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1. Revenue is recognized when it is earned using the accrual basis of accounting and when cash is received using the cash basis of accounting a. July 19 b. June 28 2. The matching principle requires companies to match expenses with the revenues they helped create. Proper matching is required in order to produce accurate financial information. 3. The time period that revenue is recognized is important because accurate financial statements cannot be produced unless the revenues are recorded in the proper period. 4. A deferral occurs when there has been a prepayment. Deferrals would only be associated with the accrual basis of accounting. A deferral would be recorded when the company is paid in advance for services to be rendered later or when a company pays for expenses in advance that are going to be used up later (e.g., supplies, insurance). 5. Adjusting entries are prepared in order to bring all of the account balances up to date. 6. Assets and expenses are both increased with debits. Assets eventually become expenses over time and use. 7. The determining factor is the benefit period with which the expenditure is associated. If the benefit period is in the future or extending from the present into one or more future accounting periods, an asset is debited. If the expenditure is associated with an item that will be used up in the present accounting period, an expense is debited. It is important to note that dollar amount is not necessarily the determining factor. a. Expense b. Asset 8. When a company is paid in advance for services to be delivered later, a deferred revenue journal entry in which cash is debited and unearned revenue is credited will be recorded. The deferred revenue account would need to be adjusted for the amount of the prepayment that has been earned during the period.
9. Accumulated depreciation is a contra-asset account. It is reported on the balance sheet along with the asset account that it modifies. 10. The closing process has two objectives: 1) to transfer the revenue, expense and dividends account balances into retained earnings, and 2) to get those accounts ready for the next accounting period by starting them out at zero. Retained earnings is the only account that is involved but not closed.
Waybright Kemp Financial Accounting 1e 133
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Short Exercises
(5-10 min.) S 3-1
1. 2. 3. 4.
b c d a
1. 2. 3. 4. 5. 6. 7.
d c b f a e g
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Type of Adjusting Entry a. b. c. d. e. Accrued expense Deferred revenue Accrued revenue Deferred expense Deferred expense
Related Income Statement Account Interest expense Service revenue Service revenue Supplies expense Depreciation expense
Journal POST DATE June 30 ACCOUNTS Rent expense ($4,500/6months) Prepaid rent Record rent expense for June. REF. Dr. 750 750 Cr.
Bal. Bal.
750
June 30
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Bal. Bal.
700
Sept. 30
Journal POST. DATE Dec. 31 ACCOUNTS Unearned subscription revenue ($2,400/12 9 months) Subscription revenue Record subscription revenue Earned for April December. 1,800 1,800 REF. Dr. Cr.
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Journal POST DATE 1. Dec. 31 ACCOUNTS Accounts receivable Service revenue Accrue service revenue. REF. Dr. 1,500 1,500 Cr.
2.
2,300 2,300
3.
375 375
139
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Retained earnings Building rent expense Salary expense Close expense accounts
500 500
141
Accounts Salary expense Salary payable Service revenue Retained earnings Retained earnings Dividends Unearned revenue Service revenue
Post. Ref.
Dr. 400
Cr.
ACCOUNT Cash Accounts receivable Prepaid insurance Prepaid rent Building Accounts payable Notes payable Common Stock Retained earnings Total
Simmons Realty, Inc. Post-Closing Trial Balance October 31, 2010 DEBIT $1,850 2,450 1,300 975 1,800
CREDIT
________ $8,375
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Exercises
(10-15 min.) E 3-14A
Req 1 The accounts used include the assets Cash and Accounts Receivable, the liability Unearned Service Revenue, and the revenue Service Revenue. Req 2 Journal POST DATE Cash Unearned service revenue Collect revenue in advance. ACCOUNTS REF. Dr. 175 175 Cr.
340 340
150 150
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Missing amounts are in italics. Beginning prepaid insurance Payments for Prepaid insurance during the year Total amount to account for Ending Prepaid insurance Insurance expense
A $ 300
B $ 600
C $ 700
D $ 400
Journal POST DATE a. ACCOUNTS Insurance expense Prepaid insurance Record insurance expense. REF. Dr. 1,100 1,100 Cr.
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750 750
c.
1,800 1,800
d.
450 450
e.
875 875
145
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b.
500 500
c.
650 650
d.
1,100 1,100
147
(continued) E 3-19A
Bal. (a) Bal. Accounts receivable 1,500 1,200 2,700 Bal. Bal. Supplies 800 (c) 150 650
1,100 1,100
(b)
900 400
(c) Bal.
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(e) Bal
Bal.
1,200
Accumulated depreciation, equipment 5,600 (b) 1,400 Bal 7,000 Salary expense 14,000 2,900 16,900
Accumulated depreciation, building 28,000 (c) 2,000 Bal 30,000 Supplies expense 1,200 1,200
(d) Bal
(a) Bal
(c) Bal
Service revenue (e) Bal. Salary payable (d) Bal 97,000 1,500 98,500
2,900 2,900
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Henderson Roofing, Inc. Income Statement Year Ended December 31, 2010 Revenues Service revenue Expenses Salary expense Depreciation expense, building Depreciation expense, equipment Supplies expense Total expenses Net Income $16,900 2,000 1,400 1,200 21,500 $ 77,000 $98,500
Req. 2 Operations were successful, as shown by the $77,000 of net income the business earned during the year. The reason is revenues were greater than expenses.
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Req. 2 Retained earnings had a net decrease of $20,600 for the year (End $11,400 Beg $32,000). This resulted from the current net loss ($11,000) and dividends paid ($9,600).
9,800
Cash payment
Service revenue
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Country Cookin Catering, Inc. Statement of Retained Earnings Month Ended March 31, 2010 Retained earnings, March 1, 2010 Add: Net income for the Month Subtotal Less: Dividends Retained earnings, March 31, 2010 $5,800 12,900 18,700 800 $17,900
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Country Cookin Catering, Inc. Balance Sheet March 31, 2010 Assets Cash Accounts receivable Supplies Equipment Less: Accum. depreciation Liabilities $4,000 Accounts payable 8,000 Salary payable 1,300 Unearned service revenue Total Liabilities 13,700 Stockholders Equity Common stock Retained earnings Total Stockholders equity Total Liabilities & Stockholders equity $27,000 $2,100 600 1,400 4,100 5,000 17,900 22,900 $27,000
$22,50 0 (8,800)
Total Assets
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Journal POST DATE Apr 30 ACCOUNTS Service revenue Interest revenue Retained earnings Close revenue accounts REF. Dr. 127,000 800 127,800 Cr.
Retained earnings Salary expense Depreciation expense Building rent expense Interest expense Supplies expense Close expense accounts
18,000 18,000
A to Z Electrical, Inc.s ending retained earnings is $80,500 ($6,500 + $127,800 - $35,800 $18,000).
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Cunningham Photography, Inc. Post-Closing Trial Balance December 31, 2010 ACCOUNT DEBIT Cash $9,450 Accounts receivable 33,100 Supplies 1,900 Equipment 68,000 Accumulated depreciation, equipment Accounts payable Salary payable Unearned service revenue Common stock Retained earnings . Total $112,450
CREDIT
155
Journal POST DATE Dec. 31 ACCOUNTS Service revenues Retained earnings Close revenue accounts REF. Dr. 73,000 73,000 Cr.
Retained earnings Salary expense Rent expense Depreciation expense, equipment Depreciation expense, furniture Supplies expense Close expense accounts
14,000 14,000
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Journal POST DATE Cash Unearned service revenue Collect revenue in advance. ACCOUNTS REF. Dr. 120 120 Cr.
425 425
110 110
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Missing amounts are in italics. Beginning prepaid insurance Payments for Prepaid insurance during the year Total amount to account for Ending Prepaid insurance Insurance expense
A $ 800
B 1,100
C $ 1,600
D $ 300
Journal POST DATE a. ACCOUNTS Insurance expense Prepaid insurance Record insurance expense. REF. Dr. 1,600 1,600 Cr.
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Journal POST DATE a. ACCOUNTS Salary expense Salary payable REF. Dr. 7,500 7,500 Cr.
1,250 1,250
c.
1,900 1,900
d.
550 550
e.
980 980
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b.
300 300
c.
950 950
d.
700 700
161
(continued) E 3-33B
Bal. (a) Bal. Accounts receivable 1,900 2,200 4,100 Bal. Bal. Supplies 1,100 (c) 150 950
700 700
(b)
1,300 1,000
(c) Bal.
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(e) Bal
Bal.
1,600
Depreciation expense, equipment (b) 1,400 Bal 1,400 Salary expense 13,500 2,500 16,000 Salary payable (d) Bal
(c) Bal
(d) Bal
(a) Bal
2,500 2,500
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Metal Main, Inc. Income Statement Year Ended August 31, 2010 Revenues Service revenue Expenses Salary expense Supplies expense Depreciation expense, equipment Depreciation expense, building Total expenses Net Loss $16,000 1,600 1,400 1,000 20,000 $ (11,350) $8,650
Req. 2 Operations were not successful from the standpoint that the business incurred a net loss of $11,350 during the year. The reason is expenses were greater than revenues.
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Req. 2 Retained earnings had a net decrease of $11,600 for the year (End $22,400 Beg $34,000). This resulted from the current net loss ($5,000) and dividends paid ($6,600).
9,500
Cash payment
Service revenue
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Spruce Up Catering, Inc. Statement of Retained Earnings Month Ended January 31, 2010 Retained earnings, January 1, 2010 Add: Net income for the Month Subtotal Less: Dividends Retained earnings, January 31, 2010 $11,100 12,200 23,300 1,100 $22,200
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Spruce Up Catering, Inc. Balance Sheet January 31, 2010 Assets Cash Accounts receivable Supplies Equipment Less: Accum. depreciation Liabilities $6,500 Accounts payable 6,000 Salary payable 400 Unearned service revenue Total Liabilities 19,800 Stockholders Equity Common stock Retained earnings Total Stockholders equity Total Liabilities & Stockholders equity $32,700 $2,300 1,100 1,900 5,300 5,200 22,200 27,400 $32,700
$26,60 0 (6,800)
Total Assets
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Journal POST DATE Sep 30 ACCOUNTS Service revenue Interest revenue Retained earnings Close revenue accounts REF. Dr. 49,000 300 49,300 Cr.
Retained earnings Salary expense Building rent expense Depreciation expense Interest expense Supplies expense Close expense accounts
14,000 14,000
Juba Electrical, Inc.s ending retained earnings is $6,000 ($7,900 + $49,300 - $37,200 $14,000).
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Fonzarelli Photo, Inc. Post-Closing Trial Balance March 31, 2010 ACCOUNT DEBIT Cash $10,250 Accounts receivable 25,000 Supplies 600 Equipment 17,000 Accumulated depreciation, equipment Accounts payable Salary payable Unearned service revenue Common stock Retained earnings . Total $52,850
CREDIT
169
Journal POST DATE Aug 31 ACCOUNTS Service revenues Retained earnings Close revenue accounts REF. Dr. 77,000 77,000 Cr.
Retained earnings Salary expense Rent expense Depreciation expense, equipment Depreciation expense, furniture Supplies expense Close expense accounts
14,000 14,000
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Problems
(15-20 min.) P 3-42A
Journal POST DATE a. Dec. ACCOUNTS 31 Insurance expense ($2,400 8/12 months) Prepaid insurance Record insurance expense. 31 Salary expense ($6,500 2/5) Salary payable Accrue salary expense. 31 Interest receivable Interest revenue Accrue interest expense. 31 Supplies expense ($1,800 + $3,700 $2,200) Supplies Record supply expense. 31 Unearned service revenue Service revenue Record revenue earned. 31 Depreciation expense, vehicles Accumulated depreciation, vehicles Depreciation expense, equipment Accumulated depreciation, Record depreciation expense. equipment REF. Dr. 1,600 1,600 2,600 2,600 350 350 Cr.
b.
c.
d.
e.
f.
171
30
30
30
30
30
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b.
30
c.
30
d.
30
e.
30
f.
31
173
Bal Bal
Bal
250
b.
Bal
Equipment 83,800
83,800
Bal Bal
Prepaid insurance 2,700 2,400 300 Accounts payable 1,900 300 2,200
a.
Bal d. Bal
50,000 Bal
450
Bal
29,300 Bal
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f.
800
Bal
Bal
3,600
175
Bal f. Bal
Bal e. Bal
a. Bal
Depreciation expense, equipment c. 1,200 Bal 1,200 Utilities expense 300 300 Supplies expense 250 250
d. Bal
b. Bal
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Req 3 Alpha Advertising, Inc. Adjusted Trial Balance November 30, 2010 ACCOUNT TITLE Cash Accounts receivable Prepaid insurance Supplies Equipment Accumulated depreciation, equipment Accounts payable Salary payable Unearned service revenue Common stock Retained earnings Dividends Service revenue Salary expense Insurance expense Depreciation expense, equipment Utilities expense Supplies expense Total
Cr.
$65,500 2,200 450 800 50,000 29,300 3,600 9,800 3,350 2,400 1,200 300 250 $158,050
______ $158,050
Req 4 The adjusted trial balance will be used to prepare Alpha Advertisings financial statements.
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Revenues ($1,800 + $4,700 + $400) Expenses ($600 + $2,400 + $250) Net Income ($6,900 - $3,250)
Req 3 The accrual basis of accounting results in a more accurate measurement of income because it reports revenues when they are earned and expenses when they are incurred regardless of when cash is received or paid.
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Lighthouse Realty, Inc. Statement of retained earnings Year Ended December 31, 2010 Retained earnings, January 1 Add: Net income Subtotal Less: Dividends Retained earnings, December 31 $8,200 19,750 27,950 14,000 $13,950
Lighthouse Realty, Inc. Balance Sheet December 31, 2010 ASSETS Cash Accounts receivable Prepaid rent Supplies Equipment Less Accum. Depr., equipmment $ 6,300 11,600 1,200 900 36,000 STOCKHOLDERS EQUITY Common stock Retained earnings Total Stockholders equity Total liabilities and $56,000 stockholders equity 20,000 13,950 33,950 $56,000 LIABILITIES Accounts payable Unearned service revenue Interest payable Salary payable Notes payable Total liabilities $ 5,400 2,100 750 1,800 12,000 22,050
48,000 (12,000)
Total assets
Req. 2
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a. The Income statement reports Lighthouse Realtys results of operations. Operations were only moderately successful, as shown by the fact that Lighthouse Realty earned net income of $19,750 for the year. b. The Balance sheet reports Lighthouse Realtys financial position
Journal POST DATE June ACCOUNTS 30 Service revenue Interest revenue Retained earnings Close revenue accounts Retained earnings Salary expense Rent expense Depreciation expense, equipment Utilities expense Supplies expense Close expense accounts Retained earnings Dividends Close dividends REF. Dr. 43,000 400 43,400 32,950 24,500 6,000 1,200 700 550 2,000 2,000 Cr.
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Req 2 Energized Espresso Inc.s ending retained earnings is $20,400 ($11,950 + $43,400 - $32,950 $2,000).
Req 3 Energized Espresso, Inc. Post-Closing Trial Balance June 30, 2010 ACCOUNT DEBIT Cash $4,900 Accounts receivable 9,600 Prepaid rent 1,800 Supplies 600 Equipment 26,000 Accumulated depreciation, equipment Accounts payable Unearned service revenue Salary payable Notes payable Common stock Retained earnings . Total $42,900
CREDIT
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b.
c.
d.
e.
f.
183
30
30
30
30
30
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b.
30
c.
30
d.
30
e.
30
f.
31
Req 2
Waybright Kemp Financial Accounting 1e 185
Bal
Cash 25,00 0
Bal
Supplies 1,200
900
b.
300
Bal
Equipment 59,000
e.
Bal
800
Bal
Prepaid insurance Bal 2,400 1,60 a. 0 Bal 800 Common stock 25,00 0 25,00 0
1,600 Bal
Bal
Bal f. Bal
Bal
Bal
Bal e. Bal
Bal
Dividends Bal 9,70 0 9,70 0 Depreciation expense, equipment 2,200 2,200 Utilities expense 1,000 1,000 Supplies expense 900 900 a.
Bal
Bal
1,600
c. Bal
d. Bal
b. Bal
187
Req 3 Ninas Novelty, Inc., Adjusted Trial Balance September 30, 2010 ACCOUNT TITLE Cash Accounts receivable Prepaid insurance Supplies Equipment Accumulated depreciation, equipment Accounts payable Salary payable Unearned service revenue Common stock Retained earnings Dividends Service revenue Salary expense Insurance expense Depreciation expense, equipment Utilities expense Supplies expense Total
Cr.
$52,200 3,000 800 1,600 25,000 22,800 9,700 17,000 4,500 1,600 2,200 1,000 900 $122,400
______ $122,400
Req 4 The adjusted trial balance will be used to prepare Ninas Novelty, Inc.s financial statements.
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Revenues ($2,500 + $3,500 + $1,100) Expenses ($500 + $1,300 + $900) Net Income ($7,100 - $2,700)
Req 3 The accrual basis of accounting results in a more accurate measurement of income because it reports revenues when they are earned and expenses when they are incurred regardless of when cash is received or paid.
189
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Destination Realty, Inc. Statement of retained earnings Year Ended October 31, 2010
Retained earnings, October 1 Add: Net income Subtotal Less: Dividends Retained earnings, October 31
191
Req. 2 Destination Realty, Inc. Balance Sheet October 31, 2010 ASSETS Cash Accounts receivable Prepaid rent Supplies Equipment Less Accum. Depr., equipmment 42,500 (11,300) 31,200 STOCKHOLDERS EQUITY $ 6,500 Accounts payable 12,100 Unearned service revenue 2,500 Interest payable 500 Salary payable Notes payable Total liabilities LIABILITIES $ 4,300 2,800 720 9,000 8,000 24,820
Common stock Retained earnings Total Stockholders equity Total liabilities and Total assets $52,800 stockholders equity
$52,800
a. The Income statement reports Destination Realtys results of operations. Operations were only moderately successful, as shown by the fact that Destination Realty earned net income of $19,320 for the year. b. The Balance sheet reports Destination Realtys financial position
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Journal POST DATE Sep 30 ACCOUNTS Service revenue Interest revenue Retained earnings Close revenue accounts REF. Dr. 41,000 1,000 42,000 Cr.
Retained earnings Salary expense Rent expense Depreciation expense, equipment Utilities expense Supplies expense Close expense accounts
4,000 4,000
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Req 2 Java Jolt Inc.s ending retained earnings is $22,200 ($11,200 + $42,000 - $27,000 - $4,000).
Req 3 Java Jolt, Inc. Post-Closing Trial Balance September 30, 2010 ACCOUNT DEBIT Cash $5,800 Accounts receivable 7,000 Prepaid rent 2,300 Supplies 300 Equipment 30,000 Accumulated depreciation, equipment Accounts payable Unearned service revenue Salary payable Notes payable Common stock Retained earnings . Total $45,400
CREDIT
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Continuing Exercise
Req. 1 & 2 6/30 Supplies expense Supplies 30 30
6/30
29 29
195
Assets 6/1 6/17 6/30 Bal. Cash 1,00 20 0 500 50 50 1,48 0 6/5 6/8 Bal. 20 6/8 Lawn supplies 50 30 6/30
1,400
Bal.
1,000
Bal.
Equipment 6/3 Bal. Accounts receivable 6/6 200 50 6/30 Bal. 150 1,400 1,400 Clo.
Clo. Bal.
700
Fuel Expense 20 0 20 0
Clo.
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Clo.
197
Req. 3 Grahams YardCare, Inc. Adjusted Trial Balance June 30, 2010 ACCOUNT DEBIT Cash $1,480 Accounts receivable 150 Lawn supplies 20 Equipment 1,400 Accumulated depreciation, equipment Accounts payable Common stock Service revenue Fuel expense 20 Depreciation expense, equipment 29 Supplies expense 30 Total $3,129
CREDIT
. $3,129
6/30
79 29 30 20
6/30
Req 5
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Grahams YardCare, Inc. Post closing Trial Balance June 30, 2010 ACCOUNT DEBIT Cash $1,480 Accounts receivable 150 Lawn supplies 20 Equipment 1,400 Accumulated depreciation, equipment Accounts payable Common stock Retained earnings . Total $3,050
CREDIT
199
Continuing Problem
Req 1 POST. DATE July 1 4 9 12 15 16 22 25 28 30 Prepaid rent Cash Cash Service revenue Cash Unearned service revenue Supplies Accounts payable Accounts receivable Service revenue Salary expense Cash Cash Accounts receivable Accounts payable Cash Cash Service revenue Dividends Cash 600 600 2,800 2,800 1,200 1,200 750 750 2,800 2,800 675 675 3,100 3,100 3,600 3,600 ACCOUNTS REF. Dr. 5,400 5,400 2,100 2,100 Cr.
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Req 2, 4 & 7 CASH POST. DATE Jun Jul ITEM 30 Bal. 1 4 9 16 22 25 28 30 ACCOUNTS RECEIVABLE POST. DATE Jun Jul ITEM 30 Bal. 15 22 31 Adj 1,900 2,800 3,100 REF. DEBIT CREDIT BALANCE DEBIT 3,800 6,600 3,500 5,400 CREDIT 1,200 600 3,100 2,800 2,100 3,600 675 5,400 REF. DEBIT CREDIT BALANCE DEBIT 16,855 11,455 13,555 17,155 16,480 19,580 16,780 17,980 17,380 CREDIT
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SUPPLIES POST. DATE Jun Jul ITEM 30 Bal. 12 31 Adj 750 2,010 REF. DEBIT CREDIT BALANCE DEBIT 1,610 2,360 350 CREDIT
PREPAID RENT POST. DATE Jul 1 31 Adj ITEM REF. DEBIT 5,400 1,800 CREDIT BALANCE DEBIT 5,400 3,600 CREDIT
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LAND POST. DATE Jun ITEM 30 Bal REF. DEBIT CREDIT BALANCE DEBIT 15,000 CREDIT
OFFICE FURNITURE POST. DATE Jun ITEM 30 Bal REF. DEBIT CREDIT BALANCE DEBIT 3,300 CREDIT
ACCUMULATED DEPRECIATION, OFFICE FURNITURE POST. DATE Jul ITEM 31 Adj REF. DEBIT CREDIT 210 BALANCE DEBIT CREDIT 210
EQUIPMENT POST. DATE Jun ITEM 30 Bal. REF. DEBIT CREDIT BALANCE DEBIT 4,700 CREDIT
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ACCUMULATED DEPRECIATION, EQUIPMENT POST. DATE Jul ITEM 31 Adj REF. DEBIT CREDIT 400 BALANCE DEBIT CREDIT 400
VEHICLES POST. DATE Jun ITEM 30 Bal. REF. DEBIT CREDIT BALANCE DEBIT 31,000 CREDIT
ACCUMULATED DEPRECIATION, VEHICLES POST. DATE Jul ITEM 31 Adj REF. DEBIT CREDIT 650 BALANCE DEBIT CREDIT 650
ACCOUNTS PAYABLE POST. DATE Jun Jul ITEM 30 Bal. 12 25 2,800 750 REF. DEBIT CREDIT BALANCE DEBIT CREDIT 3,890 4,640 1,840
SALARIES PAYABLE
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UNEARNED SERVICE REVENUE POST. DATE Jul Jul 9 31 Adj 800 ITEM REF. DEBIT CREDIT 3,600 BALANCE DEBIT CREDIT 3,600 2,800
NOTES PAYABLE POST. DATE Jun ITEM 30 Bal. REF. DEBIT CREDIT BALANCE DEBIT CREDIT 31,000
205
COMMON STOCK POST. DATE Jun ITEM 30 Bal. REF. DEBIT CREDIT BALANCE DEBIT CREDIT 38,500
RETAINED EARNINGS POST. DATE Jul ITEM 31 Clo 31 Clo 31 Clo 12,745 3,400 REF. DEBIT CREDIT 20,800 BALANCE DEBIT CREDIT 20,800 8,055 4,655
DIVIDENDS POST. DATE Jun Jul Jul ITEM 30 Bal. 30 31 Clo 600 3,400 REF. DEBIT CREDIT BALANCE DEBIT 2,800 3,400 -0CREDIT
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SERVICE REVENUE POST. DATE Jun Jul ITEM 30 Bal. 4 15 28 31 Adj 31 Adj 31 Clo 20,800 2,100 2,800 1,200 1,900 800 REF. DEBIT CREDIT BALANCE DEBIT CREDIT 12,000 14,100 16,900 18,100 20,000 20,800 -0-
SALARY EXPENSE POST. DATE Jun Jul Jul Jul ITEM 30 Bal. 16 31 Adj 31 Clo 675 675 4,050 REF. DEBIT CREDIT BALANCE DEBIT 2,700 3,375 4,050 -0CREDIT
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RENT EXPENSE POST. DATE Jun Jul Jul ITEM 30 Bal 31 Adj 31 Clo 1,800 3,600 REF. DEBIT CREDIT BALANCE DEBIT 1,800 3,600 -0CREDIT
UTILITIES EXPENSE POST. DATE Jun Jul ITEM 30 Bal. 31 Clo 1,225 REF. DEBIT CREDIT BALANCE DEBIT 1,225 -0CREDIT
ADVERTISING EXPENSE POST. DATE Jun Jul ITEM 30 Bal 31 Clo 325 REF. DEBIT CREDIT BALANCE DEBIT 325 -0CREDIT
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MISCELLANEOUS EXPENSE SUPPLIES EXPENSE DATE ITEM POST. REF. POST. REF. DEBIT DEBIT 2,010 CREDIT CREDIT 275 2,010 BALANCE DEBIT CREDIT BALANCE 275 DEBIT -02,010 -0CREDIT
DEPRECIATION EXPENSE, EQUIPMENT POST. DATE Jul Jul ITEM 31 Adj 31 Clo REF. DEBIT 400 400 CREDIT BALANCE DEBIT 400 -0CREDIT
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DEPRECIATION EXPENSE, OFFICE FURNITURE POST. DEPRECIATION EXPENSE, VEHICLES DATE ITEM REF. POST. REF. DEBIT DEBIT 210 650 CREDIT CREDIT 210 650 BALANCE DEBIT CREDIT BALANCE DEBIT 210 -0650 -0CREDIT
Req. 3
Aqua Elite, Inc. Unadjusted Trial Balance July 31, 2010 ACCOUNT Cash Accounts receivable Supplies Prepaid rent Land Office furniture Equipment Vehicles Accounts payable Notes payable Unearned service revenue Common stock Dividends Service revenue Salary expense Rent expense Utilities expense Advertising expense Miscellaneous expense Total DEBIT $ 17,380 3,500 2,360 5,400 15,000 3,300 4,700 31,000 $ 1,840 31,000 3,600 38,500 3,400 18,100 3,375 1,800 1,225 325 275 $93,040 CREDIT
$93,040
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Req 4 POST. DATE July 31 31 31 ACCOUNTS Rent expense Prepaid rent Supplies expense Supplies Depreciation expense, equipment Depreciation expense, furniture Depreciation expense, vehicles Accumulated depreciation, equipment Accumulated depreciation, furniture Accumulated depreciation, vehicles Accounts receivable Service revenue Salary expense Salary payable Unearned service revenue Service revenue REF. Dr. 1,800 1,800 2,010 2,010 400 210 650 400 210 650 1,900 1,900 675 675 800 800 Cr.
31 31 31
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Req 5 Aqua Elite, Inc. Adjusted Trial Balance July 31, 2010 ACCOUNT Cash Accounts Receivable Supplies Prepaid Rent Land Office Furniture Accumulated depreciation, Office Furniture Equipment Accumulated Depreciation, Equipment Vehicles Accumulated Depreciation, Vehicles Accounts Payable Salaries Payable Notes Payable Unearned Service Revenue Common stock Dividends Service Revenue Salary Expense Rent Expense Supplies Expense Utilities Expense Depreciation Expense, Equipment Depreciation Expense, Equipment Advertising Expense Miscellaneous Expense Depreciation Expense, Office Furniture Total DEBIT $ 17,380 5,400 350 3,600 15,000 3,300 210 4,700 400 31,000 650 1,840 675 31,000 2,800 38,500 3,400 20,800 4,050 3,600 2,010 1,225 650 400 325 275 210 $96,875 CREDIT
$96,875
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Req 6 Aqua Elite, Inc. Income Statement Three Months Ended July 31, 2010 Service Revenue Expenses: Salary Expense Rent Expense Supplies Expense Utilities Expense Depreciation Expense, Vehicles Depreciation Expense, Equipment Advertising Expense Miscellaneous Expense Depreciation Expense, Office Furniture Total expenses Net Income 20,800 $4,050 3,600 2,010 1,225 650 400 325 275 210 12,745 $8,055
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Aqua Elite, Inc. Statement of retained earnings Three Months Ended July 31, 2010
Retained earnings, May 1 Add: Net income Subtotal Less: Dividends Retained earnings, July 31
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Aqua Elite, Inc. Balance Sheet July 31, 2010 ASSETS Cash Accounts Receivable Supplies Prepaid Rent Land Office Furniture Less Accum. Depr., Office Furniture Equipment Less Accum. Depr., Equipmment Vehicles Less Accum. Depr., Vehicles 3,300 (210) 4,700 Common Stock (400) 31,000 (650) 30,350 Total liabilities and Total assets $79,470 stockholders equity $79,470 4,300 Retained Earnings Total Stockholders equity 4,655 43,155 38,500 3,090 $ 17,380 Accounts Payable 5,400 Salaries Payable 350 Unearned Service Revenue 3,600 Notes Payable 15,000 Total liabilities STOCKHOLDERS EQUITY 36,315 LIABILITIES $ 1,840 675 2,800 31,000
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Req7 POST. DATE July 31 ACCOUNTS Service revenues Retained earnings REF. Dr. 20,800 20,800 Cr.
31
Retained earnings Salary expense Rent expense Supplies expense Depreciation expense Utilities expense Advertising expense Miscellaneous expense
31
3,400 3,400
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Req 8 Aqua Elite, Inc. Post-Closing Trial Balance July 31, 2010 ACCOUNT Cash Accounts receivable Supplies Prepaid rent Land Office furniture Accumulated depreciation, office furniture Equipment Accumulated depreciation, equipment Vehicles Accumulated depreciation, vehicles Accounts payable Salaries payable Unearned service revenue Notes payable Common stock Retained earnings Total _ $80,730 31,000 650 1,840 675 2,800 31,000 38,500 4,655 $80,730 4,700 400 DEBIT $ 17,380 5,400 350 3,600 15,000 3,300 210 CREDIT
Ethics in Action
Case #1
Waybright Kemp Financial Accounting 1e 217
Yes, she is acting unethically, since she needs to record all the adjustments to properly reflect the current period activity. It does matter as there will not be a proper matching of total salary expense incurred for the accounting period in which the revenues were earned. This will overstate the current period net income and understate the liabilities as of the end of the period. Also, the net income in the following period will be understated.
The adjusted trial balance should include all the adjustments for the accounting period because the financial statements are created from the adjusted trial balances. As a result of Jennifers failure to include all the adjustments, the resulting financial statements will not be accurate and thus could be potentially misleading to any user.
Case #2 Yes, Jim should have informed the banker of the mistake and redone the current years second quarter income statement. Regardless of why the financial statements were wrong, once Jim became aware of the problem, he should have taken necessary steps to correct it. The banker is relying on the financial statements to provide accurate information. Unethical behavior occurs when there is intentional deception. Mistakes can and do occur throughout the accounting cycle. Providing wrong financial information purely due to a mistake does not constitute unethical behavior. However, once Jim became aware of the problem, he should have immediately taken action to correct the mistake. His silence in allowing the erroneous income statement to remain unchanged does constitute unethical behavior. Regardless of whether or not the loan will be repaid, the fact remains that it was obtained with false and misleading information of which Jim was fully aware.
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Financial Analysis
Req 1 & 3 Accumulated Depreciation Bal. b Bal. 168,067 22,839 190,906 Accrued Salaries, Bonus, Vacation, and Other benefits a 34,952 Bal. 34,952 c 29,437 Bal. 29,437
Req 2 POST. DATE a ACCOUNTS Accrued Salaries, Bonus, Vacation, and Other Benefits Accrued Product Warranty Accrued Cooperative Advertising Other Accrued Liabilities Cash Depreciation Expense Accumulated Depreciation Salary and Benefit Expense REF. Dr. 34,952 10,862 6,877 9,858 62,549 22,839 22,839 29,437
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Cr.
b c
Accrued Salaries, Bonus, Vacation, and Other Benefits d e f Product Warranty Expense Accrued Product Warranty Advertising Expense Accrued Cooperative Advertising Miscellaneous Expense Other Accrued Liabilities 9,746
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Industry Analysis
Both companies are using the accrual basis of accounting. That can be determined by looking at the Consolidated Balance Sheets and recognizing certain accounts which would only be present if the accrual basis of accounting is being used. Some of those accounts are Accounts Receivable, Prepaid Expenses, Accounts Payable and Accrued Expenses. Since these accounts appear on the balance sheet for both companies, that tells the reader of the financial statements that the accrual basis of accounting is being used. If one company was using the accrual basis of accounting and the other was using the cash basis, it would be much more difficult to compare the two companies. Since the basis of accounting affects the income statement as well as the balance sheet, the timing of the recognition of revenue and expenses would be different. On the balance sheet the company using the cash basis of accounting would be understating liabilities and assets. In order to properly reflect the financial position of a company in accordance with generally accepted accounting principles (GAAP), the accrual basis of accounting should be used.
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Written Communication
Dear Client: Let me apologize for the error that was committed on this years tax return that we prepared for you. Heres a brief summary of what we failed to do: At the end of every year, the accounting books and records should go through whats referred to as the closing process. During this process, all of the revenues and expenses of the business are zeroed out, along with the dividend account. This allows these accounts to be set back to zero so that the results of each year can be accounted for separately from the results of the prior year. Because we failed to prepare the closing entries for your business at the end of the first year of operations, the net income from that year ($25,000) carried over to the next year. The second year of operations should have resulted in net taxable income to you of $50,000, but because the closing process was not done, the first and second year were both being shown on this years tax return. Obviously, no one wants to pay income tax twice on the same amount. Thats why it is so vitally important to go through the closing process each and every year, to ensure that every years net income is accurately calculated. Again, I apologize for this error. I should have discovered it during my review of your return. We will immediately correct the situation by preparing the closing entries for year number one and ensure that the closing entries were made for year number two. Then we will issue a new, correct tax return for you at no charge.
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Comprehensive Problem
Req 1 Journal Entry Date a. Cash Delivery Truck Common Stock 3 b. Supplies Accounts payable c. Prepaid insurance Cash 8 d. Cash Service revenue e. Accounts receivable Service revenue 6 f. Salary expense Cash g. Cash Service revenue
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Accounts
Credit
h.
1,5 00 1,5 00 2,5 00 Accounts receivable 2,5 00 80 Accounts payable 80 1,6 00 1,6 00 7 50 7 Cash 50 50 50 5 00 5 Cash 00
i.
Cash
j.
Fuel expense
k.
l.
Rent expense
m.
n.
Dividends
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Req. 2, 4 & 6
a. d. g. h. i. Cash 7,500 1,200 800 600 1,100 1,500 2,500 10,30 0 Supplies 300 300 75 225 Adj Prepaid insurance 1,200 1,200 1,000 200 Adj 750 50 500 c. f. l. m. n. e. k. Bal Accounts receivable 4,500 2,500 1,600 3,600 i.
Bal
b. Bal Bal
c. Bal Bal
a. Bal
m.
Salary payable b. j. Bal Common stock 22,500 22,500 600 600 Adj Bal
h. Bal Bal
a. Bal
225
n. Bal Bal
Clo Clo
Clo
Bal
Service Revenue 800 4,500 1,100 1,600 8,000 500 8,500 8,500 -0-
Clo
Depreciation Expense
Ad j Bal Bal 375 375 -0Fuel Expense 80 80 -0Supplies Expense Ad j Bal Bal 225 225 -0225 Clo 80 Clo 375 Clo Adj Bal Bal
Insurance Expense
200 200 -0Rent Expense l. Bal Bal 750 750 -0750 Clo 200 Clo
j. Bal Bal
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Req. 3 Water's Landscaping, Inc. Unadjusted Trial Balance January 31, 2010 Account Cash Accounts receivable Supplies Prepaid insurance Truck Accounts payable Unearned service revenue Common stock Dividends Service revenue Rent expense Salary expense Fuel expense Total Debit 10,300 3,600 300 1,200 15,000 Credit
$ 32,330
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Req. 4
Journal Entry Date a. Salary expense Salary payable b. Depreciation expense Accumulated depreciation c. Insurance expense Prepaid insurance d. Supplies expense Supplies e. Unearned service revenue Service revenue 500 500 225 225 200 200 375 375 Accounts
Debit Credit
600 600
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Req. 5 Water's Landscaping, Inc. Adjusted Trial Balance January 31, 2010
Account Cash Accounts receivable Supplies Prepaid insurance Truck Accumulated depreciation Accounts payable Unearned service revenue Salaries payable Common stock Dividends Service revenue Salary expense Rent expense Depreciation expense Supplies expense Insurance expense Fuel expense Total
Credit
375 330 1,000 600 22,500 500 8,500 1,200 750 375 225 200 80 $ 33,305
$ 33,305
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Water's Landscaping, Inc. Income Statement Month Ended January 31, 2010 Revenue: Service revenue Expenses: Salary expense Rent expense Depreciation expense Supplies expense Insurance expense Fuel expense Total expenses Net income $8,500 $1,200 750 375 225 200 80 2,830 $5,670
Water's Landscaping, Inc. Statement of Retained Earnings Retained earnings, January 31, 2010 Retained earnings, January 1, 2010 Add: Net Income Less: Dividends Retained earnings, January 31, 2010
Water's Landscaping, Inc. Balance Sheet 31-Jan-10
ASSETS Cash Accounts receivable Supplies Prepaid insurance Truck Less: Accum depreciation $10,300 3,600 75 1,000 15,000 -375 14,625
LIABILITIES Current liabilities: Accounts payable Salary payable Unearned service revenue Total Liabilities
Stockholders' Equity Common stock 22,500 Retained earnings 5,170 Total Stockholders' Equity 27,670 Total Liabilities and Stockholders' Equity $29,600
Total Assets
$29,600
Req. 6
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Journal Entry Date Service revenue Retained earnings Retained earnings Salary expense Rent expense Depreciation expense Supplies expense 25 Insurance expense 00 Fuel expense 80 5 Retained earnings Dividends 00 5 00 2 2,8 30 1,2 00 7 50 3 75 2 Accounts Debit 8,5 00 Credit 8,5 00
Req. 7
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Water's Landscaping, Inc. Post-closing Trial Balance January 31, 2010 Account Cash Accounts receivable Supplies Prepaid insurance Truck Accumulated depreciation Accounts payable Unearned service revenue Salaries payable Common stock Retained earnings Total Debit 10,300 3,600 75 1,000 15,000 Credit
29,975
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