Chapter 4
Adjustments, Financial Statements, and the
Quality of Earnings


ANSWERS TO QUESTIONS

1. A trial balance is a l...
(b) Balance sheet: Assets = Liabilities + Stockholders' Equity
    (c) Statement of cash flows: Changes in cash for the pe...
(b) Temporary accounts -- income statement accounts; that is, revenues, gains,
         expenses, and losses (these are cl...
Authors' Recommended Solution Time
                                  (Time in minutes)


                                 ...
MINI-EXERCISES

M4–1.

                                         Puglisi Company
                                       Adj...
M4–4.

  (a    1. Deferred revenue
  )

        2. Unearned rent revenue (−L).......................... 200
              ...
M4–6.

  (a    1. Accrued expense
  )

        2. Utilities expense (+E, −SE)........................... 320
             ...
M4–8.
                                 MORGAN COMPANY
                                  Income Statement
                 ...
M4–10.

Req. 1
                                 MORGAN COMPANY
                                     Balance Sheet
        ...
M4–11.

                 Revenues:
                       Sales revenue                                               $ 42...
EXERCISES

E4–1.

                              Darius Consultants, Inc.
                               Unadjusted Trial B...
E4–2.

Req. 1

The following deferred revenues and deferred expenses may need to be adjusted at
the end of the recent fisc...
E4–3.

Req. 1

The annual reporting period for this company is January 1 through December 31, 2008.

Req. 2 (Adjusting ent...
E4–4.

Req. 1

2007 Income statement:
   Insurance expense ($7,800 x 4/24) = $1,300 used.
   Shipping supplies expense: ($...
E4–5.
                               Balance Sheet                              Income Statement
                         ...
Req. 1 and 2
a.    Accrued revenue -- revenue earned before cash is collected.
      Accounts receivable (+A)................
E4–8.
                               Balance Sheet                      Income Statement
                                 ...
Selected Balance Sheet Amounts at December 31, 2007
  Assets:
    Equipment (recorded at cost per cost principle)         ...
(c)        Cash paid on dividends payable.
                 (d)        Amount of dividends declared for the period.
      ...
E4–14.

Req. 1 Adjusting entries that were or should have been made at December 31:

(a) Should have been made.
      Depr...
E4–15.

                              Net         Total      Total          Stockholders’
        Items               Inco...
E4–16.

Req. 1

a.    Expenses (depreciation) (+E, −SE).............                    5,000
         Accumulated depreci...
E4–17.

Req. 1

a.     Salaries and wages expense (+E, −SE).................                     310
           Salaries a...
E4–17. (continued)

Req. 2
                                    DEREK, INC.
                                 Income Stateme...
E4–18.

Req. 1

(a)      Insurance expense (+E, −SE) .....................................          5
               Prepa...
E4–19.
                                     SENECA COMPANY
                                      Income Statement
        ...
E4–20.

Req. 1
The purpose of “closing the books” at the end of the accounting period is to transfer the
balance in the te...
PROBLEMS
P4–1.

Req. 1
                               Dell Computer Corporation
                                 Adjusted ...
P4–2. (continued)

Req. 2

a.   Unearned rent revenue (−L).......................................... 4,800
            Ren...
P4–3.

Req. 1

a.       Deferred expense                  e.      Accrued revenue
b.       Deferred expense               ...
P4–3. (continued)

g.     Interest expense (+E, −SE)...........................................           300
            ...
P4–5.

Req. 1

a.       Deferred expense                 e.     Accrued revenue
b.       Deferred expense                 ...
P4–6.

                                             2007             Financial            Effect on
               Account...
P4–7.

Req. 1
                         December 31, 2006 Adjusting Entries
(1)   Accounts receivable (+A)....................
P4–7. (continued)

Req. 4

Net profit margin = Net income ÷ Net Sales = $(8,700) net loss ÷ $46,400 = (18.8)%

The net pro...
P4–8.

Req. 1
                               December 31, 2007 Adjusting Entries:

(a)      Supplies expense (+E, −SE) ......
P4–8. (continued)

                                              ST. DENIS, INC.
                                         ...
P4–9.

Req. 1, 2, 3, and 5 T-accounts (in thousands)
                                  Accounts
          Cash            ...
P4–9. (continued)

Req. 2
 a. Cash (+A)...........................................................            10,000
     ...
P4–9. (continued)

Req. 3

  l.     Supplies expense (+E, −SE)..............................             16,000
          ...
P4–9. (continued)

                                    H & H TOOL, INC.
                              Statement of Stockho...
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  1. 1. Chapter 4 Adjustments, Financial Statements, and the Quality of Earnings ANSWERS TO QUESTIONS 1. A trial balance is a list of the individual accounts, usually in financial statement order, with their debit or credit balances. It is used to provide a check on the equality of the debits and credits. 2. Adjusting entries are made at the end of the accounting period to record all revenues and expenses that have not been recorded but belong in the current period. They update the balance sheet and income statement accounts at the end of the accounting period. The four different types are adjustments for: (1) Deferred revenues -- previously recorded liabilities that need to be adjusted at the end of the period to reflect revenues that have been earned (e.g., Unearned Ticket Revenue must be adjusted for the portion of ticket revenues earned in the current period). (2) Accrued revenues -- revenues that have been earned by the end of the accounting period but which will be collected in a future accounting period (e.g., recording Interest Receivable for interest revenues not yet collected). (3) Deferred expenses -- previously recorded assets that need to be adjusted at the end of the period to reflect incurred expenses (e.g., Prepaid Insurance must be adjusted for the portion of insurance expense incurred in the current period). (4) Accrued expenses -- expenses that have been incurred by the end of the accounting period but which will be paid in a future accounting period (e.g., recording Accrued Expenses Payable for utilities expense incurred during the period that has not yet been paid). 3. A contra-asset is an account related to an asset that is an offset or reduction to the asset's balance. Accumulated Depreciation is a contra-account to the equipment and buildings accounts. 4. The net income on the income statement is included in determining ending retained earnings on the statement of stockholders’ equity and the balance sheet. The change in the cash account on the balance sheet is analyzed and categorized on the statement of cash flows into cash from operating activities, investing activities, and financing activities. 5. (a) Income statement: (Revenues + Gains) - (Expenses + Losses) = Net Income McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-1
  2. 2. (b) Balance sheet: Assets = Liabilities + Stockholders' Equity (c) Statement of cash flows: Changes in cash for the period = Cash from Operations + Cash from Investing Activities + Cash from Financing Activities (d) Statement of stockholders' equity: Ending Stockholders' Equity = (Beginning Contributed Capital + Stock Issuances - Stock Repurchases) + (Beginning Retained Earnings + Net Income - Dividends Declared) 6. Adjusting entries have no effect on cash. For unearned revenues and prepayments, cash was received or paid at some point in the past. For accruals, cash will be received or paid in a future accounting period. At the time of the adjusting entry, there is no cash being received or paid. 7. Earnings per share = Net Income ÷ weighted average number of shares of stock outstanding during the period. Earnings per share measures the average amount of net income for the year attributable to one share of common stock. 8. Net profit margin = Net income ÷ net sales The net profit margin measures how much of every sales dollar generated during the period is profit. 9. An unadjusted trial balance is prepared after all current transactions have been journalized and posted to the ledger. It does not include the effects of the adjusting entries. The basic purpose of an unadjusted trial balance is to check the equalities of the accounting model (particularly, Debits = Credits) and to provide the data in a form convenient for further processing in the accounting information processing cycle. In contrast, an adjusted trial balance is prepared after the effects of all of the adjusting entries have been applied to the corresponding (prior) unadjusted trial balance amounts. The basic purpose of an adjusted trial balance is to insure that accuracy has been attained in applying the effect of the adjusting entries. The adjusted trial balance provides a second check in the model equalities (primarily Debits = Credits). It also provides data in a form convenient for further processing. 10. Closing entries are made at the end of the accounting period to transfer the balances in the temporary income statement accounts to retained earnings. The closing entries reduce the revenue, gain, expense, and loss accounts to a zero balance so that they can be used for the accumulation process during the next period. Closing entries must be entered into the system through the journal and posted to the ledger accounts to state properly the temporary and permanent account balances (i.e., zero balances in the temporary accounts). 11. (a) Permanent accounts -- balance sheet accounts; that is, the asset, liability, and stockholders’ equity accounts (these are not closed at the end of each period). McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-2 Solutions Manual
  3. 3. (b) Temporary accounts -- income statement accounts; that is, revenues, gains, expenses, and losses (these are closed at the end of each period). (c) Real accounts -- another name for permanent accounts. (d) Nominal accounts -- another name for temporary accounts. 12. The income statement accounts are closed at the end of the accounting period because, in effect, they are temporary subaccounts to retained earnings (i.e., a part of stockholders' equity). They are used only for accumulation during the accounting period. When the period ends, these accumulated accounts must be transferred (closed) to retained earnings. The closing process serves: (1) to correctly state retained earnings, and (2) to clear out the balances of the temporary accounts for the year just ended so that these subaccounts can be used again during the next period for accumulation and classification purposes. Balance sheet accounts are not closed at the end of the period because they reflect permanent accumulated balances of assets, liabilities, and stockholders' equity. Permanent accounts show the entity's financial position at the end of the period and are the beginning amounts for the next period. 13. A post-closing trial balance is a listing taken from the ledger after the adjusting and closing entries have been journalized and posted. It is not a necessary part of the accounting information processing cycle but it is useful because it demonstrates the equality of the debits and credits in the ledger after the closing entries have been journalized and posted. ANSWERS TO MULTIPLE CHOICE 1. b) 2. a) 3. d) 4. c) 5. d) 6. d) 7. a) 8. c) 9. d) 10. b) McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-3
  4. 4. Authors' Recommended Solution Time (Time in minutes) Alternate Cases and Mini-exercises Exercises Problems Problems Projects No. Time No. Time No. Time No. Time No. Time 1 5 1 10 1 15 1 15 1 25 2 5 2 10 2 20 2 20 2 25 3 3 3 10 3 25 3 20 3 25 4 5 4 15 4 20 4 20 4 25 5 5 5 10 5 20 5 20 5 25 6 5 6 20 6 25 6 25 6 40 7 5 7 20 7 30 7 30 7 45 8 5 8 20 8 30 8 30 8 35 9 5 9 15 9 60 9 50 10 5 10 20 10 25 11 5 11 10 11 * 12 3 12 20 13 15 14 15 15 20 16 20 17 20 18 20 19 10 20 15 * Due to the nature of this project, it is very difficult to estimate the amount of time students will need to complete the assignment. As with any open-ended project, it is possible for students to devote a large amount of time to these assignments. While students often benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear. For example, when our goal is to sharpen research skills, we devote class time discussing research strategies. When we want the students to focus on a real accounting issue, we offer suggestions about possible companies or industries. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-4 Solutions Manual
  5. 5. MINI-EXERCISES M4–1. Puglisi Company Adjusted Trial Balance At June 30, 2007 Debit Credit Cash $ 120 Accounts receivable 350 Inventories 610 Prepaid expenses 40 Buildings and equipment 1,400 Accumulated depreciation $ 250 Land 200 Accounts payable 200 Accrued expenses payable 150 Income taxes payable 30 Unearned fees 100 Long-term debt 1,300 Contributed capital 300 Retained earnings 120 Sales revenue 2,400 Interest income 50 Cost of sales 820 Salaries expense 660 Rent expense 400 Depreciation expense 110 Interest expense 80 Income taxes expense 110 Totals $ 4,900 $ 4,900 M4–2. (1) D; (2) B; (3) D; (4) C; (5) A; (6) C; (7) B; (8) A. M4–3. (1) A; (2) B; (3) C; (4) D. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-5
  6. 6. M4–4. (a 1. Deferred revenue ) 2. Unearned rent revenue (−L).......................... 200 Rent revenue (+R, +SE)......................... 200 To record one month of rent revenue earned ($800 ÷ 4 months). (b 1. Deferred expense ) 2. Insurance expense (+E, −SE)....................... 900 Prepaid insurance (−A).......................... 900 To record six months of insurance expense ($3,600 x 6/24). (c 1. Deferred expense ) 2. Depreciation expense (+E, −SE)................... 3,000 Accumulated depreciation (+XA, −A)..... 3,000 To record annual depreciation expense. M4–5. Balance Sheet Income Statement Stockholders’ Net Transaction Assets Liabilities Equity Revenues Expenses Income a. NE –200 +200 +200 NE +200 b. –900 NE –900 NE +900 –900 c. –3,000 NE –3,000 NE +3,000 –3,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-6 Solutions Manual
  7. 7. M4–6. (a 1. Accrued expense ) 2. Utilities expense (+E, −SE)........................... 320 Accrued utilities payable (+L)................. 320 To record utilities expense incurred but not yet paid. (b 1. Accrued expense ) 2. Wages expense (+E, −SE)............................ 4,500 Accrued wages payable (+L)................. 4,500 To record wages expense incurred but not yet paid, calculated as 10 employees x 3 days x $150 each per day. (c 1. Accrued revenue ) 2. Interest receivable (+A)................................. 200 Interest revenue (+R, +SE).................... 200 To record interest earned but not yet collected, calculated as $5,000 x 12% x 4/12. M4–7. Balance Sheet Income Statement Stockholders’ Net Transaction Assets Liabilities Equity Revenues Expenses Income a. NE +320 –320 NE +320 –320 b. NE +4,500 –4,500 NE +4,500 –4,500 c. +200 NE +200 +200 NE +200 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-7
  8. 8. M4–8. MORGAN COMPANY Income Statement For the Year Ended December 31, 2007 Revenues: Sales revenue $ 42,000 Interest revenue 120 Rent revenue 300 Total revenues 42,420 Costs and expenses: Wages expense 21,600 Depreciation expense 2,000 Utilities expense 220 Insurance expense 600 Rent expense 9,000 Total costs and expenses 33,420 Pretax income 9,000 Income tax expense 2,900 Net Income $ 6,100 Earnings per share* $20.33 * calculated as $6,100 ÷ [(100 + 500) ÷ 2] = $6,100 ÷ 300 = $20.33 Average number of shares M4–9. MORGAN COMPANY Statement of Stockholders’ Equity For the Year Ended December 31, 2007 Total Contributed Retained Stockholders’ Capital Earnings Equity Balance, January 1, 2007 $ 400 $ 1,000* $ 1,400 Share issuance 2,000 2,000 Net income 6,100 6,100 Dividends 0 0 Balance, December 31, 2007 $ 2,400 $ 7,100 $ 9,500 * From the trial balance. Work backwards McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-8 Solutions Manual
  9. 9. M4–10. Req. 1 MORGAN COMPANY Balance Sheet At December 31, 2007 Assets Current Assets: Cash $ 1,500 Accounts receivable 2,000 Interest receivable 120 Prepaid insurance 1,800 Total current assets 5,420 Notes receivable 3,000 Equipment (net of accumulated depreciation, $2,000) 10,000 Total Assets $ 18,420 Liabilities Current Liabilities: Accounts payable $ 1,600 Accrued expenses payable 3,820 Income taxes payable 2,900 Unearned rent revenue 600 Total current liabilities 8,920 Stockholders’ Equity Contributed Capital 2,400 Retained Earnings 7,100 Total Stockholders’ Equity 9,500 Total Liabilities and Stockholders’ Equity $ 18,420 Req. 2 The adjustments in M4–4 and M4–6 have no effect on the operating, investing, and financing activities on the statement of cash flows because no cash is paid or received at the time of the adjusting entries. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-9
  10. 10. M4–11. Revenues: Sales revenue $ 42,000 Interest revenue 120 Rent revenue 300 Total revenues 42,420 Costs and expenses: Wages expense 21,600 Depreciation expense 2,000 Utilities expense 220 Insurance expense 600 Rent expense 9,000 Income tax expense 2,900 Total costs and expenses 36,320 Net Income $ 6,100 Net profit margin = Net income ÷ Operating Revenues = $6,100 ÷ $42,300 = 14.4% The operating revenue sources for this company are from sales and rent revenue. Interest revenue is not included in the denominator because it is a nonoperating revenue source. M4–12. Sales revenue (−R) .................................................. 42,000 Interest revenue (−R) ............................................... 120 Rent revenue (−R) ................................................... 300 Retained earnings (+SE)............................... 6,100 Wages expense (−E) .................................... 21,600 2,000 Depreciation expense (−E) ........................... 220 Utilities expense (−E) .................................... 600 Insurance expense (−E) ................................ 9,000 Rent expense (−E) ........................................ 2,900 Income tax expense (−E) .............................. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-10 Solutions Manual
  11. 11. EXERCISES E4–1. Darius Consultants, Inc. Unadjusted Trial Balance At September 30, 2008 Debit Credit Cash $ 163,000 Accounts receivable 225,400 Supplies 12,200 Prepaid expenses 10,200 Investments 145,000 Building and equipment 323,040 Accumulated depreciation $ 18,100 Land 60,000 Accounts payable 86,830 Accrued expenses payable 25,650 Unearned consulting fees 32,500 Income taxes payable 2,030 Notes payable 160,000 Contributed capital 223,370 Retained earnings * 145,510 Consulting fees revenue 2,564,200 Investment income 10,800 Wages and benefits expense 1,590,000 Utilities expense 25,230 Travel expense 23,990 Rent expense 152,080 Professional development expense 18,600 Interest expense 17,200 Other operating expenses 188,000 General and administrative expenses 320,050 Gain on sale of land 5,000 Totals $3,273,990 $3,273,990 * Since debits are supposed to equal credits in a trial balance, the balance in Retained Earnings is determined as the amount in the credit column necessary to make debits equal credits (a “plugged” figure). McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-11
  12. 12. E4–2. Req. 1 The following deferred revenues and deferred expenses may need to be adjusted at the end of the recent fiscal year: Balance sheet account Related income statement account Inventory Cost of products Other current assets (may include Various expense accounts (e.g., supplies and prepaid expenses such supplies expense, insurance as insurance) expense, rent expense) Property, plant, and equipment and Depreciation expense Accumulated depreciation Intangible assets (depending on type) Amortization expense Deferred revenue Product revenue or service revenue Req. 2 The following accounts should be reviewed and may need to be adjusted to accrue revenues and expenses at the end of the recent fiscal year: Balance sheet account Related income statement account Other current assets (Interest receivable on the short-term investments) Investment income Accounts receivable Product revenue or service revenue Other assets (may contain long-term Interest revenue receivables) Accrued liabilities (Interest payable on short-term note payable0 Interest expense Accrued liabilities Various expense accounts (e.g., wages expense) Income tax payable Income tax expense Req. 3 Temporary accounts that accumulate during the period are closed at the end of the year to the permanent account Retained Earnings. These include: Product revenue, service revenue, interest revenue, cost of products, cost of services, interest expense, research and development expense, selling, general, and administrative expense, other expenses, loss on investments, and income tax expense. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-12 Solutions Manual
  13. 13. E4–3. Req. 1 The annual reporting period for this company is January 1 through December 31, 2008. Req. 2 (Adjusting entries) Both transactions are accruals because revenue has been earned and expenses incurred but no cash has yet been received or paid. (a) December 31, 2008: Wage expense (+E, −SE)............................................ 6,000 Wages payable (+L).......................................... 6,000 To record wages earned by employees during 2008, but not yet paid by the company. This entry records the (a) 2008 expense, and (b) 2008 liability, which is necessary to conform to accrual accounting and the matching principle. (b) December 31, 2008: Interest receivable (+A)............................................... 3,000 Interest revenue (+R, +SE)............................... 3,000 To record interest revenue earned during 2008, but not yet collected. This entry records the (a) 2008 revenue, and (b) 2008 receivable, which is necessary to conform to accrual accounting and the revenue principle. Req. 3 Adjusting entries are necessary at the end of the accounting period to ensure that all revenues earned and expenses incurred and the related assets and liabilities are measured properly. The entries above are accruals; entry (a) is an accrued expense (incurred but not yet recorded) and entry (b) is an accrued revenue (earned but not yet recorded). In applying the accrual basis of accounting, revenues should be recognized when earned and measurable and expenses should be recognized when incurred in generating revenues. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-13
  14. 14. E4–4. Req. 1 2007 Income statement: Insurance expense ($7,800 x 4/24) = $1,300 used. Shipping supplies expense: ($14,000 + $72,000 - $11,000) = $75,000 used. Req. 2 2007 Balance sheet: Prepaid insurance ($7,800 x 20/24) = $6,500 or $7,800 - $1,300 = $6,500 Shipping supplies (given) = $11,000 Req. 3 Adjusting entry (payment debited to Prepaid Insurance): Prepaid Insurance Insurance Expense 9/1 7,800 AJE 1,300 AJE 1,300 End. 6,500 End. 1,300 Insurance expense (+E, −SE)...................................... 1,300 Prepaid insurance (−A)..................................... 1,300 To record the expiration of insurance for four months ($325 per month). Req. 4 Adjusting entry (payment debited to Shipping Supplies): Shipping Supplies Shipping Supplies Expense Beg. 14,000 Purch. 72,000 AJE 75,000 AJE 75,000 End. 11,000 End. 75,000 Shipping supplies expense (+E, −SE)......................... 75,000 Shipping supplies (−A)...................................... 75,000 To record the use of shipping supplies for the year. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-14 Solutions Manual
  15. 15. E4–5. Balance Sheet Income Statement Stockholders’ Net Transaction Assets Liabilities Equity Revenues Expenses Income E4–3 (a) NE +6,000 –6,000 NE +6,000 –6,000 E4–3 (b) +3,000 NE +3,000 +3,000 NE +3,000 E4–4 (a) –1,300 NE –1,300 NE +1,300 –1,300 E4–4 (b) –75,000 NE –75,000 NE +75,000 –75,000 E4–6. Req. 1 and 2 a. Deferred expense -- cash paid before expense is incurred. Office supplies expense (+E, −SE)............................... 850 Office supplies (−A)............................................. 850 Supplies used in 2007 ($350 + 800 - 300 = $850). b. Accrued expense -- expense incurred before cash is paid. Wages expense (+E, −SE)............................................ 3,700 Wages payable (+L)............................................ 3,700 Amount is given. c. Deferred revenue -- cash received before revenue is earned. Unearned rent revenue (−L).......................................... 3,000 Rent revenue (+R, +SE)..................................... 3,000 Rent earned in 2007 ($9,000 x 2/6). d. Accrued revenue -- revenue earned before cash is collected. Rent receivable (+A)..................................................... 1,640 Rent revenue (+R, +SE)..................................... 1,640 ($820 x 2 months) e. Deferred expense -- cash paid for equipment before being used. Depreciation expense (+E, −SE)................................... 5,000 Accumulated depreciation, delivery equipment (+XA, −A) 5,000 Amount is given. f. Deferred expense -- cash paid before expense is incurred. Insurance expense (+E, −SE)....................................... 1,050 Prepaid insurance (−A)....................................... 1,050 ($4,200 x 6/24 months) g. Accrued revenue -- revenue earned before cash is received. Repair accounts receivable (+A)................................... 750 Repair shop revenue (+R, +SE)......................... 750 Amount is given. E4–7. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-15
  16. 16. Req. 1 and 2 a. Accrued revenue -- revenue earned before cash is collected. Accounts receivable (+A).............................................. 2,100 Service revenue (+R, +SE)................................. 2,100 Amount is given. b. Deferred revenue -- cash received before revenue is earned. Unearned storage revenue (−L).................................... 400 Storage revenue (+R, +SE)................................ 400 Storage revenue earned in fiscal year 2006 ($2,400 x 1/6) c. Accrued expense -- expense incurred before cash is paid. Wages expense (+E, −SE)............................................ 2,900 Wages payable (+L)............................................ 2,900 Amount is given. d. Deferred expense -- cash paid before expense is incurred. Advertising expense (+E, −SE)..................................... 450 Prepaid advertising (−A)..................................... 450 Advertising used in fiscal year 2006 ($600 x 9/12). e. Deferred expense -- cash paid for equipment before being used. Depreciation expense (+E, −SE)................................... 23,000 Accumulated depreciation, equipment (+XA, −A) 23,000 Amount is given. f. Deferred expense -- cash paid before expense is incurred. Supplies expense (+E, −SE)......................................... 50,900 Supplies (−A)....................................................... 50,900 Supplies used in 2006 ($15,600 + $47,500 - $12,200) g. Accrued expense -- expense incurred before cash is paid. Interest expense (+E, −SE) .......................................... 2,500 Interest payable (+L)........................................... 2,500 Interest incurred from October 1 to November 30, 2006 ($150,000 principal x .10 x 2/12) McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-16 Solutions Manual
  17. 17. E4–8. Balance Sheet Income Statement Stockholders’ Net Transaction Assets Liabilities Equity Revenues Expenses Income (a) –850 NE –850 NE +850 –850 (b) NE +3,700 –3,700 NE +3,700 –3,700 (c) NE –3,000 +3,000 +3,000 NE +3,000 (d) +1,640 NE +1,640 +1,640 NE +1,640 (e) –5,000 NE –5,000 NE +5,000 –5,000 (f) –1,050 NE –1,050 NE +1,050 –1,050 (g) +750 NE +750 +750 NE +750 E4–9. Balance Sheet Income Statement Stockholders’ Net Transaction Assets Liabilities Equity Revenues Expenses Income (a) +2,100 NE +2,100 +2,100 NE +2,100 (b) NE –400 +400 +400 NE +400 (c) NE +2,900 –2,900 NE +2,900 –2,900 (d) –450 NE –450 NE +450 –450 (e) –23,000 NE –23,000 NE +23,000 –23,000 (f) –50,900 NE –50,900 NE +50,900 –50,900 (g) NE +2,500 –2,500 NE +2,500 –2,500 E4–10. Debit Credit Code Amount Code Amount a. N $400 G $400 b. A 800 I 800 c. K 900 A 900 d. O 1,000 E 1,000 e. C 600 L 600 f. Q 250 B 250 g. P 220 H 220 h. L 62,000 K 62,000 i. K 420 P 420 E4–11. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-17
  18. 18. Selected Balance Sheet Amounts at December 31, 2007 Assets: Equipment (recorded at cost per cost principle) $12,000 Accumulated depreciation (for one year, as given) (1,200) Carrying value of equipment (difference) 10,800 Office supplies (on hand, as given) 400 Prepaid insurance (remaining coverage, $400 x 18/24 months) 300 Selected Income Statement Amounts for the Year Ended December 31, 2007 Expenses: Depreciation expense (for one year, as given) $ 1,200 Office supplies expense (used, $1,400 - $400 on hand) 1,000 Insurance expense (for 6 months, $400 x 6/24 months) 100 E4–12. Balance Sheet Income Statement Stockholders’ Net Date Assets Liabilities Equity Revenues Expenses Income Note 1: +20,000/ NE NE NE NE NE April 1, 2008 –20,000 December 31, 2008a + 1,500 NE + 1,500 + 1,500 NE + 1,500 +22,000/ March 31, 2009b NE + 500 +500 NE + 500 –21,500 Note 2: + 20,000 + 20,000 NE NE NE NE August 1, 2008 December 31, 2008c NE + 1,000 - 1,000 NE + 1,000 - 1,000 January 31, 2009d - 21,200 - 21,000 - 200 NE + 200 - 200 (a) $20,000 principal x .10 annual interest rate x 9/12 of a year = $1,500 (b) Additional interest revenue in 2009: $20,000 x .10 x 3/12 = $500. Cash received was $22,000 ($20,000 principal + $2,000 interest for 12 months); receivables decreased by the $20,000 note receivable and $1,500 interest receivable accrued in 2008. (c) $20,000 principal x .12 annual interest rate x 5/12 of a year = $1,000 (d) Additional interest expense in 2009: $20,000 x .12 x 1/12 = $200. Cash paid was $21,200 ($20,000 principal + $1,200 interest for 6 months); payables decreased by the $20,000 note payable and $1,000 interest payable accrued in 2008. E4–13. Req. 1 (a) Cash paid on accrued income taxes payable. (b) Accrual of additional income tax expense. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-18 Solutions Manual
  19. 19. (c) Cash paid on dividends payable. (d) Amount of dividends declared for the period. (e) Cash paid on accrued interest payable. (f) Accrual of additional interest expense. Req. 2 Computations: (a) Beg. Bal. + accrued income taxes cash paid = End. bal. $71 + 332 ? = $80 ? = $323 paid (c) Beg. Bal. + dividends declared cash paid = End. bal. $43 + 176 ? = $48 ? = $171 paid (f) Beg. Bal. + accrued interest expense cash paid = End. bal. $45 + ? 297 = $51 ? = $303 accrued McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-19
  20. 20. E4–14. Req. 1 Adjusting entries that were or should have been made at December 31: (a) Should have been made. Depreciation expense (+E, −SE)................................. 12,000 Accumulated depreciation - equipment (+XA, −A) 12,000 Amount is given. (b) Should have been made. Unearned revenue (−L)............................................... 2,000 Fee revenue (+R, +SE)..................................... 2,000 Amount is given. (c) Entry already made. Interest expense (+E, −SE) ........................................ 1,800 Interest payable (+L) ........................................ 1,800 ($15,000 x 12% x 12/12 months) Should have been made. Interest expense (+E, −SE)......................................... 300 Interest payable (+L)......................................... 300 ($15,000 x 12% x 2/12 months) (d) Should have been made. Insurance expense (+E, −SE)...................................... 600 Prepaid insurance (−A)..................................... 600 Amount is given. (e) Should have been made. Rent receivable (+A).................................................... 850 Rent revenue (+R, +SE)................................... 850 Amount is given. Req. 2 Balance Sheet Income Statement Stockholders’ Net Transaction Assets Liabilities Equity Revenues Expenses Income (a) O 12,000 NE O 12,000 NE U 12,000 O 12,000 (b) NE O 2,000 U 2,000 U 2,000 NE U 2,000 (c) NE O 1,500 U 1,500 NE O 1,500 U 1,500 (d) O 600 NE O 600 NE U 600 O 600 (e) U 850 NE U 850 U 850 NE U 850 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-20 Solutions Manual
  21. 21. E4–15. Net Total Total Stockholders’ Items Income Assets Liabilities Equity Balances reported $40,000 $80,000 $30,000 $50,000 Effects of: a. Depreciation (9,000) (9,000) (9,000) b. Wages (17,000) 17,000 (17,000) c. Rent revenue 1,600 (1,600) 1,600 Adjusted balances 15,600 71,000 45,400 25,600 d. Effect of income taxes (4,680) 4,680 (4,680) Correct balances $ 10,920 $71,000 $50,080 $20,920 Computations: a. Given, $9,000 depreciation expense. b. Given, $17,000 accrued and unpaid. c. $4,800 x 1/3 = $1,600 rent revenue earned. The remaining $3,200 in unearned revenue is a liability for two months of occupancy "owed'' to the renter. d. $15,600 income before taxes x 30% = $4,680. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-21
  22. 22. E4–16. Req. 1 a. Expenses (depreciation) (+E, −SE)............. 5,000 Accumulated depreciation (+XA, −A). . . 5,000 b. Rent receivable (+A).................................... 2,000 Revenues (rent) (+R, +SE)................... 2,000 c. Income tax expense (+E, −SE).................... 6,900 Income taxes payable (+L)................... 6,900 Req. 2 Effects of As Adjusting Corrected Prepared Entries Amounts Income statement: Revenues $98,000 b $2,000 $100,000 Expenses (72,000) a (5,000) (77,000) Income tax expense c (6,900) (6,900) Net income $26,000 (9,900) $16,100 Balance Sheet: Assets Cash $20,000 $20,000 Accounts receivable 22,000 22,000 Rent receivable b 2,000 2,000 Equipment 50,000 50,000 Accumulated depreciation (10,000) a (5,000) (15,000) $82,000 (3,000) $79,000 Liabilities Accounts payable $10,000 $10,000 Income taxes payable c 6,900 6,900 Stockholders' Equity Contributed capital 40,000 40,000 Retained earnings 32,000 (9,900) 22,100 $82,000 (3,000) $79,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-22 Solutions Manual
  23. 23. E4–17. Req. 1 a. Salaries and wages expense (+E, −SE)................. 310 Salaries and wages payable (+L).................... 310 b. Utilities expense (+E, −SE)..................................... 400 Accrued expenses payable (+L)...................... 400 c. Depreciation expense (+E, −SE)............................ 23,000 Accumulated depreciation (+XA, −A).............. 23,000 d. Interest expense (+E, −SE).................................... 500 Interest payable (+L)....................................... 500 ($20,000 x .10 x 3/12) e. No adjustment is needed because the revenue will not be earned until January (next year). f. Maintenance expense (+E, −SE)............................ 1,000 Maintenance supplies (−A).............................. 1,000 g. Income tax expense (+E, −SE)............................... 7,000 Income tax payable (+L).................................. 7,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-23
  24. 24. E4–17. (continued) Req. 2 DEREK, INC. Income Statement For the Year Ended December 31, 2007 Rental revenue $114,000 Expenses: Salaries and wages ($28,500 + $310) $28,810 Maintenance expense ($12,000 + 13,000 $1,000) Rent expense 9,000 Utilities expense ($4,000 + $400) 4,400 Gas and oil expense 3,000 Depreciation expense 23,000 Interest expense ($20,000 x 10% x 3/12) 500 Miscellaneous expenses 1,000 Total expenses 82,710 Pretax income 31,290 Income tax expense 7,000 Net income $ 24,290 Earnings per share: $24,290 ÷ 7,000 shares $3.47 Req. 3 Net profit margin = Net income ÷ Net Sales = $24,290 ÷ $114,000 = 21.3% The net profit margin indicates that, for every $1 of rental revenues, Derek earns $0.213 (21.3%) in net income. This ratio is higher than the industry average net profit margin of 18%, implying that Derek is more profitable and better able to manage its business (in terms of sales price or costs) than the average company in the industry. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-24 Solutions Manual
  25. 25. E4–18. Req. 1 (a) Insurance expense (+E, −SE) ..................................... 5 Prepaid insurance (−A)..................................... 5 (b) Depreciation expense (+E, −SE)................................. 7 Accumulated depreciation, machinery (+XA, −A) 7 (c) Wages expense (+E, −SE).......................................... 5 Wages payable (+L).......................................... 5 (d) Income tax expense (+E, −SE).................................... 9 Income tax payable (+L)................................... 9 Req. 2 SENECA COMPANY Trial Balance December 31, 2007 (in thousands of dollars) Unadjusted Adjustments Adjusted Debit Credit Debit Credit Debit Credit Cash 38 38 Accounts receivable 9 9 Prepaid insurance 6 a 5 1 Machinery 80 80 Accumulated depreciation b 7 7 Accounts payable 9 9 Wages payable c 5 5 Income taxes payable d 9 9 Contributed capital 76 76 Retained earnings 4 4 Revenues (not detailed) 84 84 Expenses (not detailed) 32 a 5 58 b 7 c 5 d 9 Totals 169 169 26 26 190 190 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-25
  26. 26. E4–19. SENECA COMPANY Income Statement For the Year Ended December 31, 2007 (in thousands of dollars) Revenues (not detailed) $84 Expenses ($32 + 5 + 7 + 5) 49 Pretax income 35 Income tax expense 9 Net income $26 EPS ($26,000 ÷ 4,000 shares) $6.50 SENECA COMPANY Statement of Stockholders' Equity For the Year Ended December 31, 2007 (in thousands of dollars) Total Contributed Retained Stockholders' Capital Earnings Equity Beginning balances, 1/1/2007 $ 0 $ 0 $ 0 Stock issuance 76 76 Net income 26 26 Dividends declared (4) * (4) Ending balances, 12/31/2007 $ 76 $ 22 $ 98 * The amount of dividends declared can be inferred because the unadjusted trial balance amount for retained earnings is a negative $4. Since this is the first year of operations, we can assume the entire amount is due to a dividend declaration. SENECA COMPANY Balance Sheet At December 31, 2007 (in thousands of dollars) Assets Liabilities Current Assets: Current Liabilities: Cash $ 38 Accounts payable $ 9 Accounts receivable 9 Wages payable 5 Prepaid insurance ($6 - $5) 1 Income taxes payable 9 Total current assets 48 Total current liabilities 23 Machinery 80 Stockholders' Equity Accumulated depreciation (7) Contributed capital 76 Retained earnings 22 Total liabilities and Total assets $121 stockholders' equity $121 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-26 Solutions Manual
  27. 27. E4–20. Req. 1 The purpose of “closing the books” at the end of the accounting period is to transfer the balance in the temporary accounts to a permanent account (Retained Earnings). This also creates a zero balance in each of the temporary accounts for accumulation of activities in the next accounting period. Req. 2 Revenues (−R)............................................................. 84 Expenses ($32 + $5 + $7 + $5 + $9) (−E)........ 58 Retained earnings (+SE).................................. 26 Req. 3 SENECA COMPANY Post-closing Trial Balance December 31, 2007 (in thousands of dollars) Debit Credit Cash 38 Accounts receivable 9 Prepaid insurance 1 Machinery 80 Accumulated depreciation 7 Accounts payable 9 Wages payable 5 Income taxes payable 9 Contributed capital 76 Retained earnings 22 Revenues (not detailed) 0 Expenses (not detailed) 0 Totals 128 128 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-27
  28. 28. PROBLEMS P4–1. Req. 1 Dell Computer Corporation Adjusted Trial Balance At January 31, 2006 (in millions of dollars) Debit Credit Cash $ 520 Marketable securities 2,661 Accounts receivable 2,094 Inventories 273 Property, plant, and equipment 775 Accumulated depreciation $ 252 Other assets 806 Accounts payable 2,397 Accrued expenses payable 1,298 Long-term debt 512 Other liabilities 349 Contributed capital 1,781 Retained earnings (deficit) 844 Sales revenue 18,243 Cost of sales 14,137 Selling, general, and administrative expenses 1,788 Research and development expense 272 Other expenses 38 Income tax expense 624 Totals $ 24,832 $ 24,832 Req. 2 Since debits are supposed to equal credits in a trial balance, the balance in Retained Earnings is determined as the amount in the debit column necessary to make debits equal credits (a “plugged” figure). P4–2. Req. 1 a. Deferred revenue e. Deferred expense b. Accrued expense f. Deferred expense c. Accrued revenue g. Deferred revenue d. Accrued expense h. Accrued expense McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-28 Solutions Manual
  29. 29. P4–2. (continued) Req. 2 a. Unearned rent revenue (−L).......................................... 4,800 Rent revenue (+R, +SE)..................................... 4,800 $7,200 ÷ 6 months = $1,200 per month x 4 months. This entry reduces (debits) the liability for the amount earned and records a revenue. b. Wage expense (+E, −SE).............................................. 14,300 Wages payable (+L)............................................ 14,300 Wage expense is increased (debited) because this expense was incurred in 2007. A liability (wages payable) is credited because this amount is owed to the employees. c. Accounts receivable (+A).............................................. 2,000 Service revenue (+R, +SE)................................. 2,000 This entry records an asset for the amount due from customers and recognizes the revenue because it was earned in 2007. d. Interest expense (+E, −SE)........................................... 600 Interest payable (+L)............................................. 600 To accrue interest expense incurred but not paid, $20,000 x 12% x 3/12 = $600. e. Insurance expense (+E, −SE)....................................... 1,000 Prepaid insurance (−A)...................................... 1,000 $6,000 ÷ 12 months = $500 per month x 2 months of coverage. This entry reduces the asset (prepaid insurance) because part of it has been used and only $5,000 represents future benefits (an asset) to the company. f. Depreciation expense (+E, −SE)................................... 1,500 Accumulated depreciation, service truck (+XA, −A) 1,500 To record depreciation expense to recognize the use of the truck during the year. Amount is given. g. Unearned service revenue (−L).................................... 400 Service revenue (+R, +SE).................................. 400 To recognize revenue earned during the year ($2,400 x 2/12). h. Property tax expense (+E, −SE)................................... 400 Property tax payable (+L)..................................... 400 To record expense incurred but not paid. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-29
  30. 30. P4–3. Req. 1 a. Deferred expense e. Accrued revenue b. Deferred expense f. Deferred expense c. Accrued expense g. Accrued expense d. Accrued expense h. Accrued expense Req. 2 a. Insurance expense (+E, −SE)....................................... 200 Prepaid insurance (−A)...................................... 200 $1,200 ÷ 36 months x 6 months of coverage. This entry reduces the asset (prepaid insurance) because part of it has been used and only $1,000 represents future benefits (an asset) to the company. b. Supplies expense (+E, −SE)......................................... 700 Supplies (−A)....................................................... 700 Supplies inventory is decreased (credited) to record the use of supplies during the year because this expense was incurred in 2008, calculated as Beg. Inventory of $200 + Purchases $800 – Ending Inventory $300. c. Repairs and maintenance expense (+E, −SE)............. 800 Accrued expenses payable (+L)......................... 800 Repairs and maintenance expense is increased (debited) because this expense was incurred in 2008. A liability (accrued expenses payable) is credited because this amount is owed but will not be paid until 2009. d. Property tax expense (+E, −SE)................................... 1,600 Property tax payable (+L)..................................... 1,600 Property tax expense is increased (debited) because this expense was incurred in 2008. A liability (property tax payable) is credited because this amount is owed but will not be paid until 2009. e. Accounts receivable (+A).............................................. 8,000 Service revenue (+R, +SE)................................. 8,000 This entry records an asset for the amount due from the customer and recognizes the revenue because it was earned in 2008. f. Depreciation expense (+E, −SE)................................... 1,100 Accumulated depreciation, van (+XA, −A) 1,100 To record depreciation expense to recognize the use of the van during the year. Amount is given. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-30 Solutions Manual
  31. 31. P4–3. (continued) g. Interest expense (+E, −SE)........................................... 300 Interest payable (+L)............................................. 300 To accrue interest expense incurred but not paid, $10,000 x 12% x 3/12 = $300. h. Income tax expense (+E, −SE)..................................... 9,990 Income tax payable (+L)....................................... 9,990 To accrue income tax expense incurred but not paid: Income before adjustments (given) $30,000 Effect of adjustments (a) through (g) +3,300 (-200 - 700 - 800 -1,600 Income before income taxes 33,300 +8,000 -1,100 -300) Income tax rate x 30% Income tax expense $ 9,990 P4–4. Req. 1 a. Deferred revenue e. Deferred expense b. Accrued expense f. Deferred expense c. Accrued revenue g. Deferred revenue d. Accrued expense h. Accrued expense Req. 2 Balance Sheet Income Statement Stockholders’ Net Transaction Assets Liabilities Equity Revenues Expenses Income a. NE –4,800 +4,800 +4,800 NE +4,800 b. NE +14,300 –14,300 NE +14,300 –14,300 c. +2,000 NE +2,000 +2,000 NE +2,000 d. NE +600 –600 NE +600 –600 e. –1,000 NE –1,000 NE +1,000 –1,000 f. –1,500 NE –1,500 NE +1,500 –1,500 g. NE –400 +400 +400 NE +400 h. NE +400 –400 NE +400 –400 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-31
  32. 32. P4–5. Req. 1 a. Deferred expense e. Accrued revenue b. Deferred expense f. Deferred expense c. Accrued expense g. Accrued expense d. Accrued expense h. Accrued expense Req. 2 Balance Sheet Income Statement Stockholders’ Net Transaction Assets Liabilities Equity Revenues Expenses Income a. − 200 NE − 200 NE + 200 − 200 b. − 700 NE − 700 NE + 700 – 700 c. NE + 800 − 800 NE + 800 − 800 d. NE + 1,600 − 1,600 NE + 1,600 − 1,600 e. + 8,000 NE + 8,000 + 8,000 NE + 8,000 f. − 1,100 NE − 1,100 NE + 1,100 − 1,100 g. NE + 300 − 300 NE + 300 − 300 h. NE + 9,990 − 9,990 NE + 9,990 − 9,990 Computations: a. Six months of expired insurance during 2008: $1,200 x 6/36 = $200. b. Supplies used during 2008: Beg. inventory, $200 + Purchases, $800 - Ending inventory, $300 = $700 used for the period. c. Expense incurred during 2008 to be paid during January 2009. d. Property taxes incurred in 2008 to be paid in 2009. e. Accrued revenue: earned in 2008 but not yet collected or recorded; payable within 30 days. f. Depreciation is given. g. Interest expense accrued for 3 months: $10,000 x 12% x 3/12 = $300. h. Adjusted income = $30,000 - 200 - 700 - 800 -1,600 + 8,000 -1,100 - 300 = $33,300 x 30% tax rate = $9,990 income tax expense. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-32 Solutions Manual
  33. 33. P4–6. 2007 Financial Effect on Account Balance Statement Cash Flows 1. Rent revenue $528,000 Income statement + $512,000 2. Salary expense 65,000 Income statement − 62,000 3. Maintenance supplies expense 9,300 Income statement No effect 4. Rent receivable 16,000 Balance sheet No effect 5. Receivables from employees 1,500 Balance sheet − 1,500 6. Maintenance supplies 1,700 Balance sheet − 8,000 7. Unearned rent revenue 12,000 Balance sheet +12,000 8. Salaries payable 3,000 Balance sheet − 4,000 (1) (2) (3) Maintenance Rent revenue Salary expense supplies expense 512,000 (a) (e) 62,000 Used 9,300 16,000 (b) (f) 3,000 528,000 65,000 9,300 (4) (5) Receivables (6) Maintenance Rent receivable from employees supplies (b) 16,000 (g) 1,500 (h) 3,000 (i) 8,000 9,300 used 16,000 1,500 (j) 1,700 (7) Unearned (8) rent revenue Salaries payable 12,000 (c) (d) 4,000 4,000 Bal. Inferred 3,000 (f) 12,000 3,000 Cash (a) from renters 512,000 4,000 (d) to employees (c) from renters 12,000 62,000 (e) to employees 1,500 (g) to employees 8,000 (i) to suppliers McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-33
  34. 34. P4–7. Req. 1 December 31, 2006 Adjusting Entries (1) Accounts receivable (+A).......................................... 400 (b) Service revenue (+R, +SE) ............................ 400 (i) To record service fees earned, but not collected. (2) Insurance expense (+E, −SE) .................................. 200 (l) Prepaid insurance (−A) .................................. 200 (c) To record insurance expired as an expense. (3) Depreciation expense (+E, −SE).............................. 8,500 (k) Accumulated depreciation, equipment (+XA, −A) 8,500 (e) To record depreciation expense. (4) Income tax expense (+E, −SE) ................................ 4,700 (m) Income taxes payable (+L) ............................ 4,700 (f) To record income taxes for 2006. Req. 2 Amounts before Amounts after Adjusting Entries Adjusting Entries Revenues: Service revenue $46,000 $46,400 Expenses: Salary expense 41,700 41,700 Depreciation expense 8,500 Insurance expense 200 Income tax expense 4,700 Total expense 41,700 55,10 0 Net income (loss) $ 4,300 $ (8,700) Net loss is $8,700 because this amount includes all revenues and all expenses (after the adjusting entries). This amount is correct because it incorporates the effects of the revenue and matching principles applied to all transactions whose effects extend beyond the period in which the transactions occurred. Net income of $4,300 was not correct because expenses of $13,400 and revenues of $400 were excluded that should have been recorded in 2006. Req. 3 Earnings (loss) per share = $(8,700) net loss ÷ 3,000 shares = $(2.90) per share McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-34 Solutions Manual
  35. 35. P4–7. (continued) Req. 4 Net profit margin = Net income ÷ Net Sales = $(8,700) net loss ÷ $46,400 = (18.8)% The net profit margin indicates that, for every $1 of service revenues, Wagonblatt actually lost $0.188 of net income. This ratio implies that Wagonblatt destroys shareholder value in generating its sales and suggests that better management of its business (in terms of sales price or costs) is required. Req. 5 Service revenue (−R)................................................ 46,400 Retained earnings (−SE) ......................................... 8,700 Salary expense (−E)......................................... 41,700 Depreciation expense (−E)............................... 8,500 Insurance expense (−E).................................... 200 Income tax expense (−E).................................. 4,700 Req. 6 Wagonblatt Company Post-closing Trial Balance December 31, 2006 Debit Credit Cash 9,000 Accounts receivable 400 Prepaid insurance 400 Equipment 120,200 Accumulated depreciation, equipment 40,000 Income taxes payable 4,700 Contributed capital 80,000 Retained earnings 5,300 Service revenue 0 Salary expense 0 Depreciation expense 0 Insurance expense 0 Income tax expense 0 Totals 130,000 130,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-35
  36. 36. P4–8. Req. 1 December 31, 2007 Adjusting Entries: (a) Supplies expense (+E, −SE) ....................................... 500 Supplies (−A) .................................................... 500 (b) Insurance expense (+E, −SE) ..................................... 500 Prepaid insurance (−A) .................................... 500 (c) Depreciation expense (+E, −SE) ................................ 4,000 Accumulated depreciation, service trucks (+XA, −A) ............................................... 4,000 (d) Wages expense (+E, −SE).......................................... 900 Wages payable (+L) ......................................... 900 (e) Income tax expense (+E, −SE) ................................... 7,350 Income taxes payable (+L) .............................. 7,350 Req. 2 ST. DENIS, INC. Income Statement For the Year Ended December 31, 2007 Service revenue $77,000 Expenses: Supplies expense ($800 - $300) 500 Insurance expense ($1,000 - $500) 500 Depreciation expense 4,000 Wages expense 900 Remaining expenses (not detailed) 41,700 Total expenses 47,600 Pretax income 29,400 Income tax expense 7,350 Net income $22,050 Earnings per share ($22,050 ÷ 5,000 shares) $4.41 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-36 Solutions Manual
  37. 37. P4–8. (continued) ST. DENIS, INC. Balance Sheet At December 31, 2007 Assets Liabilities Current Assets: Current Liabilities: Cash $60,000 Accounts payable $ 3,000 Accounts receivable 13,000 Wages payable 900 Supplies 300 Income taxes payable 7,350 Prepaid insurance 500 Total current liabilities 11,250 Total current assets 73,800 Note payable, long term 20,000 Service trucks 20,000 Total liabilities 31,250 Accumulated depreciation, service trucks (16,000) Stockholders' Equity Other assets (not detailed) 11,200 Contributed capital 28,200 Retained earnings* 29,550 Total stockholders' equity 57,750 Total liabilities and Total assets $89,000 stockholders' equity $89,000 *Unadjusted balance, $7,500 + Net income, $22,050 = Ending balance, $29,550. Req. 3 December 31, 2007 Closing Entry: Service revenue (−R)................................................... 77,000 Retained earnings (+SE) ................................. 22,050 Supplies expense (−E) ..................................... 500 Insurance expense (−E) ................................... 500 Depreciation expense (−E) .............................. 4,000 Wages expense (−E) ....................................... 900 Remaining expenses (not detailed) (−E).......... 41,700 Income tax expense (−E) ................................. 7,350 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-37
  38. 38. P4–9. Req. 1, 2, 3, and 5 T-accounts (in thousands) Accounts Cash Receivable Supplies Bal. 3 b 9 Bal. 5 f 24 Bal. 12 l 16 a 10 e 70 c 40 i 18 c 120 g 10 d 3 h 13 f 24 k 17 Bal. 41 Bal. 21 Bal. 14 Accumulated Land Equipment Depreciation b 9 Bal. 60 Bal. 6 m 6 Bal. 9 Bal. 60 Bal. 12 Other Assets Accounts Payable Notes Payable Bal. 4 h 13 Bal. 5 a 10 e 15 g 10 i 18 Bal. 14 Bal. 25 Bal. 10 Income Taxes Wages Payable Interest Payable Payable o 12 n 1 p 8 Bal. 12 Bal. 1 Bal. 8 Contributed Retained Service Capital Earnings Revenue Bal. 65 k 17 Bal. 8 c 160 d 3 CE 32 CE 160 Bal. 68 Bal. 23 Bal. 0 Depreciation Income Tax Interest Expense Expense Expense m 6 CE 6 p 8 CE 8 n* 1 CE 1 Bal. 0 Bal. 0 Bal. 0 * $10,000 x .12 x 10/12 Supplies Wages Remaining Expense Expense Expenses l 16 CE 16 o 12 CE 12 e 85 CE 85 Bal. 0 Bal. 0 Bal. 0 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-38 Solutions Manual
  39. 39. P4–9. (continued) Req. 2 a. Cash (+A)........................................................... 10,000 Notes payable (+L)................................... 10,000 Borrowed cash on 12% note, March 1, 2008. b. Land (+A)............................................................ 9,000 Cash (−A)................................................. 9,000 Purchased land for future building site. c. Cash (+A)........................................................... 120,000 Accounts receivable (+A)................................... 40,000 Service revenue (+R, +SE)...................... 160,000 Service revenues earned during 2008. d. Cash (+A)........................................................... 3,000 Contributed capital (+SE)......................... 3,000 Sold capital stock for cash. e. Remaining expenses (+E, −SE)......................... 85,000 Accounts payable (+L)............................. 15,000 Cash (−A)................................................. 70,000 Remaining expenses incurred during 2008. f. Cash (+A)........................................................... 24,000 Accounts receivable (−A)......................... 24,000 Collected on customers' accounts. g. Other assets (+A)............................................... 10,000 Cash (−A)................................................. 10,000 Purchased additional assets. h. Accounts payable (−L)........................................ 13,000 Cash (−A)................................................. 13,000 Paid creditors. i. Supplies (+A)...................................................... 18,000 Accounts payable (+L)............................. 18,000 Purchased supplies for future use. j. No entry required; no revenue earned in 2008. k. Retained earnings (−SE).................................... 17,000 Cash (−A)................................................. 17,000 Declared and paid a cash dividend. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-39
  40. 40. P4–9. (continued) Req. 3 l. Supplies expense (+E, −SE).............................. 16,000 Supplies (−A)............................................. 16,000 To record supplies used ($30 - 14). m. Depreciation expense (+E, −SE)........................ 6,000 Accumulated depreciation (+XA, −A)........ 6,000 To record depreciation as given. n. Interest expense (+E, −SE)................................ 1,000 Interest payable (+L)................................. 1,000 To accrue interest for March - December, 2008, ($10,000 x 12% x 10/12). o. Wages expense (+E, −SE)................................. 12,000 Wages payable (+L).................................. 12,000 To accrue wages incurred but not paid. p. Income tax expense (+E, −SE).......................... 8,000 Income taxes payable (+L)........................ 8,000 To accrue income tax. Req. 4 H & H TOOL, INC. Income Statement For the Year Ended December 31, 2008 Revenues: Service revenue $160,000 Expenses: Depreciation expense 6,000 Interest expense 1,000 Supplies expense 16,000 Wages expenses 12,000 Remaining expenses 85,000 Pretax income 40,000 Income tax expense 8,000 Net income $32,000 Earnings per share $0.47 [$32,000 ÷ 68,000] McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 4-40 Solutions Manual
  41. 41. P4–9. (continued) H & H TOOL, INC. Statement of Stockholders' Equity For the Year Ended December 31, 2008 Total Contributed Retained Stockholders' Capital Earnings Equity Balance, January 1, 2008 $65,000 $ 8,000 $73,000 Additional stock issuance 3,000 3,000 Net income 32,000 32,000 Dividends declared (17,000) (17,000) Balance, December 31, 2008 $68,000 $23,000 $91,000 H & H TOOL, INC. Balance Sheet At December 31, 2008 Assets: Liabilities: Current Assets: Current Liabilities: Cash $ 41,000 Accounts payable $ 25,000 Accounts receivable 21,000 Interest payable 1,000 Supplies 14,000 Wages payable 12,000 Total current assets 76,000 Income taxes payable 8,000 Land 9,000 Total current 46,000 liabilities Equipment 60,000 Notes payable 10,000 Less: Accumulated deprec. (12,000) Total liabilities 56,000 Other assets 14,000 Stockholders' Equity: Contributed capital 68,000 Retained earnings 23,000 Total stockholders' equity 91,000 Total liabilities and Total assets $147,000 stockholders' equity $147,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007 Financial Accounting, 5/e 4-41

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