Chapter 3: Adjusting and Closing Entries Discussion Questions: Key Points

1. Revenue is recognized when it is earned using the accrual basis of accounting and when cash is received using the cash basis of accounting a. July 19 b. June 28 2. The matching principle requires companies to match expenses with the revenues they helped create. Proper matching is required in order to produce accurate financial information. 3. The time period that revenue is recognized is important because accurate financial statements cannot be produced unless the revenues are recorded in the proper period. 4. A deferral occurs when there has been a prepayment. Deferrals would only be associated with the accrual basis of accounting. A deferral would be recorded when the company is paid in advance for services to be rendered later or when a company pays for expenses in advance that are going to be used up later (e.g., supplies, insurance). 5. Adjusting entries are prepared in order to bring all of the account balances up to date. 6. Assets and expenses are both increased with debits. Assets eventually become expenses over time and use. 7. The determining factor is the benefit period with which the expenditure is associated. If the benefit period is in the future or extending from the present into one or more future accounting periods, an asset is debited. If the expenditure is associated with an item that will be used up in the present accounting period, an expense is debited. It is important to note that dollar amount is not necessarily the determining factor. a. Expense b. Asset 8. When a company is paid in advance for services to be delivered later, a deferred revenue journal entry in which cash is debited and unearned revenue is credited will be recorded. The deferred revenue account would need to be adjusted for the amount of the prepayment that has been earned during the period.

9. Accumulated depreciation is a contra-asset account. It is reported on the balance sheet along with the asset account that it modifies. 10. The closing process has two objectives: 1) to transfer the revenue, expense and dividends account balances into retained earnings, and 2) to get those accounts ready for the next accounting period by starting them out at zero. Retained earnings is the only account that is involved but not closed.
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Short Exercises
(5-10 min.) S 3-1

1. 2. 3. 4.

b c d a

(5-10 min.) S 3-2

1. 2. 3. 4. 5. 6. 7.

d c b f a e g

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(5-10 min.) S 3-3

Type of Adjusting Entry a. b. c. d. e. Accrued expense Deferred revenue Accrued revenue Deferred expense Deferred expense

Related Income Statement Account Interest expense Service revenue Service revenue Supplies expense Depreciation expense

(5-10 min.) S 3-4

Journal POST DATE June 30 ACCOUNTS Rent expense ($4,500/6months) Prepaid rent Record rent expense for June. REF. Dr. 750 750 Cr.

Bal. Bal.

Prepaid rent 4,500 June 30 3,750

750

June 30

Rent expense 750

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(5-10 min.) S 3-5

Journal POST DATE Sept 30 ACCOUNTS Supplies expense ($1,200 $500) Office supplies Record supplies expense for September REF. Dr. 700 700 Cr.

Bal. Bal.

Office supplies 1,200 Sept. 30 500

700

Sept. 30

Supplies expense 700

(5-10 min.) S 3-6

Journal POST DATE Dec. 31 ACCOUNTS Interest expense ($200 5 months) Interest payable Accrue interest expense for August December. REF. Dr. 1,000 1,000 Cr.

Interest payable Dec. 31 1,000 Dec. 31

Interest expense 1,000

(5-10 min.) S 3-7

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Journal POST. DATE Dec. 31 ACCOUNTS Unearned subscription revenue ($2,400/12 9 months) Subscription revenue Record subscription revenue Earned for April December. 1,800 1,800 REF. Dr. Cr.

Unearned subscription revenue Dec. 31 1,800 Apr 1 Bal. 2,400 600

Subscription revenue Dec. 31 1,800

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(5-10 min.) S 3-8

Journal POST DATE 1. Dec. 31 ACCOUNTS Accounts receivable Service revenue Accrue service revenue. REF. Dr. 1,500 1,500 Cr.

2.

Salary expense Salary payable Accrue salary.

2,300 2,300

3.

Interest expense Interest payable Accrue interest.

375 375

(5-10 min.) S 3-9

You would record $1,350 of service revenue at the end of September. Under the accrual basis of accounting, revenues are recorded when earned regardless of when cash is received. Therefore, both the $1,200 you have received as well as the $150 that is still owed to you would be recorded as service revenue.

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(5-10 min.) S 3-10

Account Depreciation expense Sales revenue Building Cash Unearned service revenue Prepaid rent Dividends Asset Stockholders equity Permanent Temporary No Yes Type of Account Expense Revenue Asset Asset Liability Permanent/Temporary Temporary Temporary Permanent Permanent Permanent Closed Yes Yes No No No

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(10-15 min.) S 3-11

Req 1 Net income = $700 ($1,200 service revenue - $500 total expenses) Req 2 Change in Retained earnings = $200 ($700 net income - $500 dividends) Req 3 Journal POST DATE Dec. 31 ACCOUNTS Service revenue Retained earnings Close revenue accounts REF. Dr. 1,200 1,200 Cr.

Retained earnings Building rent expense Salary expense Close expense accounts

500 200 300

Retained earnings Dividends Close dividends

500 500

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(5-10 min.) S 3-12

Type of Entry (ADJ or CL) ADJ CL CL ADJ

Accounts Salary expense Salary payable Service revenue Retained earnings Retained earnings Dividends Unearned revenue Service revenue

Post. Ref.

Dr. 400

Cr.

400 900 900 1,500 1,500 800 800

(5-10 min.) S 3-13

ACCOUNT Cash Accounts receivable Prepaid insurance Prepaid rent Building Accounts payable Notes payable Common Stock Retained earnings Total

Simmons Realty, Inc. Post-Closing Trial Balance October 31, 2010 DEBIT $1,850 2,450 1,300 975 1,800

CREDIT

________ $8,375

300 2,000 5,000 1,075 $8,375

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Exercises
(10-15 min.) E 3-14A
Req 1 The accounts used include the assets Cash and Accounts Receivable, the liability Unearned Service Revenue, and the revenue Service Revenue. Req 2 Journal POST DATE Cash Unearned service revenue Collect revenue in advance. ACCOUNTS REF. Dr. 175 175 Cr.

Accounts receivable Service revenue Accrue service revenue.

340 340

Cash Service revenue Collect cash for services performed

150 150

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(5-10 min.) E 3-15A

Missing amounts are in italics. Beginning prepaid insurance Payments for Prepaid insurance during the year Total amount to account for Ending Prepaid insurance Insurance expense

A $ 300

B $ 600

C $ 700

D $ 400

1,200 1,500 400 $ 1,100

$900 1,500 500 $ 1,000

1,300 2,000 800 $ 1,200

1,500 1,900 1,100 $ 800

Journal POST DATE a. ACCOUNTS Insurance expense Prepaid insurance Record insurance expense. REF. Dr. 1,100 1,100 Cr.

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(10-15 min.) E 3-16A

Journal POST DATE a. ACCOUNTS Salary expense Salary payable REF. Dr. 6,000 6,000 Cr.

b. Unearned service revenue Service revenue

750 750

c.

Depreciation expense Accumulated depreciation

1,800 1,800

d.

Rent expense Prepaid rent

450 450

e.

Interest receivable Interest revenue

875 875

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(10-15 min.) E 3-17A

Net Income: Transaction a. b. c. d. e. Overstated/Understated Overstated Overstated Overstated Overstated Understated Amount $2,400 $1,800 $2,700 $700 $3,500

(15-20 min.) E 3-18A

Journal DATE ACCOUNTS a. Unearned rent revenue ($4,800 2/6) Rent revenue Record revenue earned. b. Interest receivable Interest revenue Accrue interest revenue. c. Salary expense ($1,700 4 days) Salary payable Accrue salary expense. d. Supplies expense Supplies ($2,200 $700) Record supplies expense. e. Depreciation Expense ($18,000 / 4 years) Accumulated Depreciation Record depreciation expense. f. Insurance expense Prepaid insurance ($1,500 5/12) Record insurance expense. POST REF. Dr. 1,600 Cr. 1,600 650 650 6,800 6,800 1,500 1,500 4,500 4,500 625 625

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(15-20 min.) E 3-19A

Journal POST DATE a. ACCOUNTS Accounts receivable Service revenue Accrue revenue. REF. Dr. 1,200 1,200 Cr.

b.

Unearned service revenue Service revenue Record revenue earned.

500 500

c.

Supplies expense ($800 $150) Supplies Record supply expense.

650 650

d.

Salary expense Salary payable Accrue salary expense.

1,100 1,100

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(continued) E 3-19A
Bal. (a) Bal. Accounts receivable 1,500 1,200 2,700 Bal. Bal. Supplies 800 (c) 150 650

Salary payable (d) Bal.

1,100 1,100

(b)

Unearned service revenue 500 Bal. Bal.

900 400

Service revenue Bal. (a) (b) Bal.

3,900 1,200 500 5,600

Bal. (d) Bal.

Salary expense 1,700 1,100 2,800

(c) Bal.

Supplies expense 650 650

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(15-20 min.) E 3-20A

Req. 1

(e) Bal

Accounts receivable 21,000 1,500 22,500

Bal.

Supplies 2,800 (a) 1,600

1,200

Accumulated depreciation, equipment 5,600 (b) 1,400 Bal 7,000 Salary expense 14,000 2,900 16,900

Accumulated depreciation, building 28,000 (c) 2,000 Bal 30,000 Supplies expense 1,200 1,200

(d) Bal

(a) Bal

Depreciation expense, equipment (b) 1,400 Bal 1,400

(c) Bal

Depreciation expense, building 2,000 2,000

Service revenue (e) Bal. Salary payable (d) Bal 97,000 1,500 98,500

2,900 2,900

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Henderson Roofing, Inc. Income Statement Year Ended December 31, 2010 Revenues Service revenue Expenses Salary expense Depreciation expense, building Depreciation expense, equipment Supplies expense Total expenses Net Income $16,900 2,000 1,400 1,200 21,500 $ 77,000 $98,500

Req. 2 Operations were successful, as shown by the $77,000 of net income the business earned during the year. The reason is revenues were greater than expenses.

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(10-15 min.) E 3-21A

Req. 1 Sigma Security, Inc. Statement of Retained Earnings Year Ended December 31, 2010 Retained earnings, January 1, 2010 Less: Net loss Subtotal Less: Dividends ($800 12 months) Retained earnings, December 31, 2010 $ 32,000 (11,000) 21,000 (9,600) $ 11,400

Req. 2 Retained earnings had a net decrease of $20,600 for the year (End $11,400 Beg $32,000). This resulted from the current net loss ($11,000) and dividends paid ($9,600).

(10-15 min.) E 3-22A

Bal. Purchase of supplies Bal. Supplies 2,800 8,700 Supplies expense 1,700

9,800

Cash payment

Salary payable Bal. 52,300 Salary expense Bal.

2,800 53,200 3,700

Service revenue

Unearned service revenue Bal. 108,100 Cash receipts Bal.

18,000 106,400 16,300

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(15-20 min.) E 3-23A

Country Cookin Catering, Inc. Income Statement Month Ended March 31, 2010 Revenue: Service revenue Expenses: Salary expense Rent expense Depreciation expense, equipment Supplies expense Total Expenses Net Income $18,600 $3,600 1,200 600 300 5,700 $12,900

Country Cookin Catering, Inc. Statement of Retained Earnings Month Ended March 31, 2010 Retained earnings, March 1, 2010 Add: Net income for the Month Subtotal Less: Dividends Retained earnings, March 31, 2010 $5,800 12,900 18,700 800 $17,900

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Country Cookin Catering, Inc. Balance Sheet March 31, 2010 Assets Cash Accounts receivable Supplies Equipment Less: Accum. depreciation Liabilities $4,000 Accounts payable 8,000 Salary payable 1,300 Unearned service revenue Total Liabilities 13,700 Stockholders Equity Common stock Retained earnings Total Stockholders equity Total Liabilities & Stockholders equity $27,000 $2,100 600 1,400 4,100 5,000 17,900 22,900 $27,000

$22,50 0 (8,800)

Total Assets

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(10-15 min.) E 3-24A

Journal POST DATE Apr 30 ACCOUNTS Service revenue Interest revenue Retained earnings Close revenue accounts REF. Dr. 127,000 800 127,800 Cr.

Retained earnings Salary expense Depreciation expense Building rent expense Interest expense Supplies expense Close expense accounts

35,800 18,500 8,200 5,100 2,300 1,700

Retained earnings Dividends Close dividends

18,000 18,000

A to Z Electrical, Inc.s ending retained earnings is $80,500 ($6,500 + $127,800 - $35,800 $18,000).

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(10-15 min.) E 3-25A

Kurlz Salon, Inc. Statement of Retained Earnings Year Ended December 31, 2010 Retained earnings, January 1, 2010 Add: Net income for the Month Subtotal Less: Dividends Retained earnings, December 31, 2010 $188,000 139,000 327,000 76,000 $251,000

(10-15 min.) E 3-26A

Cunningham Photography, Inc. Post-Closing Trial Balance December 31, 2010 ACCOUNT DEBIT Cash $9,450 Accounts receivable 33,100 Supplies 1,900 Equipment 68,000 Accumulated depreciation, equipment Accounts payable Salary payable Unearned service revenue Common stock Retained earnings . Total $112,450

CREDIT

$19,700 11,450 2,500 5,600 30,000 43,200 $112,450

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(10-15 min.) E 3-27A

Journal POST DATE Dec. 31 ACCOUNTS Service revenues Retained earnings Close revenue accounts REF. Dr. 73,000 73,000 Cr.

Retained earnings Salary expense Rent expense Depreciation expense, equipment Depreciation expense, furniture Supplies expense Close expense accounts

52,300 31,000 18,600 1,600 400 700

Retained earnings Dividends Close dividends

14,000 14,000

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(10-15 min.) E 3-28B

Req 1 The accounts used include the assets Cash and Accounts Receivable, the liability Unearned Service Revenue, and the revenue Service Revenue. Req 2

Journal POST DATE Cash Unearned service revenue Collect revenue in advance. ACCOUNTS REF. Dr. 120 120 Cr.

Accounts receivable Service revenue Accrue service revenue.

425 425

Cash Service revenue Collect cash for services performed

110 110

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(5-10 min.) E 3-29B

Missing amounts are in italics. Beginning prepaid insurance Payments for Prepaid insurance during the year Total amount to account for Ending Prepaid insurance Insurance expense

A $ 800

B 1,100

C $ 1,600

D $ 300

1,500 2,300 700 $ 1,600

$600 1,700 1,200 $ 500

1,600 3,200 600 $ 2,600

2,400 2,700 1,300 $ 1,400

Journal POST DATE a. ACCOUNTS Insurance expense Prepaid insurance Record insurance expense. REF. Dr. 1,600 1,600 Cr.

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(10-15 min.) E 3-30B

Journal POST DATE a. ACCOUNTS Salary expense Salary payable REF. Dr. 7,500 7,500 Cr.

b. Unearned service revenue Service revenue

1,250 1,250

c.

Depreciation expense Accumulated depreciation

1,900 1,900

d.

Rent expense Prepaid rent

550 550

e.

Interest receivable Interest revenue

980 980

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(10-15 min.) E 3-31B

Net Income: Transaction a. b. c. d. e. Overstated/Understated Overstated Overstated Overstated Overstated Understated Amount $2,500 $1,000 $3,100 $800 $4,500

(15-20 min.) E 3-32B

Journal DATE ACCOUNTS a. Unearned rent revenue ($3,000 2/6) Rent revenue Record revenue earned. b. Interest receivable Interest revenue Accrue interest revenue. c. Salary expense ($2,900 2 days) Salary payable Accrue salary expense. d. Supplies expense Supplies ($1,400 $200) Record supplies expense. e. Depreciation Expense ($8,000 / 10 years) Accumulated Depreciation Record depreciation expense. f. Insurance expense Prepaid insurance ($1,560 5/12) Record insurance expense. POST REF. Dr. 1,000 Cr. 1,000 520 520 5,800 5,800 1,200 1,200 800 800 650 650

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(15-20 min.) E 3-33B

Journal POST DATE a. ACCOUNTS Accounts receivable Service revenue Accrue revenue. REF. Dr. 2,200 2,200 Cr.

b.

Unearned service sevenue Service revenue Record revenue earned.

300 300

c.

Supplies expense ($1,100 $150) Supplies Record supply expense.

950 950

d.

Salary expense Salary payable Accrue salary expense.

700 700

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(continued) E 3-33B
Bal. (a) Bal. Accounts receivable 1,900 2,200 4,100 Bal. Bal. Supplies 1,100 (c) 150 950

Salary payable (d) Bal.

700 700

(b)

Unearned service revenue 300 Bal. Bal.

1,300 1,000

Service revenue Bal. (a) (b) Bal.

5,300 2,200 300 7,800

Bal. (d) Bal.

Salary expense 3,100 700 3,800

(c) Bal.

Supplies expense 950 950

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(15-20 min.) E 3-34B

Req. 1

(e) Bal

Accounts receivable 19,200 2,250 21,450

Bal.

Supplies 2,200 (a) 600

1,600

Accumulated depreciation, equipment 4,200 (b) 1,400 Bal 5,600

Accumulated depreciation, building 46,000 (c) 1,000 Bal 47,000

Depreciation expense, equipment (b) 1,400 Bal 1,400 Salary expense 13,500 2,500 16,000 Salary payable (d) Bal

(c) Bal

Depreciation expense, building 1,000 1,000 Supplies expense 1,600 1,600

(d) Bal

(a) Bal

2,500 2,500

Service revenue (e) Bal. 6,400 2,250 8,650

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Metal Main, Inc. Income Statement Year Ended August 31, 2010 Revenues Service revenue Expenses Salary expense Supplies expense Depreciation expense, equipment Depreciation expense, building Total expenses Net Loss $16,000 1,600 1,400 1,000 20,000 $ (11,350) $8,650

Req. 2 Operations were not successful from the standpoint that the business incurred a net loss of $11,350 during the year. The reason is expenses were greater than revenues.

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(10-15 min.) E 3-35B

Req. 1 Zeta Safety, Inc. Statement of Retained Earnings Year Ended December 31, 2010 Retained earnings, January 1, 2010 Less: Net loss Subtotal Less: Dividends ($550 12 months) Retained earnings, December 31, 2010 $ 34,000 (5,000) 29,000 (6,600) $ 22,400

Req. 2 Retained earnings had a net decrease of $11,600 for the year (End $22,400 Beg $34,000). This resulted from the current net loss ($5,000) and dividends paid ($6,600).

(10-15 min.) E 3-36B

Bal. Purchase of supplies Bal. Supplies 1,700 9,000 Supplies expense 1,200

9,500

Cash payment

Salary payable Bal. 55,500 Salary expense Bal.

4,000 56,000 4,500

Service revenue

Unearned service revenue Bal. 59,900 Cash receipts Bal.

17,000 58,000 15,100

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(15-20 min.) E 3-37B

Spruce Up Catering, Inc. Income Statement Month Ended January 31, 2010 Revenue: Service revenue Expenses: Salary expense Rent expense Depreciation expense, equipment Supplies expense Total Expenses Net Income $20,100 $3,800 1,700 1,500 900 7,900 $12,200

Spruce Up Catering, Inc. Statement of Retained Earnings Month Ended January 31, 2010 Retained earnings, January 1, 2010 Add: Net income for the Month Subtotal Less: Dividends Retained earnings, January 31, 2010 $11,100 12,200 23,300 1,100 $22,200

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Spruce Up Catering, Inc. Balance Sheet January 31, 2010 Assets Cash Accounts receivable Supplies Equipment Less: Accum. depreciation Liabilities $6,500 Accounts payable 6,000 Salary payable 400 Unearned service revenue Total Liabilities 19,800 Stockholders Equity Common stock Retained earnings Total Stockholders equity Total Liabilities & Stockholders equity $32,700 $2,300 1,100 1,900 5,300 5,200 22,200 27,400 $32,700

$26,60 0 (6,800)

Total Assets

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(10-15 min.) E 3-38B

Journal POST DATE Sep 30 ACCOUNTS Service revenue Interest revenue Retained earnings Close revenue accounts REF. Dr. 49,000 300 49,300 Cr.

Retained earnings Salary expense Building rent expense Depreciation expense Interest expense Supplies expense Close expense accounts

37,200 21,900 5,600 5,000 2,400 2,300

Retained earnings Dividends Close dividends

14,000 14,000

Juba Electrical, Inc.s ending retained earnings is $6,000 ($7,900 + $49,300 - $37,200 $14,000).

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(10-15 min.) E 3-39B

Resch Restore, Inc. Statement of Retained Earnings Year Ended January 31, 2010 Retained earnings, February 1, 2009 Add: Net income for the Month Subtotal Less: Dividends Retained earnings, January 31, 2010 $77,000 189,000 266,000 82,000 $184,000

(10-15 min.) E 3-40B

Fonzarelli Photo, Inc. Post-Closing Trial Balance March 31, 2010 ACCOUNT DEBIT Cash $10,250 Accounts receivable 25,000 Supplies 600 Equipment 17,000 Accumulated depreciation, equipment Accounts payable Salary payable Unearned service revenue Common stock Retained earnings . Total $52,850

CREDIT

$5,000 8,800 5,200 2,200 20,000 11,650 $52,850

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(10-15 min.) E 3-41B

Journal POST DATE Aug 31 ACCOUNTS Service revenues Retained earnings Close revenue accounts REF. Dr. 77,000 77,000 Cr.

Retained earnings Salary expense Rent expense Depreciation expense, equipment Depreciation expense, furniture Supplies expense Close expense accounts

37,800 27,000 6,000 1,500 1,300 2,000

Retained earnings Dividends Close dividends

14,000 14,000

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Problems
(15-20 min.) P 3-42A

Journal POST DATE a. Dec. ACCOUNTS 31 Insurance expense ($2,400 8/12 months) Prepaid insurance Record insurance expense. 31 Salary expense ($6,500 2/5) Salary payable Accrue salary expense. 31 Interest receivable Interest revenue Accrue interest expense. 31 Supplies expense ($1,800 + $3,700 $2,200) Supplies Record supply expense. 31 Unearned service revenue Service revenue Record revenue earned. 31 Depreciation expense, vehicles Accumulated depreciation, vehicles Depreciation expense, equipment Accumulated depreciation, Record depreciation expense. equipment REF. Dr. 1,600 1,600 2,600 2,600 350 350 Cr.

b.

c.

d.

3,300 3,300 5,100 5,100 2,850 2,850 1,200 1,200

e.

f.

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(15-20 min.) P 3-43A

Journal POST DATE June 30 ACCOUNTS Supplies expense ($1,100 - $0) Supplies ($1,400 $300) Record supplies used. Rent expense ($4,200 - $3,500) Prepaid rent ($2,800 - $2,100) Record Prepaid rent expired Depreciation expense, equipment ($1,500 $1,250) Accumulated depreciation, equipment ($7,750 $7,500) Record depreciation. Salary expense ($24,650 - $23,400) Salary payable ($1,250 $0) Accrue salary expense. Interest expense ($400 - $250) Interest payable ($150 - $0) Accrue interest expense Unearned service revenue ($2,600 - $900) Service revenue ($49,100 - $47,400) REF. Dr. 1,100 1,100 700 700 250 250 1,250 1,250 150 150 1,700 1,700 Cr.

30

30

30

30

30

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(25-30 min.) P 3-44A

Req 1 & 2 Journal POST DATE a. Nov 30 ACCOUNTS Insurance expense Prepaid insurance ($2,700 - $300) Record Prepaid rent expired Supplies expense Supplies Record supplies used. Depreciation expense, equipment Accumulated depreciation, equipment Record depreciation. Utilities expense Accounts payable Accrue utilities expense Salary expense Salary payable Accrue salary expense. Unearned service revenue ($2,200 - $800) Service revenue Record unearned revenue earned REF. Dr. 2,400 2,400 250 250 1,200 1,200 300 300 450 450 1,400 1,400 Cr.

b.

30

c.

30

d.

30

e.

30

f.

31

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Req 1 & 2 Cash 22,800 22,800 Bal 650 Supplies 900

Bal Bal

Bal

250

b.

Accounts receivable Bal 39,400

Bal

Equipment 83,800

Bal Bal 39,400

83,800

Bal Bal

Prepaid insurance 2,700 2,400 300 Accounts payable 1,900 300 2,200

a.

Accumulated depreciation, equipment 64,300 Bal 1,200 c. 65,500 Bal

Bal d. Bal

Common stock 50,000 Bal

50,000 Bal

Salary payable 450

Retained earnings e. 29,300 Bal

450

Bal

29,300 Bal

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f.

Unearned service revenue 1,400 2,200 Bal

Dividends Bal 3,600

800

Bal

Bal

3,600

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Service revenue 8,400 1,400 9,800

Bal f. Bal

Bal e. Bal

Salary expense 2,900 450 3,350 Insurance expense 2,400 2,400

a. Bal

Depreciation expense, equipment c. 1,200 Bal 1,200 Utilities expense 300 300 Supplies expense 250 250

d. Bal

b. Bal

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Req 3 Alpha Advertising, Inc. Adjusted Trial Balance November 30, 2010 ACCOUNT TITLE Cash Accounts receivable Prepaid insurance Supplies Equipment Accumulated depreciation, equipment Accounts payable Salary payable Unearned service revenue Common stock Retained earnings Dividends Service revenue Salary expense Insurance expense Depreciation expense, equipment Utilities expense Supplies expense Total

Dr. $22,800 39,400 300 650 83,800

Cr.

$65,500 2,200 450 800 50,000 29,300 3,600 9,800 3,350 2,400 1,200 300 250 $158,050

______ $158,050

Req 4 The adjusted trial balance will be used to prepare Alpha Advertisings financial statements.

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(20-25 min.) P 3-45A

Req 1 Revenues and Expenses for January $ Affect on Revenues or Impact on Revenues or Expenses Expenses No effect Increase revenues $1,800 No effect Increase expenses $600 No effect Increase revenues $4,700 No effect No effect Increase expenses $2,400 Increase expenses $250 Increase revenues $400

Date Jan 1 3 6 8 12 18 23 26 30 31 31 Req 2

Revenues ($1,800 + $4,700 + $400) Expenses ($600 + $2,400 + $250) Net Income ($6,900 - $3,250)

$6,900 $3,250 $3,650

Req 3 The accrual basis of accounting results in a more accurate measurement of income because it reports revenues when they are earned and expenses when they are incurred regardless of when cash is received or paid.

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(20-25 min.) P 3-46A

Req 1 Lighthouse Realty, Inc. Income Statement Year Ended December 31, 2010 Revenue: Service revenue Interest revenue Total Revenues Expenses: Salary expense Rent expense Depreciation Expense, Equipment Utilities expense Interest Expense Supplies Expense Total expenses Net Income $51,000 18,000 4,200 2,700 1,300 700 77,900 $19,750 $97,000 650 $97,650

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Lighthouse Realty, Inc. Statement of retained earnings Year Ended December 31, 2010 Retained earnings, January 1 Add: Net income Subtotal Less: Dividends Retained earnings, December 31 $8,200 19,750 27,950 14,000 $13,950

Lighthouse Realty, Inc. Balance Sheet December 31, 2010 ASSETS Cash Accounts receivable Prepaid rent Supplies Equipment Less Accum. Depr., equipmment $ 6,300 11,600 1,200 900 36,000 STOCKHOLDERS EQUITY Common stock Retained earnings Total Stockholders equity Total liabilities and $56,000 stockholders equity 20,000 13,950 33,950 $56,000 LIABILITIES Accounts payable Unearned service revenue Interest payable Salary payable Notes payable Total liabilities $ 5,400 2,100 750 1,800 12,000 22,050

48,000 (12,000)

Total assets

Req. 2
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a. The Income statement reports Lighthouse Realtys results of operations. Operations were only moderately successful, as shown by the fact that Lighthouse Realty earned net income of $19,750 for the year. b. The Balance sheet reports Lighthouse Realtys financial position

(20-25 min.) P 3-47A

Req 1

Journal POST DATE June ACCOUNTS 30 Service revenue Interest revenue Retained earnings Close revenue accounts Retained earnings Salary expense Rent expense Depreciation expense, equipment Utilities expense Supplies expense Close expense accounts Retained earnings Dividends Close dividends REF. Dr. 43,000 400 43,400 32,950 24,500 6,000 1,200 700 550 2,000 2,000 Cr.

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Req 2 Energized Espresso Inc.s ending retained earnings is $20,400 ($11,950 + $43,400 - $32,950 $2,000).

Req 3 Energized Espresso, Inc. Post-Closing Trial Balance June 30, 2010 ACCOUNT DEBIT Cash $4,900 Accounts receivable 9,600 Prepaid rent 1,800 Supplies 600 Equipment 26,000 Accumulated depreciation, equipment Accounts payable Unearned service revenue Salary payable Notes payable Common stock Retained earnings . Total $42,900

CREDIT

$4,200 2,400 1,100 1,800 3,000 10,000 20,400 $42,900

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(15-20 min.) P 3-48B

Journal POST DATE a. Dec. ACCOUNTS 31 Insurance expense ($3,000 3/12 months) Prepaid insurance Record insurance expense. 31 Salary expense ($19,000 4/5) Salary payable Accrue salary expense. 31 Interest receivable Interest revenue Accrue interest expense. 31 Supplies expense ($1,600 + $4,400 $2,500) Supplies Record supply expense. 31 Unearned service revenue Service revenue Record revenue earned. 31 Depreciation expense, vehicles Accumulated depreciation, vehicles Depreciation expense, equipment Accumulated depreciation, Record depreciation expense. equipment REF. Dr. 750 750 15,200 15,200 875 875 Cr.

b.

c.

d.

3,500 3,500 5,100 5,100 2,170 2,170 1,300 1,300

e.

f.

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(15-20 min.) P 3-49B

Journal POST DATE Nov 30 ACCOUNTS Supplies expense ($1,400 - $0) Supplies ($2,200 $800) Record supplies used. Rent expense ($5,700 - $4,800) Prepaid rent ($3,600 - $2,700) Record Prepaid rent expired Depreciation expense, equipment ($2,250$750) Accumulated depreciation, equipment ($6,200 $4,700) Record depreciation. Salary expense ($24,850 - $23,600) Salary payable ($1,250 $0) Accrue salary expense. Interest expense ($540 - $250) Interest payable ($290 - $0) Accrue interest expense Unearned service revenue ($3,000 - $2,100) Service revenue ($54,300 - $53,400) REF. Dr. 1,400 1,400 900 900 1,500 1,500 1,250 1,250 290 290 900 900 Cr.

30

30

30

30

30

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(25-30 min.) P 3-50B

Req 1 Journal POST DATE a. Sep 30 ACCOUNTS Insurance expense Prepaid insurance ($2,400 - $800) Record Prepaid rent expired Supplies expense Supplies Record supplies used. Depreciation expense, equipment Accumulated depreciation, equipment Record depreciation. Utilities expense Accounts payable Accrue utilities expense Salary expense Salary payable Accrue salary expense. Unearned service revenue ($2,400 - $1,600) Service revenue Record unearned revenue earned REF. Dr. 1,600 1,600 900 900 2,200 2,200 1,000 1,000 800 800 800 800 Cr.

b.

30

c.

30

d.

30

e.

30

f.

31

Req 2
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Bal

Cash 25,00 0

Bal

Supplies 1,200

900

b.

Accounts payable 2,000 Bal 1,000 3,000 d. Bal

Bal Bal 25,00 0

300

Accounts receivable Bal 17,40 0 Bal 17,40 0

Bal

Equipment 59,000

Salary payable 800

e.

Bal

59,000 Accumulated depreciation, equipment 50,00 Bal 0 2,200 c. 52,20 Bal 0

800

Bal

Unearned service revenue f. 800 2,400 Bal

Prepaid insurance Bal 2,400 1,60 a. 0 Bal 800 Common stock 25,00 0 25,00 0

1,600 Bal

Bal

Service revenue 16,200 800 17,000

Bal f. Bal

Bal

Retained earnings 22,80 0 22,80 0

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Bal

Bal e. Bal

Salary expense 3,700 800 4,500

Bal

Dividends Bal 9,70 0 9,70 0 Depreciation expense, equipment 2,200 2,200 Utilities expense 1,000 1,000 Supplies expense 900 900 a.

Insurance expense 1,600

Bal

Bal

1,600

c. Bal

d. Bal

b. Bal

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Req 3 Ninas Novelty, Inc., Adjusted Trial Balance September 30, 2010 ACCOUNT TITLE Cash Accounts receivable Prepaid insurance Supplies Equipment Accumulated depreciation, equipment Accounts payable Salary payable Unearned service revenue Common stock Retained earnings Dividends Service revenue Salary expense Insurance expense Depreciation expense, equipment Utilities expense Supplies expense Total

Dr. $25,000 17,400 800 300 59,000

Cr.

$52,200 3,000 800 1,600 25,000 22,800 9,700 17,000 4,500 1,600 2,200 1,000 900 $122,400

______ $122,400

Req 4 The adjusted trial balance will be used to prepare Ninas Novelty, Inc.s financial statements.

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(20-25 min.) P 3-51B

Req 1 Revenues and Expenses for January $ Affect on Revenues or Impact on Revenues or Expenses Expenses No effect Increase revenues $2,500 No effect Increase expenses $500 No effect Increase revenues $3,500 No effect No effect Increase expenses $1,300 Increase expenses $900 Increase revenues $1,100

Date May 1 3 6 8 12 18 23 26 30 31 31 Req 2

Revenues ($2,500 + $3,500 + $1,100) Expenses ($500 + $1,300 + $900) Net Income ($7,100 - $2,700)

$7,100 $2,700 $4,400

Req 3 The accrual basis of accounting results in a more accurate measurement of income because it reports revenues when they are earned and expenses when they are incurred regardless of when cash is received or paid.

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(20-25 min.) P 3-52B

Req 1 Destination Realty, Inc. Income Statement Year Ended October 31, 2010 Revenue: Service revenue Interest revenue Total Revenues Expenses: Salary expense Rent expense Depreciation Expense, Equipment Utilities expense Interest Expense Supplies Expense Total expenses Net Income $40,000 20,000 2,500 1,800 1,100 700 66,100 $19,320 $85,000 420 $85,420

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Destination Realty, Inc. Statement of retained earnings Year Ended October 31, 2010

Retained earnings, October 1 Add: Net income Subtotal Less: Dividends Retained earnings, October 31

$9,700 19,320 29,020 5,000 $24,020

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Req. 2 Destination Realty, Inc. Balance Sheet October 31, 2010 ASSETS Cash Accounts receivable Prepaid rent Supplies Equipment Less Accum. Depr., equipmment 42,500 (11,300) 31,200 STOCKHOLDERS EQUITY $ 6,500 Accounts payable 12,100 Unearned service revenue 2,500 Interest payable 500 Salary payable Notes payable Total liabilities LIABILITIES $ 4,300 2,800 720 9,000 8,000 24,820

Common stock Retained earnings Total Stockholders equity Total liabilities and Total assets $52,800 stockholders equity

3,960 24,020 27,980

$52,800

a. The Income statement reports Destination Realtys results of operations. Operations were only moderately successful, as shown by the fact that Destination Realty earned net income of $19,320 for the year. b. The Balance sheet reports Destination Realtys financial position

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(20-25 min.) P 3-53B

Req 1

Journal POST DATE Sep 30 ACCOUNTS Service revenue Interest revenue Retained earnings Close revenue accounts REF. Dr. 41,000 1,000 42,000 Cr.

Retained earnings Salary expense Rent expense Depreciation expense, equipment Utilities expense Supplies expense Close expense accounts

27,000 18,500 5,400 1,700 800 600

Retained earnings Dividends Close dividends

4,000 4,000

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Req 2 Java Jolt Inc.s ending retained earnings is $22,200 ($11,200 + $42,000 - $27,000 - $4,000).

Req 3 Java Jolt, Inc. Post-Closing Trial Balance September 30, 2010 ACCOUNT DEBIT Cash $5,800 Accounts receivable 7,000 Prepaid rent 2,300 Supplies 300 Equipment 30,000 Accumulated depreciation, equipment Accounts payable Unearned service revenue Salary payable Notes payable Common stock Retained earnings . Total $45,400

CREDIT

$3,800 3,000 1,900 1,400 10,000 3,100 22,200 $45,400

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Continuing Exercise
Req. 1 & 2 6/30 Supplies expense Supplies 30 30

6/30

Depreciation expense, equipment Accumulated depreciation, equipment

29 29

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Assets 6/1 6/17 6/30 Bal. Cash 1,00 20 0 500 50 50 1,48 0 6/5 6/8 Bal. 20 6/8 Lawn supplies 50 30 6/30

Liabilities Accounts payable 1,400 6/3

Stockholders equity Common stock 1,000 6/1

1,400

Bal.

1,000

Bal.

Equipment 6/3 Bal. Accounts receivable 6/6 200 50 6/30 Bal. 150 1,400 1,400 Clo.

Retained earnings 80 700 620 Service revenue 200 500 700 0

Clo. Bal.

Accumulated depreciation, equipment 29 6/30 29 Bal. Clo.

700

6/6 6/17 Bal. Bal.

6/5 Bal. Bal.

Fuel Expense 20 0 20 0

Clo.

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Depreciation expense, equipment 6/30 29 Bal. 29 29 Clo. Bal. 0 Supplies expense 30 30 30 0

6/30 Bal. Bal.

Clo.

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Req. 3 Grahams YardCare, Inc. Adjusted Trial Balance June 30, 2010 ACCOUNT DEBIT Cash $1,480 Accounts receivable 150 Lawn supplies 20 Equipment 1,400 Accumulated depreciation, equipment Accounts payable Common stock Service revenue Fuel expense 20 Depreciation expense, equipment 29 Supplies expense 30 Total $3,129

CREDIT

29 1,400 1,000 700

. $3,129

Req. 4 6/30 Service revenue Retained earnings 700 700

6/30

Retained earnings Depreciation expense, equipment Supplies expense Fuel expense

79 29 30 20

6/30

Note there were no dividends so no entry is required to close dividends

Req 5
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Grahams YardCare, Inc. Post closing Trial Balance June 30, 2010 ACCOUNT DEBIT Cash $1,480 Accounts receivable 150 Lawn supplies 20 Equipment 1,400 Accumulated depreciation, equipment Accounts payable Common stock Retained earnings . Total $3,050

CREDIT

29 1,400 1,000 621 $3050

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Continuing Problem
Req 1 POST. DATE July 1 4 9 12 15 16 22 25 28 30 Prepaid rent Cash Cash Service revenue Cash Unearned service revenue Supplies Accounts payable Accounts receivable Service revenue Salary expense Cash Cash Accounts receivable Accounts payable Cash Cash Service revenue Dividends Cash 600 600 2,800 2,800 1,200 1,200 750 750 2,800 2,800 675 675 3,100 3,100 3,600 3,600 ACCOUNTS REF. Dr. 5,400 5,400 2,100 2,100 Cr.

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Req 2, 4 & 7 CASH POST. DATE Jun Jul ITEM 30 Bal. 1 4 9 16 22 25 28 30 ACCOUNTS RECEIVABLE POST. DATE Jun Jul ITEM 30 Bal. 15 22 31 Adj 1,900 2,800 3,100 REF. DEBIT CREDIT BALANCE DEBIT 3,800 6,600 3,500 5,400 CREDIT 1,200 600 3,100 2,800 2,100 3,600 675 5,400 REF. DEBIT CREDIT BALANCE DEBIT 16,855 11,455 13,555 17,155 16,480 19,580 16,780 17,980 17,380 CREDIT

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SUPPLIES POST. DATE Jun Jul ITEM 30 Bal. 12 31 Adj 750 2,010 REF. DEBIT CREDIT BALANCE DEBIT 1,610 2,360 350 CREDIT

PREPAID RENT POST. DATE Jul 1 31 Adj ITEM REF. DEBIT 5,400 1,800 CREDIT BALANCE DEBIT 5,400 3,600 CREDIT

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LAND POST. DATE Jun ITEM 30 Bal REF. DEBIT CREDIT BALANCE DEBIT 15,000 CREDIT

OFFICE FURNITURE POST. DATE Jun ITEM 30 Bal REF. DEBIT CREDIT BALANCE DEBIT 3,300 CREDIT

ACCUMULATED DEPRECIATION, OFFICE FURNITURE POST. DATE Jul ITEM 31 Adj REF. DEBIT CREDIT 210 BALANCE DEBIT CREDIT 210

EQUIPMENT POST. DATE Jun ITEM 30 Bal. REF. DEBIT CREDIT BALANCE DEBIT 4,700 CREDIT

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ACCUMULATED DEPRECIATION, EQUIPMENT POST. DATE Jul ITEM 31 Adj REF. DEBIT CREDIT 400 BALANCE DEBIT CREDIT 400

VEHICLES POST. DATE Jun ITEM 30 Bal. REF. DEBIT CREDIT BALANCE DEBIT 31,000 CREDIT

ACCUMULATED DEPRECIATION, VEHICLES POST. DATE Jul ITEM 31 Adj REF. DEBIT CREDIT 650 BALANCE DEBIT CREDIT 650

ACCOUNTS PAYABLE POST. DATE Jun Jul ITEM 30 Bal. 12 25 2,800 750 REF. DEBIT CREDIT BALANCE DEBIT CREDIT 3,890 4,640 1,840

SALARIES PAYABLE
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POST. DATE Jul ITEM 31 Adj REF. DEBIT CREDIT 675

BALANCE DEBIT CREDIT 675

UNEARNED SERVICE REVENUE POST. DATE Jul Jul 9 31 Adj 800 ITEM REF. DEBIT CREDIT 3,600 BALANCE DEBIT CREDIT 3,600 2,800

NOTES PAYABLE POST. DATE Jun ITEM 30 Bal. REF. DEBIT CREDIT BALANCE DEBIT CREDIT 31,000

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COMMON STOCK POST. DATE Jun ITEM 30 Bal. REF. DEBIT CREDIT BALANCE DEBIT CREDIT 38,500

RETAINED EARNINGS POST. DATE Jul ITEM 31 Clo 31 Clo 31 Clo 12,745 3,400 REF. DEBIT CREDIT 20,800 BALANCE DEBIT CREDIT 20,800 8,055 4,655

DIVIDENDS POST. DATE Jun Jul Jul ITEM 30 Bal. 30 31 Clo 600 3,400 REF. DEBIT CREDIT BALANCE DEBIT 2,800 3,400 -0CREDIT

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SERVICE REVENUE POST. DATE Jun Jul ITEM 30 Bal. 4 15 28 31 Adj 31 Adj 31 Clo 20,800 2,100 2,800 1,200 1,900 800 REF. DEBIT CREDIT BALANCE DEBIT CREDIT 12,000 14,100 16,900 18,100 20,000 20,800 -0-

SALARY EXPENSE POST. DATE Jun Jul Jul Jul ITEM 30 Bal. 16 31 Adj 31 Clo 675 675 4,050 REF. DEBIT CREDIT BALANCE DEBIT 2,700 3,375 4,050 -0CREDIT

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RENT EXPENSE POST. DATE Jun Jul Jul ITEM 30 Bal 31 Adj 31 Clo 1,800 3,600 REF. DEBIT CREDIT BALANCE DEBIT 1,800 3,600 -0CREDIT

UTILITIES EXPENSE POST. DATE Jun Jul ITEM 30 Bal. 31 Clo 1,225 REF. DEBIT CREDIT BALANCE DEBIT 1,225 -0CREDIT

ADVERTISING EXPENSE POST. DATE Jun Jul ITEM 30 Bal 31 Clo 325 REF. DEBIT CREDIT BALANCE DEBIT 325 -0CREDIT

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MISCELLANEOUS EXPENSE SUPPLIES EXPENSE DATE ITEM POST. REF. POST. REF. DEBIT DEBIT 2,010 CREDIT CREDIT 275 2,010 BALANCE DEBIT CREDIT BALANCE 275 DEBIT -02,010 -0CREDIT

JunDATE 30 BalITEM Jul Jul 31 Clo Adj 31 Clo

DEPRECIATION EXPENSE, EQUIPMENT POST. DATE Jul Jul ITEM 31 Adj 31 Clo REF. DEBIT 400 400 CREDIT BALANCE DEBIT 400 -0CREDIT

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DEPRECIATION EXPENSE, OFFICE FURNITURE POST. DEPRECIATION EXPENSE, VEHICLES DATE ITEM REF. POST. REF. DEBIT DEBIT 210 650 CREDIT CREDIT 210 650 BALANCE DEBIT CREDIT BALANCE DEBIT 210 -0650 -0CREDIT

Jul DATE 31 AdjITEM Jul Jul Clo 31 Adj 31 Clo

Req. 3
Aqua Elite, Inc. Unadjusted Trial Balance July 31, 2010 ACCOUNT Cash Accounts receivable Supplies Prepaid rent Land Office furniture Equipment Vehicles Accounts payable Notes payable Unearned service revenue Common stock Dividends Service revenue Salary expense Rent expense Utilities expense Advertising expense Miscellaneous expense Total DEBIT $ 17,380 3,500 2,360 5,400 15,000 3,300 4,700 31,000 $ 1,840 31,000 3,600 38,500 3,400 18,100 3,375 1,800 1,225 325 275 $93,040 CREDIT

$93,040

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Req 4 POST. DATE July 31 31 31 ACCOUNTS Rent expense Prepaid rent Supplies expense Supplies Depreciation expense, equipment Depreciation expense, furniture Depreciation expense, vehicles Accumulated depreciation, equipment Accumulated depreciation, furniture Accumulated depreciation, vehicles Accounts receivable Service revenue Salary expense Salary payable Unearned service revenue Service revenue REF. Dr. 1,800 1,800 2,010 2,010 400 210 650 400 210 650 1,900 1,900 675 675 800 800 Cr.

31 31 31

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Req 5 Aqua Elite, Inc. Adjusted Trial Balance July 31, 2010 ACCOUNT Cash Accounts Receivable Supplies Prepaid Rent Land Office Furniture Accumulated depreciation, Office Furniture Equipment Accumulated Depreciation, Equipment Vehicles Accumulated Depreciation, Vehicles Accounts Payable Salaries Payable Notes Payable Unearned Service Revenue Common stock Dividends Service Revenue Salary Expense Rent Expense Supplies Expense Utilities Expense Depreciation Expense, Equipment Depreciation Expense, Equipment Advertising Expense Miscellaneous Expense Depreciation Expense, Office Furniture Total DEBIT $ 17,380 5,400 350 3,600 15,000 3,300 210 4,700 400 31,000 650 1,840 675 31,000 2,800 38,500 3,400 20,800 4,050 3,600 2,010 1,225 650 400 325 275 210 $96,875 CREDIT

$96,875

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Req 6 Aqua Elite, Inc. Income Statement Three Months Ended July 31, 2010 Service Revenue Expenses: Salary Expense Rent Expense Supplies Expense Utilities Expense Depreciation Expense, Vehicles Depreciation Expense, Equipment Advertising Expense Miscellaneous Expense Depreciation Expense, Office Furniture Total expenses Net Income 20,800 $4,050 3,600 2,010 1,225 650 400 325 275 210 12,745 $8,055

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Aqua Elite, Inc. Statement of retained earnings Three Months Ended July 31, 2010

Retained earnings, May 1 Add: Net income Subtotal Less: Dividends Retained earnings, July 31

$0 8,055 8,055 3,400 $4,655

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Aqua Elite, Inc. Balance Sheet July 31, 2010 ASSETS Cash Accounts Receivable Supplies Prepaid Rent Land Office Furniture Less Accum. Depr., Office Furniture Equipment Less Accum. Depr., Equipmment Vehicles Less Accum. Depr., Vehicles 3,300 (210) 4,700 Common Stock (400) 31,000 (650) 30,350 Total liabilities and Total assets $79,470 stockholders equity $79,470 4,300 Retained Earnings Total Stockholders equity 4,655 43,155 38,500 3,090 $ 17,380 Accounts Payable 5,400 Salaries Payable 350 Unearned Service Revenue 3,600 Notes Payable 15,000 Total liabilities STOCKHOLDERS EQUITY 36,315 LIABILITIES $ 1,840 675 2,800 31,000

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Req7 POST. DATE July 31 ACCOUNTS Service revenues Retained earnings REF. Dr. 20,800 20,800 Cr.

31

Retained earnings Salary expense Rent expense Supplies expense Depreciation expense Utilities expense Advertising expense Miscellaneous expense

12,745 4,050 3,600 2,010 1,260 1,225 325 275

31

Retained earnings Dividends

3,400 3,400

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Req 8 Aqua Elite, Inc. Post-Closing Trial Balance July 31, 2010 ACCOUNT Cash Accounts receivable Supplies Prepaid rent Land Office furniture Accumulated depreciation, office furniture Equipment Accumulated depreciation, equipment Vehicles Accumulated depreciation, vehicles Accounts payable Salaries payable Unearned service revenue Notes payable Common stock Retained earnings Total _ $80,730 31,000 650 1,840 675 2,800 31,000 38,500 4,655 $80,730 4,700 400 DEBIT $ 17,380 5,400 350 3,600 15,000 3,300 210 CREDIT

Ethics in Action
Case #1
Waybright Kemp Financial Accounting 1e 217

Yes, she is acting unethically, since she needs to record all the adjustments to properly reflect the current period activity. It does matter as there will not be a proper matching of total salary expense incurred for the accounting period in which the revenues were earned. This will overstate the current period net income and understate the liabilities as of the end of the period. Also, the net income in the following period will be understated.

The adjusted trial balance should include all the adjustments for the accounting period because the financial statements are created from the adjusted trial balances. As a result of Jennifers failure to include all the adjustments, the resulting financial statements will not be accurate and thus could be potentially misleading to any user.

Case #2 Yes, Jim should have informed the banker of the mistake and redone the current years second quarter income statement. Regardless of why the financial statements were wrong, once Jim became aware of the problem, he should have taken necessary steps to correct it. The banker is relying on the financial statements to provide accurate information. Unethical behavior occurs when there is intentional deception. Mistakes can and do occur throughout the accounting cycle. Providing wrong financial information purely due to a mistake does not constitute unethical behavior. However, once Jim became aware of the problem, he should have immediately taken action to correct the mistake. His silence in allowing the erroneous income statement to remain unchanged does constitute unethical behavior. Regardless of whether or not the loan will be repaid, the fact remains that it was obtained with false and misleading information of which Jim was fully aware.

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Financial Analysis
Req 1 & 3 Accumulated Depreciation Bal. b Bal. 168,067 22,839 190,906 Accrued Salaries, Bonus, Vacation, and Other benefits a 34,952 Bal. 34,952 c 29,437 Bal. 29,437

Accrued Product Warranty 10,862 Bal. 10,862 d 9,746 Bal. 9,746

Accrued Cooperative Advertising 6,877 Bal. 6,877 e 6,457 Bal. 6,457

Other Accrued Liabilities 9,858 Bal. f Bal.

9,858 12,445 12,445

Req 2 POST. DATE a ACCOUNTS Accrued Salaries, Bonus, Vacation, and Other Benefits Accrued Product Warranty Accrued Cooperative Advertising Other Accrued Liabilities Cash Depreciation Expense Accumulated Depreciation Salary and Benefit Expense REF. Dr. 34,952 10,862 6,877 9,858 62,549 22,839 22,839 29,437
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Cr.

b c

Accrued Salaries, Bonus, Vacation, and Other Benefits d e f Product Warranty Expense Accrued Product Warranty Advertising Expense Accrued Cooperative Advertising Miscellaneous Expense Other Accrued Liabilities 9,746

29,437 9,746 6,457 6,457 12,445 12,445

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Industry Analysis
Both companies are using the accrual basis of accounting. That can be determined by looking at the Consolidated Balance Sheets and recognizing certain accounts which would only be present if the accrual basis of accounting is being used. Some of those accounts are Accounts Receivable, Prepaid Expenses, Accounts Payable and Accrued Expenses. Since these accounts appear on the balance sheet for both companies, that tells the reader of the financial statements that the accrual basis of accounting is being used. If one company was using the accrual basis of accounting and the other was using the cash basis, it would be much more difficult to compare the two companies. Since the basis of accounting affects the income statement as well as the balance sheet, the timing of the recognition of revenue and expenses would be different. On the balance sheet the company using the cash basis of accounting would be understating liabilities and assets. In order to properly reflect the financial position of a company in accordance with generally accepted accounting principles (GAAP), the accrual basis of accounting should be used.

Small Business Analysis

Since the financial statements of BCS Consultants, Inc. are prepared on the accrual basis of accounting, not paying the employees will have no affect on the net income. In Chapter 2 we learned the accrual basis of accounting recognizes expenses when they are incurred, not when they are paid. Therefore, the payroll expenses will be on the income statement regardless of whether the employees are paid on the last day of the month or the first day of the next month. Regarding the large insurance payment last month, we learned in Chapter 3 that this is what is known as a deferred expense, meaning we defer recognition of the expense until its actually incurred. In other words, Jerry will have to make an adjusting entry at the end of the month to recognize one-sixth of that insurance payment as insurance expense this month. So it will have the affect of decreasing net income when we make the adjusting entry. That brings us to the cash balance. Jerry is correct in his assumption that not paying the employees until after the first of the month will cause his cash balance to be higher. That will show on the Balance Sheet. But he is incorrect in thinking that the bankers wont know why his cash balance is higher. When the Banker looks at the balance sheet, he or she will see the liability for the wages payable and realize that a portion of the cash reflected on the balance sheet will be needed to pay this liability.

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Written Communication
Dear Client: Let me apologize for the error that was committed on this years tax return that we prepared for you. Heres a brief summary of what we failed to do: At the end of every year, the accounting books and records should go through whats referred to as the closing process. During this process, all of the revenues and expenses of the business are zeroed out, along with the dividend account. This allows these accounts to be set back to zero so that the results of each year can be accounted for separately from the results of the prior year. Because we failed to prepare the closing entries for your business at the end of the first year of operations, the net income from that year ($25,000) carried over to the next year. The second year of operations should have resulted in net taxable income to you of $50,000, but because the closing process was not done, the first and second year were both being shown on this years tax return. Obviously, no one wants to pay income tax twice on the same amount. Thats why it is so vitally important to go through the closing process each and every year, to ensure that every years net income is accurately calculated. Again, I apologize for this error. I should have discovered it during my review of your return. We will immediately correct the situation by preparing the closing entries for year number one and ensure that the closing entries were made for year number two. Then we will issue a new, correct tax return for you at no charge.

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Comprehensive Problem
Req 1 Journal Entry Date a. Cash Delivery Truck Common Stock 3 b. Supplies Accounts payable c. Prepaid insurance Cash 8 d. Cash Service revenue e. Accounts receivable Service revenue 6 f. Salary expense Cash g. Cash Service revenue
Waybright Kemp Financial Accounting 1e

Accounts

Truck Common stock

Debit 7,5 00 15, 000

Credit

22,5 00 00 3 00 1,2 00 1,2 00 00 8 00 4,5 00 4,5 00 00 6 00 1,1 00 1,1 00

223

h.

Cash Unearned service revenue

1,5 00 1,5 00 2,5 00 Accounts receivable 2,5 00 80 Accounts payable 80 1,6 00 1,6 00 7 50 7 Cash 50 50 50 5 00 5 Cash 00

i.

Cash

j.

Fuel expense

k.

Accounts receivable Service revenue

l.

Rent expense

m.

Accounts payable Cash

n.

Dividends

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Req. 2, 4 & 6
a. d. g. h. i. Cash 7,500 1,200 800 600 1,100 1,500 2,500 10,30 0 Supplies 300 300 75 225 Adj Prepaid insurance 1,200 1,200 1,000 200 Adj 750 50 500 c. f. l. m. n. e. k. Bal Accounts receivable 4,500 2,500 1,600 3,600 i.

Bal

b. Bal Bal

c. Bal Bal

a. Bal

Truck 15,00 0 15,00 0

Accumulated depreciation 375 375 Adj Bal

m.

Accounts payable 50 300 8 0 330

Salary payable b. j. Bal Common stock 22,500 22,500 600 600 Adj Bal

Unearned service revenue 1,500 Ad j 500 1,500 1,000

h. Bal Bal

a. Bal

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n. Bal Bal

Dividends 500 500 -0500 Clo

Clo Clo

Retained earnings 2,830 8,500 500 5,170

Clo

Bal

Service Revenue 800 4,500 1,100 1,600 8,000 500 8,500 8,500 -0-

d. e. g. k. Bal Adj Bal Bal

f. Bal Adj Bal Bal

Salary Expense 600 600 600 1,200 -01,200 Clo

Clo

Depreciation Expense
Ad j Bal Bal 375 375 -0Fuel Expense 80 80 -0Supplies Expense Ad j Bal Bal 225 225 -0225 Clo 80 Clo 375 Clo Adj Bal Bal

Insurance Expense
200 200 -0Rent Expense l. Bal Bal 750 750 -0750 Clo 200 Clo

j. Bal Bal

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Req. 3 Water's Landscaping, Inc. Unadjusted Trial Balance January 31, 2010 Account Cash Accounts receivable Supplies Prepaid insurance Truck Accounts payable Unearned service revenue Common stock Dividends Service revenue Rent expense Salary expense Fuel expense Total Debit 10,300 3,600 300 1,200 15,000 Credit

330 1,500 22,500 500 8,000 750 600 80 $ 32,330

$ 32,330

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Req. 4
Journal Entry Date a. Salary expense Salary payable b. Depreciation expense Accumulated depreciation c. Insurance expense Prepaid insurance d. Supplies expense Supplies e. Unearned service revenue Service revenue 500 500 225 225 200 200 375 375 Accounts
Debit Credit

600 600

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Req. 5 Water's Landscaping, Inc. Adjusted Trial Balance January 31, 2010

Account Cash Accounts receivable Supplies Prepaid insurance Truck Accumulated depreciation Accounts payable Unearned service revenue Salaries payable Common stock Dividends Service revenue Salary expense Rent expense Depreciation expense Supplies expense Insurance expense Fuel expense Total

Debit 10,300 3,600 75 1,000 15,000

Credit

375 330 1,000 600 22,500 500 8,500 1,200 750 375 225 200 80 $ 33,305

$ 33,305

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Water's Landscaping, Inc. Income Statement Month Ended January 31, 2010 Revenue: Service revenue Expenses: Salary expense Rent expense Depreciation expense Supplies expense Insurance expense Fuel expense Total expenses Net income $8,500 $1,200 750 375 225 200 80 2,830 $5,670

Water's Landscaping, Inc. Statement of Retained Earnings Retained earnings, January 31, 2010 Retained earnings, January 1, 2010 Add: Net Income Less: Dividends Retained earnings, January 31, 2010
Water's Landscaping, Inc. Balance Sheet 31-Jan-10
ASSETS Cash Accounts receivable Supplies Prepaid insurance Truck Less: Accum depreciation $10,300 3,600 75 1,000 15,000 -375 14,625

$0 5,670 5,670 (500) 5,170

LIABILITIES Current liabilities: Accounts payable Salary payable Unearned service revenue Total Liabilities

330 $600 1,000 1,930

Stockholders' Equity Common stock 22,500 Retained earnings 5,170 Total Stockholders' Equity 27,670 Total Liabilities and Stockholders' Equity $29,600

Total Assets

$29,600

Req. 6
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Journal Entry Date Service revenue Retained earnings Retained earnings Salary expense Rent expense Depreciation expense Supplies expense 25 Insurance expense 00 Fuel expense 80 5 Retained earnings Dividends 00 5 00 2 2,8 30 1,2 00 7 50 3 75 2 Accounts Debit 8,5 00 Credit 8,5 00

Req. 7
Waybright Kemp Financial Accounting 1e 231

Water's Landscaping, Inc. Post-closing Trial Balance January 31, 2010 Account Cash Accounts receivable Supplies Prepaid insurance Truck Accumulated depreciation Accounts payable Unearned service revenue Salaries payable Common stock Retained earnings Total Debit 10,300 3,600 75 1,000 15,000 Credit

375 330 1,000 600 22,500 5,170 29,975

29,975

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Solutions Manual