Chapter 5: Adjustments and the Worksheet

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Chapter 5: Adjustments and the Worksheet

Chapter Opener: Thinking Critically

Students should suggest that accountants estimate the amount of wear and tear on the equipment. This expense should be charged against the income earned during that same period. The concept of adjustments and depreciation can be introduced at this time.

Fast Facts

• William Boeing founded Pacific Aero Products Company in 1916; the name was changed to Boeing in 1917.

• In 1917 the company employed 28 people. In 2004 Boeing employed more than 159,000 people in 48 U.S. states and 67 foreign countries.

• Boeing is the largest contractor working for NASA.

• Along with the ISS, the Boeing Company manufactures and services commercial airplanes, military aircraft, helicopters, a variety of electronic defense systems, and advanced communication systems.

• Boeing’s newest division, Connexion, equips aircraft with a broadband connection that provides high- speed access to the Internet, entertainment and television—all in real-time.

• Boeing’s 2004 sales were $52.5 billion from customers in 145 countries. International sales accounted for nearly 30 percent of total sales.

Computers in Accounting: Thinking Critically

Answers will vary, but students should demonstrate an understanding of the word “integrated” as it applies to computerized accounting systems. Each accounting module (accounts payable, accounts receivable, general ledger, fixed asset, etc.) communicates with the others, transferring data, keeping the entire system in balance.

Computers in Accounting: Internet Application

Students can find information at www.accubooks.com. Reports will vary. The Accu-Books general ledger module provides the following features: produces financial reports, offers customizable chart of accounts, and provides easy-to-use forms for journal entries.

Managerial Implications: Thinking Critically

Adjustments ensure that the financial statements reflect the true condition and performance of the business.

Discussion Questions

These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter.

1. Debit Depreciation Expense – Machine, $125; Credit Accum. Depr. – Machine, $125 2. Debit Insurance Expense; credit Prepaid Insurance.

3. Expense items that are acquired and paid for in advance of their use. Supplies, prepaid rent, prepaid insurance, and advertising.

4. Update supplies accounts at the end of a period to reflect amounts used.

5. b, d, f, g, and i are depreciated.

6. a. none b. none c. none d. decrease 7. a. decrease b. none c. none d. decrease

8. To create a permanent record of any changes in account balances that are shown on the worksheet.

9. Asset cost, accumulated depreciation, book value.

10. Contra asset accounts have a credit balance. Asset accounts have a debit balance.

11. Cost of asset less accumulated depreciation.

12. To keep a record of total depreciation taken; to reduce the book value of asset.

13. Charges off an equal amount of cost of asset during each accounting period in asset’s useful life.

14. Equipment, buildings, and automobiles.

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Exercises

Exercise 5.1

1. Rent Expense, $1,500 Dr.

Prepaid Rent, $1,500 Cr.

($9,000⫼ 6 months = $1,500 per month) 2. Supplies Expense, $1,475 Dr.

Supplies, $1,475 Cr.

($2,375 – $900 = $1,475)

3. Depreciation Expense—Equipment, $225 Dr.

Accumulated Depreciation—Equipment, $225 Cr.

($27,000⫼ 120 months = $225) Exercise 5.2

1. Insurance Expense, $250 Dr.

Prepaid Insurance, $250 Cr.

($6,000⫼ 24 months = $250 month) 2. Advertising Expense, $450 Dr.

Prepaid Advertising, $450 Cr.

($5,400⫼ 12 months = $450) Exercise 5.3

Mason Company Worksheet (Partial) Month Ended January 31, 2007

Trial Balance Adjustments

Adjusted Trial Balance

Account Name Debit Credit Debit Credit Debit Credit

Cash 62,000 62,000

Accounts Receivable 21,500 21,500

Supplies 8,000 (a) 5,200 2,800

Prepaid Insurance 7,200 (b) 1,800 5,400

Equipment 90,500 90,500

Accumulated Depr.—Equipment (c) 1,575 1,575

Accounts Payable 15,700 15,700

Jerry Mason, Capital 80,950 80,950

Fees Income 112,000 112,000

Rent Expense 9,600 9,600

Salaries Expense 9,850 9,850

Supplies Expense (a) 5,200 5,200

Insurance Expense (b) 1,800 1,800

Depreciation Expense—Equipment (c) 1,575 1,575

Totals 208,650 208,650 8,575 8,575 210,225 210,225

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Exercise 5.4

Net Income Before Adjustments . . . $40,000 Less Adjustments:

Rent Expense . . . $3,000 Depreciation Expense . . . 3,600 Supplies Expense . . . 1,300

Total Adjustments for Expenses Not Made . . 7,900 Corrected Net Income . . . $32,100

If the adjusting entries are not made, total expenses will be understated by $7,900 and net income will be overstated by $7,900.

Exercise 5.5

GENERAL JOURNAL PAGE 3

Post.

Date Description Ref. Debit Credit

Adjusting Entries 2007

Dec. 31 Supplies Expense . . . 523 2,500

Supplies . . . 121 2,500 31 Insurance Expense . . . 521 1,800

Prepaid Insurance . . . 131 1,800 31 Depreciation Expense—Equipment . . . 517 1,200

Accumulated Depreciation—Equipment . . . 142 1,200

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GENERAL LEDGER

ACCOUNT Supplies ACCOUNT NO. 121

Post. Balance

Date Description Ref. Debit Credit Debit Credit

2007

Dec. 1 J1 4,000 4,000

31 Adjusting J3 2,500 1,500

ACCOUNT Prepaid Insurance ACCOUNT NO. 131

Post. Balance

2007

Dec. 1 J1 10,800 10,800

31 Adjusting J3 1,800 9,000

ACCOUNT Accumulated Depreciation—Equipment ACCOUNT NO. 142

Post. Balance

2007

Dec. 31 Adjusting J3 1,200 1,200

ACCOUNT Depreciation Expense—Equipment ACCOUNT NO. 517

Post. Balance

2007

ACCOUNT Insurance Expense ACCOUNT NO. 521

Post. Balance

2007

ACCOUNT Supplies Expense ACCOUNT NO. 523

Post. Balance

2007

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Pr oblems

Problem 5.1A DENTON COMPANY Worksheet Month Ended January 31,2007 AdjustedIncome Trial BalanceAdjustmentsTrial BalanceStatementBalance Sheet Account NameDebitCreditDebitCreditDebitCreditDebitCreditDebitCredit Cash26,00026,00026,000 Accounts Receivable5,2005,2005,200 Supplies9,600(a) 8,0001,6001,600 Prepaid Insurance15,000(b) 2,50012,50012,500 Equipment27,00027,00027,000 Accumulated Dep.—Equipment(c)550550550 Accounts Payable6,2006,2006,200 Julie Denton, Capital63,00063,00063,000 Julie Denton, Drawing3,6003,6003,600 Fees Income25,80025,80025,800 Depreciation Expense—Equipment(c)550550550 Insurance Expense(b) 2,5002,5002,500 Salaries Expense7,8007,8007,800 Supplies Expense(a) 8,0008,0008,000 Utilities Expense800800800 Totals95,00095,00011,05011,05095,55095,55019,65025,80075,90069,750 Net Income6,1506,150 25,80025,80075,90075,900 Analyze: The adjustment to Prepaid Insurance decreased the account balance.

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Problem 5.2A CAMPUS BOOK STORE Worksheet Month Ended November 30, 2007 AdjustedIncome Trial BalanceAdjustmentsTrial BalanceStatementBalance Sheet Account NameDebitCreditDebitCreditDebitCreditDebitCreditDebitCredit Cash22,57522,575 Accounts Receivable3,3123,312 Supplies6,000(a) 2,4003,600 Prepaid Rent21,000(b) 3,00018,000 Equipment27,00027,000 Accumulated Depreciation—Equip.(c)700700 Accounts Payable8,0008,000 Chuck Keen, Capital40,83740,837 Chuck Keen, Capital, Drawing3,0003,000 Fees Income42,00042,000 Depreciation Expense—Equip.(c)700700 Rent Expense(b) 3,0003,000 Salaries Expense7,5007,500 Supplies Expense(a) 2,4002,400 Utilities Expense450450 Totals90,83790,8376,1006,10091,53791,537 Analyze:The balance of the Prepaid Rent account prior to the adjusting entry for expired rent is $21,000.

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Problem 5.3A

OXNARD CORPORATION Income Statement

Month Ended December 31, 2007 Revenue

Fees Income . . . 39,750 Expenses

Salaries Expense . . . 8,400 Utilities Expense . . . 900 Supplies Expense . . . 3,000 Advertising Expense . . . 1,200 Depreciation Expense—Equipment . . . . 600

Total Expenses . . . 14,100 Net Income . . . 25,650

OXNARD CORPORATION Statement of Owner’s Equity Month Ended December 31, 2007

Derrick Wells, Capital, December 1, 2007 . 54,000 Net Income for December . . . 25,650

Less Withdrawals for December . . . 3,600

Increase in Capital . . . 22,050 Derrick Wells, Capital, December 31, 2007 76,050

OXNARD CORPORATION Balance Sheet December 31, 2007

Assets

Cash . . . 38,600 Accounts Receivable . . . 6,000 Supplies . . . 2,050 Prepaid Advertising . . . 6,000 Equipment . . . 30,000

Less Accumulated Depreciation . . . 600 29,400 Total Assets . . . 82,050

Liabilities & Owner’s Equity Liabilities

Accounts Payable . . . 6,000 Owner’s Equity

Derrick Wells, Capital . . . 76,050 Total Liabilities & Owner’s Equity . . . 82,050

Analyze: Net income would be $24,450.

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Problem 5.4A RAMON CREATIVE DESIGNS Worksheet Month Ended January 31, 2007 AdjustedIncome Trial BalanceAdjustmentsTrial BalanceStatementBalance Sheet Account NameDebitCreditDebitCreditDebitCreditDebitCreditDebitCredit Cash17,75017,75017,750 Accounts Receivable6,3006,3006,300 Supplies3,875(a) 3,325550550 Prepaid Advertising4,200(b) 1,0503,1503,150 Prepaid Rent9,600(c)8008,8008,800 Equipment10,80010,80010,800 Accumulated Depreciation—Equip.(d) 909090 Accounts Payable7,7757,7757,775 Carlos Ramon, Capital30,00030,00030,000 Carlos Ramon, Drawing3,5003,5003,500 Fees Income23,80023,80023,800 Advertising Expense(b) 1,0501,0501,050 Depreciation Expense—Equipment(d)909090 Rent Expense(c)800800800 Salaries Expense4,8504,8504,850 Supplies Expense(a) 3,3253,3253,325 Utilities Expense700700700 Totals61,57561,5755,2655,26561,66561,66510,81523,80050,85037,865 Net Income12,98512,985 23,80023,80050,85050,850

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RAMON CREATIVE DESIGNS Income Statement Month Ended January 31, 2007 Revenue

Salaries Expense . . . 4,850 Utilities Expense . . . 700 Supplies Expense . . . 3,325 Advertising Expense . . . 1,050 Rent Expense . . . 800 Depreciation Expense—Equipment . . . . 90

RAMON CREATIVE DESIGNS Statement of Owner’s Equity Month Ended January 31, 2007

Carlos Ramon, Capital, January 1, 2007 . . 30,000 Net Income for January . . . 12,985

Less Withdrawals for January . . . 3,500

Increase in Capital . . . 9,485 Carlos Ramon, Capital, January 31, 2007 . 39,485

RAMON CREATIVE DESIGNS Balance Sheet

January 31, 2007 Assets

Cash . . . 17,750 Accounts Receivable . . . 6,300 Supplies . . . 550 Prepaid Advertising . . . 3,150 Prepaid Rent . . . 8,800 Equipment . . . 10,800

Less Accumulated Depreciation—Equipment . . . 90 10,710 Total Assets . . . 47,260

Liabilities and Owner’s Equity Liabilities

Carlos Ramon, Capital . . . 39,485 Total Liabilities and Owner’s Equity . . . 47,260

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GENERAL JOURNAL PAGE 3 Post.

Jan. 31 Supplies Expense . . . 517 3,325

Supplies . . . 121 3,325 31 Advertising Expense . . . 519 1,050

Prepaid Advertising . . . 130 1,050 31 Rent Expense . . . 520 800

Prepaid Rent . . . 131 800 31 Depreciation Expense—Equipment . . . 523 90

Accumulated Depreciation—Equipment . . . 142 90

GENERAL LEDGER

Post. Balance

2007

Jan. 1 J1 3,875 3,875

31 Adjusting J3 3,325 550

ACCOUNT Prepaid Advertising ACCOUNT NO. 130

Post. Balance

2007

Jan. 1 J1 4,200 4,200

31 Adjusting J3 1,050 3,150

ACCOUNT Prepaid Rent ACCOUNT NO. 131

Post. Balance

2007

Jan. 1 J1 9,600 9,600

31 Adjusting J3 800 8,800

Post. Balance

2007

Jan. 31 Adjusting J3 90 90

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Post. Balance

2007

Jan. 31 Adjusting J3 3,325 3,325

ACCOUNT Advertising Expense ACCOUNT NO. 519

Post. Balance

2007

ACCOUNT Rent Expense ACCOUNT NO. 520

Post. Balance

2007

Post. Balance

2007

Analyze: If adjusting entries had not been made, net income would be overstated.

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ARGO COMPANY Worksheet Month Ended February 28, 2007 AdjustedIncome Trial BalanceAdjustmentsTrial BalanceStatementBalance Sheet DebitCreditDebitCreditDebitCreditDebitCreditDebitCredit 73,00073,00073,000 6,4006,4006,400 4,200(a) 2,0002,2002,200 24,000(b) 2,00022,00022,000 46,00046,00046,000 (c) 1,0001,0001,000 12,00012,00012,000 Capital98,50098,50098,500 Drawing3,0003,0003,000 54,00054,00054,000 6,3006,3006,300 1,6001,6001,600 (a) 2,0002,0002,000 (b) 2,0002,0002,000 (c) 1,0001,0001,000 164,500164,5005,0005,000165,500165,50012,90054,000152,600111,500 41,10041,100 54,00054,000152,600152,600 No depreciation has been recorded for the fiscal period, or any previous fiscal period.

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DENISE DE LAROSA, ATTORNEY-AT-LAW Worksheet (Partial) Month Ended November 30, 2007 AdjustedIncome Trial BalanceAdjustmentsTrial BalanceStatementBalance Sheet DebitCreditDebitCreditDebitCreditDebitCreditDebitCredit 17,52517,525 4,2504,250 5,200(a) 1,8003,400 22,100(b) 1,70020,400 33,00033,000 (c)275275 8,5008,500 40,00040,000 3,0003,000 42,85042,850 5,4005,400 875875 (a) 1,8001,800 (b) 1,7001,700 (c) 275275 91,35091,3503,7753,77591,62591,625 Accumulated Depreciation—Equipment

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Problem 5.3B

ARROW ACCOUNTING SERVICES Income Statement

Month Ended December 31, 2007 Revenue

Salaries Expense . . . 18,600 Supplies Expense . . . 600 Utilities Expense . . . 1,080 Rent Expense . . . 3,500 Advertising Expense . . . 800 Depreciation Expense—Fixtures . . . 300

ARROW ACCOUNTING SERVICES Statement of Owner’s Equity Month Ended December 31, 2007

John Arrow, Capital, December 1, 2007 . . . 30,000 Net Income for Year . . . 6,450

Less Withdrawals for Year . . . 3,000

Increase in Capital . . . 3,450 John Arrow, Capital, December 31, 2007 . . 33,450

ARROW ACCOUNTING SERVICES Balance Sheet

December 31, 2007 Assets

Cash . . . 16,950 Accounts Receivable . . . 2,200 Supplies . . . 900 Prepaid Advertising . . . 3,200 Fixtures . . . 18,000

Less Accumulated Depreciation . . . 300 17,700 Total Assets . . . 40,950

Liabilities & Owner’s Equity Liabilities

John Arrow, Capital . . . 33,450 Total Liabilities & Owner’s Equity . . . 40,950

Analyze: Adjusting entries decreased the assets of the company by $1,700.

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TORRES ESTATE PLANNING AND INVESTMENTS Worksheet Month Ended June 30, 2007 AdjustedIncome Trial BalanceAdjustmentsTrial BalanceStatementBalance Sheet DebitCreditDebitCreditDebitCreditDebitCreditDebitCredit 9,8509,8509,850 3,0503,0503,050 3,800(a) 2,3001,5001,500 7,200(b) 1,8005,4005,400 18,000(c) 1,50016,50016,500 24,00024,00024,000 (d)400400400 5,4005,4005,400 orres, Capital30,05030,05030,050 orres, Drawing2,0002,0002,000 36,90036,90036,900 (b) 1,8001,8001,800 (d) 400400400 (c) 1,5001,5001,500 3,8003,8003,800 (a) 2,3002,3002,300 650650650 72,35072,3506,0006,00072,75072,75010,45036,90062,30035,850 26,45026,450 36,90036,90062,30062,300

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TORRES ESTATE PLANNING AND INVESTMENTS Income Statement

Month Ended June 30, 2007 Revenue

Salaries Expense . . . 3,800 Utilities Expense . . . 650 Supplies Expense . . . 2,300 Advertising Expense . . . 1,800 Rent Expense . . . 1,500 Depreciation Expense—Equipment . . . . 400

TORRES ESTATE PLANNING AND INVESTMENTS Statement of Owner’s Equity

Month Ended June 30, 2007

Paul Torres, Capital, June 1, 2007 . . . 30,050 Net Income for June . . . 26,450

Less Withdrawals for June . . . 2,000

Increase in Capital . . . 24,450 Paul Torres, Capital, June 30, 2007 . . . 54,500

TORRES ESTATE PLANNING AND INVESTMENTS Balance Sheet

June 30, 2007 Assets

Cash . . . 9,850 Accounts Receivable . . . 3,050 Supplies . . . 1,500 Prepaid Advertising . . . 5,400 Prepaid Rent . . . 16,500 Equipment . . . 24,000

Less Accumulated Depreciation—Equipment . . 400 23,600 Total Assets . . . 59,900

Liabilities & Owners Equity Liabilities

Paul Torres, Capital . . . 54,500 Total Liabilities & Owner’s Equity . . . 59,900

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Jun. 30 Supplies Expense . . . 517 2,300

Supplies . . . 121 2,300 30 Advertising Expense . . . 519 1,800

Prepaid Advertising . . . 130 1,800 30 Rent Expense . . . 520 1,500

Prepaid Rent . . . 131 1,500 30 Depreciation Expense—Equipment . . . 523 400

Accumulated Depreciation—Equipment . . . 142 400 GENERAL LEDGER

Post. Balance

2007

Jun. 1 J1 3,800 3,800

30 Adjusting J3 2,300 1,500

ACCOUNT Prepaid Advertising ACCOUNT NO. 130

Post. Balance

2007

Jun. 1 J1 7,200 7,200

30 Adjusting J3 1,800 5,400

ACCOUNT Prepaid Rent ACCOUNT NO. 131

Post. Balance

2007

Jun. 1 J1 18,000 18,000

30 Adjusting J3 1,500 16,500

Post. Balance

2007

Jun. 30 Adjusting J3 400 400

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Post. Balance

2007

Jun. 30 Adjusting J3 2,300 2,300

ACCOUNT Advertising Expense ACCOUNT NO. 519

Post. Balance

2007

ACCOUNT Rent Expense ACCOUNT NO. 520

Post. Balance

2007

Post. Balance

2007

Jun. 30 Adjusting J3 400 400

Analyze: Generally accepted accounting principles require that the original cost of the asset appear in the asset account until the asset has been used up or disposed. A contra asset account is used to record depreciation costs.

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oblem MANDELAINTERNATIONALCOMPANY Worksheet Month Ended January 31, 2007 AdjustedIncome Trial BalanceAdjustmentsTrial BalanceStatementBalance Sheet DebitCreditDebitCreditDebitCreditDebitCreditDebitCredit 18,47518,47518,475 3,4003,4003,400 2,150(a) 1,0501,1001,100 15,000(b) 2,50012,50012,500 24,00024,00024,000 (c)200200200 6,0006,0006,000 40,00040,00040,000 2,0002,0002,000 30,92530,92530,925 1,5001,5001,500 2,5002,5002,500 6,7006,7006,700 (a) 1,0501,0501,050 (b) 2,5002,5002,500 350350350 850850850 (c)200200200 76,92576,9253,7503,75077,12577,12515,65030,92561,47546,200 15 27515 275 30,92530,92561,47561,475

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MANDELA INTERNATIONAL COMPANY Income Statement

Month Ended January 31, 2007 Revenue

Advertising Expense . . . 1,500 Rent Expense . . . 2,500 Salaries Expense . . . 6,700 Supplies Expense . . . 1,050 Insurance Expense . . . 2,500 Telephone Expense . . . 350 Utilities Expense . . . 850 Depreciation Expense . . . 200

MANDELA INTERNATIONAL COMPANY Statement of Owner’s Equity Month Ended January 31, 2007

Wilson Mandela, Capital, January 1, 2007 . 40,000 Net Income for January . . . 15,275

Less Withdrawals for January . . . 2,000

Increase in Capital . . . 13,275 Wilson Mandela, Capital, January 31, 2007 53,275

MANDELA INTERNATIONAL COMPANY Balance Sheet

January 31, 2007 Assets

Cash . . . 18,475 Accounts Receivable . . . 3,400 Supplies . . . 1,100 Prepaid Insurance . . . 12,500 Equipment . . . 24,000

Less Accumulated Depreciation—Equipment . . 200 23,800 Total Assets . . . 59,275

Liabilities and Owner’s Equity Liabilities

Wilson Mandela, Capital . . . 53,275 Total Liabilities and Owners Equity . . . 59,275

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Jan. 31 Supplies Expense . . . 518 1,050

Supplies . . . 121 1,050 31 Insurance Expense . . . 519 2,500

Prepaid Insurance . . . 131 2,500 31 Depreciation Expense—Equipment . . . 524 200

Accumulated Depreciation—Equipment . . . 142 200 GENERAL LEDGER

Post. Balance

2007

Jan. 1 Balance ✓ 2,150 2,150

31 Adjusting J3 1,050 1,100

ACCOUNT Prepaid Insurance ACCOUNT NO. 131

Post. Balance

2007

Jan. 1 Balance ✓ 15,000 15,000

31 Adjusting J3 2,500 12,500

Post. Balance

2007

Post. Balance

2007

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ACCOUNT Insurance Expense ACCOUNT NO. 519

Post. Balance

2007

ACCOUNT Depreciation Expense-Equipment ACCOUNT NO. 524

Post. Balance

2007

Analyze: If the useful life of the equipment had been 12 years instead of 10 years, depreciation would have been $167 rather than $200. Net income would have been $33 greater.

Critical Thinking Problem TO: Ellis Coppell, President FROM: Student’s Name DATE: Current Date

SUBJECT: Effect on Financial Statements of Omitting Adjusting Entries

Adjusting entries are recorded to update the accounts at the end of the accounting period for previously unrecorded items that belong to that period. If these entries are omitted, the net income will not be an accurate measure of the operation of the company for the year and certain accounts on the balance sheet will not report correct end-of-year balances.

In particular, Coppell Enterprise’s net income for the year will be overstated by $52,300; net income should be $112,700 instead of $165,000. This amount represents a 32% decrease in net income over the amount that would be reported if the adjusting entries were not made. ($52,300⫼ $165,000 = 0.32).

This decrease in net income results from not making adjusting entries for the following unrecorded expenses:

1. Expense of rent for the year $21,000

($42,000 x 6/12 = $21,000 for 6 months)

2. Expense of supplies used during the year 14,500

(Total supplies of $18,000 – Ending Inventory of $3,500 = $14,500 supplies used)

3. Depreciation expense for the year 16,800

($420,000⫼ 25 = $16,800 depreciation per year)

Total increase in expenses $52,300

In addition to overstating the net income, the balances of Prepaid Rent and Supplies on the Balance Sheet would be overstated and the book value of the Building would also be overstated.

Preparation of the adjusting entries would permit the financial statements to present a more accurate measure of the company’s operations for the year and its financial condition at the end of the year.

Therefore, it is important and the time is well spent to prepare adjusting entries so that the financial statements are up to date and present an accurate picture of the business.

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Business Connections

Managerial Focus

1. Accounting records generally reflect an asset’s historical or original cost, less accumulated depreciation (not market value).

2. Depreciation Expense will offset income. Accumulated Depreciation will decrease the value of the asset.

3. Are necessary to present an accurate financial position of the firm.

4. Provides end-of-period adjusting entries and contains income statement and balance sheet accounts.

Ethical Dilemma

If the company wanted to donate to a nonprofit organization they would write a check and get a tax deduction. It is unethical to record higher costs than are actually incurred.

Streetwise

1. Answers will vary. Accruals for interest expense, interest income, adjustments for depreciation, salaries, deferral of income taxes, and accrual of sales tax payable.

2. $1,180 million. Current year depreciation expense increases the accumulated depreciation account.

Financial Statement Analysis 1. 4.7% ($1,124⫼ $23,978) 2. 57.4% ($13,754⫼ $23,978) 3. 9.1 years ($10,224⫼ $1,124) Extending the Thought

Students’ responses will vary. This situation extends the topic of adjusting entries to potentially uncollectible accounts. Students may believe that the customer’s account receivable should be reduced to zero since the likelihood of payment is low. Other students may suggest that the account be left intact until a determination is made that the customer will not make the payment.

Business Communication

Answers will vary, but students’ notes should reflect a diplomatic introduction of the topic when phoning the owner. The accountant should recommend more frequent depreciation adjustments in order to provide up- to-date records of the assets and expenses of the company.

Team Work

Mr. Mincks has expenses that will appear on the income statement. He needs to match these expenses with revenue. He can record the revenue as a receivable, other than accounts receivable, for the amount that he has completed. In this case he can record $15,000 or 15% of the price of the job.

Internet Connection

Professional liability, surety bonds, umbrella policies, errors and omissions, product liability, fire, auto, dental, workmen’s compensation, sexual harassment.

Practice Test Answer Key

Part A True-False 1. T

2. F 3. T 4. T 5. T 6. T 7. T 8. T

Part B Matching 1. a

2. e 3. f 4. c 5. b 6. d