solution manual chapter 3 fap

Chapter 3

Adjusting Accounts and Preparing Financial Statements

QUESTIONS

1. The cash basis of accounting reports revenues when cash is received while the accrual basis reports revenues when they are earned. The cash basis reports expenses when cash is paid while the accrual basis reports expenses when they are incurred (and matched with revenues they generated).

2. The accrual basis of accounting generally provides a better indication of company performance and financial condition than does the cash basis. Also, the accrual basis increases the comparability of financial statements from one period to the next. Thus, business decision makers generally prefer the accrual basis.

3. Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year.

4. A prepaid expense is reported as an asset on the balance sheet.

5. Depreciable plant assets (such as equipment, buildings, and machinery) lead to adjustments for depreciation.

6. The Accumulated Depreciation contra account is used for depreciation. It provides financial statement users with additional information about the relative age of the assets. Without the contra account information, the reader would not be able to tell whether the assets are new or in need of replacement.

7. An unearned revenue is reported as a liability on the balance sheet.

8. An accrued revenue is revenue that is earned but is not yet received in cash (and/or other assets) and the customer has not been billed prior to the end of the period. Therefore, end-of-period adjustments are made to record accrued revenue. Examples are interest income that has been earned but not collected and revenues from services performed that are neither collected nor billed.

9. If prepaid expenses are initially recorded with debits to expense accounts, then the prepaid expenses asset accounts are debited in the adjusting entries.

10. For Krispy Kreme, the two accounts of Prepaid Expenses and Property and Equipment require adjusting entries. The expense account(s) related to the prepaid account and the depreciation expense account would be understated on the income statement if Krispy Kreme fails to adjust these two asset accounts. If the adjusting entries are not made, net income would be overstated. Note: Students might also correctly identify accounts receivable, deferred income taxes and intangible assets as needing adjustment.

©McGraw-Hill Companies, Inc., 2005Solutions Manual, Chapter 3 119

11. In addition to prepayments, Tastykake must make adjusting entries to Property, Plant and Equipment, Deferred Income Taxes, Accrued Payroll and Employee Benefits, and possibly other assets and liabilities such as Receivables (for bad debts).

12. The Accrued Wages Expense would be reported as part of “Accrued Expenses and Other Liabilities” on Harley-Davidson’s balance sheet.

QUICK STUDIES

Quick Study 3-1 (10 minutes)

a. UR Unearned revenueb. PE Prepaid expenses (Depreciation)c. AE Accrued expensesd. AR Accrued revenuee. PE Prepaid expenses


a. Insurance Expense....................................................... 1,800Prepaid Insurance................................................. 1,800

To record 6-month insurance coverage expired.

b. Supplies Expense......................................................... 2,700Supplies.................................................................. 2,700

To record supplies used during the year.($1,000 + $3,000 – [?] = $1,300)


a. Depreciation Expense—Equipment............................ 5,000Accumulated Depreciation—Equipment............. 5,000

To record depreciation expense for the year.($30,000 - $5,000) / 5 years = $5,000

b. No depreciation adjustments are made for land as it is expected to last indefinitely.

©McGraw-Hill Companies, Inc., 2005Fundamental Accounting Principles, 17th Edition120


a. Unearned Revenue........................................................ 15,000Legal Revenue....................................................... 15,000

To recognize legal revenue earned (20,000 x 3/4).

b. Unearned Subscription Revenue................................ 2,400Subscription Revenue........................................... 2,400

To recognize subscription revenue earned.[100 x ($48 / 12 month) x 6 months]


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

To record salaries incurred but not yet paid.[One student earns, $100 x 4 days, M-R]


Accounts Debited and Credited Financial Statementa. Debit Unearned Revenue Balance Sheet

Credit Revenue Earned Income Statement

b. Debit Depreciation Expense Income StatementCredit Accumulated Depreciation Balance Sheet

c. Debit Wages Expense Income StatementCredit Wages Payable Balance Sheet

d. Debit Accounts Receivable Balance SheetCredit Revenue Earned Income Statement

e. Debit Insurance Expense Income StatementCredit Prepaid Insurance Balance Sheet


Adjusting entry Debit Credit

1. Accrue salaries expense f d

2. Adjust the Unearned Services Revenue account e g


to recognize earned revenue

3. Record the earning of services revenue for which cash will be received the following period

a g



The answer is c.

Explanation:The debit balance in Prepaid Insurance was reduced by $400, implying a $400 debit to Insurance Expense. The credit balance in Interest Payable increased by $800, implying an $800 debit to Interest Expense.


Cash Accounting:Revenues (cash receipts)....................................................... $33,000 Expenses (cash payments: $22,500 - $2,250 + $3,750)....... 24,000Net income .............................................................................. $ 9,000

Accrual Accounting:Revenues (earned) ................................................................. $39,000Expenses (incurred) ............................................................... 22,500Net income............................................................................... $16,500


The answer is 2.

Explanation:Insurance premium error:

Understates expenses (and overstates assets) by........... $1,600Accrued salaries error:

Understates expenses (and understates liabilities) by... . 1,000Combination of errors:

Understates expenses by..................................................... $2,600Overstates assets by............................................................. $1,600Understates liabilities by...................................................... $1,000


Profit margin = $37,925 / $390,000 = 9.7%


Interpretation: For every one dollar that Yang Company records as revenue, it earns 9.7 cents in net income. Yang’s 9.7% is markedly lower than competitors’ average profit margin of 15%—it must improve performance.

Quick Study 3-12A (5 minutes)

The answer is d.


EXERCISES

Exercise 3-1 (15 minutes)

1. B. 4. F2. E. 5. D3. C. 6. A.


a. Unearned Fee Revenue..................................................... 10,000Fee Revenue.................................................................. 10,000

To record earned portion of fee received in advance.

b. Wages Expense................................................................. 9,000Wages Payable.............................................................. 9,000

To record wages accrued but not yet paid.

c. Depreciation Expense—Equipment................................. 19,127Accumulated Depreciation—Equipment..................... 19,127

To record depreciation expense for the year.

d. Office Supplies Expense.................................................. 5,242Office Supplies**............................................................ 5,242

To record office supplies used ($480 + $5,349 - $587).

e. Insurance Expense............................................................ 2,800Prepaid Insurance*........................................................ 2,800

To record insurance coverage expired ($5,000 - $2,200).

f. Interest Receivable.......................................................... 750 Interest Revenue......................................................... 750 To record interest earned but not yet received.

g. Interest Expense.............................................................. 3,500 Interest Payable........................................................... 3,500 To record interest incurred but not yet paid.

Notes:Prepaid Insurance* Office Supplies**

Beg. Bal. 5,000 Beg. Bal. 480Purch. 5,349

? Used ? Used


End. Bal. 2,200 End. Bal. 587



a. Depreciation Expense—Equipment................................. 16,000Accumulated Depreciation—Equipment..................... 16,000

To record depreciation expense for the year.

b. Insurance Expense............................................................ 5,960Prepaid Insurance*........................................................ 5,960

To record insurance coverage that expired ($7,000 - $1,040).

c. Office Supplies Expense.................................................. 2,626Office Supplies**............................................................ 2,626

To record office supplies used ($300 + $2,680 - $354).

d. Unearned Fee Revenue..................................................... 5,000Fee Revenue.................................................................. 5,000

To record earned portion of fee received in advance ($10,000 x 1/2).

e. Insurance Expense............................................................ 4,600Prepaid Insurance......................................................... 4,600

To record insurance coverage that expired.

f. Wages Expense................................................................. 4,000Wages Payable.............................................................. 4,000

To record wages accrued but not yet paid.

Notes:Prepaid Insurance* Office Supplies**

Bal. Bal. 7,000 Beg. Bal. 300Purch. 2,680

? Used ? UsedEnd. Bal. 1,040 End. Bal. 354



a. Adjusting entry:

2005

Dec. 31 Wages Expense..............................................................500Wages Payable........................................................... 500

To record accrued wages for one day. (5 workers x $100)

b. Payday entry:

2006Jan. 4 Wages Expense.............................................................. 1,500

Wages Payable...............................................................500Cash............................................................................. 2,000

To record accrued and current wages.


a. $1,650b. $5,700c. $10,080d. $1,375

Proof:(a) (b) (c) (d)

Supplies available – prior year-end......... $ 300 $1,600 $ 1,360 $1,375

Supplies purchased in current year........ 2,100 5,400 10,080 6,000

Total supplies available............................ 2,400 7,000 11,440 7,375

Supplies available – current year-end..... (750 ) (5,700 ) (1,840 ) (800 )

Supplies expense for current year........... $1,650 $1,300 $ 9,600 $6,575



a.Apr. 30 Legal Fees Expense............................................ 2,500

Legal Fees Payable..................................... 2,500To record accrued legal fees.

May 12 Legal Fees Payable............................................. 2,500Cash.............................................................. 2,500

To pay accrued legal fees.

b.Apr. 30 Interest Expense................................................. 2,080

Interest Payable........................................... 2,080To record accrued interest expense(9.6% x $780,000 x 10/360) or ($6,240 x 10/30).

May 20 Interest Payable................................................... 2,080Interest Expense................................................. 4,160

Cash.............................................................. 6,240To record payment of accrued and current interest expense (9.6% x $780,000 x 20/360).

c.Apr. 30 Salaries Expense................................................. 3,600

Salaries Payable.......................................... 3,600To record accrued salaries($9,000 x 2/5 week).

May 3 Salaries Payable.................................................. 3,600Salaries Expense................................................. 5,400

Cash.............................................................. 9,000To record payment of accrued and current salaries ($9,000 x 3/5 week).



Balance Sheet Insurance Asset using Insurance Expense usingAccrual Basis*

Cash Basis

Accrual Basis**

Cash Basis

Dec. 31, 2003....................$11,700 $0 2003...................................$ 4,500 $16,200

Dec. 31, 2004....................6,300 0 2004...................................5,400 0

Dec. 31, 2005....................900 0 2005................................... 5,400 0

Dec. 31, 2006....................0 0 2006................................... 900 0

Total..................................$16,200 $16,200

EXPLANATIONS:

*Accrual asset balance equals months left in the policy x $450 per month (monthly cost is computed as $450, from $16,200 divided by 36 months).

Months Left Balance12/31/2003... 26 $11,70012/31/2004... 14 6,300 12/31/2005... 2 900 12/31/2006... 0 0

**Accrual insurance expense equals months covered in the year x $450 per month.

Months Covered Expense2003...................................10 $ 4,5002004...................................12 5,4002005...................................12 5,4002006...................................2 900

$16,200



Dec. 31 Accounts Receivable.............................................. 1,800Fees Earned..................................................... 1,800

To record earned but unbilled fees (30% x $6,000).

31 Unearned Fees......................................................... 4,200Fees Earned..................................................... 4,200

To record earned fees collected in advance (70% x $6,000).

31 Depreciation Expense—Computers....................... 1,500Accumulated Depreciation—Computers...... 1,500

To record depreciation on computers.

31 Depreciation Expense—Office Furniture................ 1,750Accumulated Depreciation—Office Furniture.... 1,750

To record depreciation on office furniture.

31 Salaries Expense.................................................... 2,450Salaries Payable.............................................. 2,450

To record accrued salaries.

31 Insurance Expense.................................................. 1,300Prepaid Insurance........................................... 1,300

To record expired prepaid insurance.

31 Office Supplies Expense......................................... 480Office Supplies................................................ 480

To record use of office supplies.

31 Utilities Expense...................................................... 70Utilities Payable............................................... 70

To record incurred and unpaid utility costs.



a. $5,390 / $44,830 = 12.0%b. $87,644 / $398,954 = 22.0%c. $93,385 / $257,082 = 36.3%d. $55,234 / $1,458,999 = 3.8%e. $70,158 / $435,925 = 16.1%

Analysis and Interpretation: Company c has the highest profitability according to the profit margin ratio. Company c earns 36.3 cents in net income for each one dollar of net sales recorded.

Exercise 3-10A (30 minutes)a.Dec. 1 Supplies Expense............................................ 3,000

Cash.......................................................... 3,000Purchased supplies.

b.Dec. 2 Insurance Expense.......................................... 1,440

Cash.......................................................... 1,440Paid insurance premiums.

c.Dec.15 Cash.................................................................. 12,000

Remodeling Fees Earned........................ 12,000Received fees for work to be done.

d.Dec.28 Cash.................................................................. 3,600

Remodeling Fees Earned........................ 3,600Received fees for work to be done.

e.Dec.31 Supplies........................................................... 1,920

Supplies Expense.................................... 1,920Adjust expenses for unused supplies.

f.Dec.31 Prepaid Insurance ($1,440 - $240)................. 1,200

Insurance Expense.................................. 1,200Adjust expenses for unexpired coverage.

g.Dec.31 Remodeling Fees Earned .............................. 9,300

Unearned Remodeling Fees................... 9,300Adjusted revenues for unfinished projects ($12,000 + $3,600 - $6,300).


Exercise 3-11A (25 minutes)

a. Initial credit recorded in the Unearned Fees account:July 1 Cash....................................................................... 2,000

Unearned Fees.............................................. 2,000Received fees for work to be done.

6 Cash....................................................................... 8,400Unearned Fees.............................................. 8,400

Received fees for work to be done.

12 Unearned Fees...................................................... 2,000Fees Earned................................................... 2,000

Completed work for customer.

18 Cash....................................................................... 7,500Unearned Fees.............................................. 7,500


27 Unearned Fees...................................................... 8,400Fees Earned................................................... 8,400

Completed work for customer.

31 No adjusting entries required.

b. Initial credit recorded in the Fees Earned account:July 1 Cash....................................................................... 2,000

Fees Earned................................................... 2,000Received fees for work to be done.

6 Cash....................................................................... 8,400Fees Earned................................................... 8,400


12 No entry required.18 Cash....................................................................... 7,500

Fees Earned................................................... 7,500Received fees for work to be done.

27 No entry required. 31 Fees Earned.......................................................... 7,500

Unearned Fees.............................................. 7,500Adjusted to reflect unearned fees for unfinished job.

c. Under the first method (and using entries from a):Unearned Fees = $2,000 + $8,400 - $2,000 + $7,500 - $8,400 = $7,500Fees Earned = $2,000 + $8,400 = $10,400

Under the second method (and using entries from b):Unearned Fees = $7,500


Fees Earned = $2,000 + $8,400 + $7,500 - $7,500 = $10,400[Note: Both procedures yield identical results in the financial statements.]


PROBLEM SET A

Problem 3-1A (15 minutes)

1. G. 4. B. 7. H. 10. D.2. E. 5. G. 8. E. 11. A.3. I. 6. C. 9. F. 12. D.

Problem 3-2A (35 minutes) Part 1

Adjustment (a)Dec.31 Office Supplies Expense......................... 12,760

Office Supplies................................. 12,760To record cost of supplies used($3,000 + $12,400 - $2,640).

Adjustment (b)31 Insurance Expense.................................. 12,312

Prepaid Insurance............................ 12,312To record annual insurance coverage cost.

Policy Cost per MonthMonths Active

in 2005 2005 CostA $660 ($15,840/24 mo.) 12 $ 7,920B 363 ($13,068/36 mo.) 9 3,267C 225 ($ 2,700 /12 mo.) 5 1,125

Total $12,312

Adjustment (c)31 Salaries Expense (2 days x $2,100)........ 4,200

Salaries Payable............................... 4,200To record accrued but unpaid wages.

Adjustment (d)31 Depreciation Expense—Building........... 27,000

Accumulated Depreciation—Building 27,000To record annual depreciation expense [($855,000 -$45,000) / 30 years = $27,000]


Problem 3-2A (Continued)

Adjustment (e) Dec.31 Rent Receivable....................................... 2,400

Rent Earned...................................... 2,400To record earned but unpaid Dec. rent.

Adjustment (f)

31 Unearned Rent......................................... 4,350Rent Earned...................................... 4,350

To record the amount of rent earned for November and December (2 x $2,175).

Part 2

Cash Payment for (c)

Jan. 6 Salaries Payable...................................... 4,200Salaries Expense*.................................... 6,300

Cash................................................... 10,500To record payment of accrued and current salaries. *(3 days x $2,100)

Cash Payment for (e)15 Cash.......................................................... 4,800

Rent Receivable................................ 2,400Rent Earned...................................... 2,400

To record past due rent for two months.


Problem 3-3A (90 minutes) Parts 1 and 2

Cash EquipmentUnadj. Bal. 26,000 Unadj. Bal. 70,000

Accounts ReceivableAccumulated Depreciation—

EquipmentUnadj. Bal. 0 Unadj. Bal. 16,000(f) 7,500 (c) 12,000Adj. Bal. 7,500 Adj. Bal. 28,000

Teaching Supplies Accounts PayableUnadj. Bal. 10,000 Bal. 36,000

(b) 7,400Adj. Bal. 2,600 Salaries Payable

Unadj. Bal. 0Prepaid Insurance (g) 400

Unadj. Bal. 15,000 Adj. Bal. 400(a) 3,000

Adj. Bal. 12,000 Unearned Training FeesUnadj. Bal. 11,000

Prepaid Rent (e) 4,400Unadj. Bal. 2,000 Adj. Bal. 6,600

(h) 2,000Adj. Bal. 0 T. Watson, Capital

Bal. 63,600Professional Library

Bal. 30,000 T. Watson, WithdrawalsBal. 40,000

Accumulated Depreciation—Professional Library

Unadj. Bal. 9,000(d) 6,000

Adj. Bal. 15,000


Problem 3-3A (Continued)

Tuition Fees Earned Rent ExpenseUnadj. Bal. 102,000 Unadj. Bal. 22,000(f) 7,500 (h) 2,000Adj. Bal. 109,500 Adj. Bal. 24,000

Training Fees Earned Teaching Supplies ExpenseUnadj. Bal. 38,000 Unadj. Bal. 0(e) 4,400 (b) 7,400Adj. Bal. 42,400 Adj. Bal. 7,400

Depreciation Expense—Professional Library Advertising Expense

Unadj. Bal. 0 Bal. 7,000(d) 6,000Adj. Bal. 6,000

Depreciation Expense—Equipment Utilities Expense

Unadj. Bal. 0 Bal. 5,600(c) 12,000Adj. Bal. 12,000

Salaries ExpenseUnadj. Bal. 48,000(g) 400Adj. Bal. 48,400

Insurance ExpenseUnadj. Bal. 0(a) 3,000Adj. Bal. 3,000


Problem 3-3A (Continued)Part 2

Adjustment (a)Dec. 31 Insurance Expense.......................................................3,000

Prepaid Insurance.................................................. 3,000To record the insurance expired.

Adjustment (b)31 Teaching Supplies Expense........................................7,400

Teaching Supplies.................................................. 7,400To record supplies used ($10,000-$2,600).

Adjustment (c)31 Depreciation Expense—Equipment............................12,000

Accumulated Depreciation—Equipment.................... 12,000To record equipment depreciation.

Adjustment (d)31 Depreciation Expense—Profess. Library...................6,000

Accumul. Depreciation—Profess. Library................ 6,000To record professional library depreciation.

Adjustment (e)31 Unearned Training Fees..............................................4,400

Training Fees Earned............................................. 4,400To record training fees earned that were collected in advance.

Adjustment (f)31 Accounts Receivable...................................................7,500

Tuition Fees Earned............................................... 7,500To record tuition earned ($3,000 x 2 1/2 months).

Adjustment (g)31 Salaries Expense..........................................................400

Salaries Payable..................................................... 400To record accrued salaries (2 days x $100 x 2).

Adjustment (h)31 Rent Expense................................................................2,000

Prepaid Rent........................................................... 2,000To record expiration of prepaid rent.


Problem 3-3A (Continued) Part 3

Watson Technical InstituteAdjusted Trial Balance

December 31, 2005Debit Credit

Cash.......................................................................... $ 26,000Accounts receivable................................................ 7,500Teaching supplies .................................................. 2,600Prepaid insurance.................................................... 12,000Prepaid rent.............................................................. 0Professional library................................................. 30,000Accumulated depreciation—Professional library.... $ 15,000Equipment................................................................ 70,000Accumulated depreciation—Equipment................ 28,000Accounts payable.................................................... 36,000Salaries payable....................................................... 400Unearned training fees............................................ 6,600T. Watson, Capital.................................................... 63,600T. Watson, Withdrawals.......................................... 40,000Tuition fees earned.................................................. 109,500Training fees earned................................................ 42,400Depreciation expense—Professional library........ 6,000Depreciation expense—Equipment....................... 12,000Salaries expense ..................................................... 48,400Insurance expense.................................................. 3,000Rent expense............................................................ 24,000Teaching supplies expense.................................... 7,400Advertising expense................................................ 7,000Utilities expense....................................................... 5,600 _______Totals........................................................................ $301,500 $301,500


Problem 3-3A (Continued)Part 4

WATSON TECHNICAL INSTITUTEIncome Statement

For Year Ended December 31, 2005Revenues Tuition fees earned............................................ $109,500 Training fees earned.......................................... 42,400 Total revenues.................................................... $151,900 Expenses Depreciation expense—Professional library... 6,000 Depreciation expense—Equipment.................. 12,000 Salaries expense................................................ 48,400 Insurance expense............................................. 3,000 Rent expense...................................................... 24,000 Teaching supplies expense............................... 7,400 Advertising expense.......................................... 7,000 Utilities expense................................................. 5,600 Total expenses................................................... 113,400 Net income............................................................ $ 38,500

WATSON TECHNICAL INSTITUTEStatement of Owner’s Equity

For Year Ended December 31, 2005

T. Watson, Capital, December 31, 2004.............. $ 63,600Plus: Net income.................................................. 38,500

102,100 Less: Owner withdrawals.................................... 40,000 T. Watson, Capital, December 31, 2005.............. $ 62,100


Problem 3-3A (Concluded)

WATSON TECHNICAL INSTITUTEBalance Sheet

December 31, 2005Assets

Cash................................................................................. $ 26,000 Accounts receivable...................................................... 7,500 Teaching supplies.......................................................... 2,600 Prepaid insurance.......................................................... 12,000 Professional library........................................................ $30,000 Accumulated depreciation—Professional library....... (15,000) 15,000Equipment....................................................................... 70,000 Accumulated depreciation—Equipment...................... (28,000) 42,000 Total assets..................................................................... $105,100

LiabilitiesAccounts payable........................................................... $ 36,000 Salaries payable............................................................. 400 Unearned training fees.................................................. 6,600 Total liabilities................................................................ 43,000

EquityT. Watson, Capital.......................................................... 62,100Total liabilities and equity............................................. $105,100


Problem 3-4A (45 minutes) — Part 1

AccountUnadjusted

Trial Balance AdjustmentsAdjusted

Trial Balance

Cash................................ $ 27,000 $ 27,000

Accounts receivable.......... 12,000 (a)

10,460 22,460

Office supplies.................. 18,000 (b)

15,000 3,000

Prepaid insurance............. 7,320 (c) 2,440 4,880

Office equipment............... 92,000 92,000

Accumulated depreciation —Office equipment.......... $ 12,000 (d

)6,000 $ 18,000

Accounts payable............. 9,300 (e) 900 10,200

Interest payable................. (f) 800 800

Salaries payable................ (g)

6,600 6,600

Unearned consulting fees... 16,000 (h) 1,700 14,300

Long-term notes payable.... 44,000 44,000

J. Winner, Capital............... 28,420 28,420

J. Winner, Withdrawals....... 10,000 10,000

Consulting fees earned........................... 156,000

(a)(h)

10,4601,700 168,160

Depreciation expense— Office equipment............. (d) 6,000 6,000

Salaries expense............... 71,000 (g) 6,600 77,600

Interest expense................ 1,400 (f) 800 2,200

Insurance expense............ (c)

2,440 2,440

Rent expense.................... 13,200 13,200

Office supplies expense..... (b) 15,000 15,000

Advertising expense.......... 13,800 _______ (e)

90 0

______ 14,700 _______

Totals.............................. $265,720 $265,720 $43,900 $43,90

0

$290,480 $290,480

Adjustment description:

(a) Earned but uncollected revenues.

(b) Cost of consumed office supplies.


(c) Cost of expired insurance coverage.

(d) Depreciation expense on office equipment.

(e) Incurred but unpaid advertising expense.

(f) Incurred but unpaid interest expense.

(g) Incurred but unpaid salaries expense.

(h) Earned revenues previously received in advance.


Problem 3-4A

Part 2

JJW COMPANYIncome Statement

For Year Ended July 31, 2005

Revenues Consulting fees earned ................................ $168,160 Expenses Depreciation expense—Office equipment. . $ 6,000 Salaries expense .......................................... 77,600 Interest expense ........................................... 2,200 Insurance expense ....................................... 2,440 Rent expense ................................................ 13,200 Office supplies expense .............................. 15,000 Advertising expense .................................... 14,700 Total expenses.............................................. 131,140 Net income....................................................... $ 37,020

JJW COMPANYStatement of Owner’s EquityFor Year Ended July 31, 2005

J. Winner, Capital, July 31, 2004.................... $28,420

Plus: Net income............................................. 37,020

65,440

Less: Owner withdrawals............................... 10,000

J. Winner, Capital, July 31, 2005.................... $55,440


Problem 3-4A (Concluded)Part 2

JJW COMPANYBalance Sheet

July 31, 2005

AssetsCash............................................................................. $ 27,000Accounts receivable................................................... 22,460Office supplies............................................................ 3,000Prepaid insurance....................................................... 4,880Office equipment......................................................... $92,000Accumulated depreciation—Office equipment........ (18,000) 74,000 Total assets................................................................. $131,340

LiabilitiesAccounts payable....................................................... $ 10,200Interest payable........................................................... 800Salaries payable.......................................................... 6,600Unearned consulting fees.......................................... 14,300Long-term notes payable........................................... 44,000 Total liabilities............................................................. 75,900

EquityJ. Winner, Capital........................................................ 55,440 Total liabilities and equity.......................................... $131,340


Problem 3-5A (50 minutes) Part 1

CALLAHAY COMPANYIncome Statement


Revenues Fees earned.............................................. $420,000 Interest earned.......................................... 16,000 Total revenues.......................................... $436,000 Expenses Depreciation expense—Automobiles..... 18,000 Depreciation expense—Equipment........ 10,000 Salaries expense...................................... 180,000 Wages expense........................................ 32,000 Interest expense....................................... 24,000 Office supplies expense.......................... 26,000 Advertising expense................................ 50,000 Repairs expense—Automobiles............. 16,800 Total expenses......................................... 356,800 Net income.................................................. $ 79,200

CALLAHAY COMPANYStatement of Owner's Equity


J. Callahay, Capital, December 31, 2004. . $247,800

Plus: Net income....................................... 79,200

327,000

Less: Withdrawals by owner.................... 38,000

J. Callahay, Capital, December 31, 2005. . $289,000


Problem 3-5A (Concluded)

CALLAHAY COMPANYBalance Sheet

December 31, 2005

AssetsCash......................................................................... $ 22,000Accounts receivable.............................................. 44,000Interest receivable.................................................. 10,000Notes receivable (due in 90 days)......................... 160,000Office supplies........................................................ 8,000Automobiles............................................................ $160,000Accumulated depreciation—Automobiles........... (42,000) 118,000Equipment............................................................... 130,000Accumulated depreciation—Equipment.............. (10,000) 120,000Land......................................................................... 70,000 Total assets............................................................. $552,000

LiabilitiesAccounts payable................................................... $ 88,000Interest payable...................................................... 12,000Salaries payable..................................................... 11,000Unearned fees......................................................... 22,000Long-term notes payable....................................... 130,000 Total liabilities........................................................ 263,000

EquityJ. Callahay, Capital................................................. 289,000 Total liabilities and equity..................................... $552,000

Part 2

Profit margin = $79,200 / $436,000 = 18.2%


Problem 3-6AA (40 minutes)Part 1 Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.

Nov. 1 Prepaid Advertising ....................................... 1,500Cash.......................................................... 1,500

Paid for future advertising.

1 Prepaid Insurance........................................... 2,160Cash.......................................................... 2,160

Paid insurance for one year.

30 Cash.................................................................. 3,300Unearned Service Fees........................... 3,300

Received fees in advance.

Dec. 1 Prepaid Consulting Fees ............................... 2,700Cash.......................................................... 2,700

Paid for future consulting.

15 Cash.................................................................. 7,650Unearned Service Fees........................... 7,650


31 Advertising Expense....................................... 600Prepaid Advertising ................................ 600

To adjust prepaid advertising ($1,500-$900).

31 Insurance Expense.......................................... 360Prepaid Insurance.................................... 360

To adjust prepaid insurance($2,160 x 2/12).

31 Unearned Service Fees .................................. 2,100Service Fees Earned................................ 2,100

To adjust unearned service fees ($3,300-$1,200).

31 Consulting Fees Expense .............................. 900Prepaid Consulting Fees......................... 900

To adjust prepaid consulting fees ($2,700 x 1/3).

31 Unearned Service Fees .................................. 3,000Service Fees Earned................................ 3,000

To adjust unearned service fees.


Problem 3-6AA (Continued)Part 2 Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.

Nov. 1 Advertising Expense....................................... 1,500Cash.......................................................... 1,500


1 Insurance Expense.......................................... 2,160Cash.......................................................... 2,160


30 Cash.................................................................. 3,300Service Fees Earned................................ 3,300


Dec. 1 Consulting Fees Expense............................... 2,700Cash.......................................................... 2,700

Paid for future consulting.

15 Cash.................................................................. 7,650Service Fees Earned................................ 7,650


31 Prepaid Advertising........................................ 900Advertising Expense............................... 900

To adjust for prepaid advertising.

31 Prepaid Insurance........................................... 1,800Insurance Expense.................................. 1,800

To adjust for prepaid insurance.

31 Service Fees Earned....................................... 1,200Unearned Service Fees........................... 1,200

To adjust for unearned service fees.

31 Prepaid Consulting Fees................................ 1,800Consulting Fees Expense....................... 1,800

To adjust for prepaid consulting fees.

31 Service Fees Earned....................................... 4,650Unearned Service Fees........................... 4,650



Problem 3-6AA (Concluded)

Part 3

There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following:

Advertising expense for two months................................... $ 600Prepaid advertising as of December 31............................... 900Insurance expense for two months..................................... 360Prepaid insurance as of December 31................................. 1,800Consulting fees expense (1/3 of total paid)......................... 900Prepaid consulting fees........................................................ 1,800Service fees earned for two months ($2,100 + $3,000)...... 5,100Unearned service fees at 12/31 ($1,200 + $4,650)............... 5,850

When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.


PROBLEM SET B

Problem 3-1B (15 minutes)

1. E. 4. C. 7. F. 10. I.2. H. 5. D. 8. I. 11. A.3. G. 6. B. 9. F. 12. B.

Problem 3-2B (30 minutes) Part 1

Adjustment (a)Oct. 31 Office Supplies Expense........................................ 3,450

Office Supplies................................................ 3,450To record cost of supplies used($500 + $3,650 - $700).

Adjustment (b) 31 Insurance Expense................................................. 2,365

Prepaid Insurance........................................... 2,365To record annual insurance coverage cost.

Policy Cost per MonthMonths Active

in 20052005

ExpenseA $125 ($3,000/24 mo.) 12 $1,500B 100 ($3,600/36 mo.) 7 700C 55 ( $660 / 12 mo.) 3 165

Total $2,365

Adjustment (c) 31 Salaries Expense.................................................... 800

Salaries Payable.............................................. 800To record accrued but unpaid wages(1 day x $800).

Adjustment (d) 31 Depreciation Expense—Building.......................... 5,400

Accumulated Depreciation—Building........... 5,400To record annual depreciation[($155,000-$20,000) / 25 years = $5,400].


Problem 3-2B (Concluded)

Adjustment (e)Oct. 31 Rent Receivable...................................................... 600

Rent Earned..................................................... 600To record earned but unpaid Oct. rent.

Adjustment (f) 31 Unearned Rent........................................................ 1,050

Rent Earned..................................................... 1,050To record rent earned for September and October (2 x $525).

Part 2Cash Payment for (c)

Nov. 7 Salaries Payable..................................................... 800Salaries Expense*................................................... 3,200

Cash.................................................................. 4,000To record payment of accrued and current salaries. *(4 days x $800)

Cash Payment for (e)

15 Cash......................................................................... 1,200Rent Receivable............................................... 600Rent Earned..................................................... 600

To record past due rent for two months.


Problem 3-3B (90 minutes) Parts 1 and 2

Cash Accounts PayableBal. 50,000 Bal. 12,200

Accounts Receivable Salaries PayableUnadj. Bal. 0 Unadj. Bal. 0(f) 5,500 (g) 540Adj. Bal. 5,500 Adj. Bal. 540

Teaching Supplies Unearned Training FeesUnadj. Bal. 60,000 Unadj. Bal. 27,600

(b) 57,500 (e) 9,200Adj. Bal. 2,500 Adj. Bal. 18,400

Prepaid Insurance M. Alcorn, CapitalUnadj. Bal. 18,000 Bal. 68,500

(a) 6,400Adj. Bal. 11,600

M. Alcorn, WithdrawalsPrepaid Rent Bal. 20,000

Unadj. Bal. 2,600(h) 2,600

Adj. Bal. 0

Professional LibraryBal. 10,000

Accumulated Depreciation—Professional Library

Unadj. Bal. 1,500(d) 2,000Adj. Bal. 3,500

EquipmentBal. 30,000

Accumulated Depreciation—Equipment

Unadj. Bal. 16,000(c) 4,000Adj. Bal. 20,000


Problem 3-3B (Continued)Parts 1 and 2

Tuition Fees Earned Advertising ExpenseUnadj. Bal. 105,000 Bal. 18,000(f) 5,500Adj. Bal. 110,500

Training Fees Earned Utilities ExpenseUnadj. Bal. 62,000 Bal. 12,400(e) 9,200Adj. Bal. 71,200

Depreciation Expense—Professional Library

Unadj. Bal. 0(d) 2,000Adj. Bal. 2,000

Depreciation Expense—Equipment

Unadj. Bal. 0(c) 4,000Adj. Bal. 4,000

Salaries ExpenseUnadj. Bal. 43,200(g) 540Adj. Bal. 43,740

Insurance ExpenseUnadj. Bal. 0(a) 6,400Adj. Bal. 6,400

Rent ExpenseUnadj. Bal. 28,600(h) 2,600Adj. Bal. 31,200

Teaching Supplies ExpenseUnadj. Bal. 0(b) 57,500Adj. Bal. 57,500


Problem 3-3B (Continued)Part 2

Adjustment (a)Dec. 31 Insurance Expense................................................ 6,400

Prepaid Insurance.......................................... 6,400To record the insurance expired.

Adjustment (b) 31 Teaching Supplies Expense................................. 57,500

Teaching Supplies......................................... 57,500To record the cost of supplies used ($60,000-$2,500).

Adjustment (c) 31 Depreciation Expense—Equipment..................... 4,000

Accumulated Depreciation—Equipment..... 4,000To record equipment depreciation.

Adjustment (d) 31 Depreciation Expense—Professional Library... . 2,000

Accumulated Depreciation— Professional Library............................. 2,000

To record professional library depreciation.

Adjustment (e) 31 Unearned Training Fees........................................ 9,200

Training Fees Earned..................................... 9,200To record training fees earned that were collected in advance.

Adjustment (f) 31 Accounts Receivable............................................ 5,500

Tuition Fees Earned....................................... 5,500To record tuition earned ($2,200 x 2 1/2 mo).

Adjustment (g) 31 Salaries Expense................................................... 540

Salaries Payable............................................. 540 To accrue salaries expense (3 days x $180).

Adjustment (h) 31 Rent Expense ........................................................ 2,600


Prepaid Rent.............................................................. 2,600 To record expiration of prepaid rent.



ALCORN INSTITUTEAdjusted Trial Balance

December 31, 2005

Debit Credit Cash............................................................................... $ 50,000Accounts receivable...................................................... 5,500Teaching supplies.......................................................... 2,500Prepaid insurance.......................................................... 11,600Prepaid rent................................................................... 0Professional library........................................................ 10,000Accumulated depreciation—Professional library........... $ 3,500Equipment..................................................................... 30,000Accumulated depreciation—Equipment........................ 20,000Accounts payable.......................................................... 12,200Salaries payable............................................................. 540Unearned training fees................................................... 18,400M. Alcorn, Capital........................................................... 68,500M. Alcorn, Withdrawals.................................................. 20,000Tuition fees earned........................................................ 110,500Training fees earned...................................................... 71,200Depreciation expense—Professional library.................. 2,000Depreciation expense—Equipment............................... 4,000Salaries expense............................................................ 43,740Insurance expense......................................................... 6,400Rent expense................................................................. 31,200Teaching supplies expense........................................... 57,500Advertising expense...................................................... 18,000Utilities expense............................................................. 12,400 _______Totals............................................................................. $304,840 $304,840



ALCORN INSTITUTEIncome Statement

For Year Ended December 31, 2005Revenues Tuition fees earned.................................................... $110,500 Training fees earned.................................................. 71,200 Total revenues............................................................ $181,700 Expenses Depreciation expense—Professional library.......... 2,000 Depreciation expense—Equipment......................... 4,000 Salaries expense........................................................ 43,740 Insurance expense.................................................... 6,400 Rent expense.............................................................. 31,200 Teaching supplies expense...................................... 57,500 Advertising expense.................................................. 18,000 Utilities expense......................................................... 12,400 Total expenses........................................................... 175,240 Net income.................................................................... $ 6,460

ALCORN INSTITUTEStatement of Owner’s Equity


M. Alcorn, Capital, December 31, 2004.............. $68,500 Plus: Net income.................................................. 6,460

74,960 Less: Owner withdrawals.................................... 20,000 M. Alcorn, Capital, December 31, 2005.............. $54,960



ALCORN INSTITUTEBalance Sheet

December 31, 2005

AssetsCash.............................................................................. $50,000 Accounts receivable.................................................... 5,500 Teaching supplies....................................................... 2,500 Prepaid insurance........................................................ 11,600 Professional library..................................................... $10,000 Accumulated depreciation—Professional library........... (3,500) 6,500 Equipment.................................................................... 30,000 Accumulated depreciation—Equipment.................... (20,000) 10,000 Total assets.................................................................. $86,100

LiabilitiesAccounts payable........................................................ $12,200 Salaries payable........................................................... 540 Unearned training fees................................................ 18,400 Total liabilities.............................................................. 31,140

EquityM. Alcorn, Capital......................................................... 54,960Total liabilities and equity........................................... $86,100


Problem 3-4B (45 minutes) — Part 1

AccountUnadjusted

Trial Balance AdjustmentsAdjusted

Trial Balance

Cash..................................$ 48,000 $ 48,000

Accounts receivable............. 70,000 (a) 6,660 76,660

Office supplies..................... 30,000 (b) 23,000 7,000

Prepaid insurance................ 13,200 (c) 4,600 8,600

Office equipment.................150,000 150,000

Accumulated depreciation— Office equipment.....................

$ 30,000 (d) 10,000 $ 40,000

Accounts payable................ 36,000 (e) 6,000 42,000

Interest payable................... (f) 1,600 1,600

Salaries payable................... (g) 11,200 11,200

Unearned consulting fees..... 30,000 (h) 12,200 17,800

Long-term notes payable...... 80,000 80,000

D. Chen, Capital................... 70,200 70,200

D. Chen, Withdrawals........... 10,000 10,000

Consulting fees earned........264,000

(a)(h)

6,66012,200 282,860

Depreciation expense— Office equipment............... (d) 10,000 10,000

Salaries expense..................115,600 (g) 11,200 126,800

Interest expense.................. 6,400 (f) 1,600 8,000

Insurance expense.............. (c) 4,600 4,600

Rent expense...................... 24,000 24,000

Office supplies expense........ (b) 23,000 23,000

Advertising expense............. 43,000 _______ (e) 6 ,000 ______ 49,000 _______

Totals.................................$510,200 $510,200 $75,260 $75,260 $545,660 $545,660

Adjustment Descriptions:(a) Earned but uncollected revenues.(b) Cost of consumed office supplies.(c) Cost of expired insurance coverage.(d) Depreciation expense on office equipment.(e) Incurred but unpaid advertising expense.(f) Incurred but unpaid interest expense.(g) Incurred but unpaid salaries expense.(h) Earned revenues previously received in advance.


Problem 3-4B

Part 2

DAXU CONSULTING COMPANYIncome Statement


Revenues Consulting fees earned ..................................... $282,860 Expenses Depreciation expense—Office equipment....... $ 10,000 Salaries expense ............................................... 126,800 Interest expense ................................................ 8,000 Insurance expense ............................................ 4,600 Rent expense ..................................................... 24,000 Office supplies expense ................................... 23,000 Advertising expense ......................................... 49,000 Total expenses................................................... 245,400Net income............................................................ $ 37,460

DAXU CONSULTING COMPANYStatement of Owner’s Equity


D. Chen, Capital, December 31, 2004................. $ 70,200

Plus: Net income.................................................. 37,460

107,660

Less: Owner withdrawals.................................... 10,000

D. Chen, Capital, December 31, 2005................. $ 97,660



Part 2

DAXU CONSULTING COMPANYBalance Sheet

December 31, 2005

AssetsCash................................................................................ $ 48,000Accounts receivable..................................................... 76,660Office supplies............................................................... 7,000Prepaid insurance......................................................... 8,600Office equipment........................................................... $150,000Accumulated depreciation—Office equipment.......... (40,000 ) 110,000 Total assets.................................................................... $250,260

LiabilitiesAccounts payable.......................................................... $ 42,000Interest payable............................................................. 1,600Salaries payable............................................................ 11,200Unearned consulting fees............................................ 17,800Long-term notes payable.............................................. 80,000 Total liabilities............................................................... 152,600

EquityD. Chen, Capital............................................................. 97,660 Total liabilities and equity............................................ $250,260


Problem 3-5B (50 minutes)Part 1

LIGHTNING COURIERIncome Statement


Revenues Delivery fees earned..................................... $580,000 Interest earned............................................... 24,000 Total revenues............................................... $604,000Expenses Depreciation expense—Trucks.................... 24,000 Depreciation expense—Equipment............. 46,000 Salaries expense........................................... 64,000 Wages expense............................................. 290,000 Interest expense............................................ 25,000 Office supplies expense............................... 33,000 Advertising expense..................................... 26,400 Repairs expense—Trucks............................ 34,600 Total expenses.............................................. 543,000Net income....................................................... $ 61,000

LIGHTNING COURIERStatement of Owner's Equity


J. Hallam, Capital, December 31, 2004.......... $115,000

Plus : Net income........................................... 61,000

176,000

Less: Withdrawals by owner......................... 40,000

J. Hallam, Capital, December 31, 2005.......... $136,000



LIGHTNING COURIERBalance Sheet

December 31, 2005

AssetsCash....................................................................... $ 48,000Accounts receivable............................................ 110,000Interest receivable................................................ 6,000Notes receivable (due in 90 days)......................... 200,000Office supplies...................................................... 12,000Trucks.................................................................... $ 124,000Accumulated depreciation—Trucks................... (48,000 ) 76,000Equipment............................................................. 260,000Accumulated depreciation—Equipment............ (190,000) 70,000Land....................................................................... 90,000 Total assets........................................................... $612,000

LiabilitiesAccounts payable................................................. $124,000Interest payable.................................................... 22,000Salaries payable................................................... 30,000Unearned delivery fees........................................ 110,000Long-term notes payable..................................... 190,000 Total liabilities...................................................... 476,000

EquityJ. Hallam, Capital.................................................. 136,000 Total liabilities and equity................................... $612,000

Part 2

Profit margin = $61,000 / $604,000 = 10.1%


Problem 3-6BA (40 minutes) Part 1

Method that records prepaid expenses and unearned revenues in balance sheet accounts:

Apr. 1 Prepaid Consulting Fees..................................... 3,450 Cash............................................................... 3,450

Paid for future consulting services.

1 Prepaid Insurance................................................ 2,700Cash............................................................... 2,700


30 Cash....................................................................... 7,500Unearned Service Fees................................ 7,500


May 1 Prepaid Advertising............................................. 3,450Cash............................................................... 3,450


23 Cash ..................................................................... 9,450 Unearned Service Fees............................... 9,450


31 Consulting Fees Expense.................................... 1,500Prepaid Consulting Fees.............................. 1,500

To adjust prepaid consulting fees.

31 Insurance Expense............................................... 450Prepaid Insurance......................................... 450

To adjust prepaid insurance.

31 Unearned Service Fees ....................................... 3,900Service Fees Earned..................................... 3,900


31 Advertising Expense............................................ 2,400Prepaid Advertising...................................... 2,400

To adjust prepaid advertising.

31 Unearned Service Fees........................................ 4,500Service Fees Earned..................................... 4,500



Problem 3-6BA (Continued)Part 2

Method that records prepaid expenses and unearned revenues in income statement accounts:

Apr. 1 Consulting Fees Expense ................................. 3,450Cash.............................................................. 3,450

Paid for future consulting services.

1 Insurance Expense............................................. 2,700Cash.............................................................. 2,700


30 Cash..................................................................... 7,500Service Fees Earned................................... 7,500


May 1 Advertising Expense........................................... 3,450Cash.............................................................. 3,450


23 Cash..................................................................... 9,450Service Fees Earned................................... 9,450


31 Prepaid Consulting Fees.................................... 1,950Consulting Fees Expense........................... 1,950

To adjust for prepaid consulting fees.

31 Prepaid Insurance .............................................. 2,250Insurance Expense...................................... 2,250

To adjust for prepaid insurance.

31 Service Fees Earned........................................... 3,600Unearned Service Fees .............................. 3,600


31 Prepaid Advertising............................................ 1,050Advertising Expense................................... 1,050

To adjust for prepaid advertising.

31 Service Fees Earned........................................... 4,950Unearned Service Fees .............................. 4,950



Problem 3-6BA (Concluded) Part 3

There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following:

Prepaid consulting fees as of May 31.................................... $ 1,950Consulting fees expense for two months.............................. 1,500Insurance expense for two months........................................ 450Prepaid insurance as of May 31.............................................. 2,250Unearned service fees as of May 31 ($3,600 + $4,950)......... 8,550Service fees earned for two months ($3,900 + $4,500)......... 8,400Prepaid advertising as of May 31............................................ 1,050Advertising expense for two months..................................... 2,400

When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.


Serial Problem

Serial Problem, Success Systems (120 minutes) Part 1

Journal entries:

Dec. 2 Advertising Expense..................................655 1,025Cash.....................................................101 1,025

Paid share of mall advertising costs.

3 Repairs Expense—Computer....................684 500Cash.....................................................101 500

Repaired the computer.

4 Cash.............................................................101 3,950Accounts Receivable..........................106 3,950

Collected accounts receivable.

10 Wages Expense..........................................623 750Cash.....................................................101 750

Paid employee for part-time work.

14 Cash.............................................................101 1,500Unearned Computer Services Revenue...236 1,500

Received advance on work to be performed.

15 Computer Supplies....................................126 1,100Accounts Payable...............................201 1,100

Purchased supplies on credit.

16 No entry recorded in the journal.20 Cash.............................................................101 5,625

Computer Services Revenue.............403 5,625Collected cash revenue from customer.

28 Cash.............................................................101 3,000Accounts Receivable..........................106 3,000

Collected accounts receivable.

29 Mileage Expense........................................676 192Cash.....................................................101 192

Reimbursed Breeze for mileage.

31 K. Breeze, Withdrawals..............................302 1,500Cash.....................................................101 1,500

Owner withdraws cash.


Serial Problem (Continued) Part 2

Adjusting entries:

Dec. 31 Computer Supplies Expense .........................652 3,065Computer Supplies .................................126 3,065

Adjustment for supplies used (supplies balance less cost of supplies available).

31 Insurance Expense .........................................637 555Prepaid Insurance ...................................128 555

Adjustment for expired insurance (1/4 of original prepaid amount).

31 Wages Expense ..............................................623 500Wages Payable ........................................210 500

Adjustment for accrued wages.

31 Depreciation Exp—Computer Equip.............613 1,250Accumulated Depreciation— Computer Equipment...........................168 1,250

Adjustment for computer equipment depreciation:Cost.......................................................... $20,000Predicted life........................................... 4 yearsAnnual depreciation (cost/life).............. $5,000Expense for three months..................... $1,250

31 Depreciation Expense—Office Equip............612 400Accumulated Depreciation— Office Equipment ..................................164 400

Adjustment for office equipment depreciation:Cost........................................................... $8,000Predicted life............................................. 5 yearsAnnual depreciation (cost/life)................ $1,600Expense for three months....................... $400

31 Rent Expense ..................................................640 2,475Prepaid Rent ............................................131 2,475

Adjustment for expired rent (3/4 of original prepaid amount).


Serial Problem (Continued) Parts 1 and 2

Posting to the accounts:

Cash Acct. No. 101Date Explanation PR Debit Credit BalanceOct. 1 55,000 55,000

2 3,300 51,7005 2,220 49,4808 1,420 48,060

15 4,800 52,86017 805 52,05520 1,940 50,11522 1,400 51,51531 875 50,64031 3,600 47,040

Nov. 1 320 46,7202 4,633 51,3535 1,125 50,228

18 2,208 52,43622 250 52,18628 384 51,80230 1,750 50,05230 2,000 48,052

Dec. 2 1,025 47,0273 500 46,5274 3,950 50,477

10 750 49,72714 1,500 51,22720 5,625 56,85228 3,000 59,85229 192 59,66031 1,500 58,160


Serial Problem (Continued) Parts 1 and 2

Accounts Receivable Acct. No. 106Date Explanation PR Debit Credit BalanceOct. 6 4,800 4,800

12 1,400 6,20015 4,800 1,40022 1,400 028 5,208 5,208

Nov. 8 5,668 10,87618 2,208 8,66824 3,950 12,618

Dec. 4 3,950 8,66828 3,000 5,668

Computer Supplies Acct. No. 126Date Explanation PR Debit Credit BalanceOct. 3 1,420 1,420Nov. 5 1,125 2,545Dec. 15 1,100 3,645

31 3,065 580

Prepaid Insurance Acct. No. 128Date Explanation PR Debit Credit BalanceOct. 5 2,220 2,220Dec. 31 555 1,665

Prepaid Rent Acct. No. 131 Date Explanation PR Debit Credit BalanceOct. 2 3,300 3,300Dec. 31 2,475 825

Office Equipment Acct. No. 163Date Explanation PR Debit Credit BalanceOct. 1 8,000 8,000

Accumulated Depreciation—Office Equipment Acct. No. 164Date Explanation PR Debit Credit BalanceDec. 31 400 400


Serial Problem (Continued)Parts 1 and 2

Computer Equipment Acct. No. 167Date Explanation PR Debit Credit BalanceOct. 1 20,000 20,000

Accumulated Depreciation—Computer Equipment Acct. No. 168Date Explanation PR Debit Credit BalanceDec. 31 1,250 1,250

Accounts Payable Acct. No. 201Date Explanation PR Debit Credit BalanceOct. 3 1,420 1,420

8 1,420 0Dec. 15 1,100 1,100

Wages Payable Acct. No. 210Date Explanation PR Debit Credit BalanceDec. 31 500 500

Unearned Computer Services Revenue Acct. No. 236Date Explanation PR Debit Credit BalanceDec. 14 1,500 1,500

K. Breeze, Capital Acct. No. 301Date Explanation PR Debit Credit BalanceOct. 1 83,000 83,000

K. Breeze, Withdrawals Acct. No. 302Date Explanation PR Debit Credit BalanceOct. 31 3,600 3,600Nov. 30 2,000 5,600Dec. 31 1,500 7,100



Computer Services Revenue Acct. No. 403Date Explanation PR Debit Credit BalanceOct. 6 4,800 4,800

12 1,400 6,20028 5,208 11,408

Nov. 2 4,633 16,0418 5,668 21,709

24 3,950 25,659Dec. 20 5,625 31,284

Depreciation Expense—Office Equipment Acct. No. 612Date Explanation PR Debit Credit BalanceDec. 31 400 400

Depreciation Expense—Computer Equipment Acct. No. 613Date Explanation PR Debit Credit BalanceDec. 31 1,250 1,250

Wages Expense Acct. No. 623Date Explanation PR Debit Credit BalanceOct. 31 875 875Nov. 30 1,750 2,625Dec. 10 750 3,375

31 500 3,875

Insurance Expense Acct. No. 637Date Explanation PR Debit Credit BalanceDec. 31 555 555

Rent Expense Acct. No. 640Date Explanation PR Debit Credit BalanceDec. 31 2,475 2,475



Computer Supplies Expense Acct. No. 652Date Explanation PR Debit Credit BalanceDec. 31 3,065 3,065

Advertising Expense Acct. No. 655Date Explanation PR Debit Credit BalanceOct. 20 1,940 1,940Dec. 2 1,025 2,965

Mileage Expense Acct. No. 676Date Explanation PR Debit Credit BalanceNov. 1 320 320

28 384 704Dec. 29 192 896

Miscellaneous Expenses Acct. No. 677Date Explanation PR Debit Credit BalanceNov. 22 250 250

Repairs Expense—Computer Acct. No. 684Date Explanation PR Debit Credit BalanceOct. 17 805 805Dec. 3 500 1,305


Serial Problem (Continued)Part 3

SUCCESS SYSTEMSAdjusted Trial Balance

December 31, 2004 Debit Credit

Cash ............................................................................ $ 58,160Accounts receivable .................................................. 5,668Computer supplies .................................................... 580Prepaid insurance ..................................................... 1,665Prepaid rent ................................................................ 825Office equipment ....................................................... 8,000Accumulated depreciation—Office equipment....... $ 400Computer equipment ................................................ 20,000Accumulated depreciation—Computer equipment. 1,250Accounts payable ...................................................... 1,100Wages payable ........................................................... 500Unearned computer services revenue .................... 1,500K. Breeze, Capital....................................................... 83,000K. Breeze, Withdrawals.............................................. 7,100Computer services revenue ..................................... 31,284Depreciation expense—Office equipment .............. 400Depreciation expense—Computer equipment........ 1,250Wages expense .......................................................... 3,875Insurance expense .................................................... 555Rent expense ............................................................. 2,475Computer supplies expense .................................... 3,065Advertising expense.................................................. 2,965Mileage expense ........................................................ 896Miscellaneous expenses .......................................... 250Repairs expense—Computer ................................... 1,305 _______Totals........................................................................... $119,034 $119,034



SUCCESS SYSTEMSIncome Statement

For Three Months Ended December 31, 2004

Revenue Computer services revenue....................................... $31,284 Expenses Depreciation expense—Office equipment................ $ 400 Depreciation expense—Computer equipment......... 1,250 Wages expense........................................................... 3,875 Insurance expense...................................................... 555 Rent expense............................................................... 2,475 Computer supplies expense...................................... 3,065 Advertising expense................................................... 2,965 Mileage expense......................................................... 896 Miscellaneous expenses............................................ 250 Repairs expense—Computer..................................... 1,305 Total expenses............................................................ 17,036 Net income..................................................................... $14,248

Part 5

SUCCESS SYSTEMSStatement of Owner’s Equity

For Three Months Ended December 31, 2004

K. Breeze, Capital, October 1, 2004.................. $ 0 Plus: Owner investment.......... 83,000 Net income.............................................. 14,248

97,248Less: Owner withdrawals.................................. 7,100 K. Breeze, Capital, December 31, 2004............ $90,148



SUCCESS SYSTEMSBalance Sheet

December 31, 2004

AssetsCash ................................................................................ $58,160 Accounts receivable ..................................................... 5,668 Computer supplies ........................................................ 580 Prepaid insurance ......................................................... 1,665 Prepaid rent ................................................................... 825 Office equipment ........................................................... $ 8,000 Accumulated depreciation—Office equipment........... (400) 7,600 Computer equipment..................................................... 20,000 Accumulated depreciation—Computer equipment.... (1,250) 18,750 Total assets..................................................................... $93,248

Liabilities Accounts payable........................................................... $ 1,100 Wages payable............................................................... 500 Unearned computer services revenue......................... 1,500 Total liabilities................................................................ 3,100

Equity K. Breeze, Capital........................................................... 90,148Total liabilities and equity............................................. $93,248


Reporting in Action — BTN 3-1

1. The revenue recognition principle requires that revenue be recorded when earned, not before and not after. Most companies earn revenue when they provide services and products to customers.

2. Krispy Kreme provides information related to revenue recognition in footnote 2 discussing the “Nature of Business and Significant Accounting Policies.” A policy on revenue recognition is stated for each segment of the company.

Company Store operations revenue is derived from the sale of doughnuts and related items to on-premises and off-premises customers. Revenue is recognized at the time of sale for on-premises sales and at the time of delivery for off premises sales.

Franchise Operations revenue is derived from: (1) development and franchise fees from the opening of new stores; and (2) royalties charged to franchisees based on sales. Development and franchise fees are charged for certain new stores and are deferred until the store is opened. The royalties recognized in each period are based on the sales in that period.

KKM&D revenue is derived from the sale of doughnut-making equipment, mix and other supplies needed to operate a doughnut store to Company-owned and franchised stores. Revenue is recognized at the time the title and risk of loss pass to the customer, generally upon delivery of the goods.

3. For fiscal year-end February 2, 2003, the profit margin is: $33,478,000 / $491,549,000 = 0.068 = 6.8%

For fiscal year-end February 3, 2002, the profit margin is: $26,378,000 / $394,354,000 = 0.067 = 6.7%

4. Solution depends on the financial statements accessed.


Comparative Analysis — BTN 3-2

1. Krispy Kreme

Current year, profit margin = $33,478 / $491,549 = 6.8% Prior year, profit margin = $26,378 / $394,354 = 6.7%

Tastykake

Current year, profit margin = $2,000 / $162,263 = 1.2% Prior year, profit margin = $8,048 / $166,245 = 4.8%

2. Krispy Kreme is more successful on the basis of profit margin. In the most current year, Krispy Kreme earned an average of 6.8 cents on the dollar while Tastykake earned 1.2 cents on the dollar. For the prior years, Krispy Kreme earned 6.7 cents on the dollar compared to 4.8 cents for Tastykake.

Ethics Challenge — BTN 3-3

1. GAAP requires that annual deprecation be accumulated in a contra-asset account, called Accumulated Depreciation. While property, plant, and equipment is often shown at its net value on the balance sheet (as in Krispy Kreme’s balance sheet in Appendix A) the cost of property, plant, and equipment along with its related accumulated depreciation are reported in the footnotes. Thus, Bergez is correct with her journal entry recommendation.

2. One strength of Welch’s method would be the ease of preparing the balance sheet. The property, plant, and equipment balance in the adjusted trial balance would be directly transferable to the balance sheet when the preparer desired to show the amount at net. Welch’s approach carries weaknesses in that financial statement users would not be able to ascertain the original cost of the equipment or be able to know how much of the original cost had been allocated to depreciation to date.

3. While both approaches would lead to the same total assets on the balance sheet, GAAP requires Bergez’s approach. As a professional, Bergez is required to uphold the standards of her profession and thus the decision is an ethical one for her.


Communicating in Practice — BTN 3-4

This communication activity has no set solution. A class discussion of the ratios can be conducted with emphasis on (1) return and profitability by industries and (2) a contrast of debt financing between industries.

Taking It to the Net — BTN 3-5

1. Cannondale’s primarily sells mountain bikes.

2. Review 10-K.

3. Recent fiscal years have ended on June 29, 2002, June 30, 2001 and July 1, 2000. While Cannondale labels these endings as “12 months ended” they appear to be reporting as of the end of the 52nd week.

4. Net sales for the fiscal year ended June 29, 2002, is $156,655,000.

5. Net loss for the fiscal year ended June 29, 2002, is $15,440,000.

6. Profit margin is: $(15,440) / $156,655 = -0.099 = -9.8% (or non-interpretable)

7. Cannondale’s fiscal year-end appears to (but does not necessarily) correspond to its natural business year. The difficulty in reaching a definitive answer to this question is the lack of information in Cannondale’s statements. The quarterly sales data does reveal that the 3 months ending in June has reported the highest sales of the four quarters for the last two years reported. Management does discuss “seasonality” as a factor affecting business. The bottom line is Cannondale’s fiscal year-end appears to correspond to its natural business year, but we cannot be certain.


Teamwork in Action — BTN 3-6

Note that there is no specific solution to this activity. Nevertheless, the presentation of each expert team should reflect the following summary points:

Before Adjusting

Balance Sheet Income Statement Type Account Account Adjusting Entry

Prepaid expense Asset overstated Expense understated Dr. ExpenseCr. Asset*

Unearned revenues Liability overstated Revenue understated Dr. LiabilityCr. Revenue

Accrued Expenses Liability understated Expense understated Dr. ExpenseCr. Liability

Accrued Revenues Asset understated Revenue understated Dr. AssetCr. Revenue

* For depreciation, one would Credit the Accumulated Depreciation contra account.

Some implementation notes: This activity allows all students to be actively involved in the learning process. Encourage students to take the opportunity to ask questions in the small group environment the learning team provides. Encourage the better students to serve as experts on unearned revenues. The instructor’s observation of and reactions to expert teams’ development of presentation material as well as the delivery to learning teams will have a significant impact on the effectiveness of this activity.


Business Week Activity — BTN 3-7

1. Herz personally favors a move toward what is known as “principles-based accounting.” This type of accounting would require a vast simplification of accounting standards where professionals would be asked to comply with broad goals and objectives. Such accounting would be a move away from a lengthy list of rules and exceptions.

2. Herz believes that breaking the rules is at the core of most of the scandals. When a person or company just outright violates standards and commits fraud, it is hard to say the standard is wrong. It’s like when someone robs a bank: You can’t really say that the law against bank robbing was part of the problem.

3. A principles-based system is one where the accounting standard simply lays out objectives of good reporting in an area. It may include some rules, based on the objectives, but it does not try to answer every question or provide a rule for every situation. So a typical standard would be more like 10-to-12 pages in length rather than 200 pages.

4. Principles-based accounting requires the exercise of good judgment by both companies and auditors. Those who don’t like the principles-based approach say, “I don’t trust people to do that.” They think people need rules to follow or they will try to find a way to make an objective fit almost any situation.


Entrepreneurial Decision — BTN 3-8

1. Many businesses find it cheaper to use outside collection agencies rather than hire in-house staff to handle past-due account collections. Additionally, owners of collection agencies are usually experts in the art of collection and may be able to collect on accounts that the businesses themselves never would be able to. Although a 50% commission seems steep, it must be weighed against the possibility that zero collections may be realized if the account is not turned over.

2. Mellie’s net income = Income x Profit margin = $40,000,000 x 0.08 = $3,200,000.

3. Current commission expense = $40,000,000 x 0.02 = $800,000.

4. If the commission fee charged can be negotiated down from 50% to 40%, this will be a 20% reduction in commission expense. This is computed as: (50% - 40%) / 50% = 20%. Specifically, the commission expense would change from $800,000 to 80% of $800,000 or $640,000 (also computed as $40,000,000 x 0.02 x (40%/50%)).

The $160,000 reduction from $800,000 to $640,000 represents a 20% decline from $800,000.

5. Net income would be $160,000 higher since commission expense would be reduced by $160,000. Net income would change to $3,360,000 [$3,200,000 + $160,000].

Profit margin would then equal: $3,360,000/$40,000,000 = 8.4%.

Hitting the Road — BTN 3-9

There is no formal solution to this field activity. The instructor may wish to tally students’ findings to see what companies were selected, who responded, what was the response time, etc. The instructor can also periodically ask students to bring in examples from their selected companies at certain times, and then compare and contrast them with the examples in the book.


Global Decision — BTN 3-10

1. Grupo Bimbo states under its “Significant Accounting Policies” in its annual report that revenue is recognized when the product is shipped.

2. The five types of assets that are depreciated by Grupo Bimbo are:

a. Buildings

b. Manufacturing equipment

c. Vehicles

d. Office equipment

e. Computer equipment

Land, construction-in-progress, and machinery-in-transit are not depreciated.

3. Grupo Bimbo profit margin (in thousands of pesos):

2002 profit margin = 1,002,664 / 41,373,269 = 2.4%

2001 profit margin = 1,682,025 / 34,968,097 = 4.8%


solution manual chapter 3 fap

Education

expense accounts

accounts of prepaid

depreciation expense

legal revenue

accrued expenses

ar accrued revenue

unearned subscription

minutes accounts