Lls5e Chap04 Sols

Chapter 4
Adjustments, Financial Statements, and the Quality of Earnings
ANSWERS ! Q"ES #!NS

1. A trial balance is a list of the individual accounts, usually in financial statement order, with their debit or credit balances. It is used to provide a check on the equality of the debits and credits. 2. Adjusting entries are made at the end of the accounting period to record all revenues and e penses that have not been recorded but belong in the current period. !hey update the balance sheet and income statement accounts at the end of the accounting period. !he four different types are adjustments for" #1$ %eferred revenues && previously recorded liabilities that need to be adjusted at the end of the period to reflect revenues that have been earned #e.g., 'nearned !icket (evenue must be adjusted for the portion of ticket revenues earned in the current period$. #2$ Accrued revenues && revenues that have been earned by the end of the accounting period but which will be collected in a future accounting period #e.g., recording Interest (eceivable for interest revenues not yet collected$. #)$ %eferred e penses && previously recorded assets that need to be adjusted at the end of the period to reflect incurred e penses #e.g., *repaid Insurance must be adjusted for the portion of insurance e pense incurred in the current period$. #+$ Accrued e penses && e penses that have been incurred by the end of the accounting period but which will be paid in a future accounting period #e.g., recording Accrued , penses *ayable for utilities e pense incurred during the period that has not yet been paid$. ). A contra&asset is an account related to an asset that is an offset or reduction to the asset-s balance. Accumulated %epreciation is a contra&account to the equipment and buildings accounts. +. !he net income on the income statement is included in determining ending retained earnings on the statement of stockholders. equity and the balance sheet. !he change in the cash account on the balance sheet is analy/ed and categori/ed on the statement of cash flows into cash from operating activities, investing activities, and financing activities. 0. #a$ Income statement" #(evenues 1 2ains$ & #, penses 1 3osses$ 4 5et Income
McGr a w - Hill/Ir w i n Financi al Accountin , !"e The McGraw- Hill Comp a ni e s, Inc., 2007 #- $
#b$ 6alance sheet" Assets 4 3iabilities 1 7tockholders- ,quity #c$ 7tatement of cash flows" 8hanges in cash for the period 4 8ash from 9perations 1 8ash from Investing Activities 1 8ash from :inancing Activities #d$ 7tatement of stockholdersequity" ,nding 7tockholders- ,quity 4 #6eginning 8ontributed 8apital 1 7tock Issuances & 7tock (epurchases$ 1 #6eginning (etained ,arnings 1 5et Income & %ividends %eclared$ ;. Adjusting entries have no effect on cash. :or unearned revenues and prepayments, cash was received or paid at some point in the past. :or accruals, cash will be received or paid in a future accounting period. At the time of the adjusting entry, there is no cash being received or paid. <. ,arnings per share 4 5et Income = weighted average number of shares of stock outstanding during the period. ,arnings per share measures the average amount of net income for the year attributable to one share of common stock. >. 5et profit margin 4 5et income = net sales !he net profit margin measures how much of every sales dollar generated during the period is profit. ?. An unadjusted trial balance is prepared after all current transactions have been journali/ed and posted to the ledger. It does not include the effects of the adjusting entries. !he basic purpose of an unadjusted trial balance is to check the equalities of the accounting model #particularly, %ebits 4 8redits$ and to provide the data in a form convenient for further processing in the accounting information processing cycle. In contrast, an adjusted trial balance is prepared after the effects of all of the adjusting entries have been applied to the corresponding #prior$ unadjusted trial balance amounts. !he basic purpose of an adjusted trial balance is to insure that accuracy has been attained in applying the effect of the adjusting entries. !he adjusted trial balance provides a second check in the model equalities #primarily %ebits 4 8redits$. It also provides data in a form convenient for further processing. 1@. 8losing entries are made at the end of the accounting period to transfer the balances in the temporary income statement accounts to retained earnings. !he closing entries reduce the revenue, gain, e pense, and loss accounts to a /ero balance so that they can be used for the accumulation process during the ne t period. 8losing entries must be entered into the system through the journal and posted to the ledger accounts to state properly the temporary and permanent account balances #i.e., /ero balances in the temporary accounts$. 11. #a$ *ermanent accounts && balance sheet accountsA that is, the asset, liability, and stockholders. equity accounts #these are not closed at the end of each period$. #b$ !emporary accounts && income statement accountsA that is, revenues, gains, e penses, and losses #these are closed at the end of each period$.
McGr a w - Hill/Ir w i n #- 2 The McGraw- Hill Comp a ni e s, Inc., 2007 %olutions Manual
#c$ (eal accounts && another name for permanent accounts. #d$ 5ominal accounts && another name for temporary accounts. 12. !he income statement accounts are closed at the end of the accounting period because, in effect, they are temporary subaccounts to retained earnings #i.e., a part of stockholdersequity$. !hey are used only for accumulation during the accounting period. Bhen the period ends, these accumulated accounts must be transferred #closed$ to retained earnings. !he closing process serves" #1$ to correctly state retained earnings, and #2$ to clear out the balances of the temporary accounts for the year just ended so that these subaccounts can be used again during the ne t period for accumulation and classification purposes. 6alance sheet accounts are not closed at the end of the period because they reflect permanent accumulated balances of assets, liabilities, and stockholdersequity. *ermanent accounts show the entity-s financial position at the end of the period and are the beginning amounts for the ne t period. 1). A post&closing trial balance is a listing taken from the ledger after the adjusting and closing entries have been journali/ed and posted. It is not a necessary part of the accounting information processing cycle but it is useful because it demonstrates the equality of the debits and credits in the ledger after the closing entries have been journali/ed and posted.
ANSWERS ! $"% #&%E C'!#CE

1. b$ ;. d$ 2. a$ <. a$ ). d$ >. c$ +. c$ ?. d$ 0. d$ 1@. b$
McGr a w - Hill/Ir w i n Financi al Accountin , !"e
The McGraw- Hill Comp a ni e s, Inc., 2007 #- &
Authors( Recommended Solution ime

) ime in minutes*
Mini-exercises No. Time 1 0 2 0 ) ) + 0 0 0 ; 0 < 0 > 0 ? 0 1@ 0 11 0 12 )
Exercises No. Time 1 1@ 2 1@ ) 1@ + 10 0 1@ ; 2@ < 2@ > 2@ ? 10 1@ 2@ 11 1@ 12 2@ 1) 10 1+ 10 10 2@ 1; 2@ 1< 2@ 1> 2@ 1? 1@ 2@ 10
Problems No. Time 1 10 2 2@ ) 20 + 2@ 0 2@ ; 20 < )@ > )@ ? ;@
Alternate Problems No. Time 1 10 2 2@ ) 2@ + 2@ 0 2@ ; 20 < )@ > )@
Cases and Projects No. Time 1 20 2 20 ) 20 + 20 0 20 ; +@ < +0 > )0 ? 0@ 1@ 20 11 C
C %ue to the nature of this project, it is very difficult to estimate the amount of time students will need to complete the assignment. As with any open&ended project, it is possible for students to devote a large amount of time to these assignments. Bhile students often benefit from the e tra effort, we find that some become frustrated by the perceived difficulty of the task. Dou can reduce student frustration and an iety by making your e pectations clear. :or e ample, when our goal is to sharpen research skills, we devote class time discussing research strategies. Bhen we want the students to focus on a real accounting issue, we offer suggestions about possible companies or industries.
McGr a w - Hill/Ir w i n #- #
The McGraw- Hill Comp a ni e s, Inc., 2007 %olutions Manual
$#N#+E,ERC#SES
$4-./ *uglisi 8ompany Adjusted !rial 6alance At Eune )@, 2@@< %ebit 8ash Accounts receivable Inventories *repaid e penses 6uildings and equipment Accumulated depreciation 3and Accounts payable Accrued e penses payable Income ta es payable 'nearned fees 3ong&term debt 8ontributed capital (etained earnings 7ales revenue Interest income 8ost of sales 7alaries e pense (ent e pense %epreciation e pense Interest e pense Income ta es e pense !otals F 12@ )0@ ;1@ +@ 1,+@@ F 2@@ 2@@ 10@ )@ 1@@ 1,)@@ )@@ 12@ 2,+@@ 0@ >2@ ;;@ +@@ 11@ >@ 11@ F +,?@@ 20@ 8redit
F +,?@@
$4-0/ #1$ %A #2$ 6A #)$ %A #+$ 8A #0$ AA #;$ 8A #<$ 6A #>$ A. $4-1/ #1$ AA #2$ 6A #)$ 8A #+$ %.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- !
$4-4/ (a ) 1. %eferred revenue 2@@ 2. 'nearned rent revenue # 3$.......................... (ent revenue #1(, 17,$......................... 2@@ !o record one month of rent revenue earned #F>@@ + months$. (b ) 1. %eferred e pense ?@@ 2. Insurance e pense #1,, 7,$....................... ?@@ *repaid insurance #A$.......................... !o record si months of insurance e pense #F),;@@ ;G2+$. (c ) 1. %eferred e pense 2. %epreciation e pense #1,, 7,$................... Accumulated depreciation #1HA, A$..... !o record annual depreciation e pense. ),@@@ ),@@@
$4-2/ 6alance 7heet 7tockholders. 3iabilities ,quity I2@@ 12@@ 5, I?@@ 5, I),@@@ Income 7tatement (evenues , penses 12@@ 5, 5, 1?@@ 5, 1),@@@ 5et Income 12@@ I?@@ I),@@@
!ransaction a. b. c.
Assets 5, I?@@ I),@@@
McGr a w - Hill/Ir w i n #- '
$4-3/ (a ) 1. Accrued e pense )2@ 2. 'tilities e pense #1,, 7,$........................... Accrued utilities payable #13$................ !o record utilities e pense incurred but not yet paid. (b ) 1. Accrued e pense +,0@@ 2. Bages e pense #1,, 7,$............................ Accrued wages payable #13$................. +,0@@ !o record wages e pense incurred but not yet paid, calculated as 1@ employees ) days F10@ each per day. (c ) 1. Accrued revenue 2. Interest receivable #1A$................................. Interest revenue #1(, 17,$.................... !o record interest earned but not yet collected, calculated as F0,@@@ 12J +G12. $4-4/ !ransaction a. b. c. Assets 5, 5, 12@@ 6alance 7heet 7tockholders. 3iabilities ,quity 1)2@ I)2@ 1+,0@@ I+,0@@ 5, 12@@ Income 7tatement (evenues , penses 5, 1)2@ 5, 1+,0@@ 12@@ 5, 5et Income I)2@ I+,0@@ 12@@ 2@@ 2@@
)2@
The McGraw- Hill Comp a ni e s, Inc., 2007 #- 7
$4-5/ $!R6AN C!$&AN7 #ncome Statement For the 7ear Ended 8ecem9er 1., 0::4 Re;enues< 7ales revenue Interest revenue (ent revenue !otal revenues Costs and e=penses< Bages e pense %epreciation e pense 'tilities e pense Insurance e pense (ent e pense !otal costs and e penses &reta= income Income ta e pense Net #ncome Earnings per share> F +2,@@@ 12@ )@@ +2,+2@ 21,;@@ 2,@@@ 22@ ;@@ ?,@@@ )),+2@ ?,@@@ 2,?@@ F ;,1@@ F2@.))
C calculated as F;,1@@ K#1@@ 1 0@@$ 2L 4 F;,1@@ )@@ 4 F2@.)) Average number of shares
$4-?/ $!R6AN C!$&AN7 Statement of Stoc@holdersA EBuity For the 7ear Ended 8ecem9er 1., 0::4 Contri9uted Capital F +@@ 2,@@@ F 2,+@@ Bork backwards otal Stoc@holdersA EBuity F 1,+@@ 2,@@@ ;,1@@ ;,1@@ @ @ F <,1@@ F ?,0@@ C :rom the trial balance. Retained Earnings F 1,@@@C
6alance, Eanuary 1, 2@@< 7hare issuance 5et income %ividends 6alance, %ecember )1, 2@@<
McGr a w - Hill/Ir w i n #- (
$4-.:/ (eq. 1 $!R6AN C!$&AN7 Calance Sheet At 8ecem9er 1., 0::4 Assets 8urrent Assets" 8ash Accounts receivable Interest receivable *repaid insurance !otal current assets 5otes receivable ,quipment #net of accumulated depreciation, F2,@@@$ !otal Assets %ia9ilities 8urrent 3iabilities" Accounts payable Accrued e penses payable Income ta es payable 'nearned rent revenue !otal current liabilities Stoc@holdersA EBuity 8ontributed 8apital (etained ,arnings !otal 7tockholders. ,quity !otal 3iabilities and 7tockholders. ,quity (eq. 2 !he adjustments in M+I+ and M+I; have no effect on the operating, investing, and financing activities on the statement of cash flows because no cash is paid or received at the time of the adjusting entries.
1,0@@ 2,@@@ 12@ 1,>@@ 0,+2@ ),@@@ 1@,@@@ F 1>,+2@ F 1,;@@ ),>2@ 2,?@@ ;@@ >,?2@ 2,+@@ <,1@@ ?,0@@ F 1>,+2@
The McGraw- Hill Comp a ni e s, Inc., 2007 #- )
$4-../ Re;enues< 7ales revenue Interest revenue (ent revenue !otal revenues Costs and e=penses< Bages e pense %epreciation e pense 'tilities e pense Insurance e pense (ent e pense Income ta e pense !otal costs and e penses Net #ncome F +2,@@@ 12@ )@@ +2,+2@ 21,;@@ 2,@@@ 22@ ;@@ ?,@@@ 2,?@@ );,)2@ F ;,1@@
5et profit margin 4 5et income 9perating (evenues 4 F;,1@@ F+2,)@@ 4 1+.+J !he operating revenue sources for this company are from sales and rent revenue. Interest revenue is not included in the denominator because it is a nonoperating revenue source.
$4-.0/ 7ales revenue #($ .................................................. Interest revenue #($ ............................................... (ent revenue #($ ................................................... (etained earnings #17,$............................... Bages e pense #,$ .................................... %epreciation e pense #,$ ........................... 'tilities e pense #,$ .................................... Insurance e pense #,$ ................................ (ent e pense #,$ ........................................ Income ta e pense #,$ .............................. +2,@@@ 12@ )@@ ;,1@@ 21,;@@ 2,@@@ 22@ ;@@ ?,@@@ 2,?@@
McGr a w - Hill/Ir w i n #- $0
E,ERC#SES
E4-./
8arius Consultants, #nc/

"nadjusted rial Calance At Septem9er 1:, 0::5
8e9it 8ash Accounts receivable 7upplies *repaid e penses Investments 6uilding and equipment Accumulated depreciation 3and Accounts payable Accrued e penses payable 'nearned consulting fees Income ta es payable 5otes payable 8ontributed capital (etained earnings C 8onsulting fees revenue Investment income Bages and benefits e pense 'tilities e pense !ravel e pense (ent e pense *rofessional development e pense Interest e pense 9ther operating e penses 2eneral and administrative e penses 2ain on sale of land !otals F 1;),@@@ 220,+@@ 12,2@@ 1@,2@@ 1+0,@@@ )2),@+@ F ;@,@@@
Credit
1>,1@@ >;,>)@ 20,;0@ )2,0@@ 2,@)@ 1;@,@@@ 22),)<@ 1+0,01@ 2,0;+,2@@ 1@,>@@
1,0?@,@@@ 20,2)@ 2),??@ 102,@>@ 1>,;@@ 1<,2@@ 1>>,@@@ )2@,@0@ 0,@@@ F),2<),??@ F),2<),??@
C 7ince debits are supposed to equal credits in a trial balance, the balance in (etained ,arnings is determined as the amount in the credit column necessary to make debits equal credits #a NpluggedO figure$.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- $$
E4-0/ (eq. 1 !he following deferred revenues and deferred e penses may need to be adjusted at the end of the recent fiscal year" 6alance sheet account Inventory (elated income statement account 8ost of products
9ther current assets #may include Parious e pense accounts #e.g., supplies and prepaid e penses such supplies e pense, insurance as insurance$ e pense, rent e pense$ *roperty, plant, and equipment and Accumulated depreciation Intangible assets #depending on type$ %eferred revenue (eq. 2 !he following accounts should be reviewed and may need to be adjusted to accrue revenues and e penses at the end of the recent fiscal year" 6alance sheet account 9ther current assets #Interest receivable on the short&term investments$ Accounts receivable 9ther assets #may contain long&term receivables$ (elated income statement account Investment income *roduct revenue or service revenue Interest revenue %epreciation e pense Amorti/ation e pense *roduct revenue or service revenue
Accrued liabilities #Interest payable on short&term note payable@ Interest e pense Accrued liabilities Income ta payable (eq. ) !emporary accounts that accumulate during the period are closed at the end of the year to the permanent account (etained ,arnings. !hese include" *roduct revenue, service revenue, interest revenue, cost of products, cost of services, interest e pense, research and development e pense, selling, general, and administrative e pense, other e penses, loss on investments, and income ta e pense.
McGr a w - Hill/Ir w i n #- $2 The McGraw- Hill Comp a ni e s, Inc., 2007 %olutions Manual
Parious e pense accounts #e.g., wages e pense$ Income ta e pense
E4-1/ (eq. 1 !he annual reporting period for this company is Eanuary 1 through %ecember )1, 2@@>. (eq. 2 #Adjusting entries$ 6oth transactions are accruals because revenue has been earned and e penses incurred but no cash has yet been received or paid. # a$ %ecember )1, 2@@>" Bage e pense #1,, 7,$............................................ Bages payable #13$......................................... ;,@@@ ;,@@@
!o record wages earned by employees during 2@@>, but not yet paid by the company. !his entry records the #a$ 2@@> e pense, and #b$ 2@@> liability, which is necessary to conform to accrual accounting and the matching principle. # b$ %ecember )1, 2@@>" Interest receivable #1A$............................................... Interest revenue #1(, 17,$............................... ),@@@ ),@@@
!o record interest revenue earned during 2@@>, but not yet collected. !his entry records the #a$ 2@@> revenue, and #b$ 2@@> receivable, which is necessary to conform to accrual accounting and the revenue principle. (eq. ) Adjusting entries are necessary at the end of the accounting period to ensure that all revenues earned and e penses incurred and the related assets and liabilities are measured properly. !he entries above are accrualsA entry #a$ is an accrued e pense #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 recogni/ed when earned and measurable and e penses should be recogni/ed when incurred in generating revenues.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- $&
E4-4/ (eq. 1 2@@< Income statement" Insurance e pense #F<,>@@ +G2+$ 4 F1,)@@ used. 7hipping supplies e pense" #F1+,@@@ 1 F<2,@@@ & F11,@@@$ 4 F<0,@@@ used. (eq. 2 2@@< 6alance sheet" *repaid insurance #F<,>@@ 2@G2+$ 4 F;,0@@ 7hipping supplies #given$ 4 F11,@@@ (eq. ) Adjusting entry #payment debited to *repaid Insurance$" *repaid Insurance ?G1 <,>@@ AE, 1,)@@ ,nd. ;,0@@ Insurance , pense AE, ,nd. 1,)@@ 1,)@@ or F<,>@@ & F1,)@@ 4 F;,0@@
Insurance e pense #1,, 7,$...................................... 1,)@@ *repaid insurance #A$..................................... 1,)@@ !o record the e piration of insurance for four months #F)20 per month$. (eq. + Adjusting entry #payment debited to 7hipping 7upplies$" 7hipping 7upplies 6eg. 1+,@@@ *urch. <2,@@@ AE, <0,@@@ ,nd. 11,@@@ 7hipping 7upplies , pense AE, <0,@@@ ,nd. <0,@@@ <0,@@@ <0,@@@
7hipping supplies e pense #1,, 7,$......................... 7hipping supplies #A$...................................... !o record the use of shipping supplies for the year.
McGr a w - Hill/Ir w i n #- $#
E4-2/ !ransaction Assets E43 (a) 5, E43 (b) 1),@@@ E44 (a) I1,)@@ E44 (b) I<0,@@@ E4-3/ (eq. 1 and 2 a. %eferred e pense && cash paid before e pense is incurred. 9ffice supplies e pense #1,, 7,$............................... 9ffice supplies #A$............................................. 7upplies used in 2@@< #F)0@ 1 >@@ & )@@ 4 F>0@$. b. Accrued e pense && e pense incurred before cash is paid. Bages e pense #1,, 7,$............................................ Bages payable #13$............................................ Amount is given. %eferred revenue && cash received before revenue is earned. 'nearned rent revenue #3$.......................................... (ent revenue #1(, 17,$..................................... (ent earned in 2@@< #F?,@@@ 2G;$. Accrued revenue && revenue earned before cash is collected. (ent receivable #1A$..................................................... (ent revenue #1(, 17,$..................................... #F>2@ 2 months$ %eferred e pense && cash paid for equipment before being used. %epreciation e pense #1,, 7,$................................... Accumulated depreciation, delivery equipment #1HA, A$ Amount is given. %eferred e pense && cash paid before e pense is incurred. Insurance e pense #1,, 7,$....................................... *repaid insurance #A$....................................... #F+,2@@ ;G2+ months$ Accrued revenue && revenue earned before cash is received. (epair accounts receivable #1A$.................................. (epair shop revenue #1(, 17,$......................... Amount is given. 6alance 7heet 7tockholders. 3iabilities ,quity 1;,@@@ I;,@@@ 5, 1),@@@ 5, I1,)@@ 5, I<0,@@@ Income 7tatement (evenues , penses 5, 1;,@@@ 1),@@@ 5, 5, 11,)@@ 5, 1<0,@@@ 5et Income I;,@@@ 1),@@@ I1,)@@ I<0,@@@
>0@ >0@
),<@@ ),<@@
c.
),@@@ ),@@@
d.
1,;+@ 1,;+@
e.
0,@@@ 0,@@@
1,@0@ 1,@0@
!.
<0@ <0@
E4-4/
McGr a w - Hill/Ir w i n Financi al Accountin , !"e The McGraw- Hill Comp a ni e s, Inc., 2007 #- $!
(eq. 1 and 2 a. Accrued revenue && revenue earned before cash is collected. Accounts receivable #1A$.............................................. 7ervice revenue #1(, 17,$................................. Amount is given. b. %eferred revenue && cash received before revenue is earned. 'nearned storage revenue #3$.................................... 7torage revenue #1(, 17,$................................ 7torage revenue earned in fiscal year 2@@; #F2,+@@ 1G;$ Accrued e pense && e pense incurred before cash is paid. Bages e pense #1,, 7,$............................................ Bages payable #13$............................................ Amount is given. %eferred e pense && cash paid before e pense is incurred. Advertising e pense #1,, 7,$..................................... *repaid advertising #A$..................................... Advertising used in fiscal year 2@@; #F;@@ ?G12$. %eferred e pense && cash paid for equipment before being used. %epreciation e pense #1,, 7,$................................... Accumulated depreciation, equipment #1HA, A$ Amount is given. %eferred e pense && cash paid before e pense is incurred. 7upplies e pense #1,, 7,$......................................... 7upplies #A$....................................................... 7upplies used in 2@@; #F10,;@@ 1 F+<,0@@ & F12,2@@$ Accrued e pense && e pense incurred before cash is paid. Interest e pense #1,, 7,$ .......................................... Interest payable #13$........................................... Interest incurred from 9ctober 1 to 5ovember )@, 2@@; #F10@,@@@ principal .1@ 2G12$
2,1@@ 2,1@@
+@@ +@@
c.
2,?@@ 2,?@@
d.
+0@ +0@
e.
2),@@@ 2),@@@
0@,?@@ 0@,?@@
!.
2,0@@ 2,0@@
McGr a w - Hill/Ir w i n #- $'
E4-5/ !ransaction (a) (b) (c) (d) (e) () (!) Assets I>0@ 5, 5, 11,;+@ I0,@@@ I1,@0@ 1<0@ 6alance 7heet 7tockholders. 3iabilities ,quity 5, I>0@ 1),<@@ I),<@@ I),@@@ 1),@@@ 5, 11,;+@ 5, I0,@@@ 5, I1,@0@ 5, 1<0@ Income 7tatement (evenues , penses 5, 1>0@ 5, 1),<@@ 1),@@@ 5, 11,;+@ 5, 5, 10,@@@ 5, 11,@0@ 1<0@ 5, 5et Income I>0@ I),<@@ 1),@@@ 11,;+@ I0,@@@ I1,@0@ 1<0@
E4-?/ !ransaction Assets (a) 12,1@@ (b) 5, (c) 5, (d) I+0@ (e) I2),@@@ () I0@,?@@ (!) 5, 6alance 7heet 7tockholders. 3iabilities ,quity 5, 12,1@@ I+@@ 1+@@ 12,?@@ I2,?@@ 5, I+0@ 5, I2),@@@ 5, I0@,?@@ 12,0@@ I2,0@@ Income 7tatement (evenues , penses 12,1@@ 5, 1+@@ 5, 5, 12,?@@ 5, 1+0@ 5, 12),@@@ 5, 10@,?@@ 5, 12,0@@ 5et Income 12,1@@ 1+@@ I2,?@@ I+0@ I2),@@@ I0@,?@@ I2,0@@
E4-.:/ Code 5 A Q 9 8 R * 3 Q Debit Amount F+@@ >@@ ?@@ 1,@@@ ;@@ 20@ 22@ ;2,@@@ +2@ Code 2 I A , 3 6 S Q * Credit Amount F+@@ >@@ ?@@ 1,@@@ ;@@ 20@ 22@ ;2,@@@ +2@
a. b. c. d. e. . !. ". i.
E4-../
McGr a w - Hill/Ir w i n Financi al Accountin , !"e The McGraw- Hill Comp a ni e s, Inc., 2007 #- $7
Selected Calance Sheet Amounts at 8ecem9er 1., 0::4 Assets" ,quipment #recorded at cost per cost principle$ Accumulated depreciation #for one year, as given$ 8arrying value of equipment #difference$ 9ffice supplies #on hand, as given$ *repaid insurance #remaining coverage, F+@@ 1>G2+ months$
F12,@@@ #1,2@@$ 1@,>@@ +@@ )@@
Selected #ncome Statement Amounts for the 7ear Ended 8ecem9er 1., 0::4 , penses" %epreciation e pense #for one year, as given$ F 1,2@@ 9ffice supplies e pense #used, F1,+@@ & F+@@ on hand$ 1,@@@ Insurance e pense #for ; months, F+@@ ;G2+ months$ 1@@ E4-.0/ %ate Note .< April 1, 2@@> %ecember )1, 2@@>a March )1, 2@@?b 5ote 2" August 1, 2@@> %ecember )1, 2@@>c Eanuary )1, 2@@?
d
Calance Sheet #ncome Statement 7tockholders. 5et Assets 3iabilities ,quity (evenues , penses Income 12@,@@@G 5, 5, 5, 5, 5, I2@,@@@ 1 1,0@@ 122,@@@G I21,0@@ 5, 5, 1 1,0@@ 1 0@@ 5, & 1,@@@ & 2@@ 1 1,0@@ 10@@ 5, 5, 5, 5, 5, 5, 1 1,@@@ 1 2@@ 1 1,0@@ 1 0@@ 5, & 1,@@@ & 2@@
1 2@,@@@ 1 2@,@@@ 5, & 21,2@@ 1 1,@@@ & 21,@@@
#a$ F2@,@@@ principal .1@ annual interest rate ?G12 of a year 4 F1,0@@ #b$ Additional interest revenue in 2@@?" F2@,@@@ .1@ )G12 4 F0@@. 8ash received was F22,@@@ #F2@,@@@ principal 1 F2,@@@ interest for 12 months$A receivables decreased by the F2@,@@@ note receivable and F1,0@@ interest receivable accrued in 2@@>. #c$ F2@,@@@ principal .12 annual interest rate 0G12 of a year 4 F1,@@@ #d$ Additional interest e pense in 2@@?" F2@,@@@ .12 1G12 4 F2@@. 8ash paid was F21,2@@ #F2@,@@@ principal 1 F1,2@@ interest for ; months$A payables decreased by the F2@,@@@ note payable and F1,@@@ interest payable accrued in 2@@>. E4-.1/ (eq. 1 (a) (b) 8ash paid on accrued income ta es payable. Accrual of additional income ta e pense.
McGr a w - Hill/Ir w i n #- $(
(c) (d) (e) ()
8ash paid on dividends payable. Amount of dividends declared for the period. 8ash paid on accrued interest payable. Accrual of additional interest e pense.
(eq. 2 8omputations" (a) 6eg. 6al. 1 accrued income ta es F<1 1 ))2 (c) 6eg. 6al. 1 F+) 1 () 6eg. 6al. 1 F+0 1
cash paid 4 T 4 T 4 cash paid 4 T 4 T 4 cash paid 4 2?< 4 4
,nd. bal. F>@ F)2) paid ,nd. bal. F+> F1<1 paid ,nd. bal. F01 F)@) accrued
dividends declared 1<;
accrued interest e pense T T
The McGraw- Hill Comp a ni e s, Inc., 2007 #- $)
E4-.4/ (eq. 1 Adjusting entries that were or should have been made at %ecember )1" #a$ 7hould have been made. %epreciation e pense #1,, 7,$................................. 12,@@@ Accumulated depreciation & equipment #1HA, A$ Amount is given. #b$ 7hould have been made. 'nearned revenue #3$............................................... :ee revenue #1(, 17,$..................................... Amount is given. #c$ ,ntry already made. Interest e pense #1,, 7,$ ........................................ Interest payable #13$ ........................................ #F10,@@@ 12J 12G12 months$ 7hould have been made. Interest e pense #1,, 7,$......................................... Interest payable #13$......................................... #F10,@@@ 12J 2G12 months$ #d$ 7hould have been made. Insurance e pense #1,, 7,$...................................... *repaid insurance #A$..................................... Amount is given. #e$ 7hould have been made. (ent receivable #1A$.................................................... (ent revenue #1(, 17,$................................... Amount is given. (eq. 2 6alance 7heet 7tockholders. !ransaction Assets 3iabilities ,quity (a) 9 12,@@@ 5, 9 12,@@@ (b) 5, 9 2,@@@ ' 2,@@@ (c) 5, 9 1,0@@ ' 1,0@@ (d) 9 ;@@ 5, 9 ;@@ (e) ' >0@ 5, ' >0@ Income 7tatement 5et (evenues , penses Income 5, ' 12,@@@ 9 12,@@@ ' 2,@@@ 5, ' 2,@@@ 5, 9 1,0@@ ' 1,0@@ 5, ' ;@@ 9 ;@@ ' >0@ 5, ' >0@ 2,@@@ 2,@@@
12,@@@
1,>@@ 1,>@@
)@@ )@@
;@@ ;@@
>0@ >0@
McGr a w - Hill/Ir w i n #- 20
E4-.2/ #tems 6alances reported ,ffects of" a. %epreciation b. Bages c. (ent revenue Adjusted balances d. ,ffect of income ta es 8orrect balances Net #ncome F+@,@@@ #?,@@@$ #1<,@@@$ 1,;@@ 10,;@@ #+,;>@$ F 1@,?2@ otal Assets F>@,@@@ #?,@@@$ <1,@@@ F<1,@@@ 1<,@@@ #1,;@@$ +0,+@@ +,;>@ F0@,@>@ otal %ia9ilities F)@,@@@ Stoc@holdersA EBuity F0@,@@@ #?,@@@$ #1<,@@@$ 1,;@@ 20,;@@ #+,;>@$ F2@,?2@
8omputations" a. 2iven, F?,@@@ depreciation e pense. b. 2iven, F1<,@@@ accrued and unpaid. c. F+,>@@ 1G) 4 F1,;@@ rent revenue earned. !he remaining F),2@@ in unearned revenue is a liability for two months of occupancy Uowed-- to the renter. d. F10,;@@ income before ta es )@J 4 F+,;>@.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- 2$
E4-.3/ (eq. 1 a. , penses #depreciation$ #1,, 7,$............. Accumulated depreciation #1HA, A$. . . (ent receivable #1A$.................................... (evenues #rent$ #1(, 17,$................... Income ta e pense #1,, 7,$.................... Income ta es payable #13$................... 0,@@@ 0,@@@ 2,@@@ 2,@@@ ;,?@@ ;,?@@ Effects of Adjusting Entries b a c F2,@@@ #0,@@@$ #;,?@@$ #?,?@@$
b. c.
(eq. 2 As Prepared #ncome statement< (evenues , penses Income ta e pense 5et income Calance Sheet< Assets 8ash Accounts receivable (ent receivable ,quipment Accumulated depreciation %ia9ilities Accounts payable Income ta es payable Stoc@holders( EBuity 8ontributed capital (etained earnings F?>,@@@ #<2,@@@$ F2;,@@@ Corrected Amounts F1@@,@@@ #<<,@@@$ #;,?@@$ F1;,1@@
F2@,@@@ 22,@@@ b 0@,@@@ #1@,@@@$ F>2,@@@ F1@,@@@ c +@,@@@ )2,@@@ F>2,@@@ ;,?@@ a 2,@@@ #0,@@@$ #),@@@$
F2@,@@@ 22,@@@ 2,@@@ 0@,@@@ #10,@@@$ F<?,@@@ F1@,@@@ ;,?@@ +@,@@@ 22,1@@ F<?,@@@
#?,?@@$ #),@@@$
E4-.4/ (eq. 1 a. b. c. 7alaries and wages e pense #1,, 7,$................. 7alaries and wages payable #13$.................... 'tilities e pense #1,, 7,$..................................... Accrued e penses payable #13$...................... %epreciation e pense #1,, 7,$............................ Accumulated depreciation #1HA, A$.............. Interest e pense #1,, 7,$.................................... Interest payable #13$....................................... #F2@,@@@ .1@ )G12$ 5o adjustment is needed because the revenue will not be earned until Eanuary #ne t year$. Maintenance e pense #1,, 7,$............................ Maintenance supplies #A$.............................. Income ta e pense #1,, 7,$............................... Income ta payable #13$.................................. 1,@@@ 1,@@@ <,@@@ <,@@@ )1@ )1@ +@@ +@@ 2),@@@ 2),@@@ 0@@ 0@@
d.
e. .
!.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- 2&
E4-.4/ )continued* (eq. 2
#ncome Statement For the 7ear Ended 8ecem9er 1., 0::4 (ental revenue , penses" 7alaries and wages #F2>,0@@ 1 F)1@$ Maintenance e pense #F12,@@@ 1 F1,@@@$ (ent e pense 'tilities e pense #F+,@@@ 1 F+@@$ 2as and oil e pense %epreciation e pense Interest e pense #F2@,@@@ 1@J )G12$ Miscellaneous e penses !otal e penses *reta income Income ta e pense 5et income ,arnings per share" F2+,2?@ = <,@@@ shares (eq. ) 5et profit margin 4 5et income 5et 7ales 4 F2+,2?@ F11+,@@@ 4 21.)J !he net profit margin indicates that, for every F1 of rental revenues, %erek earns F@.21) #21.)J$ in net income. !his ratio is higher than the industry average net profit margin of 1>J, implying that %erek is more profitable and better able to manage its business #in terms of sales price or costs$ than the average company in the industry. F11+,@@@ F2>,>1@ 1),@@@ ?,@@@ +,+@@ ),@@@ 2),@@@ 0@@ 1,@@@ >2,<1@ )1,2?@ <,@@@ F 2+,2?@ F).+<
8ERED, #NC/
McGr a w - Hill/Ir w i n #- 2#
E4-.5/ (eq. 1 (a) Insurance e pense #1,, 7,$ ..................................... *repaid insurance #A$..................................... %epreciation e pense #1,, 7,$................................. Accumulated depreciation, machinery #1HA, A$ Bages e pense #1,, 7,$.......................................... Bages payable #13$......................................... Income ta e pense #1,, 7,$.................................... Income ta payable #13$................................... 0 0 < < 0 0 ? ?
(b)
(c) (d)
(eq. 2 SENECA C!$&AN7 rial Calance 8ecem9er 1., 0::4 (in thousands of dollars) 'nadjusted %ebit 8redit )> ? ; >@ ? c 0 d ? <; + >+ )2 a b c d 1;? 0 < 0 ? 2; Adjustments %ebit 8redit a 0 b < Adjusted %ebit 8redit )> ? 1 >@ < ? 0 ? <; + >+ 0>
8ash Accounts receivable *repaid insurance Machinery Accumulated depreciation Accounts payable Bages payable Income ta es payable 8ontributed capital (etained earnings (evenues #not detailed$ , penses #not detailed$
!otals
1;?
2;
1?@
1?@
The McGraw- Hill Comp a ni e s, Inc., 2007 #- 2!
E4-.?/ SENECA C!$&AN7 #ncome Statement For the 7ear Ended 8ecem9er 1., 0::4 (in thousands of dollars) (evenues #not detailed$ , penses #F)2 1 0 1 < 1 0$ *reta income Income ta e pense 5et income ,*7 #F2;,@@@ = +,@@@ shares$ F>+ +? )0 ? F2; F;.0@
SENECA C!$&AN7 Statement of Stoc@holders( EBuity For the 7ear Ended 8ecem9er 1., 0::4 (in thousands of dollars) 8ontributed 8apital F @ <; F <; (etained ,arnings F @ 2; #+$ C F 22 !otal 7tockholders,quity F @ <; 2; #+$ F ?>
6eginning balances, 1G1G2@@< 7tock issuance 5et income %ividends declared ,nding balances, 12G)1G2@@<
C !he amount of dividends declared can be inferred because the unadjusted trial balance amount for retained earnings is a negative F+. 7ince this is the first year of operations, we can assume the entire amount is due to a dividend declaration. SENECA C!$&AN7 Calance Sheet At 8ecem9er 1., 0::4 (in thousands of dollars) Assets Current Assets: 8ash Accounts receivable *repaid insurance #F; & F0$ !otal current assets Machinery Accumulated depreciation !otal assets %ia9ilities Current Liabilities: Accounts payable Bages payable Income ta es payable !otal current liabilities Stoc@holders( EBuity 8ontributed capital (etained earnings !otal liabilities and stockholdersequity
F )> ? 1 +> >@ #<$ F121
? 0 ? 2) <; 22
F121
McGr a w - Hill/Ir w i n #- 2'
E4-0:/ (eq. 1 !he purpose of Nclosing the booksO at the end of the accounting period is to transfer the balance in the temporary accounts to a permanent account #(etained ,arnings$. !his also creates a /ero balance in each of the temporary accounts for accumulation of activities in the ne t accounting period. (eq. 2 (evenues #($............................................................. , penses #F)2 1 F0 1 F< 1 F0 1 F?$ # ,$........ (etained earnings #17,$.................................. (eq. ) SENECA C!$&AN7 &ost+closing rial Calance 8ecem9er 1., 0::4 (in thousands of dollars) 8ash Accounts receivable *repaid insurance Machinery Accumulated depreciation Accounts payable Bages payable Income ta es payable 8ontributed capital (etained earnings (evenues #not detailed$ , penses #not detailed$ !otals %ebit )> ? 1 >@ 8redit >+ 0> 2;
< ? 0 ? <; 22 @ @ 12> 12>
&R!C%E$S
&4-./ (eq. 1 8ell Computer Corporation Adjusted rial Calance At Eanuary 1., 0::3 )in millions of dollars* 8e9it 8ash Marketable securities Accounts receivable Inventories *roperty, plant, and equipment Accumulated depreciation 9ther assets Accounts payable Accrued e penses payable 3ong&term debt 9ther liabilities 8ontributed capital (etained earnings #deficit$ 7ales revenue 8ost of sales 7elling, general, and administrative e penses (esearch and development e pense 9ther e penses Income ta e pense !otals (eq. 2 7ince debits are supposed to equal credits in a trial balance, the balance in (etained ,arnings is determined as the amount in the debit column necessary to make debits equal credits #a NpluggedO figure$. &4-0/ (eq. 1 a. b. c. d. %eferred revenue Accrued e pense Accrued revenue Accrued e pense e. . !. ". %eferred e pense %eferred e pense %eferred revenue Accrued e pense
Credit F 02@ 2,;;1 2,@?+ 2<) <<0 F >@; 2,)?< 1,2?> 012 )+? 1,<>1 >++ 1>,2+) 1+,1)< 1,<>> 2<2 )> ;2+ F 2+,>)2 202
F 2+,>)2
McGr a w - Hill/Ir w i n #- 2(
&4-0/ )continued* (eq. 2 a. +,>@@ 'nearned rent revenue #3$.......................................... (ent revenue #1(, 17,$..................................... +,>@@ F<,2@@ = ; months 4 F1,2@@ per month + months. !his entry reduces #debits$ the liability for the amount earned and records a revenue. 1+,)@@ Bage e pense #1,, 7,$............................................. Bages payable #13$............................................ 1+,)@@ Bage e pense is increased #debited$ because this e pense was incurred in 2@@<. A liability #wages payable$ is credited because this amount is owed to the employees. Accounts receivable #1A$.............................................. 2,@@@ 7ervice revenue #1(, 17,$................................. 2,@@@ !his entry records an asset for the amount due from customers and recogni/es the revenue because it was earned in 2@@<. Interest e pense #1,, 7,$........................................... Interest payable #13$............................................. !o accrue interest e pense incurred but not paid, F2@,@@@ 12J )G12 4 F;@@. ;@@ ;@@
b.
c.
d.
e.
1,@@@ Insurance e pense #1,, 7,$....................................... 1,@@@ *repaid insurance #A$...................................... F;,@@@ = 12 months 4 F0@@ per month 2 months of coverage. !his entry reduces the asset #prepaid insurance$ because part of it has been used and only F0,@@@ represents future benefits #an asset$ to the company. 1,0@@ %epreciation e pense #1,, 7,$................................... 1,0@@ Accumulated depreciation, service truck #1HA, A$ !o record depreciation e pense to recogni/e the use of the truck during the year. Amount is given. +@@ 'nearned service revenue #3$.................................... 7ervice revenue #1(, 17,$.................................. !o recogni/e revenue earned during the year #F2,+@@ 2G12$. *roperty ta e pense #1,, 7,$.................................... *roperty ta payable #13$..................................... !o record e pense incurred but not paid. +@@ +@@ +@@
!.
".
The McGraw- Hill Comp a ni e s, Inc., 2007 #- 2)
&4-1/ (eq. 1 a. b. c. d. (eq. 2 a. 2@@ Insurance e pense #1,, 7,$....................................... 2@@ *repaid insurance #A$...................................... F1,2@@ = ); months ; months of coverage. !his entry reduces the asset #prepaid insurance$ because part of it has been used and only F1,@@@ represents future benefits #an asset$ to the company. <@@ 7upplies e pense #1,, 7,$......................................... <@@ 7upplies #A$....................................................... 7upplies inventory is decreased #credited$ to record the use of supplies during the year because this e pense was incurred in 2@@>, calculated as 6eg. Inventory of F2@@ 1 *urchases F>@@ I ,nding Inventory F)@@. >@@ (epairs and maintenance e pense #1,, 7,$.............. Accrued e penses payable #13$......................... >@@ (epairs and maintenance e pense is increased #debited$ because this e pense was incurred in 2@@>. A liability #accrued e penses payable$ is credited because this amount is owed but will not be paid until 2@@?. 1,;@@ *roperty ta e pense #1,, 7,$.................................... *roperty ta payable #13$..................................... 1,;@@ *roperty ta e pense is increased #debited$ because this e pense was incurred in 2@@>. A liability #property ta payable$ is credited because this amount is owed but will not be paid until 2@@?. Accounts receivable #1A$.............................................. >,@@@ 7ervice revenue #1(, 17,$................................. !his entry records an asset for the amount due from the customer and recogni/es the revenue because it was earned in 2@@>. >,@@@ %eferred e pense %eferred e pense Accrued e pense Accrued e pense e. . !. ". Accrued revenue %eferred e pense Accrued e pense Accrued e pense
b.
c.
d.
e.
1,1@@ %epreciation e pense #1,, 7,$................................... 1,1@@ Accumulated depreciation, van #1HA, A$ !o record depreciation e pense to recogni/e the use of the van during the year. Amount is given.
McGr a w - Hill/Ir w i n #- &0
&4-1/ )continued* !. Interest e pense #1,, 7,$........................................... Interest payable #13$............................................. !o accrue interest e pense incurred but not paid, F1@,@@@ 12J )G12 4 F)@@. )@@ )@@
".
?,??@ Income ta e pense #1,, 7,$...................................... Income ta payable #13$....................................... ?,??@ !o accrue income ta e pense incurred but not paid" Income before adjustments #given$ F)@,@@@ ,ffect of adjustments #a$ through #g$ 1),)@@ #&2@@ & <@@ & >@@ &1,;@@ Income before income ta es )),)@@ 1>,@@@ &1,1@@ &)@@$ Income ta rate )@J Income ta e pense F ?,??@
&4-4/ (eq. 1 a. b. c. d. (eq. 2 6alance 7heet 7tockholders. 3iabilities ,quity I+,>@@ 1+,>@@ 11+,)@@ I1+,)@@ 5, 12,@@@ 1;@@ I;@@ 5, I1,@@@ 5, I1,0@@ I+@@ 1+@@ 1+@@ I+@@ Income 7tatement 5et (evenues , penses Income 1+,>@@ 5, 1+,>@@ 5, 11+,)@@ I1+,)@@ 12,@@@ 5, 12,@@@ 5, 1;@@ I;@@ 5, 11,@@@ I1,@@@ 5, 11,0@@ I1,0@@ 1+@@ 5, 1+@@ 5, 1+@@ I+@@ %eferred revenue Accrued e pense Accrued revenue Accrued e pense e. . !. ". %eferred e pense %eferred e pense %eferred revenue Accrued e pense
!ransaction a. b. c. d. e. . !. ".
Assets 5, 5, 12,@@@ 5, I1,@@@ I1,0@@ 5, 5,
The McGraw- Hill Comp a ni e s, Inc., 2007 #- &$
&4-2/ (eq. 1 a. b. c. d. (eq. 2 !ransaction a. b. c. d. e. . !. ". 8omputations" a. b. c. d. e. . !. ". 7i months of e pired insurance during 2@@>" F1,2@@ ;G); 4 F2@@. Assets 2@@ <@@ 5, 5, 1 >,@@@ 1,1@@ 5, 5, 6alance 7heet 7tockholders. 3iabilities ,quity 5, 2@@ 5, <@@ 1 >@@ >@@ 1 1,;@@ 1,;@@ 5, 1 >,@@@ 5, 1,1@@ 1 )@@ )@@ 1 ?,??@ ?,??@ Income 7tatement (evenues , penses 5, 1 2@@ 5, 1 <@@ 5, 1 >@@ 5, 1 1,;@@ 1 >,@@@ 5, 5, 1 1,1@@ 5, 1 )@@ 5, 1 ?,??@ 5et Income 2@@ I <@@ >@@ 1,;@@ 1 >,@@@ 1,1@@ )@@ ?,??@ %eferred e pense %eferred e pense Accrued e pense Accrued e pense e. . !. ". Accrued revenue %eferred e pense Accrued e pense Accrued e pense
7upplies used during 2@@>" 6eg. inventory, F2@@ 1 *urchases, F>@@ & ,nding inventory, F)@@ 4 F<@@ used for the period. , pense incurred during 2@@> to be paid during Eanuary 2@@?. *roperty ta es incurred in 2@@> to be paid in 2@@?. Accrued revenue" earned in 2@@> but not yet collected or recordedA payable within )@ days. %epreciation is given. Interest e pense accrued for ) months" F1@,@@@ 12J )G12 4 F)@@.
Adjusted income 4 F)@,@@@ & 2@@ & <@@ & >@@ &1,;@@ 1 >,@@@ &1,1@@ & )@@ 4 F)),)@@ )@J ta rate 4 F?,??@ income ta e pense.
McGr a w - Hill/Ir w i n #- &2
&4-3/ 0::4 Calance F02>,@@@ ;0,@@@ ?,)@@ 1;,@@@ 1,0@@ 1,<@@ 12,@@@ ),@@@ (!) "alar# e$pense (e) ;2,@@@ () ),@@@ ;0,@@@ (() Recei ables from emplo#ees (!) 1,0@@ 1,0@@ (,) "alaries pa#able (d) +,@@@ +,@@@ 6al. ),@@@ ( ) ),@@@ Cash 012,@@@ +,@@@ 12,@@@ ;2,@@@ 1,0@@ >,@@@ Financial Statement Income statement Income statement Income statement 6alance sheet 6alance sheet 6alance sheet 6alance sheet 6alance sheet Effect on Cash FloFs 1 F012,@@@ ;2,@@@ 5o effect 5o effect 1,0@@ >,@@@ 112,@@@ +,@@@
Account 1. (ent revenue 2. 7alary e pense ). Maintenance supplies e pense +. (ent receivable 0. (eceivables from employees ;. Maintenance supplies <. 'nearned rent revenue >. 7alaries payable (1) Rent re enue 012,@@@ (a) 1;,@@@ (b) 02>,@@@ (') Rent recei able (b) 1;,@@@ 1;,@@@ (*) +nearned rent re enue 12,@@@ (c) 12,@@@
(%) &aintenance supplies e$pense 'sed ?,)@@ ?,)@@ ()) &aintenance supplies (") ),@@@ (i) >,@@@ ?,)@@ used (j) 1,<@@
Inferred
(a) from renters (c) from renters
(d) to employees (e) to employees (!) to employees (i) to suppliers
The McGraw- Hill Comp a ni e s, Inc., 2007 #- &&
&4-4/ (eq. 1 #1$ 8ecem9er 1., 0::3 Adjusting Entries Accounts receivable #1A$.......................................... +@@ 7ervice revenue #1(, 17,$ ............................ !o record service fees earned, but not collected. Insurance e pense #1,, 7,$ .................................. *repaid insurance #A$ .................................. !o record insurance e pired as an e pense. %epreciation e pense #1,, 7,$.............................. Accumulated depreciation, equipment #1HA, A$ !o record depreciation e pense. Income ta e pense #1,, 7,$ ................................ Income ta es payable #13$ ............................ !o record income ta es for 2@@;. 2@@ 2@@ >,0@@ >,0@@ +,<@@ +,<@@ +@@ # b$ (i) #l$ #c$ ##$ (e) #m$ ()
#2$
#)$
#+$
(eq. 2 Amounts before Adjusting Entries (evenues" 7ervice revenue , penses" 7alary e pense %epreciation e pense Insurance e pense Income ta e pense !otal e pense 5et income #loss$ F+;,@@@ +1,<@@ Amounts after Adjusting Entries F+;,+@@ +1,<@@ >,0@@ 2@@ +,<@@ 00,1@ @ F #>,<@@$
+1,<@@ F +,)@@
5et loss is F>,<@@ because this amount includes all revenues and all e penses #after the adjusting entries$. !his amount is correct because it incorporates the effects of the revenue and matching principles applied to all transactions whose effects e tend beyond the period in which the transactions occurred. 5et income of F+,)@@ was not correct because e penses of F1),+@@ and revenues of F+@@ were e cluded that should have been recorded in 2@@;. (eq. ) ,arnings #loss$ per share 4 F#>,<@@$ net loss ),@@@ shares 4 F#2.?@$ per share
McGr a w - Hill/Ir w i n #- &#
&4-4/ )continued* (eq. + 5et profit margin 4 5et income 5et 7ales 4 F#>,<@@$ net loss F+;,+@@ 4 #1>.>$J !he net profit margin indicates that, for every F1 of service revenues, Bagonblatt actually lost F@.1>> of net income. !his ratio implies that Bagonblatt destroys shareholder value in generating its sales and suggests that better management of its business #in terms of sales price or costs$ is required. (eq. 0 7ervice revenue #($................................................ (etained earnings #7,$ ......................................... 7alary e pense #,$......................................... %epreciation e pense #,$............................... Insurance e pense #,$.................................... Income ta e pense #,$.................................. (eq. ; Wagon9latt Company &ost+closing rial Calance 8ecem9er 1., 0::3 8e9it ?,@@@ +@@ +@@ 12@,2@@ +@,@@@ +,<@@ >@,@@@ 0,)@@ @ @ @ @ @ 1)@,@@@ 1)@,@@@ +;,+@@ >,<@@ +1,<@@ >,0@@ 2@@ +,<@@
Credit
8ash *repaid insurance ,quipment
Accounts receivable
Accumulated depreciation, equipment Income ta es payable 8ontributed capital (etained earnings 7ervice revenue 7alary e pense %epreciation e pense Insurance e pense Income ta e pense !otals
The McGraw- Hill Comp a ni e s, Inc., 2007 #- &!
&4-5/ (eq. 1 8ecem9er 1., 0::4 Adjusting Entries< # a$ 7upplies e pense #1,, 7,$ ....................................... 7upplies #A$ ................................................... Insurance e pense #1,, 7,$ ..................................... *repaid insurance #A$ .................................... %epreciation e pense #1,, 7,$ ................................ Accumulated depreciation, service trucks #1HA, A$ ............................................... Bages e pense #1,, 7,$.......................................... Bages payable #13$ ........................................ Income ta e pense #1,, 7,$ ................................... Income ta es payable #13$ .............................. 0@@ 0@@ 0@@ 0@@ +,@@@ +,@@@ ?@@ ?@@ <,)0@ <,)0@
# b$
#c$
# d$ # e$
(eq. 2 S / 8EN#S, #NC/ #ncome Statement For the 7ear Ended 8ecem9er 1., 0::4 7ervice revenue , penses" 7upplies e pense #F>@@ & F)@@$ Insurance e pense #F1,@@@ & F0@@$ %epreciation e pense Bages e pense (emaining e penses #not detailed$ !otal e penses *reta income Income ta e pense 5et income ,arnings per share #F22,@0@ = 0,@@@ shares$ F<<,@@@ 0@@ 0@@ +,@@@ ?@@ +1,<@@ +<,;@@ 2?,+@@ <,)0@ F22,@0@ F+.+1
McGr a w - Hill/Ir w i n #- &'
&4-5/ )continued* S / 8EN#S, #NC/ Calance Sheet At 8ecem9er 1., 0::4 Assets 8urrent Assets" 8ash Accounts receivable 7upplies *repaid insurance !otal current assets 7ervice trucks Accumulated depreciation, service trucks 9ther assets #not detailed$ F;@,@@@ 1),@@@ )@@ 0@@ <),>@@ 2@,@@@ #1;,@@@$ 11,2@@ Stoc@holders( EBuity 8ontributed capital (etained earningsC !otal stockholdersequity otal lia9ilities and stoc@holders( eBuity 2>,2@@ 2?,00@ 0<,<0@ G5?,::: %ia9ilities 8urrent 3iabilities" Accounts payable Bages payable Income ta es payable !otal current liabilities 5ote payable, long term !otal liabilities F ),@@@ ?@@ <,)0@ 11,20@ 2@,@@@ )1,20@
otal assets
G5?,:::
C'nadjusted balance, F<,0@@ 1 5et income, F22,@0@ 4 ,nding balance, F2?,00@. (eq. ) 8ecem9er 1., 0::4 Closing Entry< 7ervice revenue #($................................................... (etained earnings #17,$ ................................. 7upplies e pense #,$ ..................................... Insurance e pense #,$ ................................... %epreciation e pense #,$ .............................. Bages e pense #,$ ....................................... (emaining e penses #not detailed$ # ,$.......... Income ta e pense #,$ ................................. <<,@@@ 22,@0@ 0@@ 0@@ +,@@@ ?@@ +1,<@@ <,)0@
The McGraw- Hill Comp a ni e s, Inc., 2007 #- &7
&4-?/ (eq. 1, 2, ), and 0 !&accounts )in thousands* Accounts Cash Recei able 6al. ) b ? 6al. 0 2+ a 1@ e <@ c +@ c 12@ ! 1@ d ) " 1) 2+ # 1< 6al. +1 6al. 21 Land ? ? E-uipment ;@ ;@
"upplies 6al. 12 l i 1>
1;
6al.
1+
b 6al.
6al. 6al.
Accumulated Depreciation 6al. ; m ; 6al. 12 /otes Pa#able a 1@ 6al. 1@
.ther Assets 6al. + ! 6al. 1@ 1+
Accounts Pa#able " 1) 6al. 0 e 10 i 1> 6al. 20 1nterest Pa#able n 1 6al. 1 Retained Earnings 1< 6al. 8, 6al.
0ages Pa#able o 12 6al. 12 Contributed Capital 6al. ;0 d ) 6al. ;> Depreciation E$pense m ; 8, 6al. @ "upplies E$pense l 1; 8, 6al. @
1ncome 2a$es Pa#able $ > 6al. > "er ice Re enue c 1;@ 1;@ 6al. @
> )2 2)
8,
1ncome 2a$ E$pense $ > 8, 6al. @ 0ages E$pense o 12 8, 6al. @
>
1nterest E$pense n% 1 8, 1 6al. @ C F1@,@@@ .12 1@G12 Remaining E$penses e >0 8, 6al. @
1;
12
>0
McGr a w - Hill/Ir w i n #- &(
&4-?/ )continued* (eq. 2 a. 8ash #1A$........................................................... 5otes payable #13$................................... 6orrowed cash on 12J note, March 1, 2@@>. b. 3and #1A$............................................................ 8ash #A$................................................. *urchased land for future building site. 8ash #1A$........................................................... Accounts receivable #1A$................................... 7ervice revenue #1(, 17,$...................... 7ervice revenues earned during 2@@>. 8ash #1A$........................................................... 8ontributed capital #17,$......................... 7old capital stock for cash. (emaining e penses #1,, 7,$......................... Accounts payable #13$............................. 8ash #A$................................................. (emaining e penses incurred during 2@@>. 8ash #1A$........................................................... Accounts receivable #A$......................... 8ollected on customers- accounts. 9ther assets #1A$............................................... 8ash #A$................................................. *urchased additional assets. Accounts payable #3$....................................... 8ash #A$................................................. *aid creditors. 7upplies #1A$...................................................... Accounts payable #13$............................. *urchased supplies for future use. 5o entry requiredA no revenue earned in 2@@>. (etained earnings #7,$.................................... 8ash #A$................................................. %eclared and paid a cash dividend. 1<,@@@ 1<,@@@ 1@,@@@ 1@,@@@ ?,@@@ ?,@@@ 12@,@@@ +@,@@@ 1;@,@@@ ),@@@ ),@@@ >0,@@@ 10,@@@ <@,@@@ 2+,@@@ 2+,@@@ 1@,@@@ 1@,@@@ 1),@@@ 1),@@@ 1>,@@@ 1>,@@@
c.
d.
e.
!.
".
i.
j. #.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- &)
&4-?/ )continued* (eq. ) l. 7upplies e pense #1,, 7,$.............................. 7upplies #A$............................................. !o record supplies used #F)@ & 1+$. %epreciation e pense #1,, 7,$........................ Accumulated depreciation #1HA, A$........ !o record depreciation as given. Interest e pense #1,, 7,$................................ Interest payable #13$................................. !o accrue interest for March & %ecember, 2@@>, #F1@,@@@ 12J 1@G12$. Bages e pense #1,, 7,$................................. Bages payable #13$.................................. !o accrue wages incurred but not paid. Income ta e pense #1,, 7,$........................... Income ta es payable #13$........................ !o accrue income ta . 1;,@@@ 1;,@@@ ;,@@@ ;,@@@ 1,@@@ 1,@@@
m.
n.
o.
12,@@@ 12,@@@ >,@@@ >,@@@
$.
(eq. +
#ncome Statement For the 7ear Ended 8ecem9er 1., 0::5 (evenues" 7ervice revenue , penses" %epreciation e pense Interest e pense 7upplies e pense Bages e penses (emaining e penses *reta income Income ta e pense 5et income ,arnings per share KF)2,@@@ = ;>,@@@L F1;@,@@@ ;,@@@ 1,@@@ 1;,@@@ 12,@@@ >0,@@@ +@,@@@ >,@@@ F)2,@@@ F@.+<
' H ' !!%, #NC/
McGr a w - Hill/Ir w i n #- #0
&4-?/ )continued* Statement of Stoc@holders( EBuity For the 7ear Ended 8ecem9er 1., 0::5 Contri9uted Capital F;0,@@@ ),@@@ F;>,@@@ Retained Earnings F >,@@@ )2,@@@ #1<,@@@$ F2),@@@ otal Stoc@holders( EBuity F<),@@@ ),@@@ )2,@@@ #1<,@@@$ F?1,@@@
' H ' !!%, #NC/
6alance, Eanuary 1, 2@@> Additional stock issuance 5et income %ividends declared 6alance, %ecember )1, 2@@>
Calance Sheet At 8ecem9er 1., 0::5 Assets: 8urrent Assets" 8ash Accounts receivable 7upplies !otal current assets 3and ,quipment 3ess" Accumulated deprec. 9ther assets Liabilities: 8urrent 3iabilities" Accounts payable Interest payable Bages payable Income ta es payable !otal current liabilities 5otes payable !otal liabilities "toc3holders4 E-uit#: 8ontributed capital (etained earnings !otal stockholdersequity otal lia9ilities and stoc@holders( eBuity
' H ' !!%, #NC/
F +1,@@@ 21,@@@ 1+,@@@ <;,@@@ ?,@@@ ;@,@@@ #12,@@@$ 1+,@@@
F 20,@@@ 1,@@@ 12,@@@ >,@@@ +;,@@@ 1@,@@@ 0;,@@@ ;>,@@@ 2),@@@ ?1,@@@ G.44,:::
otal assets
G.44,:::
The McGraw- Hill Comp a ni e s, Inc., 2007 #- #$
&4-?/ )continued* Statement of Cash FloFs For the 7ear Ended 8ecem9er 1., 0::5 8ash from 9perating Activities" 8ash collected from customers #c 1 $ 8ash paid to suppliers and employees # e 1"$ Cash pro;ided 9y operations 8ash from Investing Activities" *urchase of land #b$ *urchase of other assets #!$ Cash used for in;esting acti;ities 8ash from :inancing Activities" 6orrowing from bank #a$ Issuance of stock #d$ *ayment of dividends ##$ Cash used for financing acti;ities 8hange in cash 6eginning cash balance, Eanuary 1, 2@@> ,nding cash balance, %ecember )1, 2@@> (eq. 0 & 8ecem9er 1., 0::5 Closing Entry 7ervice revenue #($......................................... (etained earnings #17,$ ......................... %epreciation e pense #,$ ...................... Interest e pense #,$ ............................... 7upplies e pense #,$ ............................. Bages e pense #,$ ............................... (emaining e penses #,$ ........................ Income ta e pense #,$ ......................... !o close revenues and e penses #temporary accounts$. 1;@,@@@ )2,@@@ ;,@@@ 1,@@@ 1;,@@@ 12,@@@ >0,@@@ >,@@@ F1++,@@@ #>),@@@$ 3.,::: #?,@@@$ #1@,@@@$ ).?,:::* 1@,@@@ ),@@@ #1<,@@@$ )4,:::* )>,@@@ ),@@@ F +1,@@@
' H ' !!%, #NC/
McGr a w - Hill/Ir w i n #- #2
&4-?/ )continued* (eq. ; *ost&closing trial balance" &ost+Closing rial Calance At 8ecem9er 1., 0::5 8ash Accounts receivable 7upplies 3and ,quipment Accumulated depreciation #equipment$ 9ther assets #not detailed$ Accounts payable Bages payable Interest payable Income ta es payable 5otes payable 8ontributed capital #;>,@@@ shares$ (etained earnings 7ervice revenue %epreciation e pense Income ta e pense Interest e pense 7upplies e pense Bages e pense (emaining e penses #not detailed$ !otal Debit F +1,@@@ 21,@@@ 1+,@@@ ?,@@@ ;@,@@@ 1+,@@@ 20,@@@ 12,@@@ 1,@@@ >,@@@ 1@,@@@ ;>,@@@ 2),@@@ @ @ @ @ @ @ @ F10?,@@@ Credit
' H ' !!%, #NC/
F 12,@@@
F10?,@@@
The McGraw- Hill Comp a ni e s, Inc., 2007 #- #&
&4-?/ )continued* (eq. < #a$ :inancial leverage 4 Average total assets Average stockholders. equity 4 K#F<>,@@@1F1+<,@@@$ 2L K#F<),@@@1F?1,@@@$ 2L 4 F112,0@@ F>2,@@@ 4 1.)<
!his suggests that S V S !ool, Inc., finances its assets primarily with stockholders. equity. Appro imately one&third of the assets are financed with debt and the rest with stockholders. equity. #b$ !otal asset turnover 4 7ales Average total assets 4 F1;@,@@@ F112,0@@ 4 1.+2 !his suggests that S V S !ool, Inc., generates F1.+2 for every dollar of assets. #c$ 5et profit margin 4 5et income 7ales 4 F)2,@@@ F1;@,@@@ 4 @.2@ or 2@J
!his suggests that S V S !ool, Inc., earns F@.2@ for every dollar in sales that it generates. :or all of the ratios, a comparison across time and a comparison against an industry average or competitors will need to be analy/ed to determine how risky #financial leverage ratio$, how efficient #total asset turnover$ and how effective #net profit margin$ S V S !ool.s management is.
McGr a w - Hill/Ir w i n #- ##
A% ERNA E &R!C%E$S
A&4-./ Star9uc@s Corporation Adjusted rial Calance At Septem9er 1:, 0::3 )in millions* 8ash 7hort&term investments Accounts receivable Inventories *repaid e penses 9ther current assets 3ong&term investments *roperty, plant, and equipment Accumulated depreciation 9ther long&lived assets Accounts payable Accrued liabilities 7hort&term bank debt 3ong&term liabilities 8ontributed capital (etained earnings 5et revenues Interest income 8ost of sales 7tore operating e penses 9ther operating e penses %epreciation e pense 2eneral and admin. e penses Interest e pense Income ta e pense !otals (eq. 2 7ince debits are supposed to equal credits in a trial balance, the balance in (etained ,arnings is determined as the amount in the credit column necessary to make debits equal credits #a NpluggedO figure$. 8e9it F ;; 01 +> 1>1 1? 21 ;> 1,@>1 )> 0; 1)1 ;+ +@ ;+< 212 1,;>@ ? <+1 0++ 01 ?> ?@ 1 ;2 F ),1;@ Credit
)21
F ),1;@
The McGraw- Hill Comp a ni e s, Inc., 2007 #- #!
A&4-0/ (eq. 1 a. b. c. d. (eq. 2 a. 1,;@@ Insurance e pense #1,, 7,$....................................... 1,;@@ *repaid insurance #A$...................................... F),2@@ = ; months ) months of coverage. !his entry reduces the asset #prepaid insurance$ because part of it has been used and the remaining F1,;@@ represents future benefits #an asset$ to the company. ?@@ Bage e pense #1,, 7,$............................................. Bages payable #13$............................................ ?@@ Bage e pense is increased #debited$ because this e pense was incurred by Eune )@, 2@@<. A liability #wages payable$ is credited because this amount is owed to the employees. 220 'nearned maintenance revenue #3$........................... Maintenance revenue #1(, 17,$........................ F+0@ = 2 months 1 month. !his entry reduces #debits$ the liability for the amount earned and records a revenue. %epreciation e pense #1,, 7,$................................... Accumulated depreciation, service truck #1HA, A$ %epreciation is given. ),@@@ ),@@@ 220 %eferred e pense Accrued e pense %eferred revenue %eferred e pense e. . !. ". %eferred revenue Accrued e pense Accrued e pense Accrued revenue
b.
c.
d.
e.
<@@ 'nearned service revenue #3$.................................... 7ervice revenue #1(, 17,$.................................. <@@ !o recogni/e revenue earned during the year, F+,2@@ = 12 months 2 months. Interest e pense #1,, 7,$........................................... Interest payable #13$............................................. !o accrue interest e pense incurred but not paid, F1;,@@@ ?J = 12 months 0 months 4 F;@@. *roperty ta e pense #1,, 7,$.................................... *roperty ta payable #13$..................................... !o record e pense incurred but not paid. ;@@ ;@@
!.
0@@ 0@@
".
Accounts receivable #1A$.............................................. 2,@@@ 7ervice revenue #1(, 17,$................................. 2,@@@ !his entry records an asset for the amount due from customers and recogni/es the revenue because it was earned by Eune )@, 2@@<.
McGr a w - Hill/Ir w i n #- #'
A&4-1/ (eq. 1 a. b. c. d. (eq. 2 a. 1,10@ 7upplies e pense #1,, 7,$......................................... 1,10@ 7upplies #A$....................................................... 7upplies is decreased #credited$ to record the use of supplies during the year because this e pense was incurred in 2@@>, calculated as 6eg. Inventory of F)0@ 1 *urchases F1,2@@ I ,nding Inventory F+@@. Accounts receivable #1A$.............................................. <,0@@ 8atering revenue #1(, 17,$............................... <,0@@ !his entry records an asset for the amount due from customers and recogni/es the revenue because it was earned in 2@@>. ;@@ (epairs and maintenance e pense #1,, 7,$.............. Accrued e penses payable #13$......................... ;@@ (epairs and maintenance e pense is increased #debited$ because this e pense was incurred in 2@@>. A liability #accrued e penses payable$ is credited because this amount is owed but will not be paid until 2@@?. 2@@ Insurance e pense #1,, 7,$....................................... 2@@ *repaid insurance #A$...................................... F1,2@@ = 12 months 2 months of coverage. !his entry reduces the asset #prepaid insurance$ because part of it has been used while F1,@@@ represents future benefits #an asset$ to the company. <@@ (ent e pense #1,, 7,$............................................... <@@ *repaid rent #A$................................................... F2,1@@ = ) months 1 month of coverage. !his entry reduces the asset #prepaid rent$ because part of it has been used while F1,+@@ represents future benefits #an asset$ to the company. 1,;@@ %epreciation e pense #1,, 7,$................................... Accumulated depreciation, display counters #1HA, A$ %epreciation is given. 1,;@@ %eferred e pense Accrued revenue Accrued e pense %eferred e pense e. . !. ". %eferred e pense %eferred e pense Accrued revenue Accrued e pense
b.
c.
d.
e.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- #7
A&4-1/ )continued* !. Interest receivable #1A$................................................. Interest income #1(, 17,$..................................... !o accrue interest income earned but not yet received, F+,@@@ 12J 2G12 4 F>@. >@ >@
".
<,<1? Income ta e pense #1,, 7,$...................................... Income ta payable #13$....................................... <,<1? !o accrue income ta e pense incurred but not paid" Income before adjustments #given$ F22,+@@ ,ffect of adjustments #a$ through #g$ 1),))@ #&1,10@ 1<,0@@ &;@@ Income before income ta es 20,<)@ &2@@ &<@@ &1,;@@ 1>@$ Income ta rate )@J Income ta e pense F <,<1?
A&4-4/ (eq. 1 a. b. c. d. (eq. 2 6alance 7heet 7tockholders. 3iabilities ,quity 5, I1,;@@ 1?@@ I?@@ I220 1220 5, I),@@@ I<@@ 1<@@ 1;@@ I;@@ 10@@ I0@@ 5, 12,@@@ Income 7tatement (evenues , penses 5, 11,;@@ 5, 1?@@ 1220 5, 5, 1),@@@ 1<@@ 5, 5, 1;@@ 5, 10@@ 12,@@@ 5, 5et Income I1,;@@ I?@@ 1220 I),@@@ 1<@@ I;@@ I0@@ 12,@@@ %eferred e pense Accrued e pense %eferred revenue %eferred e pense e. . !. ". %eferred revenue Accrued e pense Accrued e pense Accrued revenue
!ransaction a. b. c. d. e. . !. ".
Assets I1,;@@ 5, 5, I),@@@ 5, 5, 5, 12,@@@
A&4-2/
McGr a w - Hill/Ir w i n #- #( The McGraw- Hill Comp a ni e s, Inc., 2007 %olutions Manual
(eq. 1 a. b. c. d. (eq. 2 !ransaction a. b. c. d. e. . !. ". 8omputations" a. b. c. d. e. . !. ". 7upplies used during 2@@>" 6eg. Inventory of F)0@ 1 *urchases F1,2@@ I ,nding Inventory F+@@ 4 F1,10@ used for the period. Accrued revenue" earned in 2@@> but not yet collected or recordedA payable within )@ days. , pense incurred during 2@@> to be paid during Eanuary 2@@?. !wo months of e pired insurance during 2@@>" F1,2@@ 9ne month of e pired rent during 2@@>" F2,1@@ %epreciation is given. Interest e pense accrued for 2 months" F+,@@@ 12J 2G12 4 F>@. 2G12 4 F2@@. Assets I1,10@ 1<,0@@ 5, I2@@ I<@@ I1,;@@ 1>@ 5, 6alance 7heet 7tockholders. 3iabilities ,quity 5, I1,10@ 5, 1<,0@@ 1;@@ I;@@ 5, I2@@ 5, I<@@ 5, I1,;@@ 5, 1>@ 1<,<1? I<,<1? Income 7tatement (evenues , penses 5, 11,10@ 1<,0@@ 5, 5, 1;@@ 5, 12@@ 5, 1<@@ 5, 11,;@@ 1>@ 5, 5, 1<,<1? 5et Income I1,10@ 1<,0@@ I;@@ I2@@ I<@@ I1,;@@ 1>@ I<,<1? %eferred e pense Accrued revenue Accrued e pense %eferred e pense e. . !. ". %eferred e pense %eferred e pense Accrued revenue Accrued e pense
1G) 4 F<@@.
Adjusted income 4 F22,+@@ & 1,10@ 1 <,0@@ & ;@@ &2@@ & <@@ & 1,;@@ 1 >@ 4 F20,<)@ )@J ta rate 4 F<,<1? income ta e pense.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- #)
A&4-3/ (eq. 1 #1$ 8ecem9er 1., 0::3 Adjusting Entries Accounts receivable #1A$ ......................................... 1,0@@ 7ervice revenue #1(, 17,$ ............................ !o record service fees earned, but not collected. (ent e pense #1,, 7,$ .......................................... *repaid rent #A$............................................ !o record rent e pired as an e pense. %epreciation e pense #1,, 7,$ ............................. Accumulated depreciation #1HA, A$ !o record depreciation e pense. %eferred revenue #3$ ............................................. 7ervice revenue #1(, 17,$ ............................ !o record service fees earned. Income ta e pense #1,, 7,$ ................................ Income ta es payable #13$ ............................ !o record income ta es for 2@@;. +@@ +@@ 1<,0@@ 1<,0@@ >,@@@ >,@@@ ;,0@@ ;,0@@ 1,0@@ # b$ #j$ #m$ #c$ #l$ # e$ # !$ #j$ # n$ #$
#2$
#)$
#+$
#0$
(eq. 2 Amounts before Adjusting Entries (evenues" 7ervice revenue , penses" 7alary e pense %epreciation e pense (ent e pense Income ta e pense !otal e pense 5et income F>),@@@ 0+,@@@ Amounts after Adjusting Entries F?2,0@@ 0+,@@@ 1<,0@@ +@@ ;,0@@ <>,+@@ F 1+,1@@
0+,@@@ F 2?,@@@
5et income is F1+,1@@ because this amount includes all revenues and all e penses #after the adjusting entries$. !his amount is correct because it incorporates the effects of the revenue and matching principles applied to all transactions whose effects e tend beyond the period in which the transactions occurred. 5et income of F2?,@@@ was not correct because e penses of F2+,+@@ and revenues of F?,0@@ were e cluded that should have been recorded in 2@@;.
McGr a w - Hill/Ir w i n #- !0
A&4-3/ )continued* (eq. ) ,arnings per share 4 F1+,1@@ net income 0,@@@ shares 4 F2.>2 per share (eq. + 5et profit margin 4 5et income 5et 7ales 4 F1+,1@@ F?2,0@@ 4 10.2J !he net profit margin indicates that, for every F1 of service revenues, Abraham made F@.102 #10.2J$ of net income. !his ratio suggests that Abraham is generally profitable. (eq. 0 7ervice revenue #($................................................ (etained earnings #17,$.................................. 7alary e pense #,$......................................... %epreciation e pense #,$............................... (ent e pense #,$............................................ Income ta e pense #,$.................................. (eq. ; A9raham Company &ost+closing rial Calance 8ecem9er 1., 0::3 8e9it 8ash 1>,@@@ Accounts receivable 1,0@@ *repaid rent >@@ *roperty, plant, and equipment 21@,@@@ Accumulated depreciation Income ta es payable %eferred revenue 8ontributed capital (etained earnings 7ervice revenue 7alary e pense @ %epreciation e pense @ (ent e pense @ Income ta e pense @ !otals 2)@,)@@ ?2,0@@ 1+,1@@ 0+,@@@ 1<,0@@ +@@ ;,0@@
Credit
<@,@@@ ;,0@@ >,@@@ 11@,@@@ )0,>@@ @
2)@,)@@
The McGraw- Hill Comp a ni e s, Inc., 2007 #- !$
A&4-4/ (eq. 1 8ecem9er 1., 0::4 Adjusting Entries< # a$ %epreciation e pense #1,, 7,$ ................................ ),@@@ Accumulated depreciation, equipment #1HA, A$ Insurance e pense #1,, 7,$ ..................................... *repaid insurance #A$ .................................... Bages e pense #1,, 7,$.......................................... Bages payable #13$ ........................................ 7upplies e pense #1,, 7,$ ....................................... 7upplies #A$ ................................................... Income ta e pense #1,, 7,$ ................................... Income ta payable #13$ .................................. +0@ +0@ 1,1@@ 1,1@@ <@@ <@@ 2,?0@ 2,?0@
),@@@
# b$
#c$ # d$
# e$
(eq. 2 A"S #N C!/ #ncome Statement For the 7ear Ended 8ecem9er 1., 0::4 7ervice revenue , penses" 7upplies e pense #F1,)@@ balance & F;@@ on hand$ Insurance e pense %epreciation e pense Bages e pense (emaining e penses #not detailed$ !otal e penses *reta income Income ta e pense 5et income ,arnings per share #F;,?@@ = +,@@@ shares$ F+>,@@@ <@@ +0@ ),@@@ 1,1@@ )2,?@@ )>,10@ ?,>0@ 2,?0@ F;,?@@ F1.<)
McGr a w - Hill/Ir w i n #- !2
A&4-4/ )continued* A"S #N C!/ Calance Sheet At 8ecem9er 1., 0::4 Assets 8urrent Assets" 8ash Accounts receivable 7upplies *repaid insurance !otal current assets ,quipment Accumulated depreciation 9ther assets #not detailed$ F1?,;@@ <,@@@ ;@@ +0@ 2<,;0@ 2<,@@@ #10,@@@$ 0,1@@ %ia9ilities 8urrent 3iabilities" Accounts payable Bages payable Income ta payable !otal current liabilities 5ote payable, long term !otal liabilities Stoc@holders( EBuity 8ontributed capital (etained earningsC !otal stockholdersequity otal lia9ilities and stoc@holders( eBuity F 2,0@@ 1,1@@ 2,?0@ ;,00@ 0,@@@ 11,00@ 1;,@@@ 1<,2@@ )),2@@ G44,42:
otal assets
G44,42:
C'nadjusted balance, F1@,)@@ 1 5et income, F;,?@@ 4 ,nding balance, F1<,2@@. (eq. ) 8ecem9er 1., 0::4 Closing Entry< 7ervice revenue #($................................................... (etained earnings #17,$ ................................. 7upplies e pense #,$ ..................................... Insurance e pense #,$ ................................... %epreciation e pense #,$ .............................. Bages e pense #,$ ....................................... (emaining e penses #not detailed$ # ,$.......... Income ta e pense #,$ ................................. +>,@@@ ;,?@@ <@@ +0@ ),@@@ 1,1@@ )2,?@@ 2,?0@
The McGraw- Hill Comp a ni e s, Inc., 2007 #- !&
A&4-5/ (eq. 1, 2, ), and 0 !&accounts #in thousands$ Accounts Cash Recei able 6al. 0 b 1> 6al. + ! > a 2@ e 2> d ? c 0 ) d 0; " 11 ! > # 1@ j ) 6al. 2< 6al. 0 "mall 2ools 6al. ; l 1 ) 6al. > .ther Assets 6al. ? 6al. ? E-uipment 1> 1>
6al. i
"upplies 2 l 1@
>
6al.
b 6al.
Accumulated Depreciation m 2 6al. 2
Accounts Pa#able " 11 6al. < e < i 1@ 6al. 1) 1nterest Pa#able n 1 6al. 1 Contributed Capital 6al. 10 c 0 6al. 2@ 1ncome 2a$ E$pense $ + 8, + 6al. @ 0ages E$pense o ) 8, 6al. @ )
/otes Pa#able a 2@ 6al. 2@
0ages Pa#able o ) 6al. ) +nearned Re enue j 6al. ) )
1ncome 2a$es Pa#able $ + 6al. + Retained Earnings # 1@ 6al. 8, 6al. + 11 0
"er ice Re enue d ;0 8, ;0 6al. @ Depreciation E$pense m 2 8, 6al. @ 2
1nterest E$pense n 1 8, 1 6al. @ Remaining E$penses e )0 l ? 8, ++ 6al. @
McGr a w - Hill/Ir w i n #- !#
A&4-5/ )continued* (eq. 2 a. 8ash #1A$........................................................... 5otes payable #13$................................... 6orrowed cash on 1@J note, Euly 1, 2@@>. ,quipment #1A$.................................................. 8ash #A$................................................. *urchased equipment, Euly 1, 2@@> 8ash #1A$........................................................... 8ontributed capital #17,$......................... 7old capital stock for cash. 8ash #1A$........................................................... Accounts receivable #1A$................................... 7ervice revenue #1(, 17,$...................... 7ervice revenues earned during 2@@>. (emaining e penses #1,, 7,$......................... Accounts payable #13$............................. 8ash #A$................................................. (emaining e penses incurred during 2@@>. 7mall tools #1A$.................................................. 8ash #A$................................................. *urchased additional small tools. 8ash #1A$........................................................... Accounts receivable #A$......................... 8ollected on customers- accounts. Accounts payable #3$....................................... 8ash #A$................................................ *aid on accounts payable to suppliers. 7upplies #1A$...................................................... Accounts payable #13$............................. *urchased supplies for future use. 8ash #1A$........................................................... 'nearned revenue #13$........................... %eposit received for revenue not yet earned. 2@,@@@ 2@,@@@ 1>,@@@ 1>,@@@ 0,@@@ 0,@@@ 0;,@@@ ?,@@@ ;0,@@@ )0,@@@ <,@@@ 2>,@@@ ),@@@ ),@@@ >,@@@ >,@@@ 11,@@@ 11,@@@ 1@,@@@ 1@,@@@ ),@@@ ),@@@
b.
c.
d.
e.
!.
".
i.
j.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- !!
A&4-5/ )continued* #. (etained earnings #7,$.................................... 8ash #A$................................................. %eclared and paid a cash dividend. 1@,@@@ 1@,@@@
(eq. ) l. (emaining e penses #1,, 7,$......................... 7upplies #A$............................................. 7mall tools #A$......................................... !o record supplies used #F12 I +$ and small tools used #F? I >$. %epreciation e pense #1,, 7,$........................ Accumulated depreciation #1HA, A$........ !o record depreciation as given. Interest e pense #1,, 7,$................................ Interest payable #13$................................. !o accrue interest for Euly & %ecember, 2@@>, #F2@,@@@ 1@J ;G12$. Bages e pense #1,, 7,$................................. Bages payable #13$.................................. !o accrue wages incurred but not paid. Income ta e pense #1,, 7,$........................... Income ta es payable #13$........................ !o accrue income ta . ?,@@@ >,@@@ 1,@@@
m.
2,@@@ 2,@@@ 1,@@@ 1,@@@
n.
o.
),@@@ ),@@@ +,@@@ +,@@@
$.
McGr a w - Hill/Ir w i n #- !'
A&4-5/ )continued* (eq. +
#ncome Statement For the 7ear Ended 8ecem9er 1., 0::5 (evenues" 7ervice revenue , penses" %epreciation e pense Interest e pense Bages e pense (emaining e penses *reta income Income ta e pense 5et income ,arnings per share KF11,@@@ = K#10,@@@12@,@@@$ 2L F;0 @@@ 2,@@@ 1,@@@ ),@@@ ++,@@@ 10,@@@ +,@@@ F11,@@@ F@.;)
NEW A6A#N F"RN# "RE, #NC/
Statement of Stoc@holders( EBuity For the 7ear Ended 8ecem9er 1., 0::5 Contri9uted Capital F10,@@@ 0,@@@ F2@,@@@ Retained Earnings F +,@@@ 11,@@@ #1@,@@@$ F 0,@@@ otal Stoc@holders( EBuity F1?,@@@ 0,@@@ 11,@@@ #1@,@@@$ F20,@@@
6alance, Eanuary 1, 2@@> Additional stock issuance 5et income %ividends declared 6alance, %ecember )1, 2@@>
The McGraw- Hill Comp a ni e s, Inc., 2007 #- !7
A&4-5/ )continued*

Calance Sheet At 8ecem9er 1., 0::5
Assets: 8urrent Assets" 8ash Accounts receivable 7upplies 7mall tools !otal current assets ,quipment 3ess" Accum. depr. 9ther assets
F2<,@@@ 0,@@@ +,@@@ >,@@@ ++,@@@ 1>,@@@ #2,@@@$ ?,@@@
otal assets
G3?,:::
Liabilities: 8urrent 3iabilities" Accounts payable 5otes payable Bages payable Interest payable Income ta es payable 'nearned revenue !otal current liabilities "toc3holders4 E-uit#: 8ontributed capital (etained earnings !otal stockholdersequity otal lia9ilities and stoc@holders( eBuity
F1),@@@ 2@,@@@ ),@@@ 1,@@@ +,@@@ ),@@@ ++,@@@ 2@,@@@ 0,@@@ 20,@@@ G3?,:::
Statement of Cash FloFs For the &eriod Ended 8ecem9er 1., 0::5 8ash from 9perating Activities" 8ash collected from customers #d 1 ! 1 j$ 8ash paid to suppliers and employees # e 1 "$ Cash pro;ided 9y operations 8ash from Investing Activities" *urchase of equipment #b$ *urchase of small tools # $ Cash used in in;esting acti;ities 8ash from :inancing Activities" 6orrowing from bank #a$ Issuance of stock #c$ *ayment of dividends ##$ Cash pro;ided 9y financing acti;ities 8hange in cash 6eginning cash balance, Eanuary 1, 2@@> ,nding cash balance, %ecember )1, 2@@> F ;<,@@@ #)?,@@@$ 05,::: #1>,@@@$ #),@@@$ )0.,:::* 2@,@@@ 0,@@@ #1@,@@@$ .2,::: 22,@@@ 0,@@@ F 2<,@@@
McGr a w - Hill/Ir w i n #- !(
A&4-5/ )continued* (eq. 0 8ecem9er 1., 0::5 Closing Entry 7ervice revenue #($......................................... (etained earnings #17,$ ......................... %epreciation e pense #,$ ...................... Interest e pense #,$ ............................... Bages e pense #,$ ............................... (emaining e penses #,$ ........................ Income ta e pense #,$ ......................... !o close revenues and e penses. (eq. ; ;0,@@@ 11,@@@ 2,@@@ 1,@@@ ),@@@ ++,@@@ +,@@@

&ost+Closing rial Calance At 8ecem9er 1., 0::5 Debit F2<,@@@ 0,@@@ +,@@@ >,@@@ 1>,@@@ ?,@@@ 1),@@@ 2@,@@@ ),@@@ 1,@@@ +,@@@ ),@@@ 2@,@@@ 0,@@@ @ @ @ @ @ @ F<1,@@@ F<1,@@@
Account 2itles 8ash Accounts receivable 7upplies 7mall tools ,quipment Accumulated depreciation 9ther assets #not detailed$ Accounts payable 5otes payable Bages payable Interest payable Income ta es payable 'nearned revenue 8ontributed capital #2@,@@@ shares$ (etained earnings 7ervice revenue %epreciation e pense Bages e pense Income ta e pense Interest e pense (emaining e penses #not detailed$ !otals
Credit
F 2,@@@
The McGraw- Hill Comp a ni e s, Inc., 2007 #- !)
A&4-5/ )continued* (eq. < #a$ :inancial leverage 4 Average total assets Average stockholders. equity 4 K#F2;,@@@1F;?,@@@$ 2L K#F1?,@@@1F20,@@@$ 2L 4 F+<,0@@ F22,@@@ 4 2.1;
!his result suggests that 5ew Again :urniture, Inc., finances its assets more with debt than stockholders. equity. !he company borrowed F1.1; and utili/ed F1 of stockholders. equity to acquire every dollar of assets. #b$ !otal asset turnover 4 7ales Average total assets 4 F;0,@@@ F+<,0@@ 4 1.)< !his suggests that 5ew Again :urniture, Inc., generates F1.)< for every dollar of assets. #c$ 5et profit margin 4 5et income 7ales 4 F11,@@@ F;0,@@@ 4 @.1< or 1<J
!his suggests that 5ew Again :urniture, Inc., earns F@.1< for every dollar in sales that it generates. :or all of the ratios, a comparison across time and a comparison against an industry average or competitors will need to be analy/ed to determine how risky #financial leverage ratio$, how efficient #total asset turnover$ and how effective #net profit margin$ 5ew Again :urniture.s management is.
McGr a w - Hill/Ir w i n #- '0
CASES AN8 &R!EEC S

:I5A58IA3 (,*9(!I52 A5% A5A3D7I7 8A7,7 C&4-./ 1. At the end the 2@@+ fiscal year, *repaid , penses were F1?,?+) thousand. 9f that amount, F12,+<; thousand was prepaid rent. !his information is disclosed on the balance sheet. 2. !he company reported F2;,>2; thousand for unearned #deferred$ revenue. !his information is disclosed on the balance sheet. ). *repaid rent represents rent that *acific 7unwear of 8alifornia has paid in advance to its landlords. It is an asset. *acific 7unwear also rents property to tenants. %eferred rent represents rent that it has collected in advance for which *ac7un has an obligation to allow a tenant to use *ac7un.s property. +. Accrued 3iabilities would consist of costs that have been incurred by the end of the accounting period but which have not yet been paid. 0. !he company owed F;,;+< thousand in currently payable sales ta es at the end of the 2@@+ fiscal year. !his information is disclosed in 5ote 0 regarding accrued liabilities. ;. Interest Income is related to the company.s short&term investments. <. !he company.s income statement accounts #revenues, e pense, gains, and losses$ would not have balances on a post&closing trial balance. !hese accounts are temporary accounts that have been closed to (etained ,arnings. >. *repaid , penses is an asset account. As such, it is a permanent account that carries its ending balance into the ne t accounting period. It is not closed at the end of the period. ?. !he company reported basic earnings per share of F1.+1 for fiscal year 2@@+, F1.@0 for 2@@), and F@.;< for 2@@2.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- '$
C&4-./ )continued* 1@. :iscal year 2@@2" 5et *rofit Margin #dollars in thousands$ 4 5et Income 4 F+?,;;; 4 @.@0? 7ales 2@@)" 5et *rofit Margin >+<,10@
4 5et Income 4 F>@,2@@ 4 @.@<< 7ales 1,@+1,+0;
2@@+"
5et *rofit Margin
4 5et Income 4 F1@;,?@+ 4 @.@>< 7ales 1,22?,<;2
9ver the past three years, the company.s net profit margin has increased. *acific 7unwear of 8alifornia is becoming progressively more profitable each year. Management appears to be controlling costs, generating greater sales, or both. C&4-0/ 1. American ,agle paid F121,1)> thousand in income ta es in its 2@@+ fiscal year, as disclosed in note 2 under N7upplemental %isclosures of 8ash :low Information.O 2. !he quarter ended Eanuary 2?, 2@@0, was its best quarter in terms of sales at F;<+,@2+,@@@ #this quarter covered 8hristmas, the biggest part of the year for retailers$. !he worst quarter ended May 1, 2@@+ #the quarter following 8hristmas$, and most likely this is because most people have very little money to spend on e tra clothing in that period. 5ote 10 discloses quarterly information. ). 9ther income #net$ is an aggregate of many accounts, but a summary entry for them all would be" 9ther income #net$ .................... (etained ,arnings.......... +,12? +,12?
McGr a w - Hill/Ir w i n #- '2
C&4-0/ )continued* +. As disclosed in 5ote +, Accounts and 5ote (eceivable consists of #in thousands$" :abric 8onstruction allowances 7ell&offs to non&related parties !a es %istribution services 7ale of 6luenotes 9ther !otal 0. :iscal year 0. 2@@2" 5et *rofit Margin 2,><1 ;,>@1 ;,;0< 2,0>+ 2,@10 2,<@< 2,<?< F2;,+)2 #dollars are in thousands$ 4 5et Income 4 F>>,1@> 4 @.@;+ 7ales 2@@)" 5et *rofit Margin 1,)>2,?2)
4 5et Income 4 F0?,;22 4 @.@+2 7ales 1,+)0,+);
2@@+"
5et *rofit Margin
4 5et Income 4 F21),)+) 4 @.11) 7ales 1,>>1,2+1
9ver the past three years, the company.s net profit margin at first decreased and then the most recent year.s profit margin was almost double that during the 2@@2 fiscal year. In 2@@+, management appears to be controlling costs, generating greater sales, or both.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- '&
C&4-1/ 1. American ,agle 9utfitters reported an advertising e pense of F+1.+ million for fiscal 2@@+ #5ote 2 under Advertising 8osts$. *acific 7unwear of 8alifornia reported F11.+ million of advertising costs during fiscal 2@@+. #7ee 5ote 1 under Advertising 8osts$. 2. :iscal Dear 2@@+ 2@@) 2@@2 American ,agle 9utfitters Advertising , pense G 5et 7ales +1,+@@ G 1,>>1,2+1 2.2J ++,>@@ G 1,+)0,+); ).1J ++,+@@ G1,)>2,?2) ).2J *acific 7unwear of 8alifornia Advertising , pense G 5et 7ales 11,+@@ G 1,22?,<;2 .?J 1@,+@@ G 1,@+1,+0; 1.@J >,?@@ G >+<,10@ 1.1J
American ,agle 9utfitters incurred the higher percentage for fiscal year 2@@+. 6oth firms had a steadily declining balance of advertising costs as a percentage of net sales. ). AdvertisingG7ales 4 Industry Average ).@)J American ,agle 9utfitters 2.2J *acific 7unwear of 8alifornia .?J
6oth American ,agle 9utfitters and *acific 7unwear of 8alifornia are spending less on advertising as a percentage of sales than the average company in their industry. !his might imply that they are more effective, as they are generating more sales per dollar spent on advertising. Another interpretation is that they are not supporting their brand, and sales will eventually decline as their brands lose value. +. 6oth accounting policies are similar indicating that advertising costs are e pensed when the marketing campaigns become publicly available. American ,agle allocates advertising costs for television campaigns over the life of the campaign. *ac7un e penses its television costs when the advertising becomes publicly available. #!he policies are disclosed in note 1 of *acific 7unwear of 8alifornia.s annual report, and note 2 of American ,agle.s annual report$.
McGr a w - Hill/Ir w i n #- '#
C&4-1/ )continued* 0. 2@@2" 5et *rofit 4 5et Income Margin 7ales 2@@)" 5et *rofit 4 5et Income Margin 7ales 2@@+" 5et *rofit 4 5et Income Margin 7ales American ,agle 9utfitters F>>,1@> 4 @.@;+ 1,)>2,?2) F0?,;22 4 @.@+2 1,+)0,+); F21),)+) 4 @.11) 1,>>1,2+1 *acific 7unwear of 8alifornia F+?,;;; 4 @.@0? F>+<,10@ F>@,2@@ 4 @.@<< F1,@+1,+0; F1@;,?@+ 4 @.@>< F1,22?,<;2
6oth companies show an increase in their profit margins over the 2@@2&2@@+ time period. *acific 7unwear of 8alifornia shows steadily increasing profit margins over timeA whereas American ,agle showed a dip in its profit margin in 2@@). Bith the e ception of 2@@), American ,agle has been able to attain a greater profit margin than that for *acific 7unwear of 8alifornia, suggesting a better overall performance. ;. 5et *rofit Margin 4 Industry Average +.02J American ,agle 9utfitters 11.)J *acific 7unwear of 8alifornia >.<J
6oth companies, American ,agle 9utfitters and *acific 7unwear of 8alifornia have higher 5et *rofit Margins than the average company in their industry. !his is likely due to the strategy that these two companies have pursued, which is to differentiate their clothing in terms of style and quality and appeal to a particular niche market, therefore being able to charge a higher price.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- '!
C&4-4 (eq. 1 !he author suggests that the root cause of accounting scandals is Na widespread obsession with earnings that drives companies to push accounting standards to the limit and, in e treme cases, to engage in outright fraud.O !his causes managers to make decisions to meet short&term earnings e pectations, often at the e pense of long& term shareholder value. (eq. 2 !he uncertainties that the author believes are problems in current financial reporting are related to the subjective assumptions about the future #accruals$ I revenue recognition and e pense matching. , amples include uncertainties as to how much revenue a company will generate from current&period e penditures for research and development, employee training, brand building, or additions to production capacity. !here is also subjectivity in matching e penses with revenues. , amples include the various depreciation methods available to managers and e pensing research and development. According to the author, these uncertainties about the future combined with historical information produce financial statements, and net income in particular, that do not tell users what they need to know to make investing and lending decisions.
McGr a w - Hill/Ir w i n #- ''
C&4-2/ (eq. 1
Account 8ash Maintenance supplies 7ervice equipment Accumulated depreciation, service equipment (emaining assets 5ote payable, >J Interest payable Income ta es payable Bages payable 'nearned revenue 8ontributed capital (etained earnings 7ervice revenue , penses "nadjusted rial Calance Debit Credit 2@,@@@ 0@@ ?@,@@@ 1>,@@@ +2,0@@ 1@,@@@ +2,0@@ 1@,@@@ >@@ 1),@2@ 0@@ ;,@@@ 0;,@@@ ?,@@@ 21+,@@@ 1>),;2@ ));,)2@ ));,)2@ @ 102,<@@ Adjusted rial Calance Debit Credit 2@,@@@ 2@@ ?@,@@@ 2<,@@@ +2,0@@ 1@,@@@ >@@ 1),@2@ 0@@ ;,@@@ 0;,@@@ )?,)>@ @ 102,<@@ &ost+Closing rial Calance Debit Credit 2@,@@@ 2@@ ?@,@@@ 2<,@@@
0;,@@@ ?,@@@ 22@,@@@ 1;@,@@@ )1),@@@ )1),@@@
,nding (etained ,arnings 4 6eg., F?,@@@ 1 5et income, #F21+,@@@ & 1>),;2@$ (eq. 2 # a$ # b$ #c$ # d$ # e$ #$ !o record the amount of supplies used during 2@@<, F)@@, and to reduce the supplies account to the amount remaining on hand at the end of 2@@<. !o accrue interest e pense for 2@@< #the interest is payable in 2@@>, computed as F1@,@@@ >J 4 F>@@$ and to record interest payable. !o reduce service revenue for cash collected in advance of being earned and to record the liability for those services yet to be performed, F;,@@@. !o record depreciation e pense for 2@@<, F?,@@@. !o record 2@@< wages of F0@@ that will be paid in 2@@>. !o record 2@@< income ta and the related liability, F1),@2@.
The McGraw- Hill Comp a ni e s, Inc., 2007 #- '7
C&4-2/ )continued* (eq. ) Closing Entry on 8ecem9er 1., 0::4< 7ervice revenue #from the adjusted trial balance$ # ($......... 21+,@@@ (etained earnings #17,$............................................. )@,)>@ , penses #from the adjusted trial balance$ # ,$......... 1>),;2@ (eq. + *reta income #F21+,@@@ & 1<@,;@@$ F+),+@@ (eq. 0 5umber of shares issued >,@@@ Average issue price 4 !otal issue amount T 4 F0;,@@@ T 4 F<.@@ per share Average income ta rate 4 Income ta e pense T 4 F1),@2@ T 4 F1),@2@ T 4 )@J
McGr a w - Hill/Ir w i n #- '(
C&4-3/ 2ransaction (a): 1. !his transaction will affect 7hirley.s financial statements for 1@ years #from 2@@; to 2@10$ in conformity with the matching principle. 2. Income statement" %epreciation e pense, as given ). 6alance sheet at %ecember )1, 2@@>" Assets" 9ffice equipment 3ess" Accumulated depreciationC 8arrying #book$ value CF1,+@@ ) years 4 F+,2@@. F1,+@@ each year
F1+,@@@ +,2@@ F ?,>@@
+. An adjusting entry each year over the life of the asset would be recorded to reflect the allocation of the cost of the asset when used to generate revenues" 1,+@@ %epreciation e pense #1,, 7,$ 1,+@@ Accumulated depreciation #1HA, A$ 2ransaction (b): 1. !his transaction will affect 7hirley.s financial statements for 2 years&&2@@> and 2@@?&&because four month.s rent revenue was earned in 2@@>, and two monthsrent revenue will be earned in 2@@?. 2. !he 2@@> income statement should report rent revenue earned of F1;,@@@ #F2+,@@@ +G;$. 9ccupancy was provided for only + months in 2@@>. !his is in conformity with the revenue principle. ). !his transaction created an F>,@@@ liability #F2+,@@@ & F1;,@@@ 4 F>,@@@$ as of %ecember )1, 2@@>, because at that date 7hirley Uowes-- the renter two more months- occupancy for which it has already collected the cash. +. Des, an adjusting entry must be made to #a$ increase the rent revenue account by F1;,@@@, and #b$ to decrease the liability to F>,@@@ representing the future occupancy owed #in conformity with the revenue principle$. %ecember )1, 2@@>&&Adjusting entry" 'nearned rent revenue #3$ ............................ 1;,@@@ (ent revenue #1(, 17,$......................... 1;,@@@
The McGraw- Hill Comp a ni e s, Inc., 2007 #- ')
C&4-3/ )continued* 2ransaction (c): 1. !his transaction will directly affect 7hirley.s financial statements for two years, with the e pense incurred in 2@@> and the cash payment in 2@@?. 2. !he F<,0@@ should be reported as wage e pense in the 2@@> income statement and as a liability on the 2@@> balance sheet. 9n Eanuary 0, 2@@?, the liability will be paid. !herefore, the 2@@? balance sheet will reflect a reduced cash balance and reduced liability balance. !he transaction will not directly affect the 2@@? income statement #unless the adjusting entry was not made$. ). Des, an adjusting entry must be made to #a$ record the F<,0@@ as an e pense in 2@@> #matching principle$ and #b$ to record the liability which will be paid in 2@@?. %ecember )1, 2@@>&&Adjusting entry" Bage e pense #1,, 7,$ ................................ <,0@@ Bages payable #13$ .............................. <,0@@ 5ote" 9n Eanuary 0, 2@@?, the liability, Bages *ayable, F<,0@@, will be paid. Bage e pense for 2@@? will not include this F<,0@@. !he 2@@? related entry will debit #decrease$ wages payable, and credit #decrease$ cash, F<,0@@. 2ransaction (d): 1. Des, service revenue of F+0,@@@ #i.e., F;@,@@@ )G+$ should be recorded as earned by 7hirley in conformity with the revenue principle. 7ervice revenue is recogni/ed as the service is performed. 2. (ecognition of revenue earned but not collected by the end of 2@@> requires an adjusting entry. !his adjusting entry is necessary to #a$ record the revenue earned #to be reported on the 2@@> income statement$ and #b$ record the related account receivable #an asset to be reported on the 2@@> balance sheet$. !he adjusting entry on %ecember )1, 2@@> is" Accounts receivable #1A$............................................ +0,@@@ 7ervice revenue #1(, 17,$............................... +0,@@@ #F;@,@@@ total price )G+ completed$ ). :ebruary 10, 2@@?&&8ompletion of the last phase of the service contract and cash collected in full" 8ash #1A$ .................................................................... ;@,@@@ Accounts receivable #A$.................................. +0,@@@ 7ervice revenue #1(, 17,$............................... 10,@@@
C&4-4/ (eq. 1 Adjusting entries< (a) , penses #insurance$ #1,, 7,$ ........................................ *repaid insurance #A$ ............................................. !o adjust for e pired insurance. (b) (ent receivable #1A$ ........................................................... (evenues #rent$ #1(, 17,$........................................ !o adjust for rent revenue earned but not yet collected. , penses #depreciation$ #1,, 7,$ .................................... Accumulated depreciation, long&lived assets #1HA, A$ !o adjust for annual depreciation. , penses #wages$ #1,, 7,$ .............................................. Bages payable #13$ ................................................. !o adjust for wages earned but not recorded or paid. Income ta e pense #1,, 7,$ ........................................... Income ta es payable #13$ ....................................... !o adjust for income ta e pense. 'nearned rent revenue #3$................................................ (evenues #rent$ #1(, 17,$........................................ !o adjust for rent revenue collected but unearned. Closing entry #from the adjusted trial balance$" (evenues #($..................................................................... (etained earnings #17,$ ............................................... , penses #,$................................................................ Income ta e pense #,$................................................ !o close the temporary accounts to (etained ,arnings for 2@@;. 1 1 2 2 11 11 ) ) 0 0 ) )
(c)
(d)
(e)
()
(eq. 2 1@) 10 >) 0
The McGraw- Hill Comp a ni e s, Inc., 2007 #- 7$
C&4-4/ )continued* (eq. ) #a$ 7hares outstanding" 1,@@@ shares #given$. #b$ Interest e pense" F2@,@@@ 1@J 4 F2,@@@.
#c$ ,nding balance in retained earnings" 'nadjusted balance, F#),@@@$ 1 5et income, F10,@@@ 4 F12,@@@. #d$ Average income ta rate" F0,@@@ income ta e pense = #F1@),@@@ revenues & F>),@@@ total e penses$ 4 20J. #e$ (ent receivable && report on the balance sheet as an asset. 'nearned rent revenue && report on the balance sheet as a liability #for future occupancy Uowed--$. #f$ 5et income of F10,@@@ was computed on the basis of accrual accounting concepts. (evenue is recogni/ed when earned and e penses recorded when incurred regardless of the timing of the respective cash flows. 8ash inflows, in addition to certain revenues, were from numerous sources such as the issuance of capital stock, borrowing, and revenue collected in advance. 7imilarly, cash outflows were, in addition to certain e penses, due to numerous transactions such as the purchase of operational and other assets, prepaid insurance, and dividends to stockholders. #g$ ,*7" F10,@@@ = 1,@@@ shares #per #a$ above$ 4F10.@@ per share. #h$ 7elling price per share" F)@,@@@ contributed capital = 1,@@@ shares 4 F)@ per share. #i$ !he prepaid insurance account reflected a F2,@@@ balance before the adjustment #decrease$ of F1,@@@. !herefore, it appears that the policy premium was paid on Eanuary 1, 2@@;, and it was prepaid for two years #2@@; and 2@@<$. 9ther possibilities might be #a$ a 12&month policy purchased on Euly 1, 2@@;, or #b$ a 2& month policy purchased on %ecember 1, 2@@;. In any case, one&half of the premium has e pired. #j$ 5et profit margin" F10,@@@ net income = F1@),@@@ revenues 4 @.1+; #1+.;J$.
C&4-5/ (eq. 1 CR7S A%AS 8A7 S&A AN8 SA%!N, #NC/ #ncome Statement For the 7ear Ended 8ecem9er 1., 0::5
Cash 5asis Per Cr#stal6s "tatement F1,110,@@@ 1)@,@@@ Corrected 5asis F1,@12,@@@ 12@,@@@ +),;@@ 11,>@@ 02),0@@ 2?,>20 12,+@@ 2@,0@@ <;1,;20 F 20@,)<0 F1,110,@@@ &1)2,@@@ 1 2?,@@@ F1,@12,@@@
1tems (evenues" 7pa fees , penses" 9ffice rent 'tilities !elephone 7alaries 7upplies Miscellaneous %epreciation !otal e penses 5et income C
E$planation of Changes 7ee C below.
, clude rent for Ean. 2@@? #F1)@,@@@ = 1)$ #g$ +),;@@ 5o change 12,2@@ 7ee CC below. 022,@@@ Add %ecember 2@@> salary #F1>,@@@ = 12$ #e$ )1,?@@ 7ee CCC below. 12,+@@ 5o change @ 2iven for 2@@> #c$ <02,1@@ F );2,?@@
8ash collected for spa fees :ees earned in prior years #a$ :ees earned in 2@@> but not yet collected #b$ :ees earned in 2@@>
CC
Add %ecember 2@@> bill of F1,+@@ #f$ and subtract the %ecember 2@@< bill of F1,>@@ paid in 2@@> #F12,2@@ 1 F1,+@@ & F1,>@@ 4 F11,>@@$. 7upplies #d$ ),120 )1,?@@ 2?,>20 0,2@@
CCC 6eg. *urchases ,nd.
'sed
The McGraw- Hill Comp a ni e s, Inc., 2007 #- 7&
C&4-5/ )continued* (eq. 2 Memo to 8rystal Mulline should include the following" #1$ 5et income was overstated by F112,020 because of inappropriate recognition of revenue #overstated by F1@),@@@$ and e penses #understated by F?,020$. (evenue should be recogni/ed when earned, not when the cash is collected. 7imilarly, e penses should be matched against revenue in the period when the services or materials were used #including depreciation e pense$. #2$ 7ome other items the parties should consider in the pricing decision" #a$ A correct balance sheet at %ecember )1, 2@@>. #b$ 8ollectibility of any receivables #if they are to be sold with the business$. #c$ Any liabilities of the spa to be assumed by the purchaser. #d$ 8urrent employees && how will they be affectedT #e$ Adequacy of the rented space && is there a long&term noncancellable leaseT #f$ 8haracteristics of 8rystal.s spa practices. #g$ , pected future cash flows of the business. Bhat is the present value of those e pectationsT
McGr a w - Hill/Ir w i n #- 7#
8(I!I8A3 !SI5QI52 8A7,7 C&4-?/ (eq. 1 0::4 12G)1 (a) Adjusting Entries 7upplies e pense #1,, 7,$WWWWWWW 7upplies #A$WWWWWWWWWWWW. !o record supplies used #F;,@@@ & F1,>@@ 4 F+,2@@$. Insurance e pense #1,, 7,$WWWWWWWW. *repaid insurance #A$WWWWWWWW !o record e pired insurance at %ecember )1, 2@@<. %epreciation e pense #1,, 7,$WWWWWWW Accumulated depreciation #1HA, A$WW. !o record depreciation for one year. 7alaries e pense #1,, 7,$WWWWWWWWWW 7alaries payable #13$WWWWWWWWW !o record salaries earned but not paid. !ransportation revenue #(, 17,$ WWW 'nearned transportation revenue #13$WW !o record transportation revenue earned but collected in advance. Income ta e pense #1,, 7,$WWWWWWW... Income ta payable #13$WWWWWWWW !o record 2@@< income ta computation" !ransportation revenue" F>0,@@@ <,@@@ 4 F<>,@@@ , penses" F+<,@@@ 1 +,2@@ 1 2,@@@ 1 >,@@@ 1 2,2@@ 4 ;),+@@ *reta income F1+,;@@ Income ta e pense" F1+,;@@ 20J 4 F ),;0@ 8e9it +,2@@ +,2@@ Credit
(b)
2,@@@ 2,@@@ >,@@@ >,@@@ 2,2@@ 2,2@@ <,@@@ <,@@@
(c)
(d)
(e)
()
),;0@ ),;0@
The McGraw- Hill Comp a ni e s, Inc., 2007 #- 7!
C&4-?/ )continued* (eq. 2 $A6%#!C'E # $!I#N6 C!R&!RA #!N Corrections to 0::4 Financial Statements Amounts Reported 0::4 #ncome Statement< (evenue" !ransportation revenue , penses" 7alaries e pense 7upplies e pense 9ther e penses Insurance e pense %epreciation e pense Income ta e pense !otal e penses 5et income 8ecem9er 1., 0::4 Calance Sheet Assets: 8urrent Assets" 8ash (eceivables 7upplies *repaid insurance !otal current assets ,quipment 3ess" Accumulated deprec. (emaining assets !otal assets Liabilities: 8urrent 3iabilities" Accounts payable 7alaries payable 'nearned transportation revenue Income ta payable !otal current liabilities "toc3holders4 E-uit# 8ontributed capital (etained earnings !otal stockholdersequity !otal liabilities and stockholdersequity
McGr a w - Hill/Ir w i n #- 7'
Changes Plus &inus e d a b c 2,2@@ +,2@@ 2,@@@ >,@@@ ),;0@ <,@@@
Corrected Amounts
F >0,@@@ 1<,@@@ 12,@@@ 1>,@@@ @ @ @ +<,@@@ F )>,@@@
F <>,@@@ 1?,2@@ 1;,2@@ 1>,@@@ 2,@@@ >,@@@ ),;0@ ;<,@0@ F 1@,?0@
2,@@@ ),@@@ ;,@@@ +,@@@ 10,@@@ +@,@@@ @ 2<,@@@ F>2,@@@ F ?,@@@ @ @ @ ?,@@@ )0,@@@ )>,@@@ <),@@@ F>2,@@@
a b c >,@@@
+,2@@ 2,@@@
F 2,@@@ ),@@@ 1,>@@ 2,@@@ >,>@@ +@,@@@ #>,@@@$ 2<,@@@ F;<,>@@ F ?,@@@ 2,2@@ <,@@@ ),;0@ 21,>0@ )0,@@@ 1@,?0@ +0,?0@ F;<,>@@
d e
2,2@@ <,@@@ ),;0@
C&4-?/ )continued* (eq. ) 9mission of the adjusting entries caused" #a$ 5et income to be overstated by F2<,@0@. #b$ !otal assets to be overstated by F1+,2@@. (eq. + #a$ ,arnings per share" 'nadjusted && F)>,@@@ net income 1@,@@@ shares 4 F).>@ per share Adjusted && F1@,?0@ net income 1@,@@@ shares 4 F1.@?0 per share #b$ 5et profit margin" 'nadjusted && F)>,@@@ net income >0,@@@ sales 4 ++.<J Adjusted && F1@,?0@ net income <>,@@@ sales 4 1+.@J ,ach of the ratios was affected by inclusion of the adjustments with revenues decreasing and e penses increasing resulting in a lower net income. :or earnings per share, the numerator net income decreased while the denominator did not, resulting in a significantly lower figure. :or the net profit margin, the denominator sales was lower but did not decrease more than the reduction in the numerator net income causing a significantly lower percentage.
C&4-?/ )continued* (eq. 0 #today.s date$ !o the 7tockholders of Magliochetti Moving 8orporation" Be regret to inform you that your request for a F2@,@@@ loan has been denied. 9ur review showed that various adjustments were required to the original set of financial statements provided to us. !he original #unadjusted$ financial statements overstated net income for 2@@< by F2<,@0@ #i.e., F)>,@@@ & F1@,?0@$. !his overstatement was caused by incorrectly including F<,@@@ of revenue collected in advance that had not been earned in 2@@<. :urther, all of the e penses were understated and income ta e pense had been incorrectly e cluded. !otal assets were overstated by F1+,2@@ #i.e., F>2,@@@ & F;<,>@@$. 7upplies was overstated by F+,2@@, prepaid insurance was overstated by F2,@@@, and the net book value of the equipment was overstated by F>,@@@ because annual depreciation was not properly recogni/ed. A review of key financial ratios indicates that the adjustments caused earnings per share and net profit margin to decline. 5et profit margin declined from ++.<J to 1+.@J. !he adjusted ratios, however, would be compared to those of other start&up companies in the same industry. Be require that there be sufficient collateral pledged against the loan before we can consider it. !he current market value of the equipment may be able to provide additional collateral against which the loan could be secured. Dour personal investments may also be considered viable collateral if you are willing to sign an agreement pledging these assets as collateral for the loan. !his 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. (egards, #your name$ 3oan Application %epartment, Dour 6ank
McGr a w - Hill/Ir w i n #- 7(
C&4-.:/ (eq. 1 8ash from 9perations" F1>,@@@
(eq. 2 7ubscriptions (evenue for fiscal year ended March )1, 2@@> #F1>,@@@ <G);$" F),0@@ (eq. ) March )1, 2@@> 'nearned 7ubscriptions (evenue #F1>,@@@ 2?G);$ 4 F1+,0@@ or F1>,@@@ & F),0@@ 4 F1+,0@@. (eq. + Adjusting entry #cash receipt credited to 'nearned 7ubscriptions (evenue$" 'nearned 7ubscriptions (evenue #3$ ?G1 1>,@@@ AE, ),0@@ ,nd. 1+,0@@ 7ubscriptions (evenue #($ AE, ,nd. ),0@@ ),0@@
'nearned subscriptions revenue # 3$......................... ),0@@ 7ubscriptions revenue #1(, 17,$..................... ),0@@ !o record the earning of revenue for seven months #F0@@ per month$. (eq. 0 a. F+,@@@ revenue target based on cash sales" !his target is not clearly defined. %oes management mean any cash subscriptions received during the periodT Dour region generated F1>,@@@ in cash subscriptions. 6y this assumption, your region far e ceeded the company.s target. Dou may be entitled to a generous bonus due to your strong performance. 9n the other hand, management may mean any sales revenue earned that has also been received in cash during the period. 'nder this assumption, sales revenue earned and received in cash is F),0@@ #the accrual accounting basis amount$. If this is the company.s intention of its target, then your region did not meet the goal, only generating ><.0J of the target. Dou may need to provide an analysis to management regarding this below par performance. !his e ample demonstrates the need for clear communication of e pectations by management. b. F+,@@@ revenue target based on accrual accounting" !his situation is the same as the second assumption under a. Dour region earned F0@@ less than e pected by the company.
McGr a w - Hill/Ir w i n Financi al Accountin , !"e The McGraw- Hill Comp a ni e s, Inc., 2007 #- 7)
:I5A58IA3 (,*9(!I52 A5% A53D7I7 *(9E,8! C&4-../ !he solutions to this project will depend on the company andGor accounting period selected for analysis.
McGr a w - Hill/Ir w i n #- (0

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Chapter 4

Adjustments, Financial Statements, and the Quality of Earnings

ANSWERS ! Q"ES #!NS

ANSWERS ! $"% #&%E C'!#CE

McGr a w - Hill/Ir w i n Financi al Accountin , !"e

The McGraw- Hill Comp a ni e s, Inc., 2007 #- &

Authors( Recommended Solution ime

Mini-exercises No. Time 1 0 2 0 ) ) + 0 0 0 ; 0 < 0 > 0 ? 0 1@ 0 11 0 12 )

Exercises No. Time 1 1@ 2 1@ ) 1@ + 10 0 1@ ; 2@ < 2@ > 2@ ? 10 1@ 2@ 11 1@ 12 2@ 1) 10 1+ 10 10 2@ 1; 2@ 1< 2@ 1> 2@ 1? 1@ 2@ 10

Problems No. Time 1 10 2 2@ ) 20 + 2@ 0 2@ ; 20 < )@ > )@ ? ;@

Alternate Problems No. Time 1 10 2 2@ ) 2@ + 2@ 0 2@ ; 20 < )@ > )@

Cases and Projects No. Time 1 20 2 20 ) 20 + 20 0 20 ; +@ < +0 > )0 ? 0@ 1@ 20 11 C

The McGraw- Hill Comp a ni e s, Inc., 2007 %olutions Manual

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Assets 5, I?@@ I),@@@

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The McGraw- Hill Comp a ni e s, Inc., 2007 %olutions Manual

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Parious e pense accounts #e.g., wages e pense$ Income ta e pense

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The McGraw- Hill Comp a ni e s, Inc., 2007 %olutions Manual

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accrued interest e pense T T

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The McGraw- Hill Comp a ni e s, Inc., 2007 %olutions Manual

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The McGraw- Hill Comp a ni e s, Inc., 2007 %olutions Manual

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E4-.4/ )continued* (eq. 2

The McGraw- Hill Comp a ni e s, Inc., 2007 %olutions Manual

McGr a w - Hill/Ir w i n Financi al Accountin , !"e

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McGr a w - Hill/Ir w i n #- 2'

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McGr a w - Hill/Ir w i n #- &0

The McGraw- Hill Comp a ni e s, Inc., 2007 %olutions Manual

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McGr a w - Hill/Ir w i n Financi al Accountin , !"e

The McGraw- Hill Comp a ni e s, Inc., 2007 #- &$