Problem 3 2a financial accounting

CHAPTER 3

Adjusting the Accounts

ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief

Exercises

Do It!

Exercises

A

Problems

B

Problems

*1. Explain the time period assumption.

1

1

1

*2. Explain the accrual basis of accounting.

2, 3, 4, 5

1

2, 3, 10

*3. Explain the reasons for adjusting entries and identify the major types of adjusting entries.

6, 7, 8, 18

1, 2, 8

4, 6, 11

*4. Prepare adjusting entries for deferrals.

8, 9, 10, 11, 12, 13, 18, 19, 20

2, 3, 4, 5, 6,8

2

4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 15

1A, 2A, 3A,

4A, 5A, 6A

1B, 2B, 3B,

4B, 5B

*5. Prepare adjusting entries for accruals.

8, 14, 15, 16, 17, 18,

19, 20

2, 7, 8

3

4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 15

1A, 2A, 3A,

4A, 5A, 6A

1B, 2B, 3B,

4B, 5B

*6. Describe the nature and purpose of an adjusted trial balance.

21

9, 10

4

10, 11, 12, 13, 14

1A, 2A, 3A,

5A, 6A

1B, 2B, 3B,

5B

*7. Prepare adjusting entries for the alternative treatment of deferrals.

22

11

16, 17

6A

*8. Discuss financial reporting concepts.

23, 24, 25 26, 27, 28

12, 13 14, 15

18, 19, 20, 21, 22

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter.

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Number

Description

Difficulty

Level

Time Allotted (min.)

1A

Prepare adjusting entries, post to ledger accounts, and prepare an adjusted trial balance.

Simple

40–50

2A

Prepare adjusting entries, post, and prepare adjusted trial balance, and financial statements.

Simple

50–60

3A

Prepare adjusting entries and financial statements.

Moderate

40–50

4A

Prepare adjusting entries.

Moderate

30–40

5A

Journalize transactions and follow through accounting cycle to preparation of financial statements.

Moderate

60–70

*6A*

Prepare adjusting entries, adjusted trial balance, and financial statements using appendix.

Moderate

40–50

1B

Prepare adjusting entries, post to ledger accounts, and prepare an adjusted trial balance.

Simple

40–50

2B

Prepare adjusting entries, post, and prepare adjusted trial balance, and financial statements.

Simple

50–60

3B

Prepare adjusting entries and financial statements.

Moderate

40–50

4B

Prepare adjusting entries.

Moderate

30–40

5B

Journalize transactions and follow through accounting cycle to preparation of financial statements.

Moderate

60–70

WEYGANDT ACCOUNTING PRINCIPLES 11E

CHAPTER 3

ADJUSTING THE ACCOUNTS

Number

LO

BT

Difficulty

Time (min.)

BE1

3

C

Simple

4–6

BE2

3, 4, 5

AN

Moderate

6–8

BE3

4

AN

Simple

3–5

BE4

4

AN

Simple

3–5

BE5

4

AN

Simple

2–4

BE6

4

AN

Simple

2–4

BE7

5

AN

Simple

4–6

BE8

3, 4, 5

AN

Simple

5–7

BE9

6

AP

Simple

4–6

BE10

6

AP

Simple

2–4

BE11*

7

AN

Moderate

3–5

BE12*

8

C

Simple

3–5

BE13*

8

C

Simple

2–4

BE14*

8

C

Simple

2–4

BE15*

8

C

Simple

1–2

DI1

1, 2

K

Simple

2–4

DI2

4

AN

Simple

6–8

DI3

5

AN

Simple

4–6

DI4

6

AN

Moderate

20–30

EX1

1

C

Simple

3–5

EX2

2

E

Moderate

10–15

EX3

2

AP

Simple

6–8

EX4

3, 4, 5

AN

Simple

5–6

EX5

4, 5

AN

Moderate

10–15

EX6

3–5

AN

Moderate

10–12

EX7

4, 5

AN

Moderate

8–10

EX8

4, 5

AN

Moderate

8–10

EX9

4, 5

AN

Simple

8–10

EX10

2, 4–6

AN

Moderate

8–10

EX11

3–6

AN

Moderate

12–15

EX12

4–6

AN

Moderate

8–10

EX13

4–6

AN

Simple

8–10

EX14

6

AP

Simple

12–15

ADJUSTING THE ACCOUNTS (Continued)

Number

LO

BT

Difficulty

Time (min.)

EX15

4, 5

AN, S

Moderate

8–10

EX16*

7

AN

Moderate

6–8

EX17*

7

AN

Moderate

10–12

EX18*

8

C

Simple

3–5

EX19*

8

C

Simple

3–5

EX20*

8

C

Simple

6–8

EX21*

8

AN

Simple

10–20

EX22*

8

AN

Simple

10–20

P1A

4–6

AN

Simple

40–50

P2A

4–6

AN

Simple

50–60

P3A

4–6

AN

Moderate

40–50

P4A

4, 5

AN

Moderate

30–40

P5A

4–6

AN

Moderate

60–70

P6A

4–7

AN

Moderate

40–50

P1B

4–6

AN

Simple

40–50

P2B

4–6

AN

Simple

50–60

P3B

4–6

AN

Moderate

40–50

P4B

4, 5

AN

Moderate

30–40

P5B

4–6

AN

Moderate

60–70

BYP1

4, 5, 6

AN

Simple

10–15

BYP2

—

AN

Simple

10–15

BYP3

—

AN

Simple

10–15

BYP4

—

AN

Simple

10–15

BYP5

—

AN

Moderate

15–20

BYP6

2–6

S

Moderate

15–20

BYP7

3–6

C

Simple

10–15

BYP8

3–6

E

Moderate

10–15

BYP9

—

E

Moderate

10–15

BYP10

—

E

Moderate

10–15

BYP11

—

K

Simple

10–15

ANSWERS TO QUESTIONS

 1. (a) Under the time period assumption, an accountant is required to determine the relevance of each business transaction to specific accounting periods.

(b) An accounting time period of one year in length is referred to as a fiscal year. A fiscal year that extends from January 1 to December 31 is referred to as a calendar year. Accounting periods of less than one year are called interim periods.

 2. The two generally accepted accounting principles that relate to adjusting the accounts are:

The revenue recognition principle, which states that revenue should be recognized in the accounting period in which services are performed.

The expense recognition principle, which states that efforts (expenses) be matched with accomplishments (revenues).

 3. The law firm should recognize the revenue in April. The revenue recognition principle states that revenue should be recognized in the accounting period in which services are performed.

 4. Information presented on an accrual basis is more useful than on a cash basis because it reveals relationships that are likely to be important in predicting future results. To illustrate, under accrual accounting, revenues are recognized when the performance obligation is satisfied so they can be related to the economic environment in which they occur. Trends in revenues are thus more meaningful.

 5. Expenses of $4,500 should be deducted from the revenues in April. Under the expense recognition principle efforts (expenses) should be matched with accomplishments (revenues).

 6. No, adjusting entries are required by the revenue recognition and expense recognition principles.

 7. A trial balance may not contain up-to-date information for financial statements because:

(1) Some events are not journalized daily because it is not efficient to do so.

(2) The expiration of some costs occurs with the passage of time rather than as a result of daily transactions.

(3) Some items may be unrecorded because the transaction data are not yet known.

 8. The two categories of adjusting entries are deferrals and accruals. Deferrals consist of prepaid expenses and unearned revenues. Accruals consist of accrued revenues and accrued expenses.

 9. In the adjusting entry for a prepaid expense, an expense is debited and an asset is credited.

10. No. Depreciation is the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner. Depreciation results in the presentation of the book value of the asset, not its fair value.

11. Depreciation expense is an expense account whose normal balance is a debit. This account shows the cost that has expired during the current accounting period. Accumulated depreciation is a contra asset account whose normal balance is a credit. The balance in this account is the depreciation that has been recognized from the date of acquisition to the balance sheet date.

12. Equipment $18,000

Less: Accumulated Depreciation—Equipment 6,000 $12,000

Questions Chapter 3 (Continued)

*13. In the adjusting entry for an unearned revenue, a liability is debited and a revenue is credited.

*14. Asset and revenue. An asset would be debited and a revenue would be credited.

*15. An expense is debited and a liability is credited in the adjusting entry.

*16. Net income was understated $200 because prior to adjustment, revenues are understated by $900 and expenses are understated by $700. The difference in this case is $200 ($900 – $700).

*17. The entry is:

Jan. ADVANCE \r 1 9 Salaries and Wages Payable 2,000

Salaries and Wages Expense 3,000

Cash 5,000

*18. (a) Accrued revenues. (d) Accrued expenses or prepaid expenses.

(b) Unearned revenues. (e) Prepaid expenses.

(c) Accrued expenses. (f) Accrued revenues or unearned revenues.

*19. (a) Salaries and Wages Payable. (d) Supplies Expense.

(b) Accumulated Depreciation. (e) Service Revenue.

(c) Interest Expense. (f) Service Revenue.

*20. Disagree. An adjusting entry affects only one balance sheet account and one income statement account.

*21. Financial statements can be prepared from an adjusted trial balance because the balances of all accounts have been adjusted to show the effects of all financial events that have occurred during the accounting period.

*22. For Supplies Expense (prepaid expense): expenses are overstated and assets are understated. The adjusting entry is:

Assets (Supplies) XX

Expenses (Supplies Expense) XX

For Rent Revenue (unearned revenues): revenues are overstated and liabilities are understated. The adjusting entry is:

Revenues (Rent Revenue) XX

Liabilities (Unearned Rent Revenue) XX

**23. (a) The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions about providing capital.

(b) The fundamental qualitative characteristics are relevance and faithful representation. The enhancing qualities are comparabiIity, consistency, verifiability, timeliness, and understandability.

*24. Gross is correct. Consistency means using the same accounting principles and accounting methods from period to period within a company. Without consistency in the application of accounting principles, it is difficult to determine whether a company is better off, worse off, or the same from period to period.

Questions Chapter 3 (Continued)

*25. Comparability results when different companies use the same accounting principles. Consistency means using the same accounting principles and methods from year to year within the same company.

*26. The constraint is the cost constraint. The cost constraint allows accounting standard setters to weigh the cost that companies will incur to provide information against the benefit that financial statement users will gain from having the information available.

*27. Accounting relies primarily on two measurement principles. Fair value is sometimes used when market price information is readily available. However, in many situations reliable market price information is not available. In these instances, accounting relies on cost as its basis.

*28. The economic entity assumption states that every economic entity can be separately identified and accounted for. This assumption requires that the activities of the entity be kept separate and distinct from (1) the activities of its owners (the shareholders) and (2) all other economic entities. A shareholder of a company charging personal living costs as expenses of the company is an example of a violation of the economic entity assumption.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 3-1

(a) Prepaid Insurance—to recognize insurance expired during the period.

(b) Depreciation Expense—to account for the depreciation that has occurred on the asset during the period.

(c) Unearned Service Revenue—to record revenue earned for services performed.

(d) Interest Payable—to recognize interest accrued but unpaid on notes payable.

BRIEF EXERCISE 3-2

Item

(a)

Type of Adjustment

(b)

Account Balances before Adjustment

1.

Prepaid Expenses

Assets Overstated

Expenses Understated

2.

Accrued Revenues

Assets Understated

Revenues Understated

3.

Accrued Expenses

Expenses Understated

Liabilities Understated

4.

Unearned Revenues

Liabilities Overstated

Revenues Understated

BRIEF EXERCISE 3-3

Dec. 31 Supplies Expense 4,200

Supplies ($6,700 – $2,500) 4,200

Supplies

Supplies Expense

6,700

12/31 4,200

12/31 4,200

12/31 Bal. 2,500

BRIEF EXERCISE 3-4

Dec. 31 Depreciation Expense 4,000

Accumulated Depreciation—

  Equipment 4,000

Depreciation Expense

Accum. Depreciation—Equipment

12/31 4,000

12/31 4,000

Balance Sheet:

Equipment $30,000

Less: Accumulated Depreciation—

Equipment 4,000 $26,000

BRIEF EXERCISE 3-5

July 1 Prepaid Insurance 14,400

Cash 14,400

Dec. 31 Insurance Expense [($14,400 ÷ 3) X 1/2] 2,400

Prepaid Insurance 2,400

Prepaid Insurance

Insurance Expense

7/1 14,400

12/31 2,400

12/31 2,400

12/31 Bal. 12,000

BRIEF EXERCISE 3-6

July 1 Cash 14,400

Unearned Service Revenue 14,400

Dec. 31 Unearned Service Revenue 2,400

Service Revenue 2,400

Unearned Service Revenue

Service Revenue

12/31 2,400

7/1 14,400

12/31 2,400

12/31 Bal. 12,000

BRIEF EXERCISE 3-7

1. Dec. 31 Interest Expense 400

Interest Payable 400

2. 31 Accounts Receivable 1,900

Service Revenue 1,900

3. 31 Salaries and Wages Expense 900

Salaries and Wages Payable 900

BRIEF EXERCISE 3-8

Account

(a)

Type of Adjustment

(b)

Related Account

Accounts Receivable

Accrued Revenues

Service Revenue

Prepaid Insurance

Prepaid Expenses

Insurance Expense

Accum. Depr.—Equipment

Prepaid Expenses

Depreciation Expense

Interest Payable

Accrued Expenses

Interest Expense

Unearned Service Revenue

Unearned Revenues

Service Revenue

BRIEF EXERCISE 3-9

PARSONS COMPANY

Income Statement

For the Year Ended December 31, 2014

Revenues

Service revenue $37,000

Expenses

Salaries and wages expense $16,000

Rent expense   4,000

Insurance expense   2,000

Supplies expense   1,500

Depreciation expense 1,300

Total expenses 24,800

Net income $12,200

BRIEF EXERCISE 3-10

PARSONS COMPANY

Owner’s Equity Statement

For the Year Ended December 31, 2014

Owner’s capital, January 1 $15,600

Add: ADVANCE \r 1 Net income 12,200

 27,800

Less: Drawings 7,000

Owner’s capital, December 31 $20,800

*BRIEF EXERCISE 3-11

(a) Apr. 30 Supplies 700

Supplies Expense 700

(b) 30 Service Revenue 3,000

Unearned Service Revenue 3,000

BRIEF EXERCISE 3-12

(a) Predictive value.

(b) Confirmatory value.

(c) Materiality.

(d) Complete.

(e) Free from error.

(f) Comparability.

(g) Verifiability.

(h) Timeliness.

BRIEF EXERCISE 3-13

(a) Relevant.

(b) Faithful representation.

(c) Consistency.

BRIEF EXERCISE 3-14

(a) 1. Predictive value.

(b) 2. Neutral.

(c) 3. Verifiable.

(d) 4. Timely.

BRIEF EXERCISE 3-15

(c)

SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 3-1

1. (d) 2. (e) 3. (h) 4. (c)

DO IT! 3-2

1. Insurance Expense 300

Prepaid Insurance 300

(To record insurance expired)

2. Supplies Expense ($2,500 – $1,100) 1,400

Supplies 1,400

(To record supplies used)

3. Depreciation Expense 500

Accumulated Depreciation—Equipment 500

(To record monthly depreciation)

4. Unearned Service Revenue ($9,000 x 2/5) 3,600

Service Revenue 3,600

(To record revenue for services provided)

DO IT! 3-3

1. Salaries and Wages Expense 1,300

Salaries and Wages Payable 1,300

(To record accrued salaries)

2. Interest Expense ($20,000 x .12 x 1/12) 200

Interest Payable 200

(To record accrued interest)

3. Accounts Receivable 2,400

Service Revenue 2,400

(To record revenue for service provided)

DO IT! 3-4

(a) The net income is determined by adding revenues and subtracting expenses. The net income is computed as follows:

Revenues

Service revenue $11,360

Rent revenue 1,100

Total revenues $12,460

Expenses

Salaries and wages expense 7,400

Rent expense  1,200

Depreciation expense 700

Utilities expense   410

Supplies expense   160

Interest expense 40

Total expenses 9,910

Net income $ 2,550

(b) Total assets and liabilities are computed as follows:

Assets

Cash $ 5,360

Accounts receivable 480

Prepaid rent 720

Supplies 920

Equipment $12,000

Less: Accumulated depreciation—

Equipment 700 11,300

Total assets $18,780

Liabilities

Notes payable $ 4,000

Accounts payable  790

Unearned rent revenue 400

Salaries and wages payable 300

Interest payable 40

Total liabilities $ 5,530

(c) Owner’s Capital at June 30, 2014, can be computed in one of two ways. Using the basic accounting equation (Assets = Liabilities + Owner’s Equity), we find that total assets are $18,780 and total liabilities are $5,530; therefore, Owner’s Equity (Owner’s Capital) is $13,250 ($18,780 – $5,530).

Another way to compute the Owner’s Capital at June 30, 2012, is as follows:

Owner’s capital, April 1 $ –0–

Add: Investments $11,200

Net income 2,550 13,750

Less: Drawings 500

Owner’s capital, June 30 $13,250

SOLUTIONS TO EXERCISES

EXERCISE 3-1

1. True.

2. True.

3. False. Many business transactions affect more than one of these artificial time periods. For example, the purchase of a building affects expenses for many years.

4. True.

5. False. A time period that lasts less than one year, such as monthly or quarterly periods, is called an interim period.

6. False. All calendar years are fiscal years, but not all fiscal years are calendar years. An accounting time period that is one year in length is referred to as a fiscal year. A fiscal year that starts on January 1 and ends on December 31 is a calendar year.

EXERCISE 3-2

(a) Accrual-basis accounting records the transactions that change a company’s financial statements in the periods in which the events occur rather than in the periods in which the company receives or pays cash. Information presented on an accrual basis is useful because it reveals relationships that are likely to be important in predicting future results. Conversely, under cash-basis accounting, revenue is recorded only when cash is received, and an expense is recognized only when cash is paid. As a result, the cash basis of accounting often leads to misleading financial statements.

(b) Politicians might desire a cash-basis accounting system over an accrual-basis system because if an accrual-accounting system is used, it could mean that billions in government liabilities presently unrecorded would have to be reported in the federal budget immediately. The recognition of these additional liabilities would make the deficit even worse. This is not what politicians would like to see and be held responsible for.

EXERCISE 3-2 (Continued)

(c) Dear Senator,

It is my understanding, after having taken a beginning course in account​ing principles, that the Federal government uses a cash-basis system rather than an accrual-basis accounting system.

I am shocked at such a practice! There must be billions of dollars of liabilities hidden in many contracts that have not been recorded yet for the mere reason that they haven’t been paid yet. I realize that the deficit would dramatically increase if we were to implement an accrual system, but in all fairness, we citizens should be given a more accurate picture of what our government is up to.

Sincerely,

CONCERNED STUDENT

EXERCISE 3-3

(a) Cash received from revenue $105,000

Cash paid for expenses (72,000)

Cash-basis net income $ 33,000

(b) Revenues [($105,000 – $25,000) + $40,000] $120,000

Expenses [($72,000 – $30,000) + $42,000] (84,000)

Accrual-basis net income $ 36,000

EXERCISE 3-4

1. Unearned revenue.

2. Accrued expense.

3. Accrued expense.

4. Accrued revenue.

5. Prepaid expense.

6. Unearned revenue.

7. Accrued revenue.

8. Prepaid expense.

9. Prepaid expense.

10. Prepaid expense.

11. Accrued expense.

EXERCISE 3-5

1. Interest Expense 400

Interest Payable

($10,000 X 12% X 4/12) 400

2. Supplies Expense 1,550

Supplies ($2,450 – $900) 1,550

3. Depreciation Expense 1,000

Accumulated Depreciation—Equipment 1,000

4. Insurance Expense 1,225

Prepaid Insurance

($2,100 X 7/12) 1,225

5. Unearned Service Revenue 7,500

Service Revenue

($30,000 X 1/4) 7,500

6. Accounts Receivable 4,200

Service Revenue 4,200

7. Salaries and Wages Expense 5,400

Salaries and Wages Payable

($9,000 X 3/5) 5,400

EXERCISE 3-6

Item

(a)

Type of Adjustment

(b)

Accounts before Adjustment

1.

Accrued Revenues

Assets Understated

Revenues Understated

2.

Prepaid Expenses

Assets Overstated

Expenses Understated

3.

Accrued Expenses

Expenses Understated

Liabilities Understated

4.

Unearned Revenues

Liabilities Overstated

Revenues Understated

5.

Accrued Expenses

Expenses Understated

Liabilities Understated

6.

Prepaid Expenses

Assets Overstated

Expenses Understated

EXERCISE 3-7

1. Mar. 31 Depreciation Expense ($400 X 3)   1,200

Accumulated Depreciation—

  Equipment   1,200

2. 31 Unearned Rent Revenue 3,400

Rent Revenue ($10,200 X 1/3) 3,400

3. 31 Interest Expense   500

Interest Payable   500

4. 31 Supplies Expense 1,900

Supplies ($2,800 – $900) 1,900

5. 31 Insurance Expense ($200 X 3)   600

Prepaid Insurance   600

EXERCISE 3-8

1. Jan. 31 Accounts Receivable   875

Service Revenue   875

2. 31 Utilities Expense   650

Utilities Payable   650

3. 31 Depreciation Expense   400

Accumulated Depreciation—

  Equipment   400

31 Interest Expense   500

Interest Payable   500

4. 31 Insurance Expense ($24,000 ÷ 12) 2,000

Prepaid Insurance 2,000

5. 31 Supplies Expense ($1,600 – $400) 1,200

Supplies 1,200

EXERCISE 3-9

1. Oct. 31 Supplies Expense 2,000

Supplies ($2,500 – $500) 2,000

2. 31 Insurance Expense   100

Prepaid Insurance   100

3. 31 Depreciation Expense    50

Accumulated Depreciation—

  Equipment    50

4. 31 Unearned Service Revenue   600

Service Revenue   600

5. 31 Accounts Receivable   300

Service Revenue   300

EXERCISE 3-9 (Continued)

6. Oct. 31 Interest Expense    95

Interest Payable    95

7. 31 Salaries and Wages Expense 1,625

Salaries and Wages Payable 1,625

EXERCISE 3-10

GOPITKUMAR CO.

Income Statement

For the Month Ended July 31, 2014

Revenues

Service revenue ($5,500 + $650) $6,150

Expenses

Salaries and wages expense ($2,300 + $300) $2,600

Supplies expense ($1,200 – $250)    950

Utilities expense    600

Insurance expense    400

Depreciation expense 150

Total expenses 4,700

Net income $1,450

EXERCISE 3-11

Answer Computation

(a) Supplies balance = $800 Supplies expense $ 950

Add: ADVANCE \r 1 Supplies (1/31)  850

Less: Supplies purchased (1,000 )

Supplies (1/1) $ 800

(b) Total premium = $4,800 Total premium = Monthly premium X 12; $400 X 12 = $4,800

Purchase date = Aug. 1, 2013 Purchase date: On Jan. 31, there are 6 months’ coverage remaining ($400 X 6). Thus, the purchase date was 6 months earlier on Aug. 1, 2013.

EXERCISE 3-11 (Continued)

(c) Salaries and wages

payable = $1,400 Cash paid $3,500

Salaries and wages

payable (1/31/14) 800

 4,300

Less: Salaries and wages

expense 2,900

Salaries and wages

payable (12/31/13) $1,400

EXERCISE 3-12

(a) July 10 Supplies   650

Cash   650

14 Cash 2,000

Service Revenue 2,000

15 Salaries and Wages Expense 1,200

Cash 1,200

20 Cash   1,000

Unearned Service Revenue   1,000

(b) July 31 Supplies Expense   800

Supplies   800

31 Accounts Receivable   500

Service Revenue   500

31 Salaries and Wages Expense 1,200

Salaries and Wages Payable 1,200

31 Unearned Service Revenue   1,150

Service Revenue   1,150

EXERCISE 3-13

Aug. 31 Accounts Receivable   2,000

Service Revenue   2,000

31 Supplies Expense 1,400

Supplies 1,400

31 Insurance Expense 1,500

Prepaid Insurance 1,500

31 Depreciation Expense 900

Accumulated Depreciation—

  Equipment 900

31 Salaries and Wages Expense 1,100

Salaries and Wages Payable 1,100

31 Unearned Rent Revenue   900

Rent Revenue   900

EXERCISE 3-14

FRINZI COMPANY

Income Statement

For the Year Ended August 31, 2014

Revenues

Service revenue $36,000

Rent revenue 11,900

Total revenues $47,900

Expenses

Salaries and wages expense 18,100

Rent expense  15,000

Insurance expense   1,500

Supplies expense   1,400

Depreciation expense 900

Total expenses 36,900

Net income $11,000

EXERCISE 3-14 (Continued)

FRINZI COMPANY

Owner’s Equity Statement

For the Year Ended August 31, 2014

Owner’s capital, September 1, 2013 $15,600

Add: Net income 11,000

Owner’s capital, August 31, 2014 $26,600

FRINZI COMPANY

Balance Sheet

August 31, 2014

Assets

Cash $10,400

Accounts receivable   10,800

Supplies     900

Prepaid insurance   2,500

Equipment $14,000

Less: Accum. depreciation—equipment 4,500 9,500

Total assets $34,100

Liabilities and Owner’s Equity

Liabilities

Accounts payable $ 5,800

Salaries and wages payable   1,100

Unearned rent revenue 600

Total liabilities   7,500

Owner’s equity

Owner’s capital 26,600

Total liabilities and owner’s equity $34,100

EXERCISE 3-15

(a) 1. Cash  9,000

Accounts Receivable  9,000

2. Unearned Service Revenue 25,000

Service Revenue 25,000

3. Cash  38,000

Unearned Service Revenue  38,000

Unearned Service Revenue

($38,000 – $17,000) 21,000

  Service Revenue  21,000

4. Accounts Receivable 115,000

Service Revenue

  ($161,000 – $25,000 – $21,000) 115,000

5. Cash 101,000

Accounts Receivable

  ($115,000 – $14,000) 101,000

(b) Cash received by the club = $9,000 + $101,000 + $38,000

= $148,000

*EXERCISE 3-16

1. Prepaid Insurance 1,125

Insurance Expense

 ($2,700 X 5/12) 1,125

2. Service Revenue 30,000

Unearned Service Revenue

 ($40,000 X 3/4) 30,000

3. Supplies 900

Supplies Expense 900

*EXERCISE 3-17

(a) Jan. 2 Insurance Expense 1,920

Cash 1,920

10 Supplies Expense 1,700

Cash 1,700

15 Cash 6,100

Service Revenue 6,100

Cash

Service Revenue

1/15 6,100

1/2 1,920

1/10 1,700

1/15 6,100

Insurance Expense

Supplies Expense

1/2 1,920

1/10 1,700

(b) Jan. 31 Prepaid Insurance ($160 X 11 months) 1,760

Insurance Expense 1,760

31 Supplies   650

Supplies Expense   650

31 Service Revenue 3,600

Unearned Service Revenue 3,600

Prepaid Insurance

Supplies

Unearned Service Revenue

1/31 1,760

1/31   650

1/31 3,600

Insurance Expense

Supplies Expense

1/2 1,920

1/31 1,760

1/10 1,700

1/31 650

1/31 3,600

1/15 6,100

Bal.   160

Bal.   1,050

Bal. 2,500

(c) Prepaid insurance $1,760

Supplies    650

Unearned service revenue  3,600

Service revenue  2,500

Insurance expense   160

Supplies expense    1,050

*EXERCISE 3-18

(a) 2 Going concern assumption

(b) 6 Economic entity assumption

(c) 3 Monetary unit assumption

(d) 4 Time period assumption

(e) 5 Historical cost principle

(f) 1 Full disclosure principle

*EXERCISE 3-19

(a) This is a violation of the historical cost principle. The inventory was written up to its fair value when it should have remained at cost.

(b) This is a violation of the economic entity assumption. The treatment of the transaction treats Jay Rosman and Rosman Co. as one entity when they are two separate entities. Salaries and Wages Expense should have been debited for the purchase of the truck.

(c) This is a violation of the time period assumption. This assumption states that the economic life of a business can be divided into artificial time periods (months, quarters, or a year). By adding two more weeks to the year, Rosman Co. would be misleading financial statement readers. In addition, 2014 results would not be comparable to previous years’ results. The company should use a 52 week year.

*EXERCISE 3-20

1. Comparability

2. Going concern assumption

3. Materiality

4. Full disclosure principle

5. Time period assumption

6. Relevance

7. Historical cost principle

8. Consistency

9. Economic entity assumption

10. Faithful representation

11. Monetary unit assumption

12. Expense recognition principle

*EXERCISE 3-21

(a) The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions about providing capital. Since Net Nanny’s shares appear to be actively traded, investors must be capable of using the information made available by Net Nanny to make decisions about the company.

(b) The investors must feel as if the company will show earnings in the future. They must recognize that information relevant to their investment choice is indicated by more than Net Nanny’s net income.

(c) The change from Canadian dollars to U.S. dollars for reporting purposes should make Net Nanny more comparable with companies traded on U.S. stock exchanges.

*EXERCISE 3-22

(a) Accounting information is the compilation and presentation of financial information for a company. It provides information in the form of financial statements and additional disclosures that is useful for decision making.

The accounting rules and practices that have substantial authoritative support and are recognized as a general guide for financial reporting purposes are referred to as international financial reporting standards (IFRS). The biotechnology company that employs Ana will follow IFRS to report its assets, liabilities, equity, revenues, and expenses as it prepares financial statements.

(b) Ana is correct in her understanding that the low success rate for new biotech products will be a cause of concern for investors. Her suggestion that detailed scientific findings be reported to prospective investors might offset some of their concerns but it probably won’t conform to the qualitative characteristics of accounting information.

These characteristics consist of relevance, faithful representation, comparability, and consistency, verifiability, timeliness, and understandability. They apply to accounting information rather than the scientific findings that Ana wants to include.

SOLUTIONS TO PROBLEMS

PROBLEM 3-1A

(a)

J4

Date

Account Titles

Ref.

Debit

Credit

2014

May 31

Supplies Expense

Supplies

631

126

  900

  900

31

Utilities Expense

Accounts Payable

736

201

  250

  250

31

Insurance Expense

Prepaid Insurance

  ($3,600 ÷ 24 months)

722

130

  150

  150

31

Unearned Service Revenue

Service Revenue

  ($2,000 – $400)

209

400

1,600

1,600

31

Salaries and Wages Expense

Salaries and Wages Payable

  [(3/5 X $900) X

  2 employees]

726

212

1,080

  1,080

31

Depreciation Expense

Accumulated Depreciation—

  Equipment

717

150

  190

  190

31

Accounts Receivable

Service Revenue

112

400

1,700

1,700

(b)

Cash No. 101

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

Balance



4,500

PROBLEM 3-1A (Continued)

Accounts Receivable No. 112

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

31

Balance

Adjusting



J4

1,700

 6,000

 7,700

Supplies No. 126

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

31

Balance

Adjusting



J4

900

 1,900

 1,000

Prepaid Insurance No. 130

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

31

Balance

Adjusting



J4

150

 3,600

 3,450

Equipment No. 149

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

Balance



11,400

Accumulated Depreciation—Equipment No. 150

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

Adjusting

J4

190

   190

PROBLEM 3-1A (Continued)

Accounts Payable No. 201

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

31

Balance

Adjusting



J4

  250

4,500

 4,750

Unearned Service Revenue No. 209

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

31

Balance

Adjusting



J4

1,600

 2,000

 400

Salaries and Wages Payable No. 212

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

Adjusting

J4

  1,080

  1,080

Owner’s Capital No. 301

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

Balance



17,700

Service Revenue No. 400

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

31

31

Balance

Adjusting

Adjusting



J4

J4

1,600

1,700

 7,500

 9,100

10,800

Supplies Expense No. 631

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

Adjusting

J4

900

  900

PROBLEM 3-1A (Continued)

Depreciation Expense No. 717

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

Adjusting

J4

190

  190

Insurance Expense No. 722

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

Adjusting

J4

150

  150

Salaries and Wages Expense 726

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

31

Balance

Adjusting



J4

  1,080

 3,400

4,480

Rent Expense No. 729

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

Balance



900

Utilities Expense No. 736

Date

Explanation

Ref.

Debit

Credit

Balance

2014

May 31

Adjusting

J4

250

  250

PROBLEM 3-1A (Continued)

(c) NARDELLI CONSULTING

Adjusted Trial Balance

May 31, 2014

Debit

Credit

Cash

Accounts Receivable

Supplies Prepaid Insurance

Prepaid Insurance

Equipment

Accumulated Depreciation—

  Equipment

Accounts Payable

Unearned Service Revenue

Salaries and Wages Payable

Owner’s Capital

Service Revenue

Salaries and Wages Expense

Rent Expense

Depreciation Expense

Insurance Expense

Utilities Expense

Supplies Expense

$ 4,500

  7,700

  1,000  3,450

 11,400

4,480

    900

    190

  150

  250

    900

$34,920

$   190

4,750

400

   1,080

 17,700

10,800

$34,920

PROBLEM 3-2A

(a)

J1

Date

Account Titles

Ref.

Debit

Credit

May 31

Insurance Expense

Prepaid Insurance

  ($2,400 X 1/12)

722

130

  200

 

200

31

Supplies Expense

Supplies ($2,080 – $750)

631

126

1,330

1,330

31

Depreciation Expense

  ($3,000 X 1/12) + ($1,500 X 1/12)

Accumulated Depreciation—

  Buildings

619

142

  375

  250

Accumulated Depreciation—

  Equipment

150

  125

31

Interest Expense

Interest Payable

   [($40,000 X 12%) X 1/12]

718

230

  400

  400

31

Unearned Rent Revenue

Rent Revenue

  (2/3 X $3,300)

208

429

2,200

2,200

31

Salaries and Wages Expense

Salaries and Wages Payable

726

212

  750

  750

(b)

Cash No. 101

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Balance



3,500

PROBLEM 3-2A (Continued)

Supplies No. 126

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

31

Balance

Adjusting



J1

1,330

 2,080

   750

Prepaid Insurance No. 130

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

31

Balance

Adjusting



J1

  200

 2,400

 2,200

Land No. 140

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Balance



12,000

Buildings No. 141

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Balance



60,000

Accumulated Depreciation—Buildings No. 142

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Adjusting

J1

  250

   250

Equipment No. 149

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Balance



15,000

Accumulated Depreciation—Equipment No. 150

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Adjusting

J1

  125

   125

PROBLEM 3-2A (Continued)

Accounts Payable No. 201

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Balance



 4,800

Unearned Rent Revenue No. 208

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

31

Balance

Adjusting



J1

2,200

 3,300

 1,100

Salaries and Wages Payable No. 212

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Adjusting

J1

  750

   750

Interest Payable No. 230

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Adjusting

J1

  400

   400

Mortgage Payable No. 275

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Balance



40,000

Owner’s Capital No. 301

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Balance



41,380

Rent Revenue No. 429

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

31

Balance

Adjusting



J1

2,200

10,300

12,500

PROBLEM 3-2A (Continued)

Advertising Expense No. 610

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Balance



  600

Depreciation Expense No. 619

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Adjusting

J1

  375

  375

Supplies Expense No. 631

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Adjusting

J1

1,330

1,330

Interest Expense No. 718

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Adjusting

J1

  400

  400

Insurance Expense No. 722

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Adjusting

J1

  200

  200

Salaries and Wages Expense No. 726

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

31

Balance

Adjusting



J1

  750

3,300

4,050

Utilities Expense No. 732

Date

Explanation

Ref.

Debit

Credit

Balance

May 31

Balance



900

PROBLEM 3-2A (Continued)

(c) SKYLINE MOTEL

Adjusted Trial Balance

May 31, 2014

Debit

Credit

Cash

Supplies

Prepaid Insurance

Land

Buildings

Accumulated Depreciation—Buildings

Equipment

Accumulated Depreciation—Equipment

Accounts Payable

Unearned Rent Revenue

Salaries and Wages Payable

Interest Payable

Mortgage Payable

Owner’s Capital

Rent Revenue

Advertising Expense

Depreciation Expense

Supplies Expense

Interest Expense

Insurance Expense

Salaries and Wages Expense

Utilities Expense

$  3,500

     750

   2,200

  12,000

  60,000

  15,000

     600

     375

   1,330

     400

     200

   4,050

900

$101,305

$    250

     125

   4,800

   1,100

     750

     400

  40,000

  41,380

  12,500

$101,305

PROBLEM 3-2A (Continued)

(d) SKYLINE MOTEL

Income Statement

For the Month Ended May 31, 2014

Revenues

Rent revenue $12,500

Expenses

Salaries and wages expense $4,050

Supplies expense  1,330

Utilities expense  900

Advertising expense    600

Interest expense    400

Depreciation expense 375

Insurance expense 200

Total expenses 7,855

Net income $ 4,645

SKYLINE MOTEL

Owner’s Equity Statement

For the Month Ended May 31, 2014

Owner’s capital, May 1 $   0

Investment by owner  41,380

41,380

Add: Net income 4,645

Owner’s capital, May 31 $46,025

PROBLEM 3-2A (Continued)

SKYLINE MOTEL

Balance Sheet

May 31, 2014

Assets

Cash $ 3,500

Supplies      750

Prepaid insurance    2,200

Land   12,000

Buildings $60,000

Less: Accumulated depreciation—

buildings 250   59,750

Equipment  15,000

Less: Accumulated depreciation—

equipment 125 14,875

Total assets $93,075

Liabilities and Owner’s Equity

Liabilities

Accounts payable $ 4,800

Unearned rent revenue    1,100

Salaries and wages payable      750

Interest payable     400

Mortgage payable 40,000

Total liabilities   47,050

Owner’s equity

Owner’s capital 46,025

Total liabilities and owner’s equity $93,075

PROBLEM 3-3A

(a) Sept. 30 Accounts Receivable 1,100

Service Revenue 1,100

30 Rent Expense 1,000

Prepaid Rent 1,000

30 Supplies Expense 850

Supplies 850

30 Depreciation Expense 700

Accum. Depreciation—Equipment 700

30 Interest Expense  100

Interest Payable  100

30 Unearned Rent Revenue 850

Rent Revenue 850

30 Salaries and Wages Expense 725

Salaries and Wages Payable 725

(b) EVERETT CO.

Income Statement

For the Quarter Ended September 30, 2014

Revenues

Service revenue $17,100

Rent revenue 2,260

Total revenues $19,360

Expenses

Salaries and wages expense 8,725

Rent expense  2,900

Utilities expense    1,510

Supplies expense    850

Depreciation expense 700

Interest expense 100

Total expenses 14,785

Net income $ 4,575

PROBLEM 3-3A (Continued)

EVERETT CO.

Owner’s Equity Statement

For the Quarter Ended September 30, 2014

Owner’s capital, July 1, 2014 $     0

Investment by owner $22,000

Add: ADVANCE \r 1 Net income 4,575 26,575

 26,575

Less: Drawings 1,600

Owner’s capital, September 30, 2014 $24,975

EVERETT CO.

Balance Sheet

September 30, 2014

Assets

Cash $ 8,700

Accounts receivable 11,500

Supplies   650

Prepaid rent     1,200

Equipment $18,000

Less: Accum. depreciation—equipment 700 17,300

Total assets $39,350

Liabilities and Owner’s Equity

Liabilities

Notes payable $10,000

Accounts payable   2,500

Salaries and wages payable     725

Unearned rent revenue 1,050

Interest payable 100

Total liabilities 14,375

Owner’s equity

Owner’s capital 24,975

Total liabilities and owner’s equity $39,350

(c) Interest of 12% per year equals a monthly rate of 1%; monthly interest is $100 ($10,000 X 1%). Since total interest expense is $100, the note has been outstanding one month.

PROBLEM 3-4A

1. Dec. 31 Insurance Expense 4,890

Prepaid Insurance 4,890

  [($7,920 ÷ 3) = $2,640

  [($4,500 ÷ 2) = 2,250

$4,890]

2. Dec. 31 Unearned Rent Revenue 84,000

Rent Revenue 84,000

  [Nov. 5 X $5,000 X 2 = $50,000

  [Dec. 4 X $8,500 X 1 = 34,000

$84,000

3. Dec. 31 Interest Expense 1,800

Interest Payable

  ($120,000 X 9% X 2/12) 1,800

4. Dec. 31 Salaries and Wages Expense 2,000

Salaries and Wages Payable 2,000

  [5 X $700 X 2/5 = $1,400

  [3 X $500 X 2/5 = 600

   $2,000]

PROBLEM 3-5A

(a), (c) & (e)

Cash No. 101

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 1

8

10

12

20

22

25

29

Balance



J1

J1

J1

J1

J1

J1

J1

3,420

3,100

  600

1,700

2,700

  400

1,700

 2,400

 700

 4,120

7,220

 4,520

 4,120

2,420

3,020

Accounts Receivable No. 112

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 1

10

27

Balance



J1

J1

1,900

3,420

 4,250

 830

 2,730

Supplies No. 126

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 1

17

30

Balance

Adjusting



J1

J1

700

1,100

 1,800

 2,500

 1,400

Equipment No. 153

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 1

15

Balance



J1

2,000

12,000

14,000

PROBLEM 3-5A (Continued)

Accumulated Depreciation—Equipment No. 154

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 1

30

Balance

Adjusting



J1

  200

   2,000

   2,200

Accounts Payable No. 201

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 1

15

17

20

Balance



J1

J1

J1

2,700

2,000

700

 2,600

 4,600

 5,300

 2,600

Unearned Service Revenue No. 209

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 1

29

30

Balance

Adjusting



J1

J1

1,250

  600

 1,200

 1,800

   550

Salaries and Wages Payable No. 212

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 1

8

30

Balance

Adjusting



J1

J1

  700

  350

   700

     0

   350

Owner’s Capital No. 301

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 1

Balance



13,950

PROBLEM 3-5A (Continued)

Service Revenue No. 407

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 12

27

30

Adjusting

J1

J1

J1

3,100

1,900

1,250

3,100

5,000

6,250

Depreciation Expense No. 615

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 30

Adjusting

J1

  200

  200

Supplies Expense No. 631

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 30

Adjusting

J1

1,100

1,100

Salaries and Wages Expense No. 726

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 8

25

30

Adjusting

J1

J1

J1

1,000

1,700

  350

1,000

2,700

3,050

Rent Expense No. 729

Date

Explanation

Ref.

Debit

Credit

Balance

Nov. 22

J1

  400

  400

PROBLEM 3-5A (Continued)

(b) General Journal

J1

Date

Account Titles and Explanation

Ref.

Debit

Credit

Nov. 8

Salaries and Wages Payable

Salaries and Wages Expense

Cash

212

726

101

  700

1,000

1,700

10

Cash

Accounts Receivable

101

112

3,420

3,420

12

Cash

Service Revenue

101

407

3,100

3,100

15

Equipment

Accounts Payable

153

201

2,000

2,000

17

Supplies

Accounts Payable

126

201

700

700

20

Accounts Payable

Cash

201

101

2,700

2,700

22

Rent Expense

Cash

729

101

  400

  400

25

Salaries and Wages Expense

Cash

726

101

1,700

1,700

27

Accounts Receivable

Service Revenue

112

407

1,900

1,900

29

Cash

Unearned Service Revenue

101

209

  600

  600