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Chapter 3
Accrual Accounting & Income
Short Exercises
(10 min.) S 3-1
Millions
Sales
revenue…………………………………………….
960
Cost of goods
sold………………………………………
(270 )
All other
expenses………………………………………
(300 )
Net
income………………………………………………..
$ 390
Beginning
cash…………………………………………..
$ 105
Collections ($700 $30)−
………………………………..
935
Payments for:
inventory……………………………….
(370 )
everything
else……………………….
(285 )
Ending
cash………………………………………………
$ 385
Chapter 3 Accrual Accounting & Income 162

(10 min.) S 3-2
Statement Reports (Amounts in millions)
Income statement Interest
expense……………….
$1.8
Balance sheet Notes payable
($3.9 + $2.3 $2.0)−
………….
$4.2
Interest
payable………………..
0.1
(10 min.) S
3-3
At the end of each accounting period, the business
reports its performance through the preparation of
financial statements. In order to be useful to the various
users of financial statements they must be up-to-date.
Accounts such as cash, Equipment, Accounts Payable,
Common Stock and Dividends are up-to date and require
no adjustment at the end of the accounting period.
Accounts such as Accounts Receivable, Supplies, Salary
Expense and Salaries Payable may not be up to date as
of the last day of the accounting period. Why? Because
certain transactions that took place in the month may not
have been recorded.
The accrued salaries, which are owed to the
employees yet have not been paid, are an expense
related to the current period. The salaries that are owed
to the employees but are unpaid also represent a liability
or debt that is owed by the business. The business must
make an adjusting entry to record the accrued salary
owed as both an increase in Salary Expense and an
increase in Salaries Payable. If the business does not
make this adjustment the expenses will be understated
and net income will be overstated. In addition, liabilities
will be understated.

(10 min.) S 3-4
The large auto manufacturer should record sales
revenue when the revenue is earned by delivering
automobiles to Acme or Harris. The large auto
manufacturer should not record any revenue prior to
delivery of the vehicles because the large auto
manufacturer hasn’t earned the revenue yet. The revenue
principle governs this decision.
When the large auto manufacturer records the revenue
from the sale, at that time —not before or after — the
large auto manufacturer should also record cost of goods
sold, the expense. The matching principle tells when to
record expenses.

(10 min.) S
3-5
Depreciation is the periodic allocation of the cost of a
tangible long-lived asset, less its estimated residual
value, over its estimated useful life. All long-lived or
plant assets, except for land decline in usefulness during
their life and this decline is an expense. Accountants
must allocate the cost of each plant asset, except for
land, over the asset’s useful life. Depreciation is the
process of allocating the cost of a plant asset to expense.
Depreciation also decreases the book value of the asset
to reflect its usage.
(10 min.) S
3-6
a. The Matching Principle
b. The Time Period Concept
c. The Revenue Principle
d. The Revenue Principle
e. The Matching Principle

(10 min.) S 3-7
a.
Mar. 31 Rent Expense ($4,800 × 1/6)
……..
800
Prepaid
Rent……………………..
800
To record rent expense.
Prepaid Rent Rent Expense
Mar.
1
4,800 Mar. 31 800 Mar.
31
800
Bal. 4,000 Bal. 800
b.
Dec. 31 Supplies Expense ($900 −
$700)….
200
Supplies……………………………
.
200
To record supplies expense.
Supplies Supplies Expense
Dec.
1
900 Mar.
31
200 Marc.
31
200
Bal. 700 Bal. 200

(10 min.) S 3-8
Req. 1
(a
)
Jan.
1
Computer Equipment…………….
…..
80,00
0
Cash………………………………….
.
80,00
0
Purchased computer equipment.
(b
)
Dec.
31
Depreciation Expense −
Computer Equipment ($80,000 /
4)…
20,00
0
Accumulated Depreciation −
Computer
Equipment……………...
20,00
0
Req. 2
Computer
Equipment
Accumulated
Depreciatio
n −
Computer
Equipment
Depreciation
Expense −
Computer
Equipment
Jan. 80,00
0
Dec.
31
20,00
0
Dec.
31
20,00
0
Bal. 80,00
0
Bal. 20,00
0
Bal. 20,00
0
Req. 3
Computer
equipment………………………………….
$80,000
Less Accumulated
depreciation…………………….
(20,000 )
Book $60,000

value………………………………………………

(10 min.) S 3-9
(Amounts in millions)
Income statement: 2010
Salary expense ($38.3 + $2.8)
…..
$41.1
Balance sheet: 2010
Salary payable………………... $ 2.8

(10 min.) S 3-10
Req. 1
Oct. 31 Interest
Expense……………………………….
500
Interest
Payable……………………………..
500
To accrue interest expense for
October.
Nov. 30 Interest
Expense……………………………….
500
Interest
Payable……………………………..
500
November.
Dec.
31
Interest
Expense……………………………….
500
Interest
Payable……………………………..
500
December.
Req. 2
Interest Payable
Oct.
31
500
Nov.
30
500
Dec.
31
500
Bal. 1,500

Req. 3
Dec.
31
Interest
Payable……………………………...
1,50
0
Cash………………………………………
…
1,50
0
To pay interest.

(10 min.) S 3-11
Req. 1
Oct. 31 Interest
Receivable…………………………..
500
Interest
Revenue…………………………..
500
To accrue interest revenue for
October.
Nov. 30 Interest
500
Interest Revenue……...
…………………..
500
November.
Dec. 31 Interest
500
Interest Revenue……...
……………….…..
500
December.
Req. 2
Interest Receivable
Oct.
31
500
Nov. 30 500
Dec. 31 500
Bal. 1,500
Req. 3
Dec. Cash……………………………………… 1,50

31 …… 0
Interest
Receivable………………………
1,50
0
To collect interest.

(5- 10 min.) S 3-12
Unearned revenues are liabilities because The Globe and
Trail has received cash from subscribers in advance of
providing them with newspapers. Receiving the cash in
advance creates an obligation (a liability) for The Globe
and Trail. As The Globe and Trail delivers newspapers to
subscribers, The Globe and Trail earns the revenue, and
the dollar amount of the unearned revenue then goes into
the revenue account.
a. Cash……………………………………
……
50,000
Unearned Subscription
Revenue…...
50,000
Received cash for revenue in advance.
b. Unearned Subscription
Revenue................
50,000
Subscription
Revenue…………………….
50,000
To record the earning of subscription
revenue that was collected in
advance.

(5- 10 min.) S 3-13
Prepaid Rent at December 31:
a. Unadjusted amount…………………………. $24,00
0
b. Adjusted amount ($24,000 $8,000)−
……….
16,000
Rent Expense at December 31:
c. Unadjusted amount…………………………. $ 0
d. Adjusted amount ($24,000 / 3)
……………….
8,000
(10 min.) S 3-14
a. Accounts
Receivable…………………….
60,000
Service
Revenue……………………….
60,000
Cash……………………………………
……
45,000
Accounts
Receivable…………………
45,000
b. Cash……………………………………
……
7,500
Unearned Service
Revenue………….
7,500
Unearned Service
Revenue…………….
3,500
Service
Revenue……………………….
3,500

(15- 30 min.) S 3-15
Vulture Sporting Goods Company
Income Statement
Year Ended March 31, 2010
Thousands
Net
revenues…………………………….
$174,000
Cost of goods
sold…………………….
136,800
All other
expenses……………………..
26,000
Net
income………………………………
$ 11,200
Statement of Retained Earnings
Year Ended March 31, 2010
Thousand
s
Retained earnings, March 31,
2009…...
$2,000
Add: Net
income………………………..
11,200
2010.…..
$13,200

(continued) S 3-15
Balance Sheet
March 31, 2010
Thousands
ASSETS
Current:
Cash………………………………………
$
1,300
Accounts
receivable…………………..
28,200
Inventories………………………………
37,000
Other current
assets…………………..
5,200
Total current
assets………………..
71,700
Property and equipment,
net……………
6,000
Other
assets……………………………….
28,0
00
Total
assets…………………………………...
$105,7
00
LIABILITIES
Total current
liabilities…………………..
$53,00
0
Long-term liabilities………………….
…..
12,5
00
Total
liabilities………………………………..
65,500
STOCKHOLDERS’ EQUITY
Common
stock……………………………
27,000
Retained
earnings………………………..
13,2
00
Total stockholders’ equity………….
….......
40,2
00
Total liabilities and stockholders’
equity..
$105,7
00

(5- 10 min.) S 3-16
CLOSING ENTRIES
Thousands
Mar.
31
Net
Revenues…………………………
174,00
0
Retained
Earnings………………...
174,00
0
31
Retained
Earnings……………………
162,80
0
Cost of Goods
Sold……………….
136,80
0
All Other
Expenses………………..
26,000
Retained Earnings
Mar. 31, 2010
Expenses
162,80
0
Mar. 31, 2009 Bal. 2,000
Mar. 31, 2010
Revenues
174,00
0
Mar. 31, 2010 Bal. 13,200
Retained Earnings’ ending balance agrees with the
amount reported on the statement of retained earnings
and the balance sheet (in S 3-15).

(5 min.) S 3-17
Req. 1
(Dollars in thousands)
Current
ratio
=
Total current assets
=
$71,70
0
=
1.3
5Total current
liabilities
$53,00
0
Req. 2
Debt ratio =
Total liabilities
=
$65,50
0
=
0.6
2Total assets $105,7
00
These ratio values are neither strong nor weak. They are
middle-of-the-road values.

(10 min.) S 3-18
1
.
Earned revenue of $8,000 on account:
a
.
Current ratio =
$71,700 +
$8,000 = 1.50
$53,000
b
.
Debit ratio =
$65,500
= 0.58$105,700 +
$8,000
2
.
Paid accounts payable of $8,000:
a
.
Current ratio =
$71,700 −
$8,000
= 1.42
$53,000 −
$8,000
b
.
Debit ratio =
$65,500 −
$8,000
= 0.59
$105,700 −
$8,000

Exercises
Group A
(5- 10 min.) E 3-19A
Statement Reports
1. Income statement Sales
revenue…………
$4,10
0
Operating
expenses…
1,400
Balance sheet Accounts
receivable…
$
700
Accounts
payable……
1,300
2. Cash basis would report only the cash collections
of $4,900 from customers and the payment of
operating expenses ($1,400). Their balance sheet
should have included neither accounts receivable
nor accounts payable.
(5- 10 min.) E 3-20A
a. Cash Basis b. Accrual
Basis
Revenues………………
…...
$590,000 $580,000
Expenses………………
…...
460,000 480,000
Net
income…………………
$130,000 $ 100,000
The accrual basis measures net income better because
its information on revenues and expenses is more
complete than the information provided by the cash basis.

(5- 10 min.) E 3-21A
Million
a. Revenue…………………………………………
…….
$800
The revenue principle says to record revenue when
it has been earned, regardless of when cash is
collected. Therefore, report the amount of revenue
earned, regardless of when the company collects
cash.
b. Total
expense…………………………………….…..
$590
The matching principle governs accounting for
expenses.
c. The income statement reports revenues and
expenses.
The statement of cash flows reports cash receipts
and cash payments.

(15- 20 min.) E 3-22A
Req. 1
Adjusting Entries
DATE ACCOUNT TITLES DEBIT CREDIT
a. Insurance
Expense……………………………...
1,000
Prepaid Insurance ($500+$1,500−
$1,000)..
1,000
b. Interest Receivable………………………...
……
1,100
Interest
Revenue…………………………......
1,100
c. Unearned Service Revenue ($1,200 −
$400)..
800
Service
Revenue……………………………
800
d. Depreciation Expense……………………..
…..
4,900
Accumulated
Depreciation………………...
4,900
e. Salary Expense ($14,000 × 3/5)
………………
8,400
Salary Payable……………………….…..
…..
8,400
f. Income Tax Expense ($22,000 × .25)
……..…
5,500
Income Tax Payable…………………..
…….
5,500

(continued) E 3-22A
Req. 2
Net income understated by omission
of:
Interest
revenue……………………………..
$ 1,100
Service
revenue……………………………...
800
Total
understatement……………………….
$
1,900
Net income overstated by omission of:
Insurance
expense………………………….
$1,000
Depreciation
expense………………………
4,900
Salary
expense………………………………
8,400
Income tax
expense…………………………
5,500
Total
overstatement…………………………
19,800
Overall effect — net income overstated
by..
$17,90
0

(10- 15 min.) E 3-23A
Missing amounts in italics.
1 2 3 4
Beginning Supplies $ 100 $600 $
1,400
$ 900
Add: Payments for
supplies
during the year 1,300 600
800
700
Total amount to account
for
1,400 1,200 2,200 1,600
Less: Ending Supplies
(200 ) (200 )
(1,00
0) (300 )
Supplies Expense $ 1,200 $1,000 $
1,200
$1,300
Journal entries:
Situation
1:
Supplies………………………
……
1,300
Cash………………………….
….
1,300
Situation
2:
Supplies
Expense………………..
1,000
Supplies………………………..
.
1,000

(10- 20 min.) E 3-24A
Adjusting Entries
a. Interest
Expense………………………………
9,500
Interest
Payable…………………………….
9,500
b. Interest
Receivable……………………………
4,500
Interest Revenue…………………….
……..
4,500
c. Unearned Rent Revenue ($13,600 / 2 ×
6/12)
3,400
Rent
Revenue……………………………….
3,400
d. Salary Expense ($1,800 × 3)
………………....
5,400
Salary
Payable………………………………
5,400
e. Supplies
Expense……………………………..
2,100
Supplies ($3,300 1,200)−
……………….….
2,100
f. Depreciation Expense ($100,000 / 5)
………...
20,00
0
Accumulated
Depreciation……………….
20,000
Book value = $80,000 ($100,000 $20,000)−

(10- 20 min.) E 3-25A
Accounts Receivable Supplies
1,600 600 (a) 500
(c) 800 Bal. 100
Bal. 2,400
Salary Payable Unearned Service
Revenue
(b) 300 (d) 200 900
Bal. 300 Bal. 700
Service Revenue Salary Expense
4,800 2,500
(c) 800 (b) 300
(d) 200 Bal. 2800
Bal. 5,800
Supplies Expense
(a) 500
Bal. 500

(20- 30 min.) E 3-26A
Delicious Hams, Inc.
Income Statement
Year Ended December 31, 2010
Thousands
Revenues:
Sales
revenue………………..
.
$41,40
0
Expenses:
Cost of goods
sold…………..
$25,10
0
Selling, administrative,
and
general
expense…………..
10,70
0
Total
expenses…………….
35,80
0
Income before
tax………………
5,600
Income tax
expense…………….
2,30
0
Net
income……………………….
$
3,300
Delicious Hams, Inc..
Thousands
Retained earnings, December 31,
2009…
$4,700
Add: Net income
………………………….
3,300
8,000
Less:
Dividends……………………………. (1,500 )
2010…
$6,500

(continued) E 3-26A
Delicious Hams, Inc.
Balance Sheet
December 31, 2010
Thousands
ASSETS LIABILITIES
Cash…………………………
….
$
3,800
Accounts
payable………
$
7,600
Accounts
receivable…………
1,500 Income tax
payable……..
600
Inventories…………………
….
1,100 Other
liabilities…………..
2,20
0
Prepaid
1,700 Total
liabilities…………...
10,400
Prop., plant,
equip.
$ 6,500 STOCKHOLDERS’
Less: Accum. EQUITY
deprec…… . (2,300 )
4,200 Common
stock…………..
4,700
Other
9,300 Retained
earnings………
6,50
0
Total stockholders’
equity
11,20
Total liabilities and
Total
assets……………………
$21,60
0
stockholders’
equity...
$21,60
0

(10- 20 min.) E 3-27A
One mechanism for solving this exercise is to prepare the
relevant T-accounts, insert the given information, and
solve for the unknown amounts, shown in italics.
Amounts in millions
Receivables
Beg. bal. 270
Sales revenue 20,200 Collections 20,08
0
End. bal. 390
Prepaid Insurance
Beg. bal. 160
Payment 420
Insurance expense 39
0
End. bal. 190
Accrued Liabilities Payable
Beg. bal. 610
Payments 4,100
Other operating
expenses 4,220
End. bal. 730

(10 min.) E 3-28A
Req. 1
Mother Meghan’s income statement:
Service revenue ($6,000 × 1/2)
………………….....
$3,000
Mother Meghan’s balance sheet:
Unearned service revenue ($6,000 × 1/2)
………..
$3,000
Req. 2
Boston’s income statement:
Medical expense ($6,000 × 1/2)
……………………
$3,000
Boston’s balance sheet:
Prepaid medical expense ($6,000 × 1/2)
…………
$3,000

(10- 15 min.) E 3-29A
Req. 1
Mi
llions
Income statement
Service revenue (£460 £110)−
……………………
£350
Balance sheet
Unearned service
revenue………………………...
£110
Req. 2
Income statement
Service revenue (£55 + £460 £110)−
…………….
£405
Balance sheet
Unearned service
revenue………………………...
£110
Service revenue is greater in (2) because Nanofone
began the year owing more phone service to customers.
With collections for the year and the amount of the ending
liability unchanged, Nanofone must have earned more
revenue in situation 2 than in situation 1.
Not required but helpful:
Unearned Service Revenue
Beg. bal. 55
Earned
revenue
40
5
Collected
cash
460
End. bal. 110

(10- 20 min.) E 3-30A
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Closing Entries
Dec
.
31 Service
Revenue…………………………
24,00
0
Other
Revenue……………………………
300
Retained
Earnings…………………….
24,30
0
31 Retained
Earnings……………………….
23,60
0
Cost of Services
Sold………………...
11,30
0
Selling, General, and
Administrative
Expense……………………………...
6,700
Depreciation
4,800
Income Tax
Expense………………….
800
31 Retained
600
Dividends…………………………….
…
600
Net income for 2010 was $700 ($24,300 $23,600).−
Retained Earnings
Dec. 31,
2009
2,10
0
Dividend
s
600 Net income 700

Dec. 31,
2010
2,20
0

(15- 25 min.) E 3-31A
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT
CREDI
T
Adjusting Entries
Dec. 31 Unearned Service
Revenue……………….
6,500
Service Revenue ($20,100 −
$13,600)...
6,500
31 Salary Expense ($5,100 $4,600)−
………...
500
Salary Payable……………………….
…...
500
31 Rent Expense ($1,300 $1,000)−
…………..
300
Prepaid
Rent………………………………
300
31 Depreciation Expense ($400 $0)−
………..
400
Accumulated
Depreciation……………..
400
31 Income Tax Expense ($1,000 $0)−
……….
1,000
Income Tax
Payable……………………..
1,000
Closing Entries
31 Service
Revenue…………………………….
20,10
0
Retained
20,10
0
31 Retained
Earnings…………………………..
7,800
Salary
Expense…………………………...
5,100

Rent
Expense……………………………..
1,300
Depreciation
Expense…………………...
400
Income Tax
Expense…………………….
1,000
31 Retained
1,300
……
1,300

(20- 30 min.) E 3-32A
Req. 1
Draper Production Company
Balance Sheet
December 31, 2009
ASSETS
Current:
Cash…………………………………..…….... $14,800
Prepaid rent ($1,000 $300)……..……….− 700
Total current assets…………..…….….. 15,500
Plant:
Equipment………………………………….
..
$44,00
0
Less accumulated depreciation
($3,100 + $400)…………………….
…….. (3,500 )
40,50
0
Total assets……………………………………… $56,000
LIABILITIES
Current:
Accounts payable………………………….. $
5,100
Salary payable ($5,100 $4,600)………− 500
Unearned service revenue ($9,300 $6,500)− 2,800
Income tax payable……………………..…. 1,00
0
Total current liabilities……………….... 9,400
Note payable, long-term…………………..… 13,000
Total liabilities……………………………….… 22,400
Common stock………………………………… 8,500
Retained earnings
($14,100+$20,100 $5,100 $1,300 $400− − −
$1,000 $1,300)…….……………………− − 25,10
0
Total stockholders’ equity………………… 33,600
Total liabilities and stockholders’ equity… $56,000

(continued) E 3-32A
Req. 2
Current
Year
Prior
Year
Current
rati
o
=
=
$15,50
0
= 1.65 1.70
Total current
liabilities
$9,400
The ability to pay current liabilities with current assets
deteriorated.
Debt ratio =
Total liabilities
=
$22,40
0
= 0.40 0.30
Total assets $56,00
0
The overall ability to pay total liabilities deteriorated a
little.

(30 min.) E 3-33A
a.
Current
ratio
=
$30
=
1.6
7
Debt
ratio
=
$30 + 8
= 0.56$10 +
$8
$60 + $8
The purchase of equipment on account hurts both ratios.
b.
Current
ratio
=
$30 −
$11
= .95
Debt
ratio
=
$30 −
$11
= 0.39
$20 $60 −
$11
The payment of long-term debit hurts the current ratio and
improves the debt ratio.
c.
Current
ratio
=
$30 + $6
=
1.3
8
Debt
ratio
=
$30 + $6
= 0.55
$20 + $6 $60 + $6
Collecting cash in advance hurts both ratios.
d.
Current
ratio
=
$30
=
1.3
0
Debt
ratio
=
$30 + $3
= 0.55
$20 + $3 $60
Accruing an expense hurts both ratios.
e.
Current
ratio
=
$30 + $11
=
2.0
5
Debt ratio =
$30
= .42$20 $60 +
$11
A cash sale improves both ratios.

Exercises
Group B
(5- 10 min.) E 3-34B
Statement Reports
1. Income statement Sales
revenue…………
$4,80
0
Operating
expenses…
1,100
Balance sheet Accounts
receivable…
$
300
Accounts
payable……
500
2. Cash basis would report only the cash collections
of $4,900 from customers and the payment of
operating expenses ($1,100).The balance sheet
would include neither accounts receivable nor
accounts payable.
(5- 10 min.) E 3-35B
a. Cash Basis b. Accrual
Basis
Revenues………………
…...
$580,000 $510,000
Expenses………………
…...
440,000 470,000
Net
income…………………
$140,000 $ 40,000
The accrual basis measures net income better because
its information on revenues and expenses is more
complete than the information provided by the cash basis.

(5- 10 min.) E 3-36B
Million
a. Revenue…………………………………………
…….
$740
The revenue principle says to record revenue when
it has been earned, regardless of when cash is
collected. Therefore, report the amount of revenue
earned, regardless of when the company collects
cash.
b. Total
expense…………………………………….…..
$560
The matching principle governs accounting for
expenses.
c. The income statement reports revenues and
expenses.
The statement of cash flows reports cash receipts
and cash payments.

(15- 20 min.) E 3-37B
Req. 1
Adjusting Entries
a. Insurance
Expense……………………………...
1,600
Prepaid Insurance ($800+$2,400-
$1,600)…
1,600
b. Interest Receivable…………………..
…………
1,000
Interest Revenue……………………..
……...
1,000
c. Unearned Service Revenue ($1,500 −
$400)..
1,100
Service Revenue……………………..
………
1,100
d. Depreciation Expense…………………..
……..
4,600
Accumulated Depreciation…………..
…….
4,600
e. Salary Expense ($16,000 × 3/5)
………….……
9,600
Salary Payable……………………….…..
…...
9,600
f. Income Tax Expense ($21,000 × .25)
…………
5,250

Income Tax
Payable………………………….
5,250

(continued) E 3-37B
Req. 2
Net income understated by omission
of:
Interest
revenue……………………………..
$ 1,000
Service
revenue……………………………... 1,100
Total
understatement……………………….
$
2,100
Net income overstated by omission of:
Insurance
expense………………………….
$1,600
Depreciation
expense………………………
4,600
Salary
expense………………………………
9,600
Income tax
expense…………………………
5,250
Total
overstatement…………………………
21,050
Overall effect — net income overstated
by..
$18,95
0

(10- 15 min.) E 3-38B
Missing amounts in italics.
1 2 3 4
Beginning Supplies $ 100 $400 $
1,200
$ 800
Add: Payments for
supplies
during the year 1,400 1,000 800 800
Total amount to account
for
1,500 1,400 2,000 1,600
Less: Ending Supplies
(400 ) (500 )
(700 )
(500 )
Supplies Expense $
1,100
$ 900 $ 1,300 $1,100
Journal entries:
Situation
1:
Supplies………………………
……
1,400
Cash………………………….
….
1,400
Situation
2:
Supplies
900
Supplies………………………..
.
900

(10- 20 min.) E 3-39B
Adjusting Entries
a. Interest
Expense………………………………
9,200
Interest
Payable…………………………….
9,200
b. Interest
Receivable……………………………
4,200
Interest Revenue…………………….
……..
4,200
c. Unearned Rent Revenue ($12,600 / 2 ×
6/12)
3,150
Rent
Revenue……………………………….
3,150
d. Salary Expense ($1,900 × 3)
………………....
5700
Salary
Payable………………………………
5,700
e. Supplies
Expense……………………………..
1,400
Supplies ($2,600 1,200)−
……………….….
1,400
f. Depreciation Expense ($160,000 / 5)
………...
32,00
0
Accumulated
Depreciation……………….
32,000
Book value = $128,000 ($160,000 $32,000)−

(10- 20 min.) E 3-40B
Accounts Receivable Supplies
1,200 300 (a) 100
(c) 800 Bal. 200
Bal. 2,000
Salary Payable Unearned Service
Revenue
(b) 600 (d) 100 800
Bal. 600 Bal. 700
Service Revenue Salary Expense
4,400 1,900
(c) 800 (b) 600
(d) 100 Bal. 2,500
Bal. 5,300
Supplies Expense
(a) 100
Bal. 100

(20- 30 min.) E 3-41B
Holiday Hams, Inc.
Income Statement
Thousands
Revenues:
Sales
revenue………………..
.
$39,90
0
Expenses:
Cost of goods
sold…………..
$25,40
0
Selling, administrative,
and
general
expense…………..
10,40
0
Total
35,80
0
Income before
tax………………
4,100
Income tax
expense…………….
2,40
0
Net
income……………………….
$
1,700
Holiday Hams, Inc.
Thousands
2009…
$4,700
Add: Net income
………………………….
1,700
6,400
Less:
Dividends……………………………. (1,200 )
2010…
$5,200

(continued) E 3-41B
Holiday Hams, Inc.
Balance Sheet
December 31, 2010
Thousands
ASSETS LIABILITIES
Cash…………………………
….
$
3,500
Accounts
payable………
$
7,900
Accounts
receivable…………
1,700 Income tax
payable……..
900
Inventories…………………
….
1,200 Other
liabilities…………..
2,70
0
Prepaid
1,600 Total
liabilities…………...
11,500
Prop., plant,
equip.
$ 6,700 STOCKHOLDERS’
Less: Accum. EQUITY
deprec…… . (2,700 )
4,000 Common
stock…………..
4,800
Other
9,500 Retained
earnings………
5,20
0
equity
10,00
Total
assets……………………
$21,50
0
stockholders’
equity...
$21,50
0

(10- 20 min.) E 3-42B
One mechanism for solving this exercise is to prepare the
relevant T-accounts, insert the given information, and
solve for the unknown amounts, shown in italics.
Amounts in millions
Receivables
Beg. bal. 250
Sales revenue 20,68
0
Collections 20,60
0
End. bal. 330
Prepaid Insurance
Beg. bal. 130
Payment 450
Insurance expense 44
0
End. bal. 140
Accrued Liabilities Payable
Beg. bal. 600
Payments 4,100
Other operating
expenses 4,260
End. bal. 760

(10 min.) E 3-43B
Req. 1
Mother Elizabeth’s income statement:
Service revenue ($9,600 × 1/2)
………………….....
$4,800
Mother Elizabeth’s balance sheet:
Unearned service revenue ($9,600 × 1/2)
………..
$4,800
Req. 2
Portland’s income statement:
Medical expense ($9,600 × 1/2)
……………………
$4,800
Boston’s balance sheet:
Prepaid medical expense ($9,600 × 1/2)
…………
$4,800

(10 min.) E 3-44B
Req. 1
Mi
llions
Income statement
Service revenue (£400 £105)−
……………………
£295
Balance sheet
Unearned service
revenue………………………...
£105
Req. 2
Income statement
Service revenue (£95 + £400 £105)−
…………….
£390
Balance sheet
Unearned service
revenue………………………...
£105
Service revenue is greater in (2) because Direct began
the year owing more phone service to customers. With
collections for the year and the amount of the ending
liability unchanged, Direct must have earned more
revenue in situation 2 than in situation 1.
Not required but helpful:
Unearned Service Revenue
Beg. bal. 95
Earned
revenue
39
0
Collected
cash
400
End. bal. 105

(10- 20 min.) E 3-45B
Journal
Closing Entries
Dec
.
31 Service
Revenue…………………………
24,10
0
Other
Revenue……………………………
500
Retained
24,60
0
31 Retained
22,50
0
Cost of Services
Sold………………...
11,20
0
Selling, General, and
Administrative
Expense……………………………...
6,100
Depreciation
4,800
Income Tax
400
31 Retained
900
…
900
Net income for 2010 was $2,100 ($24,600 $22,500).−
Retained Earnings
Dec. 31, 2009 2,400
Dividend
s
900 Net income 2,100
Dec. 31, 2010 3,600

(15- 25 min.) E 3-46B
Journal
Adjusting Entries
Dec. 31 Unearned Service
Revenue……………….
6,500
Service Revenue ($19,900 −
$13,400)...
6,500
31 Salary Expense ($4,900 $4,500)−
………...
400
Salary Payable……………………….
…...
400
31 Rent Expense ($1,400 $900)−
…………..
500
Prepaid
Rent………………………………
500
31 Depreciation Expense ($600 $0)−
………..
600
Accumulated
Depreciation……………..
600
31 Income Tax Expense ($1,700 $0)−
……….
1,700
Income Tax
1,700
Closing Entries
31 Service
Revenue…………………………….
19,90
0
Retained
19,90
0
31 Retained
8,600
Salary
Expense…………………………...
4,900
Rent 1,400

Expense……………………………..
Depreciation
600
Income Tax
1,700
31 Retained
1,000
……
1,000

(20- 30 min.) E 3-47B
Req. 1
Wallace Production Company
Balance Sheet
December 31, 2009
ASSETS
Current:
Cash…………………………………………………..
….
$13,600
Prepaid rent ($1,100 $500)−
………………………....
600
Total current
assets………………………………..
14,200
Plant:
Equipment………………………………….
.
$48,00
0
Less accumulated depreciation
($3,800 + $300)…………………….
….. (4,200 )
43,80
0
Total
assets………………………………………………….
$58,000
LIABILITIES
Current:
Accounts
payable……………………………………….
$
4,400
Salary payable ($4,900 $4,500)−
…………………..…
400
Unearned service revenue
($8,500 $6,500)−
……………………………………...
2,000
Income tax
payable…………………………………..…
1,70
0
Total current
liabilities………………………………
8,500

Note payable, long-
term…………………………………..
10,000
Total
liabilities……………………………………
…………
18,500
Common
stock……………………………………………...
8,400
Retained earnings
($20,800 + $19,900 $4,900 $1,400− − −
$600
$1,700 $1,000)…….− −
…………………………………
31,10
0
equity…………………………….….
39,50
0
equity………………
$58,000

(continued) E 3-47B
Req. 2
Current
Year
Prior
Year
Current
rati
o
=
=
$14,20
0
= 1.67 1.45
Total current
liabilities
$8,500
improved.
Debt ratio =
Total liabilities
=
$18,50
0
= 0.32 0.35
Total assets $58,00
0
The overall ability to pay total liabilities improved a little.

(30 min.) E 3-48B
a. Current ratio =
$40
= 1.11 Debt ratio =
$30 + 6
= 0.55
$30 + $6 $60 + $6
The purchase of equipment on account hurts both ratios.
b. Current ratio =
$40 −
$11
= .97 Debt ratio =
$30 −
$11
= 0.39
$30 $60 −
$11
The payment of long-term debit hurts the current ratio and
improves the debt ratio.
c. Current ratio =
$40 + $8
= 1.26 Debt ratio =
$30 + $8
= 0.56
$30 + $8 $60 + $8
Collecting cash in advance hurts both ratios.
d. Current ratio =
$40
= 1.08 Debt ratio =
$30 + $7
= 0.62
$30 + $7 $60
Accruing an expense hurts both ratios.
e. Current ratio =
$40 +
$11
= 1.7 Debt ratio =
$30
= 0.42
$30 $60 +
$11
A cash sale improves both ratios.

Serial Exercises
(3 hours) E 3-
49
Reqs. 1, 3, 6, and 8
Cash Accounts Receivable
Mar.
2
7,000 Mar.
2
600 Mar.
18
2,100 Jan.
28
2,100
9 1,200 3 2,400 Bal. 0
21 1,800 12 300 Adj. 1,600
28 2,100 26 500 Bal. 1,600
31 1,400
Bal. 6,900
Supplies Equipment
Mar.
5
500 Adj. 400 Mar.
3
2,400
Bal. 100
Accumulated Depreciation
–
Equipment Furniture
Adj. 40 Mar.
4
7,500
–
Furniture Accounts Payable
Adj. 125 Mar.
26
500 Mar.
4
7,500
5
500
Bal. 7,500

(continued) E 3-49
Reqs. 1, 3, 6, and 8
Salary Payable Unearned Service Revenue
Adj. 600 Adj. 600 Mar.
21
1,800
Bal. 1,200
Common Stock Retained Earnings
Mar.
2
7,000 Clo. 2,065 Clo. 5,50
0
Clo. 1,400
Bal. 2,03
5
Dividends Service Revenue
Mar.
31
1,400 Clo. 1,400 Mar.
9
1,20
0
18
2,10
0
Bal. 3,30
0
Adj. 1,60
0
Adj. 600
Clo. 3,800 Bal. 5,50
0
Rent Expense Utilities Expense
Mar.
2
600 Clo. 600 Mar.
12
300 Clo. 300
Salary Expense
Depreciation Expense –
Equipment
Adj. 600 Clo. 600 Adj. 40 Clo. 40
Furniture Supplies Expense
Adj. 125 Clo. 125 Adj. 400 Clo. 400

(continued) E 3-49
Req. 2
March 2 through 18 entries are repeated from Solution to
Exercise 2-36.
Journal
Mar.
2
Cash…………………………………
…..
7,000
Common
Stock……………………..
7,000
2
Rent
Expense…………………………..
600
Cash………………………………….
.
600
3
Equipment…………………………
……
2,400
Cash………………………………….
.
2,400
4
Furniture……………………………
…..
7,500
Accounts
Payable………………….
7,500
5
……
500
Accounts
Payable………………….
500
9
Cash…………………………………
…..
1,200
Service
Revenue……………………
1,200

12 Utilities
Expense………………………
300
Cash………………………………….
.
300
18 Accounts
Receivable…………………
2,100
Service
Revenue……………………
2,100

(continued) E 3-49
Req. 2
Journal
Mar
.
21 Cash…………………………………
…..
1,800
Unearned Service
Revenue………
1,800
21 No entry; no transaction yet
26 Accounts
Payable…………………….
500
Cash…………………………………
.
500
28 Cash…………………………………
…..
2,100
Accounts
Receivable……………
2,100
31 Dividends…………………………
……
1,400
Cash…………………………………
.
1,400

(continued) E 3-49
Reqs. 4 and 5
Jerome Smith, Certified Public Accountant, P.C.
Adjusted Trial Balance
March 31, 2009
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
BALANCE
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash 6,900 6,900
Accounts receivable 0 (a) 1,600 1,600
Supplies 500 (c) 400 100
Equipment 2,400 2,400
Accumulated depr. – equip. — (d1) 40 40
Furniture 7,500 7,500
Accumulated depr. – furn. — ( d2) 125 125
Accounts payable 7,500 7,500
Salary payable — (e) 600 600
Unearned service revenue 1,800 (b) 600 1,200
Common stock 7,000 7,000
Retained earnings — —
Dividends 1,400 1,400
Service revenue 3,300 (a)1,600 5,500
(b) 600
Rent expense 600 600
Utilities expense 300 300
Salary expense (e) 600 600
Depreciation expense –
equip.
(d1) 40 40
furn.
(d2) 125 125
Supplies expense (c) 400 400
19,600 19,600 3,365 3,365 21,965 21,965
Chapter 3 Accrual Accounting &
Income 233

(continued) E 3-49
Req. 6
Journal
CREDI
T
Adjusting Entries
(a)
Mar.
31 Accounts
Receivable…………………..
1,60
0
Service
Revenue……………………..
1,60
0
(b) 31 Unearned Service
Revenue…………
600
Service
600
(c) 31 Supplies Expense ($500 $100)−
……..
400
Supplies……………………………….
.
400
(d1) 31 Depreciation Expense –
Equipment…
40
Accumulated Depreciation –
Equip
40
(d2) 31 Depreciation Expense –
Furniture…
125
Furn..
125
(e) 31 Salary
Expense………………………….
600
Salary
Payable………………………..
600

(continued) E 3-49
Req. 7
Income Statement
Month Ended March 31, 2009
Revenues:
Service revenue $5,50
0
Expenses:
Salary expense $600
Supplies expense 400
Rent expense 600
Utilities expense 300
furniture
40
equipment
12
5
Total expenses 2,06
5
Net income $3,43
5
Month Ended March 31, 2009
Retained earnings, March 1, 2010 $ 0
Add: Net income 3,435
3,435
Less: Dividends (1,400 )
Retained earnings, March 31, 2010 $ 2,035

(continued) E 3-49
Req. 7
Balance Sheet
March 31, 2009
ASSETS LIABILITIES
Current assets: Current liabilities:
Cash $
6,900
Accounts payable $
7,500
Accounts receivable 1,600 Salary payable 600
Supplies 10
0
Unearned service
Total current
assets
8,600 revenue 1,200
Plant assets: Total current liabilities 9,300
Equipment
$2,400
Less accum. STOCKHOLDERS’ EQUITY
depr.
(40 )
2,360 Common stock 7,000
Furniture $7,500 Retained earnings 2,035
Less accum. Total stockholders’
equity
9,035
depr.
(125)
7,37
5
Total liabilities and _____
_
Total assets $18,33
5
stockholders' equity $18,33
5

(continued) E 3-49
Req. 8
Journal
Closing Entries
Mar
.
31 Service
Revenue…………………………..
5,500
Retained
Earnings……………………..
5,500
31 Retained
Earnings………………………..
2,065
Rent
Expense…………………………..
600
Utilities
Expense……………………….
300
Salary
Expense…………………………
600
Equipment..
40
Furniture….
125
Supplies
Expense……………………...
400
31 Retained
Earnings………………………..
1,400
Dividends……………………………….
.
1,400

(continued) E 3-49
Req. 9
Current
ratio
=
=
$8,60
0
= 0.92
Total current
liabilities
$9,30
0
Debt ratio =
Total
liabilities
=
$9,300
=
0.5
5
These ratios indicate a weak financial position. The
business has only $0.92 in current assets for every $1.00
of current liabilities. It could face serious trouble in
paying current liabilities with current assets. The debt
ratio of 51% is not too high, which suggests that, overall,
the business should be able to pay its debts — if it can
generate enough cash to get its current ratio higher.

Challenge Exercises
(20- 25 min.) E 3-50
(Dollar amounts in thousands)
December 31, 2010
Current
=
$1,800 + $5,300 + $2,300 +
$1,100 =
$10,500
= 1.78
ratio $2,800 + $1,100 + $2,000 $5,900
December 31, 2011
Current
=
$400 1
+ $6,500 2
+ $2,300 3
+
$700 4
=
$9,900
= 2.11
ratio $1,300 5
+ $1,100 6
+ $2,300 7
$4,700
_____
Computations of December 31, 2010 balances:
1
Cash = $1,800 $7,400 + $7,500 $1,500 = $400− −
2
Receivables = $5,300 + $8,700 $7,500 = $6,500−
3
No change in the Inventory balance.
4
Prepaid expenses = $1,100 $400 = $700−
5
Accounts payable = $2,800 $1,500 = $1,300−
6
No change in the Unearned Revenues balance.
7
Accrued expenses payable = $2,000 + $300 = $2,300
Conclusion: Worthy Hill’s current ratio improved during
2010. The company’s current ratio is very
strong.

(60 min.) E 3-51
a. Net income: Service revenue:
($160,000 + $1,620 +
$32,000).
$193,620
Expenses:
Salary ($34,000 + $3,200)
………
$ 37,200
Depreciation –
building………..
2,500
Supplies…………………………..
3,600
Insurance…………………………
1,200
Advertising……………………….
7,600
Utilities……………………………
2,100 54,20
0
Net
income…………………………..
$139,420
b. Total
assets:
Cash………………………………
…..
16,600
Accounts receivable
($7,000 + $32,000)
………….....
39,000
Supplies ($4,200 $3,600)−
………..
600
Prepaid insurance
($3,400 $1,200)−
………………...
2,200
Building……………………………
…
$107,00
0
Less: Accum. Depr.
($15,000 + $2,500)………….
……
(17,500
)
89,500
Land………………………………
…..
52,00
0
Total assets………………….
…..
$199,900

(continued) E 3-51
c. Total
liabilities: Accounts
payable…………………….
$
6,500
Salary
payable………………………… 3,200
Unearned service revenue
($5,400 $1,620)−
…………………... 3,780
Total
liabilities…………………………
$
13,480
d. Total stock-
holders’
equity: Common
stock………………………...
$
14,000
Retained earnings, beginning….
…... 45,000
Add: Net income….
…………………... 139,420
198,420
Less:
Dividends..............................
(12,00
0)
equity…………..
$186,420
e. Total
assets
= Total liabilities + Total stockholders’ equity
$199,900 = $13,480 + $186,420

Quiz
Q3-
52
b
Q3-
53
b
Q3-
54
d
Q3-
55
b
Q3-
56
b
Q3-
57
a
Q3-
58
b
Q3-
59
b
Q3-
60
b ($2,700 × 9/12 = $2,025)
Q3-
61
a $2,000 + $26,000 $17,000−
= revenue of $11,000
Q3-
62
c
Q3-
63
d
Q3-
64
b
Q3-
65
d
Q3-
66
c Current
ratio
= $29,333 /
$24,800
= 1.183 to 1
Debt ratio =
$24,800 +
$112,738
= .635 to 1
$29,333 +
$187,430
Q3- $7,39 ($7,500 $660 $100 + $950 $300)− − −

67 0
Q3-
68
b Salary Payable
Beg. bal. 28,000
Payment 139,00
0
Salary exp. 126,00
0
End. bal. 15,000

Problems
Group A
(15- 20 min.) P 3-69A
(All amounts in millions)
1. $41 – x = $5 ; x = $36
2. Revenues…………
…..
$41
Expenses…………
…..
36
Net
income…………...
$ 5
3. Beginning
receivables………
$ 4
Add:
Sales…………………..
41
Less:
Collections…………...
(23 )
Ending
receivables………….
$18
Balance sheet
ASSETS
Current assets:
Receivables………….
$ 18
4. Beginning accounts
payable……….
$ 8
Add:
Expenses………………………
36
Less:
Payments……………………...
(41 )
Ending accounts
payable……………
$ 3

Balance sheet
LIABILITIES
Current liabilities:
Accounts
payable……………
$ 3

(20- 30 min.) P 3-70A
Req. 1
Elders Consulting
Amount of Revenue (Expense) for August
Date Cash Basis Accrual
Basis
Aug. 1 Expense $(500 ) $ 0
4 Expense (800 ) 0
5 Revenue 700 700
8 Expense (500 ) (500 )
11 Revenue 0 3,500
19 0 0
24 Revenue 3,500 0
26 Expense (1,700 ) 0
29 Expense (800 ) (800 )
31 Expense 0 $500 ÷ 5 = (100)
31 Revenue
0
600
Req. 2
Income (loss) before
tax
$ (100 ) $3,400

(continued) P 3-70A
Req. 3
The accrual-basis measure of net income is preferable
because it accounts for revenues and expenses when
they occur, not when they are received or paid in cash.
For example, on August 11, the company earned $3,500
of revenue and increased its wealth as a result. The
accrual basis records this revenue, but the cash basis
ignores it. On August 24, the business collected the
receivable that was created by the revenue earned on
account at August 11. The accrual basis records no
revenue on August 24 because the company’s increase in
wealth occurred back on August 11. The cash basis waits
until cash is received, on August 24, to record the
revenue. This is too late.

(10- 20 min.) P 3-71A
Journal
Dec
.
31 a. Insurance
Expense…………………..
3,200 *
Prepaid
Insurance……………......
3,200
To record insurance expense.
31 b. Salary Expense ($6,100 × 2/5)
……..
2,440
Salary
Payable…………………….
2,440
To accrue salary expense.
31 c. Interest
Receivable………………….
400
Interest
Revenue………………….
400
To accrue interest revenue.
31 d. Supplies
Expense……………………
6,900 **
Supplies…………………………….
6,900
31 e. Unearned Service Revenue
($12,000 × 7/12)
……………………...
8,400
Service Revenue…………….
……
8,400
To record revenue that was collected in advance.
31 f. Depreciation – Office
Furniture……
3,000
Equipment
5,400
Office
Furniture………………...
3,000

Equipment……………………….
5,400
To record depreciation
expense.
_____
* $ 900 + $3,600 $1,300= $3,200−
** $2,700 + $6,400 $2,200 = $6,900−

(45- 60 min.) P 3-72A
Req. 1
London, Inc.
December 31, 2010
BALANCE
Cash 8,900 8,900
Accounts receivable 1,200 (a) 2,100 3,300
Prepaid rent 2,400 (b) 800* 1,600
Supplies 2,500 (c) 2,170 330
Furniture 72,000 72,000
Accumulated
depreciation
3,900 (d)
2,000**
5,900
Salary payable (e)
2,880***
2,880
Retained earnings 63,110 63,110
Service revenue 11,000 (a) 2,100 13,100
Salary expense 2,300 (e)
2,880***
5,180
Rent expense (b) 800* 800
Depreciation expense (d)
2,000**
2,000
Supplies expense (c) 2,170 _____ 2,170
93,310 93,310 9,950 9,950 100,290 100,290
_____
* $2,400 ÷ 3 = $800
** $72,000 ÷ 3 = $24,000 ÷ 12 = $2,000

*** $4,800 × 3/5 = $2,880
Income 251

(continued) P 3-72A
Req. 2
London, Inc.
Income Statement
Month Ended December 31, 2010
Revenues:
0
Expenses:
Salary expense $5,180
Supplies expense 2,170
Rent expense 800
Depreciation expense 2,000
Total expenses
10,660
Net income $
2,440
London, Inc.
Month Ended December 31, 2010
2010
$63,110
65,550
Less: Dividends (3,500
)
2010
$62,050

(continued) P 3-72A
Req. 2 (continued)
London, Inc.
Balance Sheet
December 31, 2010
ASSETS LIABILITIES
Cash $
8,900
Accounts payable $3,300
Accounts receivable 3,300 Salary payable 2,88
0
Prepaid rent 1,600 Total current liabilities 6,180
Supplies 330
Total current
assets
14,130
Furniture
$72,000
Less: Accum. Common stock 12,000
deprec.
(5,900 )
66,100 Retained earnings 62,05
0
Total stockholders’ equity 74,050
Total assets $80,23
0
stockholders’ equity $80,23
0

(10- 20 min.) P 3-73A
Req. 1
Journal
CREDI
T
Apr. 30 Accounts Receivable ($6,810 −
$5,900)...
910
Rental
Revenue………………………….
910
To accrue rental revenue.
30 Interest Receivable ($200 $0)−
…………..
200
Interest Revenue ($600 $400)−
…….…
200
30 Supplies Expense ($1,200 $0)−
…………
1,20
0
Supplies ($1,800 $600)−
……………….
1,20
0
30 Insurance Expense ($1,700 $0)−
………..
1,70
0
Prepaid Insurance ($2,300 −
$600)…...
1,70
0
30 Depreciation Expense ($1,400 $0)−
…….
1,40
0
($8,800 $7,400)−
……………………...
1,40
0
To record depreciation expense.
30 Wage Expense ($2,300 $1,300)−
………...
1,00
0
Wages Payable ($1,000 $0)− 1,00

……….… 0
To accrue wage expense.
30 Unearned Rental Revenue ($2,100 −
1,600)
500
Rental
Revenue………………………….
500
To record revenue that was collected in
advance.

(continued) P 3-73A
Req. 2
Total assets = $82,710 ($8,900 + $6,810 + $200 +
$4,400 +
$600 + $600 + $70,000 −
$8,800)
Total
liabilities
= $ 9,300 ($6,700 + $1,000 + $1,600)
Total equity = $73,410 ($82,710 $9,300)−
Net income = $ 19,710 ($26,510 + $600 $1,400− −
$1,200 $400 $2,300 $400− − − −
$1,700)

(20- 30 min.) P 3-74A
Req. 1
Schneider Corporation
Income Statement
Year Ended July 31, 2010
Revenues:
00
Expenses:
0
Rent expense 10,300
Insurance expense 3,500
Interest expense 3,300
0
61,4
00
Income before tax 40,700
Income tax expense 6,5
00
Net income $
34,200
Year Ended July 31, 2010
Retained earnings, July 31, 2009 $ 5,000
39,200
Less: Dividends
(21,000 )
Retained earnings, July 31, 2010 $18,200

continued) P 3-74A
Req. 1 (continued)
Balance Sheet
July 31, 2010
ASSETS LIABILITIES
Cash $
2,000
Accounts payable $ 3,400
Accounts receivable 9,400 Interest payable 200
Supplies 2,400 Unearned service
revenue
700
Prepaid rent 1,200 Income tax payable 2,000
Note payable 18,900
Equipment $36,600 Total liabilities 25,200
Less: Accum.
deprec. (4,20
0)
32,400 STOCKHOLDERS’ EQUITY
Common stock 4,000
Retained earnings
18,200
equity
22,200
Total assets $47,40
0
Req. 2
Debt ratio:
$25,20
0
= 0.53
$47,40
0
Snead is in compliance of its debt agreement, which
requires the company to maintain a debt ratio no higher
than 0.60.

(20 min.) P 3-75A
Req. 1
Journal
Closing Entries
Mar. 31 Service
95,000
Retained
Earnings………………...
95,000
31 Retained
35,700
Advertising
Expense……………..
10,900
Depreciation
Expense……………
1,700
Interest Expense………..
…………
900
Salary
Expense……………………
17,800
Supplies
Expense…………………
4,400
31 Retained
31,200
Dividends…………………………..
.
31,200
Req. 2
Retained Earnings
Mar. 31, 2010
Expenses
35,70
0
Mar. 31, 2009 Bal. 22,00
0
Mar. 31, 2010
Dividends
31,20
0
Mar. 31, 2010
Revenues
95,00
0
Mar. 31, 2010 Bal. 50,10
0

Net income = $59,300 (revenues of $95,000 minus
expenses of $35,700.
Req. 3
Retained Earnings increased during the year because net
income of $59,300 exceeded dividends of $31,200.

(25- 40 min.) P 3-76A
Req. 1
Spa View Service, Inc.
Balance Sheet
March 31, 2010
ASSETS
Current assets:
Cash $
7,900
Accounts receivable 16,1
00
Prepaid expenses 6,00
0
Supplies 3,6
00
Total current assets 33,6
00
Plant assets:
Equipment $41,700
Less: Accumulated
depreciation (6,900 )
34,800
Other assets 14,400
Total assets
$82,800
LIABILITIES
Current portion of note payable $
1,000
Accounts payable 14,400
Salary payable 2,900
Unearned service revenue 2,700
Total current liabilities 21,000
Note payable, long-term 6,100
Total liabilities 27,100
Common stock 5,600
Retained earnings 50,100 *
Total stockholders’ equity 55,700
Total liabilities and stockholders’ equity $82,800

_____
*See next page.

(continued) P 3-76A
Req. 1 (continued)
*Retained earnings, March 31,
2009……………..
$22,000
Add: Net income ($95,000 $10,900− −
$1,700
$900 $17,800 $4,400)− − −
………………...
59,300
81,300
Less:
Dividends………………………………........
(31,200 )
2010……………..
$50,100
Req. 2
201
0
200
9
Current
ratio
=
Total current
assets
=
$33,60
0
= 1.60 1.25
Total current
liabilities
$21,00
0
improved during 2010.
Debt ratio =
Total liabilities
=
$27,100
=
0.3
3
0.20
Total assets $82,800
The overall debt position deteriorated a little during 2010.
The improvement in the current ratio is greater than the
deterioration in the debt ratio. However, Spa Brook’s
overall debt position is strong because a debt ratio of .33
is not troublesome.

(45- 60 min.) P 3-77A
Req. 1
Current
ratio
=
=
$15.
6
= 1.63
Total current
liabilities
$
9.6
$15.1
Debt
ratio
=
Total
liabilities =
$9.6 + $5.5
=
0.4
9
Total assets $31.7
Req. 2
Current Ratio Debt Ratio
a.
$15.6 ($9.6− × 1/2)
= 2.25
$15.1 ($9.6 × 1/2)−
= 0.38
($9.6 × 1/2) $31.7 ($9.6 × 1/2)−
b.
$15.6 + $6.0
= 2.25
$15,1+ $6.0
= 0.56
$9.6 $31.7 + $6.0
c.
$15.6 + $2.5
= 1.89
$15.1
= 0.44
$9.6 $31.7 + $2.5
d.
$15.6 $.6−
= 1.56
$15.1
= 0.48
$9.6 $31.7 $.6−
e.
$15.6
= 1.51
$15.1 + $0.7
= 0.50
$9.6 + $0.7 $31.7
f.
$15.6 $1.5−
= 1.47
$15.1 + $2.7
= 0.52
$9.6 $31.7 + $4.2 $1.5−
g.
$15.6
= 1.63
$15,1
= 0.49
$9.6 $31.7 $0.8−
(continued) P 3-77A

Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a company’s current ratio is greater than 1.0, as it is
for Hartford, paying off a current liability will always
increase the current ratio.
f. Borrowing money on long-term debt will always
increase the current ratio and increase the debt ratio.

Problems
Group B
(15- 20 min.) P 3-78B
1. $33 – x = $27; x = $6
2. Revenues…………
…..
$33
Expenses…………
…..
27
Net
income…………...
$ 6
3. Beginning
receivables……...
$ 9
Add:
Revenues…………….
33
Less:
Collections…………..
(24 )
Ending
receivables………….
$ 18
Balance sheet
ASSETS
Current assets:
Receivables………….
$ 18
4. Beginning accounts
payable………..
$ 11
Add:
Expenses……………………….
27
Less:
Payments……………………....
(28 )
Ending accounts
payable…………….
$ 10

Balance sheet
LIABILITIES
Accounts
payable…………….
$ 10

(20- 30 min.) P 3-79B
Req. 1
Kings Consulting
Amount of Revenue (Expense) for May
Date Cash Basis Accrual Basis
May 1 Expense $ (500 ) Expense 0
4 Expense $(600 ) Expense 0
5 Revenue $1,000 Revenue
$1,000
8 Expense $(400 ) Expense $(400 )
1
1
Revenue Revenue
$3,100
1
9
Expense 0 Expense 0
2
4
Revenue $3,100 Revenue 0
2
6
Expense $(2,000
)
Expense 0
2
9
Expense $(1,500
)
Expense $(1,50
0)
3
1
Expense 0 Expense $
(100)
3
1
Revenue 0 Revenue
$500
Req. 2
Income
(loss)
before tax $(900 ) Income before
tax
$2,60
0
Req. 3
The accrual basis better measures net income. For
example, the accrual basis accounts for the prepayment
of insurance on May 1 as an asset because prepaid
insurance gives the business insurance coverage of the

business’ assets for the next five months. The cash basis
ignores the future benefit (asset nature) of the
prepayment and accounts for the prepayment as an
expense.
(10- 20 min.) P 3-
80B
Journal
Mar 31 a. Insurance Expense 3,400 *
Prepaid Insurance 3,400
To record insurance expense
31 b. Salary Expense ($5,800 × 3/5)
……...
3,480
Salary
3,480
31 c. Interest
Receivable…………………..
700
Interest
Revenue…………………..
700
31 d. Supplies
6,600 *
*
Supplies……………………………..
6,600
31 e. Unearned Service Revenue
($12,100 × 60%)
………………………
7,260
Service
Revenue…………………..
7,260

To record revenue that was collected in
advance.
31 Depreciation Expense
…………...….
8,900
Office
Furniture……………
3,500
Equipment……………..
……
5,400
_____
* $500 + 3,800 $900 = $3,400−
** $2,700 + $6,100 $2,200 = $ 6,600−

(45- 60 min.) P 3-81B
Req. 1
Kings, Inc.
August 31, 2010
BALANCE
Cash 9,200 9,200
Accounts receivable 1,500 (a) 2,000 3,500
Prepaid rent 2,400 (b)
800*
1,600
Supplies 2,200 (c) 1,820 380
Furniture 81,000 81,000
Accumulated
depreciation
3,900 (d)
1,350**
5,250
Salary payable (e)
3,120***
3,120
Retained earnings 71,020 71,020
Advertising revenue 10,000 (a) 2,000 12,000
Salary expense 3,000 (e)
3,120***
6,120
Rent expense (b) 800 * 800
Depreciation expense (d)
1,350**
1,350
Supplies expense (c) 1,820 _____ 1,820
103,42
0
103,42
0
9,090 9,090 109,890 109,890
___
Income 271

* $2,400 ÷ 3 = $800
** $81,000 ÷ 5 = $16,200 ÷ 12 = $1,350
*** $5,200 × 3/5 = $3,120

(continued) P 3-81B
Req. 2 (continued)
Kings, Inc.
Income Statement
Month Ended August 31, 2010
Revenues:
Advertising revenue $12,00
0
Expenses:
Rent expense 800
0
Total expenses 10,610
Net income $1,390
Kings, Inc.
Month Ended August 31, 2010
Retained earnings, August 1, 2010 $71,020
72,410
Less: Dividends (3,600 )
Retained earnings, Aug 31, 2010 $68,810

(continued) P 3-81B
Req. 2 (continued)
Kings, Inc.
Balance Sheet
August 31, 2010
ASSETS LIABILITIES
Cash $9,200 Accounts payable $
3,500
Accounts receivable 3,500 Salary payable 3,12
0
Prepaid rent 1,600 Total current liabilities 6,620
Supplies 3
80
Total current assets 14,680
Furniture
$81,000
Less: Accum. Common stock 15,000
deprec.
(5,250 )
75,750 Retained earnings 68,810
equity
83,810
_____
_
Total liabilities and _____
_
Total assets $90,43
0
0

(10- 20 min.) P 3-82B
Req. 1
Journal
CREDI
T
Dec. 31 Accounts Receivable ($6,880 −
$6,000)
880
Rental
Revenue……………………………
.
880
To accrue rental revenue.
31 Supplies Expense ($900 $0)−
……………...
900
Supplies ($1,500 $600)−
………………….
900
31 Insurance Expense ($1,700 $0)−
…………..
1,700
Prepaid Insurance ($2,500 $800)−
……..
1,700
31 Depreciation Expense ($1,500 $0)−
………
1,500
($10,300 $8,800)−
………………………….
1,500
31 Wage Expense ($2,700 $1,900)−
………….
800
Wages Payable ($800 $0)−
…………..….
800
31 Interest Receivable ($500 0)……….−
…….
500
Interest Income ($500 $0)− 500

……………..
To accrue interest expense.
31 Unearned Rental Revenue
($1,500 $1,200)−
……………………………
300
Rental
Revenue………………………….
300
To record revenue that was collected in advance.

(continued) P 3-82B
Req. 2
Total assets = $78,380 ($7,900 + $6,880 + $500 +
$5,000 + $600 + $800 +
$67,000 $10,300)−
Total
liabilities
= $8,500 ($6,500 + $800 + $1,200)
Total equity = $69,880 ($78,380 $8,500)−
Net income = $12,780 ($19,480 + $700 $1,500− −
$900 $300 $2,700 $300− − − −
$1,700)

(20- 30 min.) P 3-83B
Req. 1
Sneed Corporation
Income Statement
Year Ended October 31, 2010
Revenues:
00
Expenses:
0
Rent expense 10,200
Interest expense 3,200
0
61,600
Income before tax 40,100
Income tax expense 7,50
0
Net income $
32,600
Sneed Corporation
Year Ended October 31, 2010
Retained earnings, October 31,
2009
$ 4,000
Add: Net income
32,600
36,600
Less: Dividends
(25,000 )
Retained earnings, October 31,
2010
$ 11,600

(continued) P 3-83B
Req. 1 (continued)
Sneed Corporation.
Balance Sheet
October 31, 2010
ASSETS LIABILITIES
Cash $ 1,600 Accounts payable $
3,800
Accounts receivable 8,800 Unearned service
Supplies 2,100 revenue
900
Prepaid rent 1,000 Interest payable 4
00
Income tax payable 2,500
Equipment $36,700 Note payable 18,60
0
Less:
Accum.
Total liabilities 26,200
deprec.
(4,400 ) 32,300
Common stock 8,0
00
Retained earnings 11,60
0
equity 19,60
0
Total assets $45,800 stockholders’ equity $45,800
Req. 2
Debt ratio:
$26,200
= 0.57
$45,800
Sneed Corporation’s debt ratio of 0.57 is in compliance
with the lenders’ debt restriction.

(20 min.) P 3-84B
Req. 1
Journal
Closing Entries
Mar
.
31 Service
Revenue………………………
94,100
Retained
Earnings…………………
94,100
31 Retained
36,300
Salary
Expense……………………..
18,100
Supplies
4,300
Advertising
Expense………………
11,100
Depreciation
Expense…………….
2,000
Interest
800
31 Retained
30,000
Dividends……………………………
30,000
Req. 2
Retained Earnings
Mar. 31, 2010
Expenses
36,30
0
Mar. 31, 2009 Bal. 22,00
0
Mar. 31, 2010
Dividends
30,00
0
Mar. 31, 2010
Revenues
94,10
0
Mar. 31, 2010 Bal. 49,80
0

Net income = $57,800 (revenues of $94,100 minus
expenses of $36,300)
Req. 3
Retained Earnings increased during the year because net
income of $57,800 exceeded dividends of $30,000.

(30- 40 min.) P 3-85B
Req. 1
Sunny Stream Service, Inc.
Balance Sheet
March 31, 2010
ASSETS
Current assets:
Cash……………………………………………………
.
$
7,300
Accounts
receivable………………………………… 16,400
Supplies…………………………………………
……..
3,30
0
Prepaid expenses 5,70
0
Total current
assets……………………………...
$32,700
Plant assets:
Equipment………………………………
…
$42,500
Less accumulated
depreciation…. (7,300 ) 35,200
Other
assets…………………………………………… .. 14,500
Total
assets……………………………………………… $82,400
LIABILITIES
Accounts
payable…………………………………… 14,300
Current portion of note payable 50
0
Salary
payable……………………………………….. 2,600

Unearned service
revenue……………………… 2,600
Total current
liabilities…………………………... 20,000
Note payable, long-
term………………………………. 5,900
Total
liabilities…………………………………………... 25,900
Common
stock………………………………………….. 6,700
Retained earnings
……………………………………... 49,800 *
equity……………………………. 56,500
equity…………... $82,400
_____
*See next page.

(continued) P 3-85B
Req. 1 (continued)
_____
*Computation:
2009………
$ 22,000
Add: Net income ($94,100 $18,100− −
$4,300
$11,100 $2,000 $800)− − −
……………...
57,800
79,800
Less:
Dividends………………………………….
(30,000 )
2010………
$49,800
Req. 2
2010
200
9
Current
ratio
=
=
$32,700
= 1.64 1.40Total current
liabilities
$20,000
improved during 2010.
Debt
ratio
=
Total
liabilities
=
$25,90
0
=
0.3
1
0.2
0
Sunny Stream Services’ overall debt position deteriorated
a bit from 2009 to 2010. However, the company’s debit
position is still very strong.

(45- 60 min.) P 3-86B
Req. 1
Current
ratio
=
=
$15.
3
=
1.7
8Total current
liabilities
$8.6
$14.0
Debt ratio =
Total liabilities
=
$8.6 +
$5.4 =
0.4
4
Total assets $31.7
Req. 2
Current Ratio Debt Ratio
a
.
$15.3 ($8.6 × 1/2)−
=
2.5
6
$14.0 ($8.6 ×−
1/2)
=
0.3
5($8.6 × 1/2) $31.7 ($8.6 ×−
1/2)
b
.
$15.3 + $7.0
=
2.5
9
$14.0 + $7.0
=
0.5
4$8.6 $31.7 + $7.0
c
.
$15.3 + $2.5
=
2.0
7
$14.0
=
0.4
1$8.6 $31.7 + $2.5
d
.
$15.3 $3.0−
=
1.4
3
$14.0
=
0.4
9$8.6 $31.7 $3.0−
e
.
$15.3
=
1.6
5
$14.0 + $0.7
=
0.4
6$8.6 + $0.7 $31.7
f.
$15.3 $1.9−
=
1.5
6
$14.0 + $2.8
=
0.4
9
$8.6 $31.7 + $4.7 −
$1.9
g
.
$15.3
=
1.7
8
$14.0
=
0.4
5$8.6 $31.7 $0.6−

(continued) P 3-86B
Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a company’s current ratio is greater than 1.0, as for
Hillsboro, paying off a current liability will always
increase the current ratio.
f. Borrowing money on long-term debt will always
increase the current ratio and increase the debt ratio.

Decision Cases
(25 min.) Decision Case 1
Req. 1 Unadjusted trial balance:
Cash…………………………………
…..
$8,000
Accounts
receivable………………….
4,200
…...
800
Prepaid
rent……………………………
1,200
Land…………………………………
…..
43,000
Accounts
payable…………………….
$12,000
Salary
payable…………………………
–0–
Unearned service
revenue…………..
700
Note payable, due in 3
years………..
23,400
Common
stock………………………...
5,000
Retained
earnings…………………….
9,300
Service
revenue……………………….
9,100
Salary
expense………………………..
3,400
Rent
expense…………………………..
–0–
Advertising
expense………………….
900
Supplies
expense……………………..
–
0–
Totals………………………………
……
$61,500 $59,500

Out of balance $2,000

(continued) Decision Case 1
Req. 2 Adjusted trial balance:
Cash…………………………………………
…...
$8,000
Accounts
receivable…………………………..
4,200
Supplies ($800 -400)..
………………………….
400
Prepaid rent ($1,200 x 11/12)
…………………
1,100
Land ($41,000 + $2,000)
……………………….
43,000
Accounts
payable……………………………...
12,000
Salary
payable………………………………….
1,000
Unearned service revenue ($700 -
$500)….
200
Note payable, due in 3
years………………...
25,400
Common
stock…………………………………
5,000
Retained
earnings……………………………..
9,300
Service revenue ($9,100 + $500)
…………….
9,600
Salary expense ($3,400 + $1,000)
…………..
4,400
Rent expense ($1,200 x 1/12)
………………..
100
Advertising
expense…………………………..
900
Supplies
expense……………………………...
40
0
Total…………………………………………
……
$62,50
0
$62,50
0
Req. 3

Current ratio =
$8,000 + $4,200 + $400 +
$1,100
$12,000 + $1,000 + $200
=
$13,70
0
= 1.04
$13,20
0
We might have trouble sleeping at night with a current
ratio of 1.04. To be safe, the current ratio should be
around 1.40 or higher.

(20- 30 min.) Decision Case 2
Eagle Restaurant, Inc.
Income Statement
Month Ended October 31, 2011
Sales revenue $32,000
Cost of goods sold $12,000
Wages expense 5,000
Rent expense 4,000
0
23,00
0
Net income $
9,000
Month Ended October 31, 2011
Retained earnings, beginning $ 0
+ Net income 9,000
- Dividends (3,000 )
Retained earnings, October 31, 2011 $6,000

Balance Sheet
October 31, 2011
ASSETS LIABILITIES
Cash $
8,000
Accounts payable $ 7,000
Food inventory 5,000 Unearned revenue 3,000
Prepaid insurance 1,000 10,000
Dishes, silver 4,000
Fixtures
$24,000
OWNERS’ EQUITY
Less: Accum. Common stock $25,00
0
deprec.
(1,000 )
23,00
0
Retained
earnings
6,00
0
31,00
0
Total assets $41,00
0
equity
$41,00
0
Recommendation: Do not expand the business. It is
not meeting Marks’ goals for net income
or for total assets.

(30- 40 min.) Decision Case 3
Req. 1 (your highest price)
Advertising revenue ($22,000 +
$4,000)
$26,000
Expenses:
Salary $4,000
Utilities 900
Other (unrecorded) 1,100
Salary of your manager 5,000 11,00
0
Your expected monthly net income $15,000
Multiplier to compute price X 16
Your highest price $240,00
0
Req. 2 (Williams’ asking price)
SW Advertising, Inc.
Statement of Retained Earnings and Common Stock
June 30, 2010
Beginning retained earnings $
93,000
Add: Net income
Revenue ($22,000 + $4,000) $26,000
Less: Expenses ($4,000 +
$900 + $1,100)
(6,000) 20,000
113,000
Less: Dividends
(9,000 )
Ending retained earnings $104,00
0
Common stock
50,000
Stockholders’ equity, June 30, 2010 $154,00
0
Multiplier to compute price X

2__
Williams’ asking price $308,00
0

Req. 3
You may start by offering Williams approximately
$225,000 for the business. His asking price is $308,000
so you are starting out quite far apart. If Williams
appears especially eager to sell out, you may be able to
buy the firm for closer to your highest price of $240,000.
However, if he is not so eager to sell and if you want the
business badly enough, you may have to pay somewhere
between $240,000 and $308,000. It might pay to hire an
expert to value the business’s assets. You may find that
Williams’ price is inflated based on the value of its
assets. You can always raise your offer, but you cannot
decrease it, so start the negotiating process with an offer
around $225,000.

Ethical Issues
Ethical Issue 1
1. The journal entry to record the revenue is:
Dec. Accounts
Receivable………...
XXX
Sales
Revenue……………..
XXX
The debit to Accounts Receivable will increase total
current assets and, as a result, increase (improve) the
current ratio.
The credit to Sales Revenue will increase total owner
equity and, as a result, decrease (improve) the debt
ratio.
2. a. – c. The issue is whether it is ethical to record the
revenue in the current year. The contract has been
signed, but the implication is that the company will not
have done everything it needs to do in order to earn the
revenue in the current year. The stakeholders are the
company, the bank, the stockholders, and the
company’s other creditors. From an economic
standpoint, the entry would obviously improve the
company’s short term financial position. However, the
advantage would probably be short-lived. When the
bank finds out about this entry, they will likely protest,
and demand immediate payment, so the longer-term
economic impact will likely be negative. From a “legal”
standpoint, to record this transaction in December
violates GAAP by violating the revenue principle. In this
case Cross Timbers has not made the sale (has not
delivered the merchandise) to the customer and,
therefore, has not earned the revenue prior to
December 31 of the current year. From an ethical
standpoint, recording this revenue violates the bank’s
rights for proper disclosure of the company’s income
and assets. Revenue should be recorded no earlier
than when it is earned. Cross Timbers expects to earn

the revenue in January of next year. Cross Timbers
clearly cannot record this revenue until it is earned. To
do so is not in their best economic, legal (GAAP) or
ethical best interests.
3. The authors would suggest either of two actions. Cross
Timbers can either:
a. Report the current ratio of 1.47 and the debt ratio of .
51 because these are the true values. Then tell the
bank of the signed contract for additional work and
the hope for a better set of ratio values next year. In
some cases, banks will agree to sign a waiver of the
terms of loan covenants, meaning that, although the
company is in violation, the bank will not move to
enforce the covenant. They may give Cross Timbers
a “grace period” to cure the violation in the covenant.
b. Pay off some current liabilities before year end. This
will improve both the current ratio and the debt ratio.
This may enable Cross Timbers to bring its ratio
values into compliance with the bank’s requirements.

Ethical Issue 2
1. These transactions — recorded as directed by Almond
— overstate the reported income of the company by
$21,000 ($10,000 + $10,000 + $1,000).
2. It appears that Almond wants to improve the company’s
reported income in order to borrow on favorable terms.
Her action is unethical and probably illegal as well
because she is deliberately overstating the company’s
reported income.
Almond appears to be letting the potential short term
economic advantage of these deliberate misstatements
take precedence. She needs to remember that these
misstatements violate GAAP, and that, depending on
what use is made of the financial statements, could
subject the company to civil or criminal legal
proceedings. If this happens, the short term economic
gains ($21,000) would not even come close to the long-
term economic costs associated with the legal actions,
not to mention the negative publicity. The business
will need a bank loan, and perhaps the money would be
used to pay bills, expand the business, and so on.
However, based on Almond’s lack of integrity, the
money may be destined for her own use. Regardless of
its use, the money is obtained under false pretenses
and cannot be headed for a good outcome.
The bank is harmed by Almond’s and Lail’s actions.
Lending money to Almond under false pretenses may

lead the bank to charge an unrealistically low interest
rate that robs the bank’s owners of interest revenue. In
the extreme, the public is robbed if taxpayers wind up
financing the bailout of a failed institution.
3. Personal advice will vary from student to student. The
purpose of asking this question is to challenge students
to take the high road of ethical conduct by having
nothing to do with Almond’s scheme. The authors would
advise Lail, the accountant, to take these actions, in
order:
a. Refuse to take any part in Almond’s scheme,
explaining that the result is overstatement of reported
income. This is both illegal and unethical, and will
ultimately have a negative economic impact on the
company, as well. Accountants are bound to
standards of ethical conduct that these actions
violate. The can go to prison when caught falsifying
financial statements.
b. To remain ethical, the accountant must be willing to
lose his/her job. It is better to protect one’s
reputation even if that causes a short-term hardship.

Focus on Financials: Amazon.com, Inc.
(15- 20 min.)
Req. 1
Accrued expenses are expenses that have been incurred
but that have not yet been paid as of the balance sheet
date. The accrual and matching concepts require that all
expenses be recognized during the period in which they
are incurred in order to earn revenue, regardless of when
they are paid.
Req. 2 and Req. 4 (balances in millions at December 31,
2008)
Accrued expenses and
other Cash
Beg. Bal.
$902
(a) 90
2
(a)
902
(b) 1,093 (b) 2,335
End. Bal.
$1,093
Operating expenses
(b) 3,42
8

(continued) Focus on Financials: Amazon.com, Inc.
Req. 3 (amounts in millions)
Journal
a. Accrued expenses and other…….
…
902
Cash………………….. 902
b. Operating expenses….
……………….
3,428
Cash……………………..………... 2,335
Accrued expenses and
other…
1,093
The balance of accrued expenses and other agrees with
the financial statements at December 31, 2008.

(continued) Focus on Financials: Amazon.com, Inc.
Req. 5
Current ratio:
2008 2007
(Dollar amounts in millions)
=
$6,157
=
1.3
0
$5,164
=
1.3
9Total current
liabilities
$4,746 $3,714
Debt ratio:
Total
liabilities =
$5,642*
= 0.68
$5,288**
= 0.82
Total assets $8,314 $6,485
*4,746 + $409 + $487 **3,714 + $1,282 + $292
The current ratio deteriorated slightly, but the debt ratio
improved significantly during 2008. The company used
cash to pay down long-term liabilities. This reveals
strengthening leverage at the expense of only slightly
weaker (but still respectable) liquidity.

Focus on Analysis: Foot Locker, Inc.
(15- 20 min.)
Req. 1
In fiscal 2006, Foot Locker earned the $59 million.
In fiscal 2007, Foot Locker earned the $50 million, and
$50 million is included in net income for fiscal 2007.
Req. 2
$62 million impacted rent expense in 2007 net income
computation.
$65 million impacted rent expense in 2008 net income.
This amount was still prepaid as of December 31, 2007.
Req. 3
During 2008, Foot Locker, Inc. sold plant assets
(property, plant, and equipment). They must have
removed $67 million from accumulated depreciation for
the plant assets that it sold ($870 + $100 - $903).

Req. 4
Customer deposits represent unearned income. When
received, these amounts are credited to a current liability
account. When customers redeem the gift cards, these
amounts are debited to customer deposits and credited to
sales revenue.
The entry to record the increase in this account is (in
millions):
Cash…………………………………………
……
1
Customer
deposits………………………
1
During 2007, Foot Locker, Inc. collected $1 million from
customers who were buying gift certificates. This
transaction created a liability for Foot Locker, Inc.

Group Project
(45 min.)
Req. 1
Davis Lawn Service, Inc.
Income Statement
Four Months Ended August 31, 2010
Service revenue ($5,600 + $600) $6,200
Expenses:
Wage expense ($1,900 +
$200)
$2,100
Rent expense ($600 × 4/6) 400
Supplies expense ($400 −
$50)
350
Repair expense 300
Depreciation expense ($300×
1/3)
10
0
Total expenses 3,250
Net income $2,950

(continued) Group Project
Req. 2
Davis Lawn Service, Inc.
Balance Sheet
August 31, 2010
ASSETS LIABILITIES
Current: Current:
Cash $2,040 Wages payable $ 200
Accounts receivable 600 Total current liabilities
200
Receivable from
Ludwig
(or Prepaid rent) 200
Supplies
50
STOCKHOLDERS’
Total current assets 2,890 EQUITY
Long-term: Common stock 400
Trailer $300 Retained earnings
Less accum. ($2,950 $460)− 2,490
deprec. (100 ) 200 Total stockholders’
equity
2,890
Total assets $3,090 stockholders’ equity $3,090

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