weygandt, kieso, kimmel, trenholm, kinnear, barlow,...

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

Solutions Manual 3-1 Chapter 3 © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.

CHAPTER 3

ANSWERS TO QUESTIONS 1. (a) Accountants divide the life of a business into specific time periods so that

they can provide feedback on how the business is doing. The periods chosen are of equal lengths so that the information provided is comparable, period to period. Management usually wants monthly financial statements. Investors want to view the results of publicly traded companies at least quarterly. The Canada Revenue Agency (CRA) requires financial statements to be filed with annual income tax returns. Consequently, accountants divide the life of a business into specific time periods, such as a month, a three-month quarter, or a year.

(b) A fiscal year is an accounting period that it one year long, but does not need

to start and end on the same days as the calendar year. A calendar year begins on January 1 and ends on December 31.

2. The accrual basis provides useful information for decision making as it reflects

transactions in the period in which they occur. Compared to the cash basis, the accrual basis gives a more realistic measure of the performance and future earnings potential of the business.

3. The law firm should recognize the revenue in April. The revenue should be

recognized in the accounting period in which it is earned (i.e., when the work is done).

4. Expenses of $3,000 ($500 + $2,500) should be deducted from the revenues in

April since April was when the revenue was recognized as earned. Expense recognition is tied to revenue recognition when there is a direct association between costs incurred and the earning of revenue. Wages are the costs related to earning the fee revenue.

5. The college should recognize the revenue equally (1/4 each month) over the

period September to December. This will result in the revenue being recognized in the period the service is provided.

6. Prepaid expenses are costs paid before they are used or consumed. For

example, rent or insurance is often paid in advance. Prepaid expenses need to be adjusted at the end of each accounting period to reflect the fact that part of the asset has been used up or consumed.

7. Roger can determine his supply expense for the semester by adding the amount

of supplies he had at the beginning of the semester to the amount of supplies he purchased during the semester (asset). At the end of the semester, the remaining supplies are counted. The difference between the remaining supplies and the



total of supplies on hand at the beginning of the semester and supplies purchased, gives the supplies used during the semester. The amount used is his supplies expense.

8. No. Depreciation is the process of allocating the cost of an asset to expense over

its useful life in a rational and systematic manner. Depreciation results in the presentation of the carrying amount of the asset, not its fair value.

9. (a) Depreciation Expense is an expense account whose normal balance is a

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

(b) Cost includes the amount paid to purchase the asset. Carrying amount is the

cost of the asset reduced by the accumulated depreciation.

10. The Accumulated Depreciation contra asset account is used in order to show both the original cost of an asset and the portion of the cost that has been allocated to expense to date. The Accumulated Depreciation account is offset (deducted) against the related asset account on the balance sheet in order to show the asset`s carrying amount.

11. Unearned revenue exists when cash is received for goods or services to be

provided in the future. It represents a liability and belongs on the balance sheet because the cash has not yet been earned – the company has a future obligation to provide the goods or services. As the business provides the goods or the services, adjusting journal entries are recorded at the end of the period to recognize the corresponding amount of revenue earned that will then appear on the income statement.

12. It is necessary to prepare an adjusting entry to record the revenue earned during

the month and to show the receivable that exists at the end of the month. When the interest payment is received at the beginning of each month, Waiparous will debit (increase) the Cash account and credit (decrease) the Interest Receivable account.

13. If the company prepares monthly financial statements, it is necessary to prepare

an adjusting entry dated January 31 to recognize the expense in the period that it was incurred (January) and to set up the corresponding liability (the company has a future obligation) at January 31. Utility expense is increased and accounts payable is increased.

14. Disagree. It is appropriate to make adjusting entries to accrue for revenue when

revenues have been earned but not yet received in cash or recorded at the statement date. These adjusting entries do not overstate revenues but rather



ensure that revenue is recognized in the period it is earned. 15. Disagree. The Cash account is never involved in adjusting journal entries.

Adjusting entries are intended to implement the accrual basis of accounting. Accrued revenues and expenses are recorded by adjusting journal entries before the cash is received or paid. Prepayments and unearned revenues require adjustments after the cash has been received or paid.

16. Disagree. An adjusting entry affects only one balance sheet account and one

income statement account. 17. Both the trial balance and the adjusted trial balance list the balances of all

accounts and prove the equality of the total debit and credit balances. The trial balance lists the balances in the accounts prior to adjusting entries; the adjusted trial balance lists the balances after all adjustments have been posted. The adjusted trial balance is used to prepare the financial statements.

18. Disagree. Accounts Payable must be included in the adjusted trial balance even

though there have been no adjustments made to it. The account balance must be included for the adjusted trial balance to balance and for the financial statements to accurately portray the company’s financial position.

19. The balance sheet will not balance. The balance sheet must be prepared using

the ending owner`s capital balance that is reported in the statement of owner`s equity. Profit is added to the balance in Owner’s Equity (Capital account) and Drawings are subtracted. The resulting balance then appears on the balance sheet.

*20. Disagree. While the statement is true prior to the preparation of adjusting journal

entries, the balances are correctly stated after recording and posting the adjusting entries. Both approaches yield the same results after adjusting entries have been posted.

*21. This is incorrect. When a revenue account is credited when cash is received in

advance of providing a service, the revenue account is overstated and the liability account is understated. The adjusting entry will debit the revenue account to decrease it and credit the liability account to increase it. When a liability account is credited for cash received in advance of providing a service, the adjusting entry will debit the liability account to decrease it since it is overstated and credit the revenue account to increase it since it is understated.



SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 3-1 (a) (b) Transaction Cash Accrual 1. Collected $500 cash from customers for services provided in May. +$500 +$500 2. Billed customers $600 for services provided in May. 0 +600 3. Received $100 from customers for services to be provided in June. +100 0 4. Purchased $250 of supplies on account. All of the supplies were used in May but were paid for in June. 0 –250 Profit $600 $850

BRIEF EXERCISE 3-2 Red Co. Supplies used: $795 + $3,830 – $665 = $3,960 Blue Co. Supplies on hand, May 31, 2014: $985 + $3,070 – x = $2,750 x = $1,305



BRIEF EXERCISE 3-3 (a), (b) and (e)

Supplies Supplies Expense

Jan. 1 825 Jan. 1 0 May 31 3,165 Dec. 31 2,975 Dec. 31 2,975

Dec. 31 Bal. 1,015

Dec. 31 Bal. 2,975

(b) May 31 Supplies .......................................... 3,165

Cash ........................................... 3,165

(c) Cleaning Supplies used = $825 + $3,165 − $1,015 = $2,975 (d) The balance sheet will report $1,015 as Supplies as a current

asset. The income statement will report $2,975 as Supplies Expense.

(e) Dec. 31 Supplies Expense .......................... 2,975 Supplies ..................................... 2,975



BRIEF EXERCISE 3-4 (a) March 1 Prepaid Insurance ............................ 4,800 Cash ............................................. 4,800 (b) Monthly cost: $4,800 ÷ 12 = $400/month; Number of months expired: March to December—10 months

Amount expired in 2014: 10 months × $400 = $4,000 Number of months remaining: January to February—2 months

Amount unexpired at December 31: 2 months × $400 = $800 Total $4,800 = $4,000 + $800 (c) Dec. 31 Insurance Expense .......................... 4,000 Prepaid Insurance ....................... 4,000

(d)

Prepaid Insurance Insurance Expense

Mar. 1 4,800 Dec. 31 4,000 Dec. 31 4,000

Dec. 31 Bal. 800



BRIEF EXERCISE 3-5 (a) Jan. 1/13 Equipment .................................... 18,000 Cash ......................................... 18,000 (b) Dec. 31/13 Depreciation Expense ................. 3,000 Accumulated Depreciation —Equipment ........................... 3,000 ($18,000 ÷ 6 = $3,000 per year) Dec. 31/14 Depreciation Expense ................. 3,000 Accumulated Depreciation —Equipment ........................... 3,000 (c)

REED COMPANY Balance Sheet (partial)

December 31

2014 2013 Property, plant, and equipment Equipment ............................................ $18,000 $18,000 Less: Accumulated depreciation ....... 6,000 3,000 Carrying amount.................................. $12,000 $15,000

REED COMPANY

Income Statement (partial) Year Ended December 31

2014 2013 Depreciation Expense ............................. $3,000 $3,000



BRIEF EXERCISE 3-6 (a) Mar. 1 Cash ................................................ 4,800

Unearned Revenue ...................... 4,800 (b) $4,800 ÷ 12 = $400 per month Number of months earned March to October—8 months

Amount earned to October 31: 8 × $400 = $3,200 Number of months remaining November to February—4 months Amount unearned at October 31: 4 × $400 = $1,600 Total $4,800 = $3,200 + $1,600 (c) Oct. 31 Unearned Revenue ........................... 3,200

Service Revenue .......................... 3,200 (d)

Unearned Revenue Service Revenue

Mar. 1 4,800 Oct. 31 3,200 Oct. 31 3,200

Oct. 31 Bal. 1,600



BRIEF EXERCISE 3-7 (a) An adjusting entry will be needed because services have been

provided in November but will not be invoiced until the first of December.

(b) Nov. 30 Accounts Receivable ....................... 455 Service Revenue .......................... 455 (c) No, Ullmann will not have to make a journal entry on December

1 when they invoice Rackets Plus because the November 30th adjusting entry already recorded the amount.

(d) Dec. 9 Cash .................................................. 455 Accounts Receivable .................. 455

BRIEF EXERCISE 3-8 (a) An adjusting entry will be needed because services have been

obtained in November but have not been invoiced until the first of December.

Nov. 30 Maintenance Expense ...................... 455 Accounts Payable ........................ 455 (b) Dec. 9 Accounts Payable ............................ 455 Cash ............................................. 455



BRIEF EXERCISE 3-9 (a) July 28 Salaries Expense.............................. 6,000 Cash ............................................. 6,000 (b) July 31 Salaries Expense.............................. 4,000 Salaries Payable .......................... 4,000 (Monday to Thursday at $1,000 each) (c) Aug. 4 Salaries Expense.............................. 2,000 Salaries Payable ............................... 4,000 Cash ............................................. 6,000

BRIEF EXERCISE 3-10 (a) Note 1: $40,000 × 5% × 5/12 = $833

Note 2: $10,000 × 6% × 1/12 = 50 Total accrued interest $883

(b) May 31/14 Interest Receivable ....................... 883 Interest Revenue ..................... 883

BRIEF EXERCISE 3-11 (a) July 31/13 Equipment ...................................... 50,000 Cash ......................................... 14,000 Note Payable ........................... 36,000 (b) Nov. 30/13 Interest Expense ........................... 540 Interest Payable ...................... 540 ($36,000 × 4.5% × 4/12) (c) Jan. 31/14 Interest Expense*.......................... 270 Interest Payable ............................ 540 Note Payable ................................. 36,000 Cash ........................................ 36,810 *($36,000 × 4.5% × 6/12) – $540



BRIEF EXERCISE 3-12 (a) and (b)

(1) Prepaid expenses: an adjustment is required to record the

cost of the asset that has been used up as an expense, and to show the unexpired costs in the asset accounts. If the adjustment is not recorded, assets are overstated and expenses are understated. Profit and owner’s equity are overstated.

(2) Unearned revenues: an adjusting entry is required to record the revenue that has been earned and to show the liability that remains at the end of the accounting period. If the adjustment is not recorded, liabilities are overstated and revenues are understated. Profit and owner’s equity are understated.

(3) Accrued revenues: an adjusting entry is required to show the

receivable that exists at the balance sheet date, and to record the revenue that has been earned during the period. If the adjustment is not recorded, assets and revenues are understated. Profit and owner’s equity are understated.

(4) Accrued expenses: an adjusting entry is required to record the obligations that exist at the balance sheet date, and to recognize the expenses that apply to the current accounting period. If the adjustment is not recorded, liabilities and expenses are understated. Profit and owner’s equity are overstated.



BRIEF EXERCISE 3-13

WINTERHOLT COMPANY Adjusted Trial Balance

September 30, 2014

Debit

Credit

Cash ............................................................................... Accounts receivable ..................................................... Prepaid rent ................................................................... Equipment ..................................................................... Accumulated depreciation—equipment ...................... Accounts payable ......................................................... Salaries payable ............................................................ Unearned service revenue ........................................... C. Winterholt, capital .................................................... C. Winterholt, drawings ................................................ Service revenue ............................................................ Depreciation expense ................................................... Rent expense ................................................................ Salaries expense ...........................................................

$ 1,100

6,050 780

29,800

21,000

3,100 1,560

12,215 $75,605

$ 6,400 2,890

875 840

16,150

48,450

$75,605

A A A A A L L L C D R E E E

BS BS BS BS BS BS BS BS

SOE SOE

IS IS IS IS



*BRIEF EXERCISE 3-14 (a), (b) and (d)


Jan. 1 825 Jan. 1 0 Dec. 31 190 May 31 3,165 Dec. 31 190

Dec. 31 Bal. 1,015

Dec. 31 Bal. 2,975

(b) May 31 Supplies Expense .......................... 3,165

Cash ........................................... 3,165 (c) The balance sheet will report $1,015 as Supplies as a current

asset. The income statement will report $2,975 as Supplies Expense.

(d) Dec. 31 Supplies .......................................... 190 Supplies Expense...................... 190 (e) The adjusted balances are the same. It does not matter whether

the original entry is recorded to an asset or an expense account, as long as the adjustment is done correctly.



*BRIEF EXERCISE 3-15 (a) Oct. 31 Service Revenue .............................. 1,600

Unearned Revenue ...................... 1,600 $4,800 ÷ 12 = $400 per month Number of months remaining November to February—4 months Amount unearned at October 31: 4 × $400 = $1,600


Mar. 1 4,800 Oct. 31 1,600 Oct. 31 1,600

Oct. 31 Bal. 1,600

Oct. 31 Bal. 3,200

(b) The adjusted balances are the same. It does not matter whether

the original entry is recorded to a liability or a revenue account as long as the adjustment is done correctly.



SOLUTIONS TO EXERCISES

EXERCISE 3-1 (a) When the flight takes place in December. (b) When the home theatre is delivered. (c) As the tickets are used over the season. (d) Over the period of time the loan is outstanding. (e) When the sweater is shipped in September. (f) As each magazine is delivered.

(g) When the gift card is redeemed in January.



EXERCISE 3-2 Adjustment 1:

Basic Analysis

The asset Prepaid Insurance is decreased by $350. The expense Insurance Expense is increased by $350.

Debit/Credit Analysis

Debits increase expenses: debit Insurance Expense $350.

Credits decrease assets: credit Prepaid Insurance $350.

Adjusting Journal Entry

Dec. 31 Insurance Expense 350 Prepaid Insurance 350 To record insurance expired.

Adjustment 2:

Basic Analysis

The asset Supplies is decreased by $300. The expense Supplies Expense is increased by $300.


Debits increase expenses: debit Supplies Expense $300.

Credits decrease assets: credit Supplies $300.


Dec. 31 Supplies Expense 300 Supplies 300 To record supplies used.



EXERCISE 3-2 (Continued) Adjustment 3:

Basic Analysis

One year of depreciation increases the contra asset Accumulated Depreciation—Equipment (which decreases the carrying value of the asset Equipment) by $1,140. The expense Depreciation Expense is increased by $1,140.


Debits increase expenses: debit Depreciation Expense $1,140.

Credits increase contra assets: credit Accumulated Depreciation—Equipment $1,140.


Dec. 31 Depreciation Expense 1,140 Accumulated Depreciation

—Equipment 1,140 To record depreciation of equipment.

Adjustment 4:

Basic Analysis

The liability Unearned Revenue is decreased by $260. The revenue account Service Revenue is increased by $260.


Debits decrease liabilities: debit Unearned Revenue $260.

Credits increase revenues: credit Service Revenue $260.


Dec. 31 Unearned Revenue 260 Service Revenue 260 To record revenue for services provided.




Basic Analysis

The liability account Salaries Payable is increased by $800. The expense Salaries Expense is increased by $800.


Debits increase expenses: debit Salaries Expense $800.

Credits increase liabilities: credit Salaries Payable $800.


Dec. 31 Salaries Expense 800 Salaries Payable 800 To record accrued salaries.

Adjustment 6:

Basic Analysis

The liability account Accounts Payable is increased by $225. The expense Utilities Expense is increased by $225.


Debits increase expenses: debit Utilities Expense $225.

Credits increase liabilities: credit Accounts Payable $225.


Dec. 31 Utilities Expense 225 Accounts Payable 225 To record accrued expenses.




Basic Analysis

The asset account Accounts Receivable is increased by $1,000. The revenue account Service Revenue is increased by $1,000.


Debits increase assets: debit Accounts Receivable $1,000.

Credits increase revenues: credit Service Revenue $1,000.


Dec. 31 Accounts Receivable 1,000 Service Revenue 1,000 To accrued revenue earned but not collected .

Adjustment 8:

Basic Analysis

The liability account Interest Payable is increased by $125. The expense Interest Expense is increased by $125.


Debits increase expenses: debit Interest Expense $125.

Credits increase liabilities: credit Interest Payable $125.


Dec. 31 Interest Expense 125 Interest Payable 125 To record interest on note payable.



EXERCISE 3-3 (a) Transaction 1: (1) Apr. 1 Prepaid Insurance ............................ 4,020 Cash ............................................. 4,020 (2) Dec. 31 Insurance Expense .......................... 3,015 Prepaid Insurance ....................... 3,015 ($4,020 × 9/12 = $3,015) Transaction 2: (1) Aug. 31 Prepaid Rent ..................................... 6,500 Cash ............................................. 6,500 (2) Dec. 31 Rent Expense ................................... 5,200 Prepaid Rent ................................ 5,200 ($6,500 × 4/5 = $5,200) Transaction 3: (1) Sept. 27 Cash .................................................. 3,600 Unearned Revenue ...................... 3,600 (2) Dec. 31 Unearned Revenue ........................... 1,080 Fees Earned ................................. 1,080 ($3,600 × 3/10 = $1,080) Transaction 4: (1) Nov. 30 Prepaid Expenses ............................ 1,500 Cash ............................................. 1,500 (2) Dec. 31 Office Expense ................................. 500 Prepaid Expenses ........................ 500



EXERCISE 3-3 (Continued) Transaction 5: (1) Dec. 15 Cash .................................................. 935 Unearned Gift Certificate Revenue 935 (2) Dec. 31 Unearned Gift Certificate Revenue . 390 Admission Revenue .................... 390 ($935 – $545 = $390) (b)


Apr. 1 4,020 Dec. 31 3,015 Dec. 31 3,015

Dec. 31 Bal. 1,005

Prepaid Rent Rent Expense

Aug. 31 6,500 Dec. 31 5,200 Dec. 31 5,200

Dec. 31 Bal. 1,300

Unearned Revenue Fees Earned

Sep. 27 3,600 Dec. 31 1,080 Dec. 31 1,080

Dec. 31 Bal. 2,520

Prepaid Expenses Office Expense

Nov. 30 1,500 Dec. 31 500 Dec. 31 500

Dec. 31 Bal. 1,000



EXERCISE 3-3 (Continued) (b) (continued)

Unearned Gift Certificate Revenue

Admission Revenue

Dec. 15 935 Dec. 31 390 Dec. 31 390

Dec. 31 Bal. 545



EXERCISE 3-4 (a) Dec. 31 Depreciation Expense..................... 2,720 Accumulated Depreciation— Building ....................................... 2,720 ($68,000 ÷ 25 = $2,720 per year) 31 Depreciation Expense..................... 4,000 Accumulated Depreciation— Vehicles ....................................... 4,000 ($28,000 ÷ 7 = $4,000 per year) 31 Depreciation Expense..................... 3,150 Accumulated Depreciation— Equipment .................................. 3,150 ($12,600 ÷ 4 = $3,150 per year) (b) Building Vehicles Equipment Cost $68,000 $28,000 $12,600 Less: Accumulated

Depreciation * 13,600 4,000 **7,875 Carrying amount $54,400 $24,000 $ 4,725 * $2,720 × 5 = $13,600 **$3,150 × 2.5 = $7,875



EXERCISE 3-5 (a) Dec. 31 Interest Expense .............................. 160 Interest Payable ........................... 160 ($48,000 × 4% × 1/12 = $160) 31 Salaries Expense ............................. 1,500 Salaries Payable .......................... 1,500 ($3,500 × 3/7 = $1,500) 31 Accounts Receivable ....................... 520 Commission Revenue ................. 520 31 Utilities Expense .............................. 425 Accounts Payable ....................... 425 31 Interest Receivable .......................... 90 Interest Revenue ......................... 90 ($6,000 × 6% × 3/12 = $90) (b) Jan. 1 Interest Payable ............................... 160 Cash ............................................. 160 5 Salaries Payable ............................... 1,500 Salaries Expense ............................. 2,000 Cash ............................................. 3,500 7 Cash .................................................. 520 Accounts Receivable .................. 520 9 Accounts Payable ............................ 425 Cash ............................................. 425 Feb. 1 Cash .................................................. 6,120 Interest Receivable ..................... 90 Interest Revenue ($6,000 × 6% × 1/12) 30 Note Receivable ........................... 6,000



EXERCISE 3-6 (a) July 2 Prepaid Rent ..................................... 750 Cash ............................................. 750 10 Supplies ............................................ 200 Cash ............................................. 200 14 Cash .................................................. 850 Accounts Receivable .................. 850 20 Cash .................................................. 700 Unearned Service Revenue ........ 700 25 Cash .................................................. 1,300 Service Revenue .......................... 1,300 (b) July 31 Accounts Receivable ....................... 800 Service Revenue .......................... 800 31 Rent Expense ................................... 250 Prepaid Rent ................................ 250 ($750 ÷ 3 = $250) 31 Supplies Expense ............................ 500 Supplies ....................................... 500 ($1,100 + $200 – $800 = $500) 31 Depreciation Expense..................... 130 Accumulated Depreciation —Equipment ............................... 130 ($9,360 ÷ 6 × 1/12) 31 Unearned Service Revenue ............. 900 Service Revenue .......................... 900



EXERCISE 3-7 July 1/14 Cash ................................................ 75,000 Note Payable ........................... 75,000 Nov. 1/14 Cash ................................................ 42,000 Note Payable ........................... 42,000 Dec. 1/14 Interest Expense ........................... 175 Cash ......................................... 175 ($42,000 × 5% × 1/12) Dec. 31/14 Interest Expense ........................... 1,500 Interest Payable ...................... 1,500 ($75,000 × 4% × 6/12) Dec. 31/14 Interest Expense ........................... 175 Interest Payable ...................... 175 ($42,000 × 5% × 1/12) Jan. 1/15 Interest Payable ............................ 175 Cash ......................................... 175 ($42,000 × 5% × 1/12) Feb. 1/15 Interest Expense*.......................... 175 Note Payable ................................. 42,000 Cash ........................................ 42,175 *($42,000 × 5% × 1/12) Mar. 1/15 Interest Expense*.......................... 500 Interest Payable ............................ 1,500 Note Payable ................................. 75,000 Cash ........................................ 77,000 *($75,000 × 4% × 8/12) – $1,500



EXERCISE 3-8 July 1/14 Note Receivable ............................. 75,000 Cash ......................................... 75,000 Nov. 1/14 Note Receivable ............................. 42,000 Cash ......................................... 42,000 Nov. 30/14 Interest Receivable ....................... 1,250 Interest Revenue ..................... 1,250 ($75,000 × 4% × 5/12) Nov. 30/14 Interest Receivable ....................... 175 Interest Revenue ..................... 175 ($42,000 × 5% × 1/12) Dec. 1/14 Cash ............................................... 175 Interest Receivable ................. 175 ($42,000 × 5% × 1/12) Jan. 1/15 Cash ............................................... 175 Interest Revenue ..................... 175 ($42,000 × 5% × 1/12) Feb. 1/15 Cash ............................................... 42,175 Interest Revenue* .................... 175 Note Receivable ...................... 42,000 *($42,000 × 5% × 1/12) Mar. 1/15 Cash ............................................... 77,000 Interest Revenue* .................... 750 Interest Receivable ................. 1,250 Note Receivable ...................... 75,000 *($75,000 × 4% × 8/12) – $1,250



EXERCISE 3-9 Oct. 31 Accounts Receivable ($9,230 – $8,700) 530 Service Revenue 530 Oct. 31 Supplies Expense ($2,450 – $710) 1,740 Supplies 1,740 Oct. 31 Insurance Expense 1,250 Prepaid Insurance 1,250 Oct. 31 Depreciation Expense 2,275 Accumulated Depreciation —Equipment 2,275 Oct. 31 Salaries Expense 1,125 Salaries Payable 1,125 Oct. 31 Interest Expense 500 Interest Payable 500 Oct. 31 Unearned Service Revenue ($1,600 – $900) 700 Service Revenue 700



EXERCISE 3-10

LANE COMPANY Income Statement

Year Ended October 31, 2014 Revenues Service revenue ........................................................... $46,230 Expenses Depreciation expense ................................... $ 2,275 Insurance expense ........................................ 1,250 Interest expense ............................................ 2,000 Rent expense ................................................. 15,000 Salaries expense ........................................... 18,125 Supplies expense .......................................... 1,740 Total expenses .......................................... 40,390 Profit ................................................................................. $ 5,840

LANE COMPANY Statement of Owner's Equity Year Ended October 31, 2014

E. Lane, capital, Beginning of Year ................................ $ 5,600 Add: Profit .................................................................... 5,840 11,440 Less: Drawings .............................................................. 10,000 E. Lane, capital, End of Year ........................................... $ 1,440



EXERCISE 3-10 (Continued)

LANE COMPANY Balance Sheet

October 31, 2014

Assets Cash .................................................................................. $ 9,100 Accounts receivable ........................................................ 9,230 Prepaid insurance ............................................................ 2,525 Supplies ............................................................................ 710 Equipment .......................................................... $34,100 Less: Accumulated depreciation ..................... 5,800 28,300 Total assets ............................................................. $49,865

Liabilities and Owner's Equity Liabilities Notes payable .............................................................. $40,000 Accounts payable........................................................ 5,900 Interest payable ........................................................... 500 Salaries payable .......................................................... 1,125 Unearned service revenue .......................................... 900 Total liabilities ......................................................... 48,425 Owner's equity E. Lane, capital ............................................................ 1,440 Total liabilities and owner's equity ........................ $49,865



*EXERCISE 3-11 (a) Transaction 1: (1) Apr. 1 Insurance Expense .......................... 4,020 Cash ............................................. 4,020 (2) Dec. 31 Prepaid Insurance ............................ 1,005 Insurance Expense ...................... 1,005 ($4,020 × 3/12 = $1,005) Transaction 2: (1) Aug. 31 Rent Expense ................................... 6,500 Cash ............................................. 6,500 (2) Dec. 31 Prepaid Rent ..................................... 1,300 Rent Expense ............................... 1,300 ($6,500 × 1/5 = $5,200) Transaction 3: (1) Sept. 27 Cash .................................................. 3,600 Fees Earned ................................. 3,600 (2) Dec. 31 Fees Earned ...................................... 2,520 Unearned Revenue ...................... 2,520 ($3,600 × 7/10 = $2,520) Transaction 4: (1) Nov. 30 Office Expense ................................. 1,500 Cash ............................................. 1,500 (2) Dec. 31 Prepaid Expenses ............................ 1,000 Office Expense............................. 1,000



*EXERCISE 3-11 (Continued) (a) (continued) Transaction 5: (1) Dec. 15 Cash .................................................. 935 Admission Revenue .................... 935 (2) Dec. 31 Admission Revenue ......................... 545 Unearned Gift Certificate Revenue 545 (b)


Dec. 31 1,005 Apr. 1 4,020 Dec. 31 1,005

Dec. 31 Bal. 3,015


Dec. 31 1,300 Aug. 31 6,500 Dec. 31 1,300

Dec. 31 Bal. 5,200

Unearned Revenue Fees Earned

Dec. 31 2,520 Sep. 27 3,600 Dec. 31 2,520

Dec. 31 Bal. 1,080

Prepaid Expenses Office Expense

Dec. 31 1,000 Nov. 30 1,500 Dec. 31 1,000

Dec. 31 Bal. 500



*EXERCISE 3-11 (Continued) (b) (continued)

Unearned Gift Certificate Revenue

Admission Revenue

Dec. 31 545 Dec. 15 935 Dec. 31 545

Dec. 31 Bal. 390

(c) Once the adjusting entries are posted, the ending account

balances are the same, regardless of the method used.



*EXERCISE 3-12 (a) Jan. 1 Rent Expense .................................. 1,000 Cash ............................................ 1, 000 2 Insurance Expense ......................... 1,920 Cash ............................................ 1,920 5 Supplies Expense ........................... 1,700 Cash ............................................ 1,700 19 Cash ................................................. 6,100 Service Revenue ......................... 6,100 31 Rent Expense .................................. 1,000 Cash ............................................ 1, 000 (b) 31 Prepaid Insurance ........................... 1,760 Insurance Expense ..................... 1,760 ($1,920 × 11/12) 31 Supplies ........................................... 650 Supplies Expense ....................... 650 31 Service Revenue ............................. 3,600 Unearned Service Revenue ....... 3,600 ($6,100 – $2,500) 31 Prepaid Rent .................................... 1,000 Rent Expense.............................. 1,000



*EXERCISE 3-12 (Continued) (a), (b) and (c)


Jan. 31 1,000 Jan. 1 1,000 Jan. 31 1,000 Jan. 31 1,000

Jan. 31 Bal. 1,000


Jan. 31 1,760 Jan. 2 1,920 Jan. 31 1,760

Jan. 31 Bal. 160


Jan. 31 650 Jan. 5 1,700 Jan. 31 650

Jan. 31 Bal. 1,050


Jan. 31 3,600 Jan. 19 6,100 Jan. 31 3,600

Jan. 31 Bal. 2,500



SOLUTIONS TO PROBLEMS

PROBLEM 3-1A

(a) 1. Jan. 10 Supplies ........................................... 3,400 Cash ............................................ 3,400 2. Feb. 1 Prepaid Insurance ........................... 3,780 Cash ............................................ 3,780 3. Mar. 31 Equipment ....................................... 21,240 Cash ............................................ 21,240 4. Sept. 1 Prepaid Rent .................................... 6,000 Cash ............................................ 6,000 5. Oct. 15 Cash ................................................. 1,800 Unearned Revenue ..................... 1,800 6. Nov. 1 Cash ................................................. 1,725 Unearned Revenue ..................... 1,725 (b) 1.

Basic Analysis

The asset Supplies is decreased by $2,475. The expense Supplies Expense is increased by $2,475.


Debits increase expenses: debit Supplies Expense $2,475.

Credits decrease assets: credit Supplies $2,475.


Dec. 31 Supplies Expense 2,475 Supplies ($3,400 – $925) 2,475 To record supplies used.



PROBLEM 3-1A (Continued) 2.

Basic Analysis

The asset Prepaid Insurance is decreased by $3,465. The expense Insurance Expense is increased by $3,465.


Debits increase expenses: debit Insurance Expense $3,465.

Credits decrease assets: credit Prepaid Insurance $3,465.


Dec. 31 Insurance Expense 3,465 Prepaid Insurance 3,465 To record insurance expired. ($3,780 × 11/12)

3.

Basic Analysis

One year of depreciation increases the contra asset Accumulated Depreciation—Equipment (which decreases the carrying value of the asset Equipment) by $2,655. The expense Depreciation Expense is increased by $2,655.


Debits increase expenses: debit Depreciation Expense $2,655.

Credits increase contra assets: credit Accumulated Depreciation—Equipment $2,655.


Dec. 31 Depreciation Expense 2,655 Accumulated Depreciation

—Equipment 2,655 To record depreciation of equipment. ($21,240 ÷ 6 × 9/12)




Basic Analysis

The asset Prepaid Rent is decreased by $2,000. The expense Rent Expense is increased by $2,000.


Debits increase expenses: debit Rent Expense $2,000.

Credits decrease assets: credit Prepaid Rent $2,000.


Dec. 31 Rent Expense ($6,000 × 4/12) 2,000 Prepaid Rent 2,000 To record truck lease expired.

5.

Basic Analysis

The liability Unearned Revenue is decreased by $1,200. The revenue account Service Revenue is increased by $1,200.


Debits decrease liabilities: debit Unearned Revenue $1,200.

Credits increase revenues: credit Service Revenue $1,200.


Dec. 31 Unearned Revenue ($1,800 × 2/3) 1,200 Service Revenue 1,200 To record revenue for services provided.

6.

Basic Analysis

The liability Unearned Revenue is decreased by $1,150. The revenue account Rent Revenue is increased by $1,150.


Debits decrease liabilities: debit Unearned Revenue $1,150.

Credits increase revenues: credit Rent Revenue $1,150.


Dec. 31 Unearned Revenue ($1,725 × 2/3) 1,150 Rent Revenue 1,150 To record revenue for rent earned.



PROBLEM 3-1A (Continued) (c) 1.


Jan. 10 3,400 Dec. 31 2,475 Dec. 31 2,475

Dec. 31 Bal. 925

2.


Feb. 1 3,780 Dec. 31 3,465 Dec. 31 3,465

Dec. 31 Bal. 315

3.

Equipment

Accumulated Depreciation—Equipment

Mar. 31 21,240 Dec. 31 2,655

Depreciation Expense

Dec. 31 2,655 4.


Sept. 1 6,000 Dec. 31 2,000 Dec. 31 2,000

Dec. 31 Bal. 4,000





Oct. 15 1,800 Dec. 31 1,200 Dec. 31 1,200

Dec. 31 Bal. 600

6.

Unearned Revenue Rent Revenue

Nov. 1 1,725 Dec. 31 1,150 Dec. 31 1,150

Dec. 31 Bal. 575

Taking It Further: Ouellette & Associates cannot avoid recording adjusting journal entries at the end of the fiscal year. Had Ouellette originally recorded items 1 though 4 as expenses and items 5 and 6 as revenues, there would have been a requirement to adjust the asset and liability accounts at the end of the fiscal year in order to arrive at accurate balances.



PROBLEM 3-2A

(a) Dec. 31 Interest Receivable ......................... 67 Interest Revenue ........................ 67 ($10,000 × 8% × 1/12 = $67) 31 Salaries Expense ............................ 3,900 Salaries Payable ......................... 3,900 ($6,500 ÷ 10 × 6 = $3,900) 31 Accounts Receivable ...................... 3,375 Service Revenue ......................... 3,375 31 Utilities Expense ............................. 485 Accounts Payable ...................... 485 31 Interest Expense ............................. 208 Interest Payable .......................... 208 ($25,000 × 5% × 2/12 = $208) (b) Jan. 1 Cash ................................................. 67 Interest Receivable ..................... 67 Jan. 6 Salaries Expense ............................ 2,600* Salaries Payable .............................. 3,900 Cash ............................................ 6,500 ($6,500 ÷ 10 × 4 = $2,600) Jan. 18 Cash ................................................. 3,375 Accounts Receivable ................. 3,375 Jan. 22 Accounts Payable ........................... 485 Cash ............................................ 485 Apr. 30 Interest Expense ............................. 417* Interest Payable .............................. 208 Cash ............................................ 625 *($25,000 × 5% × 4/12) PROBLEM 3-2A (Continued)



Taking It Further: The following revenue accounts would be understated by: Service Revenue ..................................................... $3,375 Interest Revenue ..................................................... 67 $ 3,442 The following expense accounts would be understated by: Interest Expense ..................................................... 208 Salaries Expense .................................................... 3,900 Utilities Expense ..................................................... 485 4,593 Profit would be overstated by ................................ $ 1,151 Assets would be understated by: Interest Receivable ................................................. $ 67 Accounts Receivable .............................................. 3,375 $3,442 Liabilities would be understated by: Interest Payable ..................................................... 208 Accounts Payable .................................................. 485 Salaries Payable .................................................... 3,900 4,593 Owner’s equity would be overstated by ................ $ 1,151



PROBLEM 3-3A

1. (a) Feb. 10 Supplies ........................................... 1,085 Cash ............................................ 1,085 (b) Dec. 31 Supplies Expense ($535 + $1,085 – $370) ..................... 1,250 Supplies ...................................... 1,250 2. (a) Sept. 2 Equipment ....................................... 23,500 Cash ............................................ 23,500 (b) Dec. 31 Depreciation Expense..................... 783 Accumulated Depreciation— Equipment ($23,500 ÷ 10 × 4/12) 783 3. (a) Oct. Cash ($200 × 250) ............................ 50,000 Unearned Revenue ..................... 50,000 (b) Dec. 31 Unearned Revenue ......................... 14,286 Admission Revenue ($50,000 ÷ 7 × 2) .......................... 14,286



PROBLEM 3-3A (Continued) 4. (a) Dec. 30 Wages Expense ............................... 4,200 Cash ............................................ 4,200 (b) Dec. 31 Wages Expense ............................... 700 Wages Payable ($4,200 ÷ 6) ....... 700 (c) Jan. 6 Wages Payable ................................ 700 Wages Expense ($4,200 ÷ 6 × 5)..... 3,500 Cash ............................................ 4,200 5. (a) Dec. 1 Cash ................................................. 350 Rental Revenue .......................... 350 (b) Dec. 31 Accounts Receivable ($500 – $350) 150 Rental Revenue .......................... 150 (c) Jan. 7 Cash ($150 + $500) .......................... 650 Accounts Receivable ................. 150 Rental Revenue .......................... 500 6. (a) June 1 Cash ................................................. 25,100 Note Payable ............................... 25,100 (b) Dec. 31 Interest Expense ............................. 622 Interest Payable ($25,100 × 4.25% × 7/12) ............. 622 (c) Mar. 1 Interest Expense ($25,100 × 4.25% × 2/12) ................. 178 Interest Payable .............................. 622 Note Payable ................................... 25,100 Cash ............................................ 25,900



PROBLEM 3-3A (Continued) 7. (b) Dec. 31 Telephone Expense ........................ 325 Accounts Payable ...................... 325 (c) Jan. 10 Accounts Payable ........................... 325 Cash ............................................ 325 Taking It Further: The three basic reasons that a trial balance may not contain complete or up to date data are:

1. Some events are not journalized daily because it is not efficient to do so.

2. Some costs are not journalized during the accounting period because they expire through the passage of time not daily transactions.

3. Some items may be unrecorded. The adjustment to record supplies used (Item 1) is an example of the first reason above. It is not practical to record an expense every time supplies are used. The adjustment to record depreciation (Item 2) is an example of the second reason above. The cost of a long-lived asset expires through the passage of time. The adjustment to record the telephone bill (Item 7) is an example of the third reason above. The bill was for the month of December but had not been recorded in the recording of daily transactions.



PROBLEM 3-4A

(a) 1. Dec. 31 Advertising Expense ...................... 5,200

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

A650 – $6,000 ÷ 12 = $500 per month for 8 months = ............................................ $4,000 B974 – $9,600 ÷ 24 = $400 per month for 3 months = ............................................ 1,200 $5,200

2. Dec. 31 Depreciation Expense ($30,000 ÷ 5) .................................... 6,000 Accumulated Depreciation-Vehicles 6,000 Dec. 31 Depreciation Expense ($40,000 ÷ 6 × 7/12) .......................... 3,889 Accumulated Depreciation-Vehicles 3,889 3. Dec. 31 Insurance Expense ......................... 11,500

Prepaid Insurance ...................... 11,500

Policy 1 – $12,360 ÷ 24 = $515 per month for 12 months = .......................................... $6,180 Policy 2 – $7,980 ÷ 12 = $665 per month for 8 months = ............................................ 5,320 $11,500

4. Dec. 31 Interest Expense ............................. 2,302

Interest Payable .......................... 2,302 ($85,000 × 6.5% × 5/12 mos. = $2,302)



PROBLEM 3-4A (Continued) (a) (Continued) 5. Dec. 31 Salaries Expense ............................ 3,150 Salaries Payable ......................... 3,150

6 × $750 × 3/6 days = ................... $2,250 3 × $600 × 3/6 days = ................... 900 Total ............................................. $3,150

6. Dec. 31 Unearned Revenue ......................... 69,000

Rent Revenue ............................. 69,000

6 × $4,000 × 2 = ............................. $48,000 3 × $7,000 × 1 = ............................... 21,000 Total rent earned ............................ $69,000

(b) Truck 1, Accumulated depreciation = $6,000 × 3 = $18,000 Carrying amount = $30,000 – $18,000 = $12,000

Truck 2, Accumulated depreciation = $3,889 Carrying amount = $40,000 – $3,889 = $36,111

Taking It Further: The purpose of depreciation is to allocate the cost of a long-lived asset to expense over the useful life of the asset in a systematic and rational manner. Land is not depreciated because it has an unlimited useful life.



PROBLEM 3-5A

(a) Cobalt Co.: Mar. 31/14 Cash ................................................ 100,000 Note Payable (Note 1) ............. 100,000 June 1/14 Cash ................................................ 60,000 Note Payable (Note 2) ............. 60,000 June 30/14 Interest Expense ............................ 1,000 Cash ......................................... 1,000 Note 1: ($100,000 × 4% × 3/12) Sept. 1/14 Cash ................................................ 25,000 Note Payable (Note 3) ............. 25,000 Sept. 30/14 Interest Expense ............................ 1,000 Cash ......................................... 1,000 Note 1: ($100,000 × 4% × 3/12) Sept. 30/14 Interest Expense ............................ 104 Interest Payable ...................... 104 Note 3: ($25,000 × 5% × 1/12) Sept. 30/14 Interest Expense ............................ 900 Interest Payable ...................... 900 Note 2: ($60,000 × 4.5% × 4/12) Oct. 1/14 Interest Payable ............................. 104 Cash ......................................... 104 Note 3: ($25,000 × 5% × 1/12) Nov. 1/14 Interest Expense ............................ 104 Cash ......................................... 104 Note 3: ($25,000 × 5% × 1/12)



PROBLEM 3-5A (Continued) (a) (Continued) Dec. 1/14 Interest Expense ............................ 104 Note Payable (Note 3) .................... 25,000 Cash ......................................... 25,104 Dec. 31/14 Interest Expense ............................ 1,000 Cash ......................................... 1,000 Note 1: ($100,000 × 4% × 3/12) Mar. 1/15 Interest Expense* ........................... 1,125 Interest Payable ............................. 900 Note Payable (Note 2) .................... 60,000 Cash ........................................ 62,025 * Note 2: ($60,000 × 4.5% × 5/12) Mar. 31/15 Interest Expense* ........................... 1,000 Note Payable (Note 1) .................... 100,000 Cash ........................................ 101,000 * Note 1: ($100,000 × 4% × 3/12) (b) Azores Enterprises: Mar. 31/14 Note Receivable (Note 1) ............... 100,000 Cash ......................................... 100,000 June 1/14 Note Receivable (Note 2) ............... 60,000 Cash ......................................... 60,000 June 30/14 Cash ................................................ 1,000 Interest Revenue ..................... 1,000 Note 1: ($100,000 × 4% × 3/12) Sept. 1/14 Note Receivable (Note 2) ............... 25,000 Cash ......................................... 25,000



PROBLEM 3-5A (Continued) (b) (Continued) Sept. 30/14 Cash ................................................ 1,000 Interest Revenue ..................... 1,000 Note 1: ($100,000 × 4% × 3/12) Oct. 1/14 Cash ................................................ 104 Interest Revenue ..................... 104 Note 3: ($25,000 × 5% × 1/12) Oct. 31/14 Interest Receivable ........................ 333 Interest Revenue ..................... 333 Note 1: ($100,000 × 4% × 1/12) Oct. 31/14 Interest Receivable ........................ 1,125 Interest Revenue ..................... 1,125 Note 2: ($60,000 × 4.5% × 5/12) Oct. 31/14 Interest Receivable ........................ 104 Interest Revenue ..................... 104 Note 3: ($25,000 × 5% × 1/12) Nov. 1/14 Cash ................................................ 104 Interest Receivable ................. 104 Note 3: ($25,000 × 5% × 1/12) Dec. 1/14 Cash ................................................ 25,104 Interest Revenue ..................... 104 Note Receivable (Note 3) ........ 25,000 Dec. 31/14 Cash ................................................ 1,000 Interest Receivable ................. 333 Interest Revenue ..................... 667 Note 1: ($100,000 × 4% × 3/12)



PROBLEM 3-5A (Continued) (b) (Continued) Mar. 1/15 Cash ................................................ 62,025 Interest Receivable ................. 1,125 Interest Revenue* .................... 900 Note Receivable (Note 2) ........ 60,000 * Note 2: ($60,000 × 4.5% × 4/12) Mar. 31/15 Cash ................................................ 101,000 Interest Revenue* .................... 1,000 Note Receivable (Note 1) ........ 100,000 * Note 1: ($100,000 × 4% × 3/12) Taking It Further: It is appropriate because the accrued interest payable records the obligation that exists at the balance sheet date and the offsetting expense that applies to the current accounting period. If it is not recorded, both liabilities and expenses are understated and profit and owners equity are overstated.



PROBLEM 3-6A

(a) 1. Aug. 31 Supplies Expense ............................ 3,825 Supplies ($4,455 – $630) .......... 3,825 2. 31 Insurance Expense ($12,660 × 10/12)10,550 Prepaid Insurance .................... 10,550 3. 31 Depreciation Expense ($40,320 ÷ 8). 5,040 Accumulated Depreciation— Equipment ................................. 5,040 31 Depreciation Expense ($421,200 ÷ 10)............................... 42,120 Accumulated Depreciation—Vehicles 42,120 4. 31 Unearned Revenue ($25,000 – $4,500) .......................... 20,500 Service Revenue ....................... 20,500 5. 31 Interest Expense ($162,000 × 6.5% × 1/12) ............... 878 Interest Payable ........................ 878 6. 31 Salaries Expense ............................. 1,635 Salaries Payable ($545 × 3) ...... 1,635 7. 31 Accounts Receivable ...................... 1,350 Service Revenue ....................... 1,350 8. 31 Fuel and Repair Expense ................ 620 Accounts Payable .................... 620



PROBLEM 3-6A (Continued) (b)

CASH

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 9,000

ACCOUNTS RECEIVABLE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 7,080 31 J2 1,350 8,430

PREPAID INSURANCE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 12,660 31 J2 10,550 2,110

SUPPLIES

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 4,455 31 J2 3,825 630



PROBLEM 3-6A (Continued) (b) (Continued)

EQUIPMENT

Date

Explanation

Ref.

Debit

Credit

Balance


ACCUMULATED DEPRECIATION—EQUIPMENT

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 25,200 31 J2 5,040 30,240

VEHICLES

Date

Explanation

Ref.

Debit

Credit

Balance


ACCUMULATED DEPRECIATION—VEHICLES

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 175,500 31 J2 42,120 217,620




ACCOUNTS PAYABLE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 5,700 31 J2 620 6,320

NOTES PAYABLE

Date

Explanation

Ref.

Debit

Credit

Balance


INTEREST PAYABLE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 J2 878 878

SALARIES PAYABLE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 J2 1,635 1,635

UNEARNED REVENUE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 25,000 31 J2 20,500 4,500




J. REYES, CAPITAL

Date

Explanation

Ref.

Debit

Credit

Balance


J. REYES, DRAWINGS

Date

Explanation

Ref.

Debit

Credit

Balance


SERVICE REVENUE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 334,300 31 J2 20,500 354,800 31 J2 1,350 356,150



PROBLEM 3-6A (Continued) (a) (Continued)

DEPRECIATION EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 J2 5,040 5,040 31 J2 42,120 47,160

FUEL AND REPAIR EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 23,972 31 J2 620 24,592

INSURANCE EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 J2 10,550 10,550

INTEREST EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 9,653 31 J2 878 10,531




RENT EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance


SALARIES EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 140,625 31 J2 1,635 142,260

SUPPLIES EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 J2 3,825 3,825



PROBLEM 3-6A (Continued) (c)

REYES RIDES Adjusted Trial Balance

August 31, 2014 ________________________________________________________ Debit Credit Cash .................................................................. $ 9,000 Accounts receivable ........................................ 8,430 Prepaid insurance ............................................ 2,110 Supplies ............................................................ 630 Equipment ........................................................ 40,320 Accumulated depreciation—equipment ......... $ 30,240 Vehicles ............................................................ 421,200 Accumulated depreciation—vehicles ............. 217,620 Accounts payable ............................................ 6,320 Notes payable .................................................. 162,000 Interest payable ............................................... 878 Salaries payable ............................................... 1,635 Unearned revenues.......................................... 4,500 J. Reyes, capital ............................................... 105,075 J. Reyes, drawings .......................................... 141,000 Service revenue ............................................... 356,150 Depreciation expense ...................................... 47,160 Fuel and repair expense .................................. 24,592 Insurance expense .......................................... 10,550 Interest expense .............................................. 10,531 Rent expense ................................................... 22,810 Salaries expense .............................................. 142,260 Supplies expense ............................................ 3,825 $884,418 $884,418



PROBLEM 3-6A (Continued) Taking It Further: The carrying amount of the vehicles at Aug. 31, 2014 is $421,200 − $217,620 = $203,580 or a bit less than half of the purchase price. Since the carrying amount is a bit less than half of the purchase price, the vehicles are a bit more than half depreciated though their useful life estimated at 10 years. Consequently the vehicles are slightly more than 5 years old. The carrying amount of the office equipment at Aug. 31, 2014 is $40,320 − $30,240 = $10,080 or 25% of the purchase price. Since the carrying amount is 25% of the purchase price, the office equipment is 75% depreciated though its useful life estimated at 8 years. Consequently the office equipment is 6 years old (75% × 8 years).



PROBLEM 3-7A

(a) 1. Aug. 31 Insurance Expense ($6,360 × 1/12) 530 Prepaid Insurance ...................... 530 2. 31 Supplies Expense ($995 – $560) .... 435 Supplies ...................................... 435 3. 31 Depreciation Expense [($150,000 ÷ 50) × 1/12] ................... 250 Accumulated Depreciation—Buildings 250 4. 31 Depreciation Expense [($33,000 ÷ 10) × 1/12] ..................... 275 Accumulated Depreciation—Furniture 275 5. 31 Unearned Revenue ......................... 11,000 Rent Revenue ............................. 11,000 [(150 – 40) × $100] 6. 31 Interest Expense ($96,000 × 6.5% × 1/12) ................... 520 Interest Payable .......................... 520 7. 31 Salaries Expense ............................ 1,450 Salaries Payable ......................... 1,450 8. 31 Utilities Expense ............................. 3,420 Accounts Payable ...................... 3,420 9. 31 Accounts Receivable ...................... 1,350 Rent Revenue ............................. 1,350




CASH

Date

Explanation

Ref.

Debit

Credit

Balance


ACCOUNTS RECEIVABLE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 J1 1,350 1,350

PREPAID INSURANCE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 4,240 31 J1 530 3,710

SUPPLIES

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 995 31 J1 435 560




LAND

Date

Explanation

Ref.

Debit

Credit

Balance


BUILDINGS

Date

Explanation

Ref.

Debit

Credit

Balance


ACCUMULATED DEPRECIATION—BUILDINGS

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 47,750 31 J1 250 48,000

FURNITURE

Date

Explanation

Ref.

Debit

Credit

Balance





ACCUMULATED DEPRECIATION—FURNITURE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 12,925 31 J1 275 13,200

ACCOUNTS PAYABLE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 8,500 31 J1 3,420 11,920

UNEARNED REVENUE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 15,000 31 J1 11,000 4,000

SALARIES PAYABLE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 J1 1,450 1,450




INTEREST PAYABLE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 J1 520 520

MORTGAGE PAYABLE

Date

Explanation

Ref.

Debit

Credit

Balance


K. MACPHAIL, CAPITAL

Date

Explanation

Ref.

Debit

Credit

Balance


K. MACPHAIL, DRAWINGS

Date

Explanation

Ref.

Debit

Credit

Balance





RENT REVENUE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 246,150 31 J1 11,000 257,150 31 J1 1,350 258,500

DEPRECIATION EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 5,775 31 J1 250 6,025 31 J1 275 6,300

INSURANCE EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 6,890 31 J1 530 7,420

INTEREST EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 5,720 31 J1 520 6,240




REPAIR EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance


SALARIES EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 153,000 31 J1 1,450 154,450

SUPPLIES EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 4,450 31 J1 435 4,885

UTILITIES EXPENSE

Date

Explanation

Ref.

Debit

Credit

Balance

Aug. 31 Balance 37,600 31 J1 3,420 41,020




HIGHLAND COVE RESORT Adjusted Trial Balance

August 31, 2014 ________________________________________________________

Debit Credit Cash ................................................................... $ 17,520 Accounts receivable ......................................... 1,350 Prepaid insurance ............................................. 3,710 Supplies ............................................................. 560 Land ................................................................... 35,000 Buildings ........................................................... 150,000 Accumulated depreciation—buildings ............ $ 48,000 Furniture ............................................................ 33,000 Accumulated depreciation—furniture ............. 13,200 Accounts payable ............................................. 11,920 Unearned revenue ............................................ 4,000 Salaries payable ................................................ 1,450 Interest payable ................................................ 520 Mortgage payable ............................................. 96,000 K. MacPhail, capital .......................................... 85,000 K. MacPhail, drawings ...................................... 42,735 Rent revenue ..................................................... 258,500 Depreciation expense ....................................... 6,300 Insurance expense ........................................... 7,420 Interest expense ............................................... 6,240 Repair expense ................................................. 14,400 Salaries expense ............................................... 154,450 Supplies expense ............................................. 4,885 Utilities expense ............................................... 41,020 _______ $518,590 $518,590



PROBLEM 3-7A (Continued) (d)

HIGHLAND COVE RESORT Income Statement

Year Ended August 31, 2014

Revenues Rent revenue ............................................... $258,500 Expenses Depreciation expense ................................ $ 6,300 Insurance expense ...................................... 7,420 Interest expense .......................................... 6,240 Repair expense ............................................ 14,400 Salaries expense ......................................... 154,450 Supplies expense ........................................ 4,885 Utilities expense .......................................... 41,020 Total expenses ........................................ 234,715 Profit ................................................................. $ 23,785

HIGHLAND COVE RESORT Statement of Owner's Equity Year Ended August 31, 2014

K. MacPhail, capital, September 1, 2013 ........................ $ 85,000 Add: Profit ........................................................................ 23,785 108,785 Less: Drawings ................................................................ 42,735 K. MacPhail, capital, August 31, 2014 ............................ $ 66,050



PROBLEM 3-7A (Continued) (d) (Continued)

HIGHLAND COVE RESORT Balance Sheet

August 31, 2014

Assets

Cash .................................................................... $ 17,520 Accounts receivable .......................................... 1,350 Prepaid insurance .............................................. 3,710 Supplies .............................................................. 560 Land .................................................................... 35,000 Cottages ............................................................ $150,000 Less: Accumulated depreciation ...................... 48,000 102,000 Furniture ............................................................. $ 33,000 Less: Accumulated depreciation ...................... 13,200 19,800 Total Assets ................................................... $179,940

Liabilities and Owner's Equity

Liabilities Accounts payable........................................................ $ 11,920 Unearned revenue ....................................................... 4,000 Salaries payable .......................................................... 1,450 Interest payable .......................................................... 520 Mortgage payable ........................................................ 96,000 Total liabilities ......................................................... 113,890 Owner's equity K. MacPhail, capital ..................................................... 66,050 Total liabilities and owner's equity ........................ $179,940



PROBLEM 3-7A (Continued) Taking It Further: The balance of the owner’s capital account that appears on the adjusted trial balance on August 31, 2014 does not correspond to the amount of the owner’s capital that appears on the balance sheet at that date. The reason for the difference is that the owner’s capital account in the trial balance does not include the amount of the profit and the drawings taken by the owner for the year ended August 31, 2014.



PROBLEM 3-8A

(a) Nov. 30 Accounts Receivable ...................... 1,100 Service Revenue ......................... 1,100 ($14,750 – $13,650) 30 Supplies Expense ........................... 5,935 Supplies ...................................... 5,935 30 Insurance Expense ......................... 1,600 Prepaid Insurance ...................... 1,600 30 Depreciation Expense..................... 5,500 Accumulated Depreciation— Equipment ................................... 5,500 30 Rent Expense ($7,750 – $7,150) ..... 600 Accounts Payable ...................... 600 30 Interest Expense ............................. 125 Interest Payable .......................... 125 30 Unearned Revenue ......................... 900 Service Revenue ......................... 900 ($7,100 – $6,200) 30 Salaries Expense ............................ 1,475 Salaries Payable ......................... 1,475




QUEEN STREET ADVERTISING AGENCY Income Statement

Year Ended November 30, 2014

Revenues Service revenue ........................................... $60,750 Expenses Depreciation expense ................................. $ 5,500 Insurance expense ...................................... 1,600 Interest expense .......................................... 1,000 Rent expense ............................................... 7,750 Salaries expense ......................................... 14,350 Supplies expense ........................................ 5,935 Total expenses ........................................ 36,135 Profit ................................................................. $24,615

QUEEN STREET ADVERTISING AGENCY Statement of Owner's Equity

Year Ended November 30, 2014

S. Dufferin, capital, December 1, 2013 ........................... $17,800 Add: Profit ........................................................................ 24,615 42,415 Less: Drawings ................................................................ 27,200 S. Dufferin, capital, November 30, 2014 ......................... $15,215




QUEEN STREET ADVERTISING AGENCY

Balance Sheet November 30, 2014

Assets

Cash .................................................................... $ 9,000 Accounts receivable .......................................... 14,750 Supplies .............................................................. 1,265 Prepaid insurance .............................................. 800 Equipment .......................................................... $66,000 Less: Accumulated depreciation ...................... 34,000 32,000 Total Assets .............................................. $57,815

Liabilities and Owner’s Equity

Liabilities Note payable ................................................................ $30,000 Accounts payable........................................................ 4,800 Interest payable ........................................................... 125 Unearned revenue ....................................................... 6,200 Salaries payable .......................................................... 1,475 Total liabilities ......................................................... 42,600 Owner’s Equity S. Dufferin, capital ....................................................... 15,215 Total liabilities and owner’s equity ........................ $57,815



PROBLEM 3-8A (Continued) (c) $30,000 × ? × 8/12 = $1,000 $1,000 interest for 8 months is equivalent to $1,500 interest for

12 months. $1,500 ÷ $30,000 = 5% interest per year (d) Salaries Expense, $14,350 less Salaries Payable on Nov. 30,

2014, $1,475 = $12,875 payment made for fiscal year 2014 salaries. Total Payments, $15,250 – $12,875 = $2,375 Salaries Payable on Nov. 30, 2013

Salaries Payable

Payments 15,250

Nov. 30/13 2,375 Expense 14,350

Nov. 30/14 1,475

Taking It Further: The advertising agency has managed to generate a profit for the year of $24,615. This would appear to be a strong result in comparison to the amount of revenue. Your friend should find out how much effort the owner put into the business to generate this profit, without receiving a salary. The profit might be too low for the amount of the work done. A worrisome figure that appears on the balance sheet is the notes payable balance of $30,000. Depending on when this liability is due to be repaid, the business financial position appears weak. As well, there are considerably more liabilities than there is equity which will make the business less attractive as an investment, and lenders will find it a high risk borrower.



PROBLEM 3-9A

(a) 1. Jan. 31 Insurance Expense ($3,960 × 7/12) ................................. 2,310 Prepaid Insurance ...................... 2,310 2. 31 Supplies Expense ........................... 5,660 Supplies ($6,580 − $920) ............ 5,660 3. 31 Depreciation Expense ($32,350 ÷ 5) 6,470 Accumulated Depreciation— Equipment ................................... 6,470 4. 31 Unearned Revenue ......................... 5,230 Service Revenue ......................... 5,230 5. 31 Interest Expense ($11,000 × 6% × 3/12) ...................... 165 Interest Payable .......................... 165 6. 31 Salaries Expense ............................ 1,315 Salaries Payable ......................... 1,315 7. 31 Accounts Receivable ...................... 2,675 Service Revenue ......................... 2,675 8. 31 Telephone Expense ........................ 170 Accounts Payable ...................... 170




AGOPIAN ENTERPRISES Adjusted Trial Balance

January 31, 2014

Debit Credit

Cash ................................................................... $ 4,970 Accounts receivable ($14,540 + $2,675) .......... 17,215 Supplies ($6,580 − $5,660) ................................ 920 Prepaid insurance ($3,960 − $2,310) ................ 1,650 Equipment ......................................................... 32,350 Accumulated depreciation— equipment ($12,940 + $6,470) ......................... $ 19,410 Notes payable ................................................... 11,000 Accounts payable ($7,760 + $170) ................... 7,930 Interest payable ................................................ 165 Salaries payable ................................................ 1,315 Unearned revenue ($7,480 − $5,230) ............... 2,250 R. Scholz, capital .............................................. 18,320 R. Scholz, drawings .......................................... 119,000 Service revenue ($214,500 + $2,675 + $5,230) ........................... 222,405 Depreciation expense ....................................... 6,470 Insurance expense ........................................... 2,310 Interest expense ............................................... 165 Rent expense .................................................... 20,750 Salaries expense ($66,950 + $1,315) ................ 68,265 Supplies expense ............................................. 5,660 Telephone expense ($2,900 + $170) ................ 3,070 _______ $282,795 $282,795




AGOPIAN ENTERPRISES Income Statement

Year Ended January 31, 2014

Revenues Service revenue ............................................ $222,405 Expenses Depreciation expense .................................. $ 6,470 Insurance expense ....................................... 2,310 Interest expense ........................................... 165 Rent expense ................................................ 20,750 Salaries expense .......................................... 68,265 Supplies expense ......................................... 5,660 Telephone expense ...................................... 3,070 Total expenses ......................................... 106,690 Profit .................................................................. $115,715

AGOPIAN ENTERPRISES Statement of Owner's Equity Year Ended January 31, 2014

E. Agopian, capital, February 1, 2013 ............................. $ 18,320 Add: Profit ........................................................................ 115,715 134,035 Less: Drawings ................................................................ 119,000 E. Agopian, capital, January 31, 2014 ............................ $ 15,035



PROBLEM 3-9A (Continued) (c) (Continued)

AGOPIAN ENTERPRISES

Balance Sheet January 31, 2014

Assets

Cash ................................................................... $ 4,970 Accounts receivable ......................................... 17,215 Supplies ............................................................. 920 Prepaid insurance ............................................. 1,650 Equipment ......................................................... $32,350 Less: Accumulated depreciation ..................... 19,410 12,940 Total Assets ............................................. $37,695


Liabilities Notes payable .............................................................. $11,000 Accounts payable........................................................ 7,930 Interest payable ........................................................... 165 Salaries payable .......................................................... 1,315 Unearned revenue ....................................................... 2,250 Total liabilities ......................................................... 22,660 Owner's equity E. Agopian, capital ...................................................... 15,035 Total liabilities and owner's equity ........................ $37,695



PROBLEM 3-9A (Continued) Taking It Further: Agopian Enterprises is performing very well. Profit is positive and expenses represent only 48% of total revenues. A negative indicator in these financial statements is the amount of drawings the owner has taken. This amount exceeds the profit for the year. The financial position of Agopian Enterprises is also positive, total cash and accounts receivable ($22,185) exceeds liabilities (excluding unearned revenues) of $20,410. As long as all accounts receivable are collected there should be adequate cash to pay all outstanding liabilities. If Agopian Enterprises wishes to purchase additional assets, the company may require additional cash. This will have to be obtained from E. Agopian by additional investment of cash or bank financing will have to be obtained.



*PROBLEM 3-10A

(a) 1. Jan. 15 Supplies ........................................... 960 Cash ............................................ 960 Apr. 1 Prepaid Insurance ........................... 3,090 Cash ............................................ 3,090 Nov. 1 Cash ................................................. 1,750 Unearned Revenue ..................... 1,750 2. Dec. 31 Supplies Expense ($960 − $245) .... 715 Supplies ...................................... 715 Dec. 31 Insurance Expense ........................ 2,318 Prepaid Insurance ...................... 2,318 ($3,090 ÷ 12 × 9) Dec. 31 Unearned Revenue ......................... 1,050 Service Revenue ($1,750 × 3/5).. 1,050 3.


Jan. 15 960 Dec.31 715 Dec. 31 715

Dec. 31 Bal. 245


Apr. 1 3,090 Dec. 31 2,318

Dec. 31 2,318

Dec. 31 Bal. 772



*PROBLEM 3-10A (Continued) (a) (Continued)


Nov. 1 1,750 Dec. 31 1,050 Dec. 31 1,050

Dec. 31 Bal. 700

(b) 1. Jan. 15 Supplies expense ............................ 960 Cash ............................................ 960 Apr. 1 Insurance Expense ......................... 3,090 Cash ............................................ 3,090 Nov. 1 Cash ................................................. 1,750 Service Revenue ......................... 1,750 2. Dec. 31 Supplies ........................................... 245 Supplies Expense ....................... 245 Dec. 31 Prepaid Insurance ($3,090 ÷ 12 × 3) 772 Insurance Expense ..................... 772 Dec. 31 Service Revenue ($350 × 2) ............ 700 Unearned Revenue ..................... 700



*PROBLEM 3-10A (Continued) (b) (Continued) 3.


Dec. 31 245 Jan. 15 960 Dec. 31 245

Dec. 31 Bal. 715


Dec. 31 772 Apr. 1 3,090 Dec. 31 772

Dec. 31 Bal. 2,318


Dec. 31 700 Nov. 1 1,750 Dec. 31 700

Dec. 31 Bal. 1,050

Taking It Further: The adjusting entries required are different but the ending balances in all accounts are the same.



*PROBLEM 3-11A

(a) 1. Dec. 31 Prepaid Insurance ($4,020 × 1/12) ........... 335 Insurance Expense .............................. 335 2. 31 Interest Expense ($44,000 × 5% × 10/12) .............................. 1,833 Interest Payable ................................... 1,833 3. 31 Depreciation Expense ($80,000 ÷ 8 × 10/12) ................................. 8,333 Accumulated Depreciation— Equipment ............................................ 8,333 4. 31 Supplies .................................................... 785 Supplies Expense ................................ 785 5. 31 Service Revenue ....................................... 2,550 Unearned Revenue .............................. 2,550 6. 31 Accounts Receivable ............................... 1,275 Service Revenue .................................. 1,275 7. 31 Prepaid Rent ............................................. 600 Rent Expense ....................................... 600



*PROBLEM 3-11A (Continued) (b)

WINTER DESIGNS Adjusted Trial Balance

December 31, 2014

Debit Credit Cash ................................................................... $16,600 Accounts receivable ($26,000 + $1,275) .......... 27,275 Supplies ............................................................. 785 Prepaid insurance ............................................. 335 Prepaid rent ....................................................... 600 Equipment ......................................................... 80,000 Accumulated depreciation—equipment .......... $ 8,333 Note payable ..................................................... 44,000 Accounts payable ............................................. 14,820 Interest payable ................................................ 1,833 Unearned revenue ............................................ 2,550 K. Brownsey, capital ......................................... 60,000 K. Brownsey, drawings .................................... 40,000 Service revenue ($121,400 + $1,275 − $2,550) ................... 120,125 Depreciation expense ....................................... 8,333 Insurance expense ($4,020 − $335) ................. 3,685 Interest expense ............................................... 1,833 Rent expense ($7,800 − $600) .......................... 7,200 Salaries expense ............................................... 59,900 Supplies expense ($5,900 − $785) ................... 5,115 _______ $251,661 $251,661 Taking It Further: The required adjusting journal entries would be different but the adjusted balances would remain the same.



CONTINUING COOKIE CHRONICLE

(a)

GENERAL JOURNAL

J2

Date

Account Titles and Explanation

Debit

Credit

Dec. 31 Supplies Expense ..................................... 103 Supplies ................................................ 103 ($198 − $95) 31 Accounts Receivable ................................ 175 Fees Earned .......................................... 175 31 Salaries Expense ...................................... 48 Salaries Payable ................................... 48 (4 hours x $12) 31 Depreciation Expense .............................. 58 Accumulated Depreciation—Equipment 58 [($550 ÷ 36 months x 2) + ($1,000 ÷ 36 months)] 31 Interest Expense ....................................... 8 Interest Payable .................................... 8 ($3,000 × 3% × 1/12)

Cash

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 Balance 2,954



CONTINUING COOKIE CHRONICLE (Continued) (a) (Continued)

Accounts Receivable

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 Balance 500 31 J2 175 675

Supplies

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 Balance 198 31 J2 103 95

Equipment

Date

Explanation

Ref.

Debit

Credit

Balance



Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 J2 58 58

Accounts Payable

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 Balance 76




Unearned revenue

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 Balance 125

Salaries Payable

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 J2 48 48

Interest Payable

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 J2 8 8

Notes Payable

Date

Explanation

Ref.

Debit

Credit

Balance


N. Koebel, Capital

Date

Explanation

Ref.

Debit

Credit

Balance





Fees Earned

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 Balance 1,050 Dec. 31 J2 175 1,225

Advertising Expense

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 325

Telephone Expense

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 174

Supplies Expense

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 J2 103 103

Salaries Expense

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 J2 48 48





Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 J2 58 58

Interest Expense

Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 J2 8 8



CONTINUING COOKIE CHRONICLE (Continued) (b)

COOKIE CREATIONS Adjusted Trial Balance

December 31, 2013

Debit Credit Cash .................................................................... $2,954 Accounts receivable .......................................... 675 Supplies .............................................................. 95 Equipment .......................................................... 1,550 Accumulated depreciation—equipment ........... $ 58 Accounts payable .............................................. 76 Unearned revenue ............................................. 125 Salaries payable ................................................. 48 Interest payable ................................................. 8 Note payable ...................................................... 3,000 N. Koebel, capital ............................................... 1,450 Fees earned ........................................................ 1,225 Advertising expense .......................................... 325 Telephone expense............................................ 174 Supplies expense .............................................. 103 Salaries expense ................................................ 48 Depreciation expense ........................................ 58 Interest expense ................................................ 8 ______ Totals ............................................................. $5,990 $5,990



CONTINUING COOKIE CHRONICLE (Continued) (c)

COOKIE CREATIONS Income Statement

Two Months Ended December 31, 2013 Revenues Fees earned ............................................................ $1,225 Expenses Advertising expense .............................................. $325 Telephone expense ................................................ 174 Supplies expense ................................................... 103 Depreciation expense ............................................ 58 Salaries expense .................................................... 48 Interest expense ..................................................... 8 716 Profit ............................................................................ $509 [Note: Statement of Owner’s Equity is not required – shown for information purposes only.]

COOKIE CREATIONS Statement of Owner's Equity

Two Months Ended December 31, 2013 N. Koebel, capital, November 1 ........................................... $ 0 Add: Investment ................................................................... 1,450 Profit ............................................................................ 509 N. Koebel, capital, December 31 ......................................... $1,959



CONTINUING COOKIE CHRONICLE (Continued) (c) (Continued) [Note: Balance Sheet is not required – shown for information purposes only.]

COOKIE CREATIONS Balance Sheet

December 31, 2013

Assets Cash .................................................................... $2,954 Accounts receivable .......................................... 675 Supplies .............................................................. 95 Equipment .......................................................... $1,550 Less: Accumulated depreciation. .................... 58 1,492 Total assets ................................................... $5,216

Liabilities and Owner's Equity Liabilities Notes payable .................................................................. $3,000 Accounts payable............................................................ 76 Unearned revenue ........................................................... 125 Salaries payable .............................................................. 48 Interest payable ............................................................... 8 Total liabilities ............................................................. 3,257 Owner's equity N. Koebel, capital ............................................................ 1,959 Total liabilities and owner's equity ............................ $5,216 (d) Yes, Cookie Creations was profitable in the two months of

November and December. It has a profit of $509 which is approximately 42% of the revenue earned in the period. It is better to measure profitability after preparing and posting the adjusting journal entries instead of before. By implementing accrual accounting, a better measure of the amount of revenue and expenses for the accounting period is achieved, and consequently, a fairer report of profit performance.



CONTINUING COOKIE CHRONICLE (Continued) (e) Natalie has $2,954 in cash available to her. The amount is

different because cash includes transactions that do not affect profit directly such as the $3,000 loan from her grandmother and the unearned revenue. Profit also includes items for which cash has not yet been received or paid such as accrued revenues and expenses. The company’s balance sheet shows that Cookie Creations has total liabilities of $3,257. All of these liabilities will be due in the coming year. Cookie Creations currently has only $2,954 of cash, but the company also has $675 in outstanding accounts receivable, totalling $3,629. Even though the company has slightly more cash and receivables than liabilities, Natalie may have to borrow additional money from her grandmother in order to purchase additional supplies and equipment to grow her business. She also has not taken any money out of the business as withdrawals to pay her living expenses.



CUMULATIVE COVERAGE: CHAPTERS 1 TO 3

(a), (c), and (e)

Cash

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 1 Balance 1,880 1 J102 10,000 11,880 8 J102 1,100 10,780 10 J102 1,200 11,980 12 J102 3,400 15,380 20 J102 4,500 10,880 22 J102 1,000 9,880 25 J102 1,200 8,680 29 J102 700 9,380

Accounts Receivable

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 1 Balance 3,720 10 J102 1,200 2,520 27 J102 900 3,420

Prepaid Rent

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 22 J102 500 500



CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a), (c), and (e) (Continued)

Supplies

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 1 Balance 800 17 J102 1,500 2,300 30 Adj. entry J103 1,020 1,280

Equipment

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 1 Balance 15,000 30 J102 3,000 18,000


Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 1 Balance 1,500 30 Adj. entry J103 250 1,750

Accounts Payable

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 1 Balance 3,100 17 J102 1,500 4,600 20 J102 4,500 100 30 J102 3,000 3,100




Unearned Revenue

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 1 Balance 400 29 J102 700 1,100 30 Adj. entry J103 650 450

Salaries Payable

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 1 Balance 700 8 J102 700 0 30 Adj. entry J103 775 775

Interest Payable

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 30 Adj. entry J103 42 42

Notes Payable

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 1 J102 10,000 10,000

R. Pitre, Capital

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 1 Balance 15,700




Service Revenue

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 12 J102 3,400 3,400 27 J102 900 4,300 30 Adj. entry J103 650 4,950


Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 30 Adj. entry J103 250 250

Interest Expense

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 30 Adj. entry J103 42 42

Rent Expense

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 22 J102 500 500




Salaries Expense

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 8 J102 400 400 25 J102 1,200 1,600 30 Adj. entry J103 775 2,375

Supplies Expense

Date

Explanation

Ref.

Debit

Credit

Balance

Sep. 30 Adj. entry J103 1,020 1,020



CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (b)

GENERAL JOURNAL

J102

Date


Debit

Credit

Sep. 1 Cash ........................................................... 10,000 Notes Payable ....................................... 10,000 8 Salaries Payable........................................ 700 Salaries Expense ...................................... 400 Cash ...................................................... 1,100 10 Cash ........................................................... 1,200 Accounts Receivable ........................... 1,200 12 Cash ........................................................... 3,400 Service Revenue ................................... 3,400 17 Supplies ..................................................... 1,500 Accounts Payable ................................ 1,500 20 Accounts Payable ..................................... 4,500 Cash ...................................................... 4,500 22 Rent Expense ............................................ 500 Prepaid Rent .............................................. 500 Cash ...................................................... 1,000 25 Salaries Expense ...................................... 1,200 Cash ...................................................... 1,200 27 Accounts Receivable ................................ 900 Service Revenue ................................... 900 29 Cash ........................................................... 700 Unearned Revenue ............................... 700



CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (b) (Continued)

GENERAL JOURNAL

J102

Date


Debit

Credit

30 Equipment ................................................. 3,000 Accounts Payable ................................ 3,000



CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (d) and (f)

PITRE EQUIPMENT REPAIR

Unadjusted and Adjusted Trial Balances September 30, 2014

________________________________________________________ Unadjusted Adjusted Dr. Cr. Dr. Cr. Cash $ 9,380 $ 9,380 Accounts receivable 3,420 3,420 Prepaid Rent 500 500 Supplies 2,300 1,280 Equipment 18,000 18,000 Accumulated depreciation —equipment $ 1,500 $ 1,750 Accounts payable 3,100 3,100 Unearned revenue 1,100 450 Salaries payable 0 775 Interest payable 0 42 Notes payable 10,000 10,000 R. Pitre, capital 15,700 15,700 Service revenue 4,300 4,950 Depreciation expense 0 250 Interest expense 0 42 Rent expense 500 500 Salaries expense 1,600 2,375 Supplies expense 0 ______ 1,020 _ _____ $35,700 $35,700 $36,767 $36,767



CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (e)

GENERAL JOURNAL

J103

Date


Debit

Credit

1. Sep. 30 Supplies Expense .............................. 1,020 Supplies ($2,300 – $1,280) ............ 1,020 2. 30 Salaries Expense................................ 775 Salaries Payable ............................ 775 3. 30 Depreciation Expense ........................ 250 Accumulated Depreciation —Equipment .................................. 250 [($15,000 ÷ 5 years) × 1/12] 4. 30 Unearned Revenue ............................. 650 Service Revenue ($400 + $700 – $450) 650 5. 30 Interest Expense ($10,000 × 5% × 1/12) 42 Interest Payable ............................. 42



CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (g)

PITRE EQUIPMENT REPAIR Income Statement

Month Ended September 30, 2014 Revenues

Service revenue........................................... $4,950 Expenses

Depreciation expense ................................. $ 250 Interest expense .......................................... 42 Rent expense ............................................... 500 Salaries expense ......................................... 2,375 Supplies expense ........................................ 1,020 Total expenses ......................................... 4,187

Profit .................................................................. $ 763

PITRE EQUIPMENT REPAIR Statement of Owner's Equity

Month Ended September 30, 2014

R. Pitre, capital, September 1, 2014 .................................. $15,700 Add: Profit ........................................................................ 763 R. Pitre, capital, September 30, 2014 ................................ $16,463



CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (g) (Continued)

PITRE EQUIPMENT REPAIR Balance Sheet

September 30, 2014

Assets Cash .................................................................... $ 9,380 Accounts receivable .......................................... 3,420 Prepaid rent ........................................................ 500 Supplies .............................................................. 1,280 Equipment .......................................................... $18,000 Less: Accumulated depreciation. .................... 1,750 16,250 Total assets ................................................... $30,830


Liabilities Accounts payable........................................................ $ 3,100 Salaries payable .......................................................... 775 Interest payable ........................................................... 42 Unearned revenue ....................................................... 450 Notes payable .............................................................. 10,000 Total liabilities ......................................................... 14,367 Owner's equity R. Pitre, capital ............................................................ 16,463 Total liabilities and owner's equity ........................ $30,830



BYP 3-1 COLLABORATIVE LEARNING ACTIVITY

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



BYP 3-2 COMMUNICATION ACTIVITY

Memorandum

To: From: Student Date: Re: Cash versus accrual basis of accounting for profit The accrual basis of calculating profit recognizes revenues as they are earned and expenses when they are incurred. The cash basis of calculating profit recognizes revenues when cash is received and expenses when cash is paid. The accrual basis of calculating profit is a better measure of performance than the cash method of calculating profit because earnings reflect economic events in the period that they occur. Using the revenue and expense recognition principles ensures that the effect of events are recorded in the same period and provides a better measure of a company’s economic performance. It is possible for management to manipulate profit using both the cash basis and accrual basis of accounting. Using the cash basis, profit can be manipulated by changing the timing of payments, for example deferring payment of expenses. Using the accrual basis, profits can be manipulated by changing estimates in calculating expenses, for example management can increase profit by increasing the useful life of long-lived assets.



BYP 3-3 ETHICS CASE

(a) The stakeholders in this situation are:

Carole Chiasson, controller

The president of Die Hard Company

The shareholders of Die Hard Company

The external users of Die Hard’s financial information (b) 1. It is unethical for the president to place pressure on Carole to

misstate profits by requesting her to prepare incorrect adjusting entries.

2. It is a common occurrence for adjusting entries to be dated

as of the balance sheet date although the entries are prepared at a later date. It is impractical to expect that all adjusting entries could be prepared at December 31. Carole did nothing unethical by dating the adjusting entries December 31.

(c) Carole should not “aggressively” accrue revenues and defer

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



BYP 3-4 ”PERSONAL FINANCIAL LITERACY” ACTIVITY

(a) Chapter 1 introduced the concept and definition of an asset as a

resource owned and controlled by the entity that is capable of producing future services or benefits. The benefits are generally focussed around the production of revenue to make profits and increase the equity (wealth) of the owner(s).

While education costs resemble payments made by a business

as an investment toward the production of future earning of revenue, there is too much uncertainty to record these costs as assets. Education is generally acquired by a person in the hopes of obtaining knowledge that will be useful in earning employment or other income. This advantage is non transferable and the likelihood of realizing the future production of revenue is uncertain and cannot be reasonably measured. Consequently it should be treated as an expense. When a business spends money training its employees, that cost is also expensed.

(b) The program of study chosen by a student might enhance the

likelihood of earning income if the program of study will help the student in obtaining a profession or a job that is in high demand. However, the risk that education will not lead to better earning potential for the student remains too strong to warrant treating these costs as an asset. Consequently, we would still conclude that education costs should be expensed.

(c) Cost-benefit analysis is unconsciously applied to purchases or

expenditures made by individuals. But the benefit received may be consumed in the present. An example would be the rest and relaxation obtained from a vacation to Hawaii. It is only when the expenditure will result in a future benefit that it can be recorded as an asset.



BYP3-4 (Continued) (c) (Continued) As an education may result in a future benefit, it is more

reasonable to consider recording the cost of your education as an asset than the cost of a vacation that doesn’t have a future benefit. But as already discussed, the benefit is still too uncertain to record your education costs as an asset.

(d) When applying for a loan, an applicant will present to the

financial institution, a list of assets, a list of debts and an employment history to demonstrate an ability to repay the loan. If the assets listed are understated, the loan application might be unsuccessful. If the assets presented to the bank are overstated and the expenses understated, the bank might be more receptive to the loan application. However, if it is later determined that you falsified your application then this could result in the bank calling your loan or in damage to your credit rating.



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