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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 accounting 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
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