Solutions to exercises  chap4
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Solutions to exercises chap4

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financial & managerial accounting 15th edition solutions manual

financial & managerial accounting 15th edition solutions manual

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Solutions to exercises  chap4 Solutions to exercises chap4 Document Transcript

  • SOLUTIONS TO EXERCISES Ex 4–1 a. b. c. d. e. f. g. h. Book value Materiality Matching principle Unrecorded revenue Adjusting entries Unearned revenue Prepaid expenses None (This is an example of “depreciation expense.”) Ex. 4–2 Income Statement Adjusting Entry a b c d e f Ex. 4–3 Balance Sheet Net Revenue − Expenses = Income Owners’ Assets = Liabilities + Equity NE NE I NE NE I I I NE I I NE D D I D D I D NE I NE D NE NE I NE I NE D D D I D D I 240,000 b. Unearned Ticket Revenue................................................................. Ticket Revenue....................................................................... To record earning portion of season ticket revenue relating to May home games. Ex. 4–4 a. Rent Expense...................................................................................... Prepaid Rent........................................................................... To record rent expense for May ($1,200,000 ÷ 5 months = $240,000 per month). 148,800 a. (1) Interest Expense.......................................................................... Interest Payable............................................................... $50,000 x 9% annual rate x 1/12 = $375. 375 (2) Accounts Receivable.................................................................... Consulting Fees Earned.................................................. To record ten days of unbilled consulting fees at $1,000 per day. 10,000 b. $2,250 ($50,000 x 9% x 6/12 = $2,250) c. $15,000 ($25,000 - $10,000 earned in December, 2002) 240,000 148,800 375 10,000
  • Ex. 4–5 a. The balance of TWA’s Advance Ticket Sales account represents unearned revenue— that is, amounts collected from customers prior to rendering the related services (air travel). As TWA has an obligation to render these services, the Advanced Ticket Sales account appears among the liabilities in TWA’s balance sheet. b. TWA normally reduces the balance of this liability account by rendering services to customers—that is, by providing flights for which the customers have purchased tickets. On some occasions, however, TWA reduces the balance of this liability by making cash refunds to customers.
  • Ex. 4–6 a. 1.Interest Expense............................................................................... Interest Payable...................................................................... To record interest accrued on bank loan during December. 1,200 2.Depreciation Expense: Office Building.......................................... Accumulated Depreciation: Office Building........................ To record depreciation on office building ($330,000 ÷ 25 years × 1⁄ 12 = $1,100). 1,100 3.Accounts Receivable........................................................................ Marketing Revenue Earned.................................................. To record accrued Marketing revenue earned in December. 64,000 4.Insurance Expense........................................................................... Prepaid Insurance.................................................................. To record insurance expense (1,800 ÷ 12 months = $150). 150 5.Unearned Revenue........................................................................... Marketing Revenue Earned.................................................. To record portion of unearned revenue that had become earned in December. 3,500 6.Salaries Expense.............................................................................. Salaries Payable..................................................................... To record accrued salaries in December. 2,400 b. Ex. 4–7 1,200 1,100 64,000 150 3,500 2,400 $62,650 ($64,000 + $3,500 − $1,200 − $1,100 − $150 − $2,400). a. The total interest expense over the life of the note is $5,400 ($120,000 × .09 × 6⁄ 12 = $5,400). The monthly interest expense is $900 ($5,400 ÷ 6 = $900). b. The liability to the bank at December 31, 2002, is $121,800 (Principal, $120,000 + $1,800 accrued interest). c. 2002 Oct. 31 Cash................................................................................... Notes Payable........................................................ Obtain from bank six-month loan with interest at 9% a year. d. Dec. 31 Interest Expense................................................................ Interest Payable.................................................... To accrue interest expense for December on note payable ($120,000 × 9% × 1⁄ 12). 120,000 120,000 900 900 e. The liability to the bank at March 31, 2003, is $124,500, consisting of $120,000 principal plus $4,500 accrued interest for five months.
  • Ex. 4–8 a. May   1 Cash................................................................................... Notes Payable........................................................ Obtained a three-month loan from National Bank at 12% interest per year. 300,000 May 31 Interest Expense................................................................ Interest Payable.................................................... To record interest expense for May on note payable to National Bank ($300,000 × 12% × 1⁄ 12 = $3,000). 3,000 b. May   1 Prepaid Rent..................................................................... Cash....................................................................... Paid rent for six months at $30,000 per month. 180,000 May 31 Rent Expense..................................................................... Prepaid Rent......................................................... To record rent expense for the month of May. 30,000 c. May   2 Cash................................................................................... Unearned Admissions Revenue............................ Sold season tickets to the 70-day racing season. 910,000 May 31 Unearned Admissions Revenue....................................... Admissions Revenue............................................. To record admissions revenue from the 20 racing days in May ($910,000 × 20⁄ 70 = $260,000). 260,000 300,000 3,000 180,000 30,000 910,000 260,000 d. May   4 No entry required. e. May   6 Prepaid Printing............................................................... Cash....................................................................... Printed racing forms for first 30 racing days. 12,000 May 31 Printing Expense............................................................... Prepaid Printing.................................................... To record printing expense for 20 racing days in May. 8,000 May 31 Concessions Receivable.................................................... Concessions Revenue............................................ Earned 10% of refreshment sales of $165,000 during May. 16,500 f. 12,000 8,000 16,500
  • Something to Consider: Effects of omission of May 31 adjusting entry for rent expense on May 31 financial statements: Revenue Not affected Expenses Understated (by May’s rent of $30,000) Net Income Overstated (because May rent expense was not recognized) Assets Overstated (Prepaid Rent should be reduced by portion expired in May) Liabilities Not affected Owners’ Equity Overstated (because net income is overstated) Ex. 4–9 a. Materiality refers to the relative importance of an item. An item is material if knowledge of it might reasonably influence the decisions of users of financial statements. If an item is immaterial, by definition it is not relevant to decision makers. Accountants must account for material items in the manner required by generally accepted accounting principles. However, immaterial items may be accounted for in the most convenient and economical manner. b. Whether a specific dollar amount is “material” depends upon the (1) size of the amount and (2) nature of the item. In evaluating the size of a dollar amount, accountants consider the amount in relation to the size of the organization. Based solely upon dollar amount, $2,500 is not material in relation to the financial statements of a large, publicly owned corporation. For a small business however, this amount could be material. In addition to considering the size of a dollar amount, accountants must also consider the nature of the item. The nature of an item may make the item “material” to users of the financial statements regardless of its dollar amount. Examples might include bribes paid to government officials, or theft of company assets or other illegal acts committed by management. In summary, one cannot say whether $2,500 is a material amount. The answer depends upon the related circumstances. c. Two ways in which the concept of materiality may save time and effort for accountants are: 1. Adjusting entries may be based upon estimated amounts if there is little or no possibility that the use of an estimate will result in material error. For example, an adjusting entry to reflect the amount of supplies used may be based on an estimate of the cost of supplies remaining on hand. 2. Adjusting entries need not be made to accrue immaterial amounts of unrecorded expenses or unrecorded revenue. For example, no adjusting entries normally are made to record utility expense payable at year-end.
  • Ex. 4–10 a. None (or Materiality). Accounting for immaterial items is not “wrong” or a “violation” of generally accepted accounting principles; it is merely a waste of time. The bookkeeper is failing to take advantage of the concept of materiality, which permits charging immaterial costs directly to expense, thus eliminating the need to record depreciation in later periods. b. Matching. c. Realization. Ex. 4–11 a. Accounts likely to have required an adjusting entry are: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Investments Accounts Receivable Inventories Prepaid Expenses Deferred Income Taxes Buildings Machinery and Equipment Intangible Assets Accounts Payable Accrued Liabilities Income Taxes Payable Deferred Compensation and Other Liabilities Note to the Instructor: The adjustments required for many of the accounts listed above are discussed in subsequent chapters. Some are beyond the scope of an introductory course.
  • SOLUTIONS TO PROBLEMS 20 Minutes, Easy PROBLEM 4–1 FLORIDA PALMS COUNTRY CLUB (Adjusting Entries) 20__ (1) Dec 31 Salary Expense Salaries Payable To record accrued salaries at December 31. (2) 31 Accounts Receivable Green Fee Revenue To record green fees owed by the Tampa Univ. golf team. (3) 31 Unearned Membership Dues Membership Dues Earned To record the portion of annual membership dues earned in December. (4) 31 Depreciation Expense: Carts Accumulated Depreciation: Carts To record December depreciation expense ($180,000 ÷ 15 years x 1/12). (5) 31 Interest Expense Interest Payable To record accrued interest expense in December ($45,000 × 8% × 1/12). (6) 31 Insurance Expense Unexpired Insurance To record December insurance expense ($7,800 × 1/12). 9600 9600 1800 1800 106000 106000 1000 1000 300 300 650 650 (7) No adjusting entry required. Revenue is recognized when it is earned. Entering into a contract does not constitute the earning of revenue. (8) 31 Income Taxes Expense Income Taxes Payable To record income taxes accrued in December. 19000 19000
  • PROBLEM 4–1 FLORIDA PALMS COUNTRY CLUB (concluded) b. 1. Accruing unpaid expenses. 2. Accruing uncollected revenue. 3. Converting liabilities to revenue. 4. Converting assets to expenses. 5. Accruing unpaid expenses. 6. Converting assets to expenses. 7. No adjusting entry required. 8. Accruing unpaid expenses. c. The clubhouse was built in 1925 and has been fully depreciated for financial accounting purposes. The net book value of an asset reported in the balance sheet does not reflect the asset’s fair market value. Likewise, depreciation expense reported in the income statement does not reflect a decline in fair market value, physical obsolescence, or wear-and-tear. 40 Minutes, Medium PROBLEM 4–2 ENCHANTED FOREST
  • a. General Journal (Adjusting Entries) (1) Dec 31 Interest Receivable Interest Revenue To record accrued interest revenue in CD on December 31. (2) 31 Interest Expense Interest Payable To record accrued interest expense in December ($12,000 x 8.5% x 1/12). (3) 31 Depreciation Expense: Buildings Accumulated Depreciation: Buildings To record December depreciation expense ($600,000 ÷ 25 years x 1/12). 400 400 85 85 2000 2000 (4) No adjusting entry required. Revenue is recognized when it is earned. Entering into a contract does not constitute the earning of revenue. (5) 31 Salary Expense Salaries Payable To record accrued salary expense in December. (6) 31 Camper Revenue Receivable Camper Revenue To record accrued camper revenue earned in December. (7) 31 Unearned Camper Revenue Camper Revenue To record revenue earned by campers paying in advance ($5,400 ÷ 6 months). (8) 31 Bus Rental Expense Accounts Payable To record accrued bus rental expense in December ($40 per day x 25 days). (9) 31 Income Taxes Expense Income Taxes Payable To record income taxes accrued in December. 1250 1250 2400 2400 900 900 1000 1000 8400 8400
  • PROBLEM 4–2 ENCHANTED FOREST (concluded) b. 1. Accruing uncollected revenue. 2. Accruing unpaid expenses. 3. Converting assets to expenses. 4. No adjusting entry required. 5. Accruing unpaid expenses. 6. Accruing uncollected revenue. 7. Converting liabilities to revenue. 8. Accruing unpaid expenses. 9. Accruing unpaid expenses. c. Income Statement Adjustment 1. 2. 3. 4. 5. 6. 7. 8. 9. Net Revenue − Expenses = Income I NE I NE I D NE I D NE NE NE NE I D I NE I I NE I NE I D NE I D Balance Sheet Assets = Liabilities + I NE D NE NE I NE NE NE d. Original cost of buildings........................................................................... Accumulated depreciation: buildings (prior to adjusting entry 3 in part a)................................................................................................................. December depreciation expense from part a............................................ Accumulated depreciation, buildings, 12/31............................................. Net book value at December 31................................................................. I D D NE D I I D D $340 ($12,000 x 0.85% x 4/12) e. NE I NE NE I NE D I I Owners’ Equity 25 Minutes, Strong $600,000 $310,000 2,000 (312,000) $288,000 PROBLEM 4–3 SEA CAT
  • (1) Age of the catamaran in months = accumulated depreciation ÷ monthly depreciation. Useful life is given as 10 years, or 120 months. Cost $46,200 ÷ 120 months = $385 monthly depreciation expense. Accumulated depreciation of $9,240 ÷ $385 monthly depreciation = 24 months. (2) a. Tickets used in June........................................... Tickets outstanding on June 30 ($825 ÷ $15). . .  Tickets sold to resort hotel on June 1................ 14 5 5 5 20 0 (3) Prepaid rent of $6,000 ÷ 5 months remaining = $1,200 monthly rental  expense. (4) $1,400 x 12/8 = $2,100 original cost. Since 4 months of the 12-month life of the policy have expired, the $1,400 of unexpired insurance applies to the remaining 8 months. This indicates a monthly cost of $175, computed as $1,400 ÷ 8. Therefore, the 12-month policy originally cost $2,100, or 12 x $175. b. General Journal (Adjusting Entries) 20__ (1) June 30 Depreciation Expense: Catamaran Accumulated Depreciation: Catamaran To record June depreciation on catamaran. (2) 30 Unearned Passenger Revenue Passenger Revenue To record earning of revenue from 145 future ride tickets used in June (145 x $15 = $2,175). (3) 30 Rent Expense Prepaid Rent To recognize rent expense for June. (4) 30 Insurance Expense Unexpired Insurance To record expiration of insurance in June. 30 Minutes, Medium 385 385 2175 2175 1200 1200 175 175 PROBLEM 4–4 CAMPUS THEATER
  • a. General Journal (Adjusting Entries) 20__ (1) Aug. 31 Film Rental Expense Prepaid Film Rental Film rental expense incurred in August. 15200 15200 (2) 31 Depreciation Expense: Buildings Accumulated Depreciation: Buildings To record August depreciation ($168,000 ÷ 240 months). (3) 31 Depreciation Expense: Fixtures and Equipment Accumulated Depreciation: Fixtures and Equipment To record August depreciation ($36,000 ÷ 60 months). (4) 31 Interest Expense Interest Payable Interest expense accrued in August. 700 700 600 600 1500 1500 (5) 31 Unearned Admissions Revenue (YMCA) Admissions Revenue To record advance payment from YMA earned in August ($1,500 x 1/3). (6) 31 Concessions Revenue Receivable Concessions Revenue To record accrued concessions revenue in August. (7) 31 Salaries Expense Salaries Payable To record accrued salary expense in August. (8) 31 Income Taxes Expense Income Taxes Payable To record income taxes accrued in August. 500 500 2250 2250 1700 1700 4200 4200 (9) 31 No adjusting entry required. PROBLEM 4–4 CAMPUS THEATER (concluded) b. (1) Eight months (bills received January through August). Utilities bills are recorded as
  • (2) (3) c. monthly bills are received. As of August 31, eight monthly bills should have been received. Seven months (January through July). Depreciation expense is recorded only in month-end adjusting entries. Thus, depreciation for August is not included in the August unadjusted trial balance. Twenty months ($14,000 ÷ $700 per month). Corporations must pay their income taxes in several installment payments throughout the year. The balance in the Income Taxes Expense account represents the total amount of income taxes expense recognized since the beginning of the year. But Income Taxes Payable represents only the portion of this expense that has not yet been paid. In the example at hand, the $4,740 in income taxes payable probably represents only the income taxes expense accrued in July, as Pickwood should have paid taxes accrued in the first two quarters by June 15. 50 Minutes, Strong PROBLEM 4–5 KEN HENSLEY ENTERPRISES, INC.
  • a. General Journal (Adjusting Entries) 20__ (1) Dec. 31 Accounts Receivable Studio Revenue Earned To record accrued studio revenue earned in December. (2) 31 Supplies Expense Studio Supplies To record studio supplies used in December ($7,600 - $6,900). (3) 31 Insurance Expense Unexpired Insurance To record December insurance expense ($1,500 x 1/6). (4) 31 Studio Rent Expense Prepaid Studio Rent To record studio rent in December ($6,000 x 1/3). (5) 31 Depreciation Expense: Recording Equipment Accumulated Depreciation: Recording Equipment To record depreciation expense in December ($90,000 x 1/60). (6) 31 Interest Expense Interest Payable To record accrued interest expense in December. ($16,000 x 9% x 1/12). (7) 31 Unearned Studio Revenue Studio Revenue Earned To record advance collections earned in December. (8) 31 Salaries Expense Salaries Payable To record salaries accrued in December. (9) 31 Income Taxes Expense Income Taxes Payable To record income taxes accrued in December. ($19,600 - $17,900). 4400 4400 700 700 250 250 2000 2000 1500 1500 120 120 3600 3600 540 540 1700 1700 PROBLEM 4–5 KEN HENSLEY ENTERPRISES, INC. (continued)
  • b. Ken Hensley Enterprises, Inc. Schedule of Income Earned For the Year Ended December 31, 2002 Studio Revenue Earned $115000 Salaries Expense Supplies Expense Insurance Expense Depreciation Expense: Recording Equipment Studio Rent Expense Utilities Expense Interest Expense Income Taxes Expense Total Expense Net Income c. $18 1 1 18 23 2 5 9 2 0 0 3 9 196 4 0 5 0 0 5 6 0 0 0 0 0 0 0 0 0 $ 85600 29400 Monthly rent expense for the last two months of 2002 was $2,000 ($6,000 ÷ 3 months). The $21,000 rent expense shown in the studio’s trial balance includes a $2,000 rent expense for November, which means that total rent expense for January through October was $19,000 ($21,000 - $2,000). The monthly rent expense in these months must have been $1,900 ($19,000 ÷ 10 months). Thus, it appears that the studio’s monthly rent increased by $100 (from $1,900 to $2,000) in November and December. 15 Minutes, Medium Error PROBLEM 4–6 KOYNE CORPORATION Total Revenue Total Expenses Net Income Total Assets Total Liabilities Owners’ Equity a. Recorded a dividend as an expense reported in the income statement. NE O U NE NE NE b. Recorded the payment of an account payable as a debit to accounts payable and a credit to an expense account. NE U O O NE O c. Failed to record depreciation expense. NE U O O NE O d. Recorded the issue of capital stock as a debit to cash and a credit to NE NE NE NE NE NE
  • retained earnings. e. Recorded the receipt of a customer deposit as a debit to cash and a credit to fees earned. O NE O NE U O f. Failed to record expired portion of an insurance policy. NE U O O NE O g. Failed to record accrued interest earned on an outstanding note receivable. U NE U U NE U