Chapter 04 - Adjustments, Financial Statements, and Financial Results

Chapter 4
Adjustments, Financial Statements, and
ANSWERS TO MINI-EXERCISES M4-7 a b c Liabilities + Stockholders Equity Utilities +600 Utilities 600 = Payable Expense (+E) Wages +3,000* Wages 3,000 = Payable Expense (+E) Interest +100 Interest +100 = Receivable Revenue (+R) Assets =

* $3,000 = 10 employees x 3 days x $100 per day $1,200 12 months = $100 for one month.

M4-8 (a ) dr Utilities Expense (+E, SE)........................... cr Utilities Payable (+L)........................... To record utilities expense incurred but not yet paid. (b ) dr Wages Expense (+E, SE)............................ 3,000 3,000 600 600

cr Wages Payable (+L)........................... To record wages expense incurred but not yet paid, calculated as 10 employees x 3 days x $100 per day. (c ) dr Interest Receivable (+A)............................... cr Interest Revenue (+R, +SE)................ To record interest earned but not yet collected, calculated as $1,200 x 1/12. 100

100

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

ANSWERS TO EXERCISES E4-4 Req. 1 The annual reporting period for this company is January 1 through December 31. Req. 2 Both transactions are accruals because revenue has been earned and expenses incurred but no cash has yet been received or paid. Req. 3 Assets a . b . Interest Receivable Liabilities + Stockholders Equity Wages +6,000 Wage -6,000 = Payable Expense (+E) +3,000 Interest +3,000 = Revenue (+R) =

Req. 4 Adjustments are needed to ensure the financial statements are up-to-date and complete. Adjusting entries are necessary at the end of the accounting period to ensure that all revenues earned and expenses incurred and the related assets and liabilities are measured properly. The entries above are accruals; entry (a) is an accrued expense (incurred but not yet recorded) and entry (b) is an accrued revenue (earned but not yet recorded). In applying the accrual basis of accounting, revenues should be recognized when earned and expenses should be recognized when incurred in generating revenues.

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

E4-5 (a) December 31, 2009:

dr Wage Expense (+E, SE)....................................... cr Wages Payable (+L)....................................

6,000 6,000

To record wages incurred during 2009, but not yet paid. (b) December 31, 2009:
dr Interest Receivable (+A)......................................... cr Interest Revenue (+R, +SE).........................

3,000 3,000

To record interest revenue earned during 2009, but not yet collected. E4-6 Req. 1 2010 Income statement: Insurance Expense ($7,200 x 12/24) = $3,600 used. 2010 Balance sheet: Prepaid Insurance ($7,200 x 12/24) = $3,600 unused. Req. 2 2010 Income statement: Shipping Supplies Expense: $72,000 + ($15,000 $10,000) = $77,000 used. 2010 Balance sheet: Shipping Supplies (given) = $10,000 Req. 3 Assets a . b . Prepaid Insurance Shipping Supplies 3,600 5,000 = = = Liabilities + Stockholders Equity Insurance 3,600 Expense (+E) Supplies 5,000 Expense (+E)

ANSWERS TO GROUP A PROBLEMS PA4-1

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

Req. 1 STARBOOKS CORPORATION Adjusted Trial Balance At September 30, 2009 (in thousands) Account Titles Cash Accounts Receivable Supplies Prepaid Expenses Other Current Assets Property and Equipment Accumulated Depreciation Other Long-lived Assets Accounts Payable Accrued Liabilities Unearned Revenue Short-term Bank Loan Long-term Debt Contributed Capital Retained Earnings Service Revenues Interest Revenue Selling Expenses Store Operating Expenses Other Operating Expenses Depreciation Expense General and Administrative Expenses Income Tax Expense Totals Debit $ 307 191 546 94 71 2,142 461 221 354 175 476 196 151 1,445 6,369 92 2,605 2,166 197 340 357 302 9,779 $ Credit

300

9,779

No. The amount to be reported for retained earnings on the balance sheet would be the amount reported on the statement of retained earnings. The $1,445 in the adjusted trial balance does not yet include the net income generated by Starbooks for the year ended September 30, 2009.

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

Req. 2
dr Service Revenues ( R)....................................... dr Interest Revenue ( R)......................................... cr Selling Expenses ( ............................... E) cr Store Operating Expenses ( ................. E) cr Other Operating Expenses ( ................ E) cr Depreciation Expense ( ........................ E) cr General and Administrative Expenses ( E) cr Income Tax Expense ( ......................... E) cr Retained Earnings (+SE) .......................... 6,369 92 2,605 2,166 197 340 357 302 494

Req. 3 STARBOOKS CORPORATION Post-closing Trial Balance At September 30, 2009 (in thousands) Account Titles Cash Accounts Receivable Supplies Prepaid Expenses Other Current Assets Property and Equipment Accumulated Depreciation Other Long-lived Assets Accounts Payable Accrued Liabilities Unearned Revenue Short-term Bank Loan Long-term Debt Contributed Capital Retained Earnings Service Revenues Interest Revenue Selling Expenses Store Operating Expenses Other Operating Expenses Depreciation Expense General and Administrative Expenses Income Tax Expense Totals Debit $ 307 191 546 94 71 2,142 461 221 354 175 476 196 151 1,939 0 0 0 0 0 0 0 0 3,812 $ Credit

300

3,812

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

PA4-2 Req. 1 Assets a. Prepaid Insurance b. Supplies c. d. e. Accounts Receivable f. Accumulated Depreciation (+xA) g. h. +7,900 2,750 100 700 = Liabilities = = Accrued = Liabilities = = = Interest Payable Income = Taxes Payable = Property Tax Payable + Stockholders Equity Insurance 100 Expense (+E) Supplies Expense 700 (+E) +800 Repairs and 800 Maintenance Expense (+E) +1,600 Property Tax 1,600 Expense (+E) Service Revenue +7,900 (+R) Depreciation 2,750 Expense (+E) +500 +9,435 * Interest Expense (+E) Income Tax Expense (+E) 500 9,435

* ($30,000 100 700 800 1,600 + 7,900 2,750 500) x 30% = $9,435. Req. 2 a. dr Insurance Expense (+E, SE).................................. cr Prepaid Insurance ( A).................................. 100 100

$600 36 months x 6 months of coverage. This entry reduces the asset (Prepaid Insurance) because part of it has been used and only $500 represents future benefits (an asset) to the company. b . dr Supplies Expense (+E, SE).................................... cr Supplies ( A).................................................. 700 700

The Supplies account is decreased (credited) to record the use of supplies during the year because this expense was incurred in 2010, calculated as Unadjusted balance of $1,000 Ending balance of $300.

c.

dr Repairs and Maintenance Expense (+E, SE)......... cr Accrued Liabilities (+L)..................................

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800 800

Chapter 04 - Adjustments, Financial Statements, and Financial Results

Repairs and Maintenance Expense is increased (debited) because this expense was incurred in 2010. A liability (accrued liabilities) is credited because this amount is owed but will not be paid until 2011. d. dr Property Tax Expense (+E, SE)............................. cr Property Tax Payable (+L)............................... 1,600 1,600

Property Tax Expense is increased (debited) because this expense was incurred in 2010. A liability (Property Tax Payable) is credited because this amount is owed but will not be paid until 2011. e. dr Accounts Receivable (+A)....................................... cr Service Revenue (+R, +SE).......................... 7,900 7,900

This entry records an asset for the amount due from customers and recognizes the revenue because it was earned in 2010. f. dr Depreciation Expense (+E, SE).............................. cr Accumulated Depreciation (+xA, .............. A) 2,750 2,750

To record depreciation on van for six months (amount is given). g. dr Interest Expense (+E, SE)...................................... cr Interest Payable (+L)....................................... To accrue interest expense incurred but not paid (given). 500 500

h.

dr Income Tax Expense (+E, SE)............................... cr Income Tax Payable (+L).................................

9,435 9,435

To accrue income tax expense incurred but not paid: Income before adjustments (given) $30,000 Effect of adjustments (a) through (g) +1,450 ( 100 700 800 1,600 Income before income taxes 31,450 + 7,900 2,750 500) Income tax rate 30% Income tax expense $ 9,435

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

PA4-5
Req. 1, 2, 4, and 7 (T-accounts) + Bal. a c d g j Bal. Cash (A) 7 b 25 22 e 25 5 f 3 47 h 10 9 k 4 3 26 Accounts + Receivable (A) Bal. 3 g 9 d 8 + Supplies (A) Bal. 3 i 7 10 l 7 Bal. 3

Bal.

2 Accumulated

+ Equipment (A) Bal. 6 b Bal. 25 31

Depreciation (xA) +
Bal. 1 m 4 Bal. 5

+ Other Assets (A) Bal. 6 f Bal. 3 9

Accounts Payable (L) + h 10 Bal. e i Bal.

5 5 7 7

Notes Payable (L) +

a 22

Wages Payable (L) +

o 3

Bal.

22

Bal. Unearned j Bal.

Interest Payable (L) +

n Bal.

1 1

Payable (L) +
p Bal.

Income Taxes

4 4

Revenue (L) +
3 3

Capital (SE) +
Bal. c Bal.

Contributed

15 5 20

Earnings (SE) +
CE2 4 Bal. CE1 Bal.

Retained

4 6 6

Dividends + Declared (D) k 4 CE2 4 Bal. 0 Interest + Expense (E) n 1 CE1 1 Bal. 0

Service Revenue (R) +

d 55 CE1 55 Bal. 0

Income Tax + Expense (E) p 4 CE1 4 Bal. 0 Operating + Expenses (E) e 30 l 7 o 3 CE1 40 Bal. 0

Depreciation + Expense (E) m 4 CE1 4 Bal. 0

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

Req. 2 a. dr Cash (+A)........................................................... cr Note Payable (+L).....................................

Borrowed cash on note.

22 22 25 25 5 5 47 8 55 30 5 25 3 3 9 9 10 10 7 7 3 3 4 4

b.

dr Equipment (+A)................................................... cr Cash ( A)...................................................

Purchased equipment.

c.

dr Cash (+A)........................................................... cr Contributed Capital (+SE).........................

Sold capital stock for cash.

d.

dr Cash (+A)........................................................... dr Accounts Receivable (+A).................................. cr Service Revenue (+R, +SE)......................

Service revenues earned.

e.

dr Operating Expenses (+E, SE) cr Accounts Payable (+L).............................. cr Cash ( A)...................................................

Operating expenses incurred.

f.

dr Other Assets (+A)............................................... cr Cash ( A)...................................................

Purchased additional assets.

g.

dr Cash (+A)........................................................... cr Accounts Receivable ( A).........................

Collected on customers' accounts.

h.

dr Accounts Payable ( L)........................................ cr Cash ( A)..................................................

Paid on accounts payable.

i.

dr Supplies (+A)...................................................... cr Accounts Payable (+L)..............................

Purchased supplies for future use.

j.

dr Cash (+A)........................................................... cr Unearned Revenue (+L)..........................

Deposit received for revenue not yet earned.

k.

dr Dividends Declared (+D, SE).............................. cr Cash ( ).................................................. A

Declared and paid a dividend.

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

Req. 3 NORTHLAND PHYSICAL THERAPY Unadjusted Trial Balance At December 31, 2009 (in thousands) Account Titles Cash Accounts Receivable Supplies Equipment Accumulated Depreciation (Equipment) Other Assets Accounts Payable Notes Payable Wages Payable Interest Payable Income Taxes Payable Unearned Revenue Contributed Capital Retained Earnings Dividends Declared Service Revenue Depreciation Expense Income Tax Expense Interest Expense Operating Expenses Totals $ Debit 26 2 10 31 9 7 22 Credit

3 20 4 4 55

30 112

112

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

Req. 4 l. dr Operating Expenses (+E, SE)..................... cr Supplies ( A)........................................ To record supplies used ($10 3). dr Depreciation Expense (+E, SE)................... cr Accumulated Depreciation (+xA, . . A). To record depreciation for the year (amount is given). dr Interest Expense (+E, SE)........................... cr Interest Payable (+L)............................ To accrue interest for July - December, 2009. dr Operating Expenses (+E, SE)..................... cr Wages Payable (+L)............................ To accrue wages incurred but not paid. dr Income Tax Expense (+E, SE).................... cr Income Taxes Payable (+L)................. To accrue income tax. 7 7 4 4 1 1 3 3 4 4

m.

n.

o.

p.

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

Req. 5 NORTHLAND PHYSICAL THERAPY Adjusted Trial Balance At December 31, 2009 (in thousands) Account Titles Cash Accounts Receivable Supplies Equipment Accumulated Depreciation (Equipment) Other Assets Accounts Payable Notes Payable Wages Payable Interest Payable Income Taxes Payable Unearned Revenue Contributed Capital Retained Earnings Dividends Declared Service Revenue Depreciation Expense Income Tax Expense Interest Expense Operating Expenses Totals Req. 6 NORTHLAND PHYSICAL THERAPY Income Statement For the Year Ended December 31, 2009 (in thousands) Revenues: Service Revenue Expenses: Operating Expenses Depreciation Expense Interest Expense Income Tax Expense Total Expenses Net Income $ 55 40 4 1 4 49 $ 6 $ Debit 26 2 3 31 9 7 22 3 1 4 3 20 4 4 55 4 4 1 40 124 Credit

124

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

NORTHLAND PHYSICAL THERAPY Statement of Retained Earnings For the Year Ended December 31, 2009 (in thousands) Balance, January 1, 2009 Add: Net Income Subtract: Dividends Declared Balance, December 31, 2009 $ $ 4 6 (4) 6

NORTHLAND PHYSICAL THERAPY Balance Sheet At December 31, 2009 (in thousands) Assets: Current Assets: Cash Accounts Receivable Supplies Total Current Assets Equipment Less: Accum. Depr. Other Assets $ 31 5 Liabilities: Current Liabilities: Accounts Payable Notes Payable Wages Payable Interest Payable Income Taxes Payable Unearned Revenue Total Current Liabilities

26 2 3 31 26 9

7 22 3 1 4 3 40 20 6 26 66

Total Assets

66

Stockholders' Equity: Contributed Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity $

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

Req. 7 1 dr Service Revenue ( R)................................... cr Depreciation Expense ( ..................... E) cr Income Tax Expense ( ...................... E) cr Interest Expense ( ............................. E) cr Operating Expenses ( E)........................ cr Retained Earnings (+SE) ....................... dr Retained Earnings ( SE) .............................. cr Dividends Declared ( D)......................... 55 4 4 1 40 6 4 4

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

Req. 8 NORTHLAND PHYSICAL THERAPY Post-Closing Trial Balance At December 31, 2009 (in thousands) Account Titles Cash Accounts Receivable Supplies Equipment Accumulated Depreciation (Equipment) Other Assets Accounts Payable Notes Payable Wages Payable Interest Payable Income Taxes Payable Unearned Revenue Contributed Capital Retained Earnings Dividends Declared Service Revenue Depreciation Expense Income Tax Expense Interest Expense Operating Expenses Totals Req. 9 The business generated $6 (thousand) in net income during 2009. The company is financed primarily by liabilities, with liabilities providing financing for $40 (thousand) of total assets and stockholders equity providing financing of $26 (thousand). $ Debit 26 2 3 31 9 7 22 3 1 4 3 20 6 0 0 0 0 0 0 71 Credit

71

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

ANSWERS TO SKILLS DEVELOPMENT CASES S4-6 Req.1 (a) dr Supplies Expense (+E, SE) cr Supplies ( A). To record supplies used ($6,000 $1,800 = $4,200). (b) dr Insurance Expense (+E, SE). cr Prepaid Insurance ( A) To record expired insurance at December 31, 2009. (c) dr Depreciation Expense (+E, SE) cr Accumulated Depreciation (+xA, A). To record depreciation for one year. (d) dr Salaries Expense (+E, SE) cr Salaries Payable (+L) To record salaries earned but not paid. (e) dr Transportation Revenue ( R, SE).. cr Unearned Transportation Revenue (+L) To record transportation revenue not earned but collected in advance, previously recorded as earned. (f) dr Income Tax Expense (+E, SE)... cr Income Tax Payable (+L) To record 2009 income taxes. Computation: Transportation revenue: $85,000 7,000 = Expenses: $47,000 + 4,200 + 2,000 + 8,000 + 2,200 = Net income before taxes Income tax expense: $14,600 x 25% = 3,650 3,650 7,000 7,000 2,200 2,200 8,000 8,000 2,000 2,000 4,200 4,200

$78,000 63,400 $14,600 $ 3,650

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

Req. 2 PIRATE PETE MOVING CORPORATION Corrections to 2009 Financial Statements Amounts Reported 2009 Income Statement: Revenue: Transportation Revenue Expenses: Salaries Expense Supplies Expense Other Expenses Insurance Expense Depreciation Expense Income Tax Expense Total Expenses Net Income December 31, 2009 Balance Sheet Assets: Current Assets: Cash Receivables Supplies Prepaid Insurance Total Current Assets Equipment Less: Accumulated Depn. Remaining Assets Total Assets Liabilities: Current Liabilities: Accounts Payable Salaries Payable Unearned Transportation Revenue Income Tax Payable Total Current Liabilities Stockholders' Equity: Contributed Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity Changes Plus Minus e d a b c f 2,200 4,200 2,000 8,000 3,650 7,000 Correct Amounts

$ 85,000 17,000 12,000 18,000 0 0 0 47,000 $ 38,000

$ 78,000 19,200 16,200 18,000 2,000 8,000 3,650 67,050 $ 10,950

2,000 3,000 6,000 4,000 15,000 40,000 0 27,000 $ 82,000 $ 9,000 0 0 0 9,000

$ a b c 8,000 4,200 2,000

2,000 3,000 1,800 2,000 8,800 40,000 (8,000) 27,000 $ 67,800 $ 9,000 2,200 7,000 3,650 21,850

d e f

2,200 7,000 3,650

35,000 38,000 73,000 $ 82,000

35,000 10,950 45,950 $ 67,800

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Chapter 04 - Adjustments, Financial Statements, and Financial Results

Req.3 (a) Decrease Net Income by $27,050. (b) Decrease Total Assets by $14,200. Req. 4 (todays date) To the Stockholders of Pirate Pete Moving Corporation: We regret to inform you that your request for a $20,000 loan has been denied. Our review showed that various adjustments were required to the original set of financial statements provided to us. The original (unadjusted) financial statements overstated net income for 2009 by $27,050 (i.e., $38,000 $10,950). This overstatement was caused by incorrectly including $7,000 of revenue collected in advance that had not been earned in 2009. Further, the expenses were understated and income tax expense had not been included. Total assets were overstated by $14,200 (i.e., $82,000 $67,800). Supplies were overstated by $4,200, prepaid insurance was overstated by $2,000, and the net book value of the equipment was overstated by $8,000 because annual depreciation was not properly recognized. We require that there be sufficient collateral pledged against the loan before we can consider it. The current market value of the equipment may be able to provide additional collateral against which the loan could be secured. Your personal investments may also be considered viable collateral if you are willing to sign an agreement pledging these assets as collateral for the loan. This is a common requirement for small start-up businesses. If you would like us to reconsider your application, please provide us the current market values of any assets you would pledge as collateral. Regards, (your name) Loan Application Department Your Bank

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