Chapter 3
Adjusting Accounts and Preparing
Financial Statements
QUESTIONS
1. The cash basis of accounting reports revenues...
11. In addition to prepayments, Tastykake must make adjusting entries to Property,
Plant and Equipment, Deferred Income Ta...
Quick Study 3-4 (15 minutes)
a. Unearned Revenue........................................................ 15,000
Legal Reve...
to recognize earned revenue
3. Record the earning of services revenue for which
cash will be received the following period...
Quick Study 3-8 (10 minutes)
The answer is c.
Explanation:
The debit balance in Prepaid Insurance was reduced by $400, imp...
Interpretation: For every one dollar that Yang Company records as revenue,
it earns 9.7 cents in net income. Yang’s 9.7% i...
EXERCISES
Exercise 3-1 (15 minutes)
1. B. 4. F
2. E. 5. D
3. C. 6. A.
Exercise 3-2 (30 minutes)
a. Unearned Fee Revenue......
End. Bal. 2,200 End. Bal. 587
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17th
Edition126
Exercise 3-3 (25 minutes)
a. Depreciation Expense—Equipment.............................. 16,000
Accumulated Depreciation—...
Exercise 3-4 (15 minutes)
a. Adjusting entry:
2005
Dec. 31 Wages Expense................................................ 5...
Exercise 3-6 (25 minutes)
a.
Apr. 30 Legal Fees Expense............................................ 2,500
Legal Fees Payab...
Exercise 3-7 (20 minutes)
Balance Sheet Insurance Asset using Insurance Expense using
Accrual
Basis*
Cash
Basis
Accrual
Ba...
Exercise 3-8 (25 minutes)
Dec. 31 Accounts Receivable.............................................. 1,800
Fees Earned........
Exercise 3-9 (10 minutes)
a. $5,390 / $44,830 = 12.0%
b. $87,644 / $398,954 = 22.0%
c. $93,385 / $257,082 = 36.3%
d. $55,2...
Exercise 3-11A
(25 minutes)
a. Initial credit recorded in the Unearned Fees account:
July 1 Cash.............................
Fees Earned = $2,000 + $8,400 + $7,500 - $7,500 = $10,400
[Note: Both procedures yield identical results in the financial ...
PROBLEM SET A
Problem 3-1A (15 minutes)
1. G. 4. B. 7. H. 10. D.
2. E. 5. G. 8. E. 11. A.
3. I. 6. C. 9. F. 12. D.
Problem...
Problem 3-2A (Continued)
Adjustment (e)
Dec.31 Rent Receivable....................................... 2,400
Rent Earned......
Problem 3-3A (90 minutes)
Parts 1 and 2
Cash Equipment
Unadj. Bal. 26,000 Unadj. Bal. 70,000
Accounts Receivable
Accumulat...
Problem 3-3A (Continued)
Tuition Fees Earned Rent Expense
Unadj. Bal. 102,000 Unadj. Bal. 22,000
(f) 7,500 (h) 2,000
Adj. ...
Problem 3-3A (Continued)
Part 2
Adjustment (a)
Dec. 31 Insurance Expense......................................... 3,000
Pr...
Problem 3-3A (Continued)
Part 3
Watson Technical Institute
Adjusted Trial Balance
December 31, 2005
Debit Credit
Cash........
Problem 3-3A (Continued)
Part 4
WATSON TECHNICAL INSTITUTE
Income Statement
For Year Ended December 31, 2005
Revenues
Tuit...
Problem 3-3A (Concluded)
WATSON TECHNICAL INSTITUTE
Balance Sheet
December 31, 2005
Assets
Cash..............................
Problem 3-4A (45 minutes) — Part 1
Account
Unadjusted
TrialBalance Adjustments
Adjusted
TrialBalance
Cash....................
(c) Cost of expired insurance coverage.
(d) Depreciation expense on office equipment.
(e) Incurred but unpaid advertising ...
Problem 3-4A
Part 2
JJW COMPANY
Income Statement
For Year Ended July 31, 2005
Revenues
Consulting fees earned ...............
Problem 3-4A (Concluded)
Part 2
JJW COMPANY
Balance Sheet
July 31, 2005
Assets
Cash..........................................
Problem 3-5A (50 minutes)
Part 1
CALLAHAY COMPANY
Income Statement
For Year Ended December 31, 2005
Revenues
Fees earned.....
Problem 3-5A (Concluded)
CALLAHAY COMPANY
Balance Sheet
December 31, 2005
Assets
Cash........................................
Problem 3-6AA
(40 minutes)
Part 1
Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.
Nov...
Problem 3-6AA
(Continued)
Part 2
Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.
Nov. ...
Problem 3-6AA
(Concluded)
Part 3
There are no differences between the two methods in terms of the amounts
that appear on t...
PROBLEM SET B
Problem 3-1B (15 minutes)
1. E. 4. C. 7. F. 10. I.
2. H. 5. D. 8. I. 11. A.
3. G. 6. B. 9. F. 12. B.
Problem...
Problem 3-2B (Concluded)
Adjustment (e)
Oct. 31 Rent Receivable...................................................... 600
...
Problem 3-3B (90 minutes)
Parts 1 and 2
Cash Accounts Payable
Bal. 50,000 Bal. 12,200
Accounts Receivable Salaries Payable...
Problem 3-3B (Continued)
Parts 1 and 2
Tuition Fees Earned Advertising Expense
Unadj. Bal. 105,000 Bal. 18,000
(f) 5,500
A...
Problem 3-3B (Continued)
Part 2
Adjustment (a)
Dec. 31 Insurance Expense................................................ 6...
Prepaid Rent.............................................................. 2,600
To record expiration of prepaid rent.
©Mc...
Problem 3-3B (Continued)
Part 3
ALCORN INSTITUTE
Adjusted Trial Balance
December 31, 2005
Debit Credit
Cash..................
Problem 3-3B (Continued)
Part 4
ALCORN INSTITUTE
Income Statement
For Year Ended December 31, 2005
Revenues
Tuition fees e...
Problem 3-3B (Concluded)
ALCORN INSTITUTE
Balance Sheet
December 31, 2005
Assets
Cash........................................
Problem 3-4B (45 minutes) — Part 1
Account
Unadjusted
TrialBalance Adjustments
Adjusted
TrialBalance
Cash....................
Problem 3-4B
Part 2
DAXU CONSULTING COMPANY
Income Statement
For Year Ended December 31, 2005
Revenues
Consulting fees ear...
Problem 3-4B (Concluded)
Part 2
DAXU CONSULTING COMPANY
Balance Sheet
December 31, 2005
Assets
Cash..........................
Problem 3-5B (50 minutes)
Part 1
LIGHTNING COURIER
Income Statement
For Year Ended December 31, 2005
Revenues
Delivery fee...
Problem 3-5B (Concluded)
LIGHTNING COURIER
Balance Sheet
December 31, 2005
Assets
Cash.......................................
Problem 3-6BA
(40 minutes)
Part 1
Method that records prepaid expenses and unearned revenues in balance sheet accounts:
Ap...
Problem 3-6BA
(Continued)
Part 2
Method that records prepaid expenses and unearned revenues in income statement accounts:
...
Problem 3-6BA
(Concluded)
Part 3
There are no differences between the two methods in terms of the amounts
that appear on t...
Serial Problem
Serial Problem, Success Systems (120 minutes) Part 1
Journal entries:
Dec. 2 Advertising Expense..............
Serial Problem (Continued)
Part 2
Adjusting entries:
Dec. 31 Computer Supplies Expense .........................652 3,065
...
Serial Problem (Continued)
Parts 1 and 2
Posting to the accounts:
Cash Acct. No. 101
Date Explanation PR Debit Credit Bala...
Serial Problem (Continued)
Parts 1 and 2
Accounts Receivable Acct. No. 106
Date Explanation PR Debit Credit Balance
Oct. 6...
Serial Problem (Continued)
Parts 1 and 2
Computer Equipment Acct. No. 167
Date Explanation PR Debit Credit Balance
Oct. 1 ...
Serial Problem (Continued)
Parts 1 and 2
Computer Services Revenue Acct. No. 403
Date Explanation PR Debit Credit Balance
...
Serial Problem (Continued)
Parts 1 and 2
Computer Supplies Expense Acct. No. 652
Date Explanation PR Debit Credit Balance
...
Serial Problem (Continued)
Part 3
SUCCESS SYSTEMS
Adjusted Trial Balance
December 31, 2004
Debit Credit
Cash ................
Serial Problem (Continued)
Part 4
SUCCESS SYSTEMS
Income Statement
For Three Months Ended December 31, 2004
Revenue
Comput...
Serial Problem (Continued)
Part 6
SUCCESS SYSTEMS
Balance Sheet
December 31, 2004
Assets
Cash ...............................
Reporting in Action — BTN 3-1
1. The revenue recognition principle requires that revenue be recorded
when earned, not befo...
Comparative Analysis — BTN 3-2
1. Krispy Kreme
Current year, profit margin = $33,478 / $491,549 = 6.8%
Prior year, profit ...
Communicating in Practice — BTN 3-4
This communication activity has no set solution. A class discussion of the
ratios can ...
Teamwork in Action — BTN 3-6
Note that there is no specific solution to this activity. Nevertheless, the
presentation of e...
Business Week Activity — BTN 3-7
1. Herz personally favors a move toward what is known as “principles-
based accounting.” ...
Entrepreneurial Decision — BTN 3-8
1. Many businesses find it cheaper to use outside collection agencies rather
than hire ...
Global Decision — BTN 3-10
1. Grupo Bimbo states under its “Significant Accounting Policies” in its
annual report that rev...
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Solution manual chapter 3 fap

  1. 1. Chapter 3 Adjusting 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
  2. 2. 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. UR Unearned revenue b. PE Prepaid expenses (Depreciation) c. AE Accrued expenses d. AR Accrued revenue e. PE Prepaid expenses Quick Study 3-2 (10 minutes) a. Insurance Expense....................................................... 1,800 Prepaid Insurance................................................. 1,800 To record 6-month insurance coverage expired. b. Supplies Expense......................................................... 2,700 Supplies.................................................................. 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............................ 5,000 Accumulated Depreciation—Equipment............. 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 Fundamental Accounting Principles, 17th Edition120
  3. 3. Quick Study 3-4 (15 minutes) a. Unearned Revenue........................................................ 15,000 Legal Revenue....................................................... 15,000 To recognize legal revenue earned (20,000 x 3/4). b. Unearned Subscription Revenue................................ 2,400 Subscription Revenue........................................... 2,400 To recognize subscription revenue earned. [100 x ($48 / 12 month) x 6 months] Quick Study 3-5 (10 minutes) Salaries Expense........................................................... 400 Salaries Payable.................................................... 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 Financial Statement a. Debit Unearned Revenue Balance Sheet Credit Revenue Earned Income Statement b. Debit Depreciation Expense Income Statement Credit Accumulated Depreciation Balance Sheet c. Debit Wages Expense Income Statement Credit Wages Payable Balance Sheet d. Debit Accounts Receivable Balance Sheet Credit Revenue Earned Income Statement e. Debit Insurance Expense Income Statement Credit Prepaid Insurance Balance Sheet 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
  4. 4. 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 Fundamental Accounting Principles, 17th Edition122
  5. 5. 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........... $1,600 Accrued salaries error: Understates expenses (and understates liabilities) by.... 1,000 Combination of errors: Understates expenses by................................................... $2,600 Overstates assets by.......................................................... $1,600 Understates liabilities by.................................................... $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
  6. 6. 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 Fundamental Accounting Principles, 17th Edition124
  7. 7. EXERCISES Exercise 3-1 (15 minutes) 1. B. 4. F 2. E. 5. D 3. C. 6. A. Exercise 3-2 (30 minutes) a. Unearned Fee Revenue................................................. 10,000 Fee Revenue............................................................... 10,000 To record earned portion of fee received in advance. b. Wages Expense.............................................................. 9,000 Wages Payable........................................................... 9,000 To record wages accrued but not yet paid. c. Depreciation Expense—Equipment.............................. 19,127 Accumulated Depreciation—Equipment.................. 19,127 To record depreciation expense for the year. d. Office Supplies Expense............................................... 5,242 Office Supplies** ......................................................... 5,242 To record office supplies used ($480 + $5,349 - $587). e. Insurance Expense........................................................ 2,800 Prepaid Insurance* ..................................................... 2,800 To record insurance coverage expired ($5,000 - $2,200). f. Interest Receivable....................................................... 750 Interest Revenue....................................................... 750 To record interest earned but not yet received. g. Interest Expense........................................................... 3,500 Interest Payable........................................................ 3,500 To record interest incurred but not yet paid. Notes: Prepaid Insurance* Office Supplies** Beg. Bal. 5,000 Beg. Bal. 480 Purch. 5,349 ? Used ? Used ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 125
  8. 8. End. Bal. 2,200 End. Bal. 587 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition126
  9. 9. Exercise 3-3 (25 minutes) a. Depreciation Expense—Equipment.............................. 16,000 Accumulated Depreciation—Equipment.................. 16,000 To record depreciation expense for the year. b. Insurance Expense........................................................ 5,960 Prepaid Insurance* ..................................................... 5,960 To record insurance coverage that expired ($7,000 - $1,040). c. Office Supplies Expense............................................... 2,626 Office Supplies** ......................................................... 2,626 To record office supplies used ($300 + $2,680 - $354). d. Unearned Fee Revenue................................................. 5,000 Fee Revenue............................................................... 5,000 To record earned portion of fee received in advance ($10,000 x 1/2). e. Insurance Expense........................................................ 4,600 Prepaid Insurance...................................................... 4,600 To record insurance coverage that expired. f. Wages Expense.............................................................. 4,000 Wages Payable........................................................... 4,000 To record wages accrued but not yet paid. Notes: Prepaid Insurance* Office Supplies** Bal. Bal. 7,000 Beg. Bal. 300 Purch. 2,680 ? Used ? Used End. Bal. 1,040 End. Bal. 354 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 127
  10. 10. Exercise 3-4 (15 minutes) a. Adjusting entry: 2005 Dec. 31 Wages Expense................................................ 500 Wages Payable.............................................. 500 To record accrued wages for one day. (5 workers x $100) b. Payday entry: 2006 Jan. 4 Wages Expense................................................ 1,500 Wages Payable.................................................. 500 Cash............................................................... 2,000 To record accrued and current wages. Exercise 3-5 (15 minutes) a. $1,650 b. $5,700 c. $10,080 d. $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... (750) (5,700) (1,840) (800) Supplies expense for current year......... $1,650 $1,300 $ 9,600 $6,575 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition128
  11. 11. Exercise 3-6 (25 minutes) a. Apr. 30 Legal Fees Expense............................................ 2,500 Legal Fees Payable..................................... 2,500 To record accrued legal fees. May 12 Legal Fees Payable............................................. 2,500 Cash.............................................................. 2,500 To pay accrued legal fees. b. Apr. 30 Interest Expense................................................. 2,080 Interest Payable........................................... 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................................................... 2,080 Interest Expense................................................. 4,160 Cash.............................................................. 6,240 To record payment of accrued and current interest expense (9.6% x $780,000 x 20/360). c. Apr. 30 Salaries Expense................................................. 3,600 Salaries Payable.......................................... 3,600 To record accrued salaries ($9,000 x 2/5 week). May 3 Salaries Payable.................................................. 3,600 Salaries Expense................................................. 5,400 Cash.............................................................. 9,000 To record payment of accrued and current salaries ($9,000 x 3/5 week). ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 129
  12. 12. Exercise 3-7 (20 minutes) Balance Sheet Insurance Asset using Insurance Expense using Accrual Basis* Cash Basis Accrual Basis** Cash Basis Dec. 31, 2003 $11,700 $0 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 Fundamental Accounting Principles, 17th Edition130
  13. 13. Exercise 3-8 (25 minutes) Dec. 31 Accounts Receivable.............................................. 1,800 Fees Earned..................................................... 1,800 To record earned but unbilled fees (30% x $6,000). 31 Unearned Fees......................................................... 4,200 Fees Earned..................................................... 4,200 To record earned fees collected in advance (70% x $6,000). 31 Depreciation Expense—Computers....................... 1,500 Accumulated Depreciation—Computers...... 1,500 To record depreciation on computers. 31 Depreciation Expense—Office Furniture................ 1,750 Accumulated Depreciation—Office Furniture.... 1,750 To record depreciation on office furniture. 31 Salaries Expense.................................................... 2,450 Salaries Payable.............................................. 2,450 To record accrued salaries. 31 Insurance Expense.................................................. 1,300 Prepaid Insurance........................................... 1,300 To record expired prepaid insurance. 31 Office Supplies Expense......................................... 480 Office Supplies................................................ 480 To record use of office supplies. 31 Utilities Expense...................................................... 70 Utilities Payable............................................... 70 To record incurred and unpaid utility costs. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 131
  14. 14. Exercise 3-9 (10 minutes) a. $5,390 / $44,830 = 12.0% b. $87,644 / $398,954 = 22.0% c. $93,385 / $257,082 = 36.3% d. $55,234 / $1,458,999 = 3.8% e. $70,158 / $435,925 = 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............................................ 3,000 Cash.......................................................... 3,000 Purchased supplies. b. Dec. 2 Insurance Expense.......................................... 1,440 Cash.......................................................... 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.................................................................. 3,600 Remodeling Fees Earned........................ 3,600 Received fees for work to be done. e. Dec.31 Supplies........................................................... 1,920 Supplies Expense.................................... 1,920 Adjust expenses for unused supplies. f. Dec.31 Prepaid Insurance ($1,440 - $240)................. 1,200 Insurance Expense.................................. 1,200 Adjust expenses for unexpired coverage. g. Dec.31 Remodeling Fees Earned .............................. 9,300 Unearned Remodeling Fees................... 9,300 Adjusted revenues for unfinished projects ($12,000 + $3,600 - $6,300). ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition132
  15. 15. 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....................................................................... 8,400 Unearned Fees.............................................. 8,400 Received fees for work to be done. 12 Unearned Fees...................................................... 2,000 Fees Earned................................................... 2,000 Completed work for customer. 18 Cash....................................................................... 7,500 Unearned Fees.............................................. 7,500 Received fees for work to be done. 27 Unearned Fees...................................................... 8,400 Fees Earned................................................... 8,400 Completed work for customer. 31 No adjusting entries required. b. Initial credit recorded in the Fees Earned account: July 1 Cash....................................................................... 2,000 Fees Earned................................................... 2,000 Received fees for work to be done. 6 Cash....................................................................... 8,400 Fees Earned................................................... 8,400 Received fees for work to be done. 12 No entry required. 18 Cash....................................................................... 7,500 Fees Earned................................................... 7,500 Received fees for work to be done. 27 No entry required. 31 Fees Earned.......................................................... 7,500 Unearned Fees.............................................. 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 Solutions Manual, Chapter 3 133
  16. 16. 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 Fundamental Accounting Principles, 17th Edition134
  17. 17. PROBLEM SET A Problem 3-1A (15 minutes) 1. G. 4. B. 7. H. 10. D. 2. E. 5. G. 8. E. 11. A. 3. I. 6. C. 9. F. 12. D. Problem 3-2A (35 minutes) Part 1 Adjustment (a) Dec.31 Office Supplies Expense......................... 12,760 Office Supplies................................. 12,760 To record cost of supplies used ($3,000 + $12,400 - $2,640). Adjustment (b) 31 Insurance Expense.................................. 12,312 Prepaid Insurance............................ 12,312 To record annual insurance coverage cost. Policy Cost per Month Months Active in 2005 2005 Cost A $660 ($15,840/24 mo.) 12 $ 7,920 B 363 ($13,068/36 mo.) 9 3,267 C 225 ($ 2,700 /12 mo.) 5 1,125 Total $12,312 Adjustment (c) 31 Salaries Expense (2 days x $2,100)........ 4,200 Salaries Payable............................... 4,200 To record accrued but unpaid wages. Adjustment (d) 31 Depreciation Expense—Building........... 27,000 Accumulated Depreciation—Building 27,000 To record annual depreciation expense [($855,000 -$45,000) / 30 years = $27,000] ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 135
  18. 18. Problem 3-2A (Continued) Adjustment (e) Dec.31 Rent Receivable....................................... 2,400 Rent Earned...................................... 2,400 To record earned but unpaid Dec. rent. Adjustment (f) 31 Unearned Rent......................................... 4,350 Rent Earned...................................... 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...................................... 4,200 Salaries Expense*.................................... 6,300 Cash................................................... 10,500 To record payment of accrued and current salaries. *(3 days x $2,100) Cash Payment for (e) 15 Cash.......................................................... 4,800 Rent Receivable................................ 2,400 Rent Earned...................................... 2,400 To record past due rent for two months. ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition136
  19. 19. Problem 3-3A (90 minutes) Parts 1 and 2 Cash Equipment Unadj. Bal. 26,000 Unadj. Bal. 70,000 Accounts Receivable Accumulated Depreciation— Equipment Unadj. Bal. 0 Unadj. Bal. 16,000 (f) 7,500 (c) 12,000 Adj. Bal. 7,500 Adj. Bal. 28,000 Teaching Supplies Accounts Payable Unadj. Bal. 10,000 Bal. 36,000 (b) 7,400 Adj. Bal. 2,600 Salaries Payable Unadj. Bal. 0 Prepaid Insurance (g) 400 Unadj. Bal. 15,000 Adj. Bal. 400 (a) 3,000 Adj. Bal. 12,000 Unearned Training Fees Unadj. Bal. 11,000 Prepaid Rent (e) 4,400 Unadj. Bal. 2,000 Adj. Bal. 6,600 (h) 2,000 Adj. Bal. 0 T. Watson, Capital Bal. 63,600 Professional Library Bal. 30,000 T. Watson, Withdrawals Bal. 40,000 Accumulated Depreciation— Professional Library Unadj. Bal. 9,000 (d) 6,000 Adj. Bal. 15,000 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 137
  20. 20. Problem 3-3A (Continued) Tuition Fees Earned Rent Expense Unadj. Bal. 102,000 Unadj. Bal. 22,000 (f) 7,500 (h) 2,000 Adj. Bal. 109,500 Adj. Bal. 24,000 Training Fees Earned Teaching Supplies Expense Unadj. Bal. 38,000 Unadj. Bal. 0 (e) 4,400 (b) 7,400 Adj. Bal. 42,400 Adj. Bal. 7,400 Depreciation Expense— Professional Library Advertising Expense Unadj. Bal. 0 Bal. 7,000 (d) 6,000 Adj. Bal. 6,000 Depreciation Expense— Equipment Utilities Expense Unadj. Bal. 0 Bal. 5,600 (c) 12,000 Adj. Bal. 12,000 Salaries Expense Unadj. Bal. 48,000 (g) 400 Adj. Bal. 48,400 Insurance Expense Unadj. Bal. 0 (a) 3,000 Adj. Bal. 3,000 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition138
  21. 21. Problem 3-3A (Continued) Part 2 Adjustment (a) Dec. 31 Insurance Expense......................................... 3,000 Prepaid Insurance..................................... 3,000 To record the insurance expired. Adjustment (b) 31 Teaching Supplies Expense.......................... 7,400 Teaching Supplies.................................... 7,400 To record supplies used ($10,000-$2,600). Adjustment (c) 31 Depreciation Expense—Equipment.............. 12,000 Accumulated Depreciation—Equipment...... 12,000 To record equipment depreciation. Adjustment (d) 31 Depreciation Expense—Profess. Library..... 6,000 Accumul. Depreciation—Profess. Library... 6,000 To record professional library depreciation. Adjustment (e) 31 Unearned Training Fees................................. 4,400 Training Fees Earned............................... 4,400 To record training fees earned that were collected in advance. Adjustment (f) 31 Accounts Receivable...................................... 7,500 Tuition Fees Earned................................. 7,500 To record tuition earned ($3,000 x 2 1/2 months). Adjustment (g) 31 Salaries Expense............................................ 400 Salaries Payable....................................... 400 To record accrued salaries (2 days x $100 x 2). Adjustment (h) 31 Rent Expense.................................................. 2,000 Prepaid Rent.............................................. 2,000 To record expiration of prepaid rent. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 139
  22. 22. Problem 3-3A (Continued) Part 3 Watson Technical Institute Adjusted Trial Balance December 31, 2005 Debit Credit Cash......................................................................... $ 26,000 Accounts receivable.............................................. 7,500 Teaching supplies ................................................. 2,600 Prepaid insurance.................................................. 12,000 Prepaid rent............................................................ 0 Professional library................................................ 30,000 Accumulated depreciation—Professional library. . $ 15,000 Equipment............................................................... 70,000 Accumulated depreciation—Equipment.............. 28,000 Accounts payable................................................... 36,000 Salaries payable..................................................... 400 Unearned training fees.......................................... 6,600 T. Watson, Capital.................................................. 63,600 T. Watson, Withdrawals......................................... 40,000 Tuition fees earned................................................ 109,500 Training fees earned.............................................. 42,400 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 _______ Totals....................................................................... $301,500 $301,500 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition140
  23. 23. 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.................................................... $151,900 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................................................... 113,400 Net income............................................................ $ 38,500 WATSON TECHNICAL INSTITUTE Statement of Owner’s Equity For Year Ended December 31, 2005 T. Watson, Capital, December 31, 2004.............. $ 63,600 Plus: Net income.................................................. 38,500 102,100 Less: Owner withdrawals.................................... 40,000 T. Watson, Capital, December 31, 2005.............. $ 62,100 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 141
  24. 24. Problem 3-3A (Concluded) WATSON TECHNICAL INSTITUTE Balance Sheet December 31, 2005 Assets Cash................................................................................. $ 26,000 Accounts receivable...................................................... 7,500 Teaching supplies.......................................................... 2,600 Prepaid insurance.......................................................... 12,000 Professional library........................................................ $30,000 Accumulated depreciation—Professional library....... (15,000) 15,000 Equipment....................................................................... 70,000 Accumulated depreciation—Equipment...................... (28,000) 42,000 Total assets..................................................................... $105,100 Liabilities Accounts payable........................................................... $ 36,000 Salaries payable............................................................. 400 Unearned training fees.................................................. 6,600 Total liabilities................................................................ 43,000 Equity T. Watson, Capital.......................................................... 62,100 Total liabilities and equity............................................. $105,100 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition142
  25. 25. Problem 3-4A (45 minutes) — Part 1 Account Unadjusted TrialBalance Adjustments Adjusted TrialBalance Cash............................... $27,000 $27,000 Accountsreceivable.......... 12,000 (a ) 10,460 22,460 Officesupplies.................. 18,000 (b ) 15,000 3,000 Prepaidinsurance............. 7,320 (c) 2,440 4,880 Officeequipment............... 92,000 92,000 Accumulateddepreciation —Officeequipment.......... $12,000 (d ) 6,000 $18,000 Accountspayable............. 9,300 (e) 900 10,200 Interestpayable................. (f) 800 800 Salariespayable................ (g ) 6,600 6,600 Unearnedconsultingfees... 16,000 (h) 1,700 14,300 Long-termnotespayable.... 44,000 44,000 J.Winner,Capital.............. 28,420 28,420 J.Winner,Withdrawals....... 10,000 10,000 Consultingfees earned........................... 156,000 (a) (h ) 10,460 1,700 168,160 Depreciationexpense— Officeequipment............. (d) 6,000 6,000 Salariesexpense............... 71,000 (g) 6,600 77,600 Interestexpense................ 1,400 (f) 800 2,200 Insuranceexpense............ (c ) 2,440 2,440 Rentexpense................... 13,200 13,200 Officesuppliesexpense..... (b) 15,000 15,000 Advertisingexpense.......... 13,800 _______ (e ) 90 0 ______ 14,700 _______ Totals.............................. $265,720 $265,720 $43,900 $43,90 0 $290,480 $290,480 Adjustment description: (a) Earned but uncollected revenues. (b) Cost of consumed office supplies. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 143
  26. 26. (c) Cost of expired insurance coverage. (d) Depreciation expense on office equipment. (e) Incurred but unpaid advertising expense. (f) Incurred but unpaid interest expense. (g) Incurred but unpaid salaries expense. (h) Earned revenues previously received in advance. ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition144
  27. 27. Problem 3-4A Part 2 JJW COMPANY Income Statement For Year Ended July 31, 2005 Revenues Consulting fees earned ................................ $168,160 Expenses Depreciation expense—Office equipment. . $ 6,000 Salaries expense .......................................... 77,600 Interest expense ........................................... 2,200 Insurance expense ....................................... 2,440 Rent expense ................................................ 13,200 Office supplies expense .............................. 15,000 Advertising expense .................................... 14,700 Total expenses.............................................. 131,140 Net income....................................................... $ 37,020 JJW COMPANY Statement of Owner’s Equity For Year Ended July 31, 2005 J. Winner, Capital, July 31, 2004.................... $28,420 Plus: Net income............................................. 37,020 65,440 Less: Owner withdrawals............................... 10,000 J. Winner, Capital, July 31, 2005.................... $55,440 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 145
  28. 28. Problem 3-4A (Concluded) Part 2 JJW COMPANY Balance Sheet July 31, 2005 Assets Cash............................................................................ $ 27,000 Accounts receivable.................................................. 22,460 Office supplies........................................................... 3,000 Prepaid insurance...................................................... 4,880 Office equipment........................................................ $92,000 Accumulated depreciation—Office equipment....... (18,000) 74,000 Total assets................................................................ $131,340 Liabilities Accounts payable...................................................... $ 10,200 Interest payable.......................................................... 800 Salaries payable......................................................... 6,600 Unearned consulting fees......................................... 14,300 Long-term notes payable.......................................... 44,000 Total liabilities............................................................ 75,900 Equity J. Winner, Capital....................................................... 55,440 Total liabilities and equity......................................... $131,340 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition146
  29. 29. 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.......................................... $436,000 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......................................... 356,800 Net income.................................................. $ 79,200 CALLAHAY COMPANY Statement of Owner's Equity For Year Ended December 31, 2005 J. Callahay, Capital, December 31, 2004. . $247,800 Plus: Net income....................................... 79,200 327,000 Less: Withdrawals by owner.................... 38,000 J. Callahay, Capital, December 31, 2005. . $289,000 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 147
  30. 30. Problem 3-5A (Concluded) CALLAHAY COMPANY Balance Sheet December 31, 2005 Assets Cash........................................................................ $ 22,000 Accounts receivable............................................. 44,000 Interest receivable................................................. 10,000 Notes receivable (due in 90 days)....................... 160,000 Office supplies...................................................... 8,000 Automobiles.......................................................... $160,000 Accumulated depreciation—Automobiles.......... (42,000) 118,000 Equipment.............................................................. 130,000 Accumulated depreciation—Equipment............. (10,000) 120,000 Land........................................................................ 70,000 Total assets........................................................... $552,000 Liabilities Accounts payable................................................. $ 88,000 Interest payable..................................................... 12,000 Salaries payable.................................................... 11,000 Unearned fees....................................................... 22,000 Long-term notes payable..................................... 130,000 Total liabilities....................................................... 263,000 Equity J. Callahay, Capital............................................... 289,000 Total liabilities and equity.................................... $552,000 Part 2 Profit margin = $79,200 / $436,000 = 18.2% ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition148
  31. 31. Problem 3-6AA (40 minutes) Part 1 Assume prepaid expenses are recorded as assets and unearned revenues as liabilities. Nov. 1 Prepaid Advertising ....................................... 1,500 Cash.......................................................... 1,500 Paid for future advertising. 1 Prepaid Insurance........................................... 2,160 Cash.......................................................... 2,160 Paid insurance for one year. 30 Cash.................................................................. 3,300 Unearned Service Fees........................... 3,300 Received fees in advance. Dec. 1 Prepaid Consulting Fees ............................... 2,700 Cash.......................................................... 2,700 Paid for future consulting. 15 Cash.................................................................. 7,650 Unearned Service Fees........................... 7,650 Received fees in advance. 31 Advertising Expense....................................... 600 Prepaid Advertising ................................ 600 To adjust prepaid advertising ($1,500-$900). 31 Insurance Expense.......................................... 360 Prepaid Insurance.................................... 360 To adjust prepaid insurance ($2,160 x 2/12). 31 Unearned Service Fees .................................. 2,100 Service Fees Earned................................ 2,100 To adjust unearned service fees ($3,300-$1,200). 31 Consulting Fees Expense .............................. 900 Prepaid Consulting Fees......................... 900 To adjust prepaid consulting fees ($2,700 x 1/3). 31 Unearned Service Fees .................................. 3,000 Service Fees Earned................................ 3,000 To adjust unearned service fees. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 149
  32. 32. Problem 3-6AA (Continued) Part 2 Assume prepaid expenses are recorded as expenses and unearned revenues as revenues. Nov. 1 Advertising Expense....................................... 1,500 Cash.......................................................... 1,500 Paid for future advertising. 1 Insurance Expense.......................................... 2,160 Cash.......................................................... 2,160 Paid insurance for one year. 30 Cash.................................................................. 3,300 Service Fees Earned................................ 3,300 Received fees in advance. Dec. 1 Consulting Fees Expense............................... 2,700 Cash.......................................................... 2,700 Paid for future consulting. 15 Cash.................................................................. 7,650 Service Fees Earned................................ 7,650 Received fees in advance. 31 Prepaid Advertising........................................ 900 Advertising Expense............................... 900 To adjust for prepaid advertising. 31 Prepaid Insurance........................................... 1,800 Insurance Expense.................................. 1,800 To adjust for prepaid insurance. 31 Service Fees Earned....................................... 1,200 Unearned Service Fees........................... 1,200 To adjust for unearned service fees. 31 Prepaid Consulting Fees................................ 1,800 Consulting Fees Expense....................... 1,800 To adjust for prepaid consulting fees. 31 Service Fees Earned....................................... 4,650 Unearned Service Fees........................... 4,650 To adjust for unearned service fees. ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition150
  33. 33. 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................................... $ 600 Prepaid advertising as of December 31............................... 900 Insurance expense for two months..................................... 360 Prepaid insurance as of December 31................................. 1,800 Consulting fees expense (1/3 of total paid)......................... 900 Prepaid consulting fees........................................................ 1,800 Service fees earned for two months ($2,100 + $3,000)...... 5,100 Unearned service fees at 12/31 ($1,200 + $4,650)............... 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 Solutions Manual, Chapter 3 151
  34. 34. PROBLEM SET B Problem 3-1B (15 minutes) 1. E. 4. C. 7. F. 10. I. 2. H. 5. D. 8. I. 11. A. 3. G. 6. B. 9. F. 12. B. Problem 3-2B (30 minutes) Part 1 Adjustment (a) Oct. 31 Office Supplies Expense........................................ 3,450 Office Supplies................................................ 3,450 To record cost of supplies used ($500 + $3,650 - $700). Adjustment (b) 31 Insurance Expense................................................. 2,365 Prepaid Insurance........................................... 2,365 To record annual insurance coverage cost. Policy Cost per Month Months Active in 2005 2005 Expense A $125 ($3,000/24 mo.) 12 $1,500 B 100 ($3,600/36 mo.) 7 700 C 55 ( $660 / 12 mo.) 3 165 Total $2,365 Adjustment (c) 31 Salaries Expense.................................................... 800 Salaries Payable.............................................. 800 To record accrued but unpaid wages (1 day x $800). Adjustment (d) 31 Depreciation Expense—Building.......................... 5,400 Accumulated Depreciation—Building........... 5,400 To record annual depreciation [($155,000-$20,000) / 25 years = $5,400]. ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition152
  35. 35. Problem 3-2B (Concluded) Adjustment (e) Oct. 31 Rent Receivable...................................................... 600 Rent Earned..................................................... 600 To record earned but unpaid Oct. rent. Adjustment (f) 31 Unearned Rent........................................................ 1,050 Rent Earned..................................................... 1,050 To record rent earned for September and October (2 x $525). Part 2 Cash Payment for (c) Nov. 7 Salaries Payable..................................................... 800 Salaries Expense*................................................... 3,200 Cash.................................................................. 4,000 To record payment of accrued and current salaries. *(4 days x $800) Cash Payment for (e) 15 Cash......................................................................... 1,200 Rent Receivable............................................... 600 Rent Earned..................................................... 600 To record past due rent for two months. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 153
  36. 36. Problem 3-3B (90 minutes) Parts 1 and 2 Cash Accounts Payable Bal. 50,000 Bal. 12,200 Accounts Receivable Salaries Payable Unadj. Bal. 0 Unadj. Bal. 0 (f) 5,500 (g) 540 Adj. Bal. 5,500 Adj. Bal. 540 Teaching Supplies Unearned Training Fees Unadj. Bal. 60,000 Unadj. Bal. 27,600 (b) 57,500 (e) 9,200 Adj. Bal. 2,500 Adj. Bal. 18,400 Prepaid Insurance M. Alcorn, Capital Unadj. Bal. 18,000 Bal. 68,500 (a) 6,400 Adj. Bal. 11,600 M. Alcorn, Withdrawals Prepaid Rent Bal. 20,000 Unadj. Bal. 2,600 (h) 2,600 Adj. Bal. 0 Professional Library Bal. 10,000 Accumulated Depreciation— Professional Library Unadj. Bal. 1,500 (d) 2,000 Adj. Bal. 3,500 Equipment Bal. 30,000 Accumulated Depreciation— Equipment Unadj. Bal. 16,000 (c) 4,000 Adj. Bal. 20,000 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition154
  37. 37. Problem 3-3B (Continued) Parts 1 and 2 Tuition Fees Earned Advertising Expense Unadj. Bal. 105,000 Bal. 18,000 (f) 5,500 Adj. Bal. 110,500 Training Fees Earned Utilities Expense Unadj. Bal. 62,000 Bal. 12,400 (e) 9,200 Adj. Bal. 71,200 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 Rent Expense Unadj. Bal. 28,600 (h) 2,600 Adj. Bal. 31,200 Teaching Supplies Expense Unadj. Bal. 0 (b) 57,500 Adj. Bal. 57,500 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 155
  38. 38. Problem 3-3B (Continued) Part 2 Adjustment (a) Dec. 31 Insurance Expense................................................ 6,400 Prepaid Insurance.......................................... 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..................... 4,000 Accumulated Depreciation—Equipment..... 4,000 To record equipment depreciation. Adjustment (d) 31 Depreciation Expense—Professional Library.... 2,000 Accumulated Depreciation— Professional Library............................. 2,000 To record professional library depreciation. Adjustment (e) 31 Unearned Training Fees........................................ 9,200 Training Fees Earned..................................... 9,200 To record training fees earned that were collected in advance. Adjustment (f) 31 Accounts Receivable............................................ 5,500 Tuition Fees Earned....................................... 5,500 To record tuition earned ($2,200 x 2 1/2 mo). Adjustment (g) 31 Salaries Expense................................................... 540 Salaries Payable............................................. 540 To accrue salaries expense (3 days x $180). Adjustment (h) 31 Rent Expense ........................................................ 2,600 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition156
  39. 39. Prepaid Rent.............................................................. 2,600 To record expiration of prepaid rent. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 157
  40. 40. Problem 3-3B (Continued) Part 3 ALCORN INSTITUTE Adjusted Trial Balance December 31, 2005 Debit Credit Cash............................................................................ $ 50,000 Accounts receivable.................................................... 5,500 Teaching supplies....................................................... 2,500 Prepaid insurance....................................................... 11,600 Prepaid rent................................................................. 0 Professional library..................................................... 10,000 Accumulated depreciation—Professional library........ $ 3,500 Equipment................................................................... 30,000 Accumulated depreciation—Equipment..................... 20,000 Accounts payable....................................................... 12,200 Salaries payable.......................................................... 540 Unearned training fees................................................ 18,400 M. Alcorn, Capital........................................................ 68,500 M. Alcorn, Withdrawals............................................... 20,000 Tuition fees earned...................................................... 110,500 Training fees earned.................................................... 71,200 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 _______ Totals.......................................................................... $304,840 $304,840 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition158
  41. 41. 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............................................................ $181,700 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........................................................... 175,240 Net income.................................................................... $ 6,460 ALCORN INSTITUTE Statement of Owner’s Equity For Year Ended December 31, 2005 M. Alcorn, Capital, December 31, 2004.............. $68,500 Plus: Net income.................................................. 6,460 74,960 Less: Owner withdrawals.................................... 20,000 M. Alcorn, Capital, December 31, 2005.............. $54,960 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 159
  42. 42. Problem 3-3B (Concluded) ALCORN INSTITUTE Balance Sheet December 31, 2005 Assets Cash.............................................................................. $50,000 Accounts receivable.................................................... 5,500 Teaching supplies....................................................... 2,500 Prepaid insurance........................................................ 11,600 Professional library..................................................... $10,000 Accumulated depreciation—Professional library........... (3,500) 6,500 Equipment.................................................................... 30,000 Accumulated depreciation—Equipment.................... (20,000) 10,000 Total assets.................................................................. $86,100 Liabilities Accounts payable........................................................ $12,200 Salaries payable........................................................... 540 Unearned training fees................................................ 18,400 Total liabilities.............................................................. 31,140 Equity M. Alcorn, Capital......................................................... 54,960 Total liabilities and equity........................................... $86,100 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition160
  43. 43. Problem 3-4B (45 minutes) — Part 1 Account Unadjusted TrialBalance Adjustments Adjusted TrialBalance Cash............................... $48,000 $48,000 Accountsreceivable......... 70,000 (a) 6,660 76,660 Officesupplies................. 30,000 (b) 23,000 7,000 Prepaidinsurance............ 13,200 (c) 4,600 8,600 Officeequipment.............. 150,000 150,000 Accumulateddepreciation— Officeequipment................ $30,000 (d) 10,000 $40,000 Accountspayable............ 36,000 (e) 6,000 42,000 Interestpayable................ (f) 1,600 1,600 Salariespayable............... (g) 11,200 11,200 Unearnedconsultingfees. 30,000 (h) 12,200 17,800 Long-termnotespayable. . 80,000 80,000 D.Chen,Capital............... 70,200 70,200 D.Chen,Withdrawals....... 10,000 10,000 Consulting feesearned.... 264,000 (a) (h) 6,660 12,200 282,860 Depreciationexpense— Officeequipment........... (d) 10,000 10,000 Salariesexpense.............. 115,600 (g) 11,200 126,800 Interestexpense............... 6,400 (f) 1,600 8,000 Insurance expense.......... (c) 4,600 4,600 Rentexpense.................. 24,000 24,000 Officesuppliesexpense.... (b) 23,000 23,000 Advertisingexpense......... 43,000 _______ (e) 6,000 ______ 49,000 _______ Totals.............................. $510,200 $510,200 $75,260 $75,260 $545,660 $545,660 Adjustment Descriptions: (a) Earned but uncollected revenues. (b) Cost of consumed office supplies. (c) Cost of expired insurance coverage. (d) Depreciation expense on office equipment. (e) Incurred but unpaid advertising expense. (f) Incurred but unpaid interest expense. (g) Incurred but unpaid salaries expense. (h) Earned revenues previously received in advance. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 161
  44. 44. Problem 3-4B Part 2 DAXU CONSULTING COMPANY Income Statement For Year Ended December 31, 2005 Revenues Consulting fees earned ..................................... $282,860 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................................................... 245,400 Net income............................................................ $ 37,460 DAXU CONSULTING COMPANY Statement of Owner’s Equity For Year Ended December 31, 2005 D. Chen, Capital, December 31, 2004................. $ 70,200 Plus: Net income.................................................. 37,460 107,660 Less: Owner withdrawals.................................... 10,000 D. Chen, Capital, December 31, 2005................. $ 97,660 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition162
  45. 45. 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....................................................... $ 42,000 Interest payable........................................................... 1,600 Salaries payable.......................................................... 11,200 Unearned consulting fees.......................................... 17,800 Long-term notes payable........................................... 80,000 Total liabilities............................................................. 152,600 Equity D. Chen, Capital.......................................................... 97,660 Total liabilities and equity.......................................... $250,260 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 163
  46. 46. 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............................................... $604,000 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.............................................. 543,000 Net income....................................................... $ 61,000 LIGHTNING COURIER Statement of Owner's Equity For Year Ended December 31, 2005 J. Hallam, Capital, December 31, 2004.......... $115,000 Plus : Net income........................................... 61,000 176,000 Less: Withdrawals by owner......................... 40,000 J. Hallam, Capital, December 31, 2005.......... $136,000 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition164
  47. 47. 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............................................... $124,000 Interest payable................................................... 22,000 Salaries payable.................................................. 30,000 Unearned delivery fees....................................... 110,000 Long-term notes payable................................... 190,000 Total liabilities..................................................... 476,000 Equity J. Hallam, Capital................................................ 136,000 Total liabilities and equity.................................. $612,000 Part 2 Profit margin = $61,000 / $604,000 = 10.1% ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 165
  48. 48. 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............................................... 450 Prepaid Insurance......................................... 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 Fundamental Accounting Principles, 17th Edition166
  49. 49. Problem 3-6BA (Continued) Part 2 Method that records prepaid expenses and unearned revenues in income statement accounts: Apr. 1 Consulting Fees Expense ................................. 3,450 Cash.............................................................. 3,450 Paid for future consulting services. 1 Insurance Expense............................................. 2,700 Cash.............................................................. 2,700 Paid insurance for one year. 30 Cash..................................................................... 7,500 Service Fees Earned................................... 7,500 Received fees in advance. May 1 Advertising Expense........................................... 3,450 Cash.............................................................. 3,450 Paid for future advertising. 23 Cash..................................................................... 9,450 Service Fees Earned................................... 9,450 Received fees in advance. 31 Prepaid Consulting Fees.................................... 1,950 Consulting Fees Expense........................... 1,950 To adjust for prepaid consulting fees. 31 Prepaid Insurance .............................................. 2,250 Insurance Expense...................................... 2,250 To adjust for prepaid insurance. 31 Service Fees Earned........................................... 3,600 Unearned Service Fees .............................. 3,600 To adjust for unearned service fees. 31 Prepaid Advertising............................................ 1,050 Advertising Expense................................... 1,050 To adjust for prepaid advertising. 31 Service Fees Earned........................................... 4,950 Unearned Service Fees .............................. 4,950 To adjust for unearned service fees. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 167
  50. 50. 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 Fundamental Accounting Principles, 17th Edition168
  51. 51. Serial Problem Serial Problem, Success Systems (120 minutes) Part 1 Journal entries: Dec. 2 Advertising Expense..................................655 1,025 Cash.....................................................101 1,025 Paid share of mall advertising costs. 3 Repairs Expense—Computer....................684 500 Cash.....................................................101 500 Repaired the computer. 4 Cash.............................................................101 3,950 Accounts Receivable..........................106 3,950 Collected accounts receivable. 10 Wages Expense..........................................623 750 Cash.....................................................101 750 Paid employee for part-time work. 14 Cash.............................................................101 1,500 Unearned Computer Services Revenue...236 1,500 Received advance on work to be performed. 15 Computer Supplies....................................126 1,100 Accounts Payable...............................201 1,100 Purchased supplies on credit. 16 No entry recorded in the journal. 20 Cash.............................................................101 5,625 Computer Services Revenue.............403 5,625 Collected cash revenue from customer. 28 Cash.............................................................101 3,000 Accounts Receivable..........................106 3,000 Collected accounts receivable. 29 Mileage Expense........................................676 192 Cash.....................................................101 192 Reimbursed Breeze for mileage. 31 K. Breeze, Withdrawals..............................302 1,500 Cash.....................................................101 1,500 Owner withdraws cash. ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 169
  52. 52. Serial Problem (Continued) Part 2 Adjusting entries: Dec. 31 Computer Supplies Expense .........................652 3,065 Computer Supplies .................................126 3,065 Adjustment for supplies used (supplies balance less cost of supplies available). 31 Insurance Expense .........................................637 555 Prepaid Insurance ...................................128 555 Adjustment for expired insurance (1/4 of original prepaid amount). 31 Wages Expense ..............................................623 500 Wages Payable ........................................210 500 Adjustment for accrued wages. 31 Depreciation Exp—Computer Equip.............613 1,250 Accumulated Depreciation— Computer Equipment...........................168 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............612 400 Accumulated Depreciation— Office Equipment ..................................164 400 Adjustment for office equipment depreciation: Cost.......................................................... $8,000 Predicted life............................................ 5 years Annual depreciation (cost/life)............... $1,600 Expense for three months....................... $400 31 Rent Expense ..................................................640 2,475 Prepaid Rent ............................................131 2,475 Adjustment for expired rent (3/4 of original prepaid amount). ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition170
  53. 53. Serial Problem (Continued) Parts 1 and 2 Posting to the accounts: Cash Acct. No. 101 Date Explanation PR Debit Credit Balance Oct. 1 55,000 55,000 2 3,300 51,700 5 2,220 49,480 8 1,420 48,060 15 4,800 52,860 17 805 52,055 20 1,940 50,115 22 1,400 51,515 31 875 50,640 31 3,600 47,040 Nov. 1 320 46,720 2 4,633 51,353 5 1,125 50,228 18 2,208 52,436 22 250 52,186 28 384 51,802 30 1,750 50,052 30 2,000 48,052 Dec. 2 1,025 47,027 3 500 46,527 4 3,950 50,477 10 750 49,727 14 1,500 51,227 20 5,625 56,852 28 3,000 59,852 29 192 59,660 31 1,500 58,160 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 171
  54. 54. Serial Problem (Continued) Parts 1 and 2 Accounts Receivable Acct. No. 106 Date Explanation PR Debit Credit Balance Oct. 6 4,800 4,800 12 1,400 6,200 15 4,800 1,400 22 1,400 0 28 5,208 5,208 Nov. 8 5,668 10,876 18 2,208 8,668 24 3,950 12,618 Dec. 4 3,950 8,668 28 3,000 5,668 Computer Supplies Acct. No. 126 Date Explanation PR Debit Credit Balance Oct. 3 1,420 1,420 Nov. 5 1,125 2,545 Dec. 15 1,100 3,645 31 3,065 580 Prepaid Insurance Acct. No. 128 Date Explanation PR Debit Credit Balance Oct. 5 2,220 2,220 Dec. 31 555 1,665 Prepaid Rent Acct. No. 131 Date Explanation PR Debit Credit Balance Oct. 2 3,300 3,300 Dec. 31 2,475 825 Office Equipment Acct. No. 163 Date Explanation PR Debit Credit Balance Oct. 1 8,000 8,000 Accumulated Depreciation—Office Equipment Acct. No. 164 Date Explanation PR Debit Credit Balance Dec. 31 400 400 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition172
  55. 55. Serial Problem (Continued) Parts 1 and 2 Computer Equipment Acct. No. 167 Date Explanation PR Debit Credit Balance Oct. 1 20,000 20,000 Accumulated Depreciation—Computer Equipment Acct. No. 168 Date Explanation PR Debit Credit Balance Dec. 31 1,250 1,250 Accounts Payable Acct. No. 201 Date Explanation PR Debit Credit Balance Oct. 3 1,420 1,420 8 1,420 0 Dec. 15 1,100 1,100 Wages Payable Acct. No. 210 Date Explanation PR Debit Credit Balance Dec. 31 500 500 Unearned Computer Services Revenue Acct. No. 236 Date Explanation PR Debit Credit Balance Dec. 14 1,500 1,500 K. Breeze, Capital Acct. No. 301 Date Explanation PR Debit Credit Balance Oct. 1 83,000 83,000 K. Breeze, Withdrawals Acct. No. 302 Date Explanation PR Debit Credit Balance Oct. 31 3,600 3,600 Nov. 30 2,000 5,600 Dec. 31 1,500 7,100 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 173
  56. 56. Serial Problem (Continued) Parts 1 and 2 Computer Services Revenue Acct. No. 403 Date Explanation PR Debit Credit Balance Oct. 6 4,800 4,800 12 1,400 6,200 28 5,208 11,408 Nov. 2 4,633 16,041 8 5,668 21,709 24 3,950 25,659 Dec. 20 5,625 31,284 Depreciation Expense—Office Equipment Acct. No. 612 Date Explanation PR Debit Credit Balance Dec. 31 400 400 Depreciation Expense—Computer Equipment Acct. No. 613 Date Explanation PR Debit Credit Balance Dec. 31 1,250 1,250 Wages Expense Acct. No. 623 Date Explanation PR Debit Credit Balance Oct. 31 875 875 Nov. 30 1,750 2,625 Dec. 10 750 3,375 31 500 3,875 Insurance Expense Acct. No. 637 Date Explanation PR Debit Credit Balance Dec. 31 555 555 Rent Expense Acct. No. 640 Date Explanation PR Debit Credit Balance Dec. 31 2,475 2,475 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition174
  57. 57. Serial Problem (Continued) Parts 1 and 2 Computer Supplies Expense Acct. No. 652 Date Explanation PR Debit Credit Balance Dec. 31 3,065 3,065 Advertising Expense Acct. No. 655 Date Explanation PR Debit Credit Balance Oct. 20 1,940 1,940 Dec. 2 1,025 2,965 Mileage Expense Acct. No. 676 Date Explanation PR Debit Credit Balance Nov. 1 320 320 28 384 704 Dec. 29 192 896 Miscellaneous Expenses Acct. No. 677 Date Explanation PR Debit Credit Balance Nov. 22 250 250 Repairs Expense—Computer Acct. No. 684 Date Explanation PR Debit Credit Balance Oct. 17 805 805 Dec. 3 500 1,305 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 175
  58. 58. Serial Problem (Continued) Part 3 SUCCESS SYSTEMS Adjusted Trial Balance December 31, 2004 Debit Credit 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....... $ 400 Computer equipment ................................................ 20,000 Accumulated depreciation—Computer equipment. 1,250 Accounts payable ...................................................... 1,100 Wages payable ........................................................... 500 Unearned computer services revenue .................... 1,500 K. Breeze, Capital....................................................... 83,000 K. Breeze, Withdrawals.............................................. 7,100 Computer services revenue ..................................... 31,284 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 $119,034 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition176
  59. 59. Serial Problem (Continued) Part 4 SUCCESS SYSTEMS Income Statement For Three Months Ended December 31, 2004 Revenue Computer services revenue....................................... $31,284 Expenses 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 Total expenses............................................................ 17,036 Net income..................................................................... $14,248 Part 5 SUCCESS SYSTEMS Statement of Owner’s Equity For Three Months Ended December 31, 2004 K. Breeze, Capital, October 1, 2004................. $ 0 Plus: Owner investment.......... 83,000 Net income.............................................. 14,248 97,248 Less: Owner withdrawals.................................. 7,100 K. Breeze, Capital, December 31, 2004............ $90,148 ©McGraw-Hill Companies, Inc., 2005 Solutions Manual, Chapter 3 177
  60. 60. Serial Problem (Continued) Part 6 SUCCESS SYSTEMS Balance Sheet December 31, 2004 Assets 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........... (400) 7,600 Computer equipment..................................................... 20,000 Accumulated depreciation—Computer equipment.... (1,250) 18,750 Total assets..................................................................... $93,248 Liabilities Accounts payable........................................................... $ 1,100 Wages payable............................................................... 500 Unearned computer services revenue......................... 1,500 Total liabilities................................................................ 3,100 Equity K. Breeze, Capital........................................................... 90,148 Total liabilities and equity............................................. $93,248 ©McGraw-Hill Companies, Inc., 2005 Fundamental Accounting Principles, 17th Edition178
  61. 61. 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 Solutions Manual, Chapter 3 179
  62. 62. 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 contra- asset 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 Fundamental Accounting Principles, 17th Edition180
  63. 63. 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 Solutions Manual, Chapter 3 181
  64. 64. 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: Before Adjusting Balance Sheet Income Statement Type Account Account Adjusting Entry Prepaid expense Asset overstated Expense understated Dr. Expense Cr. Asset* Unearned revenues Liability overstated Revenue understated Dr. Liability Cr. Revenue Accrued Expenses Liability understated Expense understated Dr. Expense Cr. Liability Accrued Revenues Asset understated Revenue understated 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 Fundamental Accounting Principles, 17th Edition182
  65. 65. Business Week Activity — BTN 3-7 1. Herz personally favors a move toward what is known as “principles- based 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 principles- based 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 Solutions Manual, Chapter 3 183
  66. 66. 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. 2. Mellie’s net income = Income x Profit margin = $40,000,000 x 0.08 = $3,200,000. 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 Fundamental Accounting Principles, 17th Edition184
  67. 67. 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 b. Manufacturing equipment c. Vehicles d. Office equipment e. Computer equipment 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 Solutions Manual, Chapter 3 185

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