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Problem Solutions: Topics 1 and 2
ACCT 60601 Evaluating Financial Performance
Fall 2015 Note: All problems are organized by Topic. Each problem is numbered with the topic number first followed by a dash and then the problem number for that topic. Many of the problems in this set are from the Dyckman, Magee and Pfeiffer (4th edition) textbook. For those problems, the topic-problem number is followed by the textbook reference number in parentheses. Note that some of the problems extracted from the textbook have been revised or reworded.
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Topic 1 Solutions: Financial Accounting Theory and Concepts 1-1 (Q1.1)
Organizations undertake planning activities that subsequently shape three major activities: financing, investing, and operating. Financing is the means used to pay for resources. Investing refers to the buying and selling of resources necessary to carry out the organization’s plans. Operating activities are the actual carrying out of these plans. (Planning is the glue that connects these activities, including the organization’s ideas, goals and strategies.)
1-2 (Q1.2)
An organization’s financing activities (liabilities and equity = sources of funds) pay for investing activities (assets = uses of funds). An organization cannot have more or less assets than its liabilities and equity combined and, similarly, it cannot have more or less liabilities and equity than its total assets. This means: assets = liabilities + equity. This relation is called the accounting equation (sometimes called the balance sheet equation, or BSE), and it applies to all organizations at all times.
1-3 (Q1.3)
The four main financial statements are: income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows. The income statement provides information relating to the company’s revenues, expenses and profitability over a period of time. The balance sheet lists the company’s assets (what it owns), liabilities (what it owes), and stockholders’ equity (the residual claims of its owners) as of a point in time. The statement of stockholders’ equity reports on the changes to each stockholders’ equity account during the year. Some changes to stockholders’ equity, such as those resulting from the payment of dividends and unrealized gains (losses) on marketable securities, can only be found in this statement as they are not included in the computation of net income. The statement of cash flows identifies the sources (inflows) and uses (outflows) of cash, that is, from what sources the company has derived its cash and how that cash has been used. All four statements are necessary in order to provide a complete picture of the financial condition of the company.
1-4 (Q1.4)
The balance sheet provides information that helps users understand a company’s resources (assets) and claims to those resources (liabilities and stockholders’ equity) as of a given point in time.
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An income statement reports whether the business has earned a net income (also called profit or earnings) or a net loss. Importantly, the income statement lists the types and amounts of revenues and expenses making up net income or net loss. The income statement covers a period of time.
1-5 (Q1.6)
The statement of cash flows reports on the cash inflows and outflows relating to a company’s operating, investing, and financing activities over a period of time. The sum of these three activities yields the net change in cash for the period. This statement is a useful complement to the income statement which reports on revenues and expenses, but conveys relatively little information about cash flows.
1-6 (Q1.7) Articulation refers to the updating of the balance sheet by information
contained in the income statement or the statement of cash flows. For example, retained earnings is increased each period by any profit earned during the period (as reported in the income statement) and decreased each period by the payment of dividends (as reported in the statement of cash flows and the statement of stockholders’ equity). It is by the process of articulation that the financial statements are linked.
1-7 (Q1.14)
Generally Accepted Accounting Principles (GAAP) are the various methods, rules, practices, and other procedures that have evolved over time in response to the need to regulate the preparation of financial statements. They are primarily set by the Financial Accounting Standards Board (FASB), an entity of the private sector with representatives from companies that issue financial statements, accounting firms that audit those statements, and users of financial information.
1-8 (Q2-2)
The revenue recognition principle requires that revenues be recognized when earned. Revenues are earned when the product has been delivered to the buyer and is usually signified by a formal transfer of title. A good test of whether revenue has been earned is whether the rights, risks and obligations of ownership have been transferred to the buyer. If a service is involved, revenues are not earned until the service has been provided. The matching principle prescribes that the expenses incurred in providing the service or product be matched against the revenues recognized from the sale or the provision of the service. When these two principles are followed, income can be properly measured in a given accounting reporting period.
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1-9 (Q2-3) Accrual accounting entails the recognition of revenue under the revenue recognition principle (record revenues when earned), and the recognition of expenses using the matching principle (record expenses when incurred). The recognition of revenues or the expenses does not require that cash be received or disbursed. For example the recognition of revenues on sale can lead to an account receivable, and wage expense can be accrued using a wages payable (accrued) liability account. This differs from a cash-based accounting system, where revenues are recognized only when cash is received and expenses are recognized only when cash is expended.
1-10 (M1.20) Financing and Investing Relations, and Financing Sources
($ millions)
Assets = Liabilities + Equity $72,921 $41,604 $31,317
Coca-Cola receives slightly more of its financing from creditors ($41,604 million) versus owners ($31,317 million). Its owner financing comprises 42.9% of its total financing ($31,317 mil./ $72,921 mil.). Several years ago, the percentage was 50%.
1-11 (M2-16) Applying the Accounting Equation to the Balance Sheet
a. $375,000 - $105,000 = $270,000 equity
b. $43,000 + $11,000 = $54,000 assets
c. $878,000 - $422,000 = $456,000 liabilities
1-12 (M1.21) Applying the Accounting Equation and Computing Financing Proportions
($ millions) Assets = Liabilities + Equity
Hewlett-Packard
$129,517
$90,513
(a)$39,004
General Mills
$ 18,675
(b)$12,063
$ 6,612
Harley-Davidson
(c) $ 9,674
$ 7,254
$ 2,420
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The percent of owner financing for each company follows:
Hewlett-Packard, 30.1% ($39,004 mil./ $129,517 mil.);
General Mills, 35.4% ($6,612 mil./ $18,675 mil.);
Harley-Davidson, 25.0% ($2,420 mil./ $9,674 mil.).
The creditor percent of financing is computed as 100% minus the owner percent. Therefore, Hewlett-Packard is more owner-financed than the other two firms, while Harley-Davidson and General Mills rely more on creditor financing.
1-13 (E1-28) Applying the Accounting Equation and Financial Statement Articulation ($ millions) a. Using the accounting equation:
($ millions) Assets = Liabilities + Equity
Intel $63,186 $13,756 $49,430 b. Starting with the accounting equation at the beginning of the year:
($ millions) Assets = Liabilities + Equity JetBlue $6,549 $5,003 $1,546
Using the accounting equation at the end of the year:
($ millions) Assets = Liabilities + Equity JetBlue $6,549+$44 $5,003-$64 $1,654
c. Starting with the accounting equation at the end of the year:
($ millions) Assets = Liabilities + Equity Walt Disney $72,124 $29,864+$2,807 $39,453
Using the accounting equation at the beginning of the year:
($ millions) Assets = Liabilities + Equity Walt Disney $72,124-
$2,918 $29,864 $39,342
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Topic 2 Solutions: Accounting for Transactions and Preparing Financial Statements 2-1 (Q2-1)
An asset is something that we own that is expected to provide future benefits. A liability is a current obligation that will require a future sacrifice. Equity is the difference between assets and liabilities. It represents the claims of the company’s owners to its income and assets. The following are some examples of each:
ASSETS • Cash • Receivables • Inventories • Plant, property and equipment • LIABILITIES • Accounts payable • Accrued liabilities • Notes payable • Long-term debt
EQUITY • Contributed capital (common and preferred stock)
• Additional paid-in capital • Earned capital (retained earnings) • Treasury stock
2-2 (Q3-8)
Many of the transactions reflected in the accounting records through the first two steps of the accounting cycle affect the net income of more than one period. Therefore, adjustments to the account balances are ordinarily necessary at the end of each accounting period to record the proper amount of revenue and to match expenses with revenue properly. This process is also intended to achieve a more accurate picture of financial position by adjusting balance sheet amounts to show unexpired costs, up-to-date amounts of obligations, and so on.
2-3 (Q3-9)
1. Allocating assets to expense to reflect expenses incurred during the period. Example: Recording supplies used by debiting Supplies Expense and crediting Supplies.
2. Allocating payments received in advance by crediting the revenue account to
reflect revenues earned during the period. Example: Recording service fees earned by debiting Unearned Service Fees and crediting Service Fees Earned.
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3. Accruing expenses to reflect expenses incurred during the period that are not yet paid or recorded. Example: Recording unpaid wages by debiting Wages Expense and crediting Wages Payable.
4. Accruing revenues to reflect revenues earned during the period that are not yet
received or recorded. Example: Recording commissions earned by debiting Commissions Receivable and crediting Commissions Earned.
2-4 (Q3-11)
A contra account is an account that is related to, and deducted from, another account when financial statements are prepared or when book values are computed. Accumulated depreciation is deducted from the cost of a depreciable asset in computing and portraying the asset's book value.
2-5 (Q3-12)
The building is five years old by the end of 2014, so the accumulated depreciation of $800,000 represents five years of depreciation at an annual rate of $160,000 ($800,000/5). If the annual depreciation is $160,000, then the expected life of the building must be 25 years.
At the end of 2021, the building will be twelve years old, and the accumulated depreciation will be 12×$160,000, or $1,920,000. The book value of the building (defined as original cost less accumulated depreciation) will be $2,080,000.
2-6 (Q3-16)
The temporary accounts—sometimes called nominal accounts—are closed at year-end. They consist principally of the income statement accounts (expense and revenue accounts). (The Income Summary account and the Dividend account are also closed if they are used.)
2-7 (Q3-18)
A post-closing trial balance ensures that an equality of debits and credits has been maintained throughout the adjusting and closing procedures and that the general ledger is in balance to start the next period. Only balance sheet accounts appear in a post-closing trial balance. Depreciation Expense and Supplies Expense are temporary accounts that should have been closed and should not appear in the post-closing trial balance.
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2-8 (M1.24) Identifying Financial Statement Line Items and Accounts
a. BS d. BS g. SCF and SE
b. IS e. SCF h. SCF and SE
c. BS f. BS and SE i. IS, SE, and SCF
2-9 (E1-30) Financial Statement Relations to Compute Dividends
Computation of dividends
Retained earnings, 2009 ...................................................... $13,157
+ Net income.............................................................................. 2,203
– Cash dividends ........................................................................ (?)
= Retained earnings, 2010 ........................................................ $14,329
Thus, dividends were $1,031 million for 2010. This dividends amount comprises 46.8% ($1,031/ $2,203) of its 2010 net income.
2-10 (P1-39) Formulating a Statement of Stockholders’ Equity from Raw Data
DP Systems, Inc. Statement of Stockholders’ Equity
For Year Ended December 31, 2013 Common
Stock Retained Earnings Stockholders’ Equity
December 31, 2012 .................. $ 550 $2,437 $2,987
Net income................................ 859 859
Cash dividends ......................... (281) (281)
December 31, 2013 .................. $ 550 $3,015 $3,565
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2-11 (M2-14) Determining Retained Earnings and Net Income Using the Balance Sheet
Use the accounting equation.
a. Cash $ 8,000
Accounts receivable 23,000 Supplies 9,000 Equipment 138,000
178,000 Accounts payable $ 11,000 Common stock 110,000 121,000 Retained earnings $ 57,000
b. Retained Earnings:
December 31, 2013 $ 57,000 January 1, 2013 30,000
Increase 27,000 Add: Dividends 12,000 Net Income 2013 $ 39,000
2-12 (M2-18) Analyzing Transaction Effects on Equity
a. no effect
b. decrease
c. decrease
d. no effect
e. increase
f. increase
g. increase
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2-13 (M2-19 Identifying and Classifying Financial Statement Items
a. Balance sheet
b. Income statement
c. Balance sheet
d. Income statement
e. Balance sheet
f. Balance sheet
g. Balance sheet
h. Balance sheet
i. Income statement
j. Income statement
k. Balance sheet
l. Balance sheet 2-14 (M2-25 Analyzing the Effect of transactions on the Balance Sheet a. Increase assets (Cash)
Increase equity (Service Revenues) b. Increase assets (Office Supplies)
Increase liabilities (Accounts Payable) c. Increase assets (Cash)
Increase equity (Contributed Capital or Common Stock) d. Decrease liabilities (Accounts Payable)
Decrease assets (Cash) e. Increase assets (Cash)
Increase liabilities (Notes Payable) f. Increase assets (Accounts Receivable)
Increase equity (Service Revenues) g. Increase assets (Office Equipment)
Decrease assets (Cash) h. Decrease equity (Interest Expense)
Decrease assets (Cash) i. Decrease equity (Utilities Expense) Increase liabilities (Accounts Payable
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2-15 (M2-29) Analyzing Transactions using the Financial Statement effects Template
Balance Sheet Income Statement
Transaction Cash + Noncash = Liabil- + Contrib. + Earned Revenues - Expenses = Net Asset Assets ities Capital Capital Income
a. Issue stock for
$1,000 cash. +1,000
Cash
+1,000 = - =
Common Stock
b. Purchase inventory
for $500 cash. -500 Cash
+500 Inventory
= - =
c. Sell inventory for
$2,000 on credit. +2,000 Accts Rec =
+2,000 Retained Earnings
+2,000
Sales - =
+2,000
d. Record $500 for cost of inventory sold in c.
-500 =
Inventory
-500 Retained Earnings
+500 -
COGS Expense
-500 =
e. Receive $2,000
cash on receivable from c.
+2,000
Cash
-2,000 Accts Rec
= - =
Totals 2,500 + 0 = = + 1,000 + 1,500 2,000 - 500 = 1,500
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+ Accounts Receivable (A) -
(c) 2,000 (e) 2,000
- Sales (R) +
(c) 2,000
+ Cost of Goods Sold (E) -
(d) 500
- Common Stock (SE) +
(a) 1,000
2-16 (M2-30) Journalizing Business Transactions
a. Cash (+A) ........................................................................... Common stock (+SE) ....................................................
1,000
1,000
b.
Inventory (+A) ..................................................................... Cash (-A) ........................................................................
500
500
c.
Accounts receivable (+A).................................................... Sales (+R, +SE) .............................................................
2,000
2,000 d.
Cost of goods sold (+E, -SE) ..............................................
Inventory (-A)..................................................................
500
500 e.
Cash (+A) ...........................................................................
Accounts receivable (-A) ................................................
2,000
2,000
2-17 (M2-31) Posting to T-Accounts
+ Cash (A) -
(a) 1,000 (e) 2,000
(b) 500
+ Inventory (A) -
(b) 500 (d) 500
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2-18 (E2-34) Preparing Balance Sheets, Computing Income and Applying the Current and Quick Ratios.
Lang Services
a. Balance Sheet
December 31, 2013 2012
Assets Cash $10,000 $ 8,000 Accounts receivable 22,800 17,500 Supplies 4,700 4,200 Equipment 32,000 27,000 Total assets $69,500 $56,700
Liabilities Accounts payable $25,000 $25,000 Notes payable 1,800 1,600
Total liabilities 26,800 26,600
Stockholders’ equity Equity 42,700 30,100 Total liabilities and stockholders’ equity $69,500 $56,700
b. Equity, December 31, 2013 $42,700 Equity, December 31, 2012 30,100 Increase 12,600 Add: Dividends 17,000
29,600 Less: Common Stock issued 5,000 Net Income for 2013 $24,600
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2-19 (E2-35) Constructing Balance Sheets and Determining Income
LYNCH SERVICES
a. BALANCE SHEETS
Assets
December 31, 2013 2012
Cash $ 23,000 $ 20,000 Accounts receivable 42,000 33,000 Supplies 20,000 18,000 Land 40,000 40,000 Building 250,000 260,000 Equipment 43,000 45,000 Total assets $418,000 $416,000
Liabilities Accounts payable $ 6,000 $ 9,000 Mortgage payable 90,000 100,000
Total liabilities 96,000 109,000
Stockholders' equity Common stock 220,000 220,000 Retained earnings 102,000 87,000
Total stockholders' equity 322,000 307,000 Total liabilities and stockholders' equity $418,000 $416,000
b. Retained Earnings, December 31, 2013 $102,000 Retained Earnings, December 31, 2012 87,000
Increase during 2013 15,000 Add: Dividend for 2013 10,000 Net Income for 2013 $ 25,000
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2-20 (E2-44) Constructing Balance Sheets
Bettis Contractors a. and b. Balance Sheets
Assets
June 30, July 2, 2013 2013
Cash …………………………………………………………… $ 14,700 $ 2,200 Accounts receivable 9,200 9,200 Supplies 30,500 30,500
Current assets 54,400 41,900 Land 25,000 25,000 Equipment 98,000 108,000 Total assets $177,400 $174,900
Liabilities Accounts payable 8,900 8,900
Current liabilities 8,900 8,900 Notes payable $ 30,000 $ 33,000
Total liabilities 38,900 41,900
Stockholders' Equity Common stock 100,000 100,000 Retained earnings 38,500 33,000
Total stockholders' equity 138,500 133,000 Total liabilities and stockholders' equity $177,400 $174,900
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2-21 (E2-45) Analyzing Transactions Using the Financial Statement Effects Template
Balance Sheet Income Statement
Transaction Cash + Noncash = Liabil- + Contrib. + Earned Revenues - Expenses = Net
1. Receive $20,000 cash in exchange for common stock.
2. Purchase $2,000
Asset
+20,000
Cash
Assets +2,000
ities =
+2,000
Capital +20,000 Common
Stock
Capital Income - =
of inventory on credit.
3. Sell inventory for $3,000 on credit.
Inventory =
+3,000 Accounts
Accounts Payable
+3,000
Retained
+3,000
- =
+3,000 Receivable =
Earnings Sales - =
4. Record cost of goods sold in 3.
5. Collect $3,000
+3,000
-2,000
Inventory =
-3,000
-2,000 Retained Earnings -
+ 2,000 COGS
Expense
=
- 2,000
cash from transaction 3.
6. Acquire $5,000 of
Cash Accounts Receivable
+5,000
= - =
+5,000
equipment by signing a note.
7. Pay wages of
-1,000
Equipment = Notes
Payable
-1,000 Retained
- =
+ 1,000
$1,000 in cash. 8. Pay $5,000 cash on
Cash =
-5,000
-5,000
Earnings - Wages
Expense =
- 1,000
a note payable.
9. Pay $2,000 cash
Cash = Notes
Payable - =
-2,000
dividend. -2,000 =
Cash
Retained Earnings
- =
TOTALS 15,000 + 5,000 = 2,000 + 20,000 + -2,000 3,000 - 3,000 = 0
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2-22 (E2-46) Recording Transactions using Journal Entries and T-Accounts Part a: 1. Cash (+A) ........................................................................... 20,000
Common stock (+SE) ..................................................... 20,000 2. Inventory (+A) ..................................................................... 2,000
Accounts payable (+L).................................................... 2,000 3. Accounts receivable (+A).................................................... 3,000
Sales (+R, +SE) ............................................................. 3,000 4. Cost of goods sold (+E, -SE) .............................................. 2,000
Inventory (-A).................................................................. 2,000 5. Cash (+A) ........................................................................... 3,000
Accounts receivable (-A) ................................................ 3,000 6. Equipment (+A)................................................................... 5,000
Notes payable (+L) ......................................................... 5,000 7. Wages expense (+E, -SE) .................................................. 1,000
Cash (-A) ........................................................................ 1,000 8. Notes payable (-L) .............................................................. 5,000
Cash (-A) ........................................................................ 5,000 9. Retained earnings (-SE) ..................................................... 2,000
Cash (-A) ........................................................................ 2,000
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- Common Stock (SE) + 20,000 (1)
- Sales Revenue (R) + 3,000 (3)
+ Cost of Goods Sold (E) - (4) 2,000
+ Wages Expense (E) - (7) 1,000
- Accounts Payable (L) + 2,000 (2)
- Retained Earnings (SE) + (9) 2,000
Part b:
+ Cash (A) - (1) 20,000 (5) 3,000
1,000 (7) 5,000 (8) 2,000 (9)
+ Inventory (A) - (2) 2,000 2,000 (4)
+ Accounts Receivable (A) - (3) 3,000 3,000 (5)
+ Equipment (A) - (6) 5,000
- Notes Payable (L) +
(8) 5,000 5,000 (6)
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2-23 (P2-51) Preparing a Balance Sheet, Computing Net Income, and Understanding Equity Transactions.
Barth Company Balance Sheet
a. December 31, 2013
Assets Liabilities
Cash.................................$ 8,800 Accounts payable.............. $ 7,500 Accounts receivable ..........18,400 Equipment ...........................9,000 Land ..................................50,000 Equity
Stockholders’ equity .......... 78,700 Total assets $86,200 Total liabilities & equity ..... $86,200
b. Increase in Equity ($78,700-$67,500) $11,200 Add: Dividends 12,000 Net Income for 2013 23,200 c.
Increase in Equity
($78,700-$67,500)
$11,200 Add: Dividends 21,000 32,200
Less: Additional Investment 13,500 Net Income for 2013 $18,700
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2-24 (P2-55) Analyzing Transactions using the Financial Statement Effects Template and Preparing an Income Statement.
a.
Balance Sheet Income Statement
Transaction Cash + Noncash = Liabil- + Contrib. + Earned Revenues - Expenses = Net
1. Issued common Asset +7,000
Assets ities Capital +7,000
Capital Income
stock $7,000. Cash = Common - = Stock
2. Paid rent $750. -750 Cash =
3. Received $500
+500
-750 Retained Earnings
-500
+750 - Rent Expense =
+500
-750 -500
invoice for advertising expense.
4. Borrowed $15,000
+15,000
= Accounts Payable
+15,000
Retained - Earnings
Advertising = Expense
cash from bank.
5. $1,200 Cash received for services.
6. Billed clients $6,800
Cash = +1,200
Cash =
+6,800
Notes Payable
+1,200 Retained Earnings +6,800
+1,200
Counseling Services Revenue +6,800
- =
+1,200 - =
+6,800 for services.
7. Paid $2,200 cash
-2,200
Accounts = Receivable
Retained Earnings
-2,200
Services Revenue
- =
+2,200
-2,200
for salary.
8. Paid $370 cash for utilities.
9. Paid $900 cash
Cash = -370 Cash = -900
Retained Earnings
-370 Retained Earnings
-900
- Salary Expense
+370 - Utilities
Expense
=
-370 =
dividend. Cash = Retained - = Earnings
10. Acquired land for $13,000.
-13,000 Cash
+13,000 = - = Land
11. Paid $100 interest in cash.
-100 Cash =
-100 Retained Earnings
+100 - Interest
Expense
-100 =
Totals $5,880 + $19,800 = $15,500 + $7,000 + $3,180 $8,000 - $3,920 = $4,080
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b. Lambert Services
Income Statement For the Month of December 2013
Counseling services revenue $8,000 Expenses
Rent expense $ 750 Advertising expense 500 Salary expense 2,200 Utilities expense 370 Interest expense 100 Total expenses 3,920
Net income $4,080
22
-
2-25 (P2-60) Analyzing Transactions using the Financial Statement Effects Template and Preparing an Income Statement.
a. Balance Sheet Income Statement
Transaction Cash Asset + Noncash
Assets
= Liabil- ities + Contrib.
Capital + Earned Capital Revenues Expenses = Net
Income 1. Issued common
stock for cash.
2. Rent paid in cash $4,800.
3. Invoice for
entertainment expense: $1,600.
4. Cash paid for
+$50,000 Cash =
-4,800
Cash =
=
-900
+$50,000 Common
Stock +1,600 Accounts Payable
-4,800 Retained Earnings
-1,600 Retained Earnings
-900
- =
+4,800 - Rent Expense =
+1,600 - Entertainment =
Expense
+900
-4,800 -1,600 -900
advertising: $900. Cash = Retained Earnings
- Advertising = Expense
5. July insurance premium prepaid in cash: $1,800.
-1,800 Cash
+1,800 Prepaid
Insurance
= - =
6. Flight services collected in cash $22,700.
7. Billed for flight
+22,700 Cash =
+15,900
+22,700 Retained Earnings +15,900
+22,700 Flight
Services Revenue
+15,900
+22,700 - =
+15,900 services $15,900.
8. Paid $1,500 on
-1,500
Accounts Receivable
=
-1,500
Retained Earnings
Flight - = Services Revenue
accounts. Cash = Accounts - = Payable
9. Received $13,200 on account.
+13,200 Cash
-13,200 Accounts
Receivable
= - =
10. Paid wages in cash: $16,000.
11. Invoice received for
-16,000 Cash =
+3,500
-16,000 Retained Earnings
-3,500
+16,000 - Wages
expense +3,500
-16,000 =
-3,500 fuel; $3,500. = Accounts
Payable Retained Earnings
- Fuel Expense =
12. Cash dividend paid: $3,000.
-3,000 Cash =
-3,000 Retained - = Earnings
TOTALS $57,900 + $4,500 = $3,600 + $50,000 + $8,800 $38,600 - $26,800 = $11,800
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b. Outback Flights
INCOME STATEMENT
FOR THE MONTH OF JUNE 2013 Revenue
Services fees earned $38,600 Expenses
Rent expense $4,800 Entertainment expense 1,600 Advertising expense 900 Wages expense 16,000 Fuel expense 3,500 Total expenses 26,800
Net income $11,800 Note that the insurance premium paid is for the next month (July) and is not an expense, but a prepaid asset, at the end of June.
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2-26 (P2-61) Recording Transactions in Journal Entries and T-Accounts
a.
1. Cash (+A) ........................................................................... Common stock (+SE) .....................................................
50,000
50,000
2.
Rent expense (+E,-SE)....................................................... Cash (-A) ........................................................................
4,800
4,800
3.
Entertainment expense (+E,-SE) ........................................ Accounts payable (+L)....................................................
1,600
1,600
4.
Advertising expense (+E,-SE) ............................................ Cash (-A) ........................................................................
900
900 5.
Prepaid insurance (+A) .......................................................
Cash (-A) ........................................................................
1,800
1,800 6.
Cash (+A) ..........................................................................
Flight services revenue (+R,+SE)...................................
22,700
22,700
7.
Accounts receivable (+A).................................................... Flight services revenue (+R,+SE)...................................
15,900
15,900
8.
Accounts payable (-L)......................................................... Cash (-A) ........................................................................
1,500
1,500
9.
Cash (+A) ........................................................................... Accounts receivable (-A) ................................................
13,200
13,200
10.
Wages expense (+E,-SE) ................................................... Cash (-A) ........................................................................
16,000
16,000
11.
Fuel expense (+E,-SE) ....................................................... Accounts payable (+L)....................................................
3,500
3,500 12.
Retained earnings (dividend paid) (-SE).............................
Cash (-A) ........................................................................
3,000
3,000
25
- Accounts Payable (L) + (8) 1,500 1,600 (3)
3,500 (11)
- Common Stock (SE) + 50,000 (1)
- Retained Earnings (SE) + (12) 3,000
- Flight Services Revenue (R) + 22,700 (6)
15,900 (7)
+ Entertainment Expense (E) - (3) 1,600
+ Wages Expense (E) - (10) 16,000
+ Fuel Expense (E) - (11) 3,500
b.
+ Cash (A) - (1) 50,000 (6) 22,700 (9) 13,200
4,800 (2) 900 (4)
1,800 (5) 1,500 (8)
16,000 (10) 3,000 (12)
+ Accounts Receivable (A) -
(7) 15,900 (9) 13,200
+ Prepaid Insurance (A) - (5) 1,800
+ Rent Expense (E) - (2) 4,800
+ Advertising Expense (E) - (4) 900
26
2-27 (P2-64) Preparing the Income Statement, Statement of Stockholders’ Equity, and the Balance Sheet.
a. Geyer, Inc.
Income Statement For Year Ended December 31, 2013
Service fee revenue..................................................................... $67,600
Supplies expense ........................................................................ $ 9,700
Insurance expense ...................................................................... 1,500
Salaries expense ......................................................................... 30,000
Advertising expense .................................................................... 1,700
Rent expense .............................................................................. 7,500
Miscellaneous expense ............................................................... 200
Total expenses ...................................................................... 50,600
Net income .................................................................................. $17,000
b.
Geyer, Inc. Statement of Stockholders’ Equity
For Year Ended December 31, 2013
Common Retained Total Stockholders’ Stock Earnings Equity
Balance at December 31, 2012 .... $4,000 $6,200 $10,200 Stock issuance ........................... 1,400 1,400 Dividends ................................... (13,500) (13,500) Net income ................................. 17,000 17,000
Balance at December 31, 2013 .... $5,400 $9,700 $15,100
27
c. Geyer, Inc. Balance Sheet
December 31, 2013
Cash ..................................... $14,800 Accounts payable....................... $ 1,800
Supplies................................ 6,100 Notes payable ........................... 4,000
Total assets .......................... $20,900 Total liabilities ……………… 5,800
Common stock ………………. 5,400
Retained earnings* …………. 9,700
Total liabilities and equities .. $20,900 * $6,200 beginning balance + $17,000 net income - $13,500 dividend
28
2-28 (P2-65) Analyzing Transactions Using the Financial Statement Effects Template and Preparing Financial Statements.
a & b.
Balance Sheet Income Statement
Transaction Cash + Noncash = Liabil-ities + Contrib. + Earned Revenues - Expenses = Net Asset Assets Capital Capital Income
Beginning Balances +5,000 +5,200 = +3,500 +5,500 +1,200 - 1. Paid $600 cash
toward accounts payable
-600 Cash =
-600 Accounts Payable - =
2. Paid rent in cash:
$3,600
3. Billed clients
-3,600 Cash =
+11,500
-3,600 Retained Earnings
+11,500
+11,500
+3,600 - Rent Expense =
-3,600 +11,500
$11,500
4. $500 invoice
Accounts = Receivable
+500
Retained Earnings
-500
Services Revenue
- =
+500
-500
received for advertising
= Accounts Payable
Retained Earnings
- Advertising = Expense
5. Cash collected on
account: $10,000 +10,000
Cash -10,000 Accounts
Receivable
= - =
6. Paid wages expense in cash: $2,400
7. Invoiced for utility
-2,400 Cash =
+680
-2,400 Retained Earnings
-680
+2,400 - Wages
Expense
+680
-2,400 =
-680 expense: $680 = Accounts
Payable Retained Earnings
- Utilities = Expense
8. Paid $20 cash for interest on note
9. Paid $900 cash
-20 Cash = -900
-20 Retained Earnings
-900
+20 - Interest =
Expense
-20
dividend Cash = Retained - = Earnings
10. Paid $4,000 cash for sound equipment
-4,000 Cash
+4,000 Equipment = - =
TOTALS $3,480 + $10,700 = $4,080 + $5,500 + $4,600 $11,500 - $7,200 = $4,300
29
2-29 (M3-23) Journalizing Transactions and Adjusting Accounts.
a. Balance Sheet Income Statement
Transaction Cash Asset
+ Noncash Assets
= Liabil-‐ ities + Contrib. Capital + Earned
Capital Revenues -‐ Expenses = Net
Income 1. Received $20,100 in
advance for contract work.
+20,100 Cash =
+20,100U nearned -‐ = ervice Fees
Jan. 1 Cash (+A) 20,100 Unearned service fees (+L) 20,100
To record fee received in advance. b.
Balance Sheet Income Statement
Transaction Cash Asset
+ Noncash Assets
= Liabil-‐ ities + Contrib. Capital
+ Earned Capital
Revenues -‐ Expenses = Net Income
2. Adjusting entry for work completed by Jan. 31.
-‐3,350 = Unearned
ervice Fees
+3,350 Retained Earnings
+3,350 Service Fees
+3,350 -‐ =
Jan. 31 Unearned service fees (-‐L) 3,350 Service fees (+R, +SE) 3,350
To reflect January service fees earned on contract ($20,100/6 = $3,350).
c.
Balance Sheet Income Statement
Transaction Cash Asset + Noncash Assets
= Liabil-‐ ities + Contrib. Capital + Earned
Capital Revenues -‐ Expenses = Net
Income 3. Adjusting entry for
fees earned but not billed.
+570 Fees =
Receivable
+570 Retained Earnings
+570 Service Fees
+570 -‐ =
Jan. 31 Fees receivable (+A) 570 Service fees (+R, +SE) 570
To record unbilled service fees earned at January 31.
30
2-‐30 (M3-24) Adjusting Accounts.
1.
Balance Sheet Income Statement
Transaction Cash Asset
+ Noncash Assets
= Liabil-‐ ities + Contrib. Capital
+ Earned Capital
Revenues -‐ Expenses = Net Income
1. Adjusting entry for prepaid insurance.
-‐185 Prepaid = Insurance
-‐185 Retained Earnings
+185 -‐ Insurance =
Expense
-‐185
Jan. 31 Insurance expense (+E, -‐SE) 185 Prepaid insurance (-‐A) 185
To record January insurance expense ($6,660/36 = $185).
2.
Balance Sheet Income Statement
Transaction Cash Asset
+ Noncash Assets
= Liabil-‐ ities + Contrib. Capital
+ Earned Capital
Revenues -‐ Expenses = Net Income
2. Adjusting entry for supplies used.
-‐1,080 Supplies =
-‐1,080 Retained Earnings
+1,080 -‐ Supplies
Expense
-‐1,080 =
Jan. 31 Supplies expense (+E, -‐SE) 1,080 Supplies (-‐A) 1,080
To record January supplies expense ($1,930 -‐ $850 = $1,080).
3.
Balance Sheet Income Statement
Transaction Cash Asset +
Noncash Assets -‐ Contra
Assets = Liabil-‐ities + Contrib. Capital + Earned Capital Revenues -‐ Expenses = Net
Income 3. Adjusting entry
for depreciation of equipment.
+62
-‐ Accumulated Depreciation
-62
Retained Earnings
- +62
Depreciation Expense
= -62
Jan. 31 Depreciation expense—Equipment (+E, -‐SE) 62 Accumulated depreciation—Equipment (+XA, -‐A) 62
To record January depreciation on office equipment ($5,952/96 = $62).
31
4.
Balance Sheet Income Statement
Transaction Cash Asset
+ Noncash Assets
= Liabil-‐ ities + Contrib. Capital
+ Earned Capital
Revenues -‐ Expenses = Net Income
4. Adjusting entry for rent. =
-‐875 Unearned
Rent Revenue
+875 Retained Earnings
+875 Rent Revenue -‐ =
+875
Jan. 31 Unearned rent revenue (-‐L) 875 Rent revenue (+R, +SE) 875
To record portion of advance rent earned in January.
5.
Balance Sheet Income Statement
Transaction Cash Asset
+ Noncash Assets
= Liabil-‐ ities + Contrib. Capital
+ Earned Capital
Revenues -‐ Expenses = Net Income
5. Adjusting entry for accrued salaries. =
+490 Salaries Payable
-‐490 Retained Earnings
+490 -‐ Salaries
Expense
-‐490 =
Jan. 31 Salaries expense (+E, -‐SE) 490 Salaries payable (+L) 490
To record accrued salaries at January 31.
32
=
2-31 (M3-25) Inferring Transactions from Financial Statements.
(All amounts in $ millions.) a.
Balance Sheet Income Statement
Transaction Cash Asset
Inventory purchases
+ Noncash Assets +2,913.49
= Liabilities + Contrib. Capital
+2,913.49
+ Earned Capital
Revenues -‐ Expenses = Net Income
(total). Inventory = Accounts -‐ = Payable
Inventories (+A)……………………….. 2,913.49 Accounts payable (+L)…………….. 2,913.49
To record total purchases made at various dates.
b. Beginning AP balance + Purchases – Payments = Ending AP balance, or Payments = Beg AP Balance + Puchases -‐ Ending AP Balance
Payments= $365.75 + $2,913.49 -‐ $299.11 = $2,980.13.
c.
Balance Sheet Income Statement Transaction Cash Asset + Noncash Assets
Adjusting entry for cost of
= Liabilities + Contrib.
Capital
+ Earned Capital Revenues -‐ Expenses
= Net Income
goods sold for FYE 2012. -‐2,946.08
Inventory -‐2,946.08 Retained Earnings
-‐ +2,946.08 Cost of Goods
Sold
= -‐2,946.08
* Beginning Inv balance + Purchases – Cost of goods sold = Ending Inv balance, or COGS = Beg Inv Balance +Purchases – Ending Inv Balance COGS = $887.36 + $2,913.49 – $854.77 = $2,946.08
Cost of goods sold (+E, -‐SE)…………………... 2,946.08 Inventories (-‐A)………………………………… 2,946.08
To record cost of goods sold for the year ended 1/28/2012.
33
+ Utilities Expense (E) -‐
Bal. 8,200 8,200 (2) Dec. 31 Bal. 0
-‐ Commissions Revenue (R) +
(1)Dec. 31 84,000 84,900 Bal. 0 Bal.
-‐ Retained Earnings (SE) +
(2)Dec. 31 55,900 72,100 Bal. 84,900 (1)Dec.31
101,100 Bal. Dec.31
2-32 (M3-28) Preparing Closing Entries Using Journal Entries and T-Accounts.
Part a.
Date 2014 Description Debit Credit Dec. 31 Commissions revenue (-‐R)
Retained earnings (+SE) 84,900
84,900
To close the revenue account. 31 Retained earnings (-‐SE) 55,900
Wages expense (-‐E) 36,000 Insurance expense (-‐E) 1,900 Utilities expense (-‐E) 8,200 Depreciation expense (-‐E) 9,800
To close the expense accounts.
Closing the revenue and expense accounts into retained earnings has the effect of increasing the retained earnings balance by an amount equal to net income (revenue minus expenses). The balance of Smith’s Retained Earnings after closing entries are posted is
$101,100 credit ($72,100 + $29,000).
Part b.
+ Wages Expense (E) -‐
Bal. 36,000 36,000 (2)Dec. 31 Bal. 0
+ Insurance Expense (E) -‐
Bal. 1,900 1,900 (2)Dec. 31 Bal. 0
+ Depreciation Expense (E) -‐
Bal. 9,800 9,800 (2)Dec. 31 Bal. 0
34
2-33 (E3-32) Preparing and Journalizing Adjusting Entries.
Part a.
Balance Sheet Income Statement
Transaction Cash Asset +
Noncash Assets -‐ Contra
Assets = Liabilities + Contrib. Capital + Earned Capital Revenues -‐ Expenses = Net
Income 1. Adjusting entry for
depreciation: equipment.
2. Adjusting entry for
-1,890
+610 - Accumulated
Depreciation
= -610 Retained Earnings
= -1,890 Retained
- +610 Depreciation
Expense - +1,890
= -610 = -1,890
supplies expense.
3. Adjusting entry for
Supplies - = +390
Earnings
-390
Supplies Expense
- +390 Utilities
= -390
utilities expense. - Utilities Payable
Retained Earnings
Expense
4. Adjusting entry for rent expense.
-700 Prepaid Rent -
= -700 Retained Earnings
- +700 Rent Expense
= -700
5. Adjusting entry for premium revenues.
-
= -468 Unearned Premium
+468 Retained Earnings
+468 Premium Revenue
- = +468
Revenue 6. Adjusting entry for = +965 -965 - +965 = -965
wage expense. - Wages Retained Wage Payable Earnings Expense 7. Adjusting entry for +300 = +300 +300 - = +300
interest earned. Interest - Retained Interest Receivable Earnings Income TOTALS 0 + -2,290 - 610 = 887 + 0 + -3,787 768 - 4,555 = -3,787
35
Part b. 1. Depreciation expense—Equipment (+E,-SE) 610
Accumulated depreciation—Equip (+XA) 610 To record depreciation for the period.
2. Supplies expense (+E,-SE) 1,890
Supplies (-A) 1,890 To record supplies expense for the period ($2,990 - $1,100 = $1,890).
3. Utilities expense (+E, - SE) 390
Utilities payable (+L) 390 To record accrued utilities expense.
4. Rent expense (+E,-SE) 700
Prepaid rent (-A) 700 To record rent expense for the month ($2,800/4 = $700).
5. Unearned premium revenue (-L) 468
Premium revenue (+R,+SE) 468 To record premium revenue earned [($624/12) * 9 = $468].
6. Wages expense (+E,-SE) 965
Wages payable (+L) 965 To record accrued wages at the end of the period.
7. Interest receivable (+A) 300 Interest income (+R,+SE) 300
To accrue interest earned but not yet received.
36
2-34 (E3-34) Analyzing Accounts Using Adjusted Data
a. Balance, January 1 = $960 + $800 - $620 = $1,140.
b. Amount of premium = $82 * 12 = $984. Therefore, five months' premium ($984 - $574 = $410à 410/82=5) has expired by January 31. The policy has been in effect since September 1, 2013. The policy term began on September 1 of the previous year.
c. Wages paid in January = $3,200 - $500 = $2,700.
d. Monthly depreciation expense = $8,700/60 months = $145. Fields has owned
the truck for 18 months ($2,610/$145 = 18).
2-35 (E3-37) Preparing Closing Procedures. Part a.
Dec. 31 Service fees earned (-R) 92,500
Interest income (-R) 2,200 Retained earnings (+SE) 94,700
To close the revenue accounts.
31 Retained earnings (-SE) 64,700 Salaries expense (-E) 41,800 Advertising expense (-E) 4,300 Depreciation expense (-E) 8,700 Income tax expense (-E) 9,900
To close the expense accounts.
37
- Service Fees Earned (R) + (1) 92,500 92,500 Bal. 0 Bal.
- Interest Income (R) + (1) 2,200 2,200 Bal. 0 Bal.
+ Advertising Expense (E) - Bal. 4,300 4,300 (2) Bal. 0
+ Income Tax Expense(E) - Bal. 9,900 9,900 (2) Bal. 0
Part b.
- Retained Earnings (SE) + (2) 64,700 42,700 Bal.
94,700 (1) 72,700 Bal.
+ Salaries Expense (E) - Bal. 41,800 41,800 (2) Bal. 0
+ Depreciation Expense (E) - Bal. 8,700 8,700 (2) Bal. 0
2-36 (P3-41) Preparing an Unadjusted Trail Balance and Adjustments
a.
SnapShot Company
UNADJUSTED TRIAL BALANCE DECEMBER 31, 2013
Debit Credit
Cash $2,150 Accounts Receivable 3,800 Prepaid Rent 12,600 Prepaid Insurance 2,970 Supplies 4,250 Equipment 22,800 Accounts Payable $1,910 Unearned Photography Fees 2,600 Common Stock 24,000 Photography Fees Earned 34,480 Wages Expense 11,000 Utilities Expense 3,420
$62,990 $62,990
38
b.
Balance Sheet Income Statement
Transaction Cash Asset +
Noncash Assets -‐ Contra
Assets = Liabilities + Contrib.
Capital + Earned Capital Revenues -‐ Expenses = Net
Income 1. Fees earned
but not received.
2. Recognize depreciation
+925 Fees
Receivable
- =
+2,280 Accumulated
+925 Retained Earnings
-2,280 Retained
+925 Photography Fees Earned
- =
+2,280 Depreciation
+925 -2,280
expense for one year.
3. Recognize
- Depreciation = +400
Earnings -
-400
Expense = +400
-400
utilities expense.
4. Recognize
-6,300
- = Utilities Payable
Retained Earnings
-6,300
- Utilities Expense
+6,300
=
-6,300 rent expense for year.
5. Recognize
Prepaid Rent - = -2,600
Retained Earnings
+2,600
+2,600
- Rent Expense = +2,600
photo revenues.
6. Recognize
-990
- = Unearned Photo Fees
Retained Earnings
-990
Photography Fee Earned
- =
+990
-990
insurance expense.
7. Recognize
Prepaid - = Insurance
-2,730
Retained Earnings
-2,730
- Insurance Expense
+2,730
=
-2,730 supplies expense.
8. Recognize wages expense.
Supplies - =
- =
+375 Wages Payable
Retained Earnings
-375 Retained Earnings
- Supplies Expense
+375 - Wages
Expense
=
-375 =
Totals 0 + -9,095 - 2,280 = -1,825 + 0 + -9,550 3,525 - 13,075 = -9,550
39
Date 2013 Description Debit Credit Dec. 31 Fees receivable (+A)
Photography fees earned (+R, +SE) ` 925
925
To record revenue earned but not billed.
31
Depreciation expense (+E,-SE) Accum. depreciation—Equipment (+XA, -A)
2,280
2,280 To record depreciation for the year
($22,800/10 years = $2,280).
31 Utilities expense (+E, -SE) 400 Utilities payable (+L) 400
To record estimated December utilities expense.
31 Rent expense (+E, -SE) 6,300 Prepaid rent (-A) 6,300
To record rent expense for the year ($12,600/2 years = $6,300).
31 Unearned photography fees (-L) 2,600 Photography fees earned (+R, +SE) 2,600
To record advance payments earned during the year.
31 Insurance expense (+E, -SE) 990 Prepaid insurance (-A) 990
To record insurance expense for the year ($2,970/3 years = $990).
31 Supplies expense (+E,-SE) 2,730 Supplies (-A) 2,730
To record supplies expense for the year ($4,250 - $1,520 = $2,730).
31 Wages expense (+E, -SE) 375 Wages payable(+L) 375
To record unpaid wages at December 31.
40
+ Equipment (A) -‐ Unadj. bal. 22,800 Adj. bal. 22,800
-‐ Accum. Depreciation – Equip. (XA) +
2,280 (2) Dec.31
2,280 Adj. Bal.
+ Supplies Expense (E) -‐ Dec. 31 (7) 2,730 Adj. bal. 2,730
+ Insurance Expense (E) -‐ Dec. 31 (6) 990
Adj. bal. 990
c.
+ Cash (A) -‐ -‐ Accounts Payable (L) + Unadj. bal. 2,150 1,910 Unadj. bal.
Adj. bal. 2,150 1,910 Adj. bal.
+ Accounts Receivable (A) -‐ -‐ Unearned Photo Fees (L) + Unadj. bal. 3,800 Dec.31 (5) 2,600 2,600 Unadj. bal.
Adj. bal. 3,800 0 Adj. bal.
+ Fees Receivable (A) -‐ -‐ Utilities Payable (L) + Dec. 31 (1) 925 400 (3) Dec.31
Adj. bal. 925 400 Adj. bal.
+ Prepaid Rent (A) -‐ -‐ Wages Payable (L) + Unadj. bal. 12,600 6,300 (4) Dec.31 375 (8) Dec.31
Adj. bal. 6,300 375 Adj. bal.
+ Prepaid Insurance (A) -‐ -‐ Common Stock (SE) + Unadj. bal. 2,970 990 (6) Dec.31 24,000 Unadj. bal.
Adj. bal. 1,980 24,000 Adj. bal.
+ Supplies (A) -‐ -‐ Photo Fees Earned (R) + Unadj. bal. 4,250 2,730 (7) Dec.31 34,480 Unadj. bal
Adj. bal. 1,520 925 (1) Dec.31 2,600 (5) Dec.31
38,005 Adj. bal.
+ Wages Expense (E) -‐ Unadj. bal. 11,000 Dec.31 (8) 375 Adj. Bal. 11,375
+ Utilities Expense (E) -‐ Unadj. bal. 3,420 Dec.31 (3) 400 Adj. Bal. 3,820
+ Depreciation Expense – Equip. (E) -‐ Dec.31 (2) 2,280 Adj. Bal. 2,280
+ Rent Expense (E) -‐ Dec.31 (4) 6,300 Adj. Bal. 6,300
41
2-37 (P3-43) Preparing Adjusting Entries.
Part a.
Balance Sheet Income Statement
Transaction Cash Asset +
Noncash Assets -‐ Contra
Assets = Liabil-‐ities + Contrib. Capital + Earned Capital Revenues -‐ Expenses = Net
Income 1. Accrue salary
expense.
2. Accrue interest expense.
- = +720 Salaries Payable
- = +200 Interest Payable
-720 Retained Earnings
-200 Retained Earnings
- +720 Salaries Expense
- +200 Interest Expense
= -720 = -200
3. Accrue fees receivable.
+900 Fees
Receivable
- = +900 Retained Earnings
+900 Printing
Revenue
- = +900
4. Accrue maintenance expense.
5. Accrue ad. Expense.
-400 Prepaid
Maintenance
-300 Prepaid
Advertising
- = -400 Retained Earnings
- = -300 Retained Earnings
- +400 Maintenance
Expense - +300
Ad. Expense
= -400 = -300
6. Accrue rent expanse.
- = +160 Rent
Payable
-160 Retained Earnings
- +160 Rent
Expense
= -160
7. Accrue interest revenue.
+38 Interest
Receivable
- = +38 Retained Earnings
+38 Interest Revenue
- = +38
8. Accrue depreciation expense.
- +2,175 Accumulated Depreciation
= -2,175 Retained Earnings
- +2,175 Depreciation
Expense
= -2,175
Totals 0 + +238 - 2,175 = 1,080 + 0 + -3,017 938 - 3,955 = -3,017
42
b. Date Description Debit Credit Dec 31 Salaries expense (+E, -SE) 720
Salaries payable (+L) 720 To accrue salaries at December 31 ($1,800 * 2/5 = $720).
31 Interest expense (+E, -SE) 200 Interest payable (+L) 200
To accrue interest expense at December 31.
31 Fees receivable (+A) 900 Printing revenue (+R, +SE) 900
To record revenue earned but not yet billed.
31 Maintenance expense (+E ,-SE) 400 Prepaid maintenance (-A) 400
To record December maintenance expense.
31 Advertising expense (+E, -SE) 300 Prepaid advertising (-A) 300
To record December advertising expense ($900 * 1/3 = $300).
31 Rent expense (+E, -SE) 160 Rent payable (+L) 160
To accrue one-half month's rent expense [(400 *$0.80)/2 = $160].
31 Interest receivable (+A) 38 Interest income (+R, +SE) 38
To accrue interest earned in December.
31 Depreciation expense—Equipment (+E, -SE) 2,175 Accum. depreciation—Equipment (+XA) 2,175
To record annual depreciation on equipment.
43
2-38 (P3-44) Preparing Financial Statements and Closing Entries.
TRUEMAN CONSULTING INC. INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2013
a. Revenue
Service fees earned $58,400 Expenses
Rent expense $12,000
Salaries expense 33,400 Supplies expense 4,700 Insurance expense 3,250 Depreciation expense—Equipment 720 Interest expense 630
Total Expenses 54,700 Net Income $ 3,700
TRUEMAN CONSULTING INC. STATEMENT
OF STOCKHOLDERS’ EQUITY FOR THE YEAR ENDED DECEMBER 31, 2013
Common Stock
Retained Earnings
Total Stockholders’ Equity
Balance at December 31, 2012 .............. $1,000 $3,305 $4,305 Stock issuance ....................................... Dividends................................................ Net income ............................................. 3,700 3,700 Balance at December 31, 2013 .............. $1,000 $7,005 $8,005
44
TRUEMAN CONSULTING
BALANCE SHEET
DECEMBER 31, 2013 Assets
Liabilities
Cash $ 2,700 Accounts payable $ 845 Accounts receivable 3,270 Long-term notes payable 7,000 Supplies 3,060 Total Liabilities 7,845 Prepaid insurance 1,500 Equipment $ 6,400
Owners’ Equity Less: Accumulated depreciation
1,080 5,320
Common stock 1,000 Retained earnings 7,005
Total Assets $15,850
Total Liabilities and Owners’ Equity $15,850
b.
Date 2013 Description Debit Credit Dec. 31 Service fees earned (-R) 58,400
Retained earnings (+SE) 58,400 To close the revenue account.
31 Retained earnings (-SE) 54,700 Rent expense (-E) 12,000 Salaries expense(-E) 33,400 Supplies expense (-E) 4,700 Insurance expense (-E) 3,250 Depreciation expense—Equip (-E) 720 Interest expense (-E) 630
To close the expense accounts.
45
- Accounts Payable (L) + 9,480 6/1
- Salaries Payable (L) + 725 2.
- Unearned Service Fees (L) + 5. 3,200 6,400 6/2 3,200
- Common Stock (SE) + 24,000 6/1
- Retained Earnings(SE) + 6/30 1,500
+ Supplies Expense (E) - 1. 1,310
+ Travel Expense (E) - 6/15 1,240
+ Depreciation Expense(E) - 3. 115
2-39 (P3-47) Journalizing and Posting Transactions, and Preparing a Trial Balance and Adjustments.
a, b and d. For part d, the adjusting entries are indicated by the numbers 1-5. The unadjusted trial balance required in part c is calculated before the adjusting entries are made.
+ Cash (A) - 6/1 24,000 6/2 6,400 6/30 7,800
4,400 6/1 875 6/2 930 6/2
3,600 6/12 1,240 6/15
520 6/18 3,600 6/26 1,500 6/30
21,535
+ Accounts Receivable (A) - 6/10 5,800 6/28 5,200
7,800 6/30
3,200
+ Prepaid Advertising (A) - 6/2 930 310 4.
620
+ Office Supplies (A) - 6/1 2,840 1,310 1.
1,530
+ Office Equipment (A) - 6/1 11,040
- Acc. Depreciation – Off. Equip (XA) + 115 3.
46
+ Rent Expense (E) - 6/2 875
- Service Fees Earned (R) + 5,800 6/10
5,200 6/28 3,200 5.
14,200
+ Advertising Expense (E) -
4. 310
+ Salaries Expenses (E) - 6/12 3,600 6/26 3,600 2. 725
7,925
+ Postage Expense (E) - 6/18 520
b.
Balance Sheet Income Statement
Transaction Cash Asset
+ Noncash Assets = Liabilities + Contrib.
Capital + Earned
Capital
Revenues -‐ Expenses = Net Income
6/1. Investment for common stock.
+24,000 =
Cash +24,000
-‐ = Common Stock
6/1. Purchase of assets for cash & on account.
-‐4,400 Cash
+ 11,040 Office
Equipment
+2,840 Supplies
+9,480 Accounts Payable
= -‐ =
6/2. Pay rent $875. -‐875 Cash =
-‐875 Retained Earnings
+875 -‐ Rent
Expense
-‐875 =
6/2.Purchase $930 of advertising in advance.
6/2Signed research
-‐930 Cash
+6,400
+930 Prepaid
Advertising
= -‐ =
+6,400
contract. 6/10. Bill customers for
Cash =
+5,800
Unearned Service Fees
+5,800
-‐ =
+5,800 Service
+5,800
services. 6/12. Paid salaries. -‐3,600
Accounts =
Receivable Retained Earnings
-‐3,600
Fees Earned -‐ =
+3,600
-‐3,600
6/15. Paid travel
expenses.
Cash =
-‐1,240 Cash =
Retained Earnings
-‐1,240 Retained Earnings
-‐ Salaries Expense =
+1,240
-‐ Travel Expense =
-‐1,240
6/18. Paid postage. -‐520 =
Cash
-‐520 Retained
-‐ +520
= Postage Expense
-‐520
47
6/26. Paid salaries. -‐3,600
Cash =
Earnings
-‐3,600 Retained Earnings
+3,600
-‐ Salaries Expense =
-‐3,600
6/28. Bill customers for services.
6/30. Collect service
+7,800
+5,200 Accounts = Receivable
-‐7,800
+5,200 Retained Earnings
+5,200 Service Fees
Earned
+5,200 -‐ =
fees.
6/30. Cash dividend paid.
Cash
-‐1,500 Cash
= -‐ = Acts. Rec.
-‐1,500 Retained -‐
Earnings
Date 2014 Description Debit Credit June 1 Cash (+A) 24,000
Common stock (+SE) 24,000 Owner invested cash for common stock.
1 Office equipment (+A) 11,040 Office supplies (+A) 2,840
Cash (-A) 4,400 Accounts payable (+L) 9,480
Purchased equipment and supplies; $4,400 cash paid with the remainder due in 60 days.
2 Rent expense (+E, -SE) 875 Cash (-A) 875
Paid June rent.
2 Prepaid advertising (+A) 930 Cash (-A) 930
Paid three months' advertising in advance.
2 Cash (+A) 6,400 Unearned service fees (+L) 6,400
Received two months' fees in advance on six-month contract.
10 Accounts receivable (+A) 5,800 Service fees earned (+R, +SE) 5,800
Billed customers for services.
48
12 Salaries expense (+E, -SE) 3,600 Cash (-A) 3,600
Paid two weeks' salaries to employees.
15 Travel expense (+E, -SE) 1,240 Cash (-A) 1,240
Paid business travel expenses.
18 Postage expense (+E, -SE) 520 Cash (-A) 520
Paid postage for questionnaire mailing.
26 Salaries expense (+E, -SE) 3,600 Cash (-A) 3,600
Paid two weeks' salaries to employees.
28 Accounts receivable (+A) 5,200 Service fees earned (+R, +SE) 5,200
Billed customers for services.
30 Cash (+A) 7,800 Accounts receivable (-A) 7,800
Collections from customers on account.
30 Retained earnings (-SE) 1,500 Cash (-A) 1,500
Declared and paid dividends.
49
c. MARKET-PROBE UNADJUSTED
TRIAL BALANCE JUNE 30, 2014
Debit Credit
Cash $21,535 Accounts Receivable 3,200 Office Supplies 2,840 Prepaid Advertising 930 Office Equipment 11,040 Accounts Payable $9,480 Unearned Service Fees 6,400 Common Stock 24,000 Retained Earnings* 1,500 Service Fees Earned 11,000 Salaries Expense 7,200 Rent Expense 875 Travel Expense 1,240 Postage Expense 520 $50,880 $50,880 * The negative (debit) balance in Retained Earnings reflects the dividend paid.
d.
Balance Sheet Income Statement
Transaction Cash Asset +
Noncash Assets -‐ Contra
Assets = Liabilities + Contrib. Capital
+ Earned Capital Revenues -‐ Expenses = Net Income
a. Recognize supplies expense.
-1,310 Office -
Supplies
= -1,310 Retained Earnings
- +1,310 Supplies Expense
= -1,310
b. Recognize salaries expense.
= +725 - Salaries
Payable
-725 Retained Earnings
- +725 Salaries Expense
= -725
c. Accrue depreciation
+115 - Accumulated
= -115 Retained
- +115 Depreciation
= -115
expense. d. Recognize
-310
Depreciation =
Earnings -310
Expense - +310
=
-310 advertising Prepaid - Retained Advertising expense. Advertising Earnings Expense
e. Recognize = -3,200 +3,200 +3,200 - = +3,200 earned service - Unearned Retained Service Fees fees. Service Fees Earnings Earned
50
Date 2014 Description Debit Credit June 30 Supplies expense (+E, -SE)
Office supplies (-A) 1,310
1,310 To record supplies used during June
($2,840 - $1,530 = $1,310).
30 Salaries expense (+E, -SE) 725 Salaries payable (+L) 725
To record unpaid salaries at June 30.
30 Depreciation expense—Office equipment (+E, -SE) 115 Accum. depr. Office equipment (+XA, -A) 115
To record June depreciation ($11,040/96 mo. = $115).
30 Advertising expense (+E, -SE) 310 Prepaid advertising (-A) 310
To record one month's advertising expense.
30 Unearned service fees (-L) 3,200 Service fees earned (+R, +SE) 3,200
To record one month's fees earned, received in advance.
2-40 (P3-50) Preparing Financial Statement and Closing Entries.
Part a.
Revenues
TRAILS, INC. INCOME
STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2013
Subscription revenue $ 168,300 Advertising revenue 49,700
Total revenues $218,000 Expenses
Salaries expense 100,230 Printing and mailing expense 85,600 Rent expense 8,800 Supplies expense 6,100 Insurance expense 1,860 Depreciation expense 5,500 Income tax expense 1,600
Total expenses 209,690 Net income $8,310
51
Trails, Inc. Statement of Stockholders’ Equity
For Year Ended December 31, 2013 Common
Stock Retained Earnings
Total Stockholders’ Equity
Balance at December 31, 2012........ $25,000 $23,220 $48,220 Stock issuance............................... Dividends ....................................... Net income..................................... 8,310 8,310
Balance at December 31, 2013........ $25,000 $31,530 $56,530
TRAILS, INC. BALANCE SHEET
DECEMBER 31, 2013 Assets Liabilities
Cash $3,400 Accounts payable $ 2,100 Accounts receivable 8,600 Unearned subscription revenue 10,000 Supplies 4,200 Salaries payable 3,500 Prepaid insurance 930 Total liabilities 15,600 Office equipment $66,000 Less: Acc. Dep 11,000 55,000
Stockholders' equity
Common stock $25,000 Retained earnings 31,530
Total stockholders' equity 56,530 Total liabilities and
Total assets $72,130 stockholders' equity $72,130
52
b. Date 2013 Description Debit Credit Dec. 31 Subscription revenue (-R) 168,300
Advertising revenue (-R) 49,700 Retained earnings (+SE) 218,000
To close the revenue accounts.
31 Retained earnings (-SE) 209,690 Salaries expense (-E) 100,230 Printing and mailing expense (-E) 85,600 Rent expense (-E) 8,800 Supplies expense (-E) 6,100 Insurance expense (-E) 1,860 Depreciation expense (-E) 5,500 Income tax expense (-E) 1,600
To close the expense accounts.
2-41 Zealock Bookstore: Analysis of transactions and preparation of income statement and balance sheet.
a. T-accounts. Cash (A) Accounts Receivable (A) (1) 25,000 20,000 (3) (8) 148,200 142,400 (10) (2) 30,000 4,000 (4) (8) 24,600 10,000 (5) (10) 142,400 8,000 (6) (13) 850 16,700 (11)
139,800 (12) 24,350 5,800
Merchandise Inventory (A) Prepaid Rent (A) (7) 160,000 140,000 (8) (3) 20,000 10,000 (15)
14,600 (9) 5,400 10,000
Deposit with Suppliers (A) Equipment (A) (6) 8,000 (4) 4,000
(5) 10,000 8,000 14,000
53
Accumulated Depreciation (XA) Note Payable (L) 400 (16) 30,000 (2)
1,500 (17) 1,900 30,000
Accounts Payable (L) Advances from Customers (L) (9) 14,600 160,000 (7) 850 (13) (12) 139,800
5,600 850 Interest Payable (L) Income Tax Payable (L)
900 (14) 1,320 (18)
900 1,320
Common Stock (SE) Retained Earnings (SE) 25,000 (1) 1,980 (19)
25,000 1,980
Sales Revenue (SE) Cost of Goods Sold (SE) (19) 172,800 172,800 (8) (8) 140,000 140,000 (19)
Compensation Expense (SE) Interest Expense (SE) (11) 16,700 16,700 (19) (14) 900 900 (19)
Rent Expense (SE) Depreciation Expense (SE) (15) 10,000 10,000 (19) (16) 400 1,900 (19)
(17) 1,500
Income Tax Expense (SE) (18) 1,320 1,320 (19)
54
b. ZEALOCK BOOKSTORE Income Statement
For the Six Months Ending December 31, 2013
Sales Revenue...................................................................... $ 172,800 Less Expenses:
Cost of Goods Sold ........................................................... $ 140,000 Compensation Expense ................................................... 16,700 Interest Expense ............................................................. 900 Rent Expense ................................................................... 10,000 Depreciation Expense...................................................... 1,900
Income Before Income Taxes ...................................... 3,300 Income Tax Expense ....................................................... 1,320
Net Income................................................................... $ 1,980
c. ZEALOCK BOOKSTORE Balance Sheet
December 31, 2013
Assets Current Assets:
Cash ............................................................................ $ 24,350 Accounts Receivable ................................................... 5,800 Merchandise Inventories ........................................... 5,400 Prepaid Rent............................................................... 10,000 Deposit with Suppliers ............................................... 8,000
Total Current Assets .............................................. $ 53,550 Equipment .................................................................. $ 14,000 Less Accumulated Depreciation ................................ (1,900) Equipment (Net)......................................................... $ 12,100
Total Assets ............................................................ $ 65,650
Current Liabilities:
Liabilities and Shareholders' Equity
Accounts Payable........................................................ $ 5,600 Note Payable............................................................... 30,000 Advances from Customers ......................................... 850 Interest Payable ......................................................... 900 Income Tax Payable ................................................... 1,320
Total Current Liabilities ........................................ $ 38,670 Shareholders' Equity:
Common Stock ............................................................ $ 25,000 Retained Earnings...................................................... 1,980
Total Shareholders' Equity .................................... $ 26,980 Total Liabilities and Shareholders' Equity ........... $ 65,650
55
2-42 Zealock Bookstore: analysis of transactions and preparation of comparative income statements and balance sheet.
a. T-accounts. Cash (A) Accounts Receivable (A)
24,350 5,800 (3) 75,000 1,320 (1) (7) 327,950 320,600 (9) (4) 8,000 31,800 (2) (7) 24,900 20,000 (5) (9) 320,600 29,400 (10)
281,100 (11) 4,000 (12)
85,230 13,150 Merchandise Inventory (A) Prepaid Rent (A)
5,400 10,000
(6) 310,000 286,400 (7) (5) 20,000 20,000 (13) 22,700 (8)
6,300 10,000
Deposit with Suppliers (A) Equipment (A) 8,000 14,000
8,000 (4) 0 14,000
Accumulated Depreciation (XA) Note Payable (L)
1,900 30,000 800 (14) (2) 30,000 75,000 (3)
3,000 (15) 5,700 75,000
Accounts Payable (L) Advance from Customers (L)
5,600 850 (8) 22,700 310,000 (6) (7) 850 (11) 281,100
11,800 0
Interest Payable (L) Income Tax Payable (L) 900 1,320
(2) 900 3,000 (16) (1) 1,320 4,080 (17) 3,000 4,080
Common Stock (SE) Retained Earnings (SE)
25,000 1,980 (12) 4,000 6,120 (18)
25,000 4,100
56
Sales Revenue (SE) Cost of Goods Sold (SE) (18) 353,700 353,700 (7) (7) 286,400 286,400 (18)
Compensation Expense (SE) Interest Expense (SE) (10) 29,400 29,400 (18) (2) 900
(16) 3,000 3,900 (18)
Rent Expense (SE) Depreciation Expense (SE) (13) 20,000 20,000 (18) (14) 800
(15) 3,000 3,800 (18)
Income Tax Expense (SE) (17) 4,080 4,080 (18)
b. ZEALOCK BOOKSTORE Comparative Income Statement
For 2013 and 2014
2014 2013 Sales Revenue ............................................... $ 353,700 $ 172,800 Less Expenses:
Cost of Goods Sold..................................... $ 286,400 $ 140,000 Compensation Expense.............................. 29,400 16,700 Interest Expense ......................................... 3,900 900 Rent Expense ............................................. 20,000 10,000 Depreciation Expense................................. 3,800 1,900
Income Before Income Taxes ................. 10,200 3,300 Income Tax Expense .................................. 4,080 1,320
Net Income ............................................. $ 6,120 $ 1,980
57
c. ZEALOCK BOOKSTORE Comparative Balance Sheet December 31, 2013 and 2014
Current Assets:
Assets
2014 2013
Cash ........................................................... $ 85,230 $ 24,350 Accounts Receivable .................................. 13,150 5,800 Merchandise Inventories............................. 6,300 5,400 Prepaid Rent ............................................... 10,000 10,000 Deposit with Suppliers ................................ -- 8,000
Total Current Assets ............................... $ 114,680 $ 53,550 Noncurrent Assets:
Equipment................................................... $ 14,000 $ 14,000 Less Accumulated Depreciation ................. (5,700) (1,900) Equipment (Net).......................................... $ 8,300 $ 12,100
Total Assets ............................................ $ 122,980 $ 65,650
Liabilities and Shareholders' Equity Current Liabilities:
Accounts Payable ....................................... $ 11,800 $ 5,600 Note Payable .............................................. 75,000 30,000 Advances from Customers.......................... -- 850 Interest Payable .......................................... 3,000 900 Income Tax Payable ................................... 4,080 1,320
Total Current Liabilities ........................... $ 93,880 $ 38,670 Shareholders' Equity:
Common Stock ........................................... $ 25,000 $ 25,000 Retained Earnings ...................................... 4,100 1,980
Total Shareholders' Equity ...................... $ 29,100 $ 26,980 Total Liabilities and Shareholders'
Equity.................................................. $ 122,980 $ 65,650
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