CHAPTER 3 Solutions MEASURING BUSINESS INCOME

(1)

1. 2. 3. 4. 31 800 800 + – = $800 Dec. 31 920 920 + – = $920 Mar. 31 100 100 $1,900 300 $1,600 June 30 230 230 ( ÷ 6 ) × 1 = Wages Expense

To record depreciation for the month Supplies Expense

$380

To record supplies used during the year Insurance Expense

Dec.

Accumulated Depreciation—Office Equipment $980

$700

$440 Prepaid Insurance

Supplies

Less accumulated depreciation Office equipment

Chapter 3, SE 5.

Balance Sheet Presentation: a $1,040 Chapter 3, SE 2. c $460 Chapter 3, SE 1. Chapter 3, SE 3. d Chapter 3, SE 4. Wages Payable

To record wages accrued at the end of June

$1,380 $230

Depreciation Expense—Office Equipment

CHAPTER 3—Solutions

MEASURING BUSINESS INCOME

b

(2)

31 760

760 To record service revenue earned during

August on which advance deposits had been received $1,300 $450 200 175 100 25 950 $ 350 $4,300 350 $4,650 175 $4,475 Shimura Company

Statement of Retained Earnings For the Month Ended December 31, 2011

Less dividends

Retained earnings, December 31, 2011 Unearned Service Revenue

Retained earnings, November 30, 2011 Net income Subtotal Net income Total expenses Rent expense Chapter 3, SE 6. Service Revenue Shimura Company Income Statement Aug. Chapter 3, SE 7. Service revenue

For the Month Ended December 31, 2011 Revenue

Expenses

Income taxes expense Utilities expense Telephone expense Wages expense

102

(3)

Dec. 31 1,300 1,300 950 450 200 175 100 25 350 350 175 175 Dividends

To close the Dividends account Retained Earnings

Retained Earnings

To close the Income Summary account To close the expense accounts

Income Summary Income Summary

To close the revenue account Wages Expense

Rent Expense

Telephone Expense Income Summary

Income Taxes Expense Utilities Expense

Service Revenue Chapter 3, SE 8.

(4)

$1,950 $675 300 263 150 38 1,426 $ 524 $6,450 524 $6,974 263 $6,711 Income taxes expense

Utilities expense Service revenue

Subtotal

For the Month Ended October 31, 2011

Total expenses Rent expense Revenue

Expenses

Retained earnings, October 31, 2011

Cloud Company Income Statement

Cloud Company

Statement of Retained Earnings For the Month Ended October 31, 2011

Less dividends

Telephone expense

Retained earnings, September 30, 2011 Wages expense

Net income

104

(5)

Dec. 31 1,950 1,950 1,426 675 300 263 150 38 524 524 263 263 Closing entries prepared

Income Summary Service Revenue

Income Summary

To close the revenue account

Income Taxes Expense Utilities Expense

To close the Income Summary account Wages Expense

Rent Expense

Telephone Expense

To close the expense accounts

Dividends

To close the Dividends account Income Summary

(6)

$8,750

$7,000 = 1.3 times

Chapter 3, SE 12. Chapter 3, SE 11.

Cash Flow Yield =

Financial ratio calculated:

$ 450

$2,350 650 $3,000 2,550 Unearned Revenue at December 31

Service Revenue earned during December

Potential receipts from services provided during December Less Unearned Revenue at November 30

Cash received during December for services to be provided

Cash Flow from Operations

Net Income = = 1.3

106

(7)

1. 2. 3. 4. 1. 2. 3. 1. 4. 2. 5. 3. 6.

recorded by a credit to Supplies.

penses, and dividends for the year, which are listed in the adjusted trial

represents an asset increase and is recorded by a debit to Supplies. The asset over its life, not to determine its market value.

Cash flow yield is a good measure of liquidity and is closely related to the goal in relation to its net income.

of liquidity. It tells how much cash is generated by the company's operations is also an increase in assets and/or decrease in liabilities.

No, the carrying value will equal the market value of the asset only by coinci-To measure a company's performance (net income) accurately, each expense (in this case, guaranty or warranty expense) must be matched with the related

f

(Note to the instructor: Because more than one concept may apply to a particular intended to generate discussion.)

Chapter 3, E 3.

closely related to the goal of liquidity.

balance.

c

action, which concept is most applicable is a matter of judgment. This exercise is

e d

Accrual accounting is more closely related to profitability because the purpose

b a

You would expect to find the amount expended in cash on the debit side of Retained Earnings is not listed because it begins with a zero balance in the first month of operation. It does not yet reflect the amounts of revenues,

ex-the Supplies T account. The amount expended in cash to purchase supplies dence because the goal of recording depreciation is to allocate the cost of the revenue in the year in which the product or service was sold. Otherwise, net Chapter 3, E 1.

When a company has net income, its stockholders' equity increases, but there

income will be overstated, and the related liability will be understated. of accrual accounting is to measure net income. Cash accounting is more

(8)

1. 2. 3. 4. 31 87,500 87,500 1. 17,150 17,150 – = 2. 4,300 4,300 To record expired insurance

$33,690

To record expired insurance Chapter 3, E 5.

To recognize revenue for subscriptions expired during 2011

Chapter 3, E 4.

Services have not been rendered.

Magazine Subscriptions Received in Advance 2011

Dec.

Magazine Subscriptions Revenue

Persuasive evidence of an arrangement does not exist. Collectibility is not reasonably assured.

The seller's price to the buyer is not fixed or determinable.

Insurance Expense Prepaid Insurance Chapter 3, E 6. Insurance Expense Prepaid Insurance $16,540 $17,150 108

(9)

1. b c d $ 217 $196 $ 822 1,191 174 1,928 $1,408 $370 $2,750 972 314 1,632 $ 436 $ 56 $1,118 2. 31 194 194 1. 31 28,000 28,000 ÷ 5 = × 2 2. June 3 42,000 28,000 70,000 $264

work days (Monday and Tuesday)

To pay weekly salaries incurred = $70,000 Salaries Expense $28,000 $316 52

To accrue salaries owed but not paid at month end

$14,000 per day Salaries Expense

Salaries Payable Adjusting entry for column a Chapter 3, E 7.

Amounts indicated by the question marks are in italics a

To record adjustment for supplies used

$122

Total supplies available Supplies consumed during

Salaries Payable Cash

Supplies on hand at July 1 Supplies purchased during

the month

Supplies the month

Supplies on hand at July 31

July Supplies Expense

194

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$20,000 $430,000 × 15 64,500 $84,500 31 64,500 64,500 31 64,500 64,500

Note: The $12,000 paid on May 1 relates to 2010.

1. Royalty expense and royalty income calculated

2. Adjusting entries recorded

To record royalties owed for the last half of Royalty Expense Royalty Payable Dec. 2011 Dec. Chapter 3, E 9. percent)

In Bit Comp, Inc.'s records: July to December 2011 (

In Regina Company's records: 2011

Royalty Receivable

January to June 2011 (payment on November 1)

2011 royalty expense and royalty income

2011, to be paid on May 1, 2011

Royalty Income

To record royalties earned for the last half of 2011, to be received on May 1, 2011

110

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$14,620 $5,680 2,920 1,200 800 720 580 380 320 12,600 $ 2,020 $11,034 2,020 $13,054 2,000 $11,054 Retained earnings, August 31, 2011

Net income

Income taxes expense

Total expenses

Less dividends

For the Month Ended August 31, 2011 Retained earnings, July 31, 2011

Spark Cleaning Company, Inc. Statement of Retained Earnings

Subtotal

Janitorial revenue Wages expense Rent expense Chapter 3, E 10.

For the Month Ended August 31, 2011 Spark Cleaning Company, Inc.

Income Statement

Expenses

Net income

Depreciation expense—cleaning equipment Depreciation expense—truck

Revenue

Gas, oil, and other truck expenses Insurance expense

(12)

$ 4,590 2,592 380 200 152 $ 3,200 320 _2,880 $ 7,200 720 6,480 $17,274 $ 420 80 920 800 $ 2,220 $ 4,000 11,054 15,054 $17,274 Less accumulated depreciation

Prepaid rent Cleaning supplies

Liabilities

Income taxes payable Unearned janitorial revenue

Stockholders' Equity Accounts receivable

Cash

Less accumulated depreciation

Common stock Total liabilities

Chapter 3, E 10. (Continued)

Truck

Spark Cleaning Company, Inc.

Total assets Prepaid insurance Assets Cleaning equipment Accounts payable Balance Sheet August 31, 2011 Wages payable

Total liabilities and stockholders' equity Retained earnings

Total stockholders' equity

112

(13)

31 14,620 14,620 12,600 5,680 2,920 1,200 800 720 580 380 320 31 2,020 2,020 31 2,000 2,000 Aug.

Depreciation Expense—Cleaning Equipment Depreciation Expense—Truck

Income Taxes Expense Chapter 3, E 11.

Closing entries recorded

Dividends

To close the revenue account

To close the Dividends account Janitorial Revenue

To close the expense accounts Income Summary

Wages Expense Supplies Expense

Gas, Oil, and Other Truck Expenses Income Summary

Income Summary Rent Expense

(14)

1. 428 428 + = – 2. 1,065 1,065 3. 900 900 4. 425 425 5. 375 375 6. 400 400 To record service revenue earned but not billed

To record interest accrued during the period Unearned Revenue

Service Revenue

To record revenue earned for services for which Interest Receivable

Interest Income

To record property taxes applicable to the six-Chapter 3, E 12.

Accumulated Depreciation—Office Equipment Office Supplies

To record supplies consumed during the year

570

Depreciation Expense—Office Equipment Office Supplies Expense

$428

Service Revenue

payment had been received in advance month period

To record depreciation allocated to the year Property Taxes Expense

Property Taxes Payable Beginning balance Purchases Total available Ending balance Supplies consumed $168 830 $998 Accounts Receivable 114

(15)

1 42,000 42,000 31 10,500 10,500 ( ÷ 12 months ) × 3 = 2. 31 31,700 31,700 31 23,275 13,500 3,000 2,650 2,525 1,600 31 8,425 8,425 31 7,000 7,000 Dec. Consulting Fees Earned

Office Salaries Expense Income Summary

To close the expense accounts Advertising Expense

To close the Dividends account Income Summary

Retained Earnings Dividends

To close the Income Summary account Income Summary

Rent Expense

Income Taxes Expense Unearned Legal Fees

Legal Fees Earned

months

To record legal fees received in advance

$42,000 Dec.

Cash

been earned. Unearned Legal Fees is a liability of $31,500 on the balance sheet. Unearned Legal Fees

$10,500

To recognize three months' fees earned

Revenue on the income statement includes the $10,500 in legal fees that have

Chapter 3, E 14.

Closing entries recorded

To close the revenue account Chapter 3, E 13.

Entries recorded 1.

(16)

$52,000 44,000 $96,000 19,000 $77,000 $ 1,200 1,900 $ 3,100 1,450 $ 1,650 $ 1,100 9,750 $10,850 600 $10,250 $ 2,100 4,450 $ 6,550 950 $ 5,600 Wages Payable at end of 2010

Retained earnings, December 31, 2011 Retained earnings, December 31, 2010

Less Unearned Revenue at end of 2010 Wages Expense during 2011

Cash payments for wages during 2011

Fees Earned during 2011

Statement of retained earnings prepared

Cash payments for insurance during 2011 Potential payments for insurance during 2011 Less Prepaid Insurance at end of 2010

Subtotal

Potential receipts from fees during 2011 Insurance Expense during 2011

Cash receipts from fees during 2011 Potential payments for wages during 2011 Less Wages Payable at end of 2011

Unearned Revenue at end of 2011 Prepaid Insurance at end of 2011 Chapter 3, E 15.

Statement of Retained Earnings For the Year Ended December 31, 2011

Less dividends

Cindy's Beauty Salon, Inc.

Net income

116

(17)

1. $152,700 2. $26,400 3. $229,000 $6,000 $5,000 $5,500 $4,300

Cash Flows from Operating Activities Net Income = 2011 = or 1.2 = 1.3 or = 1.2 Interest Expense $26,400 — $26,400 23,400 $ 3,000 — $ 152,700 28,000 $257,000 242,000 $ 15,000

Financial ratios calculated

= Cash Flow Yield

2010

times

times 1.3

Salaries Expense

Potential cash paid for salaries Less ending balance

Cash paid during the year

$ 2,700

$ 152,700

$229,000 Potential cash paid for interest

Less ending balance Cash paid during the year

Cash paid for salaries during the year: Beginning balance

Cash paid for rent during the year: Ending balance

Rent Expense

Potential cash paid for rent Less beginning balance Cash paid during the year

Cash paid for interest during the year: Beginning balance

(18)

Balance Balance after after Adjustment Adjustment a. – $ 5,440 $ 1,360 + $ 5,440 $ 5,440 b. – 12,448 2,300 + 12,448 12,448 c. + 25,600 116,800 + 25,600 25,600 d. + 2,000 2,000 + 2,000 24,000 e. – 850 2,550 + 850 320,118 f. + 4,080 4,080 + 4,080 206,740 g. + 4,600 4,600 + 4,600 4,600 Chapter 3, P 1. Income Adjustment Insurance Expense

Balance Sheet Account

(+ or –) Adjustment Cleaning Revenue Prepaid Insurance Depreciation Expense— Amount of

Cleaning Supplies Expense

Accumulated Depreciation—

(+ or –)

Statement Account

Income Taxes Payable

Income Taxes Expense

Wages Payable Wages Expense Interest Payable Interest Expense Amount of Building

Unearned Cleaning Revenue

Building

Cleaning Supplies

118

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a. June 30 26,000 26,000 b. 30 22,440 22,440 ( ÷ 5 3 days = c. d. 30 8,824 8,824 + – = $8,824 e. 30 6,514 6,514 [( ÷ × 6 [( ÷ × 2 f. 30 14,600 41,300 14,600 41,300 g. 30 3,600 3,600 ( ÷ 12 × 1 month = h. 30 9,000 9,000 i. 30 12,600 12,600 1. Adjusting entries recorded

Interest Expense

$37,400 Interest Payable

To record accrued interest on mortgage Chapter 3, P 2.

Insurance Expense $8,230

months ] $5,800

To record expired insurance Prepaid Insurance $3,230 $2,636 12 months ) 2,900 $3,240 Depreciation Expense—Equipment Accumulated Depreciation—Buildings $6,732 36 months ) 374 months ] Service Revenue $6,514

Income Taxes Payable Service Revenue

To record service revenue earned on a Accounts Receivable

$43,200 $3,600

To accrue estimated income taxes for the year

contract to be billed in August Income Taxes Expense

Depreciation Expense—Buildings

Accumulated Depreciation—Equipment To record supplies used

Salaries Payable Salaries Expense

To record accrued salaries days ) Supplies No entry Supplies Expense $22,440 ×

To record annual depreciation

months)

To record service revenue earned on services collected in advance

(20)

2. User Insight: Revenue recognition discussed

In transaction c , no revenue is recognized because even though a contract has Chapter 3, P 2. (Continued)

been signed, no services have yet been provided or earned. In transaction h , the services have been provided and earned. Thus, in this case, it is appropriate to recognize revenue for the portion of the contract that has been completed.

120

(21)

Bal. 9,250 Bal. 1,331 (a) 1,181 (g) 1,550 Bal. 150 Bal. 5,675 Bal. 660 (b) 305 Bal. 4,620 Bal. 355 (c) 263 Bal. 1,033

Bal. 2,970 Bal. 5,500 (f) 902 Bal. 1,485

Bal. 583

(d) 285 (e) 165 (h) 2,100

Bal. 6,000 Bal. 7,001 Bal. 11,000

Bal. 36,300 Bal. 24,700 Bal. 2,200 (e) 165 (b) 305 (g) 1,550 Bal. 24,865 Bal. 2,505 Bal. 38,752

Bal. 2,140 (a) 1,181 (c) 263

(d) 285 (h) 2,100 1. T accounts set up and balances entered

Accounts Payable

Income Taxes Payable Notes Payable

770 Prepaid Rent Office Equipment Office Equipment

Bal. 4,125 2. Adjusting entries posted to the accounts

Bal.

Retained Earnings Chapter 3, P 3.

Cash Accounts Receivable Office Supplies

Common Stock Depreciation Expense— Office Equipment Interest Expense Dividends Service Revenue (f)

Office Supplies Expense Utilities Expense

Rent Expense

Unearned Service Revenue

902

(22)

$ 9,250 5,675 150 355 4,620 $ 1,033 2,970 5,500 583 285 165 2,100 6,000 7,001 11,000 38,752 24,865 2,505 2,140 1,181 263 285 2,100 $64,389 $64,389 Adjusted Trial Balance

Office Supplies

Chapter 3, P 3. (Continued)

3. Adjusted trial balance prepared

Prepaid Rent

December 31, 2011 Financial Service, Inc.

Accounts Receivable

Service Revenue

Accumulated Depreciation—Office Equipment Accounts Payable

Cash

Interest Payable

Depreciation Expense—Office Equipment Interest Expense

Income Taxes Expense Notes Payable

Office Equipment

Office Supplies Expense Common Stock Salaries Payable Salaries Expense Retained Earnings Dividends Rent Expense Utilities Expense 122

(23)

a. b. c. d. e. f. g. h.

Balance sheet, income statement, statement of retained earnings Balance sheet, income statement, statement of retained earnings Balance sheet, income statement, statement of retained earnings Balance sheet, income statement, statement of retained earnings Balance sheet, income statement, statement of retained earnings Balance sheet, income statement, statement of retained earnings Balance sheet, income statement, statement of retained earnings Chapter 3, P 3. (Continued)

4. User Insight: The following financial statements are affected by the adjustments:

(24)

Bal. 480 (b) 280

Bal. 200

Bal. 1,560 (a) 1,110 Bal. 14,200 Bal. 1,540

Bal. 450

Bal. 3,130

(e) 438 Bal. 438 (f) 4,860 (d) 42 Bal. —

Bal. 1,312

Bal. 7,000 Bal. 6,878 Bal. 12,000

Bal. 43,852 Bal. 16,600 Bal. 1,300 (e) 438 Bal. 44,290 Bal. 4,800 Bal. 440 (b) 280 (d) 42 Bal. 482 (a) 1,110 (c) 1,590 (f) 4,860 2. Adjusting entries posted to the accounts

1. T accounts set up and balances entered

Advertising Expense

Office Supplies Expense

Depreciation Expense—

Rent Expense Insurance Expense

Income Taxes Expense Office Salaries Expense

Retained Earnings Dividends

Tax Fees Revenue Common Stock

Unearned Tax Fees Revenue Bal. Accounts Payable 2,198 Office Supplies 7,400 Office Equipment Chapter 3, P 4.

Cash Accounts Receivable Prepaid Insurance Bal.

1,270

Income Taxes Payable Bal. 1,590 (c) Office Equipment Accumulated Depreciation— 124

(25)

$ 7,400 2,198 200 450 14,200 $ 3,130 1,312 4,860 7,000 6,878 12,000 44,290 16,600 1,300 4,800 482 280 1,110 1,590 4,860 $67,470 $67,470

Note: Unearned Tax Fees Revenue does not appear on the adjusted trial balance

because it now has a zero balance. Office Supplies Expense

Depreciation Expense—Office Equipment Income Taxes Expense

Rent Expense

Accumulated Depreciation—Office Equipment Cash

Income Taxes Payable Common Stock

Telephone Expense Tax Fees Revenue

Insurance Expense

3. Adjusted trial balance, income statement, statement of retained earnings,

Prepaid Insurance

and balance sheet prepared Chapter 3, P 4. (Continued)

Office Supplies

December 31, 2011 Kazai Tax Service, Inc.

Adjusted Trial Balance

Advertising Expense Retained Earnings Dividends

(26)

$44,290 $16,600 4,860 4,800 1,590 1,300 1,110 482 280 31,022 $13,268 $ 6,878 13,268 $20,146 12,000 $ 8,146 Retained earnings, December 31, 2011

For the Year Ended December 31, 2011 Retained earnings, December 31, 2010

Less dividends Revenue

Kazai Tax Service, Inc.

Net income Subtotal Net income Expenses

Advertising expense Tax fees revenue

Office salaries expense

Office supplies expense

Depreciation expense—office equipment Income taxes expense

Rent expense

Telephone expense Insurance expense Total expenses

Statement of Retained Earnings Kazai Tax Service, Inc. Chapter 3, P 4. (Continued)

Income Statement

For the Year Ended December 31, 2011

126

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$ 7,400 2,198 200 450 $14,200 3,130 11,070 $21,318 $ 1,312 4,860 $ 6,172 $ 7,000 8,146 15,146 $21,318 Prepaid insurance Assets

Total liabilities and stockholders' equity Total stockholders' equity

Less accumulated depreciation Chapter 3, P 4. (Continued)

Kazai Tax Service, Inc. December 31, 2011 Cash Balance Sheet Total assets Office supplies Office equipment Accounts payable Accounts receivable Total liabilities Liabilities

Income taxes payable

Retained earnings Common stock

Stockholders' Equity

4. User Insight: The effect of adjusting entries discussed

is why it is not necessary to show the effects of adjusting entries on the statement of cash flows.

(28)

Page 14 Post.

Ref. Debit Credit 2011 a. June 30 514 6,000 117 6,000 b. 30 515 900 118 900 c. 30 518 5,472 119 5,472 d. 30 516 4,647 141 4,647 $5,655 – = $4,647 e. 30 517 13,750 143 13,750 $110,000 × 12.5% = f. 30 519 5,650 213 5,650 g. 30 212 6,092 411 6,092 $15,000 – = $6,092 h. 30 520 6,625 214 6,625 $13,750 advance Interest Expense Depreciation Expense—Limousines

limousines for the year

To record spare parts used during $1,008

1. Adjusting entries recorded in the general journal

Date

for the year Interest Payable

To record accrued interest

Unearned Passenger Service Revenue

$8,908 Income Taxes Payable

To accrue estimated income taxes To recognize passenger service revenue earned

Passenger Service Revenue

Accumulated Depreciation—Limousines To record depreciation on the

during the year Spare Parts Expense

the year Spare Parts

during the year Insurance Expense

Prepaid Maintenance Maintenance Expense

General Journal

To record insurance that expired Description

Prepaid Rent Rent Expense

To expense one year's rent paid in

To record amount of deposit used

Income Taxes Expense Chapter 3, P 5.

128

(29)

Ref. Debit Credit Debit Credit

30 4,906

30 7,114

30 6,000

30 J14 6,000 —

30 2,450

30 J14 900 1,550

30 6,000

30 J14 5,472 528

2. Ledger accounts opened and balances recorded 3. Adjusting entries posted from the general journal

(30)

30 5,655

30 J14 4,647 1,008

30 110,000

30 17,500

30 J14 13,750 31,250

30 22,500

30 15,000

30 J14 6,092 8,908

30 J14 5,650 5,650 Balance 2011 June Balance 2011 June Balance Date Item Post. Post. Date Item Accumulated Depreciation—Limousines

Limousines Account No. 142

Date Adjustment 2011 Item Balance Item Adjustment Balance Post. June Interest Payable Date

Unearned Passenger Service Revenue Account No. 212

Balance Balance

Spare Parts Account No. 141

2011 Post. Date Item Account No. 143 Chapter 3, P 5. (Continued) June Balance

Notes Payable Account No. 211

Balance Post. Item Date June Balance 2011 2011 Adjustment Account No. 213 June Post. Adjustment Balance 130

(31)

30 J14 6,625 6,625

30 20,000

30 24,106

30 10,000

30 214,249

30 J14 6,092 220,341

30 44,650

Income Taxes Payable Account No. 214

Date Item Balance June Balance Adjustment Date Item 2011 Balance Post. 2011 June Balance

Dividends Account No. 313

Date Item Account No. 312 Chapter 3, P 5. (Continued) Balance Post. Balance Account No. 511 Post. June Balance Balance Balance June 2011

Passenger Service Revenue Retained Earnings

Post.

Gas and Oil Expense

Account No. 411 Item Date 2011 Item Date Balance Post.

Common Stock Account No. 311

(32)

30 103,180

30 13,400

30 J14 6,000 6,000

30 J14 900 900

30 J14 4,647 4,647

30 J14 13,750 13,750 Date Balance Post. Account No. 512 Salaries Expense June Balance Item 2011 2011 June Adjustment Post. Date Item 2011 June Balance Item

Rent Expense Account No. 514

Post. Balance Balance Insurance Expense Date Item Post. Post. Balance Adjustment

Depreciation Expense—Limousines Account No. 517

June June Adjustment 2011 Account No. 515 Chapter 3, P 5. (Continued) Balance Post. Balance Date Item 2011 June 2011

Spare Parts Expense

Date Item

Adjustment

Advertising Expense Account No. 513

Date

Account No. 516

132

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30 J14 5,472 5,472

30 J14 5,650 5,650

30 J14 6,625 6,625 June Adjustment Account No. 518 Post. 2011 Item Maintenance Expense Balance Date

Interest Expense Account No. 519

Date Post. Chapter 3, P 5. (Continued) Balance Balance Item 2011 June Adjustment

Income Taxes Expense Account No. 520

Post.

Date Item

2011

(34)

$ 4,906 7,114 1,550 528 1,008 110,000 $ 31,250 22,500 8,908 5,650 6,625 20,000 24,106 10,000 220,341 44,650 103,180 13,400 6,000 900 4,647 13,750 5,472 5,650 6,625 $339,380 $339,380 Gas and Oil Expense

Common Stock Retained Earnings Interest Payable

Maintenance Expense Cash

Prepaid Maintenance

June 30, 2011 Elite Livery, Inc.

and balance sheet prepared

Notes Payable

4. Adjusted trial balance, income statement, statement of retained earnings, Chapter 3, P 5. (Continued)

Note: Prepaid Rent does not appear on the adjusted trial balance because it now has

Advertising Expense Salaries Expense Limousines

Accumulated Depreciation—Limousines

Passenger Service Revenue

Insurance Expense Spare Parts Expense

Depreciation Expense—Limousines

Unearned Passenger Service Revenue Prepaid Insurance a zero balance. Spare Parts Dividends Rent Expense 134

(35)

$220,341 $103,180 44,650 13,750 13,400 6,625 6,000 5,650 5,472 4,647 900 204,274 $ 16,067 $ 24,106 16,067 $ 40,173 10,000 $ 30,173 Income taxes expense

Advertising expense Rent expense

Insurance expense Total expenses

Statement of Retained Earnings Chapter 3, P 5. (Continued)

Elite Livery, Inc. Income Statement

For the Year Ended June 30, 2011 Revenue

Net income Expenses

Salaries expense

Passenger service revenue

Gas and oil expense

Spare parts expense

Depreciation expense—limousines

For the Year Ended June 30, 2011 Retained earnings, June 30, 2010

Retained earnings, June 30, 2011 Maintenance expense

Interest expense

Elite Livery, Inc.

Net income Subtotal

(36)

$ 4,906 7,114 1,550 528 1,008 $110,000 31,250 78,750 $93,856 $ 22,500 8,908 5,650 6,625 $43,683 $ 20,000 30,173 50,173 $93,856

5. User Insight: The effect of adjustments discussed Chapter 3, P 5. (Continued)

Elite Livery, Inc. June 30, 2011 Balance Sheet

Total stockholders' equity Income taxes payable Total assets

Total liabilities and stockholders' equity Unearned passenger service revenue

Total liabilities Retained earnings Common stock Prepaid maintenance Accounts receivable Prepaid insurance Assets

Adjusting entries affect net income on the income statement, and therefore they

to decrease. Liabilities Interest payable Notes payable Limousines Spare parts Cash Stockholders' Equity

affect the cash flow yield. After the adjustments have been posted in the previous parts of the problem, the cash flow yield for the year has increased because the additional expenses recorded exceed the additional revenues, causing net income

136

(37)

Balance Balance after after Adjustment Adjustment – $ 783 $ 150 + $ 783 $ 783 – 600 200 + 600 600 + 416 416 + 416 416 – 148 740 + 148 9,250 + 105 105 + 105 2,005 + 1,110 1,110 + 1,110 1,110 Amount of Revenue Equipment Adjustment (+ or –) Accumulated Depreciation—

Adjustment

Prepaid Rent

Statement Account

Balance Sheet Account

Rent Expense

Office Supplies Unearned Answering Service Wages Payable

Wages Expense

Equipment

Income

Amount of

Depreciation Expense— Answering Service Revenue

(+ or –)

137

(38)

a. 30 5,171 5,171 + – = b. 30 6,874 6,874 [ ( ÷ 12 × 5 [ ( ÷ 36 × 2 c. 30 16,000 40,000 16,000 40,000 d. 30 4,650 4,650 ( ÷ 12 × 3 e. 30 7,000 7,000 f. 30 18,000 18,000 Chapter 3, P 7.

1. Adjusting entries recorded Nov.

To record service revenue earned on a months ) $4,650 months = Service Revenue Accounts Receivable Depreciation Expense—Buildings

To record service revenue earned on Service Revenue

Depreciation Expense—Equipment

months ) Supplies Expense

Supplies

To record supplies used

$1,397 $2,350 $4,218

$5,171 Insurance Expense

To record expired insurance

months ] $7,272 $4,200 $4,720 1,750 404 $6,874

To record annual depreciation

Accumulated Depreciation—Equipment Accumulated Depreciation—Buildings

services collected in advance $18,600

months ) months ]

contract to be billed in January

payable Interest Expense

To record accrued interest on note Interest Payable

138

(39)

g. 30 10,000 10,000 ( ÷ 6 4 days = h. i. 30 23,000 23,000 No entry

2. User Insight: Revenue recognition discussed the year

In transaction e , $7,000 has to be recognized as revenue because services have Chapter 3, P 7. (Continued)

$15,000 days ) × To record accrued salaries

already been provided and there is an obligation to pay for them. In transaction h , Income Taxes Expense

To accrue estimated income taxes for

November 29 is not a recognition point because no services have been provided and there is no obligation to pay for them.

Salaries Expense Salaries Payable Nov.

(40)

Bal. 13,786 Bal. 991 (a) 894 (g) 915 Bal. 97 Bal. 25,755 Bal. 1,400 (b) 500 Bal. 7,300 Bal. 900 (c) 720 Bal. 3,320 Bal. 1,820 Bal. 10,000 (d) 600 (e) 230 (f) 1,450 Bal. 2,860 (h) 2,780 Bal. 1,410

Bal. 11,000 Bal. 19,387 Bal. 15,000

Bal. 58,500 Bal. 33,400 Bal. 1,750

(e) 230 (g) 915 Bal. 33,630 Bal. 60,865 Bal. 7,700 (a) 894 (c) 720 (b) 500 Bal. 8,200 (d) 600 (h) 2,780 Accounts Payable Office Equipment 2. Adjusting entries posted to the accounts

1. T accounts set up and balances entered

Chapter 3, P 8.

Cash Accounts Receivable Office Supplies

Prepaid Rent

Bal.

Unearned Service Revenue Salaries Payable

Common Stock

Office Supplies Expense (f) 1,450

Service Revenue

Rent Expense

Interest Expense Income Taxes Expense

Office Equipment Depreciation Expense—

Utilities Expense Dividends Interest Payable

Income Taxes Payable 2,600 Notes Payable 24,840 Office Equipment Bal. Retained Earnings Salaries Expense 140

(41)

$ 13,786 25,755 97 900 7,300 $ 3,320 1,820 10,000 600 230 1,410 2,780 11,000 19,387 15,000 60,865 33,630 1,750 8,200 894 720 600 2,780 $111,412 $111,412 Rent Expense

Notes Payable Office Equipment Retained Earnings Interest Payable Dividends Interest Expense

Unearned Service Revenue Income Taxes Payable Common Stock

Utilities Expense Salaries Payable

Salaries Expense Service Revenue

Accumulated Depreciation—Office Equipment Accounts Payable

Cash

3. Adjusted trial balance prepared

Prepaid Rent

December 31, 2011

Sigma Consultants Corporation

(42)

a. b. c. d. e. f. g. h.

The statement of cash flows is not affected by the adjustments. Balance sheet, income statement, statement of retained earnings Chapter 3, P 8. (Continued)

4. User Insight: The following financial statements are affected by the adjustments: Balance sheet, income statement, statement of retained earnings

Balance sheet, income statement, statement of retained earnings Balance sheet, income statement, statement of retained earnings Balance sheet, income statement, statement of retained earnings Balance sheet, income statement, statement of retained earnings Balance sheet, income statement, statement of retained earnings Balance sheet, income statement, statement of retained earnings

142

(43)

Bal. 195 (b) 130

Bal. 65

Bal. 610 (a) 430 Bal. 6,800 Bal. 670

Bal. 180

Bal. 1,320

(e) 315 Bal. 315 (f) 2,385

(d) 45 Bal. —

Bal. 635

Bal. 3,300 Bal. 3,117 Bal. 4,200

Bal. 20,079 Bal. 8,300 Bal. 585

(e) 315 Bal. 20,394 Bal. 2,350 Bal. 411 (b) 130 (d) 45 Bal. 456 (a) 430 (c) 650 (f) 2,385 Insurance Expense Rent Expense

Income Taxes Expense Telephone Expense

Office Equipment Office Supplies Expense

Depreciation Expense—

650 (c)

970

Office Equipment Office Supplies Office Equipment

Bal. 3,650 Bal.

Chapter 3, P 9.

Cash Accounts Receivable Prepaid Insurance

2. Adjusting entries posted to the accounts 1. T accounts set up and balances entered

Travel Fees Revenue Accounts Payable

Common Stock Retained Earnings Dividends

Advertising Expense Office Salaries Expense

Travel Fees Revenue 590

(44)

$ 3,650 970 65 180 6,800 $ 1,320 635 2,385 3,300 3,117 4,200 20,394 8,300 585 2,350 456 130 430 650 2,385 $31,151 $31,151 Advertising Expense Retained Earnings Dividends Office Equipment

Office Salaries Expense Accounts Payable

Office Supplies

December 31, 2011 Angel Travel, Inc.

Common Stock

Telephone Expense Travel Fees Revenue

Note: Unearned Travel Fees Revenue does not appear on the adjusted trial balance

because it now has a zero balance. Office Supplies Expense

Rent Expense

Accumulated Depreciation—Office Equipment Cash

144

(45)

$20,394 $8,300 2,385 2,350 650 585 456 430 130 15,286 $ 5,108 $3,117 5,108 $8,225 4,200 $4,025 Chapter 3, P 9. (Continued)

Angel Travel, Inc. Income Statement

For the Year Ended December 31, 2011

Income taxes expense Rent expense

Telephone expense Insurance expense

Office salaries expense

Office supplies expense

Depreciation expense—office equipment Revenue

Total expenses Advertising expense Travel fees revenue

Angel Travel, Inc.

Less dividends

Statement of Retained Earnings

Retained earnings, December 31, 2011

(46)

$ 3,650 970 65 180 $6,800 1,320 5,480 $10,345 $ 635 2,385 $ 3,020 $3,300 4,025 7,325 $10,345 Common stock

4. User Insight: The effect of adjusting entries discussed

By definition, adjusting entries cannot include a debit or a credit to Cash. Because adjusting entries never involve the Cash account, they never affect cash flows. That is why it is not necessary to show the effects of adjusting entries on the state-ment of cash flows.

Income taxes payable Total assets Balance Sheet Accounts payable Accounts receivable Total liabilities Liabilities Retained earnings Stockholders' Equity Office supplies Cash Chapter 3, P 9. (Continued)

Angel Travel, Inc. December 31, 2011

Less accumulated depreciation Office equipment

Prepaid insurance

Assets

146

(47)

Page 14 Post.

Ref. Debit Credit 2011 a. June 30 514 11,000 117 11,000 b. 30 515 1,400 118 1,400 c. 30 518 9,879 119 9,879 d. 30 516 12,520 141 12,520 $15,100 – = $12,520 e. 30 517 23,750 143 23,750 $190,000 × 12.5% = f. 30 519 11,800 213 11,800 g. 30 212 15,965 411 15,965 $29,500 – = $15,965 h. 30 520 12,980 214 12,980

1. Adjusting entries recorded in the general journal

Spare Parts Expense during the year

To record insurance that expired General Journal

during the year

To record spare parts used during To record amount of deposit used Date Accumulated Depreciation—Vehicles Maintenance Expense $2,580 Depreciation Expense—Vehicles the year Spare Parts Prepaid Maintenance

To record accrued interest Unearned Service Revenue

$13,535 Income Taxes Expense

Description

for the year Interest Payable Chapter 3, P 10.

Prepaid Rent Rent Expense

To expense one year's rent paid in advance

To accrue estimated income taxes To recognize service revenue earned To record depreciation on the

vehicles for the year

$23,750

Service Revenue

(48)

30 8,120

30 13,270

30 11,000

30 J14 11,000 —

30 3,700

30 J14 1,400 2,300

30 11,000

30 J14 9,879 1,121

3. Adjusting entries posted from the general journal 2. Ledger accounts opened and balances recorded

Date Adjustment Balance Date June Prepaid Rent Accounts Receivable Item Date Post. Balance Balance June 2011 Balance Account No. 117 Balance Item Account No. 112 Balance Post. Post. 2011 June Chapter 3, P 10. (Continued) Cash 2011 Account No. 111 Post. Item Account No. 119 Item Date Item Prepaid Maintenance Balance Date 2011 June Balance Adjustment Account No. 118 June Balance 2011 Adjustment Balance Post. Prepaid Insurance 148

(49)

30 15,100

30 J14 12,520 2,580

30 190,000

30 25,000

30 J14 23,750 48,750

30 48,000

30 29,500

30 J14 15,965 13,535

30 J14 11,800 11,800

Spare Parts Account No. 141

Balance Date Balance Post. June Balance 2011

Notes Payable Account No. 211

Item Adjustment Post. Date Item Balance 2011 June Balance Account No. 143 Chapter 3, P 10. (Continued) Balance Account No. 213 Post. June 2011 June Interest Payable

Unearned Service Revenue Account No. 212

(50)

30 J14 12,980 12,980

30 27,000

30 53,650

30 19,000

30 419,160

30 J14 15,965 435,125

30 95,600 Date Item 2011 June Balance 2011 June Adjustment Post.

Common Stock Account No. 311

Balance Post. 2011 Item Date Item Date Retained Earnings Post.

Gas and Oil Expense 2011 Service Revenue June Balance Balance Balance June Account No. 511 Post. Post. Balance Account No. 312 Chapter 3, P 10. (Continued) Balance Date Item Account No. 411 Post. 2011 June Balance

Dividends Account No. 313

Date Item

2011

Balance

June Balance

Adjustment

Income Taxes Payable Account No. 214

Date Item

Balance

150

(51)

30 214,320

30 21,200

30 J14 11,000 11,000

30 J14 1,400 1,400

30 J14 12,520 12,520

30 J14 23,750 23,750

Account No. 516

Advertising Expense Account No. 513

Date

2011

Adjustment

Post. Spare Parts Expense

Date Item Date Item 2011 June Balance 2011 Account No. 515 Chapter 3, P 10. (Continued) Balance Adjustment

Depreciation Expense—Vehicles Account No. 517

June June Adjustment Post. Balance Item Post. Insurance Expense Date Balance Balance

Rent Expense Account No. 514

Post. June Balance Item 2011 June Adjustment June Balance Date Item Post. 2011

Salaries Expense Account No. 512

Item

Post. Date

(52)

30 J14 9,879 9,879

30 J14 11,800 11,800

30 J14 12,980 12,980 2011 Item 2011 Adjustment Balance Balance Post. Chapter 3, P 10. (Continued) June June Adjustment Date Date Item Post.

Income Taxes Expense Account No. 520

Interest Expense Account No. 519

Date Maintenance Expense Balance Item June Adjustment Account No. 518 Post. 2011 152

(53)

$ 8,120 13,270 2,300 1,121 2,580 190,000 $ 48,750 48,000 13,535 11,800 12,980 27,000 53,650 19,000 435,125 95,600 214,320 21,200 11,000 1,400 12,520 23,750 9,879 11,800 12,980 $650,840 $650,840 Dividends Rent Expense

Income Taxes Expense Service Revenue

Insurance Expense Spare Parts Expense

Depreciation Expense—Vehicles

Note: Prepaid Rent does not appear on the adjusted trial balance because it now has

a zero balance.

Accumulated Depreciation—Vehicles

Notes Payable Spare Parts Cash

Advertising Expense Salaries Expense Vehicles

Prepaid Maintenance

June 30, 2011

Ray Heating & Cooling, Inc.

Gas and Oil Expense Common Stock Retained Earnings

(54)

$435,125 $214,320 95,600 23,750 21,200 12,980 12,520 11,800 11,000 9,879 1,400 414,449 $ 20,676 $ 53,650 20,676 $ 74,326 19,000 $ 55,326 Maintenance expense Interest expense

Ray Heating & Cooling, Inc.

Less dividends

For the Year Ended June 30, 2011 Retained earnings, June 30, 2010

Retained earnings, June 30, 2011 Revenue

Salaries expense Service revenue

Gas and oil expense

Spare parts expense

Depreciation expense—vehicles

Ray Heating & Cooling, Inc. Income Statement

For the Year Ended June 30, 2011

Income taxes expense Advertising expense

Rent expense Insurance expense Total expenses

Statement of Retained Earnings Chapter 3, P 10. (Continued)

154

(55)

$ 8,120 13,270 2,300 1,121 2,580 $190,000 48,750 141,250 $168,641 $ 48,000 13,535 11,800 12,980 $ 86,315 $ 27,000 55,326 82,326 $168,641

affect the cash flow yield. After the adjustments have been posted in the previous parts of the problem, the cash flow yield for the year has increased because the come and thus increasing cash flow yield.

additional expenses recorded exceed the additional revenues, decreasing net in-Accounts receivable

Total liabilities

Liabilities Total assets

Notes payable

Retained earnings Common stock Prepaid maintenance

Unearned service revenue Interest payable

Income taxes payable

Adjusting entries affect net income on the income statement, and therefore they 5. User Insight: The effect of adjustments discussed