ACCT 60601 Problem Solutions - Topics 1 and 2 - Fall 2015 · PDF file12/31/2013 · Problem Solutions: Topics 1 and 2! ... (4th edition) textbook. For ... steps of the accounting cycle

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.

2

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.

3

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.

4

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

5

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

6

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.

7

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.

8

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

9

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

10

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

11

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

12

+ 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

13

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

14

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


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

15

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


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

16

2-21 (E2-45) Analyzing Transactions Using the Financial Statement Effects Template


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

17

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

18

- 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)

19

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

20

2-24 (P2-55) Analyzing Transactions using the Financial Statement Effects Template and Preparing an Income Statement.

a.


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


-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


-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 - Interest

Expense

-100 =

Totals $5,880 + $19,800 = $15,500 + $7,000 + $3,180 $8,000 - $3,920 = $4,080

21

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


-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


-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

23

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.

24

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.


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


+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


-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


-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.



+ 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 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.


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.



+ Noncash Assets


+ Earned Capital


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.



+ Noncash Assets


+ Earned Capital


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.


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.



+ Noncash Assets


+ Earned Capital


4. Adjusting entry for rent. =

-‐875 Unearned

Rent Revenue


+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.



+ Noncash Assets


+ Earned Capital


5. Adjusting entry for accrued salaries. =

+490 Salaries Payable


+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.



Inventory purchases

+ Noncash Assets +2,913.49

= Liabilities + Contrib. Capital

+2,913.49

+ Earned Capital


(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.




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 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


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.




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


-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


- 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.




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 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 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


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.



+ Noncash Assets = Liabilities + Contrib.

Capital + Earned

Capital


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 -‐ 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


-‐ 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

-‐ Salaries Expense =

-‐3,600

6/28. Bill customers for services.

6/30. Collect service

+7,800

+5,200 Accounts = Receivable

-‐7,800


+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.




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 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


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

Documents

ACCT 60601 Problem Solutions - Topics 1 and 2 - Fall 2015 · PDF file12/31/2013 · Problem Solutions: Topics 1 and 2! ... (4th edition) textbook. For ... steps of the accounting cycle