Adjusting entries

Question 1 - Adjusting entries

Present, in journal form, the adjustments that would be made on July 31, 2013, the
end of the fiscal year, for each of the following:
1. The supplies inventory on August 1, 2012 was $8,350. Supplies costing $16,650
were purchased during the fiscal year and debited to Supplies Inventory. A count
on July 31, 2013 indicated supplies on hand of $6,810.
2.

On April 30, a ten-month, 4% note for $40,000 was received from a customer.

3.

On March 1, $8,400 was collected as rent for one year and a nominal (temporary)
account was credited.

Solution
1. Supplies Expense (8,350 + 16,650 6,810)........................
Supplies Inventory .......................................................
2.

3.

18,190
18,190

Interest Receivable (40,000 x 4% x 3/12)..............................

Interest Revenue .........................................................

400

Rent Revenue (8,400 x 7/12 unearned) ................................

Unearned Revenue .....................................................

4,900

400

4,900

Question 2 - Adjusting entries

Amadeus Ltd. wishes to record receipts and payments in such a manner that
adjustments at the end of the period will not require reversing entries at the beginning
of the next period.
Instructions
Record the following transactions in the desired manner; as well, record the adjusting
entry on December 31, 2013. (Two entries for each part.)
1. An insurance policy for two years was purchased on April 1, 2013 for $4,800.
2.

Rent of $4,200 for six months for a portion of the building was received on
November 1, 2013.

Solution
1. Prepaid Insurance ...................................................................
Cash .............................................................................
Insurance Expense (4,800 x 9/24) ........................................
Prepaid Insurance .........................................................
2.

Cash........................................................................................
Unearned Rent .............................................................
Unearned Rent (4,200 x 2/6) ...............................................
Rent Revenue ...............................................................

4,800
4,800
1,800
1,800
4,200
4,200
1,400
1,400

Multiple-step income statement

Question 2 - Multiple-step income statement
Shown below is an income statement for 2014 that was prepared by a junior accountant at
Poodle Corporation.
POODLE CORPORATION
Income Statement
December 31, 2014
Sales revenue .......................................................................................................................
Investment revenue .............................................................................................................
Cost of merchandise sold .....................................................................................................
Selling expenses ...................................................................................................................
Administrative expense........................................................................................................
Interest expense...................................................................................................................
Income before special items ................................................................................................
Special items
Loss on disposal of a segment of the business ............................................................
Major fire loss ..............................................................................................................
Net income tax liability ........................................................................................................
Net income........................................................................................................................... $

$975,000
19,500
(408,500)
(155,000)
(215,000)
(13,000)
203,000
(30,000)
(80,000)
(27,900)
65,100

Instructions
In good form, prepare a multiple-step income statement for 2014 for Poodle Corporation that is
presented in accordance with generally accepted accounting principles (including format and
terminology). Poodle Corporation has 50,000 common shares outstanding and has a 20% income
tax rate on all tax related items. As a private corporation, Poodle does not disclose earnings per
share information.

Solution
POODLE CORPORATION
Income Statement
For the Year Ended December 31, 2014
Sales .......................................................................................................................
Cost of goods sold ..................................................................................................
Gross profit.............................................................................................................
Selling expenses .....................................................................................................
Administrative expenses ........................................................................................
Income from operations ........................................................................................
Other revenue Interest revenue..........................................................................
Other expenses Interest expense ........................................................................
Fire loss ..................................................................................................................

$975,000
408,500
566,500
$155,000
215,000

370,000
196,500
19,500
216,000
13,000
80,000

Income from continuing operations before taxes ..................................................

Income taxes ..........................................................................................................
Income from continuing operations ......................................................................
Discontinued operations:
Loss from discontinued operations, net of applicable income tax of $6,000 ........
Net income .............................................................................................................

123,000
24,600
98,400

24,000
$ 74,400

Question 3 - Income statement and retained earnings statement

Spaniel Corporation's capital structure consists of 20,000 common shares. At December 31, 2014
an analysis of the accounts and discussions with company officials revealed the following
information:
Sales ............................................................................................................... $1,200,000
Purchase discounts ........................................................................................
18,000
Purchases .......................................................................................................
720,000
Earthquake loss (net of $18,000 tax) ...........................................................
42,000
Selling expenses .............................................................................................
128,000
Cash ................................................................................................................
60,000
Accounts receivable .......................................................................................
90,000
Common shares .............................................................................................
200,000
Accumulated depreciation .............................................................................
180,000
Dividend revenue ...........................................................................................
18,000
Inventory, January 1, 2014 .............................................................................
152,000
Inventory, December 31, 2014 .......................................................................
125,000
Unearned service revenue .............................................................................
4,400
Accrued interest payable ...............................................................................
1,000
Land................................................................................................................
370,000
Patents ...........................................................................................................
100,000
Retained earnings, January 1, 2014 ...............................................................
270,000
Interest expense.............................................................................................
17,000
Cumulative effect of change from straight-line to accelerated
depreciation (net of $15,000 tax) ..................................................................
35,000
General and administrative expenses ............................................................
160,000
Dividends declared.........................................................................................
29,000
Allowance for doubtful accounts ...................................................................
5,000
Notes payable (maturity July 1, 2017) ...........................................................
200,000
Machinery and equipment ............................................................................
450,000
Materials and supplies ...................................................................................
40,000
Accounts payable ...........................................................................................
60,000
Unless indicated otherwise, you may assume a 30% income tax rate.
Instructions
a)

Prepare, in good form, a multiple-step income statement.

b)

Prepare, in good form, a retained earnings statement.

Solution
SPANIEL CORPORATION
Income Statement
For the Year Ended December 31, 2014
Sales .......................................................................................................................
Cost of goods sold
Merchandise inventory, Jan. 1 .......................................................................
Purchases
$720,000
Less purchase discounts
18,000
Net purchases ........................................................................................
Merchandise available for sale ......................................................................
Less merchandise inventory, Dec. 31 .............................................................
Cost of goods sold ..................................................................................
Gross profit on sales...............................................................................................
Operating expenses
Selling expenses .............................................................................................
General and administrative expenses ............................................................
Total operating expenses .......................................................................
Operating income...................................................................................................
Other revenue and gains
Dividend revenue ...........................................................................................
Other expenses and losses
Interest expense.............................................................................................
Loss from earthquake ....................................................................................
Income before taxes ...............................................................................................
Income taxes ..................................................................................................
Net income .............................................................................................................

$1,200,000
$152,000

702,000
854,000
125,000
729,000
471,000
128,000
160,000
288,000
183,000
18,000
(17,000)
(60,000)

Earnings per share..................................................................................................

(77,000)
124,000
37,200
86,800
$4.34

SPANIEL CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1, 2014 .......................................................................
Cumulative effect of change in depreciation methods,
net of applicable taxes of $15,000 ..................................................................
Adjusted beginning retained earnings ...................................................................
Add: Net income ....................................................................................................
Deduct: Dividends declared ...................................................................................
Retained earnings, December 31, 2014 .................................................................

$270,000
(35,000)
235,000
$86,800
29,000

57,800
$292,800

Statement of Cash Flows direct method and Indirect method

Question 3
Statement of Cash Flows direct method and Indirect method
The controller of Nebula Corporation has provided you with the following information:
Nebula Corporation
Income Statement
For the Year Ended December 31, 2014
Net sales .................................................................................................................
Operating expenses................................................................................................
Income from operations ........................................................................................
Other revenues and expenses
Gain on sale of equipment ............................................................................. 30,000
Interest expense............................................................................................. 8,000
Income before income taxes ..................................................................................
Income taxes ..........................................................................................................
Net income .............................................................................................................
Nebula Corporation
Comparative Account Information
Relating to Operations
For the Year Ended December 31, 2014

Accounts receivable
Prepaid insurance
Accounts payable
Interest payable
Income taxes payable
Unearned revenue

2014
56,000
5,000
59,000
600
4,200
20,000

2013
40,000
6,000
47,000
1,500
6,000
14,000

Instructions
Prepare a Statement of Cash Flows (for operating activities only) for the year ended December 31,
2014, using the

a. direct method.
b. Indirect method

620,000
410,000
210,000

22,000
232,000
92,800
139,200

Solution Direct method

Nebula Corporation
Partial Statement of Cash Flows
For the Year Ended December 31, 2014
Cash received from customers ..........................................................................
Cash paid
For operating expenses .............................................................................
For interest ................................................................................................
For income taxes .......................................................................................
Net cash provided by operating activities .........................................................
Calculations:
Cash received from customers:
Net sales ............................................................
Increase in accounts receivable ..................
+ Increase in unearned revenue........................
Cash paid for operating expenses:
Operating expenses...........................................
Decrease in prepaid insurance .......................
Increase in accounts payable .........................
Cash paid for interest:
Interest expense ................................................
+ Decrease in interest payable ..........................
Cash paid for income tax:
Income tax expense ..........................................
+ Decrease in income tax payable .....................

$ 620,000
(16,000)
6,000
$ 610,000
$ 410,000
(1,000)
(12,000)
$ 397,000
$ 8,000
900
$ 8,900
$ 92,800
1,800
$ 94,600

$610,000
$397,000
$8,900
$94,600

$500,500
$109,500

Solution - indrirect method

Nebula Corporation
Partial Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income ........................................................................................
Adjustments:
Gain on sale of equipment ................................................................
Increase in accounts receivable ........................................................
Decrease in prepaid insurance ..........................................................
Increase in accounts payable ............................................................
Decrease in interest payable .............................................................
Decrease in income taxes payable ....................................................
Increase in unearned revenue ..........................................................
Net cash provided by operating activities .........................................

$139,200
(30,000)
(16,000)
1,000
12,000
(900)
(1,800)
6,000
$109,500

POC
Question 1
Comparison of accounting methods for long-term contracts
Compare the percentage-of-completion and completed-contract methods.

Solution 1
The percentage-of-completion method recognizes revenue before completion of the project. A
major advantage of this method is that the contractors' revenue stream is not distorted. However,
the reliance on estimates, rather than on actual numbers, is a disadvantage. This method
conforms to the earnings-based view of revenue recognition.
Under the completed contract method, revenue recognition is deferred until the completion of
the project. A major advantage of this method is the use of actual numbers, rather than
estimates. A major disadvantage is the distortion of income, as no revenue is recognized during
the contract. This method does not conform to the earnings-based view of revenue recognition.
Question 2 - Bundled sales
Loon Inc., a software company sells new accounting software and user support bundled together.
The fair value of the software is $1,500 and the fair value of the user support is $500. The user
support is valid for a period of 12 months from the date of software purchase. To be able to
compete with a competitor's offering, Loon decided to sell the bundle at a discount for $1,800.
During its first month of sales, 100 units of this software bundle were sold at the discounted price,
and expenses were $50,000.

Instructions
a)

Calculate the sale price that should be allocated to each component of the bundle using the
relative fair value method.

b)

Calculate the sale price that should be allocated to each component of the bundle using the
residual value method.

c)

Assuming that the relative fair value method is used and income tax rate is 30%, calculate
the net income applicable to Loon's first month of sales.

Solution
a) Relative fair value method:
Software: $1,500 x [$1,800 / ($1,500 + $500)] =
User Support: $500 x [$1,800 / ($1,500 + $500)] =

b) Residual value method:

Software: $1,800 - $500
User Support: $1,800 - $1,300

c) Net income calculation:

Sales ($1,800 x 100) ...............................................................
Less: Expenses ........................................................................
User Support Unearned Portion ............................................
[($450 x 100) x 1112]
Income before tax ..................................................................
Less income tax (30%) ............................................................
Net Income.............................................................................

$1,350
450
$1,800

$1,300
500
$1,800

$180,000
(50,000)
(41,250)
88,750
(26,625)
$62,125

Question 3 - Accounting for long-term construction contracts

The Corporation to choose between the completed-contract method and the
percentage-of-completion method of accounting for long-term contracts in the company's
financial statements. You have been asked to provide the calculation. The following information is
available to you to calculate.
1.

Snowbird commenced doing business on January 1, 2014.

2.

Construction activities for the year ended December 31, 2014, were as follows:
Total contract

Project

Billings through

Cash collections

price

12/31/14

615,000

$ 340,000

450,000

135,000

135,000

475,000

475,000

390,000

600,000

240,000

160,000

480,000

400,000

400,000

$2,620,000

$1,590,000

$1,395,000

Contract costs

Estimated

incurred through

additional costs to

Project
A

12/31/14
$

through 12/31/14
$

310,000

complete contracts

510,000

$120,000

130,000

260,000

350,000

-0-

370,000

290,000

320,000

80,000

$1,680,000

$750,000

3.

Each contract is with a different customer.

4.

Any work remaining to be done on the contracts is expected to be completed in 2015.

Instructions
a)

Prepare a schedule by project, calculating the amount of gross profit (or loss) for the 2014
calendar year, which would be reported under:
(1) The completed-contract method.
(2) The percentage-of-completion method (based on estimated costs).

Solution 3
a) (1) and (2)
Projects
Contract price
Contract costs incurred
Additional costs
to complete
Total cost
Total gross profit
(loss)

A
$615,000
510,000

B
$450,000
130,000

C
$475,000
350,000

D
$600,000
370,000

E
$480,000
320,000

120,000
630,000

260,000
390,000

-0350,000

290,000
660,000

80,000
400,000

60,000

$125,000

$ (60,000)

$ (15,000)

The amount reported as gross profit (loss) under the completed-contract method for 2014 is:
Project A
$(15,000)
B
-0C
125,000
D
(60,000)
E
-0$ 50,000
The amount reported as gross profit (loss) under the percentage-of-completion method for 2014
is:
Project A
$(15,000)
B
20,000
$60,000 ($130,000 $390,000)
C
125,000
D
(60,000)
E
64,000
$80,000 ($320,000 $400,000)
$134,000

$ 80,000