SM Chapter 04

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CHAPTER 4 Income Measurement and Accrual Accounting

OVERVIEW OF E ERCI!E!" PRO#$EM!" A%& CA!E!
$earning O'(ecti)e E*ercises Estimated Time in Minutes $e)el
1+ Explain the significance of recognition and measurement in the preparation and use of financial statements. ,+ Explain the differences bet een the cash and accrual bases of accounting. -+ Describe the re!enue recognition principle" and explain its application in !arious situations. 4+ Describe the matching principle and the !arious methods for recogni$ing expenses. .+ %dentif# the four ma&or t#pes of ad&usting entries and prepare them for a !ariet# of situations.
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Diff Mod Diff Mod Eas# Diff Mod Mod Mod Mod Eas# Eas# Eas# Eas# Eas# Eas# Eas# Mod Eas# Eas# Eas# Eas# Mod Mod Mod Mod
*Exercise" problem" or case co!ers t o or more learning ob&ecti!es +e!el , Difficult# le!els- Eas#. Moderate /Mod0. Difficult /Diff0 1ontinued
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/+ Explain the steps in the accounting c#cle and the significance of each step.
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$earning O'(ecti)e
Pro'lems and Alternates
Estimated Time in Minutes
$e)el
1+ Explain the significance of recognition and measurement in the preparation and use of financial statements. ,+ Explain the differences bet een the cash and accrual bases of accounting. -+ Describe the re!enue recognition principle" and explain its application in !arious situations. 9* 1 9* 10* 11* 9** 10* 11 2 ' ( 5 ) * 8 12* 12* 25 25 25 25 '0 25 25 '0 20 20 20 15 20 25 15 )0 90 Mod Mod Mod Diff Diff Mod Diff Diff Mod Mod Mod Mod Mod Mod Mod Mod Mod
4+ Describe the matching principle and the !arious methods for recogni$ing expenses. .+ %dentif# the four ma&or t#pes of ad&usting entries and prepare them for a !ariet# of situations.
/+ Explain the steps in the accounting c#cle and the significance of each step. *Exercise" problem" or case co!ers t o or more learning ob&ecti!es = 5riginal problem onl# **4lternate problem onl# +e!el , Difficult# le!els- Eas#. Moderate /Mod0. Difficult /Diff0
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$earning O'(ecti)e
Cases
Estimated Time in Minutes
$e)el
1+ Explain the significance of recognition and measurement in the preparation and use of financial statements. ,+ Explain the differences bet een the cash and accrual bases of accounting. -+ Describe the re!enue recognition principle" and explain its application in !arious situations. 5* ** 1* 2 ' ( 5* ** 1* 5* ) ** 8 1* ** '0 )0 '0 '0 20 25 '0 )0 '0 '0 25 )0 (5 '0 )0 Mod Diff Mod Mod Mod Mod Mod Diff Mod Mod Mod Diff Mod Mod Diff
4+ Describe the matching principle and the !arious methods for recogni$ing expenses.
.+ %dentif# the four ma&or t#pes of ad&usting entries and prepare them for a !ariet# of situations. /+ Explain the steps in the accounting c#cle and the significance of each step. *Exercise" problem" or case co!ers t o or more learning ob&ecti!es +e!el , Difficult# le!els- Eas#. Moderate /Mod0. Difficult /Diff0
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01E!TIO%! 1+ 7he accountant cannot sho a stoc>holder or other user the compan#?s assets" such as cash and buildings. %nstead" hat the user sees is a representation or depiction of the real thing. 7he accountant describes ith ords and numbers the !arious items in the financial statements. 4ccountants stri!e to present financial statements that are both rele!ant to the decisions made b# users of the statements and also reliable or !erifiable. 9ometimes" ho e!er" there are trade@offs. 2or example" in deciding hether an asset that a compan# pledges as collateral for a loan is sufficient" a ban>er ma# be most interested in the current !alue of the asset. 7hat is" this amount ma# be the most rele!ant attribute or characteristic of the asset for the ban>er?s needs. 7he accountant" ho e!er" ma# be reluctant to present the current !alue of the asset on the balance sheet because of the difficult# in measuring the !alue of the asset ith an# degree of reliabilit#. 7he amount paid for the assetAthat is" its historical costAma# be more reliable" although not as rele!ant to the ban>er?s decision. 7he realtor ill recogni$e re!enue from the sale of the home on Bul# 8 if the cash basis is used because this is the date cash is received. <e!enue ill be recogni$ed on Bune 12 if the accrual basis is used because this is the date the sale ta>es place and thus is the date on hich the re!enue is earned. 7his statement is not entirel# accurate. Cecause it is based on historical cash flo s" a statement of cash flo s is not necessaril# the most accurate source of information on the future cash flo prospects for a compan#. 4n income statement ma# in fact pro!ide more important information about future cash flo s. 2or example" an income statement includes not onl# sales on a cash basis this period but also sales on credit that ill generate cash flo s in future periods. 9imilarl#" a statement of cash flo s reports onl# expenses that reDuired a cash outla# in the current period. 4n accrual@based income statement pro!ides information on accrued expenses that ill result in a cash outla# in future periods. 7he time period assumption is important in accounting because financial statement users ant information about a compan# as of a particular point in time and for distinct periods of time. 2or example" a potential stoc>holder ants to >no the financial position at the end of the most recent #ear and the profit of a business for the most recent #ear. 6nder an accrual accounting s#stem" re!enues are recogni$ed hen the# are earned regardless of hen cash is recei!ed" and expenses are recogni$ed hen the# are incurred regardless of hen cash is paid. 7he accountant does not ait until all of the cash from a sale has been collected to report the sale on the income statement. %n this a#" the user of the statement recei!es information on a timel# basis.
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3o" the recognition of re!enue is not al a#s the result of the acDuisition of an asset. 4ssume that a publisher sells a maga$ine subscription and collects cash from the customer in ad!ance. 4t the time cash is collected" the publisher incurs a liabilit#. 4s each month?s maga$ine is mailed to the customer" a portion of the liabilit# is satisfied and re!enue is recogni$ed. 7hus" in some instances re!enue results from the settlement of a liabilit#. 7he percentage of completion method is used b# contractors to spread the recognition of re!enue o!er the life of the pro&ect. <e!enue is earned o!er the life of a pro&ect rather than at an# one point in time. %t ma>es sense for the contractor to recogni$e re!enue as or> progresses" rather than to ait and recogni$e all of the re!enue from the pro&ect in the #ear in hich the pro&ect is completed. %t ould in fact be a distortion to report all of the re!enue in the #ear of completion. 4ccording to professional accounting standards" an initial franchise fee should be recogni$ed as re!enue onl# hen the franchiser has made Esubstantial performanceF of its obligations and collection of the fee is reasonabl# assured. %llinois ill recogni$e the G50"000 fee as re!enue hen it has assisted the franchisee in selecting a site and has helped to train the personnel. 4 maga$ine publisher recogni$es re!enue at the time the maga$ines are deli!ered to the customers. 7his is the point at hich the publisher has earned re!enue. 7he re!enue recognition principle calls for the recognition hen re!enues are either reali$ed or reali$able. <e!enues are reali$able hen assets recei!ed or held are readil# con!ertible to >no n amounts of cash or claims to cash. 2or example" the significant e!ent in the re!enue recognition process for a gold mining compan# is the production of the commodit#. Cecause each ounce of gold is interchangeable and the mar>et can absorb all of the gold the compan# sells ithout there being an effect on the price" the actual sale of the gold is secondar# to its production. 7hus" it is considered acceptable for the compan# to recogni$e re!enue hen the gold is mined rather than hen it is sold. 4 compan# incurs a cost hen it acDuires an asset. 2or example" assume that a retailer bu#s a product for G100 on 5ctober 21. 5n this date it has incurred a cost of G100 to acDuire an asset" namel# merchandise in!entor#. 7he asset ill be remo!ed from the records and an expense recogni$ed" namel# cost of goods sold" hen the product is sold. %n place of the in!entor#" the compan# ill acDuire another asset" either cash or an account recei!able. %n summar#" assets are unexpired costs and expenses are expired costs.
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Depreciation is the process of allocating the cost of a tangible long@term asset to its useful life. 2or example" the accountant attempts to recogni$e or match the cost of a machine as an expense o!er the period of time that the machine is used to manufacture products. 7he four basic t#pes of ad&ustments area+ 7o recogni$e the expired portion of a prepaid expense. 2or example" an ad&ustment is needed at the end of each month to recogni$e insurance expense for the portion of an insurance polic# that has expired during the period. '+ 7o recogni$e the earned portion of a deferred re!enue or liabilit#. 2or example" a publisher has to ma>e an ad&ustment at the end of each period to recogni$e the earned portion of a subscription. c+ 7o recogni$e expense at the end of the period before cash is paid. 2or example" an ad&ustment is made at the end of the #ear to recogni$e income tax expense" e!en though the taxes ill not be paid until earl# in the follo ing #ear. d+ 7o recogni$e re!enue at the end of the period before cash is recei!ed. 2or example" a landlord ill need to ma>e an ad&ustment at the end of the month for the rent o ed b# a tenant but not pa#able until some time during the follo ing month.
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Calance sheet accounts are called real accounts because the# are permanent and are not closed at the end of a period. 1on!ersel#" income statement accounts are called nominal accounts because the# are temporar# and are closed at the end of the period. 2or example" it ould not ma>e sense to close the EDuipment account at the end of the period. 7he account should sta# on the boo>s as long as the compan# >eeps the asset. 5n the other hand" Depreciation Expense on the eDuipment is a temporar# account that indicates the expense associated ith using the asset during the period and is therefore closed along ith all other income statement accounts at the end of the period. 1losing entries ser!e t o important purposes. 2irst" the balances in all temporar# or nominal accounts are returned to $ero to start the next accounting period. 9econd" the net income and the di!idends of the period are transferred to the <etained Earnings account.
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ERCI!E!
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E ERCI!E 4-1 REVE%1E RECO6%ITIO%
1ash collected at toll booth ;asses redeemed <e!enue recogni$ed
G '"000"000 1"*00"000 G ("*00"000
5nl# the amount of passes that ha!e been used should be recogni$ed as re!enue. 7he difference bet een the G2"000"000 of passes issued and the G1"*00"000 of passes used is unearned re!enue at this point. $O 4 1+ b ,+ c -+ b or c / ould recogni$e immediatel# if supplies are normall# used up the period0 4+ c .+ a /+ c 2+ a 3+ c 4+ b $O . 1+ ,+ -+ 4+ 4+ D< 44 DE
E ERCI!E 4-- ACCR1A$! A%& &EFERRA$! E ERCI!E 4-, THE MATCHI%6 PRI%CIP$E
ithin
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DE D< 4+ 44
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
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E ERCI!E 4-4 OFFICE !1PP$IE!
7o record office supplies used.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< 5H'1 5ffice 9upplies on :and /1")'00 /1"(50 I 1"100 J 9200
I%COME
!TATEME%T
8 Re)enues = E*>enses 5ffice 9upplies Expense /1")'00
3et income for the month of Ma# ould be o!erstated b# G1")'0 if this ad&ustment ere not recogni$ed" because expenses ould be understated.
$O .
E ERCI!E 4-. PREPAI& RE%T?01ARTER$@ A&A1!TME%T!
1+ G12"000H) months , G2"000 per month. ,+ 7o record prepa#ment of six monthsK rent on 9eptember 1.
#A$A%CE !HEET
Assets 9H1 ;repaid <ent 1ash 7 12"000 /12"0000 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses
-+ 7o record one month of rent expense on 9eptember '0.

#A$A%CE !HEET
Assets 9H'0 ;repaid <ent 7 /2"0000 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
/2"0000
8 Re)enues = E*>enses <ent Expense
4+ %f the accountant forgot to record an ad&ustment on December '1" net income for the #ear ould be o!erstated b# G)"000 /G2"000 per month L ' months0.
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E ERCI!E 4-/ &EPRECIATIO%
1+ 7o record purchase of combine on Bul# 1.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< *H1 EDuipment 100"000 1ash /100"0000
I%COME
!TATEME%T
,+ ;urchase price +ess estimated sal!age !alue Depreciable cost
G 100"000 /1)"0000 G 8("000
-+ Monthl# depreciation , depreciable costHestimated life , G8("000H8( months , G1"000Hmonth. 4+ 7o record one monthKs depreciation expense on Bul# '1.
#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< *H'1 4ccumulated Depreciation /1"0000
I%COME
!TATEME%T
8 Re)enues = E*>enses Depreciation Expense /1"0000
.+ EDuipment +ess- 4ccumulated depreciation /) months G1"000Hmonth0 1arr#ing !alue
G 100"000
L
/)"0000 G 9("000
$O .
E ERCI!E 4-2 PREPAI& I%!1RA%CE?A%%1A$ A&A1!TME%T!
1+ Monthl# cost- G*2"000H2( months , G'"000. ,+ 7o record purchase of 2(@month polic# on 4pril 1.
#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< (H1 ;repaid %nsurance *2"000 1ash /*2"0000
I%COME
!TATEME%T
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-11
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7o record expiration of 9 months of insurance on December '1.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses %nsurance Expense /2*"0000
12H'1 ;repaid %nsurance /2*"0000
4+ 3et income ill be o!erstated b# G2*"000 if the accountant forgets to record an ad&ustment to recogni$e an expense.
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E ERCI!E 4-3 !1#!CRIPTIO%!
1+ 7o record collection of 900 subscriptions of G'0 each in 4ugust.

#A$A%CE !HEET
Assets 4ug. 1ash 2*"000 7 $ia'ilities 9ubscriptions <ecei!ed in 4d!ance /900 L '00 8 O9ners: E;uit<
I%COME
!TATEME%T
2*"000
,+ 7o record subscriptions earned during 4ugust and recorded on 4ugust '1.

#A$A%CE !HEET
Assets 8H'1 7 $ia'ilities 8 O9ners: E;uit< 9ubscriptions <ecei!ed in 4d!ance /*"5000 /(0"500 I 2*"000 J )0"0000
I%COME
!TATEME%T
8 Re)enues = E*>enses 9ubscriptions <e!enue *"500
-+ 3et income for the month ould be understated b# G*"500 if the accountant forgot to ma>e the ad&ustment to recogni$e re!enue earned. $O .
E ERCI!E 4-4 C1!TOMER &EPO!IT!
1+ 7o record on 4pril 1 receipt of customer deposit for three months of legal ser!ice.
#A$A%CE !HEET
Assets (H1 1ash 9"000 7 $ia'ilities 1ustomer Deposits 8 9"000 O9ners: E;uit<
I%COME
!TATEME%T
4-1,
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,+ 7o record on 4pril '0 one month of legal fees earned.

#A$A%CE !HEET
Assets (H'0 7 $ia'ilities 1ustomer Deposits /9"000H'0 8 /'"0000 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses +egal 2ees Earned '"000
-+ %f the 4pril '0 ad&ustment is not recorded" net income G'"000.
ill be understated b#
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E ERCI!E 4-15 WA6E! PA@A#$E

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1+ Mee>l# pa#roll- G10 per hour G1*"500
* hours per da#
5 da#s
50 emplo#ees ,
,+ 7o record pa#ment of ee>l# pa#roll on 5ctober 2*.

#A$A%CE !HEET
Assets 10H2* 1ash 7 /1*"5000 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses Mages Expense /1*"5000
-+ 7o record accrual for t o da#sK

#A$A%CE !HEET
Assets 10H'1 7 $ia'ilities Mages ;a#able /1*"500H5 da#s
L
ages on 5ctober '1.

I%COME
!TATEME%T
/*"0000
8 *"000 2 da#s0
O9ners: E;uit<
8 Re)enues = E*>enses Mages Expense
4+ 7o record pa#ment of ee>l# pa#roll on 3o!ember '.

#A$A%CE !HEET
Assets 11H' 1ash /10"5000 7 $ia'ilities 8 /*"0000 O9ners: E;uit< /1*"5000 Mages ;a#able
I%COME
!TATEME%T
.+ 3et income for 5ctober ould be o!erstated b# G*"000 if the compan# failed to record accrued ages on 5ctober '1. $O .
E ERCI!E 4-11 I%TERE!T PA@A#$E
1+ 7o record 12N" 90@da# loan from 2irst 3ational Can> on March 1.

#A$A%CE !HEET
Assets 'H1 1ash 7 $ia'ilities 8 100"000 O9ners: E;uit< 100"000 3ote ;a#able
I%COME
!TATEME%T
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-1-
,+ 7o accrue interest due on note for one month on March '1.

#A$A%CE !HEET
Assets 'H'1 7 $ia'ilities %nterest ;a#able /100"000 L .12
L
I%COME
!TATEME%T
8 1"000 '0H')00
O9ners: E;uit<
8 Re)enues = E*>enses %nterest Expense /1"0000
7o accrue interest due on note for one month on 4pril '0.

#A$A%CE !HEET
Assets (H'0 7 $ia'ilities %nterest ;a#able 8 1"000 O9ners: E;uit<
I%COME
!TATEME%T
/1"0000
8 Re)enues = E*>enses %nterest Expense
-+ 7o record pa#ment of note and interest at maturit# date on Ma# '0.

#A$A%CE !HEET
Assets 5H'0 1ash 7 $ia'ilities 3ote ;a#able %nterest ;a#able 8 /100"0000 /2"0000 O9ners: E;uit< /10'"0000
I%COME
!TATEME%T
/1"0000
$O .
E ERCI!E 4-1, PROPERT@ TA E! PA@A#$E? A%%1A$ A&A1!TME%T!
1+ 7o accrue 200( propert# taxes on December '1.

#A$A%CE !HEET
Assets ,554 12H'1 7 $ia'ilities ;ropert# 7axes ;a#able /50"000 L 1.050 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses ;ropert# 7ax Expense
52"500
/52"5000
,+ 7o record pa#ment of 200( propert# taxes on Bune 1.

#A$A%CE !HEET
Assets ,55. )H1 1ash 7 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
/52"5000 ;ropert# 7axes ;a#able
/52"5000
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E ERCI!E 4-1- I%TERE!T RECEIVA#$E
7o record 10N" )0@da# loan to MaxiDri!er" %nc. on Bune 1.

#A$A%CE !HEET
I%COME
!TATEME%T
)H1
1ash /)0"0000 3ote <e@ cei!able )0"000
,+
7o accrue interest due on note for one month on Bune '0.

#A$A%CE !HEET
I%COME
!TATEME%T
8 Re)enues = E*>enses %nterest %ncome 500
)H'0 %nterest <ecei!able 500 /)0"000 L .10 L '0H')00
-+
7o record collection of note and interest at maturit# date on Bul# '1.

#A$A%CE !HEET
I%COME
!TATEME%T
500
8 Re)enues = E*>enses %nterest %ncome
*H'1 1ash )1"000 3ote <ecei!able /)0"0000 %nterest <ecei!able /5000
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E ERCI!E 4-14 1%#I$$E& ACCO1%T! RECEIVA#$E
1+ 6nder the re!enue recognition principle" re!enue should be recorded hen ser!ices are performed" because this is the point at hich re!enue is earned. ,+ 7o record on Bune '0 unbilled ser!ice fees earned during Bune.
#A$A%CE !HEET
Assets )H'0 7 $ia'ilities 8 O9ners: E;uit< 4ccounts <ecei!able (0"000
I%COME
!TATEME%T
8 Re)enues = E*>enses 9er!ice 2ees Earned (0"000
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-1.
$O . 1+ 5 ,+ 6 -+ 5 $O .
E ERCI!E 4-1. THE EFFECT OF I6%ORI%6 A&A1!TME%T! O% %ET I%COME
4+ 5 .+ 5 /+ 6
E ERCI!E 4-1/ THE EFFECT OF A&A1!TME%T! O% THE ACCO1%TI%6 E01ATIO%
1+ ,+ -+ 4+ .+ /+
Assets D 3E D 3E % 3E
$ia'ilities 3E % 3E D 3E %
O9ners: E;uit< D D D % % D
$O /
E ERCI!E 4-12 THE ACCO1%TI%6 C@C$E
5rder in the accounting c#cle- (" *" 1" 5" '" )" 2 M1$TI-CO%CEPT E ERCI!E! $O 1","E ERCI!E 4-13 REVE%1E RECO6%ITIO%" CA!H A%& ACCR1A$ #A!I!
1+ 4ccrual basis income statementsHATHAWA@ HEA$TH C$1# I%COME !TATEME%T! FOR THE @EAR! E%&E& &ECEM#ER -1 9ales*G ExpensesDepreciation** 9alaries and ages 4d!ertising <ent and utilities 7otal expenses 3et income /loss0 *@ear 1B G'))"000H' , G122"000 third of the total recogni$ed. @ear 1 122"000 G ''"000 50"000 5"000 ')"000 G12("000 G /2"0000 @ear , G152"000 G ''"000 50"000 5"000 ')"000 G12("000 G 28"000 @ear G182"000 G ''"000 50"000 5"000 ')"000 G 12("000 G 58"000
ith a three #ear membership. onl# one@
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@ear ,B G122"000 I O/1000/G9000H'P /additional three@#ear memberships sold in second #ear" but onl# one@third recogni$ed as re!enue0 , G152"000. @ear -B G122"000 I G'0"000 /additional #ear of re!enue recogni$ed on memberships sold in #ear 20 I G'0"000 /additional three@#ear memberships sold in third #ear" but onl# one@third recogni$ed as re!enue0 , G182"000. **/G100"000 J G1"0000H' #ears , G''"000 per #ear. ,+ 6nder the re!enue recognition principle" re!enue is recogni$ed not hen cash is recei!ed but rather hen re!enue is earned. %t is earned ith the passage of time as members use the facilities o!er their respecti!e three@ #ear membership periods. 4ccrual basis income statements allo the reader to focus on the long@term profitabilit# of the business rather than simpl# on the amount of cash recei!ed in an# gi!en #ear. $O 1","E ERCI!E 4-14 THE EFFECT OF THE PERCE%TA6E-OF-COMP$ETIO% METHO& O% FI%A%CIA$ !TATEME%T!
1+ @ear 1 2 ' 7otals Income RecogniCed 1nder Percentage-oD-Com>letion #asis CasE #asis /1"200"000H2"(00"000*0 2"000"000 J L 1")00"000** G 800"000 1"200"000 G 800"000 /)00"000H2"(00"0000 L 1")00"000 /)00"000H2"(00"0000 L 1")00"000 G (00"000 0 J )00"000 2"000"000 J )00"000 /)00"0000 1"(00"000 G 1")00"000
G (00"000 G 1")00"000
*7otal costs- G1"200"000 I G)00"000 I G)00"000 , G2"(00"000. **7otal income- G("000"000 J G2"(00"000 , G1")00"000. ,+ 6nder the percentage@of@completion method" re!enue is recogni$ed as it is earned. 4s or> progresses" the amount of re!enue and income to recogni$e is based on the extent of completion. 4 common method used to estimate the percent of completion is to compare the costs incurred to date to the total estimated costs for the pro&ect.
$O 4".
E ERCI!E 4-,5 &EPRECIATIO% E PE%!E
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-12
1+ Depreciation 7ruc> 1omputer Cuilding
expense for 200(O/G18"000 J G'"0000H5P L 9H12 O/G55"000 J G5"0000H10P L )H12 O/G250"000 J G10"0000H'0P L 'H12
, , ,
G2"250 G2"500 G2"000
,+ 1ertainl# it ould be less costl# in terms of the time spent b# the accountant to expense all costs rather than treat certain ones as assets to be ritten off o!er their useful li!es. :o e!er" this is a !iolation of the matching principle hich reDuires that costs be allocated to the periods during hich the# pro!ide benefits" i.e." aid the generation of re!enue. Estimates such as those reDuired to depreciate assets are a normal and necessar# part of an accrual accounting s#stem. $O 4".
E ERCI!E 4-,1 ACCR1A$ OF I%TERE!T O% A $OA%
1+ 7o record t o@month" 12N ban> loan on Bul# 1.

#A$A%CE !HEET
Assets a+ *H1 1ash 7 $ia'ilities 8 50"000 O9ners: E;uit< 50"000 3otes ;a#able
I%COME
!TATEME%T
7o accrue one@month interest on ban> loan on Bul# '1.

#A$A%CE !HEET
Assets '+ *H'1 7 $ia'ilities 8 O9ners: E;uit< %nterest ;a#able 500 /50"000 L .12 L 1H120
I%COME
!TATEME%T
/5000
7o record repa#ment of principal and interest on ban> loan on 4ugust '1.

#A$A%CE !HEET
Assets c+ 8H'1 1ash 7 $ia'ilities 8 /5000 /50"0000 O9ners: E;uit< /51"0000 %nterest ;a#able 3otes ;a#able
I%COME
!TATEME%T
/5000
,+
%t ould sa!e the time and cost in ma>ing a &ournal entr# to s>ip an ad&usting entr# on Bul# '1 and simpl# record interest hen the loan is repaid on 4ugust '1. :o e!er" to do so ould !iolate the matching principle. 5ne of the necessar# costs in Bul# as interest" and it should be matched ith the re!enues of that period. %f interest ere not accrued at the end of Bul#" the expense for that month ould be understated and the expense for 4ugust ould be o!erstated.
PRO#$EM!
4-13
2%3431%4+ 4115637%38 95+67%539 M4364+
$O -
PRO#$EM 4-1 THE REVE%1E RECO6%ITIO% PRI%CIP$E
a+ 7he )N commission on G150"000" or G9"000" should be recogni$ed on Ma# 1. 7his is the date on hich a sale ta>es place. %t is the date on hich the realtor?s client accepts the offer to sell the house. '+ 4ssuming that 1hic>en Qing is reasonabl# assured of collecting the entire fee" it should recogni$e G10"000 of re!enue on March 1'. 4 franchiser must ha!e made Rsubstantial performanceR under the agreement to recogni$e re!enue. 5n this date" 1hic>en Qing has pro!ided the ser!ice it promisedassistance in selecting a site. c+ 7he franchiser should recogni$e re!enue of G)0"000 L 2N" or G1"200" on Bune '0. 6nder the accrual accounting concept" it has earned the franchise fee on this date" regardless of hen the franchisee either reports the amount of sales or remits the fee to 1hic>en Qing. %oteB Cecause 1hic>en Qing does not recei!e the report until Bul# '" it ill either need to estimate on Bune '0 the amount to be recei!ed or ait until Bul# ' to actuall# make the ad&usting entr# to accrue re!enue. :o e!er" the ad&usting entr# should be dated Bune '0 and its effect sho n in an# financial statements prepared as of this date. d+ 8oldstar should accrue re!enue of G'00 L 50 ounces" or G15"000" throughout 4ugust as the gold is mined. 6nder the production method" re!enue is recogni$ed at the time of production rather than at the point of sale. 7he method is appropriate for precious commodities such as gold. 7he compan# ill ha!e to ma>e an ad&ustment to recogni$e an additional G10 per ounce L 50 ounces" or G500 of re!enue" on 9eptember 5 hen the gold is sold. e+ Mhatadeal should recogni$e G2"500 of re!enue /G10"000 L 25N0 on December 2 hen the do n pa#ment is recei!ed. 7he remaining G*"500 is recogni$ed on 2ebruar# 1" hen it is recei!ed in cash. Mhen there is a high degree of uncertaint# about the collectibilit# of an account" the installment method is acceptable. %t is essentiall# a cash basis of recording.
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-14
$O .
PRO#$EM 4-, A&A1!TME%T!
1+ 4d&ustments on March '1" 200(7o accrue interest.

#A$A%CE !HEET
Assets a+ 'H'1 7 $ia'ilities 8 O9ners: E;uit< %nterest ;a#able 100 /15"000 L .08 L '0H')00
I%COME
!TATEME%T
/1000
7o record supplies used.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< '+ 'H'15ffice 9upplies on :and /))00 /1"280 I *50 J 1"'*00
I%COME
!TATEME%T
/))00
8 Re)enues = E*>enses 9upplies Expense
7o record depreciation.
#A$A%CE !HEET
Assets c+ 'H'1 7 $ia'ilities 8 O9ners: E;uit< 4ccumulated DepreciationA 5ffice EDuipment /8000 /)2")00 J 5"0000 L 1H*2
I%COME
!TATEME%T
8 Re)enues = E*>enses Depreciation Expense /8000
7o accrue ages.
#A$A%CE !HEET
Assets d+ 'H'1 7 $ia'ilities Mages ;a#able /950 L )0 8 5"*00 O9ners: E;uit<
I%COME
!TATEME%T
/5"*000
7o recogni$e rent earned.

#A$A%CE !HEET
Assets e+ 'H'1 7 $ia'ilities <ent 1ollected in 4d!ance 8 /2"5000 O9ners: E;uit<
I%COME
!TATEME%T
2"500
8 Re)enues = E*>enses <ent <e!enue
4-,5
2%3431%4+ 4115637%38 95+67%539 M4364+
7o record customer deposits earned.

#A$A%CE !HEET
Assets D+ 'H'1 7 $ia'ilities 1ustomer Deposits /("800H(0 8 /1"2000 O9ners: E;uit<
I%COME
!TATEME%T
1"200
8 Re)enues = E*>enses 9er!ice <e!enue
7o record estimated income taxes.

#A$A%CE !HEET
Assets g+ 'H'1 7 $ia'ilities %ncome 7ax ;a#able 8 '"900 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses %ncome 7ax Expense /'"9000
,+ %ncome before ad&ustments <ent re!enue 9er!ice re!enue %nterest expense 9upplies expense Depreciation expense Mages expense %ncome tax expense 4d&usted net income $O .
PRO#$EM 4-- A%%1A$ A&A1!TME%T!
G 2'"000 I 2"500 I 1"200 /1000 /))00 /8000 /5"*000 /'"9000 G 15"5(0
1+ 4d&ustments on December '1" 200(7o record annual depreciation expense.

#A$A%CE !HEET
Assets a+ 12H'1 7 $ia'ilities 8 O9ners: E;uit< 4ccumulated Depreciation /2"9500 /15"000 J 2500H5 #ears
I%COME
!TATEME%T
8 Re)enues = E*>enses Depreciation Expense /2"9500
7o record supplies used during the #ear.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< '+ 12H'1 9upplies on :and /19"'500 /'")00 I 1*")00 J 1"8500
I%COME
!TATEME%T
8 Re)enues = E*>enses 9upplies Expense /19"'500
7o record customer deposits earned bet een 4ugust and December.
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-,1
#A$A%CE !HEET
Assets c+ 12H'1 7 $ia'ilities 8 O9ners: E;uit< 1ustomer Deposits /20"0000 /2("000H) months0 L 5 months
I%COME
!TATEME%T
20"000
8 Re)enues = E*>enses 2ees Earned
7o record rent expense for 3o!ember through December.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< d+ 12H'1 ;repaid <ent /5"(000 /2"*00 L 20
I%COME
!TATEME%T
/5"(000
7o accrue interest pa#able on note.

#A$A%CE !HEET
Assets e+ 12H'1 7 $ia'ilities 8 O9ners: E;uit< %nterest ;a#able '"000 /200"000 L .09 L )0H')00
I%COME
!TATEME%T
/'"0000
7o accrue ages pa#able at #ear@end.

#A$A%CE !HEET
Assets D+ 12H'1 7 $ia'ilities Mages ;a#able 8 500 O9ners: E;uit<
I%COME
!TATEME%T
/5000
8 Re)enues = E*>enses Mage Expense
,+ 3et increase /decrease0 in net income from ad&ustmentsa+ Depreciation expense '+ 9upplies expense c+ 2ees earned d+ <ent expense e+ %nterest expense D+ Mage expense 5!erstatement of 200( net income
G /2"9500 /19"'500 20"000 /5"(000 /'"0000 /5000 G /11"2000
4-,,
2%3431%4+ 4115637%38 95+67%539 M4364+
$O . a+ '+ c+ d+ e+ D+ g+ E+ $O .
PRO#$EM 4-4 REC1RRI%6 TRA%!ACTIO%! A%& A&A1!TME%T!
1" 12" 1' 5" 1 *" 1" 11 '" 1 (" 8 1" 1( 1" 2 2" 1(
i+ (+ F+ l+ m+ n+ o+
8" 1 1*" 9 15" ( 1)" ' 11" 19" 1 18" ) 20" 10
PRO#$EM 4-. 1!E OF ACCO1%T #A$A%CE! A! A #A!I! FOR A%%1A$ A&A1!TME%T!
1+ 4d&ustments on December '1" 200(7o recogni$e expired insurance.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< a+ 12H'1 ;repaid %nsurance /1"0000 /*"200 L 5H')0
I%COME
!TATEME%T
8 Re)enues = E*>enses %nsurance Expense /1"0000
7o recogni$e rent earned.

#A$A%CE !HEET
Assets '+ 12H'1 7 $ia'ilities <ent 1ollected in 4d!ance /)"000 L *H120 8 O9ners: E;uit< /'"5000
I%COME
!TATEME%T
'"500
8 Re)enues = E*>enses <ent <e!enue
7o recogni$e interest earned.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< c+ 12H'1 %nterest <ecei!able 1"500 /50"000 L .09 L (H120
I%COME
!TATEME%T
1"500
8 Re)enues = E*>enses %nterest <e!enue
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-,-
,+ %f ad&ustments ere made at the end of each month" the ;repaid %nsurance account ould ha!e been reduced b# the monthl# expense of G200 /G*"200H')0 on four occasions- 4ugust '1" 9eptember '0" 5ctober '1" and 3o!ember '0. 7hus" the balance in the account before the December ad&usting entr# ould be G*"200 J O/(0/G2000P , G)"(00. $O .
PRO#$EM 4-/ 1!E OF ACCO1%T #A$A%CE! A! A #A!I! FOR A&A1!TME%T!
1+ 4d&ustments on 4pril '0" 200(7o recogni$e one month?s insurance expense.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< a+ ;repaid %nsurance /500
I%COME
!TATEME%T
/500
8 Re)enues = E*>enses %nsurance Expense
7o record supplies used.

#A$A%CE !HEET
Assets '+ 5ffice 9upplies /250 J 1800 7 /*00 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses 5ffice 9upplies Expense /*00
#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< c+ 4ccumulated DepreciationA 5ffice EDuip@ ment /(1*0 /50"000 L 1H1200
I%COME
!TATEME%T
8 Re)enues = E*>enses Depreciation Expense /(1*0
#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< d+ 4ccumulated DepreciationA 4utomobile /2000 /12"000 L 1H)00
I%COME
!TATEME%T
4-,4
2%3431%4+ 4115637%38 95+67%539 M4364+
7o record commissions earned.

#A$A%CE !HEET
Assets e+ 7 $ia'ilities 6nearned 1ommissions /9"500 J 5"0000 8 /("5000 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses 1ommissions Earned ("500
7o record re!enue earned" not #et collected.

#A$A%CE !HEET
Assets D+ 4ccounts <ecei!able 7 1"500 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses 1ommissions Earned 1"500
7o record interest on note pa#able.

#A$A%CE !HEET
Assets g+ 7 $ia'ilities %nterest ;a#able 8 20 O9ners: E;uit<
I%COME
!TATEME%T
/200
7o record salaries not #et paid.

#A$A%CE !HEET
Assets E+ 7 $ia'ilities 9alaries ;a#able 8 2"500 O9ners: E;uit<
I%COME
!TATEME%T
/2"5000
8 Re)enues = E*>enses 9alaries Expense
,+ 3et increase /decrease0 in net income from ad&ustments%nsurance expense 9upplies expense Depreciation expense Depreciation expense 1ommissions earned 1ommissions earned %nterest expense 9alaries expense 3et increase in net income
/500 /*00 /(1*0 /2000 ("500 1"500 /200 /2"5000 G 2"*('
-+ 7he office eDuipment as purchased on 4pril 1" 200'" and has been depreciated for one #ear before depreciation is recorded for the month of 4pril" 200(. 7hus" if the eDuipment has a 10@#ear life" the balance in 4ccumulated Depreciation ill be G50"000H10 #ears" or G5"000.
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-,.
$O .
PRO#$EM 4-2 RECO%!TR1CTIO% OF A&A1!TME%T! FROM ACCO1%T #A$A%CE!
1+ 7o record insurance expense on Bune '0.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< )H'0 ;repaid %nsurance /1500 /'")00 J '"(500
I%COME
!TATEME%T
/1500
8 Re)enues = E*>enses %nsurance Expense
,+ 1ost of polic# as G150
') months , G5"(00.
-+ 7o record depreciation expense on Bune '0.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< )H'0 4ccumulated /Depreciation /800 /1"')0 J 1"2800
I%COME
!TATEME%T
4+ Estimated useful life in months- G9")00HG80 month , 120 months. .+ 7o record interest expense on Bune '0.
#A$A%CE !HEET
Assets )H'0 7 $ia'ilities %nterest ;a#able /2"((8 J 2"'0(0 L 8 1(( O9ners: E;uit<
I%COME
!TATEME%T
/1((0
/+ %nterest rate- /G1(( per month
12 months0HG9)00 , 18N.
7he monthl# rate is 18NH12 months , 1.5N. $O .

PRO#$EM 4-3 1!E OF ACCO1%T #A$A%CE! A! A #A!I! FOR A&A1!TME%T!
1+ <ecording ad&ustments7o record rent expense.

#A$A%CE !HEET
Assets a+ ;repaid <ent 7 /)000 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
/)000
4-,/
2%3431%4+ 4115637%38 95+67%539 M4364+
7o record expense of orn out !ideos.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< '+ Sideo %n!entor# /2"()00
I%COME
!TATEME%T
/2"()00
8 Re)enues = E*>enses Sideo Expense
7o record depreciation expense on displa# stands.

#A$A%CE !HEET
Assets c+ 4ccumulated Depreciation 7 /1(00 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses Depreciation Expense /1(00
7o record unpaid
Assets 7
ages and salaries.

$ia'ilities 8 O9ners: E;uit<
#A$A%CE !HEET
d+ Mages and 9alaries ;a#able
I%COME
!TATEME%T
8 Re)enues = E*>enses Mages and 9alar# Expense
1"(50
/1"(500
7o record subscription re!enue earned.

#A$A%CE !HEET
Assets e+ 7 $ia'ilities 8 /2"((00 O9ners: E;uit< 1ustomer 9ubscriptions
I%COME
!TATEME%T
8 Re)enues = E*>enses 9ubscription <e!enue 2"((0
7o record accrued income taxes.

#A$A%CE !HEET
Assets D+ 7 $ia'ilities 8 8(9 O9ners: E;uit< %ncome 7axes ;a#able
I%COME
!TATEME%T
8 Re)enues = E*>enses %ncome 7ax Expense /8(90
E*>lanationsB GaH G*"200H12 months G'H G25")00 J G2'"1(0 GcH /G8"900 J G5000H)0 months GDH 1alculation of taxes due9ubscription re!enue <ental re!enue Mage and salar# expense /G2"'20 I G1"(500 6tilit# expense 4d!ertising expense <ent expense G 2"((0 9"200 /'"**00 /1"2(00 /)000 /)000
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-,2
Sideo expense Depreciation expense %ncome before tax L tax rate %ncome tax expense
/2"()00 /1(00 G 2"8'0 .'0 G 8(9
,+ 5n the basis of the information a!ailable" 2our 9tar appears to be a profitable business. 9ubscription re!enue and rental re!enue together total G11")(0 for the month. 3et income for the month is G2"8'0 J G8(9 /taxes0" or G1"981. 7his results in a profit margin of G1"981HG11")(0" or 1*N. M1$TI-CO%CEPT PRO#$EM! $O ,"PRO#$EM 4-4 CA!H A%& ACCR1A$ I%COME !TATEME%T! FOR A MA%1FACT1RER
1+ 1ash re!enue- 500"000 components L G2 +ess- amounts not #et recei!ed 1ash re!enue 4ccrual re!enue- 500"000 components L G2
G 1"000"000 150"000 G 850"000 G 1"000"000
,+ 6nder the matching principle" Dr#sdale should match all expenses to re!enues generated. 7hus" all expenses should be recogni$ed during the #ear" except for the cost of the truc>. 7he cost of G10"000 should be spread o!er the estimated useful life of fi!e #ears. -+ %ncome statement under the accrual basis&R@!&A$E COMPA%@ I%COME !TATEME%T FOR THE @EAR E%&E& I 9ales re!enue 1ost of goods sold 8ross profit 5perating expenses9ales and administrati!e salaries 7ruc> depreciation 7otal operating expenses 3et income *<ent- G1"000 L 12 <a materials 9alaries and ages 1ost of goods sold **G10"000H5 #ears $O -"4
PRO#$EM 4-15 REVE%1E RECO6%ITIO% O%
I G 1"000"000 )02"000* G '98"000 G G G G G 100"000 2"000** 102"000 29)"000 12"000 (00"000 190"000 )02"000
4-,3
2%3431%4+ 4115637%38 95+67%539 M4364+
I%!TA$$ME%T !A$E!
Bohn is incorrect in suggesting that 2rances should recogni$e re!enue on all of the units constructed" regardless of hether the# ha!e been sold. %t is probabl# his experience as a farmer that has led him to suggest the production method of accounting. Mhen there is a read# mar>et price for a commodit#" at an established price" this method is sometimes used. %t is not appropriate" ho e!er" as a basis for recogni$ing re!enue from the sale of condominium units. 2rances should recogni$e re!enue in the current #ear on the units sold- /(0 L G50"0000 I /'0 L G)0"0000 , G'"800"000. %n subseDuent #ears she ould ma>e similar calculations" based on the number sold in an# particular #ear. 9ometimes re!enue from the sale of realt#" such as the condos" is recogni$ed on the cash basis because there is considerable uncertaint# about collectibilit#. 7his is an exception" and the cash basis should be used onl# if circumstances arrant its use. 7he necessar# costs to build the condos should be matched ith re!enues. 1osts such as building materials and labor can be directl# matched ith the re!enues generated from the sale of the units and thus should be recogni$ed in the same periods hen the re!enues are recogni$ed.
$O -"4
PRO#$EM 4-11 REVE%1E A%& E PE%!E RECO6%ITIO%
1+ %ncome statements for the first t o #ears&AR#@ &E$IVER@ !ERVICE I%COME !TATEME%T! 9ales re!enue GaH Expenses4d!ertising G'H 9alaries GcH <ent GdH 7otal expenses 3et income E*>lanationsB a+ +et L , Tear 1 sales Tear 1 sales I 2/Tear 1 sales0 , G)9"000 'L , G)9"000. L , G2'"000 , Tear 1 sales Tear 1 G 2'"000 G 2"000 15"000 5"000 G 22"000 G 1"000 Tear 2 G ()"000 G 1"500 2("000 5"000 G '0"500 G 15"500
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-,4
2L , G()"000 , Tear 2 sales '+ 7otal ad!ertising expense +ess promotional portion 7otal ee>l# expense G'"500 500 G'"000 or G1"500H#ear
Tear 1 ad!ertising , G500 I G1"500 , G2"000 Tear 2 ad!ertising , G1"500 c+ +et L , one emplo#ee?s annual salar# 1st #ear , L I .25L 2nd #ear , 2L L I .25L I 2L , G'9"000 '.25L , G'9"000. L , G12"000 1st #ear , G12"000 I .25/G12"0000 , G15"000 2nd #ear , 2/G12"0000 , G2("000 d+ 9ame rent for t o #ears- G10"000H2 , G5"000 $O ."/
PRO#$EM 4-1, MO%TH$@ TRA%!ACTIO%!" A&A1!TME%T!" A%& FI%A%CIA$ !TATEME%T!
1+ Effects on the accounting eDuation7o record issuance of stoc> to o ners on Banuar# 2.

#A$A%CE !HEET
Assets 1H2 1ash )0"000 /' L 20"0000 7 $ia'ilities 8 O9ners: E;uit< 1apital 9toc>
I%COME
!TATEME%T
)0"000
7o record purchase of Sictorian inn on Banuar# 2.

#A$A%CE !HEET
Assets 1H2 +and :ouse 1ash 7 15"000 '5"000 /50"0000 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
4--5
2%3431%4+ 4115637%38 95+67%539 M4364+
7o record issuance of t o@#ear" 12N promissor# note on Banuar# '.

#A$A%CE !HEET
Assets 1H' 1ash '0"000 7 $ia'ilities 3otes ;a#able 8 '0"000 O9ners: E;uit<
I%COME
!TATEME%T
7o record purchase of furniture for cash on Banuar# (.

#A$A%CE !HEET
Assets 1H( 2urniture 1ash 7 15"000 /15"0000 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
7o record purchase of 2(@month insurance polic# on Banuar# 5.

#A$A%CE !HEET
Assets 1H5 ;repaid %nsurance 1ash 7 )"000 /)"0000 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
7o record pa#ment for ad!ertising on Banuar# ).

#A$A%CE !HEET
Assets 1H) 1ash 7 /(500 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses 4d!ertising Expense /(500
7o record purchase of cleaning supplies on account on Banuar# *.

#A$A%CE !HEET
Assets 1H* 1leaning 9upplies 7 950 $ia'ilities 4ccounts ;a#able 8 950 O9ners: E;uit<
I%COME
!TATEME%T
7o record pa#ment of ages for first half of month on Banuar# 15.

#A$A%CE !HEET
Assets 1H15 1ash 7 /("2'00 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
/("2'00
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4--1
7o record guest?s prepa#ment for t o@ ee> sta# on Banuar# 1).

#A$A%CE !HEET
Assets 1H1) 1ash 7 $ia'ilities 8 980 O9ners: E;uit< 980 <ent <ecei!ed in 4d!ance
I%COME
!TATEME%T
7o record cash receipts from rentals for Banuar# on Banuar# '1.

#A$A%CE !HEET
Assets 1H'1 1ash 7 8"'00 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses <e!enue from <ental of <ooms 8"'00
7o record cash receipts from restaurant for Banuar# on Banuar# '1.

#A$A%CE !HEET
Assets 1H'1 1ash 7 )")00 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses <estaurant <e!enue )")00
7o record pa#ment of di!idends for Banuar# on Banuar# '1.

#A$A%CE !HEET
Assets 1H'1 1ash /' L 2000 7 /)000 $ia'ilities 8 O9ners: E;uit< /)000 Di!idends
I%COME
!TATEME%T
,+ +ist of accounts and account balancesAssets 1ash +and :ouse 2urniture ;repaid %nsurance 1leaning 9upplies $ia'ilities 4ccounts ;a#able 3otes ;a#able <ent <ecei!ed %n 4d!ance
G 29")00 15"000 '5"000 15"000 )"000 950 G 950 '0"000 980
O9nersJ E;uit<
4--,
2%3431%4+ 4115637%38 95+67%539 M4364+
1apital 9toc> 4d!ertising Expense Mages Expense <e!enue 2rom <ental 2rom <ooms <estaurant <e!enue Di!idends -+ 4d&ustments7o record depreciation expense on the house.
#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< a+ 4ccumulated DepreciationA :ouse /1000
I%COME
G )0"000 (50 ("2'0 8"'00 )")00 )00
!TATEME%T
7o record depreciation expense on the furniture.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< '+ 4ccumulated DepreciationA 2urniture /1250
I%COME
!TATEME%T
8 Re)enues = E*>enses Depreciation ExpenseA 2urniture
/1250
7o record interest on the note.

#A$A%CE !HEET
Assets c+ 7 $ia'ilities %nterest ;a#able 8 '00 O9ners: E;uit<
I%COME
!TATEME%T
/'000
7o record expired insurance.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< d+ ;repaid %nsurance /2500
I%COME
!TATEME%T
8 Re)enues = E*>enses %nsurance Expense /2500
7o record earned portion of guestKs deposit.

#A$A%CE !HEET
Assets e+ 7 $ia'ilities <ent <ecei!ed in 4d!ance /(900 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses <e!enue from <ental of <oom (90
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4---
7o record ages earned b# emplo#ees.

#A$A%CE !HEET
Assets D+ 7 $ia'ilities 8 5"120 O9ners: E;uit< Mages ;a#able
I%COME
!TATEME%T
/5"1200
7o record use of cleaning supplies.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< g+ 1leaning 9upplies /*200
I%COME
!TATEME%T
/*200
8 Re)enues = E*>enses 9upplies Expense
7o record utilit# expense.

#A$A%CE !HEET
Assets E+ 7 $ia'ilities 6tilities ;a#able 8 *(0 O9ners: E;uit<
I%COME
!TATEME%T
/*(00
8 Re)enues = E*>enses 6tilities Expense
7o record income tax expense.

#A$A%CE !HEET
Assets i+ 7 $ia'ilities %ncome 7ax ;a#able 8 1"00* O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses %ncome 7ax Expense /1"00*0
E*>lanations Dor ad(usting entr< amountsB GaH /G'5"000 J G5"0000H'00 months , G100Hmonth G'H G15"000H120 months , G125Hmonth GcH G'0"000
L
12N L 1H12 , G'00Hmonth
GdH G)"000H2( months , G250Hmonth GeH G980H2 ee>s , G(90H ee> GDH G5"120 for second half of month GgH G950 J G2'0 , G*20 used GEH G*(0 due at end of month GiH 1alculation of tax expense<e!enue from rental of rooms <estaurant re!enue Mages expense 4d!ertising expense Depreciation on house Depreciation on furniture %nterest expense
G 8"*90 )")00 /9"'500 /(500 /1000 /1250 /'000
4--4
2%3431%4+ 4115637%38 95+67%539 M4364+
%nsurance expense 9upplies expense 6tilities expense %ncome before tax L tax rate %ncome tax expense 4+ 2inancial statementsGaH MOO%$I6HT #A@ I%% I%COME !TATEME%T FOR THE MO%TH E%&E& AA%1AR@ -1" ,554 G 8"*90 )")00
/2500 /*200 /*(00 G '"'55 .'0 G 1"00*
<e!enues2rom rental of rooms 2rom restaurant 7otal re!enues Expenses4d!ertising Mages DepreciationAhouse DepreciationAfurniture %nterest %nsurance 9upplies 6tilities %ncome taxes 7otal expenses 3et income G'H
G15"'90 G (50 9"'50 100 125 '00 250 *20 *(0 1"00* 1'"0(2 G 2"'(8
MOO%$I6HT #A@ I%% !TATEME%T OF RETAI%E& EAR%I%6! FOR THE MO%TH E%&E& AA%1AR@ -1" ,554 G 0 2"'(8 )00 G 1"*(8
Ceginning balance" Banuar# 1" 200( 4dd- 3et income Deduct- 1ash di!idends Ending balance" Banuar# '1" 200(
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4--.
GcH
MOO%$I6HT #A@ I%% #A$A%CE !HEET AA%1AR@ -1" ,554
Assets 1urrent assets1ash 1leaning supplies ;repaid insurance 7otal current assets ;ropert#" plant" and eDuipment+and :ouse +ess- 4ccumulated depreciation 2urniture +ess- 4ccumulated depreciation 7otal propert#" plant" and eDuipment 7otal assets $ia'ilities 1urrent liabilities4ccounts pa#able %nterest pa#able Mages pa#able %ncome tax pa#able <ent recei!ed in ad!ance 6tilities pa#able 7otal current liabilities +ong@term debt3otes pa#able 7otal liabilities !tocFEolders: E;uit< 1apital stoc> <etained earnings 7otal stoc>holders? eDuit# 7otal liabilities and stoc>holders? eDuit#
G 29")00 2'0 5"*50 G '5"580 G 15"000 G '5"000 100 G 15"000 125 '("900 1("8*5 )("**5 G 100"'55 G 950 '00 5"120 1"00* (90 *(0 G 8")0* '0"000 G '8")0* G )0"000 1"*(8 G )1"*(8 G 100"'55
.+ 7he inn has sho n the abilit# to ma>e a profit. 7he profit margin is G2"'(8HG15"'90" or approximatel# 15N. 7his is an indication that the inn has been able to generate re!enues and control the necessar# costs in the process. 7he balance sheet sho s a !er# strong current position for the inn. 7he current ratio is G'5"580HG8")0*" or o!er ( to 1. 7he inn has almost enough cash on hand at the present time to repa# the loan. 5n the basis of the financial statements alone" it appears that the ban>er should be comfortable ith the loan made.
4--/
2%3431%4+ 4115637%38 95+67%539 M4364+
A$TER%ATE PRO#$EM! $O PRO#$EM 4-1A THE REVE%1E RECO6%ITIO% PRI%CIP$E
a+ <e!enue should be recogni$ed as the painting and decorating is completed o!er the next six months. <e!enue is recogni$ed as it is earned. '+ 7he initial franchise fee of G2"500 for each franchise should be recogni$ed as re!enue hen the training and accounting s#stems ha!e been completed. 7he franchiser is reDuired to render substantial performance of its responsibilities before it recogni$es re!enue. 7he ongoing fee of 5N of the franchiseesK re!enues should be recogni$ed as the franchisees report re!enue. %t is o!er this same period that the franchiser earns re!enue. c+ 7he contractor in this situation should probabl# use the percentage@of@ completion method. %t earns re!enue as the pro&ect is completed regardless of hen it recei!es cash from the count#. Dan Di!er ill e!entuall# report re!enue of G500"000 I /200/G*5"0000" or G2"000"000" but it should be spread o!er the next 20 months as or> progresses.
d+ 1ropper should use the production method of accounting and recogni$e the expected sales !alue of the heat of G(50"000 as re!enue hen it is har!ested. 7his method is appropriate hen products such as commodities can be sold at a Duoted price in an acti!e mar>et that can absorb the Duantit# being sold ithout significantl# affecting the price. e+ <e!enue for the store spaces should be recogni$ed hen the spaces are sold. 2or Example" because four spaces ere sold during Ma#" G25"000 x (" or G100"000" should be recogni$ed as re!enue.
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4--2
$O .
PRO#$EM 4-,A A&A1!TME%T!
1+ 4d&ustments on Bune '0" 2001a+ 7o accrue interest- G10"000

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< )H'0 %nterest <ecei!able '' L
(N L 1H12.
I%COME
!TATEME%T
''
8 Re)enues = E*>enses %nterest <e!enue
'+ 7o record supplies used- G(*5 I G5")00 J G50*.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< )H'0 5ffice 9upplies on :and /5"5)80
I%COME
!TATEME%T
8 Re)enues = E*>enses 9upplies Expense /5"5)80
c+ 7o record depreciation- /G1*0"000 J G2"0000

#A$A%CE !HEET
Assets 7 $ia'ilities 8
1H(8.
I%COME
!TATEME%T
O9ners: E;uit<
8 Re)enues = E*>enses Depreciation Expense /'"5000
)H'0 4ccumulated DepreciationA Machiner# /'"5000
d+ 7o record rent expense- G(")50H'.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< )H'0 ;repaid <ent /1"5500
I%COME
!TATEME%T
/1"5500
e+ 7o accrue ages- G*"000.

#A$A%CE !HEET
Assets )H'0 7 $ia'ilities Mages ;a#able 8 )"000 O9ners: E;uit<
I%COME
!TATEME%T
/)"0000
D+
7o record estimated income taxes.

#A$A%CE !HEET
Assets 7 $ia'ilities %ncome 7axes ;a#able 8 2"900 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses %ncome 7ax Expense /2"9000
)H'0
,+
%ncome before ad&ustments
G '5"000
4--3
2%3431%4+ 4115637%38 95+67%539 M4364+
%nterest re!enue 9upplies expense Depreciation expense <ent expense Mages expense %ncome tax expense 4d&usted net income $O .
PRO#$EM 4--A A%%1A$ A&A1!TME%T!
'' /5")880 /'"5000 /1"5000 /)"0000 /2"9000 G 15"515
1+ 4d&ustmentsa+ 7o record annual depreciation expense- /G25"000 J G("0000H* #ears.

#A$A%CE !HEET
Assets 12H'1 4ccumulated Depreciation 7 /'"0000 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses Depreciation Expense /'"0000
'+ 7o record supplies used during #ear- G1"200 I G12"900 J G900.

#A$A%CE !HEET
Assets 12H'1 9upplies on :and 7 /1'"2000 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses 9upplies Expense /1'"2000
c+ 7o record customer deposits earned bet een Bul# and December/G8"800H8 months0 L ) months.
#A$A%CE !HEET
Assets 12H'1 7 $ia'ilities 1ustomer Deposits /)")000 8 O9ners: E;uit<
I%COME
!TATEME%T
)")00
8 Re)enues = E*>enses 2ees Earned
d+ 7o record rent expense for 9eptember through December- G("000

#A$A%CE !HEET
Assets 12H'1 ;repaid <ent 7 /1)"0000 $ia'ilities 8 O9ners: E;uit<
I%COME
(.
!TATEME%T
/1)"0000
e+ 7o accrue interest pa#able on note- G'0"000
)N L )0H')0.
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4--4
#A$A%CE !HEET
Assets 12H'1 7 $ia'ilities 8 '00 O9ners: E;uit< %nterest ;a#able
I%COME
!TATEME%T
/'000
D+
7o accrue ages pa#able at #ear@end- G("150H5.

#A$A%CE !HEET
Assets 7 $ia'ilities Mages ;a#able 8 8'0 O9ners: E;uit<
I%COME
!TATEME%T
/8'00
8 Re)enues = E*>enses Mage Expense
12H'1
,+ 3et increase /decrease0 in net income from ad&ustmentsa+ Depreciation expense '+ 9upplies expense c+ 2ees earned d+ <ent expense e+ %nterest expense D+ Mage expense 5!erstatement of 200( net income
G /'"0000 /1'"2000 )")00 /1)"0000 /'000 /8'00 G /2)"*'00
$O . a+ '+ c+ d+ e+ D+ g+ E+
PRO#$EM 4-4A REC1RRI%6 TRA%!ACTIO%! A%& A&A1!TME%T!
1" 11" 12 5" 1 2" 1 (" * 1" ' 1"18 1)"1 5" 1"10
i+ (+ F+ l+ m+
2" 1' 1*" ) 19" 9 1(" ( 15" '
4-45
2%3431%4+ 4115637%38 95+67%539 M4364+
$O .
PRO#$EM 4-.A 1!E OF ACCO1%T #A$A%CE! A! A #A!I! FOR A%%1A$ A&A1!TME%T!
1+ 4d&ustments on December '1" 200(a+ 7o record supplies used- G5"*90 J G1"520.

#A$A%CE !HEET
Assets 12H'1 9upplies 7 /("2*00 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses 9upplies Expense /("2*00
'+ 7o recogni$e re!enue earned- G1"800

#A$A%CE !HEET
Assets 12H'1 7 $ia'ilities 6nearned <e!enue 8 /1"2000 L
8H12.
I%COME
!TATEME%T
1"200
O9ners: E;uit<
8 Re)enues = E*>enses 9er!ice <e!enue
c+ 7o record interest on note- G)0"000

#A$A%CE !HEET
Assets 12H'1 7 $ia'ilities %nterest ;a#able 8 2"000
10N L (H12.
I%COME
!TATEME%T
/2"0000
O9ners: E;uit<
,+ %f ad&ustments ere made at the end of each month" the 6nearned <e!enue account ould ha!e been reduced b# the monthl# re!enue of G150 /G1"800H120 at the end of each of se!en months" beginning on Ma# '1 and ending on 3o!ember '0. 7hus" the balance in the account before the December ad&ustment ould be G1"800 J O/*0/G1500P , G*50.
$O .
PRO#$EM 4-/A 1!E OF ACCO1%T #A$A%CE! A! A
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-41
#A!I! FOR A&A1!TME%T!
1+ 4d&ustments on Bune '0" 200(a+ 7o recogni$e one month?s rent expense.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< )H'0 ;repaid <ent /)000
I%COME
!TATEME%T
/)000
'+ 7o record supplies used- G15"210 J G1"290.

#A$A%CE !HEET
Assets )H'0 5ffice 9upplies /1'"9200 7 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses 9upplies Expense /1'"9200
c+ 7o record depreciation- /G()"120 J G)"1200

#A$A%CE !HEET
Assets 7 $ia'ilities 8
1H120.
I%COME
!TATEME%T
O9ners: E;uit<
8 Re)enues = E*>enses Depreciation Expense /'''0
)H'0 4ccumulated DepreciationA EDuipment /'''0
d+ 7o record interest on note pa#able.

#A$A%CE !HEET
Assets )H'0 7 $ia'ilities %nterest ;a#able 8 50 O9ners: E;uit<
I%COME
!TATEME%T
/500
4-4, e+
2%3431%4+ 4115637%38 95+67%539 M4364+
7o record salaries not #et paid.

#A$A%CE !HEET
Assets 7 $ia'ilities 9alaries ;a#able 8 )20 O9ners: E;uit<
I%COME
!TATEME%T
/)200
8 Re)enues = E*>enses 9alaries Expense
)H'0
,+ 3et increase /decrease0 in net income from ad&ustmentsa+ '+ c+ d+ e+ 3et decrease in net income from ad&ustments
/)000 /1'"9200 /'''0 /500 /)200 G /15"52'0
-+ 7he office eDuipment as purchased on Bune 1" 200'" and has been depreciated for one #ear before depreciation is recorded for the month of Bune 200(. 7hus" if the eDuipment has a 10@#ear life" the balance in 4ccumulated Depreciation ill be /G()"120 J G)"120H10 #ears0" or G("000.
$O .
PRO#$EM 4-2A RECO%!TR1CTIO% OF A&A1!TME%T! FROM ACCO1%T #A$A%CE!
1+ 7o record rent expense on Bune '0- G("000 J G'"000.

#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< )H'0 ;repaid <ent /1"0000
I%COME
!TATEME%T
/1"0000
,+ 4t G1"000 per month" the original six@month pa#ment and balance of ;repaid <ent on 4pril 1" 200(" as G)"000. -+ 7o record depreciation expense on Bune '0- G900 J G800.
#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< )H'0 4ccumulated Depreciation /1000
I%COME
!TATEME%T
4+ Estimated useful life in months- G9")00HG100 month , 9) months. .+ 7o record interest expense on Bune '0- G8)( J G*)8.
#A$A%CE !HEET
Assets )H'0 7 $ia'ilities %nterest ;a#able 8 9) O9ners: E;uit<
I%COME
!TATEME%T
/9)0
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-4-
/+ %nterest rate- /G9) per month L 12 months0HG9")00 , 12N /annual rate0. 7he monthl# rate is 12NH12 months , 1N.
$O .
PRO#$EM 4-3A 1!E OF ACCO1%T #A$A%CE! A! A #A!I! FOR A&A1!TME%T!
1+ 4d&ustments#A$A%CE !HEET
Assets a+ ;repaid <ent 7 /(000 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
/(000
#A$A%CE !HEET
Assets '+ 4ccumulated Depreciation 7 /1500 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
#A$A%CE !HEET
Assets c+ 1hemical %n!entor# 7 /8"1000 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses 1hemical Expense /8"1000
#A$A%CE !HEET
Assets d+ 7 $ia'ilities Mages and 9alaries ;a#able 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses Mages and 9alar# Expense /1"0800
1"080
#A$A%CE !HEET
Assets e+ 7 $ia'ilities %ncome 7axes ;a#able 8 1"881 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses %ncome 7ax Expense /1"8810
E*>lanationsB GaH G("800H12 months , G(00Hmonth G'H /G18"200 J G2000H120 months , G150Hmonth GcH /G9"(00 J G1"'000 , G8"100
4-44
2%3431%4+ 4115637%38 95+67%539 M4364+
GeH 1alculation of taxes due7reatment re!enue Mages and salar# expense 6tilit# expense 4d!ertising expense <ent expense Depreciation expense 1hemical expense %ncome before tax L tax rate %ncome tax expense
G (0")00 /2'"5800 /1"2(00 /8)00 /(000 /1500 /8"1000 G )"2*0 .'0 G 1"881
,+ 5n the basis of the information a!ailable" +e is appears to be a profitable business. 3et income for the month as G)"2*0 J G1"881 /taxes0" or G("'89. Mith treatment re!enue of G(0")00" this results in a profit margin of G("'89HG(0")00" or approximatel# 11N. A$TER%ATE M1$TI-CO%CEPT PRO#$EM!
$O ,"-"4
PRO#$EM 4-4A CA!H A%& ACCR1A$ I%COME !TATEME%T! FOR A MA%1FACT1RER
1+ 1ash re!enue- 50"000 sand iches L G2 +ess- amounts not #et recei!ed 1ash re!enue 4ccrual re!enue- 50"000 sand iches L G2
G 100"000 25"000 G *5"000 G 100"000
,+ 4ccountants recogni$e re!enue under an accrual accounting s#stem hen it is earned. %n the catering business" re!enue is earned as the sand iches are deli!ered to the !endors. MarieKs might consider using the cash method to account for sales of sand iches if there is a significant amount of uncertaint# about the collectibilit# of accounts recei!able.
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-4.
-+
%ncome statement under the accrual basisMARIE:! CATERI%6 !ERVICE I%COME !TATEME%T FOR THE @EAR E%&E& I I 9ales re!enue 1ost of goods sold 8ross profit 5perating expenses5ffice salaries EDuipment depreciation 7ruc> depreciation 7otal operating expenses 3et income * <ent- G800 L 12 <a materials 9alaries and ages 1ost of goods sold ** G10"000H10 #ears *** G1("000H5 #ears G 9")00 25"000 '5"000 G )9")00 G 100"000 )9")00* G '0"(00 G G G 12"000 1"000** 2"800*** 15"800 1(")00
$O -"4
PRO#$EM 4-15A REVE%1E RECO6%ITIO% O% THE PERCE%TA6E-OF-COMP$ETIO% A%& PRO&1CTIO% METHO&!
1ash flo results from the inflo and outflo of cash to a business. %t is not the inflo of cash to a business" ho e!er" that gi!es rise to the recognition of re!enue. <e!enue is recogni$ed as it is earned. Bud# should use the production method and recogni$e re!enue before cash is recei!ed" because there is a read# mar>et and an established price for the diamonds. 5n the other hand" Mart# should use the percentage@of@completion method and recogni$e re!enue as or> progresses on the run a#s and hangars. 7he follo ing schedule compares the amount of re!enue each ill recogni$e o!er the next three #ears200( 2005 200) 7otal Aud< G 1"500"000 )00"000 0 0 G 1"500"000 1"500"000 Mart< G1"500"000 L /G(00"000HG1"000"000*0 , G1"500"000 G1"500"000
L L
G *50"000 150"000 G
/G500"000HG1"000"0000 /G100"000HG1"000"0000
, ,
*Estimated total costs- G(00"000 I G500"000 I G100"000.
4-4/ $O -"4
2%3431%4+ 4115637%38 95+67%539 M4364+
PRO#$EM 4-11A REVE%1E A%& E PE%!E RECO6%ITIO%
%ncome statements for the first t o #ears!1E:! A1&IO #OOK RE%TA$! I%COME !TATEME%T! 9ales re!enue GaH Expenses4d!ertising G'H 9alaries Depreciation GcH <ent GdH 7otal expenses 3et income E*>lanationsB a+ +et L , Tear 1 salesTear 1 sales I '/Tear 1 sales0 , G8("000 (L , G8("000 L , G21"000 , Tear 1 sales 'L , G)'"000 , Tear 2 sales '+ 7otal ad!ertising expense +ess promotional portion 7otal ad expense G 10"500 1"500 G 9"000 or G("500H#ear @ear 1 G 21"000 G )"000 0 2"500 9"000 G 1*"500 G '"500 @ear , G )'"000 G ("500 12"000 2"500 9"000 G 28"000 G '5"000
Tear 1 ad!ertising , G("500 I G1"500 , G)"000 Tear 2 ad!ertising , G("500 c+ Depreciation per #ear , G5"000H2 , G2"500H#ear d+ <ent per #ear , G18"000H2 , G9"000H#ear
1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38
4-42
$O ."/
PRO#$EM 4-1,A A&A1!TME%T! A%& FI%A%CIA$ !TATEME%T!
1+ 4d&ustments#A$A%CE !HEET
Assets a+ ;repaid %nsurance 7 /*500 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses %nsurance Expense /*500
#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< '+ 4ccumulated DepreciationA Marehouse /1500
I%COME
!TATEME%T
8 Re)enues = E*>enses Depreciation ExpenseA Marehouse
/1500
#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< c+ 4ccumulated DepreciationA 7ruc> 2leet /'"1250
I%COME
!TATEME%T
8 Re)enues = E*>enses Depreciation ExpenseA 7ruc> 2leet
/'"1250
#A$A%CE !HEET
Assets d+ 7 $ia'ilities %nterest ;a#able 8 '*5 O9ners: E;uit<
I%COME
!TATEME%T
/'*50
#A$A%CE !HEET
Assets e+ 7 $ia'ilities 1ustomer Deposits 8 /("5000 O9ners: E;uit<
I%COME
!TATEME%T
("500
8 Re)enues = E*>enses 2reight <e!enue
#A$A%CE !HEET
Assets D+ 7 $ia'ilities Mages and 9alaries ;a#able 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses Mages and 9alar# Expense

I%COME
8"200
/8"2000
#A$A%CE !HEET
Assets g+ 7 $ia'ilities %ncome 7axes ;a#able 8 9"2'* O9ners: E;uit<
!TATEME%T
8 Re)enues = E*>enses %ncome 7ax Expense /9"2'*0
4-43
2%3431%4+ 4115637%38 95+67%539 M4364+
E*>lanations Dor ad(usting entr< amountsB GaH G18"000H2( months , G*50Hmonth G'H /G(0"000 J G("0000H2(0 months , G150Hmonth GcH /G2(0"000 J G15"0000H*2 months , G'"125Hmonth GdH /G50"000
L
9N0 L 1H12 , G'*5 G 1*0"1*0 /5*"''00 /2)"(000 /51"2500 /*500 /1500 /'"1250 /'*50 G '0"*90 .'0 G 9"2'*
GgH 1alculation of income tax expense2reight re!enue 8as and oil expense Maintenance expense Mage and salar# expense %nsurance expense Depreciation on arehouse Depreciation on truc> fleet %nterest expense %ncome before tax L tax rate %ncome tax expense ,+ 2inancial statementsGaH TE%FO1R TR1CKI%6 COMPA%@ I%COME !TATEME%T FOR THE MO%TH E%&E& AA%1AR@ -1" ,554
2reight re!enue Expenses8as and oil Maintenance Mages and salaries %nsurance DepreciationA arehouse DepreciationAtruc> fleet %nterest %ncome taxes 3et income G'H
G 1*0"1*0 G 5*"''0 2)"(00 51"250 *50 150 '"125 '*5 9"2'*
1(8")1* G 21"55'
TE%FO1R TR1CKI%6 COMPA%@ !TATEME%T OF RETAI%E& EAR%I%6! FOR THE MO%TH E%&E& AA%1AR@ -1" ,554 G(0"(*0 21"55' G)2"02' 20"000 G (2"02'
Ceginning balance" Banuar# 1" 2001 4dd- 3et income Deduct- 1ash di!idends Ending balance" Banuar# '1" 2001
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GcH
TE%FO1R TR1CKI%6 COMPA%@ #A$A%CE !HEET AA%1AR@ -1" ,554
Assets 1urrent assets1ash 4ccounts recei!able ;repaid insurance 7otal current assets ;ropert#" plant" and eDuipment+and Marehouse +ess- accumulated depreciation 7ruc> fleet +ess- accumulated depreciation 7otal propert#" plant" and eDuipment 7otal assets $ia'ilities 1urrent liabilities4ccounts pa#able 3otes pa#able %nterest pa#able 1ustomer deposits Mages and salaries pa#able %ncome tax pa#able 7otal current liabilities 7otal liabilities !tocFEolders: E;uit< 1apital stoc> <etained earnings 7otal stoc>holders? eDuit# 7otal liabilities and stoc>holders? eDuit#
G 2*"'(0 (1"500 1*"250 G 8)"090 G 20"000 G (0"000 21"*50 G 2(0"000 115")25 12("'*5 1)2")25 G 2(8"*15 G '2"880 50"000 ("8*5 1"500 8"200 9"2'* G 10)")92 G 10)")92 G 100"000 (2"02' 1(2"02' G 2(8"*15 18"250
4-.5
2%3431%4+ 4115637%38 95+67%539 M4364+
-+ 1urrent ratio , 1urrent assetsH1urrent liabilities G8)"090HG10)")92 , .81 to 1 7enfour ma# ha!e difficulties in meeting all of its current obligations. Especiall# note orth# is the significantl# higher amount of accounts recei!able at #ear end compared ith cash /cash and accounts recei!able constitute '2N and (8N of the current assets" respecti!el#0. %t is also orth noting that the other 20N of the current assets consists of prepaid insurance" an asset that ill not be con!erted into cash and thus ill not help in an# a# to pa# the current liabilities. 4+ 7enfour cannot compute a gross profit ratio because it does not report cost of sales. %t is a ser!ice business rather than a product compan#. 5ne possible measure of profitabilit# for an# compan# is the profit margin" hich is net income di!ided b# sales. 2or 7enfour" this ratio is G21"55'HG1*0"1*0 or 12.*N. Man# ser!ice businesses calculate ratios that are specific to their t#pe of business. 2or example" a truc>ing firm might compute the ratio of re!enues to miles dri!en. &ECI!IO% CA!E!
REA&I%6 A%& I%TERPRETI%6 FI%A%CIA$ !TATEME%T!
$O -" 4" .
&ECI!IO% CA!E 4-1 COMPARI%6 TWO COMPA%IE! I% THE !AME I%&1!TR@B WI%%E#A6O I%&1!TRIE! A%& MO%ACO COACH CORPORATIO%
1+ Minnebago %ndustries reports t o current recei!ables. 5ne account is titled E<ecei!ables" less allo ance for doubtful accountsF and the other is titled EDealer financing recei!ables" less allo ance for doubtful accounts.F Monaco 1oach reports one account titled E7rade recei!ables" net.F ,+ Minnebago %ndustriesK ;repaid expenses account totals G("'1("000 at the end of 2002" hile Monaco 1oachKs same account totals G'")12"000. Mhen the benefits from this asset expire it is most li>el# that Minnebago increasesE9ellingF andHor E8eneral and administrati!e.F Monaco 1oach most li>el# increases the account E9elling" general and administrati!e.F -+ <ather than sho a separate accumulated depreciation account on its balance sheet" Monaco 1oach uses the account E;ropert#" plant and eDuipment" net.F 7hat is" the accumulated depreciation has been deducted from the asset to arri!e at a net amount. Monaco 1oach chooses to report the amount of accumulated depreciation in one of the notes to the financial statements. 1ompanies ha!e flexibilit# as to hether the# report this information directl# on the balance sheet or onl# in one of the notes to the statements.
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$O -
&ECI!IO% CA!E 4-, REA&I%6 A%& I%TERPRETI%6 MC&O%A$&J! %OTE!?REVE%1E RECO6%ITIO%
1+ McDonaldKs recogni$es re!enue from its compan#@operated restaurants on the cash basis of accounting. 7his means that re!enue is recogni$ed hen cash is recei!ed from customers. ,+ 1ontinuing fees from franchised and affiliated restaurants are recogni$ed in the period earned. 7his is in agreement ith the re!enue recognition principle that reDuires re!enue to be recogni$ed hen it is earned. -+ McDonaldKs recogni$es initial fees from its franchised and affiliated restaurants hen ne locations are opened. 7his is in agreement ith the re!enue recognition principle that reDuires the compan# to perform substantiall# all of the initial ser!ices reDuired b# its agreement ith the franchisee. 4+ 2ranchise fees are a significant source of re!enue to McDonaldKs" amounting to G'"90).1 million in 2002. 8i!en that total re!enues amount to G15"(05.* million" franchise fees represent 25.(N of total re!enues. $O &ECI!IO% CA!E 4-- REA&I%6 A%& I%TERPRETI%6 WI%%E#A6O I%&1!TRIE!J %OTE!?REVE%1E RECO6%ITIO%
1+
Minnebago %ndustries adopted 94C 101 E<e!enue <ecognitionF as of the beginning of fiscal #ear 2001. 7his ne accounting principle reDuires companies to recogni$e re!enue hen products are deli!ered to the dealer" hich is hen title passes. 7his ma# not necessaril# be the same point in time as hen the <Ss are shipped to customers. ,+ EDealer 2loor ;lan <ecei!ablesF are amounts due to Minnebago %ndustries from sales of its <Ss to select Minnebago" %tasca" <ialta and 6ltimate dealers. 1ollateral for these recei!ables are in the form of the <Ss that the compan# sells to the dealers. -+ Minnebago %ndustries earns t o forms of re!enue from these recei!ables. 2irst" it earns re!enue from the sale of the <Ss" as described in 1. abo!e. 9econd" the compan# earns interest income from the recei!ables. 7he interest is recorded on the accrual basis in accordance ith the terms of the loan agreements Minnebago %ndustries has ith its customers. $O 1+
&ECI!IO% CA!E 4-4 REA&I%6 A%& I%TERPRETI%6 !EAR! ROE#1CKJ! %OTE!?REVE%1E RECO6%ITIO%
6nder the accrual basis" re!enue should be recogni$ed hen it is earned rather than hen cash is recei!ed. 5!er the life of a ser!ice contract" the retailer ill incur costs to repair damaged merchandise. 7he retailer earns re!enue o!er the life of the ser!ice contract.
4-.,
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,+ <e!enue to be recogni$ed each #ear@ear 1 G2"'20* )0** G2"'80 @ear , G 0 )0 G )0 @ear G 0 )0 G )0 Total G 2"'20 180 G 2"500
9ales re!enue 9er!ice contract re!enue 7otal re!enue *G2"500 J G180 **G180H' #ears
Mhen a retailer sells a ser!ice contract" it recei!es cash and at the same time incurs a liabilit# to pro!ide ser!ice in the future. 7hus" on its balance sheet" it ill report a liabilit# account for or> to be performed under ser!ice contractsAa form of unearned re!enue. 7his account tells the reader the amount of re!enue to be recogni$ed in the future under ser!ice contracts. %n this particular example" the liabilit# account ould contain G120 and G)0 at the ends of #ears 1 and 2" respecti!el#" to report the amount of unearned re!enue. MAKI%6 FI%A%CIA$ &ECI!IO%!
$O ,"-"4 1+
&ECI!IO% CA!E 4-. THE 1!E OF %ET I%COME A%& CA!H F$OW TO EVA$1ATE A COMPA%@
&1KE" I%C+ !TATEME%T OF CA!H F$OW! FOR THE @EAR E%&E& &ECEM#ER -1" ,554 O>erating Acti)itiesB 1ash recei!ed from ser!ices pro!ided to clients 1ash paid for9alaries and ages 9upplies 6tilities <ent 3et increase in cash *G1"250"000 J G2'0"000 **G(80"000 J G(0"000 ***G10"000
L
G 1"020"000* G ((0"000** 100"000 '0"000 180"000*** G
*50"000 2*0"000
18 months
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%ote to InstructorB Tou ma# ant to point out to students that the net increase in cash is also the net cash pro!ided b# operating acti!ities for the #ear. 7hat is" there are no in!esting or financing acti!ities because the acDuisition of the computer s#stem b# the signing of a promissor# note did not result in an# net change in cash" if it is assumed that the note as signed directl# ith the computer !endor. 7he transaction ould not appear directl# on a statement of cash flo s but instead on a supplementar# schedule. ,+ 5ne important Duestion to be as>ed is hether it is possible for the compan# to continue to generate ser!ice re!enues in succeeding #ears at the le!el attained in its first #ear. 7he abilit# to collect the re!enues billed in 200(" but not #et collected /G2'0"0000" should also be a concern. 5n the basis of the cash flo s generated in the first #ear" the business appears to be orth strong consideration. 5ne ma&or concern" ho e!er" is hether the compan# ill be able to repa# the note in 200*. %t must generate sufficient cash flo s o!er the next three #ears /this includes the #ear &ust concluded0 to repa# G1"*25"000 in principal and G(1("000 /G1'8"000 per #ear L ' #ears0 in interest. 7his ma# be !er# difficult to do unless more cash flo is generated from operations or the compan# is able to negotiate an extension of the due date for the loan.
$O 4
&ECI!IO% CA!E 4-/ &EPRECIATIO%
7he decision to purchase or lease long@term assets is a difficult one for all businesses and reDuires an anal#sis of all the rele!ant facts. <apidl# changing technolog# ma# ma>e it less ris># to lease computer eDuipment than to purchase it. 7his is certainl# a >e# consideration in this particular case. Benner also needs to consider maintenance costs. 7he case does not indicate hether Benner ould be responsible for maintenance if it leases the eDuipment. 4nother rele!ant factor ould be hether the eDuipment ould ha!e an# sal!age !alue at the end of its useful life. %ote to InstructorB 7his ma# be an opportune time to raise the issue hether certain leases should be capitali$ed as assets. 8i!en the students? understanding of the nature of an asset" do the# thin> some long@term leases possess the characteristics to Dualif# for treatment as assetsU Depreciation is the process of allocating the cost of a long@term tangible asset o!er its useful life. Cecause of rapidl# changing technolog#" computer eDuipment presents a challenge to the accountant in determining economic life. E!en though the eDuipment ma# last for 10 to 20 #ears before it ph#sicall# ears out" its economic life ma# be much shorter than that because of technological obsolescence. %n this particular case" a life of three to fi!e #ears" possibl# four #ears" seems to be arranted.
4-.4
2%3431%4+ 4115637%38 95+67%539 M4364+
ACCO1%TI%6 A%& ETHIC!?WHAT WO1$& @O1 &OL $O ,"-"4".

&ECI!IO% CA!E 4-2 REVE%1E RECO6%ITIO% A%& THE MATCHI%6 PRI%CIP$E
1+ %f sales are recorded but the commissions associated ith these sales are not recorded during the month of Bune" net income ill be larger b# the understatement of commissions expense. 7he failure to record ad!ertising expense for the month of Bune ill also result in an understatement of expense and an o!erstatement or increase in net income. 2inall#" an increase in the estimated useful life of the automobiles ill result in a decrease in the amount of depreciation expense and thus an increase in net income. ,+ 7he first suggestion" to dela# recording the (N commission expense until Bul#" is a clear !iolation of the matching principle. <egardless of hen the sales staff is paid commissions" it is rong to record the re!enues in Bune but not record the expense associated ith earning that re!enueAi.e." commissionsAuntil Bul#. +i>e ise" deferring the recognition of the ad!ertising bill as an expense until Bul# also !iolates the matching principle. 6nder the matching principle" this cost should be recogni$ed as an expense in the period in hich it pro!ides benefits /in this case" the month of Bune0" regardless of hen cash is paid. 2inall#" the change in estimated useful life for the automobiles is also Duestionable from an accounting point of !ie . 1ompanies are allo ed under generall# accepted accounting principles to change estimated useful li!es of depreciable assets" but the changes must be &ustified on sound economic grounds. 2or example" changes in technolog# might prompt a compan# to decrease the estimated useful li!es of its computers. 7he need to increase the net income for the #ear is certainl# not an acceptable reason under 844; to change the estimated useful li!es of depreciable assets. 7he changes suggested result in financial statements that do not faithfull# represent hat the# claim to represent and are not merel# minor boo>>eeping changes. <eaders assume that the statements are prepared on an accrual basis rather than a cash basis. 4lso" the# assume that the compan# is consistent in the a# the# depreciate assets from one period to the next. -+ Each of the three suggestions in!ol!es a Duestion of ethics. 4ll three in!ol!e an attempt to consciousl# o!erstate income for the purpose of obtaining a loan" and the decisions made b# the o ners pro!ide information that is biased to ard ma>ing the compan# loo> better. 7here is an attempt on the part of the !ice@president of sales to decei!e a user of the accounting information. 7he ban>er relies on the trust orthiness of the compan# to accuratel# report its income" and each of the three suggestions ould !iolate that trust. 7he compan# ould not be acting in good faith if it ere to
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report income as has been suggested. 7he !ice@president has suggested changes that are intended to o!erstate net income for the purpose of recei!ing the loan. 4+ 7he controller ma# benefit in the short@term b# ma>ing the proposed changes /he gets to >eep his &ob and his 1adillac0. Cut in the long@term his professional reputation ill be harmed hen the ban> reali$es that he misstated income to mislead the ban> and recei!e the loan. %f the ban> appro!es the loan based on o!erstated net income" the ban> ill be harmed. 7he interest rate of the loan ill not properl# reflect the ris> of the compan#. 4n# outsiders ho rel# on the financial statements ill be harmed. Mhen net income is o!erstated future cash flo s are also o!erstated and outsiders ho rel# upon the incorrect financial statements ma# ma>e the rong decisions about the compan# /e.g. extend credit hen the# should not0.
$O 4
&ECI!IO% CA!E 4-3 A&VICE TO A POTE%TIA$ I%VE!TOR
7he financial statements contain t o ma&or errors that pre!ent them from being in accordance ith generall# accepted accounting principles. 2irst" if the normal balance of supplies on hand is G1"000" 1entur# should recogni$e supplies expense on its income statement for G1)"500 /the amount of supplies on its balance sheet0 less G1"000" or G15"500. 9econd" it should also recogni$e depreciation expense of G'5"000 o!er se!en #ears" or G5"000" on the eDuipment. 7hese t o ad&ustments ould result in re!ised net income as follo s3et income reported 9upplies expense Depreciation expense <e!ised net income /loss0 G 10"500 /15"5000 /5"0000 G /10"0000
7he compan# as able to generate significant re!enues from its ser!ices during the first #ear. 8i!en this le!el of re!enues" ho e!er" it as not able to control its costs" particularl# its salaries and ages. 5n the basis of these financial statements alone" it ould be difficult to ad!ise an#one to in!est in the compan#. %n addition to the information gi!en" the in!estor ould ant to >no more about the nature of the compan#?s business /its mar>ets" customers" pricing structure" etc.0 and the industr# in hich it operates.
FROM CO%CEPT TO PRACTICE 4+1 McDonalds generated 25N" 2)N" and 2*N of its total re!enues from franchised restaurants in 2002" 2001" and 2000 respecti!el#. 7his percentage has remained relati!el# stable o!er the three@#ear period" although there has been a slight decrease in the compan#Ks reliance on franchised restaurants as a form of re!enue.
4-./
2%3431%4+ 4115637%38 95+67%539 M4364+
FROM CO%CEPT TO PRACTICE 4+, Coth Minnebago %ndustries and Monaco 1oach classif# their prepaid expenses as current assets. 7he t#pes of prepaid expenses companies such as these might ha!e include !arious prepa#ments" such as insurance and rent" and !arious t#pes of supplies" such as cleaning and office supplies. FROM CO%CEPT TO PRACTICE 4+Minnebago %ndustries uses the term Eaccrued expensesF for its accrued liabilities. 7he indi!idual accounts include- 4ccrued 1ompensation" ;roduct Marranties" %nsurance" ;romotional" and 5ther. 7he largest of these is the 4ccrued 1ompensation account. 4lternati!el#" Monaco 1oach reports one line on its balance sheet titled E4ccrued expenses and other liabilities.F !O$1TIO%! TO I%TE6RATIVE PRO#$EM! Part 1 1+ Effects on the accounting eDuation are as follo s#A$A%CE !HEET
Assets a+ 7 $ia'ilities 9alar# and Mages ;a#able 8 ("000 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses 9alar# and Mages Expense /("0000
#A$A%CE !HEET
Assets '+ Medical 9upplies /)("'(*0 7 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses 9upplies Expense /)("'(*0
#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< c+ 4ccumulated DepreciationA 4utomobiles /'0"0000
I%COME
!TATEME%T
8 Re)enues = E*>enses Depreciation ExpenseA 4utomobiles
/'0"0000
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4-.2
#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< d+ 4ccumulated DepreciationA Cuilding /10"0000
I%COME
!TATEME%T
8 Re)enues = E*>enses Depreciation ExpenseA Cuilding
/10"0000
#A$A%CE !HEET
Assets e+ Extended Marrant# 7 /'"0000 $ia'ilities 8 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses Extended Marrant# Expense /'"0000
#A$A%CE !HEET
Assets 7 $ia'ilities 8 O9ners: E;uit< D+ Cillings <ecei!able" /3et0 1)"000
I%COME
!TATEME%T
8 Re)enues = E*>enses Medical 9er!ices <e!enue 1)"000
#A$A%CE !HEET
Assets g+ 7 $ia'ilities %nterest ;a#able 8 '"000 O9ners: E;uit<
I%COME
!TATEME%T
8 Re)enues = E*>enses %nterest Expense '"000
,+
MO1%TAI% HOME HEA$TH" I%C+ I%COME !TATEME%T FOR THE @EAR E%&E& &ECEM#ER -1" ,55<e!enuesMedical ser!ices re!enue Expenses9alar# and ages expense 9upplies expense 8asoline expense 6tilities expense %nterest expense Depreciation expenseAautomobiles Depreciation expenseAbuilding Extended arrant# contract expense 3et income G 5))"000 G292"000 )("'(* 1'*"500 12"000 '"000 '0"000 10"000 '"000 551"8(* G 1("15'
4-.3
2%3431%4+ 4115637%38 95+67%539 M4364+
MO1%TAI% HOME HEA$TH" I%C+ RETAI%E& EAR%I%6! !TATEME%T FOR THE @EAR E%&E& &ECEM#ER -1" ,55Ceginning balance 4dd- 3et income Deduct- Di!idends Ending balance -+ MO1%TAI% HOME HEA$TH" I%C+ #A$A%CE !HEET A! OF &ECEM#ER -1" ,55Assets 1urrent assets1ash Cillings recei!able" net Medical supplies 7otal current assets ;ropert#" plant" and eDuipmentCuilding +ess- 4ccumulated depreciation 7otal assets $ia'ilities and !tocFEoldersJ E;uit< 1urrent liabilities4ccounts pa#able %nterest pa#able 9alar# and ages pa#able Di!idend pa#able 7otal current liabilities +ong@term liabilitiesMortgage pa#able 7otal liabilities !tocFEoldersJ E;uit< 1apital stoc> 4dditional paid@in capital <etained earnings 7otal stoc>holdersK eDuit# 7otal liabilities and stoc>holdersK eDuit# G 99"900 1("15' /10"0000 G 10("05'
G **"(00 1)*"000 8")5' G 25'"05' G 200"000 /)0"0000 1(0"000 G '9'"05'
G 22"000 '"000 ("000 10"000 G '9"000 100"000 G 1'9"000 G 100"000 50"000 10("05' 25("05' G '9'"05'
4+ a+ Mor>ing capital- G25'"05' J G'9"000 , G21("05' '+ 1urrent ratio- G25'"05'HG'9"000 , ).5 to 1
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4-.4
.+ C# their nature" all ad&ustments cause a difference bet een the amount of income recogni$ed on an accrual basis and that recogni$ed on a cash basis. 7he ad&ustment for ages and salaries" and interest" result in decreases in income in the current period ith a dela# in the outflo of cash until a later period. 9imilarl#" the ad&ustment for ser!ice re!enue represents re!enue earned currentl# but dela#ed until a later period in the receipt of cash. 1on!ersel#" the ad&ustments for depreciation" arranties and supplies used represent the recognition of expense in the current period for cash outla#s in an earlier period. /+ 9uppl# of cash needed9alaries- G800 per da# L * da#s per ee> L * ee>s 9upplies- G1"500 per ee> L * ee>s 8asoline- G'*5 per da# L * da#s per ee> L * ee>s 9uppl# of cash needed for * ee>s , , , , G '9"200 10"500 18"'*5 G )8"0*5

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4-1

CHAPTER 4 Income Measurement and Accrual Accounting

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Pro'lems and Alternates

Estimated Time in Minutes

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Estimated Time in Minutes

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E ERCI!E 4-1 REVE%1E RECO6%ITIO%

1ash collected at toll booth ;asses redeemed <e!enue recogni$ed

G '"000"000 1"*00"000 G ("*00"000

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E ERCI!E 4-4 OFFICE !1PP$IE!

7o record office supplies used.

8 Re)enues = E*>enses 5ffice 9upplies Expense /1")'00

E ERCI!E 4-. PREPAI& RE%T?01ARTER$@ A&A1!TME%T!

-+ 7o record one month of rent expense on 9eptember '0.

8 Re)enues = E*>enses <ent Expense

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E ERCI!E 4-/ &EPRECIATIO%

1+ 7o record purchase of combine on Bul# 1.

,+ ;urchase price +ess estimated sal!age !alue Depreciable cost

G 100"000 /1)"0000 G 8("000

8 Re)enues = E*>enses Depreciation Expense /1"0000

.+ EDuipment +ess- 4ccumulated depreciation /) months G1"000Hmonth0 1arr#ing !alue

E ERCI!E 4-2 PREPAI& I%!1RA%CE?A%%1A$ A&A1!TME%T!

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7o record expiration of 9 months of insurance on December '1.

8 Re)enues = E*>enses %nsurance Expense /2*"0000

12H'1 ;repaid %nsurance /2*"0000

E ERCI!E 4-3 !1#!CRIPTIO%!

1+ 7o record collection of 900 subscriptions of G'0 each in 4ugust.

,+ 7o record subscriptions earned during 4ugust and recorded on 4ugust '1.

8 Re)enues = E*>enses 9ubscriptions <e!enue *"500

2%3431%4+ 4115637%38 95+67%539 M4364+

,+ 7o record on 4pril '0 one month of legal fees earned.

8 Re)enues = E*>enses +egal 2ees Earned '"000

-+ %f the 4pril '0 ad&ustment is not recorded" net income G'"000.

E ERCI!E 4-15 WA6E! PA@A#$E

1+ Mee>l# pa#roll- G10 per hour G1*"500

* hours per da#

,+ 7o record pa#ment of ee>l# pa#roll on 5ctober 2*.

8 Re)enues = E*>enses Mages Expense /1*"5000

-+ 7o record accrual for t o da#sK

ages on 5ctober '1.

8 Re)enues = E*>enses Mages Expense

4+ 7o record pa#ment of ee>l# pa#roll on 3o!ember '.

8 Re)enues = E*>enses Mages Expense

1+ 7o record 12N" 90@da# loan from 2irst 3ational Can> on March 1.

1:4;7E< ( %315ME ME496<EME37 43D 411<64+ 4115637%38

,+ 7o accrue interest due on note for one month on March '1.

8 Re)enues = E*>enses %nterest Expense /1"0000

7o accrue interest due on note for one month on 4pril '0.

8 Re)enues = E*>enses %nterest Expense

-+ 7o record pa#ment of note and interest at maturit# date on Ma# '0.

8 Re)enues = E*>enses %nterest Expense

E ERCI!E 4-1, PROPERT@ TA E! PA@A#$E? A%%1A$ A&A1!TME%T!

1+ 7o accrue 200( propert# taxes on December '1.

8 Re)enues = E*>enses ;ropert# 7ax Expense

G '"000"000 1"00"000 G ("00"000

8 Re)enues = E>enses %nsurance Expense /2"0000

8 Re)enues = E>enses 9ubscriptions <e!enue "500

8 Re)enues = E>enses Mages Expense /1"5000