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Class Notes – Chapter 3
1. What is the time period concept? Who might use a fiscal year different from the calendar year?
2. When are revenues and expenses recognized under the cash basis of accounting? Is this OK per GAAP?
3. When are revenues and expenses recognized under the accrual basis of accounting?
4. Why are adjusting journal entries necessary when using the accrual system?
5. Define depreciation. What is the journal entry to record depreciation?
6. What is accumulated depreciation? What type of account is it?
7. How is depreciation calculated using the straight-line method?
8. What is interest expense? How is it calculated?
9. A classified balance sheet arranges assets as follows. Define each and provide examples:
Current Assets-
Long-Term Investments-
Property, Plant, and Equipment (Plant Assets) –
Intangible Assets-
Current Liabilities-
Long-Term Liabilities-
10. Which accounts are temporary or nominal? Which accounts are permanent or real?
11. What are closing entries and why are they necessary?
12. What are the steps in the accounting cycle?
13. What does the current ratio measure? How is it calculated?
14. What does the profit margin measure? How it calculated?
1
Class Problems – Chapter 3
1. On 8/1 you purchased $3,200 of supplies on account. When you go to the supply closet on 8/31 there is
only $500 of office supplies left. What entry is required 8/1 and what adjusting entry is required 8/31?
2. You signed a 1 year rental contract on 10/1/04 and prepaid 3 months’ rent (a total of $6,000). What journal
entry is required 10/1 and what adjusting entry is required 10/31?
3. On 5/1/04 your company, Premium Pizza Delivery, purchased a Lamborghini Murcielago for $270,000
cash. The car has an expected life of 10 years and a residual value of $60,000. What journal entries are
recorded 5/1 & 12/31?
4. On April 1st you received $10,000 advance payment from Kroger Co. for accounting services to be
provided May 1 – August 31st. What entry is required 4/1 and adjusting entry 5/31?
5. On 6/1/04 you borrowed $250,000 and signed an 8-year 10% promissory note with annual interest
payments due June 1st
and principal due at maturity. What journal entries are required 6/1/04, 12/31/04,
and 6/1/05 (assume no adjusting journal entries were made in 2005)?
6. Record the monthly adjusting entries for Good Company, Inc. as of 1/31/0Y assuming that all necessary
adjusting entries were recorded at the end of last year (12/31/0X).
a. Last year a delivery truck was purchased for $35,000. The truck has a residual value of $3,000 and
an estimated life of 15 years.
b. There are supplies of $650 left in storage, but the supplies account has a balance of $2,535.
c. A $250,000 15-year 9% promissory note was signed last year. According to the terms of the note,
the interest payments are due semiannually (June 30 and December 31).
d. Employee wages total $10,000 each week and employees are paid every Friday for that week’s
work (Mon-Fri). 1/31 falls on a Tuesday.
e. On 1/31/0Y Good Company hadn’t yet received a few bills which it pays each month. It hadn’t
received the telephone bill which costs $49.99 each month, the power bill which costs $100 each
month, and the Internet bill which costs $30 each month.
f. Last year on 10/1/0X a year’s rent ($24,000) was paid in advance. What entry is required at the end
of January assuming previous adjusting entries were recorded?
7. Given the following excerpts from Practice Corp’s 12/31/08 adjusted trial balance, prepare an income
statement, statement of retained earnings, and classified balance sheet. Then journalize the closing entries.
Land (used to operate business) 100 Note Payable 8/1/12 100 Note Receivable 2/1/18 40 Patent 60 Prepaid Rent 50 Rent Expense 40 Retained Earnings 150 Salary Expense 50 Salary Payable 10 Supplies 15 Supplies Expense 30 Unearned Revenue 60
A/P 15 A/R 20 Accum. Deprec.-Equip. 40 Cash 50 Common Stock 75 Copyright 70 Drafting Revenue 200 Depreciation Exp. 10 Dividends 10 Equipment 50 Inventory 25 Land (held for speculation) 30
2
HW Problem 3.1 – A) Record the journal entries for the following transactions. B) Make adjusting entries
as of 6/30/1X assuming no adjustments were made in May and $200 of supplies remain. (You'll need to
make adjustments for EACH of the following transactions.)
5/1/1X $2,100 of supplies were purchased on account at Office Mart (invoice #553).
5/8/1X Received $3,000 from a customer that prepaid for six months of service (June 1 – Nov. 30).
5/15/1X Paid $6,000 of advertising in advance (ck #235). The ads run for 3 months (June 1- Aug 31).
5/20/1X Paid a 6-month insurance premium of $1,200 (check #236) for June 1 – November 30.
5/31/1X Borrowed $50,000 and signed a 4-month 8% promissory note with interest due at maturity.
6/1/1X Purchased a new computer for $3,900 on account from Office Depot (invoice #2352). The
computer has an expected life of three years and an expected salvage value of $300.
HW Problem 3.2 - Given the following information from Yo Co’s 12/31/11 adjusted trial balance A)
Prepare financial statements (including classified BS). B) Record the closing entries.
Accounts Payable (A/P) 15 Land used to operate business 150 Accounts Receivable (A/R) 20 Note Payable 8/1/12 150 Accounting Revenue 400 Note Receivable 2/1/18 80 Accum. Deprec.-Equip. 40 Patent 50 Cash 40 Prepaid Advertising 40 Common Stock 200 Rent Expense 100 Common Stock held in IBM 120 Retained Earnings 1/1/11 180 (not planning to sell next year)
Salary Expense 200
Depreciation Exp. 20 Supplies 15 Dividends 25 Supplies Expense 50 Equipment 70 Taxes Payable 70 Inventory 25 Trademark 80 Land held for speculation 70 Unearned Revenue 100
HW Problem 3.3 – Record the adjusting entries in the general journal as of 12/31/11. Assume the original
transactions were journalized correctly and no adjusting entries have been made in 2011.
4/1/11 Purchased equipment for $6,500. It has an expected life of 10 years and a salvage value of $500.
8/1/11 Borrowed $20,000 and signed a 6-month 7.5% note with interest and principal due at maturity.
9/30/11 Paid $9,000 or 6 months’ rent in advance (October – March).
10/9/11 Purchased $4,200 of supplies. As of 12/31/11, $500 of supplies remained.
11/1/11 Received $15,000 in advance from Customer Co. for 3 months of service (November – January).
HW Problem 3.4 – A) Calculate the current ratio for each year. B) Which company is more capable of
paying its short-term obligations (more liquid)? C) Calculate the profit margin for each year. D) Which
company earns more for each dollar of sales?
Walmart (in millions $) Target (in millions $)
Year Ending
1/31/10
Year Ending
1/31/09
Year Ending
1/31/08
Year Ending
1/31/10
Year Ending
1/31/09
Year Ending
1/31/08
Net Sales Revenue 408,214 404,374 377,023 65,357 64,948 63,367 Net Income 14,335 13,400 12,731 2,488 2,214 2,849 Current Assets 48,331 48,949 48,020 18,424 17,488 18,906 Current Liabilities 55,561 55,390 58,478 11,327 10,512 11,782
3
Practice 3.1 - Record the following in the general journal.
1-Apr Purchased new machine for $200,000 cash. Its salvage value is $20,000 and life 6 years.
7-May Purchased $5,000 of supplies on account from office max (inv#153)
1-Aug Received $24,000 from Client Co. for work to be performed over the next year.
1-Sep Borrowed $100,000 and signed a 6%, 5 year note with interest payments due annually 9/1.
1-Oct Paid $2,400 for one year's insurance (ck #152).
Practice 3.2 - Record adjusting entries as of 12/31 for each of the transactions from 3.1. Assume no
previous adjustments have been made and that there are $500 of supplies in the supply closet.
Practice 3.3 - Prepare the financial statements (including a classified balance sheet) for Your Company as
of 12/31/11 given the following account balances.
Advert Exp. 15
Land (held speculation) 20
A/P 20
Land (used business) 100
A/R 35
Service Revenue 300
Cash 755
Supplies 15
Common Stock 180
Supplies Expense 25
Depreciation Exp. 20
Retained Earnings 250
Dividends 35
Patent 50
Copyright 15
Note Receiv (5/1/25) 30
Insurance Expense 15
Note Payable (5/1/15) 200
Equipment 20
Wages Payable 200
Accum. Deprec.-Equip. 5
Wages Expense 15
Inventory 15
Unearned Revenue 25
4
5
Student Name: _______________________
Sam’s Singles Service - Practice Set
Spring 2015
Table of Contents
February Instructions & Transactions 7 - 9
General Journal 10 - 13
General Ledger 14 - 20
Plagiarism & Academic Dishonesty: Students who copy others’ work are subject to an F on the
assignment, an F in the class, and possible suspension from Butte College. It is OK to discuss
transactions with your classmates, but you are expected to do your own work.
NO COPY JOBS!!! (We can tell).
6
Sam’s Singles Service, Inc. - Practice Set
Samantha has a knack for setting up friends and helping them with relationships. Last month she opened
Sam’s Singles Service to provide dating consultations and to host events where like-minded singles could
meet. You’ve taken over as Sam’s new bookkeeper and are presented with the following chart of accounts
and post-closing trial balance for January 31, 201X.
Number Account
110 Cash
115 Accounts recievable
116 Allowance for Doubtful Accounts
120 Prepaid Insurance
123 Prepaid Advertising
125 Office Supplies
127 Merchandise Inventory
140 Surveillance Equipment
145 Accumulated Depreciation-Surveillance
210 Accounts Payable
215 Unearned Revenue
220 Sales Tax Payable
240 Federal Income Tax Payable
241 State Tax Payable
242 FICA Payable
243 Federal Unemployment Tax Payable
244 State Unemployment Tax Payable
245 Wages & Salaries Payable
247 Interest Payable
250 Note Payable
310 Common Stock
315 Retained Earnings
320 Income Summary
325 Dividends
410 Event Revenue
411 Consulting Revenue
413 Book Sales
414 Sales Returns & Allowances
415 Interest Revenue
510 Advertising Expense
511 Bad Debt Expense
512 Catering Expense
513 Cost of Goods Sold
520 Depreciation Expense-Surveillance
525 Insurance Expense
530 Interest Expense
535 Legal Expense
540 Miscellaneous Expense
545 Office Supplies Expense
547 Payroll Tax Expense
550 Postage Expense
555 Printing Expense
560 Rent Expense
565 Service Charge Expense
575 Telephone Expense
585 Utilities Expense
590 Wage & Salary Expense
Chart of Accounts
Sam's Singles Service, Inc.
Post-Closing Trial Balance
1/31/201X
Account Name Dr. Cr.
Cash 25,000.00
Accounts Receivable 8,500.00
Office Supplies 50.00
Accounts Payable 2,000.00
Common Stock 25,100.00
Retained Earnings 6,450.00
Totals 33,550.00 33,550.00
A/R - Subsidiary Ledger
Dudley, Jim 3,500.00
Gooseman, Paul 2,000.00
Pardon, Peggy 2,000.00
Talkmuch, Tammy 1,000.00
Total $ 8,500.00
A/P - Subsidiary Ledger
Sun Company 350.00
Moon Company 500.00
Stars Company 1,150.00
Total $ 2,000.00
7
Instructions
1. Enter February transactions in the general journal.
2. Post the transactions to the general ledger.
3. Prepare a trial balance.
4. Journalize and post adjusting entries.
5. Prepare an adjusted trial balance.
6. Prepare an A/P & A/R schedule to verify ending account balances. (The A/R schedule lists customers’
names and balances at the end of February. The total of the A/R schedule should equal the A/R balance
on the trial balance. Similarly, the A/P schedule lists creditors and the amount owed to each at the end
of February. The total of the A/P schedule should equal the balance of A/P on the trial balance.)
7. Prepare the financial statements.
8. Prepare the closing entries and post to the general ledger.
Transactions
2/1/1X Issued check #100 for $300 to MailHouse for postage and handling on a mass marketing letter
Sam sent out that afternoon.
2/2/1X Signed a 1 year lease for office space and paid February’s rent of $1,500 by issuing check #101
to Kwant Co.
2/2/1X Issued check # 102 to Spy Co. for $8,900 to purchase electronic surveillance equipment to
observe clients’ dates and better understand their dating problems.
2/3/1X Performed a dating consultation for Dinah Toluvia and billed Dinah $5,000.
2/3/1X Purchased 6 month’s liability insurance issuing check #103 to Travelers Insurance for $1,200.
2/4/1X Sam’s Singles Service received $25,000 and issued shares of common stock to Amanda Friend.
2/5/1X Received $3,500 total for services performed the previous month. ($500 from Jim Dudley,
$2,000 from Paul Gooseman, and $1,000 from Tammy Talkmuch.)
2/7/1X Hosted Ivy League Speed Dating Night where Ivy League graduates paid $60 each to go on a
number of 5 minute “dates.” 50 people attended the event and cash was collected from all but
five of the participants, who agreed to mail in a check later that week. (The names of the five
unpaid participants were: John Good, Brandon Broke, Wendy Jones, Ima Welch, and Skip
Townsend.)
2/8/1X Received an invoice for $500 from SF News & Review for an advertisement that ran in last
week’s newspapers (invoice # 52A7J).
2/8/1X Samantha was approached by Cy Burnette, a successful young internet entrepreneur that can’t
seem to get a second date. Samantha agreed to observe one of Cy’s dates and explain what he’s
doing wrong.
2/9/1X Paid outstanding invoices to Sun Company $350; Moon Company $500; and Stars Company
$1,150 issuing checks #104-106. (The expenses for these invoices were accrued last month.)
2/10/1X Received $120 ($60 from John Good and $60 from Wendy Jones) for the Ivy League Speed
Dating night held 2/7.
8
2/11/1X Purchased $800 of office supplies on account from Office Depot (invoice #62309).
2/14/1X Sam’s received invoice #97389 for $800 from Dewey, Cheatem & Howe Law Offices for legal
advice provided Sam’s Singles.
2/15/1X Sam’s hosted Goth Date Night where participants paid $60 to attend a dinner party and meet
other Gothic singles. 40 people attended and all paid at the door. (Sam’s changed its credit
policy to require cash at the door of special events.)
2/16/1X Sam’s issued check # 107 for $1,630 to Sam & Ella’s Catering Co. to pay for refreshments at the
Ivy League Speed Dating Night and dinner at Gothic Night.
2/17/1X Sam’s received a $15,000 advance from Percy Pratt for dating consultation services to be
provided in February and March.
2/18/1X Samantha observed one of Cy Burnette’s dates and met with him to discuss her observations. Cy
wrote Sam’s a check for $6,000 for the services.
2/23/1X Samantha performed a dating consultation for Phil O. Pfangst and billed him $4,000.
2/24/1X Sam’s issued check #108 to pay Office Depot $800 (invoice #62309 from 2/11) and check #109
to pay Dewey, Cheatem & Howe Law Offices $800 (Invoice #97389 from 2/14).
2/25/1X Sam’s issued dividends totaling $1,000 with checks #110-112.
2/27/1X Received invoice #8783AC15 for $95 from AT&T for February’s cell phone service.
2/28/1X Received invoice #25351 from PG&E for February’s power of $102.00.
Information for February’s Adjusting Entries:
Surveillance equipment purchased 2/2 has a 4-year life and a $500 expected salvage value. Sam’s uses
the straight line method of depreciation.
On 2/28/1X, Sam’s has supplies on hand of $150.
As bookkeeper you earn $2,500, and Samantha earns $4,000 a month. Checks will be issued March 5th
for February’s work. (For simplicity, assume there are no withholdings.)
By the end of February, Samantha had performed 30% of her dating consultations for Percy Pratt
(Sam’s received an advance from Percy on 2/17).
By the end of February, one month’s insurance had expired (see 2/3 transaction).
9
General Journal Page: 1
Date Account Post Ref Debit Credit 1/5/1X Cash 110 25,100.00
Common Stock 310 25,100.00 (Issued 1,500 shares of nonpar stock)
1/10/1X Office Supplies 125 100.00 Cash 110 100.00 (Office Max - Check #99)
1/10/1X A/R 115 2,000.00 Consulting Revenue 411 2,000.00 (Peggy Pardon inv# 1007)
1/11/1X Advertising Expense 510 350.00 A/P 210 350.00 (Sun Company-Inv. #5235 - January issue)
1/12/1X Printing Expense 555 1,150.00 A/P 210 1,150.00 Stars Company-Inv#925552-mktg brochure)
1/13/1X A/R 115 3,500.00 Consulting Revenue 411 3,500.00 (Bill Mr. Dudley -Inv. #1008)
1/20/1X Postage Expense 550 500.00 A/P 210 500.00 (Moon Co-Inv #2235-mail brochures)
1/25/1X A/R 115 2,000.00 Consulting Revenue 411 2,000.00 (Paul Gooseman - Consultation - Inv. #1009
1/28/1X A/R 115 1,000.00 Consulting Revenue 411 1,000.00 (Tammy Talkmuch-Consult-Inv#1010)
1/31/1X Office Supplies Expense 545 50.00 Office Supplies 125 50.00 (Adjusting entry-supplies used up)
Closing Entries 1/31/1X Consulting Revenue 8,500.00
Income Summary 8,500.00 Income Summary 2,050.00 Advertising Expense 350.00 Office Supply Expense 50.00 Postage Expense 500.00 Printing Expense 1,150.00 Income Summary 6,450.00 Retained Earnings 6,450.00 (Update retained earnings & close temporary accounts)
10
General Journal Page: 2
Date Account Post Ref Debit Credit
11
General Journal Page: 3
Date Account Post Ref Debit Credit
12
General Journal Page: 4
Date Account Post Ref Debit Credit
13
General Ledger
Account Cash Account No. 110
Post Date Explanation Ref Debit Credit Debit Credit
1/5/1X GJ1 25,100.00 25,100.00 1/10/1X GJ1 100.00 25,000.00
Account Accounts Receivable Account No. 115
Post Date Explanation Ref Debit Credit Debit Credit
1/10/1X GJ1 2,000.00 2,000.00 1/13/1X GJ1 3,500.00 5,500.00 1/25/1X GJ1 2,000.00 7,500.00 1/28/1X GJ1 1,000.00 8,500.00
Balance
Balance
Gooseman, Paul
Dudley, Jim
Pardon, Peggy
Talkmuch, Tammy
14
Account Allowance for Doubtful Accounts Account No. 116
Post Date Explanation Ref Debit Credit Debit Credit
Account Prepaid Insurance Account No. 120
Post Date Explanation Ref Debit Credit Debit Credit
Account Prepaid Advertising Account No. 123
Post Date Explanation Ref Debit Credit Debit Credit
Account Office Supplies Account No. 125
Post Date Explanation Ref Debit Credit Debit Credit
1/10/1X GJ1 100.00 100.00 1/31/1X GJ1 50.00 50.00
Account Merchandise Inventory Account No. 127
Post Date Explanation Ref Debit Credit Debit Credit
Balance
Balance
Balance
Balance
Balance
15
Account Surveillance Equip. Account No. 140
Post Date Explanation Ref Debit Credit Debit Credit
Account Accumulated Depreciation - Surv. Equip. Account No. 145
Post Date Explanation Ref Debit Credit Debit Credit
Account Accounts Payable Account No. 210
Post Date Explanation Ref Debit Credit Debit Credit
1/11/1X GJ1 350.00 350.00 1/12/1X GJ1 1,150.00 1,500.00 1/20/1X GJ1 500.00 2,000.00
Balance
Balance
Balance
Moon Co Stars Co
Sun Co
16
Account Unearned Revenue Account No. 215
Post Date Explanation Ref Debit Credit Debit Credit
Account Wages & Salaries Payable Account No. 245
Post Date Explanation Ref Debit Credit Debit Credit
Account Interest Payable Account No. 247
Post Date Explanation Ref Debit Credit Debit Credit
Account Common Stock Account No. 310
Post Date Explanation Ref Debit Credit Debit Credit
1/5/1X GJ1 25,100.00 25,100.00
Account Retained Earnings Account No. 315
Post Date Explanation Ref Debit Credit Debit Credit
1/31/1X Closing Entries GJ1 6,450.00 6,450.00
Account Income Summary Account No. 320
Post Date Explanation Ref Debit Credit Debit Credit
1/31/1X Closing GJ1 8,500.00 8,500.00 1/31/1X Closing GJ1 2,050.00 6,450.00 1/31/1X Closing GJ1 6,450.00 0.00
Account Dividends Account No. 325
Post Date Explanation Ref Debit Credit Debit Credit
Balance
Balance
Balance
Balance
Balance
Balance
Balance
17
Account Event Revenue Account No. 410
Post Date Explanation Ref Debit Credit Debit Credit
Account Consulting Revenue Account No. 411
Post Date Explanation Ref Debit Credit Debit Credit
1/10/1X GJ1 2,000.00 2,000.00 1/13/1X GJ1 3,500.00 5,500.00 1/25/1X GJ1 2,000.00 7,500.00 1/28/1X GJ1 1,000.00 8,500.00 1/31/1X Closing GJ1 8,500.00 0.00
Account Interest Revenue Account No. 415
Post Date Explanation Ref Debit Credit Debit Credit
Account Advertising Expense Account No. 510
Post Date Explanation Ref Debit Credit Debit Credit
1/11/1X GJ1 650.00 650.00 1/31/1X Closing GJ1 650.00 0.00
Account Catering Expense Account No. 512
Post Date Explanation Ref Debit Credit Debit Credit
Balance
Balance
Balance
Balance
Balance
18
Account Depreciation Expense - Surv. Equip. Account No. 520
Post Date Explanation Ref Debit Credit Debit Credit
Account Insurance Expense Account No. 525
Post Date Explanation Ref Debit Credit Debit Credit
Account Interest Expense Account No. 530
Post Date Explanation Ref Debit Credit Debit Credit
Account Legal Expense Account No. 535
Post Date Explanation Ref Debit Credit Debit Credit
Account Medical Insurance Expense Account No. 537
Post Date Explanation Ref Debit Credit Debit Credit
Account Miscellaneous Expense Account No. 540
Post Date Explanation Ref Debit Credit Debit Credit
Account Office Supplies Expense Account No. 545
Post Date Explanation Ref Debit Credit Debit Credit
1/31/1X GJ1 50.00 50.00 1/31/1X Closing GJ1 50.00 0.00
Balance
Balance
Balance
Balance
Balance
Balance
Balance
19
.