1,800

Interest expense ................................................. 42

Rent expense ...................................................... 6,000


Supplies expense ............................................... 8,800

Telephone expense ............................................ 2,430 ______

Totals .............................................................. $94,722 $94,722




(g) ALOU EQUIPMENT REPAIR

Income Statement Year Ended September 30, 2014

Revenues Service revenue .......................................................... $56,700 Expenses Salaries expense ............................................ $27,300 Supplies expense .......................................... 8,800 Rent expense ................................................. 6,000 Telephone expense ....................................... 2,430 Depreciation expense .................................... 1,800 Interest expense ............................................ 42 Total expenses ....................................................... 46,372 Profit ................................................................................. $10,328

ALOU EQUIPMENT REPAIR Statement of Owner's Equity

Year Ended September 30, 2014

J. Alou, capital, Oct. 1, 2013 ........................................ $21,200 Add: Profit ................................................................... 10,328

31,528 Less: Drawings ............................................................ 16,400 J. Alou, capital, Sept. 30, 2014 .................................... $15,128



CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (g) (Continued)

ALOU EQUIPMENT REPAIR Balance Sheet

September 30, 2014

Assets

Current assets Cash ............................................................................. $14,640 Accounts receivable ................................................... 7,310 Supplies....................................................................... 1,000 Total current assets ............................................... 22,950 Property, plant, and equipment Equipment ...................................................... $9,000 Less: Accumulated depreciation ................. 3,600 5,400 Total assets ............................................................ $28,350


Current liabilities Accounts payable ....................................................... $ 2,100 Salaries payable.......................................................... 630 Interest payable .......................................................... 42 Unearned revenue ...................................................... 450 Total current liabilities ........................................... 3,222 Long-term liabilities Notes payable ............................................................. 10,000 Total liabilities ................................................................. 13,222 Owner's equity J. Alou, capital ............................................................ 15,128 Total liabilities and owner's equity ....................... $28,350



CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (h)

GENERAL JOURNAL

J3 Date


Debit

Credit

Sept. 30 Service Revenue ................................. 56,700 Income Summary ........................... 56,700 30 Income Summary ............................... 46,372 Rent Expense ................................. 6,000 Salaries Expense ........................... 27,300 Telephone Expense ....................... 2,430 Depreciation Expense .................. 1,800 Supplies Expense .......................... 8,800 Interest Expense ............................ 42 30 Income Summary ............................... 10,328 J. Alou, Capital ............................... 10,328 30 J. Alou, Capital ................................... 16,400 J. Alou, Drawings ........................... 16,400



CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (i)

ALOU EQUIPMENT REPAIR Post-Closing Trial Balance

September 30, 2014

Debit Credit

Cash .................................................................... $14,640


Supplies .............................................................. 1,000

Equipment........................................................... 9,000



Interest payable .................................................. 42

Notes payable ..................................................... 10,000



J. Alou, capital .................................................... 15,128

$31,950 $31,950



BYP 4-1 COLLABORATIVE LEARNING ACTIVITY

All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.



BYP 4-2 COMMUNICATION ACTIVITY

MEMO

To: Friend From: A. Student Re: Steps in the Accounting Cycle

The required steps in the accounting cycle, in the order in which they should be completed, are:

1. Analyze business transactions. 2. Journalize the transactions. 3. Post to the ledger accounts. 4. Prepare a trial balance. 5. Journalize and post the adjusting entries. 6. Prepare an adjusted trial balance. 7. Prepare the financial statements. 8. Journalize and post the closing entries. 9. Prepare a post-closing trial balance.

The optional steps in the accounting cycle include preparing a work sheet and preparing reversing entries. If a work sheet is prepared, it is done after step 3 above, and it includes steps 4 and 6. The work sheet is a form used to make it easier to prepare the adjusting entries and financial statements. If re-versing entries are prepared, they are journalized and posted after step 9, at the beginning of the next accounting period. A reversing entry is the exact opposite of a previously recorded adjusting entry, and simplifies the recording of subsequent transactions.



BYP 4-3 ETHICS CASE

(a) The error caused last year’s balance sheet to have an

inflated amount of accounts receivable. Including these receivables at that time caused the current ratio to be higher than it should have been. Since there is no error concerning the upcoming ending balance sheet of the current year, no misstatements would be reported on the balance sheet and the current ratio would be correct.

(b) The stakeholders in this case are:

You, as controller. Eddy Lieman, president. Users of the company's financial statements (particularly the owners, the banks and other creditors to whom the statements were issued).

The ethical issue is the continued circulation of

significantly misstated financial statements. As controller, you have just issued misleading financial statements. You have acted ethically by telling the company's president. The president has reacted unethically by allowing the misleading financial statements to continue to circulate.

(c) As controller, you should impress upon the president the consequences of having those misleading financial statements detected by some user or the regulatory body (especially if you are a public company). Also stress upon him that you have a professional obligation to correct the statements or to resign.



BYP 4-4 “PERSONAL FINANCIAL LITERACY” ACTIVITY

(a)

Student Personal Balance Sheet

Date

Assets

Current assets Cash ............................................................................. $ 1,200 Long-term assets Automobile ............................................. $8,000 Computer and accessories ................... 1,200 Clothes and furniture ............................ 4,000 13,200 Total assets ............................................................ $14,400

Liabilities and Personal Equity (Deficit)

Current liabilities Automobile loan .......................................................... $ 2,400 Credit cards balance .................................................. 1,000 Total current liabilities ........................................... 3,400 Long-term liabilities Student loan ........................................... $10,000 Automobile loan ..................................... 3,600 13,600 Total liabilities ................................................................. 17,000 Personal equity (deficit) .................................................. (2,600) Total liabilities and personal deficit ...................... $14,400



BYP4-4 (Continued) (b) If the tuition fees are considered an asset, an additional

student loan will add to the liabilities and will add an equivalent amount to assets with no effect on the Personal Equity (Deficit). On the other hand, if the tuition fees are considered an expense, then the Personal Equity (Deficit) will be reduced by the amount of the expense. Because it is a deficit, the deficit will be larger.

(c) By earning income during the summer, and avoiding

having to borrow an additional student loan, you will have succeeded in increasing your assets (cash in chequing account) by $2,000 while not increasing liabilities, and so the Personal Equity will be increased or (Deficit) will be reduced by $2,000.

(d) Paying liabilities (automobile loan) with assets (cash in

chequing account) does not affect your Personal Equity (Deficit).



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Copyright

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