chapter 03 - financial accounting

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CHAPTER 3 THE ADJUSTING PROCESS

DISCUSSION QUESTIONS

1. a. Under cash-basis accounting, revenues are reported in the period in which cash is received and expenses are reported in the period in which cash is paid.

b. Under accrual-basis accounting, reve-nues are reported in the period in which they are earned and expenses are re-ported in the same period as the reve-nues to which they relate.

2. The matching concept is related to the ac-crual basis of accounting.

3. Adjusting entries are necessary at the end of an accounting period to bring the ledger up to date.

4. Adjusting entries bring the ledger up to date as a normal part of the accounting cycle. Cor-recting entries correct errors in the ledger.

5. Four different categories of adjusting entries include prepaid expenses (deferred ex-penses), unearned revenues (deferred reve-nues), accrued expenses (accrued liabili-ties), and accrued revenues (accrued assets).

6. Statement (a): Increases the balance of a revenue account.

7. Statement (b): Increases the balance of an expense account.

8. Yes, because every adjusting entry affects expenses or revenues.

9. a. The rights acquired represent an asset. b. The justification for debiting Rent Ex-

pense is that when the ledger is summa-rized in a trial balance at the end of the month and statements are prepared, the rent will have become an expense. Hence, no adjusting entry will be neces-sary.

10. a. The portion of the cost of a fixed asset deducted from revenue of the period is debited to Depreciation Expense. It is the expired cost for the period. The reduction in the fixed asset account is recorded by a credit to Accumulated Depreciation rather than to the fixed as-set account. The use of the contra-asset account facilitates the presentation of original cost and accumulated deprecia-tion on the balance sheet.

b. Depreciation Expense—debit balance; Accumulated Depreciation—credit bal-ance.

c. No, it is not customary for the balances of the two accounts to be equal in amount.

d. Depreciation Expense appears in the in-come statement; Accumulated Depre-ciation appears on the balance sheet.



PRACTICE EXERCISES

PE 3–1A

a. Yes c. No e. Yes b. No d. Yes f. Yes

PE 3–1B

a. No c. Yes e. No b. No d. No f. Yes

PE 3–2A

a. Unearned revenue c. Accrued revenue b. Prepaid expense d. Accrued expense

PE 3–2B

a. Unearned revenue c. Accrued expense b. Accrued revenue d. Prepaid expense

PE 3–3A

Supplies Expense.......................................................... 5,000 Supplies .................................................................... 5,000 Supplies used ($2,400 + $3,975 – $1,375).

PE 3–3B

Insurance Expense........................................................ 4,000 Prepaid Insurance .................................................... 4,000 Insurance expired ($7,200 + $4,800 – $8,000).



PE 3–4A

Unearned Fees............................................................... 160,250 Fees Earned.............................................................. 160,250 Fees earned ($178,900 – $18,650).

PE 3–4B

Unearned Rent ............................................................... 4,375 Rent Revenue ........................................................... 4,375 Rent earned [($10,500/12) × 5 months].

PE 3–5A

Accounts Receivable .................................................... 11,600 Fees Earned.............................................................. 11,600 Accrued fees.

PE 3–5B

Accounts Receivable .................................................... 21,750 Fees Earned.............................................................. 21,750 Accrued fees.

PE 3–6A

Salaries Expense ........................................................... 14,400 Salaries Payable....................................................... 14,400 Accrued salaries [($18,000/5 days) × 4 days].

PE 3–6B

Salaries Expense ........................................................... 17,250 Salaries Payable....................................................... 17,250 Accrued salaries [($34,500/6 days) × 3 days].



PE 3–7A

Depreciation Expense ................................................... 11,500 Accumulated Depreciation—Equipment ................ 11,500 Depreciation on equipment.

PE 3–7B


PE 3–8A

a. Revenues were understated by $33,300. b. Expenses were understated by $13,200 ($7,200 + $6,000). c. Net income was understated by $20,100 ($33,300 – $13,200).

PE 3–8B

a. Revenues were understated by $13,900. b. Expenses were understated by $14,100 ($2,100 + $12,000). c. Net income was overstated by $200 ($14,100 – $13,900).

PE 3–9A

a. The totals are unequal. The debit total is higher by $270 ($17,520 – $17,250). b. The totals are equal since the adjusting entry was omitted.

PE 3–9B

a. The totals are equal even though the credit should have been to Wages Pay-able instead of Accounts Payable.

b. The totals are unequal. The credit total is higher by $360 ($1,840 – $1,480).



PE 3–10A

a. Fortson Company

Income Statements For Years Ended December 31

2012 2011 Amount Percent Amount Percent

Fees earned.................... $425,000 100% $375,000 100% Operating expenses ...... 263,500 62 225,000 60 Operating income .......... $161,500 38% $150,000 40%

b. An unfavorable trend of increasing operating expenses and decreasing oper-

ating income is indicated.

PE 3–10B

a. Bradford Company Income Statements

For Years Ended December 31 2012 2011 Amount Percent Amount Percent

Fees earned.................... $825,000 100% $700,000 100% Operating expenses ...... 684,750 83 602,000 86 Operating income .......... $140,250 17% $ 98,000 14%

b. A favorable trend of decreasing operating expenses and increasing operating

income is indicated.



EXERCISES

Ex. 3–1

1. Prepaid expense 2. Accrued revenue 3. Unearned revenue 4. Accrued expense

5. Unearned revenue 6. Prepaid expense 7. Accrued expense 8. Accrued expense

Ex. 3–2

Account Answer Accounts Receivable ........................... Normally requires adjustment (AR). Cash ...................................................... Does not normally require adjustment. Interest Expense................................... Normally requires adjustment (AE). Interest Receivable............................... Normally requires adjustment (AR). Johann Atkins, Capital......................... Does not normally require adjustment. Land....................................................... Does not normally require adjustment. Office Equipment ................................. Does not normally require adjustment. Prepaid Rent ......................................... Normally requires adjustment (PE). Supplies ................................................ Normally requires adjustment (PE). Unearned Fees...................................... Normally requires adjustment (UR). Wages Expense.................................... Normally requires adjustment (AE).

Ex. 3–3

Supplies Expense.......................................................... 2,165 Supplies .................................................................... 2,165 Supplies used ($3,915 – $1,750).

Ex. 3–4

$3,650 ($900 + $2,750)



Ex. 3–5

a. Insurance expense (or expenses) will be understated. Net income will be over-stated.

b. Prepaid insurance (or assets) will be overstated. Owner’s equity will be over-stated.

Ex. 3–6

a. Insurance Expense........................................................ 11,200 Prepaid Insurance .................................................... 11,200 Insurance expired.

b. Insurance Expense........................................................ 11,200 Prepaid Insurance .................................................... 11,200 Insurance expired ($14,800 – $3,600).

Ex. 3–7

a. Insurance Expense........................................................ 14,800 Prepaid Insurance .................................................... 14,800 Insurance expired ($4,800 + $15,000 – $5,000).

b. Insurance Expense........................................................ 14,800 Prepaid Insurance .................................................... 14,800 Insurance expired.

Ex. 3–8

Unearned Fees............................................................... 36,000 Fees Earned.............................................................. 36,000 Fees earned ($45,000 – $9,000).

Ex. 3–9

a. Rent revenue (or revenues) will be understated. Net income will be under-stated.

b. Unearned rent (liabilities) will be overstated. Owner’s equity at the end of the period will be understated.



Ex. 3–10

a. Accounts Receivable .................................................... 12,300 Fees Earned.............................................................. 12,300 Accrued fees.

b. No. If the cash basis of accounting is used, revenues are recognized only when the cash is received. Therefore, earned but unbilled revenues would not be recognized in the accounts, and no adjusting entry would be necessary.

Ex. 3–11

a. Unearned Fees............................................................... 78,500 Fees Earned.............................................................. 78,500 Unearned fees earned during year.

b. Accounts Receivable .................................................... 23,600 Fees Earned.............................................................. 23,600 Accrued fees earned.

Ex. 3–12

a. Fees earned (or revenues) will be understated. Net income will be understated.

b. Accounts (fees) receivable (or assets) will be understated. Owner’s equity will be understated.

Ex. 3–13

a. Salary Expense .............................................................. 3,750 Salaries Payable....................................................... 3,750 Accrued salaries [($9,375/5 days) × 2 days].

b. Salary Expense .............................................................. 7,500 Salaries Payable....................................................... 7,500 Accrued salaries [($9,375/5 days) × 4 days].

Ex. 3–14

$37,500 ($41,250 – $3,750)



Ex. 3–15

a. Salary expense (or expenses) will be understated. Net income will be over-stated.

b. Salaries payable (or liabilities) will be understated. Owner’s equity will be overstated.

Ex. 3–16

a. Salary expense (or expenses) will be overstated. Net income will be under-stated.

b. The balance sheet will be correct. This is because salaries payable has been satisfied, and the net income errors have offset each other. Thus, owner’s eq-uity is correct.

Ex. 3–17

a. Taxes Expense............................................................... 6,750 Prepaid Taxes........................................................... 6,750 Prepaid taxes expired [($9,000/12) × 9 months].

Taxes Expense............................................................... 34,500 Taxes Payable .......................................................... 34,500 Accrued taxes.

b. $41,250 ($6,750 + $34,500)

Ex. 3–18


Ex. 3–19

a. $325,000 ($750,000 – $425,000)

b. No. Depreciation is an allocation of the cost of the equipment to the periods benefiting from its use. It does not necessarily relate to value or loss of value.



Ex. 3–20

a. $7,535 million ($15,082 – $7,547)

b. No. Depreciation is an allocation method, not a valuation method. That is, de-preciation allocates the cost of a fixed asset over its useful life. Depreciation does not attempt to measure market values, which may vary significantly from year to year.

Ex. 3–21

Income: $3,434 million ($1,714 + $1,720)

Ex. 3–22

a. $579 million

b. 53.7% ($579 ÷ $1,079)

Ex. 3–23

Error (a) Error (b) Over- Under- Over- Under- stated stated stated stated

1. Revenue for the year would be.............. $ 0 $18,000 $ 0 $ 0 2. Expenses for the year would be ............ 0 0 0 3,000 3. Net income for the year would be.......... 0 18,000 3,000 0 4. Assets at May 31 would be .................... 0 0 0 0 5. Liabilities at May 31 would be................ 18,000 0 0 3,000 6. Owner’s equity at May 31 would be....... 0 18,000 3,000 0

Ex. 3–24

$255,000 ($240,000 + $18,000 – $3,000)



Ex. 3–25

a. Depreciation Expense ................................................... 14,500 Accumulated Depreciation—Equipment ................ 14,500 Depreciation on equipment.

b. (1) Depreciation expense would be understated. Net income would be over-stated.

(2) Accumulated depreciation would be understated, and total assets would be overstated. Owner’s equity would be overstated.

Ex. 3–26

1. Accounts Receivable .................................................... 2 Fees Earned.............................................................. 2 Accrued fees earned.

2. Supplies Expense.......................................................... 1 Supplies .................................................................... 1 Supplies used.

3. Insurance Expense........................................................ 4 Prepaid Insurance .................................................... 4 Insurance expired.

4. Depreciation Expense ................................................... 1 Accumulated Depreciation—Equipment ................ 1 Equipment depreciation.

5. Wages Expense ............................................................. 1 Wages Payable ......................................................... 1 Accrued wages.



Ex. 3–27

1. The accountant debited Accounts Receivable for $3,750 but did not credit Laundry Revenue. This adjusting entry represents accrued laundry revenue.

2. The accountant debited rather than credited Laundry Supplies for $1,750.

3. The accountant credited the prepaid insurance account for $3,800 but debited the insurance expense account for only $800.

4. The accountant credited Laundry Equipment for the depreciation expense of $6,000, instead of crediting the accumulated depreciation account.

5. The accountant did not debit Wages Expense for $1,200.

The corrected adjusted trial balance is shown below.

E-Z Laundry Adjusted Trial Balance

July 31, 2012

Debit Credit Balances Balances Cash ............................................................................ 7,500 Accounts Receivable ................................................. 22,000 Laundry Supplies ....................................................... 2,000 Prepaid Insurance ...................................................... 1,400 Laundry Equipment.................................................... 190,000 Accumulated Depreciation—Laundry Equipment ... 54,000 Accounts Payable ...................................................... 9,600 Wages Payable ........................................................... 1,200 Myrna Lundy, Capital ................................................. 110,300 Myrna Lundy, Drawing............................................... 28,775 Laundry Revenue ....................................................... 185,850 Wages Expense.......................................................... 50,400 Rent Expense ............................................................. 25,575 Utilities Expense ........................................................ 18,500 Depreciation Expense................................................ 6,000 Insurance Expense..................................................... 3,800 Laundry Supplies Expense........................................ 1,750 Miscellaneous Expense ............................................. 3,250 360,950 360,950



Ex. 3–28

a. $$396 million decrease ($1,487 – $1,883) 21.0% ($396 ÷ $1,883) decrease

b. 2009: 7.8% ($1,487 ÷ $19,176) 2008: 10.1% ($1,883 ÷ $18,627)

c. The net income decreased during 2009 by $396 million, or 21.0%, from 2008, an unfavorable trend. The percent of net income to net sales also decreased.

Ex. 3–29

a. Dell Inc. Amount Percent

Net sales.................................................... $ 61,101 100.0% Cost of goods sold ................................... (50,144) 82.1 Operating expenses ................................. (7,767) 12.7 Operating income (loss) .......................... $ 3,190 5.2% b. Hewlett-Packard Company (HP) Amount Percent

Net sales.................................................... $118,364 100.0% Cost of goods sold ................................... (89,592) 75.7 Operating expenses ................................. (17,970) 15.2 Operating income (loss) .......................... $ 10,802 9.1% c. Hewlett-Packard (HP) is more profitable than Dell. Specifically, HP’s cost of

goods sold of 75.7% is significantly less (6.4%) than Dell’s cost of goods sold of 82.1%. This is partially offset by HP’s higher operating expenses of 15.2% as compared to Dell’s operating expenses of 12.7%. The net result is that HP generates an operating income of 9.1% of sales, while Dell generates operat-ing income of 5.2% of sales. Dell must improve its operations if it is to remain competitive with HP.



PROBLEMS

Prob. 3–1A

1. a. Supplies Expense ....................................................... 2,925 Supplies.................................................................. 2,925 Supplies used ($3,975 – $1,050).

b. Unearned Rent............................................................. 2,750 Rent Revenue......................................................... 2,750 Rent earned ($11,000/4).

c. Wages Expense........................................................... 2,500 Wages Payable....................................................... 2,500 Accrued wages.

d. Accounts Receivable .................................................. 4,900 Fees Earned ........................................................... 4,900 Accrued fees earned.

e. Depreciation Expense................................................. 1,100 Accumulated Depreciation—Office Equipment .. 1,100 Depreciation expense.

2. Adjusting entries are a planned part of the accounting process to update the accounts. Correcting entries are not planned but arise only when necessary to correct errors.



Prob. 3–2A

1. a. Accounts Receivable ............................................... 13,500 Fees Earned ........................................................ 13,500 Accrued fees earned.

b. Supplies Expense .................................................... 2,050 Supplies............................................................... 2,050 Supplies used ($3,000 – $950).

c. Rent Expense ........................................................... 4,000 Prepaid Rent........................................................ 4,000 Prepaid rent expired.

d. Depreciation Expense.............................................. 1,500 Accumulated Depreciation—Equipment........... 1,500 Equipment depreciation.

e. Unearned Fees ......................................................... 8,000 Fees Earned ........................................................ 8,000 Fees earned ($10,500 – $2,500).

f. Wages Expense........................................................ 2,200 Wages Payable.................................................... 2,200 Accrued wages. 2. Fees Earned would be understated by $13,500; Wages Expense would be un-

derstated by $2,200; and net income would be understated by $11,300 ($13,500 – $2,200).

3. Accounts Receivable would be understated by $13,500; total assets would be understated by $13,500; Wages Payable would be understated by $2,200; total liabilities would be understated by $2,200; owner’s capital would be understated by $11,300 ($13,500 – $2,200); and total liabilities and owner’s equity would be understated by $13,500.

4. There is no effect on the “Net increase or decrease in cash” on the statement of cash flows since adjusting entries do not affect cash.



Prob. 3–3A


b. Supplies Expense .................................................... 13,450 Supplies............................................................... 13,450 Supplies used ($21,600 – $8,150).

c. Depreciation Expense.............................................. 13,800 Accumulated Depreciation—Equipment........... 13,800 Equipment depreciation.

d. Unearned Fees ......................................................... 19,000 Fees Earned ........................................................ 19,000 Fees earned.

e. Wages Expense........................................................ 1,770 Wages Payable.................................................... 1,770 Accrued wages. 2. Revenues ........... $543,000 Expenses ........... 301,800 ($126,000 + $96,000 + $69,000 + $10,800) Net income......... $241,200

3. Revenues ........... $572,000 ($543,000 + $10,000 + $19,000) Expenses ........... 330,820 ($301,800 + $13,450 + $13,800 + $1,770) Net income......... $241,180

4. The effect on Randy Huntsinger, Capital of the adjusting entries is the differ-

ence in net income in (2) and (3) of $20 ($241,200 – $241,180).



Prob. 3–4A

2012 Apr. 30 Supplies Expense ............................................... 7,750 Supplies ......................................................... 7,750 Supplies used ($11,250 – $3,500).

30 Insurance Expense ............................................. 11,550 Prepaid Insurance ......................................... 11,550 Insurance expired ($14,250 – $2,700).

30 Depreciation Expense—Equipment .................. 12,500 Accumulated Depreciation—Equipment ..... 12,500 Equipment depreciation

($107,000 – $94,500).

30 Depreciation Expense—Automobiles ............... 2,750 Accumulated Depreciation—Automobiles .. 2,750 Automobile depreciation

($57,500 – $54,750).

30 Utilities Expense ................................................. 1,070 Accounts Payable.......................................... 1,070 Accrued utilities expense

($26,000 – $24,930, or $13,970 – $12,900).

30 Salary Expense ................................................... 7,500 Salaries Payable ............................................ 7,500 Accrued salary ($524,400 – $516,900).

30 Unearned Service Fees ...................................... 12,000 Service Fees Earned ..................................... 12,000 Service fees earned ($18,000 – $6,000, or $745,800 – $733,800).



Prob. 3–5A

1. a. Insurance Expense................................................... 2,400 Prepaid Insurance............................................... 2,400 Insurance expired ($7,200 – $4,800). b. Supplies Expense .................................................... 1,380 Supplies............................................................... 1,380 Supplies used ($1,980 – $600). c. Depreciation Expense—Building............................ 3,100 Accumulated Depreciation—Building............... 3,100 Building depreciation. d. Depreciation Expense—Equipment........................ 2,700 Accumulated Depreciation—Equipment........... 2,700 Equipment depreciation. e. Unearned Rent.......................................................... 5,000 Rent Revenue...................................................... 5,000 Rent revenue earned ($6,750 – $1,750). f. Salaries and Wages Expense.................................. 3,000 Salaries and Wages Payable.............................. 3,000 Accrued salaries and wages. g. Accounts Receivable ............................................... 10,750 Fees Earned ........................................................ 10,750 Accrued fees earned.



Prob. 3–5A (Concluded)

2. GALLOWAY COMPANY Adjusted Trial Balance

July 31, 2012

Debit Credit Balances Balances Cash ............................................................................ 7,500 Accounts Receivable ................................................. 49,150 Prepaid Insurance ...................................................... 4,800 Supplies ...................................................................... 600 Land............................................................................. 112,500 Building....................................................................... 200,250 Accumulated Depreciation—Building ...................... 140,650 Equipment................................................................... 135,300 Accumulated Depreciation—Equipment .................. 100,650 Accounts Payable ...................................................... 12,150 Unearned Rent............................................................ 1,750 Salaries and Wages Payable ..................................... 3,000 Fran Briggs, Capital ................................................... 221,000 Fran Briggs, Drawing................................................. 15,000 Fees Earned................................................................ 335,350 Rent Revenue ............................................................. 5,000 Salaries and Wages Expense.................................... 196,370 Utilities Expense ........................................................ 42,375 Advertising Expense.................................................. 22,800 Repairs Expense ........................................................ 17,250 Depreciation Expense—Building.............................. 3,100 Depreciation Expense—Equipment.......................... 2,700 Insurance Expense..................................................... 2,400 Supplies Expense....................................................... 1,380 Miscellaneous Expense ............................................. 6,075 819,550 819,550



Prob. 3–6A

1. a. Supplies Expense .................................................... 1,500 Supplies............................................................... 1,500 Supplies used.

b. Accounts Receivable ............................................... 18,000 Fees Earned ........................................................ 18,000 Accrued fees earned.

c. Depreciation Expense.............................................. 3,000 Accumulated Depreciation................................. 3,000 Equipment depreciation.

d. Wages Expense........................................................ 1,200 Wages Payable.................................................... 1,200 Accrued wages. 2. Total Net Total Total Owner’s

Income Assets = Liabilities + Equity

Reported amounts $80,000 $500,000 $200,000 $300,000 Corrections: Adjustment (a) –1,500 –1,500 0 –1,500 Adjustment (b) +18,000 +18,000 0 +18,000 Adjustment (c) –3,000 –3,000 0 –3,000 Adjustment (d) –1,200 0 +1,200 –1,200 Corrected amounts $92,300 $513,500 $201,200 $312,300



Prob. 3–1B

1. a. Accounts Receivable ................................................ 10,280 Fees Earned.......................................................... 10,280 Accrued fees earned.

b. Supplies Expense...................................................... 4,800 Supplies ................................................................ 4,800 Supplies used ($6,100 – $1,300).

c. Wages Expense ......................................................... 3,000 Wages Payable ..................................................... 3,000 Accrued wages.

d. Unearned Rent ........................................................... 1,500 Rent Revenue ....................................................... 1,500 Rent earned ($4,500/3).

e. Depreciation Expense ............................................... 1,400 Accumulated Depreciation—Equipment ............ 1,400 Depreciation expense.

2. Adjusting entries are a planned part of the accounting process to update the accounts. Correcting entries are not planned but arise only when necessary to correct errors.



Prob. 3–2B

1. a. Supplies Expense .................................................... 2,370 Supplies............................................................... 2,370 Supplies used ($3,170 – $800).

b. Depreciation Expense.............................................. 750 Accumulated Depreciation................................. 750 Depreciation for year.

c. Rent Expense ........................................................... 9,000 Prepaid Rent........................................................ 9,000 Rent expired.

d. Wages Expense........................................................ 1,700 Wages Payable.................................................... 1,700 Accrued wages.

e. Unearned Fees ......................................................... 3,500 Fees Earned ........................................................ 3,500 Fees earned ($10,000 – $6,500).

f. Accounts Receivable ............................................... 15,000 Fees Earned ........................................................ 15,000 Accrued fees.

2. Fees Earned would be understated by $3,500; Depreciation Expense would be understated by $750; and net income would be understated by $2,750 ($3,500 – $750).

3. Accumulated Depreciation would be understated by $750; total assets would be overstated by $750; Unearned Fees would be overstated by $3,500; total li-abilities would be overstated by $3,500; owner’s capital would be understated by $2,750 ($3,500 – $750); and total liabilities and owner’s equity would be overstated by $750 ($3,500 – $2,750).

4. There is no effect on the “Net increase or decrease in cash” on the statement of cash flows since adjusting entries do not affect cash.



Prob. 3–3B

1. a. Supplies Expense .................................................... 5,350 Supplies............................................................... 5,350 Supplies used ($7,200 – $1,850).

b. Accounts Receivable ............................................... 6,500 Fees Earned ........................................................ 6,500 Accrued fees earned.

c. Depreciation Expense.............................................. 2,800 Accumulated Depreciation—Equipment........... 2,800 Equipment depreciation.

d. Wages Expense........................................................ 1,275 Wages Payable.................................................... 1,275 Accrued wages.

e. Unearned Fees ......................................................... 3,000 Fees Earned ........................................................ 3,000 Fees earned. 2. Revenues ........... $295,800 Expenses ........... 256,800 ($152,800 + $55,000 + $42,000 + $7,000) Net income......... $ 39,000 3. Revenues ........... $305,300 ($295,800 + $6,500 + $3,000) Expenses ........... 266,225 ($256,800 + $5,350 + $2,800 + $1,275) Net income......... $ 39,075 4. The effect on Jon Wolfe, Capital of the adjusting entries is the difference in

net income in (2) and (3) of $75 ($39,000 – $39,075).



Prob. 3–4B

2012 Jan. 31 Supplies Expense ............................................... 4,725 Supplies ........................................................ 4,725 Supplies used ($6,200 – $1,475).

31 Insurance Expense ............................................. 6,300 Prepaid Insurance ........................................ 6,300 Insurance expired ($9,000 – $2,700).

31 Depreciation Expense—Buildings..................... 8,500 Accumulated Depreciation—Buildings ...... 8,500 Depreciation ($60,000 – $51,500).

31 Depreciation Expense—Trucks ......................... 1,550 Accumulated Depreciation—Trucks........... 1,550 Depreciation ($13,550 – $12,000).

31 Utilities Expense ................................................. 1,080 Accounts Payable ........................................ 1,080 Accrued utilities expense

($8,000 – $6,920, or $7,280 – $6,200).

31 Salary Expense ................................................... 750 Salaries Payable........................................... 750 Accrued salaries ($80,750 – $80,000).

31 Unearned Service Fees ...................................... 4,500 Service Fees Earned .................................... 4,500 Service fees earned ($10,500 – $6,000, or $167,180 – $162,680).



Prob. 3–5B

1. a. Depreciation Expense—Building............................ 1,900 Accumulated Depreciation—Building............... 1,900 Building depreciation. b. Depreciation Expense—Equipment........................ 2,400 Accumulated Depreciation—Equipment........... 2,400 Equipment depreciation. c. Salaries and Wages Expense.................................. 1,375 Salaries and Wages Payable.............................. 1,375 Accrued salaries and wages. d. Insurance Expense................................................... 3,300 Prepaid Insurance............................................... 3,300 Insurance expired ($6,000 – $2,700). e. Accounts Receivable ............................................... 9,400 Fees Earned ........................................................ 9,400 Accrued fees earned. f. Supplies Expense .................................................... 1,400 Supplies............................................................... 1,400 Supplies used ($1,725 – $325). g. Unearned Rent.......................................................... 1,800 Rent Revenue...................................................... 1,800 Rent earned ($3,600 – $1,800).



Prob. 3–5B (Concluded)

2. PACIFIC FINANCIAL SERVICES CO.

Adjusted Trial Balance October 31, 2012

Debit Credit Balances Balances Cash ............................................................................ 10,200 Accounts Receivable ................................................. 44,150 Prepaid Insurance ...................................................... 2,700 Supplies ...................................................................... 325 Land............................................................................. 50,000 Building....................................................................... 80,750 Accumulated Depreciation—Building ...................... 39,750 Equipment................................................................... 45,000 Accumulated Depreciation—Equipment .................. 20,050 Accounts Payable ...................................................... 3,750 Unearned Rent............................................................ 1,800 Salaries and Wages Payable ..................................... 1,375 Eileen Hastings, Capital............................................. 103,550 Eileen Hastings, Drawing .......................................... 8,000 Fees Earned................................................................ 168,000 Rent Revenue ............................................................. 1,800 Salaries and Wages Expense.................................... 58,225 Utilities Expense ........................................................ 14,100 Advertising Expense.................................................. 7,500 Repairs Expense ........................................................ 6,100 Insurance Expense..................................................... 3,300 Depreciation Expense—Building.............................. 1,900 Depreciation Expense—Equipment.......................... 2,400 Supplies Expense....................................................... 1,400 Miscellaneous Expense ............................................. 4,025 340,075 340,075



Prob. 3–6B


b. Depreciation Expense.............................................. 9,000 Accumulated Depreciation—Equipment........... 9,000 Depreciation for March.

c. Wages Expense........................................................ 3,500 Wages Payable.................................................... 3,500 Accrued wages.

d. Supplies Expense .................................................... 2,000 Supplies............................................................... 2,000 Supplies used.

2. Total Net Total Total Owner’s

Income Assets = Liabilities + Equity

Reported amounts $150,000 $1,000,000 $350,000 $650,000 Corrections: Adjustment (a) +15,000 +15,000 0 +15,000 Adjustment (b) –9,000 –9,000 0 –9,000 Adjustment (c) –3,500 0 +3,500 –3,500 Adjustment (d) –2,000 –2,000 0 –2,000 Corrected amounts $150,500 $1,004,000 $353,500 $650,500



CONTINUING PROBLEM

1. JOURNAL Page 3 Post. Date Description Ref. Debit Credit

2012 July 31 Accounts Receivable.......................... 12 1,600 Fees Earned ................................... 41 1,600 Accrued fees earned (120 hrs. –

80 hrs.) × $40 = $1,600.

31 Supplies Expense ............................... 56 850 Supplies ......................................... 14 850 Supplies used ($1,250 – $400).

31 Insurance Expense ............................. 57 225 Prepaid Insurance ......................... 15 225 Insurance expired

($2,700/12 months = $225 per month).

31 Depreciation Expense ........................ 58 75 Accum. Depr.—Office Equipment 18 75 Office equipment depreciation.

31 Unearned Revenue ............................. 23 3,600 Fees Earned ................................... 41 3,600 Fees earned ($7,200 ÷ 2).

31 Wages Expense.............................. 50 170 Wages Payable ......................... 22 170 Accrued wages.



Continuing Problem (Continued)

2. Cash 11 Post. Balance Date Item Ref. Dr. Cr. Dr. Cr.

2012 July 1 Balance ................... ............ ............. 5,310 ............. 1 ................................. 1 4,000 ............. 9,310 ............. 1 ................................. 1 ............ 1,800 7,510 ............. 1 ................................. 1 ............ 2,700 4,810 ............. 2 ................................. 1 1,250 ............. 6,060 ............. 3 ................................. 1 7,200 ............. 13,260 ............. 3 ................................. 1 ............ 250 13,010 ............. 4 ................................. 1 ............ 800 12,210 ............. 8 ................................. 1 ............ 200 12,010 ............. 11 ................................. 1 900 ............. 12,910 ............. 13 ................................. 1 ............ 600 12,310 ............. 14 ................................. 1 ............ 1,200 11,110 ............. 16 ................................. 2 2,100 ............. 13,210 ............. 21 ................................. 2 ............ 620 12,590 ............. 22 ................................. 2 ............ 800 11,790 ............. 23 ................................. 2 750 ............. 12,540 ............. 27 ................................. 2 ............ 760 11,780 ............. 28 ................................. 2 ............ 1,200 10,580 ............. 29 ................................. 2 ............ 370 10,210 ............. 30 ................................. 2 400 ............. 10,610 ............. 31 ................................. 2 2,800 ............. 13,410 ............. 31 ................................. 2 ............ 1,400 12,010 ............. 31 ................................. 2 ............ 1,500 10,510 ............. Accounts Receivable 12

2012 July 1 Balance ................... ............ ............. 1,250 ............. 2 ................................. 1 ............ 1,250 — — 23 ................................. 2 1,750 ............. 1,750 ............. 30 ................................. 2 1,400 ............. 3,150 ............. 31 Adjusting ................ 3 1,600 ............. 4,750 .............




Supplies 14 Post. Balance Date Item Ref. Dr. Cr. Dr. Cr.

2012 July 1 Balance ................... ............ ............. 170 ............. 18 ................................. 2 1,080 ............. 1,250 ............. 31 Adjusting ................ 3 ............ 850 400 ............. Prepaid Insurance 15

2012 July 1 ................................. 1 2,700 ............. 2,700 ............. 31 Adjusting ................ 3 ............ 225 2,475 ............. Office Equipment 17

2012 July 5 ................................. 1 6,000 ............. 6,000 ............. Accumulated Depreciation—Office Equipment 18

2012 July 31 Adjusting ................ 3 ............ 75 ............ 75 Accounts Payable 21

2012 July 1 Balance ................... ............ ............. ............ 250 3 ................................. 1 250 ............. — — 5 ................................. 1 ............ 6,000 ............ 6,000 18 ................................. 2 ............ 1,080 ............ 7,080 Wages Payable 22

2012 July 31 Adjusting ................ 3 ............ 170 ............ 170 Unearned Revenue 23

2012 July 3 ................................. 1 ............ 7,200 ............ 7,200 31 Adjusting ................ 3 3,600 ............. ............ 3,600




Pat Sharpe, Capital 31 Post. Balance Date Item Ref. Dr. Cr. Dr. Cr.

2012 July 1 Balance ................... ............ ............. ............ 5,000 1 ................................. 1 ............ 4,000 ............ 9,000 Pat Sharpe, Drawing 32

2012 July 1 Balance ................... ............ ............. 500 ............. 31 ................................. 2 1,500 ............. 2,000 ............. Income Summary 33

This account is not used in Chapter 3. Fees Earned 41

2012 July 1 Balance ................... ............ ............. ............ 6,650 11 ................................. 1 ............ 900 ............ 7,550 16 ................................. 2 ............ 2,100 ............ 9,650 23 ................................. 2 ............ 2,500 ............ 12,150 30 ................................. 2 ............ 1,800 ............ 13,950 31 ................................. 2 ............ 2,800 ............ 16,750 31 Adjusting ................ 3 ............ 1,600 ............ 18,350 31 Adjusting ................ 3 ............ 3,600 ............ 21,950 Wages Expense 50

2012 July 1 Balance ................... ............ ............. 400 ............. 14 ................................. 1 1,200 ............. 1,600 ............. 28 ................................. 2 1,200 ............. 2,800 ............. 31 Adjusting ................ 3 170 ............. 2,970 ............. Office Rent Expense 51

2012 July 1 Balance ................... ............ ............. 750 ............. 1 ................................. 1 1,800 ............. 2,550 .............




Equipment Rent Expense 52 Post. Balance Date Item Ref. Dr. Cr. Dr. Cr.

2012 July 1 Balance ................... ............ ............. 700 ............. 13 ................................. 1 600 ............. 1,300 ............. Utilities Expense 53

2012 July 1 Balance ................... ............ ............. 300 ............. 27 ................................. 2 760 ............. 1,060 ............. Music Expense 54

2012 July 1 Balance ................... ............ ............. 1,590 ............. 21 ................................. 2 620 ............. 2,210 ............. 31 ................................. 2 1,400 ............. 3,610 ............. Advertising Expense 55

2012 July 1 Balance ................... ............ ............. 450 ............. 8 ................................. 1 200 ............. 650 ............. 22 ................................. 2 800 ............. 1,450 ............. Supplies Expense 56

2012 July 1 Balance ................... ............ ............. 180 ............. 31 Adjusting ................ 3 850 ............. 1,030 ............. Insurance Expense 57

2012 July 31 Adjusting ................ 3 225 ............. 225 ............. Depreciation Expense 58

2012 July 31 Adjusting ................ 3 75 ............. 75 .............



Continuing Problem (Concluded)

Miscellaneous Expense 59 Post. Balance Date Item Ref. Dr. Cr. Dr. Cr.

2012 July 1 Balance ................... ............ ............. 300 ............. 4 ................................. 1 800 ............. 1,100 ............. 29 ................................. 2 370 ............. 1,470 ............. 3.

PS MUSIC Adjusted Trial Balance

July 31, 2012

Debit Credit Balances Balances Cash ............................................................................ 10,510 Accounts Receivable ................................................. 4,750 Supplies ...................................................................... 400 Prepaid Insurance ...................................................... 2,475 Office Equipment ....................................................... 6,000 Accumulated Depreciation—Office Equipment....... 75 Accounts Payable ...................................................... 7,080 Wages Payable ........................................................... 170 Unearned Revenue..................................................... 3,600 Pat Sharpe, Capital..................................................... 9,000 Pat Sharpe, Drawing .................................................. 2,000 Fees Earned................................................................ 21,950 Wages Expense.......................................................... 2,970 Office Rent Expense .................................................. 2,550 Equipment Rent Expense .......................................... 1,300 Utilities Expense ........................................................ 1,060 Music Expense ........................................................... 3,610 Advertising Expense.................................................. 1,450 Supplies Expense....................................................... 1,030 Insurance Expense..................................................... 225 Depreciation Expense................................................ 75 Miscellaneous Expense ............................................. 1,470 41,875 41,875



CASES & PROJECTS

CP 3–1

It is acceptable for Joshua to prepare the financial statements for Laser on an accrual basis. The revision of the financial statements to include the accrual of the $25,000 commission as of December 28, 2011, would not be appropriate. Most real estate contracts include contingencies that can void the contract. Such contingencies include obtaining a loan, appraisals, environmental studies, and inspection results. In other words, Joshua can only be sure of earning the com-mission on January 5, 2012, when the attorney formally records the transfer of the property to the buyer. However, Joshua may disclose the pending sale and related commission in a note to the financial statements. Indicating on the loan application to NYC Bank that Laser has not been rejected previously for credit is unethical and unprofessional. In addition, intentionally filing false loan docu-ments is illegal.

CP 3–2

The cost of the warranty repairs, $2,400, should be recognized as an expense of 2012 in order to properly match revenues from the sale of the truck with the re-lated expenses. Since the cost of the actual repairs will not be known at the time of sale (2012), Ford Motor Company would estimate warranty costs and expenses at the end of 2012 using its past warranty (repair) history with the Ford 350F. This estimate would be recorded in the accounts through use of an adjusting entry. The adjusting entry would debit Warranty Expense and credit Estimated Warranty Payable, a liability account.



CP 3–3

Revenue is normally recorded when the services are provided or when the goods are delivered (title passes) to the buyer. By waiting until after the services are provided, the expenses of providing the services can be more accurately meas-ured and matched against the related revenues. Also, at this point, the provider of the services has a right to demand payment for the services if payment hasn’t already been received. Airlines, such as Delta Air Lines, normally record revenue from ticket sales after completing a flight. At this point, the boarding passes, which have been col-lected from the passengers, represent revenue to the airline. In addition, the expenses related to each flight, such as landing fees and fuel, would have been incurred and would be accurately measured. Note to Instructors: The following points might also be worth discussing: (1) The receipt of revenue from customers in advance of a flight represents

unearned revenues to the airline. For example, the purchase of discount tickets, which often requires prepayment months in advance of the actual flight, is unearned revenue to the airline.

(2) At the end of the airline’s accounting period, it would have adjusting entries related to such items as the following: • Accrued wages for employees • Depreciation on airplanes, terminal buildings, etc. • Unearned revenues (described above) • Accrued income from transporting freight, etc. • Accrued income from other airlines

(When a flight is delayed or canceled, airlines often accept passengers from other airlines and then later collect the revenue from the other airline.)

• Prepaid expenses related to insurance, etc.



CP 3–4

a. There are several indications that adjusting entries were not recorded before the financial statements were prepared, including:

1. All expenses on the income statement are identified as “paid” items and not as “expenses.”

2. No expense is reported on the income statement for depreciation, and no accumulated depreciation is reported on the balance sheet.

3. No supplies, accounts payable, or wages payable are reported on the balance sheet.

b. Likely accounts requiring adjustment include:

1. Accumulated Depreciation—Truck for depreciation expense.

2. Supplies (paid) expense for supplies on hand.

3. Insurance (paid) expense for unexpired insurance.

4. Wages accrued.

5. Utilities accrued.

CP 3–5

Note to Instructors: The purpose of this activity is to familiarize students with be-haviors that are common in codes of conduct. In addition, this activity addresses an actual ethical dilemma for students related to doing their homework. Consider asking students to look up your school’s Student Code of Conduct and discuss its implications for the behaviors described in this case. An excerpt from one such Honor Code is shown below.

Southern Methodist University, The Honor Code, http://smu.edu/studentlife/studenthandbook.

chapter 03 - financial accounting

Documents

accrued expense pe

expense account

accrued expenses

supplies expense

prepaid expense pe

accrued revenues

accounting period

revenue account