fap chapter 3 solution manual

Chapter 3Adjusting Accounts and Preparing Financial Statements QUESTIONS 1. The cash basis of accounting reports revenues when cash is received while the accrual basis reports revenues when they are earned. The cash basis reports expenses when cash is paid while the accrual basis reports expenses when they are incurred (and matched with revenues they generated). 2. The accrual basis of accounting generally provides a better indication of company performance and financial condition than does the cash basis. Also, the accrual basis increases the comparability of financial statements from one period to the next. Thus, business decision makers generally prefer the accrual basis. 3. Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year. 4. A prepaid expense is reported as an asset on the balance sheet. 5. Depreciable plant assets (such as equipment, buildings, and machinery) lead to adjustments for depreciation. 6. The Accumulated Depreciation contra account is used for depreciation. It provides financial statement users with additional information about the relative age of the assets. Without the contra account information, the reader would not be able to tell whether the assets are new or in need of replacement. 7. An unearned revenue is reported as a liability on the balance sheet. 8. An accrued revenue is revenue that is earned but is not yet received in cash (and/or other assets) and the customer has not been billed prior to the end of the period. Therefore, end-of-period adjustments are made to record accrued revenue. Examples are interest income that has been earned but not collected and revenues from services performed that are neither collected nor billed. 9. If prepaid expenses are initially recorded with debits to expense accounts, then the prepaid expenses asset accounts are debited in the adjusting entries. 10. For Krispy Kreme, the two accounts of Prepaid Expenses and Property and Equipment require adjusting entries. The expense account(s) related to the prepaid account and the depreciation expense account would be understated on the income statement if Krispy Kreme fails to adjust these two asset accounts. If the adjusting entries are not made, net income would be overstated. Note: Students might also correctly identify accounts receivable, deferred income taxes and intangible assets as needing adjustment. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 119 11. In addition to prepayments, Tastykake must make adjusting entries to Property, Plant and Equipment, Deferred Income Taxes, Accrued Payroll and Employee Benefits, and possibly other assets and liabilities such as Receivables (for bad debts). 12. The Accrued Wages Expense would be reported as part of “Accrued Expenses and Other Liabilities” on Harley-Davidson’s balance sheet. QUICK STUDIES Quick Study 3-1 (10 minutes) a. b. c. d. e. UR PE AE AR PE Unearned revenue Prepaid expenses (Depreciation) Accrued expenses Accrued revenue Prepaid expenses Quick Study 3-2 (10 minutes) a. Insurance Expense....................................................... Prepaid Insurance................................................. 1,800 1,800 To record 6-month insurance coverage expired. b. Supplies Expense......................................................... Supplies.................................................................. 2,700 2,700 To record supplies used during the year. ($1,000 + $3,000 – [?] = $1,300) Quick Study 3-3 (10 minutes) a. Depreciation Expense—Equipment............................ Accumulated Depreciation—Equipment............. 5,000 5,000 To record depreciation expense for the year. ($30,000 - $5,000) / 5 years = $5,000 b. No depreciation adjustments are made for land as it is expected to last indefinitely. ©McGraw-Hill Companies, Inc., 2005 120 Fundamental Accounting Principles, 17th Edition Quick Study 3-4 (15 minutes) a. Unearned Revenue........................................................ Legal Revenue....................................................... 15,000 15,000 To recognize legal revenue earned (20,000 x 3/4). b. Unearned Subscription Revenue................................ Subscription Revenue........................................... 2,400 2,400 To recognize subscription revenue earned. [100 x ($48 / 12 month) x 6 months] Quick Study 3-5 (10 minutes) Salaries Expense........................................................... Salaries Payable.................................................... 400 400 To record salaries incurred but not yet paid. [One student earns, $100 x 4 days, M-R] Quick Study 3-6 (15 minutes) Accounts Debited and Credited Debit Unearned Revenue Credit Revenue Earned Financial Statement Balance Sheet Income Statement b. Debit Credit Depreciation Expense Accumulated Depreciation Income Statement Balance Sheet c. Debit Credit Wages Expense Wages Payable Income Statement Balance Sheet d. Debit Credit Accounts Receivable Revenue Earned Balance Sheet Income Statement e. Debit Credit Insurance Expense Prepaid Insurance Income Statement Balance Sheet a. Quick Study 3-7 (10 minutes) Adjusting entry Debit Credit 1. Accrue salaries expense f d 2. Adjust the Unearned Services Revenue account e g ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 121 to recognize earned revenue 3. Record the earning of services revenue for which cash will be received the following period a g ©McGraw-Hill Companies, Inc., 2005 122 Fundamental Accounting Principles, 17th Edition Quick Study 3-8 (10 minutes) The answer is c. Explanation: The debit balance in Prepaid Insurance was reduced by $400, implying a $400 debit to Insurance Expense. The credit balance in Interest Payable increased by $800, implying an $800 debit to Interest Expense. Quick Study 3-9 (10 minutes) Cash Accounting: Revenues (cash receipts)....................................................... $33,000 Expenses (cash payments: $22,500 - $2,250 + $3,750)....... 24,000 Net income .............................................................................. $ 9,000 Accrual Accounting: Revenues (earned) ................................................................. $39,000 Expenses (incurred) ............................................................... 22,500 Net income............................................................................... $16,500 Quick Study 3-10 (15 minutes) The answer is 2. Explanation: Insurance premium error: Understates expenses (and overstates assets) by........... Accrued salaries error: Understates expenses (and understates liabilities) by.... Combination of errors: Understates expenses by................................................... Overstates assets by.......................................................... Understates liabilities by.................................................... $1,600 1,000 $2,600 $1,600 $1,000 Quick Study 3-11 (10 minutes) Profit margin = $37,925 / $390,000 = 9.7% ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 123 Interpretation: For every one dollar that Yang Company records as revenue, it earns 9.7 cents in net income. Yang’s 9.7% is markedly lower than competitors’ average profit margin of 15%—it must improve performance. Quick Study 3-12A (5 minutes) The answer is d. ©McGraw-Hill Companies, Inc., 2005 124 Fundamental Accounting Principles, 17th Edition EXERCISES Exercise 3-1 (15 minutes) 1. 2. 3. B. E. C. 4. 5. 6. F D A. Exercise 3-2 (30 minutes) a. Unearned Fee Revenue................................................. Fee Revenue............................................................... 10,000 10,000 To record earned portion of fee received in advance. b. Wages Expense.............................................................. Wages Payable........................................................... 9,000 9,000 To record wages accrued but not yet paid. c. Depreciation Expense—Equipment.............................. Accumulated Depreciation—Equipment.................. 19,127 19,127 To record depreciation expense for the year. d. Office Supplies Expense............................................... Office Supplies**......................................................... 5,242 5,242 To record office supplies used ($480 + $5,349 - $587). e. Insurance Expense........................................................ Prepaid Insurance*..................................................... 2,800 2,800 To record insurance coverage expired ($5,000 - $2,200). f. Interest Receivable....................................................... Interest Revenue....................................................... 750 750 To record interest earned but not yet received. g. Interest Expense........................................................... Interest Payable........................................................ 3,500 3,500 To record interest incurred but not yet paid. Notes: Beg. Bal. Prepaid Insurance* 5,000 ? End. Bal. 2,200 Beg. Bal. Purch. Used End. Bal. Office Supplies** 480 5,349 ? 587 Used ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 125 Exercise 3-3 (25 minutes) a. Depreciation Expense—Equipment.............................. Accumulated Depreciation—Equipment.................. To record depreciation expense for the year. 16,000 b. Insurance Expense........................................................ Prepaid Insurance*..................................................... To record insurance coverage that expired ($7,000 - $1,040). 5,960 c. Office Supplies Expense............................................... Office Supplies**......................................................... To record office supplies used ($300 + $2,680 - $354). 2,626 d. Unearned Fee Revenue................................................. Fee Revenue............................................................... To record earned portion of fee received in advance ($10,000 x 1/2). 5,000 e. Insurance Expense........................................................ Prepaid Insurance...................................................... To record insurance coverage that expired. 4,600 Wages Expense.............................................................. Wages Payable........................................................... To record wages accrued but not yet paid. 4,000 f. 16,000 5,960 2,626 5,000 4,600 4,000 Notes: Prepaid Insurance* Bal. Bal. 7,000 ? End. Bal. 1,040 Used Office Supplies** Beg. Bal. 300 Purch. 2,680 ? End. Bal. 354 Used ©McGraw-Hill Companies, Inc., 2005 126 Fundamental Accounting Principles, 17th Edition Exercise 3-4 (15 minutes) a. Adjusting entry: 2005 Dec. 31 Wages Expense................................................ Wages Payable.............................................. 500 500 To record accrued wages for one day. (5 workers x $100) b. Payday entry: 2006 Jan. 4 Wages Expense................................................ Wages Payable.................................................. Cash............................................................... 1,500 500 2,000 To record accrued and current wages. Exercise 3-5 (15 minutes) a. b. c. d. $1,650 $5,700 $10,080 $1,375 Proof: (a) (b) (c) (d) Supplies available – prior year-end....... $ 300 $1,600 $ 1,360 $1,375 Supplies purchased in current year....... 2,100 5,400 10,080 6,000 Total supplies available........................... 2,400 7,000 11,440 7,375 Supplies available – current year-end... Supplies expense for current year......... (750) $1,650 (5,700) $1,300 (1,840) $ 9,600 (800) $6,575 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 127 Exercise 3-6 (25 minutes) a. Apr. 30 Legal Fees Expense............................................ Legal Fees Payable..................................... 2,500 2,500 To record accrued legal fees. May 12 Legal Fees Payable............................................. Cash.............................................................. 2,500 2,500 To pay accrued legal fees. b. Apr. 30 Interest Expense................................................. Interest Payable........................................... 2,080 2,080 To record accrued interest expense (9.6% x $780,000 x 10/360) or ($6,240 x 10/30). May 20 Interest Payable................................................... Interest Expense................................................. Cash.............................................................. 2,080 4,160 6,240 To record payment of accrued and current interest expense (9.6% x $780,000 x 20/360). c. Apr. 30 Salaries Expense................................................. Salaries Payable.......................................... 3,600 3,600 To record accrued salaries ($9,000 x 2/5 week). May 3 Salaries Payable.................................................. Salaries Expense................................................. Cash.............................................................. 3,600 5,400 9,000 To record payment of accrued and current salaries ($9,000 x 3/5 week). ©McGraw-Hill Companies, Inc., 2005 128 Fundamental Accounting Principles, 17th Edition Exercise 3-7 (20 minutes) Balance Sheet Insurance Asset using Accrual Cash * Basis Basis Dec. 31, 2003 $11,700 $0 Insurance Expense using Accrual Cash ** Basis Basis 2003......... $ 4,500 $16,200 Dec. 31, 2004 6,300 0 2004......... 5,400 0 Dec. 31, 2005 900 0 2005......... 5,400 0 Dec. 31, 2006 0 0 2006......... 900 0 Total........ $16,200 $16,200 EXPLANATIONS: * Accrual asset balance equals months left in the policy x $450 per month (monthly cost is computed as $450, from $16,200 divided by 36 months). Months Left Balance 12/31/2003... 26 $11,700 12/31/2004... 14 6,300 12/31/2005... 2 900 12/31/2006... 0 0 ** Accrual insurance expense equals months covered in the year x $450 per month. Months Covered Expense 2003...... 10 $ 4,500 2004...... 12 5,400 2005...... 12 5,400 2006...... 2 900 $16,200 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 129 Exercise 3-8 (25 minutes) Dec. 31 Accounts Receivable.............................................. 1,800 Fees Earned..................................................... To record earned but unbilled fees (30% x $6,000). 31 Unearned Fees......................................................... 4,200 Fees Earned..................................................... To record earned fees collected in advance (70% x $6,000). 1,800 4,200 31 Depreciation Expense—Computers....................... 1,500 Accumulated Depreciation—Computers...... To record depreciation on computers. 1,500 31 Depreciation Expense—Office Furniture................ 1,750 Accumulated Depreciation—Office Furniture.... To record depreciation on office furniture. 1,750 31 Salaries Expense.................................................... 2,450 Salaries Payable.............................................. To record accrued salaries. 2,450 31 Insurance Expense.................................................. 1,300 Prepaid Insurance........................................... To record expired prepaid insurance. 1,300 31 Office Supplies Expense......................................... Office Supplies................................................ To record use of office supplies. 480 31 Utilities Expense...................................................... Utilities Payable............................................... To record incurred and unpaid utility costs. 70 480 70 ©McGraw-Hill Companies, Inc., 2005 130 Fundamental Accounting Principles, 17th Edition Exercise 3-9 (10 minutes) a. b. c. d. e. $5,390 $87,644 $93,385 $55,234 $70,158 / / / / / $44,830 $398,954 $257,082 $1,458,999 $435,925 = 12.0% = 22.0% = 36.3% = 3.8% = 16.1% Analysis and Interpretation: Company c has the highest profitability according to the profit margin ratio. Company c earns 36.3 cents in net income for each one dollar of net sales recorded. Exercise 3-10A (30 minutes) a. Dec. 1 Supplies Expense............................................ Cash.......................................................... 3,000 3,000 Purchased supplies. b. Dec. 2 Insurance Expense.......................................... Cash.......................................................... 1,440 1,440 Paid insurance premiums. c. Dec.15 Cash.................................................................. 12,000 Remodeling Fees Earned........................ 12,000 Received fees for work to be done. d. Dec.28 Cash.................................................................. Remodeling Fees Earned........................ 3,600 3,600 Received fees for work to be done. e. Dec.31 Supplies........................................................... Supplies Expense.................................... 1,920 1,920 Adjust expenses for unused supplies. f. Dec.31 Prepaid Insurance ($1,440 - $240)................. Insurance Expense.................................. 1,200 1,200 Adjust expenses for unexpired coverage. g. Dec.31 Remodeling Fees Earned .............................. Unearned Remodeling Fees................... 9,300 9,300 Adjusted revenues for unfinished projects ($12,000 + $3,600 - $6,300). ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 131 Exercise 3-11A (25 minutes) a. Initial credit recorded in the Unearned Fees account: July 1 Cash....................................................................... 2,000 Unearned Fees.............................................. 2,000 Received fees for work to be done. 6 Cash....................................................................... Unearned Fees.............................................. 8,400 8,400 Received fees for work to be done. 12 Unearned Fees...................................................... Fees Earned................................................... 2,000 2,000 Completed work for customer. 18 Cash....................................................................... Unearned Fees.............................................. 7,500 7,500 Received fees for work to be done. 27 Unearned Fees...................................................... Fees Earned................................................... 8,400 8,400 Completed work for customer. 31 No adjusting entries required. b. Initial credit recorded in the Fees Earned account: July 1 Cash....................................................................... Fees Earned................................................... 2,000 2,000 Received fees for work to be done. 6 Cash....................................................................... Fees Earned................................................... 8,400 8,400 Received fees for work to be done. 12 18 No entry required. Cash....................................................................... Fees Earned................................................... 7,500 7,500 Received fees for work to be done. 27 31 No entry required. Fees Earned.......................................................... Unearned Fees.............................................. 7,500 7,500 Adjusted to reflect unearned fees for unfinished job. c. Under the first method (and using entries from a): Unearned Fees = $2,000 + $8,400 - $2,000 + $7,500 - $8,400 = $7,500 Fees Earned = $2,000 + $8,400 = $10,400 Under the second method (and using entries from b): Unearned Fees = $7,500 ©McGraw-Hill Companies, Inc., 2005 132 Fundamental Accounting Principles, 17th Edition Fees Earned = $2,000 + $8,400 + $7,500 - $7,500 = $10,400 [Note: Both procedures yield identical results in the financial statements.] ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 133 PROBLEM SET A Problem 3-1A (15 minutes) 1. 2. 3. G. E. I. 4. 5. 6. B. G. C. 7. 8. 9. H. E. F. 10. 11. 12. D. A. D. Problem 3-2A (35 minutes) Part 1 Adjustment (a) Dec.31 Office Supplies Expense......................... Office Supplies................................. 12,760 12,760 To record cost of supplies used ($3,000 + $12,400 - $2,640). 31 Adjustment (b) Insurance Expense.................................. Prepaid Insurance............................ 12,312 12,312 To record annual insurance coverage cost. Policy A B C Total 31 Cost per Month $660 ($15,840/24 mo.) 363 ($13,068/36 mo.) 225 ($ 2,700 /12 mo.) Months Active in 2005 12 9 5 Adjustment (c) Salaries Expense (2 days x $2,100)........ Salaries Payable............................... 2005 Cost $ 7,920 3,267 1,125 $12,312 4,200 4,200 To record accrued but unpaid wages. 31 Adjustment (d) Depreciation Expense—Building........... Accumulated Depreciation—Building 27,000 27,000 To record annual depreciation expense [($855,000 -$45,000) / 30 years = $27,000] ©McGraw-Hill Companies, Inc., 2005 134 Fundamental Accounting Principles, 17th Edition Problem 3-2A (Continued) Adjustment (e) Dec.31 Rent Receivable....................................... Rent Earned...................................... 2,400 2,400 To record earned but unpaid Dec. rent. Adjustment (f) 31 Unearned Rent......................................... Rent Earned...................................... 4,350 4,350 To record the amount of rent earned for November and December (2 x $2,175). Part 2 Cash Payment for (c) Jan. 6 Salaries Payable...................................... Salaries Expense*.................................... Cash................................................... 4,200 6,300 10,500 To record payment of accrued and current salaries. *(3 days x $2,100) 15 Cash Payment for (e) Cash.......................................................... Rent Receivable................................ Rent Earned...................................... 4,800 2,400 2,400 To record past due rent for two months. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 135 Problem 3-3A (90 minutes) Parts 1 and 2 Unadj. Bal. Cash 26,000 Unadj. Bal. Accumulated Depreciation— Equipment Unadj. Bal. 16,000 (c) 12,000 Adj. Bal. 28,000 Accounts Receivable Unadj. Bal. 0 (f) 7,500 Adj. Bal. 7,500 Unadj. Bal. Adj. Bal. Teaching Supplies 10,000 (b) 2,600 Equipment 70,000 Accounts Payable Bal. Salaries Payable Unadj. Bal. Prepaid Insurance Unadj. Bal. 15,000 (a) Adj. Bal. 12,000 (g) Adj. Bal. Adj. Bal. Prepaid Rent 2,000 (h) 0 Unearned Training Fees (e) 11,000 4,400 Adj. Bal. 6,600 2,000 T. Watson, Capital Bal. Bal. 0 400 400 3,000 Unadj. Bal. Unadj. Bal. 36,000 7,400 Professional Library 30,000 Bal. 63,600 T. Watson, Withdrawals 40,000 Accumulated Depreciation— Professional Library Unadj. Bal. 9,000 (d) 6,000 Adj. Bal. 15,000 ©McGraw-Hill Companies, Inc., 2005 136 Fundamental Accounting Principles, 17th Edition Problem 3-3A (Continued) Tuition Fees Earned Unadj. Bal. (f) Adj. Bal. 102,000 7,500 109,500 Training Fees Earned Unadj. Bal. (e) Adj. Bal. 38,000 4,400 42,400 Unadj. Bal. (h) Adj. Bal. Rent Expense 22,000 2,000 24,000 Teaching Supplies Expense Unadj. Bal. 0 (b) 7,400 Adj. Bal. 7,400 Depreciation Expense— Professional Library Unadj. Bal. 0 (d) 6,000 Adj. Bal. 6,000 Bal. Advertising Expense 7,000 Depreciation Expense— Equipment Unadj. Bal. 0 (c) 12,000 Adj. Bal. 12,000 Bal. Utilities Expense 5,600 Unadj. Bal. (g) Adj. Bal. Unadj. Bal. (a) Adj. Bal. Salaries Expense 48,000 400 48,400 Insurance Expense 0 3,000 3,000 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 137 Problem 3-3A (Continued) Part 2 Dec. 31 Adjustment (a) Insurance Expense......................................... Prepaid Insurance..................................... 3,000 3,000 To record the insurance expired. Adjustment (b) 31 Teaching Supplies Expense.......................... Teaching Supplies.................................... 7,400 7,400 To record supplies used ($10,000-$2,600). Adjustment (c) 31 Depreciation Expense—Equipment.............. 12,000 12,000 Accumulated Depreciation—Equipment...... To record equipment depreciation. Adjustment (d) 31 Depreciation Expense—Profess. Library..... Accumul. Depreciation—Profess. Library... 6,000 6,000 To record professional library depreciation. Adjustment (e) 31 Unearned Training Fees................................. Training Fees Earned............................... 4,400 4,400 To record training fees earned that were collected in advance. Adjustment (f) 31 Accounts Receivable...................................... Tuition Fees Earned................................. 7,500 7,500 To record tuition earned ($3,000 x 2 1/2 months). Adjustment (g) 31 Salaries Expense............................................ Salaries Payable....................................... 400 400 To record accrued salaries (2 days x $100 x 2). Adjustment (h) 31 Rent Expense.................................................. Prepaid Rent.............................................. 2,000 2,000 To record expiration of prepaid rent. ©McGraw-Hill Companies, Inc., 2005 138 Fundamental Accounting Principles, 17th Edition Problem 3-3A (Continued) Part 3 Watson Technical Institute Adjusted Trial Balance December 31, 2005 Cash......................................................................... Accounts receivable.............................................. Teaching supplies ................................................. Prepaid insurance.................................................. Prepaid rent............................................................ Professional library................................................ Accumulated depreciation—Professional library. . Equipment............................................................... Accumulated depreciation—Equipment.............. Accounts payable................................................... Salaries payable..................................................... Unearned training fees.......................................... T. Watson, Capital.................................................. T. Watson, Withdrawals......................................... Tuition fees earned................................................ Training fees earned.............................................. Depreciation expense—Professional library....... Depreciation expense—Equipment...................... Salaries expense ................................................... Insurance expense................................................. Rent expense.......................................................... Teaching supplies expense................................... Advertising expense.............................................. Utilities expense..................................................... Totals....................................................................... Debit $ 26,000 7,500 2,600 12,000 0 30,000 Credit $ 15,000 70,000 28,000 36,000 400 6,600 63,600 40,000 109,500 42,400 6,000 12,000 48,400 3,000 24,000 7,400 7,000 5,600 $301,500 _______ $301,500 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 139 Problem 3-3A (Continued) Part 4 WATSON TECHNICAL INSTITUTE Income Statement For Year Ended December 31, 2005 Revenues Tuition fees earned............................................ $109,500 Training fees earned.......................................... 42,400 Total revenues.................................................... Expenses Depreciation expense—Professional library... 6,000 Depreciation expense—Equipment.................. 12,000 Salaries expense................................................ 48,400 Insurance expense............................................. 3,000 Rent expense...................................................... 24,000 Teaching supplies expense............................... 7,400 Advertising expense.......................................... 7,000 Utilities expense................................................. 5,600 Total expenses................................................... Net income............................................................ $151,900 113,400 $ 38,500 WATSON TECHNICAL INSTITUTE Statement of Owner’s Equity For Year Ended December 31, 2005 T. Watson, Capital, December 31, 2004.............. Plus: Net income.................................................. Less: Owner withdrawals.................................... T. Watson, Capital, December 31, 2005.............. $ 63,600 38,500 102,100 40,000 $ 62,100 ©McGraw-Hill Companies, Inc., 2005 140 Fundamental Accounting Principles, 17th Edition Problem 3-3A (Concluded) WATSON TECHNICAL INSTITUTE Balance Sheet December 31, 2005 Assets Cash................................................................................. Accounts receivable...................................................... Teaching supplies.......................................................... Prepaid insurance.......................................................... Professional library........................................................ $30,000 Accumulated depreciation—Professional library....... (15,000) Equipment....................................................................... 70,000 Accumulated depreciation—Equipment...................... (28,000) Total assets..................................................................... Liabilities Accounts payable........................................................... Salaries payable............................................................. Unearned training fees.................................................. Total liabilities................................................................ Equity T. Watson, Capital.......................................................... Total liabilities and equity............................................. $ 26,000 7,500 2,600 12,000 15,000 42,000 $105,100 $ 36,000 400 6,600 43,000 62,100 $105,100 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 141 Problem 3-4A (45 minutes) — Part 1 Account Unadjusted Trial Balance Adjusted Trial Balance Adjustments Cash............................... $ 27,000 Accounts receivable.......... 12,000 Office supplies.................. 18,000 Prepaid insurance............. 7,320 92,000 Office equipment............... (a ) Accumulated depreciation —Office equipment.......... $ 12,000 Accounts payable............. 9,300 10,460 Interest payable................. Salaries payable................ Unearned consulting fees... 16,000 (h) 44,000 28,420 Long-term notes payable.... J. Winner, Capital.............. J. Winner, Withdrawals....... 71,000 1,400 2,440 4,880 92,000 (d ) (e) (f) (g ) 6,000 $ 18,000 900 800 6,600 10,200 800 6,600 14,300 44,000 28,420 (a) (h ) 10,460 1,700 6,000 6,000 (g) 6,600 800 2,440 77,600 2,200 2,440 13,200 (b) 13,800 _______ Totals.............................. $265,720 $265,720 168,160 (d) (f) (c ) Office supplies expense..... Advertising expense.......... 3,000 1,700 156,000 Insurance expense............ Rent expense................... 15,000 10,000 Depreciation expense— Office equipment............. Interest expense................ (b ) (c) 10,000 Consulting fees earned........................... Salaries expense............... $ 27,000 22,460 (e ) 15,000 90 0 $43,900 13,200 15,000 14,700 _______ $43,90 $290,480 $290,480 ______ 0 (a) (b) Adjustment description: Earned but uncollected revenues. Cost of consumed office supplies. ©McGraw-Hill Companies, Inc., 2005 142 Fundamental Accounting Principles, 17th Edition (c) (d) (e) (f) (g) (h) Cost of expired insurance coverage. Depreciation expense on office equipment. Incurred but unpaid advertising expense. Incurred but unpaid interest expense. Incurred but unpaid salaries expense. Earned revenues previously received in advance. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 143 Problem 3-4A Part 2 JJW COMPANY Income Statement For Year Ended July 31, 2005 Revenues Consulting fees earned ................................ Expenses Depreciation expense—Office equipment. . Salaries expense .......................................... Interest expense ........................................... Insurance expense ....................................... Rent expense ................................................ Office supplies expense .............................. Advertising expense .................................... Total expenses.............................................. Net income....................................................... $168,160 $ 6,000 77,600 2,200 2,440 13,200 15,000 14,700 131,140 $ 37,020 JJW COMPANY Statement of Owner’s Equity For Year Ended July 31, 2005 J. Winner, Capital, July 31, 2004.................... Plus: Net income............................................. Less: Owner withdrawals............................... J. Winner, Capital, July 31, 2005.................... $28,420 37,020 65,440 10,000 $55,440 ©McGraw-Hill Companies, Inc., 2005 144 Fundamental Accounting Principles, 17th Edition Problem 3-4A (Concluded) Part 2 JJW COMPANY Balance Sheet July 31, 2005 Assets Cash............................................................................ Accounts receivable.................................................. Office supplies........................................................... Prepaid insurance...................................................... Office equipment........................................................ $92,000 Accumulated depreciation—Office equipment....... (18,000) Total assets................................................................ $ 27,000 22,460 3,000 4,880 74,000 $131,340 Liabilities Accounts payable...................................................... Interest payable.......................................................... Salaries payable......................................................... Unearned consulting fees......................................... Long-term notes payable.......................................... Total liabilities............................................................ $ 10,200 800 6,600 14,300 44,000 75,900 Equity J. Winner, Capital....................................................... Total liabilities and equity......................................... 55,440 $131,340 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 145 Problem 3-5A (50 minutes) Part 1 CALLAHAY COMPANY Income Statement For Year Ended December 31, 2005 Revenues Fees earned.............................................. $420,000 Interest earned.......................................... 16,000 Total revenues.......................................... Expenses Depreciation expense—Automobiles..... 18,000 Depreciation expense—Equipment........ 10,000 Salaries expense...................................... 180,000 Wages expense........................................ 32,000 Interest expense....................................... 24,000 Office supplies expense.......................... 26,000 Advertising expense................................ 50,000 Repairs expense—Automobiles............. 16,800 Total expenses......................................... Net income.................................................. $436,000 356,800 $ 79,200 CALLAHAY COMPANY Statement of Owner's Equity For Year Ended December 31, 2005 J. Callahay, Capital, December 31, 2004. . Plus: Net income....................................... Less: Withdrawals by owner.................... J. Callahay, Capital, December 31, 2005. . $247,800 79,200 327,000 38,000 $289,000 ©McGraw-Hill Companies, Inc., 2005 146 Fundamental Accounting Principles, 17th Edition Problem 3-5A (Concluded) CALLAHAY COMPANY Balance Sheet December 31, 2005 Assets Cash........................................................................ Accounts receivable............................................. Interest receivable................................................. Notes receivable (due in 90 days)....................... Office supplies...................................................... Automobiles.......................................................... Accumulated depreciation—Automobiles.......... Equipment.............................................................. Accumulated depreciation—Equipment............. Land........................................................................ Total assets........................................................... $ 22,000 44,000 10,000 160,000 8,000 $160,000 (42,000) 130,000 (10,000) 118,000 120,000 70,000 $552,000 Liabilities Accounts payable................................................. Interest payable..................................................... Salaries payable.................................................... Unearned fees....................................................... Long-term notes payable..................................... Total liabilities....................................................... $ 88,000 12,000 11,000 22,000 130,000 263,000 Equity J. Callahay, Capital............................................... Total liabilities and equity.................................... 289,000 $552,000 Part 2 Profit margin = $79,200 / $436,000 = 18.2% ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 147 Problem 3-6AA (40 minutes) Part 1 Assume prepaid expenses are recorded as assets and unearned revenues as liabilities. Nov. 1 Prepaid Advertising ....................................... Cash.......................................................... 1,500 1,500 Paid for future advertising. 1 Prepaid Insurance........................................... Cash.......................................................... 2,160 2,160 Paid insurance for one year. 30 Cash.................................................................. Unearned Service Fees........................... 3,300 3,300 Received fees in advance. Dec. 1 Prepaid Consulting Fees ............................... Cash.......................................................... 2,700 2,700 Paid for future consulting. 15 Cash.................................................................. Unearned Service Fees........................... 7,650 7,650 Received fees in advance. 31 Advertising Expense....................................... Prepaid Advertising ................................ 600 600 To adjust prepaid advertising ($1,500-$900). 31 Insurance Expense.......................................... Prepaid Insurance.................................... 360 360 To adjust prepaid insurance ($2,160 x 2/12). 31 Unearned Service Fees .................................. Service Fees Earned................................ 2,100 2,100 To adjust unearned service fees ($3,300-$1,200). 31 Consulting Fees Expense .............................. Prepaid Consulting Fees......................... 900 900 To adjust prepaid consulting fees ($2,700 x 1/3). 31 Unearned Service Fees .................................. Service Fees Earned................................ 3,000 3,000 To adjust unearned service fees. ©McGraw-Hill Companies, Inc., 2005 148 Fundamental Accounting Principles, 17th Edition Problem 3-6AA (Continued) Part 2 Assume prepaid expenses are recorded as expenses and unearned revenues as revenues. Nov. 1 Advertising Expense....................................... Cash.......................................................... 1,500 1,500 Paid for future advertising. 1 Insurance Expense.......................................... Cash.......................................................... 2,160 2,160 Paid insurance for one year. 30 Cash.................................................................. Service Fees Earned................................ 3,300 3,300 Received fees in advance. Dec. 1 Consulting Fees Expense............................... Cash.......................................................... 2,700 2,700 Paid for future consulting. 15 Cash.................................................................. Service Fees Earned................................ 7,650 7,650 Received fees in advance. 31 Prepaid Advertising........................................ Advertising Expense............................... 900 900 To adjust for prepaid advertising. 31 Prepaid Insurance........................................... Insurance Expense.................................. 1,800 1,800 To adjust for prepaid insurance. 31 Service Fees Earned....................................... Unearned Service Fees........................... 1,200 1,200 To adjust for unearned service fees. 31 Prepaid Consulting Fees................................ Consulting Fees Expense....................... 1,800 1,800 To adjust for prepaid consulting fees. 31 Service Fees Earned....................................... Unearned Service Fees........................... 4,650 4,650 To adjust for unearned service fees. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 149 Problem 3-6AA (Concluded) Part 3 There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following: Advertising expense for two months................................... Prepaid advertising as of December 31............................... Insurance expense for two months..................................... Prepaid insurance as of December 31................................. Consulting fees expense (1/3 of total paid)......................... Prepaid consulting fees........................................................ Service fees earned for two months ($2,100 + $3,000)...... Unearned service fees at 12/31 ($1,200 + $4,650)............... $ 600 900 360 1,800 900 1,800 5,100 5,850 When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result. ©McGraw-Hill Companies, Inc., 2005 150 Fundamental Accounting Principles, 17th Edition PROBLEM SET B Problem 3-1B (15 minutes) 1. 2. 3. E. H. G. 4. 5. 6. C. D. B. 7. 8. 9. F. I. F. 10. 11. 12. I. A. B. Problem 3-2B (30 minutes) Part 1 Adjustment (a) Oct. 31 Office Supplies Expense........................................ Office Supplies................................................ 3,450 3,450 To record cost of supplies used ($500 + $3,650 - $700). Adjustment (b) 31 Insurance Expense................................................. Prepaid Insurance........................................... 2,365 2,365 To record annual insurance coverage cost. Policy A B C Total Cost per Month $125 ($3,000/24 mo.) 100 ($3,600/36 mo.) 55 ( $660 / 12 mo.) Months Active in 2005 12 7 3 2005 Expense $1,500 700 165 $2,365 Adjustment (c) 31 Salaries Expense.................................................... Salaries Payable.............................................. 800 800 To record accrued but unpaid wages (1 day x $800). Adjustment (d) 31 Depreciation Expense—Building.......................... Accumulated Depreciation—Building........... 5,400 5,400 To record annual depreciation [($155,000-$20,000) / 25 years = $5,400]. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 151 Problem 3-2B (Concluded) Adjustment (e) Oct. 31 Rent Receivable...................................................... Rent Earned..................................................... 600 600 To record earned but unpaid Oct. rent. Adjustment (f) 31 Unearned Rent........................................................ Rent Earned..................................................... 1,050 1,050 To record rent earned for September and October (2 x $525). Part 2 Cash Payment for (c) Nov. 7 Salaries Payable..................................................... Salaries Expense*................................................... Cash.................................................................. 800 3,200 4,000 To record payment of accrued and current salaries. *(4 days x $800) Cash Payment for (e) 15 Cash......................................................................... Rent Receivable............................................... Rent Earned..................................................... 1,200 600 600 To record past due rent for two months. ©McGraw-Hill Companies, Inc., 2005 152 Fundamental Accounting Principles, 17th Edition Problem 3-3B (90 minutes) Parts 1 and 2 Cash 50,000 Bal. Accounts Payable Bal. Accounts Receivable 0 (f) 5,500 Adj. Bal. 5,500 Salaries Payable Unadj. Bal. Unadj. Bal. Adj. Bal. Unadj. Bal. Adj. Bal. Unadj. Bal. Adj. Bal. Bal. Teaching Supplies 60,000 (b) 2,500 Prepaid Insurance 18,000 (a) 11,600 Prepaid Rent 2,600 (h) 0 12,200 Unadj. Bal. (g) Adj. Bal. 0 540 540 Unearned Training Fees 57,500 (e) Unadj. Bal. 27,600 Adj. Bal. 18,400 9,200 M. Alcorn, Capital Bal. 68,500 6,400 Bal. M. Alcorn, Withdrawals 20,000 2,600 Professional Library 10,000 Accumulated Depreciation— Professional Library Unadj. Bal. 1,500 (d) 2,000 Adj. Bal. 3,500 Bal. Equipment 30,000 Accumulated Depreciation— Equipment Unadj. Bal. 16,000 (c) 4,000 Adj. Bal. 20,000 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 153 Problem 3-3B (Continued) Parts 1 and 2 Tuition Fees Earned Unadj. Bal. (f) Adj. Bal. 105,000 5,500 110,500 Bal. Advertising Expense 18,000 62,000 9,200 71,200 Bal. Utilities Expense 12,400 Training Fees Earned Unadj. Bal. (e) Adj. Bal. Depreciation Expense— Professional Library Unadj. Bal. 0 (d) 2,000 Adj. Bal. 2,000 Depreciation Expense— Equipment Unadj. Bal. 0 (c) 4,000 Adj. Bal. 4,000 Salaries Expense Unadj. Bal. 43,200 (g) 540 Adj. Bal. 43,740 Insurance Expense Unadj. Bal. 0 (a) 6,400 Adj. Bal. 6,400 Unadj. Bal. (h) Adj. Bal. Rent Expense 28,600 2,600 31,200 Teaching Supplies Expense 0 (b) 57,500 Adj. Bal. 57,500 Unadj. Bal. ©McGraw-Hill Companies, Inc., 2005 154 Fundamental Accounting Principles, 17th Edition Problem 3-3B (Continued) Part 2 Adjustment (a) Dec. 31 Insurance Expense................................................ Prepaid Insurance.......................................... 6,400 6,400 To record the insurance expired. Adjustment (b) 31 Teaching Supplies Expense................................. 57,500 Teaching Supplies......................................... 57,500 To record the cost of supplies used ($60,000-$2,500). Adjustment (c) 31 Depreciation Expense—Equipment..................... Accumulated Depreciation—Equipment..... 4,000 4,000 To record equipment depreciation. Adjustment (d) 31 Depreciation Expense—Professional Library.... Accumulated Depreciation— Professional Library............................. 2,000 2,000 To record professional library depreciation. Adjustment (e) 31 Unearned Training Fees........................................ Training Fees Earned..................................... 9,200 9,200 To record training fees earned that were collected in advance. Adjustment (f) 31 Accounts Receivable............................................ Tuition Fees Earned....................................... 5,500 5,500 To record tuition earned ($2,200 x 2 1/2 mo). Adjustment (g) 31 Salaries Expense................................................... Salaries Payable............................................. 540 540 To accrue salaries expense (3 days x $180). Adjustment (h) 31 Rent Expense ........................................................ 2,600 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 155 Prepaid Rent.............................................................. 2,600 To record expiration of prepaid rent. ©McGraw-Hill Companies, Inc., 2005 156 Fundamental Accounting Principles, 17th Edition Problem 3-3B (Continued) Part 3 ALCORN INSTITUTE Adjusted Trial Balance December 31, 2005 Cash............................................................................ Accounts receivable.................................................... Teaching supplies....................................................... Prepaid insurance....................................................... Prepaid rent................................................................. Professional library..................................................... Accumulated depreciation—Professional library........ Equipment................................................................... Accumulated depreciation—Equipment..................... Accounts payable....................................................... Salaries payable.......................................................... Unearned training fees................................................ M. Alcorn, Capital........................................................ M. Alcorn, Withdrawals............................................... Tuition fees earned...................................................... Training fees earned.................................................... Depreciation expense—Professional library............... Depreciation expense—Equipment............................. Salaries expense......................................................... Insurance expense...................................................... Rent expense.............................................................. Teaching supplies expense......................................... Advertising expense................................................... Utilities expense.......................................................... Totals.......................................................................... Debit $ 50,000 5,500 2,500 11,600 0 10,000 Credit $ 3,500 30,000 20,000 12,200 540 18,400 68,500 20,000 110,500 71,200 2,000 4,000 43,740 6,400 31,200 57,500 18,000 12,400 $304,840 _______ $304,840 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 157 Problem 3-3B (Continued) Part 4 ALCORN INSTITUTE Income Statement For Year Ended December 31, 2005 Revenues Tuition fees earned.................................................... $110,500 Training fees earned.................................................. 71,200 Total revenues............................................................ Expenses Depreciation expense—Professional library.......... 2,000 Depreciation expense—Equipment......................... 4,000 Salaries expense........................................................ 43,740 Insurance expense.................................................... 6,400 Rent expense.............................................................. 31,200 Teaching supplies expense...................................... 57,500 Advertising expense.................................................. 18,000 Utilities expense........................................................ 12,400 Total expenses........................................................... Net income.................................................................... $181,700 175,240 $ 6,460 ALCORN INSTITUTE Statement of Owner’s Equity For Year Ended December 31, 2005 M. Alcorn, Capital, December 31, 2004.............. Plus: Net income.................................................. Less: Owner withdrawals.................................... M. Alcorn, Capital, December 31, 2005.............. $68,500 6,460 74,960 20,000 $54,960 ©McGraw-Hill Companies, Inc., 2005 158 Fundamental Accounting Principles, 17th Edition Problem 3-3B (Concluded) ALCORN INSTITUTE Balance Sheet December 31, 2005 Assets Cash.............................................................................. Accounts receivable.................................................... Teaching supplies....................................................... Prepaid insurance........................................................ Professional library..................................................... $10,000 Accumulated depreciation—Professional library........... (3,500) Equipment.................................................................... 30,000 Accumulated depreciation—Equipment.................... (20,000) Total assets.................................................................. Liabilities Accounts payable........................................................ Salaries payable........................................................... Unearned training fees................................................ Total liabilities.............................................................. Equity M. Alcorn, Capital......................................................... Total liabilities and equity........................................... $50,000 5,500 2,500 11,600 6,500 10,000 $86,100 $12,200 540 18,400 31,140 54,960 $86,100 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 159 Problem 3-4B (45 minutes) — Part 1 Unadjusted Trial Balance Account Cash............................... $ 48,000 Accounts receivable......... 70,000 Office supplies................. 30,000 Prepaid insurance............ 13,200 Office equipment.............. 150,000 Adjusted Trial Balance Adjustments (a) 6,660 (b) (c) 23,000 4,600 $ 48,000 76,660 7,000 8,600 150,000 Accumulated depreciation— Office equipment................ $ 30,000 (d) 10,000 $ 40,000 Accounts payable............ Interest payable................ Salaries payable............... Unearned consulting fees. Long-term notes payable. . D. Chen, Capital............... D. Chen, Withdrawals....... Consulting fees earned.... 36,000 (e) (f) (g) 6,000 1,600 11,200 42,000 1,600 11,200 17,800 80,000 70,200 (a) (h) 6,660 12,200 30,000 (h) 80,000 70,200 10,000 10,000 264,000 Depreciation expense— Office equipment............ Salaries expense.............. 115,600 Interest expense............... 6,400 Insurance expense.......... Rent expense.................. 24,000 Office supplies expense.... Advertising expense......... 43,000 _______ Totals.............................. $510,200 $510,200 (a) (b) (c) (d) (e) (f) (g) (h) 12,200 282,860 (d) 10,000 10,000 (g) (f) (c) 11,200 1,600 4,600 (b) (e) 23,000 6 ,000 $75,260 126,800 8,000 4,600 24,000 23,000 ______ 49,000 _______ $75,260 $545,660 $545,660 Adjustment Descriptions: Earned but uncollected revenues. Cost of consumed office supplies. Cost of expired insurance coverage. Depreciation expense on office equipment. Incurred but unpaid advertising expense. Incurred but unpaid interest expense. Incurred but unpaid salaries expense. Earned revenues previously received in advance. ©McGraw-Hill Companies, Inc., 2005 160 Fundamental Accounting Principles, 17th Edition Problem 3-4B Part 2 DAXU CONSULTING COMPANY Income Statement For Year Ended December 31, 2005 Revenues Consulting fees earned ..................................... Expenses Depreciation expense—Office equipment....... $ 10,000 Salaries expense ............................................... 126,800 Interest expense ................................................ 8,000 Insurance expense ............................................ 4,600 Rent expense ..................................................... 24,000 Office supplies expense ................................... 23,000 Advertising expense ......................................... 49,000 Total expenses................................................... Net income............................................................ $282,860 245,400 $ 37,460 DAXU CONSULTING COMPANY Statement of Owner’s Equity For Year Ended December 31, 2005 D. Chen, Capital, December 31, 2004................. Plus: Net income.................................................. Less: Owner withdrawals.................................... D. Chen, Capital, December 31, 2005................. $ 70,200 37,460 107,660 10,000 $ 97,660 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 161 Problem 3-4B (Concluded) Part 2 DAXU CONSULTING COMPANY Balance Sheet December 31, 2005 Assets Cash............................................................................. $ 48,000 Accounts receivable................................................... 76,660 Office supplies............................................................ 7,000 Prepaid insurance....................................................... 8,600 Office equipment......................................................... $150,000 Accumulated depreciation—Office equipment........ (40,000) 110,000 Total assets................................................................. $250,260 Liabilities Accounts payable....................................................... Interest payable........................................................... Salaries payable.......................................................... Unearned consulting fees.......................................... Long-term notes payable........................................... Total liabilities............................................................. $ 42,000 1,600 11,200 17,800 80,000 152,600 Equity D. Chen, Capital.......................................................... Total liabilities and equity.......................................... 97,660 $250,260 ©McGraw-Hill Companies, Inc., 2005 162 Fundamental Accounting Principles, 17th Edition Problem 3-5B (50 minutes) Part 1 LIGHTNING COURIER Income Statement For Year Ended December 31, 2005 Revenues Delivery fees earned..................................... $580,000 Interest earned............................................... 24,000 Total revenues............................................... Expenses Depreciation expense—Trucks.................... 24,000 Depreciation expense—Equipment............. 46,000 Salaries expense........................................... 64,000 Wages expense............................................. 290,000 Interest expense............................................ 25,000 Office supplies expense............................... 33,000 Advertising expense..................................... 26,400 Repairs expense—Trucks............................ 34,600 Total expenses.............................................. Net income....................................................... $604,000 543,000 $ 61,000 LIGHTNING COURIER Statement of Owner's Equity For Year Ended December 31, 2005 J. Hallam, Capital, December 31, 2004.......... Plus : Net income........................................... Less: Withdrawals by owner......................... J. Hallam, Capital, December 31, 2005.......... $115,000 61,000 176,000 40,000 $136,000 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 163 Problem 3-5B (Concluded) LIGHTNING COURIER Balance Sheet December 31, 2005 Assets Cash...................................................................... $ 48,000 Accounts receivable........................................... 110,000 Interest receivable............................................... 6,000 Notes receivable (due in 90 days)........................ 200,000 Office supplies.................................................... 12,000 Trucks................................................................... $ 124,000 Accumulated depreciation—Trucks.................. (48,000) 76,000 Equipment............................................................ 260,000 Accumulated depreciation—Equipment........... (190,000) 70,000 Land...................................................................... 90,000 Total assets......................................................... $612,000 Liabilities Accounts payable............................................... Interest payable................................................... Salaries payable.................................................. Unearned delivery fees....................................... Long-term notes payable................................... Total liabilities..................................................... $124,000 22,000 30,000 110,000 190,000 476,000 Equity J. Hallam, Capital................................................ Total liabilities and equity.................................. 136,000 $612,000 Part 2 Profit margin = $61,000 / $604,000 = 10.1% ©McGraw-Hill Companies, Inc., 2005 164 Fundamental Accounting Principles, 17th Edition Problem 3-6BA (40 minutes) Part 1 Method that records prepaid expenses and unearned revenues in balance sheet accounts: Apr. 1 Prepaid Consulting Fees..................................... 3,450 Cash............................................................... 3,450 Paid for future consulting services. 1 Prepaid Insurance................................................ 2,700 Cash............................................................... 2,700 Paid insurance for one year. 30 Cash....................................................................... 7,500 Unearned Service Fees................................ 7,500 Received fees in advance. May 1 Prepaid Advertising............................................. 3,450 Cash............................................................... 3,450 Paid for future advertising. 23 Cash ..................................................................... 9,450 Unearned Service Fees............................... 9,450 Received fees in advance. 31 Consulting Fees Expense.................................... 1,500 Prepaid Consulting Fees.............................. 1,500 To adjust prepaid consulting fees. 31 Insurance Expense............................................... Prepaid Insurance......................................... 450 450 To adjust prepaid insurance. 31 Unearned Service Fees ....................................... 3,900 Service Fees Earned..................................... 3,900 To adjust unearned service fees. 31 Advertising Expense............................................ 2,400 Prepaid Advertising...................................... 2,400 To adjust prepaid advertising. 31 Unearned Service Fees........................................ 4,500 Service Fees Earned..................................... 4,500 To adjust unearned service fees. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 165 Problem 3-6BA (Continued) Part 2 Method that records prepaid expenses and unearned revenues in income statement accounts: Apr. 1 Consulting Fees Expense ................................. Cash.............................................................. 3,450 3,450 Paid for future consulting services. 1 Insurance Expense............................................. Cash.............................................................. 2,700 2,700 Paid insurance for one year. 30 Cash..................................................................... Service Fees Earned................................... 7,500 7,500 Received fees in advance. May 1 Advertising Expense........................................... Cash.............................................................. 3,450 3,450 Paid for future advertising. 23 Cash..................................................................... Service Fees Earned................................... 9,450 9,450 Received fees in advance. 31 Prepaid Consulting Fees.................................... Consulting Fees Expense........................... 1,950 1,950 To adjust for prepaid consulting fees. 31 Prepaid Insurance .............................................. Insurance Expense...................................... 2,250 2,250 To adjust for prepaid insurance. 31 Service Fees Earned........................................... Unearned Service Fees .............................. 3,600 3,600 To adjust for unearned service fees. 31 Prepaid Advertising............................................ Advertising Expense................................... 1,050 1,050 To adjust for prepaid advertising. 31 Service Fees Earned........................................... Unearned Service Fees .............................. 4,950 4,950 To adjust for unearned service fees. ©McGraw-Hill Companies, Inc., 2005 166 Fundamental Accounting Principles, 17th Edition Problem 3-6BA (Concluded) Part 3 There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following: Prepaid consulting fees as of May 31.................................... $ 1,950 Consulting fees expense for two months.............................. 1,500 Insurance expense for two months........................................ 450 Prepaid insurance as of May 31.............................................. 2,250 Unearned service fees as of May 31 ($3,600 + $4,950)......... 8,550 Service fees earned for two months ($3,900 + $4,500)......... 8,400 Prepaid advertising as of May 31............................................ 1,050 Advertising expense for two months..................................... 2,400 When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 167 Serial Problem Serial Problem, Success Systems (120 minutes) Part 1 Journal entries: Dec. 2 Advertising Expense..................................655 Cash.....................................................101 1,025 1,025 Paid share of mall advertising costs. 3 Repairs Expense—Computer....................684 Cash.....................................................101 500 500 Repaired the computer. 4 Cash.............................................................101 Accounts Receivable..........................106 3,950 3,950 Collected accounts receivable. 10 Wages Expense..........................................623 Cash.....................................................101 750 750 Paid employee for part-time work. 14 Cash.............................................................101 Unearned Computer Services Revenue...236 1,500 1,500 Received advance on work to be performed. 15 Computer Supplies....................................126 Accounts Payable...............................201 1,100 1,100 Purchased supplies on credit. 16 20 No entry recorded in the journal. Cash.............................................................101 Computer Services Revenue.............403 5,625 5,625 Collected cash revenue from customer. 28 Cash.............................................................101 Accounts Receivable..........................106 3,000 3,000 Collected accounts receivable. 29 Mileage Expense........................................676 Cash.....................................................101 192 192 Reimbursed Breeze for mileage. 31 K. Breeze, Withdrawals..............................302 Cash.....................................................101 1,500 1,500 Owner withdraws cash. ©McGraw-Hill Companies, Inc., 2005 168 Fundamental Accounting Principles, 17th Edition Serial Problem (Continued) Part 2 Adjusting entries: Dec. 31 Computer Supplies Expense .........................652 Computer Supplies .................................126 3,065 3,065 Adjustment for supplies used (supplies balance less cost of supplies available). 31 Insurance Expense .........................................637 Prepaid Insurance ...................................128 555 555 Adjustment for expired insurance (1/4 of original prepaid amount). 31 Wages Expense ..............................................623 Wages Payable ........................................210 500 500 Adjustment for accrued wages. 31 Depreciation Exp—Computer Equip.............613 Accumulated Depreciation— Computer Equipment...........................168 1,250 1,250 Adjustment for computer equipment depreciation: Cost......................................................... $20,000 Predicted life........................................... 4 years Annual depreciation (cost/life).............. $5,000 Expense for three months..................... $1,250 31 Depreciation Expense—Office Equip............612 Accumulated Depreciation— Office Equipment ..................................164 400 400 Adjustment for office equipment depreciation: Cost.......................................................... Predicted life............................................ Annual depreciation (cost/life)............... Expense for three months....................... $8,000 5 years $1,600 $400 31 Rent Expense ..................................................640 Prepaid Rent ............................................131 2,475 2,475 Adjustment for expired rent (3/4 of original prepaid amount). ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 169 Serial Problem (Continued) Parts 1 and 2 Posting to the accounts: Cash Date Oct. Nov. Dec. Explanation 1 2 5 8 15 17 20 22 31 31 1 2 5 18 22 28 30 30 2 3 4 10 14 20 28 29 31 PR Debit 55,000 4,800 1,400 4,633 2,208 3,950 1,500 5,625 3,000 Acct. No. 101 Credit Balance 55,000 3,300 51,700 2,220 49,480 1,420 48,060 52,860 805 52,055 1,940 50,115 51,515 875 50,640 3,600 47,040 320 46,720 51,353 1,125 50,228 52,436 250 52,186 384 51,802 1,750 50,052 2,000 48,052 1,025 47,027 500 46,527 50,477 750 49,727 51,227 56,852 59,852 192 59,660 1,500 58,160 ©McGraw-Hill Companies, Inc., 2005 170 Fundamental Accounting Principles, 17th Edition Serial Problem (Continued) Parts 1 and 2 Date Oct. Nov. Dec. Date Oct. Nov. Dec. Date Oct. Dec. Date Oct. Dec. Date Oct. Date Dec. 6 12 15 22 28 8 18 24 4 28 3 5 15 31 5 31 2 31 1 Accounts Receivable Explanation PR Debit 4,800 1,400 5,208 5,668 3,950 Acct. No. 106 Credit Balance 4,800 6,200 4,800 1,400 1,400 0 5,208 10,876 2,208 8,668 12,618 3,950 8,668 3,000 5,668 Computer Supplies Explanation PR Debit 1,420 1,125 1,100 Acct. No. 126 Credit Balance 1,420 2,545 3,645 3,065 580 Prepaid Insurance Explanation PR Debit 2,220 Acct. No. 128 Credit Balance 2,220 555 1,665 Prepaid Rent Explanation PR Debit 3,300 Acct. No. 131 Credit Balance 3,300 2,475 825 Office Equipment Explanation PR Debit 8,000 Acct. No. 163 Credit Balance 8,000 Accumulated Depreciation—Office Equipment Acct. No. 164 Explanation PR Debit Credit Balance 31 400 400 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 171 Serial Problem (Continued) Parts 1 and 2 Date Oct. 1 Computer Equipment Explanation PR Debit 20,000 Accumulated Depreciation—Computer Equipment Date Explanation PR Debit Dec. 31 Date Oct. Dec. Date Dec. Date Dec. Date Oct. Date Oct. Nov. Dec. Accounts Payable Explanation PR Debit 3 8 15 1,420 Wages Payable Explanation PR Debit 31 Unearned Computer Services Revenue Explanation PR Debit 14 K. Breeze, Capital Explanation PR Debit 1 31 30 31 K. Breeze, Withdrawals Explanation PR Debit 3,600 2,000 1,500 Acct. No. 167 Credit Balance 20,000 Acct. No. 168 Credit Balance 1,250 1,250 Acct. No. 201 Credit Balance 1,420 1,420 0 1,100 1,100 Acct. No. 210 Credit Balance 500 500 Acct. No. 236 Credit Balance 1,500 1,500 Acct. No. 301 Credit Balance 83,000 83,000 Acct. No. 302 Credit Balance 3,600 5,600 7,100 ©McGraw-Hill Companies, Inc., 2005 172 Fundamental Accounting Principles, 17th Edition Serial Problem (Continued) Parts 1 and 2 Date Oct. Nov. Dec. Computer Services Revenue Explanation PR Debit 6 12 28 2 8 24 20 Acct. No. 403 Credit Balance 4,800 4,800 1,400 6,200 5,208 11,408 4,633 16,041 5,668 21,709 3,950 25,659 5,625 31,284 Date Dec. 31 Depreciation Expense—Office Equipment Explanation PR Debit 400 Acct. No. 612 Credit Balance 400 Date Dec. Depreciation Expense—Computer Equipment Explanation PR Debit 31 1,250 Acct. No. 613 Credit Balance 1,250 Wages Expense Explanation PR 31 30 10 31 Debit 875 1,750 750 500 Acct. No. 623 Credit Balance 875 2,625 3,375 3,875 31 Insurance Expense Explanation PR Debit 555 Acct. No. 637 Credit Balance 555 Rent Expense Explanation PR Acct. No. 640 Credit Balance 2,475 Date Oct. Nov. Dec. Date Dec. Date Dec. 31 Debit 2,475 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 173 Serial Problem (Continued) Parts 1 and 2 Date Dec. Date Oct. Dec. Date Nov. Dec. Date Nov. Date Oct. Dec. 31 Computer Supplies Expense Explanation PR Debit 3,065 Acct. No. 652 Credit Balance 3,065 20 2 Advertising Expense Explanation PR Debit 1,940 1,025 Acct. No. 655 Credit Balance 1,940 2,965 Mileage Expense Explanation PR 1 28 29 Debit 320 384 192 Acct. No. 676 Credit Balance 320 704 896 22 Miscellaneous Expenses Explanation PR Debit 250 Acct. No. 677 Credit Balance 250 17 3 Repairs Expense—Computer Explanation PR Debit 805 500 Acct. No. 684 Credit Balance 805 1,305 ©McGraw-Hill Companies, Inc., 2005 174 Fundamental Accounting Principles, 17th Edition Serial Problem (Continued) Part 3 SUCCESS SYSTEMS Adjusted Trial Balance December 31, 2004 Debit Cash ............................................................................ $ 58,160 Accounts receivable .................................................. 5,668 Computer supplies .................................................... 580 Prepaid insurance ..................................................... 1,665 Prepaid rent ................................................................ 825 Office equipment ....................................................... 8,000 Accumulated depreciation—Office equipment....... Computer equipment ................................................ 20,000 Accumulated depreciation—Computer equipment. Accounts payable ...................................................... Wages payable ........................................................... Unearned computer services revenue .................... K. Breeze, Capital....................................................... K. Breeze, Withdrawals.............................................. 7,100 Computer services revenue ..................................... Depreciation expense—Office equipment .............. 400 Depreciation expense—Computer equipment........ 1,250 Wages expense .......................................................... 3,875 Insurance expense .................................................... 555 Rent expense ............................................................. 2,475 Computer supplies expense .................................... 3,065 Advertising expense.................................................. 2,965 Mileage expense ........................................................ 896 Miscellaneous expenses .......................................... 250 Repairs expense—Computer ................................... 1,305 Totals........................................................................... $119,034 Credit $ 400 1,250 1,100 500 1,500 83,000 31,284 _______ $119,034 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 175 Serial Problem (Continued) Part 4 SUCCESS SYSTEMS Income Statement For Three Months Ended December 31, 2004 Revenue Computer services revenue....................................... Expenses Depreciation expense—Office equipment................ Depreciation expense—Computer equipment......... Wages expense........................................................... Insurance expense...................................................... Rent expense............................................................... Computer supplies expense...................................... Advertising expense................................................... Mileage expense......................................................... Miscellaneous expenses............................................ Repairs expense—Computer..................................... Total expenses............................................................ Net income..................................................................... $31,284 $ 400 1,250 3,875 555 2,475 3,065 2,965 896 250 1,305 17,036 $14,248 Part 5 SUCCESS SYSTEMS Statement of Owner’s Equity For Three Months Ended December 31, 2004 K. Breeze, Capital, October 1, 2004................. Plus: Owner investment.......... Net income.............................................. Less: Owner withdrawals.................................. K. Breeze, Capital, December 31, 2004............ $ 0 83,000 14,248 97,248 7,100 $90,148 ©McGraw-Hill Companies, Inc., 2005 176 Fundamental Accounting Principles, 17th Edition Serial Problem (Continued) Part 6 SUCCESS SYSTEMS Balance Sheet December 31, 2004 Assets Cash ................................................................................ Accounts receivable ..................................................... Computer supplies ........................................................ Prepaid insurance ......................................................... Prepaid rent ................................................................... Office equipment ........................................................... $ 8,000 Accumulated depreciation—Office equipment........... (400) Computer equipment..................................................... 20,000 Accumulated depreciation—Computer equipment.... (1,250) Total assets..................................................................... $58,160 5,668 580 1,665 825 7,600 18,750 $93,248 Liabilities Accounts payable........................................................... Wages payable............................................................... Unearned computer services revenue......................... Total liabilities................................................................ $ 1,100 500 1,500 3,100 Equity K. Breeze, Capital........................................................... Total liabilities and equity............................................. 90,148 $93,248 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 177 Reporting in Action — BTN 3-1 1. The revenue recognition principle requires that revenue be recorded when earned, not before and not after. Most companies earn revenue when they provide services and products to customers. 2. Krispy Kreme provides information related to revenue recognition in footnote 2 discussing the “Nature of Business and Significant Accounting Policies.” A policy on revenue recognition is stated for each segment of the company. • Company Store operations revenue is derived from the sale of doughnuts and related items to on-premises and off-premises customers. Revenue is recognized at the time of sale for on-premises sales and at the time of delivery for off premises sales. • Franchise Operations revenue is derived from: (1) development and franchise fees from the opening of new stores; and (2) royalties charged to franchisees based on sales. Development and franchise fees are charged for certain new stores and are deferred until the store is opened. The royalties recognized in each period are based on the sales in that period. • KKM&D revenue is derived from the sale of doughnut-making equipment, mix and other supplies needed to operate a doughnut store to Company-owned and franchised stores. Revenue is recognized at the time the title and risk of loss pass to the customer, generally upon delivery of the goods. 3. For fiscal year-end February 2, 2003, the profit margin is: $33,478,000 / $491,549,000 = 0.068 = 6.8% For fiscal year-end February 3, 2002, the profit margin is: $26,378,000 / $394,354,000 = 0.067 = 6.7% 4. Solution depends on the financial statements accessed. ©McGraw-Hill Companies, Inc., 2005 178 Fundamental Accounting Principles, 17th Edition Comparative Analysis — BTN 3-2 1. Krispy Kreme Current year, profit margin = $33,478 / $491,549 = 6.8% Prior year, profit margin = $26,378 / $394,354 = 6.7% Tastykake Current year, profit margin = $2,000 / $162,263 = 1.2% Prior year, profit margin = $8,048 / $166,245 = 4.8% 2. Krispy Kreme is more successful on the basis of profit margin. In the most current year, Krispy Kreme earned an average of 6.8 cents on the dollar while Tastykake earned 1.2 cents on the dollar. For the prior years, Krispy Kreme earned 6.7 cents on the dollar compared to 4.8 cents for Tastykake. Ethics Challenge — BTN 3-3 1. GAAP requires that annual deprecation be accumulated in a contraasset account, called Accumulated Depreciation. While property, plant, and equipment is often shown at its net value on the balance sheet (as in Krispy Kreme’s balance sheet in Appendix A) the cost of property, plant, and equipment along with its related accumulated depreciation are reported in the footnotes. Thus, Bergez is correct with her journal entry recommendation. 2. One strength of Welch’s method would be the ease of preparing the balance sheet. The property, plant, and equipment balance in the adjusted trial balance would be directly transferable to the balance sheet when the preparer desired to show the amount at net. Welch’s approach carries weaknesses in that financial statement users would not be able to ascertain the original cost of the equipment or be able to know how much of the original cost had been allocated to depreciation to date. 3. While both approaches would lead to the same total assets on the balance sheet, GAAP requires Bergez’s approach. As a professional, Bergez is required to uphold the standards of her profession and thus the decision is an ethical one for her. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 179 Communicating in Practice — BTN 3-4 This communication activity has no set solution. A class discussion of the ratios can be conducted with emphasis on (1) return and profitability by industries and (2) a contrast of debt financing between industries. Taking It to the Net — BTN 3-5 1. Cannondale’s primarily sells mountain bikes. 2. Review 10-K. 3. Recent fiscal years have ended on June 29, 2002, June 30, 2001 and July 1, 2000. While Cannondale labels these endings as “12 months ended” they appear to be reporting as of the end of the 52nd week. 4. Net sales for the fiscal year ended June 29, 2002, is $156,655,000. 5. Net loss for the fiscal year ended June 29, 2002, is $15,440,000. 6. Profit margin is: $(15,440) / $156,655 = -0.099 = -9.8% (or non-interpretable) 7. Cannondale’s fiscal year-end appears to (but does not necessarily) correspond to its natural business year. The difficulty in reaching a definitive answer to this question is the lack of information in Cannondale’s statements. The quarterly sales data does reveal that the 3 months ending in June has reported the highest sales of the four quarters for the last two years reported. Management does discuss “seasonality” as a factor affecting business. The bottom line is Cannondale’s fiscal year-end appears to correspond to its natural business year, but we cannot be certain. ©McGraw-Hill Companies, Inc., 2005 180 Fundamental Accounting Principles, 17th Edition Teamwork in Action — BTN 3-6 Note that there is no specific solution to this activity. Nevertheless, the presentation of each expert team should reflect the following summary points: Type Before Adjusting Balance Sheet Income Statement Account Account Prepaid expense Asset overstated Expense understated Unearned revenues Liability overstated Revenue understated Accrued Expenses Liability understated Expense understated Accrued Revenues Asset understated Revenue understated Adjusting Entry Dr. Expense Cr. Asset* Dr. Liability Cr. Revenue Dr. Expense Cr. Liability Dr. Asset Cr. Revenue * For depreciation, one would Credit the Accumulated Depreciation contra account. Some implementation notes: This activity allows all students to be actively involved in the learning process. Encourage students to take the opportunity to ask questions in the small group environment the learning team provides. Encourage the better students to serve as experts on unearned revenues. The instructor’s observation of and reactions to expert teams’ development of presentation material as well as the delivery to learning teams will have a significant impact on the effectiveness of this activity. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 181 Business Week Activity — BTN 3-7 1. Herz personally favors a move toward what is known as “principlesbased accounting.” This type of accounting would require a vast simplification of accounting standards where professionals would be asked to comply with broad goals and objectives. Such accounting would be a move away from a lengthy list of rules and exceptions. 2. Herz believes that breaking the rules is at the core of most of the scandals. When a person or company just outright violates standards and commits fraud, it is hard to say the standard is wrong. It’s like when someone robs a bank: You can’t really say that the law against bank robbing was part of the problem. 3. A principles-based system is one where the accounting standard simply lays out objectives of good reporting in an area. It may include some rules, based on the objectives, but it does not try to answer every question or provide a rule for every situation. So a typical standard would be more like 10-to-12 pages in length rather than 200 pages. 4. Principles-based accounting requires the exercise of good judgment by both companies and auditors. Those who don’t like the principlesbased approach say, “I don’t trust people to do that.” They think people need rules to follow or they will try to find a way to make an objective fit almost any situation. ©McGraw-Hill Companies, Inc., 2005 182 Fundamental Accounting Principles, 17th Edition Entrepreneurial Decision — BTN 3-8 1. Many businesses find it cheaper to use outside collection agencies rather than hire in-house staff to handle past-due account collections. Additionally, owners of collection agencies are usually experts in the art of collection and may be able to collect on accounts that the businesses themselves never would be able to. Although a 50% commission seems steep, it must be weighed against the possibility that zero collections may be realized if the account is not turned over. Mellie’s net income = Income x Profit margin = $40,000,000 x 0.08 = $3,200,000. 2. 3. Current commission expense = $40,000,000 x 0.02 = $800,000. 4. If the commission fee charged can be negotiated down from 50% to 40%, this will be a 20% reduction in commission expense. This is computed as: (50% - 40%) / 50% = 20%. Specifically, the commission expense would change from $800,000 to 80% of $800,000 or $640,000 (also computed as $40,000,000 x 0.02 x (40%/50%)). The $160,000 reduction from $800,000 to $640,000 represents a 20% decline from $800,000. 5. Net income would be $160,000 higher since commission expense would be reduced by $160,000. Net income would change to $3,360,000 [$3,200,000 + $160,000]. Profit margin would then equal: $3,360,000/$40,000,000 = 8.4%. Hitting the Road — BTN 3-9 There is no formal solution to this field activity. The instructor may wish to tally students’ findings to see what companies were selected, who responded, what was the response time, etc. The instructor can also periodically ask students to bring in examples from their selected companies at certain times, and then compare and contrast them with the examples in the book. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 183 Global Decision — BTN 3-10 1. Grupo Bimbo states under its “Significant Accounting Policies” in its annual report that revenue is recognized when the product is shipped. 2. The five types of assets that are depreciated by Grupo Bimbo are: a. Buildings d. Office equipment b. Manufacturing equipment e. Computer equipment c. Vehicles Land, construction-in-progress, and machinery-in-transit are not depreciated. 3. Grupo Bimbo profit margin (in thousands of pesos): 2002 profit margin = 1,002,664 / 41,373,269 = 2.4% 2001 profit margin = 1,682,025 / 34,968,097 = 4.8% ©McGraw-Hill Companies, Inc., 2005 184 Fundamental Accounting Principles, 17th Edition