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Fundamentals of Financial Accounting 5th Edition Phillips

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Chapter 4 Adjustments, Financial Statements, and Financial Results

ANSWERS TO QUESTIONS

1. Adjusting entries are made at the end of the accounting period to record all revenues and expenses that have not been recorded but belong in the current period. These adjustments also ensure that the related accounts on the balance sheet and income statement are up–to–date and complete.

2. (a) The time period assumption states that the long life of a company can be divided into shorter time periods. Adjustments are required by GAAP to ensure that a company’s financial statements include all the transactions of the given time period.

(b) The revenue recognition principle states that revenues should be recorded when earned. Adjustments assist in recording revenues during the period in which they are earned, rather than when cash is received.

(c) The expense recognition or “matching” principle states that expenses are recorded when incurred to generate revenues. Adjustments ensure that the expenses incurred during a particular period are, in fact, recorded during that period.

3. The two different types of adjusting journal entries are:

(1) Deferral adjustments:

Fundamentals of Financial Accounting, 5/e 4–1

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reproduction or distribution without the prior written consent of McGraw-Hill Education.

(a) Revenues – previously recorded liabilities that need to be adjusted at the end of the period to reflect earned revenues (e.g., unearned revenue must be adjusted for the portion of sales revenues earned in the current period).

(b) Expenses– previously recorded assets that need to be adjusted at the end of the period to reflect incurred expenses (e.g., prepaid insurance must be adjusted for the portion of insurance expense incurred in the current period).

(2) Accrual adjustments:

(a) Revenues - revenues that have been earned by the end of the accounting period, but will be collected in a future accounting period (e.g., recording interest receivable for interest earned but not yet collected).

(b) Expenses – expenses that have been incurred by the end of the accounting period, but will be paid in a future accounting period (e.g., recording an account payable for utilities used during the period but which have not yet been paid).

4. Adjusting entries have no effect on cash. For unearned revenues and prepayments, cash was received or paid at some point in the past. For accruals, cash will be received or paid in a future accounting period. At the time of the adjusting entry, no cash is received or paid.

5. A contra–asset is an account related to an asset that is an offset or reduction to the asset's balance. Accumulated Depreciation is a contra–account to the equipment and buildings accounts.

6. Depreciation expense is reported on the income statement. It indicates the amount of depreciation for the current period. Accumulated depreciation is reported on the balance sheet (as a contra–asset). It indicates the total depreciation, which has accumulated from the date the asset was acquired to the date of the balance sheet.

7. An adjusted trial balance is a list of the individual accounts, usually in financial statement order, with their adjusted debit or credit balances. It is used to provide a check on the equality of the debits and credits.

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Assets = Liabilities + Stockholders’ Equity Dec 31 Cash Prepaid Rent 9,000 +9,000 = Jan 31 Prepaid Rent 3,000 = Rent Expense (+E) 3,000 Feb 28 Prepaid Rent 3,000 = Rent Expense (+E) 3,000 Mar 31 Prepaid Rent 3,000 = Rent Expense (+E) 3,000

Prepaid rent $6,000

9. Balance sheet accounts at January 31:

Rent

Income statement accounts for period ended January 31:

expense $3,000

11. (a) Income statement: Revenues Expenses = Net Income

(b) Balance sheet: Assets = Liabilities + Stockholders' Equity

12 The net income from the income statement is included on the statement of retained earnings to determine the ending retained earnings balance, which is then reported on the balance sheet as a stockholders’ equity account.

13.Closing journal entries are made at the end of the accounting period to transfer the balances in the temporary accounts to retained earnings. The closing journal entries reduce the revenue, expense, and dividends accounts to a zero balance so that they can be used for the accumulation process during the next period. Closing entries must be entered into the system through the journal and posted to the ledger accounts to state properly the temporary and permanent account balances (i.e., zero balances in the temporary accounts).

14 Permanent accounts are balance sheet accounts (for assets, liabilities, and stockholders’ equity accounts). These accounts are not closed at the end of each period.

Temporary accounts include all income statement accounts (for revenues and expenses) and the Dividends account. These accounts are used to track results of only the current period, so they are closed (into Retained Earnings) at the end of each year.

Fundamentals of Financial Accounting, 5/e 4–4 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education 10. 12/31 Prepaid Rent (+A).................................................. 9,000 Cash ( A) 9,000 1/31 Rent Expense (+E, SE) 3,000 Prepaid Rent ( A)........................................... 3,000 2/28 Rent Expense (+E, SE)........................................ 3,000 Prepaid Rent ( A) 3,000 3/31 Rent Expense (+E, SE) 3,000 Prepaid Rent ( A)........................................... 3,000

15 The income statement accounts are closed at the end of the accounting period because, in effect, they are temporary sub–accounts to retained earnings (i.e., a part of stockholders' equity). They are used only for accumulation during the accounting period. When the period ends, these accumulated accounts must be transferred (closed) to retained earnings. The closing process serves:

(1) to correctly state retained earnings, and

(2) to clear out the balances of the temporary accounts for the year just ended, so that these sub–accounts can be used again during the next period for accumulation and classification purposes.

Balance sheet accounts are not closed at the end of the period because they reflect permanent accumulated balances of assets, liabilities, and stockholders' equity. Permanent accounts show the business’s financial position at the end of the period and are the beginning amounts for the next period.

16. A post–closing trial balance is a list of all the accounts and their balances taken from the ledger, after the adjusting and closing journal entries have been journalized and posted. It is not a necessary part of the accounting information processing cycle but it is useful because it demonstrates the equality of the debits and credits in the ledger, after the closing entries have been journalized and posted. It also shows that all temporary accounts (revenues, expenses, dividends) contain zero balances (after the closing entries have been posted).

17 The owner is correct; the adjustment process does consume a lot of time and it delays month–end reporting of financial results. However, prior to adjustments, the financial results are not complete or up–to–date. Important information relating to assets, liabilities, revenues, and expenses has not yet been incorporated into the accounting records. Without this information, the owner may make decisions that are inappropriate for the business. Only after adjustments have been completed, will the owner have accurate information on which to base her decisions.

Fundamentals of Financial Accounting, 5/e 4–5

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Authors' Recommended Solution Time (Time in minutes)

* Due to the nature of cases, it is very difficult to estimate the amount of time students will need to complete them. As with any open–ended project, it is possible for students to devote a large amount of time to these assignments. While students often benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear, and by offering suggestions (about how to research topics or what companies to select). The skills developed by these cases are indicated on the following page

Hill

Mini–exercises Exercises Problems Skills

Continuing

No. Time No. Time No. Time No. Time No. Time 1 5 1 10 CP4–1 20 1 20 1 45 2 5 2 10 CP4–2 20 2 20 3 5 3 15 CP4–3 15 3 30 4 5 4 10 CP4–4 45 4 25 5 5 5 20 PA4–1 20 5 25 6 5 6 20 PA4–2 20 6 40 7 5 7 20 PA4–3 15 7 45 8 5 8 15 PA4–4 45 9 5 9 15 PB4–1 20 10 5 10 20 PB4–2 20 11 10 11 5 PB4–3 15 12 5 12 15 PB4–4 45 13 5 13 10 C4–1 45 14 5 14 20 C4–2 60 15 5 15 20 C4–3 60 16 10 16 10 C4–4 60 17 5 17 15 C4–5 45 18 5 18 10 C4–6 45 19 5 19 20 20 5 21 5 22 10 23 10 24 10 25 10 26 10

Development Cases*

Case

Fundamentals of Financial Accounting, 5/e 4–7 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Case Financial Analysis Research Ethical Reasoning Critical Thinking Technology Writing Teamwork 1 x 2 x 3 x X x x x 4 x x x 5 x x x x 6 x x x 7 x x

MINI–EXERCISES M4–1 1. A, D 2. A, E 3. B, C 4. B, F M4–2 1. A, E 2. A, D 3. B, F 4. B, C M4–3 (1) B (2) A (3) A (4) A (5) B M4–4 (1) Supplies Expense (+E –SE) 400 Supplies (–A) 400 (2) Interest Receivable (+A) 250 Interest Revenue (+R +SE) 250 (3) Salaries and Wages Expense (+E, –SE) 3,600 Salaries and Wages Payable (+L) 3,600 (4) Accounts Receivable (+A) 1,000 Service Revenue (+R, +SE) 1,000 (5) Unearned Revenue (–L) 600 Service Revenue (+R, +SE) 600

ANSWERS TO

a $2,400 ÷ 3 months = $800 per month

b $1,200 ÷ 24 months = $50 for one month M4

b $3,000 = 10

x 3 days x $100 per day

c $1,200 ÷ 12 months = $100 for one month

M4–8

–5 Assets = Liabilities + Stockholders’ Equity a = Unearned Revenue 800 Rent Revenue (+R) +800 b Prepaid Insurance 50 = Insurance Expense (+E) 50 c Accum. Depn–Equip. (+xA) 400 = Depreciation Expense (+E) 400

a. Unearned Revenue ( L) 800 Rent Revenue (+R, +SE)................................................. 800 ($800 =

b. Insurance Expense (+E, SE) 50 Prepaid Insurance ( A).................................................... 50 ($50 = 1/24

$1,200) c. Depreciation Expense (+E, SE) 400 Accumulated Depreciation–Equipment (+xA, A) ........ 400 ($400 = 1/12 x $4,800)

–7 Assets = Liabilities + Stockholders’ Equity A = Accounts Payable +600 Utilities Expense (+E) 600 B = Salaries and Wages Payable +3,000 Salaries and Wages Expense (+E) 3,000 C Interest Receivable +100 = Interest Revenue (+R) +100

–6

1/3 x $2,400)

employees

Fundamentals of Financial Accounting, 5/e 4–10 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education (a) Utilities Expense (+E, SE) ............................... 600 Accounts Payable (+L) 600 To record utilities expense incurred but not yet paid. (b) Salaries and Wages Expense (+E, SE)........... 3,000 Salaries and Wages Payable (+L) 3,000 To record Salaries and Wages Expense incurred but not yet paid, calculated as 10 employees x 3 days x $100 per day. (c) Interest Receivable (+A) 100 Interest Revenue (+R, +SE) .................... 100 To record interest earned but not yet collected, calculated as $1,200 x 1/12. M4–9 a) Sept. 30 Prepaid Rent (+A) 4,000 Cash (–A) 4,000 Oct. 31 AJE Rent Expense (+E –SE) 2,000 Prepaid Rent (–A) 2,000 b) Sept. 30 Cash (+A) 16,000 Unearned Revenue (+L) 16,000 Oct. 31 AJE Unearned Revenue (–L) 8,000 Service Revenue (+R +SE) 8,000 c) Sept. 30 Prepaid Insurance (+A) 3,000 Cash (–A) 3,000 Oct. 31 AJE Insurance Expense (+E –SE) 1,000 Prepaid Insurance (–A) 1,000 M4–10

Fundamentals of Financial Accounting, 5/e 4–11 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. a) Dec. 31 Cash (+A) 12,000 Unearned Revenue (+L) 12,000 Jan. 31 AJE Unearned Revenue (–L) 1,000 Service Revenue (+R +SE) 1,000 b) Dec. 31 Supplies (+A) 1,200 Cash (–A) 1,200 Jan. 31 AJE Supplies Expense (+E –SE) 200 Supplies (–A) 200 c) Dec. 31 Cash (+A) 3,000 Unearned Revenue (+L) 3,000 Jan. 31 AJE Unearned Revenue (–L) 1,000 Service Revenue (+R +SE) 1,000 M4–11 (a) Prepaid Insurance (+A) 2,275 Insurance Expense ( E, +SE) 2,275 (b) Service Revenue ( R, SE) 1,000 Unearned Revenue (+L).......................... 1,000 (c) Income Tax Expense (+E, SE)........................ 2,000 Income Tax Payable (+L) 2,000 Calculations for (a) and (b): Prepaid Insurance (A) Insurance Expense (E) Service Revenue (R) Unearned Revenue (L) 0 2,340 1,500 0 (a) (a) (b) (b) 2,275 65 500 1,000 ($2,275 = $2,340 x 35/36 months remaining; $65 used up) ($500 = $1,500 x 1/3 earned; 2/3 unearned) Calculation for (c): $10,000 x 20% = 10,000 x 0.20 = $2,000

Fundamentals of Financial Accounting, 5/e 4–12 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education M4–12 Account Financial Statement? Classification? Normal dr or cr Balance? Interest Expense IS E Dr Prepaid Rent BS CA Dr Amortization Expense IS E Dr Unearned Revenue BS CL Cr Retained Earnings BS SE Cr Accumulated Depreciation BS NCA Cr M4–13 MACRO COMPANY Adjusted Trial Balance At June 30 Account Titles Debit Credit Cash $ 1,020 Accounts Receivable 550 Supplies 710 Prepaid Rent 40 Equipment 1,400 Accumulated Depreciation–Equipment $ 250 Software 200 Accumulated Amortization 150 Accounts Payable 300 Income Tax Payable 30 Unearned Revenue 100 Notes Payable (long–term) 1,300 Common Stock 300 Retained Earnings 120 Sales Revenue 3,600 Interest Revenue 50 Office Expense 820 Salaries and Wages Expense 660 Rent Expense 400 Depreciation Expense 110 Interest Expense 180 Income Tax Expense 110 Totals $ 6,200 $ 6,200

For

SKY

Statement

For

Fundamentals of Financial Accounting, 5/e 4–13

–

distribution

Hill

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M4–14

Statement

the Year Ended December 31 Revenues: Sales Revenue Rent Revenue Total Revenues Expenses: Salaries and Wages Expense Rent Expense Utilities Expense Insurance Expense Depreciation Expense Income Tax Expense Total Expenses $ 42,030 300 42,330 21,600 6,000 4,220 1,400 1,300 2,900 37,420 Net Income $ 4,910

SKY BLUE CORPORATION Income

The Sky Blue Corporation generated $4,910 of net income during the year.

M4–15

BLUE CORPORATION

of Retained Earnings

the Year Ended December 31 Balance, January 1 $ 1,000 Add: Net Income 4,910 Subtract: Dividends (300) Balance, December 31 $ 5,610

BLUE CORPORATION Balance Sheet At December 31 Assets Current Assets: Cash Accounts Receivable Prepaid Insurance Total Current Assets Notes Receivable (long–term) Equipment $12,000 Accumulated Depreciation (2,600) Total Assets Liabilities Current Liabilities: Accounts Payable Salaries and Wages Payable Income Taxes Payable Unearned Revenue Total Current Liabilities Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ 1,230 2,000 2,300 5,530 3,000 9,400 $ 17,930 $ 5,420 1,000 2,900 600 9,920 2,400 5,610 8,010 $ 17,930 Sky Blue’s total assets are financed more by debt ($9,920) than by equity ($8,010) M4–17 Sales Revenue ( R) ............................................... Rent Revenue ( R) ................................................ 42,030 300 Salaries and Wages Expense ( E) Depreciation Expense ( E) .......................... Utilities Expense ( E) Insurance Expense ( E) .............................. Rent Expense ( E) Income Tax Expense ( E) ........................... Retained Earnings (+SE) Retained Earnings ( SE)…………………………. Dividends ( D)………………….. 300 21,600 1,300 4,220 1,400 6,000 2,900 4,910 300

SKY

Fundamentals of Financial Accounting, 5/e 4–15 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. M4–18 Supplies Expense (+E, SE) 1,300 Supplies ( A)..................................................... 1,300 ($1,300 = $9,000 beginning – $7,700 still on hand = $1,300 used) Supplies (A) Supplies Expense (E) Bal. 9,000 Bal. 0 AJE 1,300 AJE 1,300 End. 7,700 End. 1,300 M4–19 Depreciation Expense (+E, SE)......................................... 6,000 Accumulated Depreciation–Equipment (+xA, A)...... 6,000 Accumulated Depreciation–Equipment (xA) Depreciation Expense (E) Bal. 0 Bal. 0 AJE 6,000 AJE 6,000 End. 6,000 End. 6,000 M4–20 Insurance Expense (+E, SE)..................................... 1,800 Prepaid Insurance ( A) 1,800 ($1,800 = $7,200 total x 6/24 used) Prepaid Insurance (A) Insurance Expense (E) Bal 7,200 Bal 0 AJE 1,800 AJE 1,800 End. 5,400 End. 1,800 M4–21 Unearned Revenue ( L) 2,500 Service Revenue (+R, +SE).............................. 2,500 Unearned Revenue (L) Service Revenue (R) 5,000 Bal 33,800 Bal AJE 2,500 2,500 AJE 2,500 End. 36,300 End.

Fundamentals of Financial Accounting, 5/e 4–16 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education M4–22 Salaries and Wages Expense (+E, SE) 1,200 Salaries and Wages Payable (+L)..................... 1,200 Salaries and Wages Payable (L) Salaries and Wages Expense (E) 0 Bal. Bal. 20,000 1,200 AJE AJE 1,200 1,200 End. End. 21,200 M4–23 Interest Expense (+E, SE)......................................... 500 Interest Payable (+L) 500 Interest Payable (L) Interest Expense (E) 0 Bal. Bal. 0 500 AJE AJE 500 500 End. End. 500 M4–24 Amortization Expense (+E, –SE) 5,000 Accumulated Amortization (+xA, A)......................... 5,000 Accum. Amortization (xA) Amortization Expense (E) 0 Bal Bal 0 5,000 AJE AJE 5,000 5,000 End. End. 5,000

PI DETECTIVES

Adjusted Trial Balance

As of December 31

Total debits must equal total credits, so total debits must sum to $73,700. Thus, the missing balance for Cash is $5,000

Fundamentals of Financial Accounting, 5/e 4–17

M4–25

Account Titles Debit Credit Cash $ ? Accounts Receivable 500 Supplies 9,000 Prepaid Insurance 7,200 Equipment 28,000 Accumulated Depreciation–Equipment $ 4,000 Accounts Payable 200 Unearned Revenue 5,000 Notes Payable 3,000 Common Stock 22,000 Retained Earnings 5,700 Dividends 3,000 Service Revenue 33,800 Salaries and Wages Expense 20,000 Depreciation Expense 1,000 Totals $ ? $ 73,700

Fundamentals of Financial Accounting, 5/e 4–18 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education M4–26 a 1/2/15 Prepaid Insurance (+A) 30,000 JE Cash ( A) ........................................................ 30,000 b 12/31/15 Insurance Expense (+E, SE)............................... 10,000 AJE Prepaid Insurance ( A) 10,000 c 12/31/15 Retained Earnings ( SE) 10,000 CJE Insurance Expense ( E)................................. 10,000 d 12/31/16 Insurance Expense (+E, SE).............................. 10,000 AJE Prepaid Insurance ( A) 10,000 e 12/31/16 Retained Earnings ( SE) 10,000 CJE Insurance Expense ( E)................................ 10,000 Cash (A) 1/2/15 12/31/15 90,000 60,000 30,000 a 12/31/16 60,000 Retained Earnings (SE) c e 10,000 10,000 80,000 70,000 1/2/15 12/31/15 60,000 12/31/16 Balance sheet: 12/31/2015 12/31/2016 Assets Cash $60,000 $60,000 Prepaid Insurance 20,000 10,000 Stockholders’ Equity Retained Earnings 70,000 60,000 Income statement: Insurance Expense $10,000 $10,000 ANSWERS TO EXERCISES Prepaid Insurance (A) 1/2/15 a 12/31/15 0 30,000 20,000 10,000 10,000 b d 12/31/16 10,000 Insurance Expense (E) 1/2/15 0 b 10,000 0 d 10,000 10,000 10,000 c e End. 0

Because debits must equal credits in a trial balance, the balance in Retained Earnings is determined in this exercise as the amount in the credit column necessary to make debits equal credits (a “plugged” figure).

E4–1 (continued)

Fundamentals of Financial Accounting, 5/e 4–19 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. E4–1 Req.

Depreciation Exp. Acc. Depn.–Equip. Inc. Tax Expense Inc. Tax Payable 0 18,100 0 2,030 3,000 3,000 26,200 26,200 3,000 21,100 26,200 28,230 GIBSON COMPANY Adjusted Trial Balance At December 31, 2015 Account Titles Debit Credit Cash $ 178,000 Accounts Receivable 225,400 Supplies 12,200 Prepaid Rent 10,200 Equipment 323,040 Accumulated Depreciation–Equipment $ 21,100 Land 60,000 Accounts Payable 86,830 Unearned Revenue 32,500 Income Taxes Payable 28,230 Notes Payable (long–term) 160,000 Common Stock 233,370 Retained Earnings * 171,160 Service Revenue 2,564,200 Salaries and Wages Expense 1,590,000 Office Expense 632,250 Rent Expense 152,080 Utilities Expense 25,230 Supplies Expense 42,590 Interest Expense 17,200 Depreciation Expense 3,000 Income Tax Expense 26,200 Totals $ 3,297,390 $ 3,297,390

Req. 2

Because the temporary accounts for 2015 have not yet been closed to Retained Earnings, the Retained Earnings balance determined in requirement 1 must represent the balance as of December 31, 2014.

E4–2

Req. 1

(a) Rent Expense (b) Accumulated Depreciation—Equipment

Req. 2

(a) Interest Receivable (b) Salaries and Wages Payable

Req. 3

of McGraw-Hill

Hill

prior written consent

Education

FEDEX CORP. Income Statement For the Year Ended May 31, 2013 Service Revenue $ 44,200 Interest Revenue 20 Total Revenues 44,220 Salaries and Wages Expense 16,600 Transportation Expense 11,900 Office Expenses 7,540 Rent Expense 2,500 Depreciation Expense 2,400 Repairs and Maintenance Expense 1,900 Interest Expense 100 Income Tax Expense 900 Total Expenses 43,840 Net Income $ 380

E4-2 (continued)

Req. 3 (continued)

the prior written

of McGraw-Hill Education.

without

consent

FEDEX CORP Statement of Retained Earnings For the Year Ended May 31, 2013 Beginning Balance, 6/1/2012 $ 17,100 Add: Net Income 380 Subtract: Dividends (170) Ending Balance, 5/31/2013 $ 17,310 FEDEX CORP Balance Sheet At May 31, 2013 Assets Liabilities Current Assets Current Liabilities Cash $ 4,900 Accounts Payable $ 2,900 Accounts Receivable 5,000 Salaries and Wages Payable 1,700 Interest Receivable Prepaid Rent Supplies Total Current Assets 10 850 450 11,210 Notes Payable (short-term) Income Tax Payable Total Current Liabilities 300 900 5,800 Notes Payable (long-term) 7,700 Equipment $38,100 Total Liabilities 13,500 Accum. Depn. (19,600) Equipment, Net 18,500 Stockholders' Equity Common Stock 2,700 Goodwill 3,800 Retained Earnings 17,310 Total Stockholders’ Equity 20,010 Total Assets $ 33,510 Total Liabilities and Stockholders' Equity $ 33,510

/ Date Journal Entries and Adjusting Journal Entries (a) Sept 1 Prepaid Rent (+A)……………………………………12,000 Cash ( A)……………………………………. 12,000 Sept 30 Rent Expense (+E, SE) ($12,000 x 1/6) 2,000 Prepaid Rent ( A)………………………….... 2,000 (b) Sept 1 Cash (+A)……………………………………………60,000 Unearned Revenue (+L)……………………. 60,000 Sept 30 Unearned Revenue ( L)……………………………. 5,000 Sales Revenue (+R, +SE) ($60,000 x 1/12) 5,000 (c) Sept 1 No journal entry. A transaction has not yet occurred. Sept 30 Accounts Receivable (+A)………………………… 2,000 Rent Revenue (+R, +SE)…………………… 2,000 (d) Sept 1 No journal entry. A transaction has not yet occurred. Sept 30 Salaries and Wages Expense (+E, SE)..……… 3,000 Salaries and Wages Payable (+L) 3,000

Ref

Req. 1

The annual reporting period for this company is November 1 through October 31.

Req. 2

Both transactions are accruals because revenue has been earned and expenses incurred but no cash has yet been received or paid.

Req. 4

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

Fundamentals of Financial Accounting, 5/e 4–23

or distribution without the prior written consent of McGraw-Hill Education. E4–4

Assets = Liabilities + Stockholders’ Equity a. = Salaries and Wages Payable +6,000 Salaries and Wages Expense (+E) –6,000 b. Interest Receivable +3,000 = Interest Revenue (+R) +3,000

Req. 3

prior written

of McGraw-Hill Education E4–5

a) October 31: Salaries and Wage Expense (+E, SE).................... 6,000 Salaries and Wages Payable (+L) 6,000

without the

consent

(

salaries

wages

(b) October 31: Interest Receivable (+A)........................................... 3,000 Interest Revenue (+R, +SE) 3,000

To record

and

incurred during the year, but not yet paid.

interest revenue

To record

earned during the year, but not yet collected.

E4–6

Req. 1

2015 Income statement:

Req. 2

2015

statement:

2015 Balance sheet:

$72,000 + ($15,000 $10,000) = $77,000 used.

of McGraw-Hill Education.

consent

Insurance

Expense ($7,200 x 12/24) = $3,600 used.

Prepaid Insurance ($7,200

2015 Balance sheet:

x 12/24) = $3,600

Income

Supplies Expense:

Supplies

Req. 3 Assets = Liabilities + Stockholders’ Equity a. Prepaid Insurance 3,600 = Insurance Expense (+E) 3,600 b. Supplies 5,000 = Supplies Expense (+E) 5,000 E4–7 (a) Insurance Expense (+E, SE) .................................. 3,600 Prepaid Insurance ( A) 3,600 To record the expiration of insurance for twelve months ($300 per month). (b) Supplies Expense (+E, SE) .................................... 5,000 Supplies ( A) .................................................. 5,000 To record the use of supplies for the year.

(given) = $10,000

Fundamentals of Financial Accounting, 5/e 4–26 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education E4–8 a. Supplies Expense (+E, SE) 750 Supplies ( A).................................................... 750 Supplies used ($850 100 = $750). b. Salaries and Wages Expense (+E, SE) 3,700 Salaries and Wages Payable (+L)..................... 3,700 c. Unearned Revenue ( L)............................................ 2,200 Rent Revenue (+R, +SE) 2,200 Rent earned ($2,200 = $6,600 x 2/6) d. Depreciation Expense (+E, SE) 2,000 Accumulated Depreciation–Equipment (+xA, A) 2,000 e. Insurance Expense (+E, SE)................................... 750 Prepaid Insurance ( A) 750 ($3,000 x 6/24 months) f. Accounts Receivable (+A)......................................... 750 Service Revenue (+R, +SE) 750 E4–9 Trans Assets Liabilities Stockholders’ Equity (a) Supplies –750 NE Supplies Expense (+E) –750 (b) NE Salaries and Wages Payable +3,700 Salaries and Wages Expense (+E) –3,700 (c) NE Unearned Revenue –2,200 Rent Revenue (+R) +2,200 (d) Accum. Depn–Equip. (+xA) –2,000 NE Depreciation Expense (+E) –2,000 (e) Prepaid Ins. –750 NE Insurance Expense (+E) –750 (f) Accts. Rec. +750 NE Service Revenue (+R) +750

E4–10

Req. 1

Income Tax Payable

 Increase – With a credit for accrual of additional income taxes payable.

 Decrease – With a debit for cash paid on accrued income taxes payable.

Interest Payable

 Increase – With a credit for accrual of additional interest payable.

 Decrease – With a debit for cash paid on accrued interest payable.

Salaries and Wages Payable

 Increase – With a credit for accrual of salaries and wages expense for the period that is not yet paid.

 Decrease – With a debit for cash paid on accrued salaries and wages payable

Req. 2 Computations:

(a) Beg. Bal. + accrued income taxes cash paid = End. bal. $100 + ? $600 = $80 ? = $580 accrued

(b) Beg. Bal. + accrued wages cash paid = End. bal. $1,000 + 20,000 ? = $1,200 ? = $19,800 paid

Fundamentals of Financial Accounting, 5/e

4–27

Balance

Assets Equipment 250,000 Accum.

Liabilities Stockholders’ Equity Income Statement Revenues Expenses Depreciation Expense 30,000

Sheet

Depn–Equip. (150,000)

Computations:

a Given, $8,000 Amortization Expense

b. Given, $17,000 accrued and unpaid.

c $4,800 x 1/3 = $1,600 Rent Revenue earned. The remaining $3,200 in Unearned Revenue is a liability for two months of occupancy "owed'' to the renter.

d. $6,600 income before taxes x 30% = $1,980.

Fundamentals of Financial Accounting, 5/e 4–28 ©

–

Education.

rights

or distribution

Education E4

Code Amount Code Amount a. K $ 400 L $ 400 b. C 600 P 600 c. F 220 G 220 d. D 1,000 B 1,000 e. A 1,000 M 1,000 f. O 250 N 250 g. M 75,000 J 75,000 E4

Items Net Income Total Assets Total Liabilities Stockholders’ Equity Amounts reported $30,000 $90,000 $40,000 $50,000 Effects of: a. Amortization (8,000) (8,000) (8,000) b. Salaries and Wages (17,000) 17,000 (17,000) c. Rent Revenue 1,600 (1,600) 1,600 Adjusted balances 6,600 82,000 55,400 26,600 d. Effect of Income Taxes (1,980) 1,980 (1,980) Correct amounts $ 4,620 $82,000 $57,380 $24,620

2016 by McGraw

Hill

All

reserved. No reproduction

without the prior written consent of McGraw-Hill

–12 Debit Credit

–13

E4–14 (continued)

Fundamentals of Financial Accounting, 5/e 4–29 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. E4–14 Req. 1 a. Salaries and Wages Expense (+E, SE) 310 Salaries and Wages Payable (+L)................. 310 b. Utilities Expense (+E, SE) 400 Accounts Payable (+L).................................. 400 c. Depreciation Expense (+E, SE)......................... 23,000 Accum. Depn–Equip. (+xA, A) 23,000 d. Interest Expense (+E, SE) 500 Interest Payable (+L)..................................... 500 e. Rent Revenue (–R, SE)..................................... 4,000 Unearned Revenue (+L) 4,000 f. Supplies Expense (+E, SE)............................... 600 Supplies ( A) 600 g. Income Tax Expense (+E, SE) 7,000 Income Taxes Payable (+L) .......................... 7,000 Req. 2 DYER, INC. Income Statement For the Year Ended December 31, 2015 Rent Revenue ($114,000 $4,000) $ 110,000 Expenses: Salaries and Wages ($28,500 + $310) $ 28,810 Depreciation Expense 23,000 Repairs and Maintenance Expense 13,000 Rent Expense 9,000 Utilities Expense ($4,000 + $400) 4,400 Travel Expense 3,000 Supplies Expense 600 Interest Expense 500 Income Tax Expense 7,000 Total Expenses 89,310 Net Income $ 20,690

Req. 3

Net income was $56,500 before adjustments and $20,690 after adjustments. This decrease of $35,810 is significant; adjusted net income is only 36.6% of the unadjusted net income ($20,690/$56,500).

distribution

Education

without the prior written consent of McGraw-Hill

E4–15 Req. 1 Assets = Liabilities + Stockholders’ Equity a. Prepaid Rent 1,200 = Rent Expense (+E) 1,200 b. Accumulated Depreciation –Equipment (+xA) 1,000 = Depreciation Expense (+E) 1,000 c. = Accounts Payable +9,000 Utilities Expense (+E) 9,000 d. = Income Tax Payable +390 Income Tax Expense (+E) 390 Req. 2 (a) Rent Expense (+E, SE) 1,200 Prepaid Rent ( A)........................................... 1,200 (b) Depreciation Expense (+E, SE).............................. 1,000 Accumulated Depreciation–Equipment (+xA, A) 1,000 (c) Utilities Expense (+E, SE) ...................................... 9,000 Accounts Payable (+L) 9,000 (d) Income Tax Expense (+E, SE) 390 Income Tax Payable (+L)................................ 390

E4–15 (continued)

by McGraw–Hill

distribution without the prior written consent of McGraw-Hill Education.

Req. 3 Prepaid Rent (A) Rent Expense (E) Bal. 2,400 1,200 a Bal. a 0 1,200 1,200 1,200 Accumulated Dep.–Equipment (xA) Depreciation Expense (E) 1,000 1,000 Bal. b Bal. b 0 1,000 2,000 1,000 Accounts Payable (L) Utilities Expense (E) 1,000 9,000 Bal. c Bal. c 12,500 9,000 10,000 21,500 NORTH STAR Adjusted Trial Balance As of December 31 Account Titles Debit Credit Cash 12,000 Accounts Receivable 6,000 Prepaid Rent 1,200 Equipment 21,000 Accumulated Depreciation–Equipment 2,000 Accounts Payable 10,000 Income Taxes Payable 390 Common Stock 24,800 Retained Earnings 2,100 Sales Revenue 50,000 Salaries and Wages Expense 25,000 Utilities Expense 21,500 Rent Expense 1,200 Depreciation Expense 1,000 Income Tax Expense 390 Totals $ 89,290 $ 89,290 Income Tax Payable (L) Income Tax Expense (E) 0 390 Bal. d Bal. d 0 390 390 390

E4–15 (continued)

of McGraw-Hill Education

consent

Req.

Preliminary net income = $50,000 – 25,000 – 12,500 = $12,500 (b) Adjusted net income = $50,000 – 25,000 – 21,500 – 1,200 – 1,000 – 390 = $910 Without adjustments, preliminary net income would have been overstated by $11,590 E4–16 Req. 1 (a) Insurance Expense (+E, SE) .................................. 5 Prepaid Insurance ( A) 5 (b) Depreciation Expense (+E, SE)............................... 4 Accumulated Depreciation–Equipment (+xA, A) 4 (c) Salaries and Wages Expense (+E, SE) 7 Salaries and Wages Payable (+L).................. 7 (d) Income Tax Expense (+E, SE)................................ 9 Income Taxes Payable (+L) 9 Req. 2 Cash (A) Accounts Receivable(A) Prepaid Insurance (A) Bal. 38 Bal. 9 Bal. 6 a 5 Bal. 38 Bal. 9 Bal. 1 Equipment (A) Accumulated Depreciation–Equipment (xA) Accounts Payable (L) Bal 80 Bal. 0 Bal. 9 b 4 Bal. 80 Bal. 4 Bal. 9 Salaries and Wages Payable (L) Income Tax Payable (L) Common Stock (SE) Bal. 0 Bal. 0 Bal. 76 c 7 d 9 Bal. 7 Bal. 9 Bal. 76 Retained Earnings (SE) Sales Revenue (R) Supplies Expenses (E) Bal. 4 Bal. 80 Bal. 26 Bal. 4 Bal. 80 Bal. 26

4 (a)

E4–16 (continued)

Req. 2 (continued)

Req. 3

Without adjusting journal entries, net income would have been overstated by $25 (because expenses for $5 + 4 + 7 + 9 = 25 would not have been recorded).

Education.

without the prior written consent of McGraw-Hill

Salaries and Wages Expense (E) Depreciation Expense (E) Insurance Expense (E) Bal. 10 Bal. 0 Bal. 0 c 7 b 4 a 5 Bal. 17 Bal. 4 Bal. 5 Income Tax Expense (E) Bal. 0 d 9 Bal. 9 MINT CLEANING INC. Adjusted Trial Balance December 31 (in thousands of dollars) Account Titles Debit Credit Cash $ 38 Accounts Receivable 9 Prepaid Insurance 1 Equipment 80 Accumulated Depreciation–Equipment $ 4 Accounts Payable 9 Salaries and Wages Payable 7 Income Tax Payable 9 Common Stock 76 Retained Earnings 4 Sales Revenue 80 Supplies Expenses 26 Salaries and Wages Expense 17 Depreciation Expense 4 Insurance Expense 5 Income Tax Expense 9 Totals $ 189 $189

Fundamentals of Financial Accounting, 5/e 4–34 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education E4–17 MINT CLEANING INC. Income Statement For the Year Ended December 31 (in thousands of dollars) Sales Revenue $ 80 Supplies Expenses 26 Salaries and Wages Expense 17 Depreciation Expense 4 Insurance Expense 5 Income Tax Expense 9 Total Expenses 61 Net Income $ 19 MINT CLEANING INC. Statement of Retained Earnings For the Year Ended December 31 (in thousands of dollars) Beginning Balance, 1/1/2015 $ 4 Add: Net Income 19 Subtract: Dividends 0 Ending Balance, 12/31/2015 $ 23 MINT CLEANING INC. Balance Sheet At December 31 (in thousands of dollars) Assets Liabilities Current Assets Current Liabilities Cash $ 38 Accounts Payable $ 9 Accounts Receivable 9 Salaries and Wages Payable 7 Prepaid Insurance 1 Income Tax Payable 9 Total Current Assets 48 Total Current Liabilities 25 Equipment $80 Stockholders' Equity Accum. Depn–Equip. (4) Common Stock 76 Equipment, Net 76 Retained Earnings 23 Total Assets $ 124 Total Liabilities and Stockholders' Equity $ 124

Event a

(1) On January 22, 2015, MSM received $24,000 cash from customers for one–year subscriptions to the magazine for February 2015 – January 2016

Fundamentals of Financial Accounting, 5/e 4–35 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. E4–18 Sales Revenue ( R) 80 Supplies Expenses ( E) .................................. 26 Salaries and Wages Expense ( E) 17 Depreciation Expense ( E).............................. 4 Insurance Expense ( E) 5 Income Tax Expense ( E) ............................... 9 Retained Earnings (+SE)................................. 19 E4–19

Assets = Liabilities + Stockholders’ Equity Cash +24,000 Unearned Revenue +24,000 (3) Account Names Debit Credit Cash (+A) 24,000 Unearned Revenue (+R, +SE) 24,000 (4) Cash Unearned Revenue 24,000 24,000

(2)

E4–19 (continued)

Event b

(1) MSM received utilities services on account at a cost of $3,000.

Event c

(1) MSM provided $2,000 of subscriptions for which it had previously received payment.

E4–19 (continued)

written

of McGraw-Hill

without the prior

consent

Education

Liabilities

Stockholders’

Accounts Payable +3,000 Utilities Expense (+E) –3,000

Account Names Debit Credit Utilities Expense (+E, –SE) 3,000 Accounts Payable (+L) 3,000

Accounts Payable Utilities Expense 3,000 3,000

(2) Assets =

Equity

(3)

(4)

Liabilities

Stockholders’ Equity Unearned Revenue –2,000 Subscription Revenue (+R) +2,000 (3) Account Names Debit Credit Unearned Revenue (–L) 2,000 Subscription Revenue (+R, +SE) 2,000 (4) Unearned Revenue Subscription Revenue 2,000 2,000

(2) Assets =

Event d

(1) On March 31, 2015, MSM recorded an adjusting entry for the month’s depreciation of $10,000. (2)

Event

(1) On April 1, MSM paid $5,000 rent in advance of obtaining its benefits.

Education.

Hill

or distribution without the prior written consent of McGraw-Hill

Assets = Liabilities + Stockholders’ Equity Accumulated Depreciation Depreciation–Equipment (+xA) –10,000 Expense (+E) –10,000 (3) Account Names Debit Credit Depreciation Expense (+E, –SE) 10,000 Accumulated Depreciation–Equipment (+xA, –A) 10,000 (4) Accumulated Depreciation–Equipment Depreciation Expense 10,000 10,000

Assets = Liabilities + Stockholders’ Equity Cash –5,000 Prepaid Rent +5,000 (3) Account Names Debit Credit Prepaid Rent (+A) 5,000 Cash (–A) 5,000 (4) Cash Prepaid Rent 5,000 5,000

(2)

E4–19 (continued)

Event f

(1) On April 30, 2015, MSM billed customers for $10,000 of advertising services provided on account. (2)

Education

without the prior written consent of McGraw-Hill

Assets = Liabilities

Stockholders’

Accounts Service Receivable +10,000 Revenue (+R) +10,000 (3) Account Names Debit Credit Accounts Receivable (+A) 10,000 Service Revenue (+R, +SE) 10,000 (4) Accounts Receivable Service Revenue 10,000 10,000

Equity

ANSWERS TO COACHED PROBLEMS

No. The amount to be reported for Retained Earnings on the balance sheet would be the amount calculated for ending Retained Earnings on the statement of retained earnings. The $99,900 in the adjusted trial balance does not yet include the revenues and expenses for the year ended September 30, 2015.

Req.

ROLLCOM, INC. Adjusted Trial Balance At September 30, 2015 Account Titles Debit Credit Cash $ 80,300 Accounts Receivable 66,500 Supplies 35,200 Equipment 90,700 Accumulated Depreciation–Equipment $ 21,500 Accounts Payable 39,100 Notes Payable (long–term) 1,500 Common Stock 94,800 Retained Earnings 99,900 Sales Revenue 325,600 Rent Expense 164,200 Salaries and Wages Expenses 128,700 Office Expense 6,300 Income Tax Expense 10,500 Totals $ 582,400 $ 582,400

CP4–1

Req. 2 Sales Revenue ( R)..................................................... 325,600 Rent Expense ( E) 164,200 Salaries and Wages Expenses ( E) 128,700 Office Expense ( E) 6,300 Income Tax Expense ( E) ................................... 10,500 Retained Earnings (+SE) 15,900

CP4–1 (continued)

Req. 3

* Post–closing Retained Earnings = Unadjusted Balance + Effects of Closing Entry = $99,900+ $15,900 = $115,800

Hill

without the prior written consent of McGraw-Hill Education

September 30,

Account Titles Debit Credit Cash $ 80,300 Accounts Receivable 66,500 Supplies 35,200 Equipment 90,700 Accumulated Depreciation–Equipment $ 21,500 Accounts Payable 39,100 Notes Payable (long–term) 1,500 Common Stock 94,800 Retained Earnings* 115,800 Sales Revenue 0 Rent Expense 0 Salaries and Wages Expenses 0 Office Expense 0 Income Tax Expense 0 Totals $ 272,700 $ 272,700

ROLLCOM, INC. Post–closing Trial Balance At

2015

Fundamentals of Financial Accounting, 5/e 4–41 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. CP4–2 Req. 1 Assets = Liabilities + Stockholders’ Equity a. = Interest Payable +700 Interest Expense (+E) 700 b. = Unearned Revenue 3,200 Rent Revenue (+R) +3,200 c. Accounts Receivable +3,300 = Service Revenue (+R) +3,300 d. Prepaid Insurance 700 = Insurance Expense (+E) 700 e. = Salaries and Wages Payable +1,100 Salaries and Wages Expense (+E) 1,100 f. Accumulated Depreciation –Equipment (+xA) 1,000 = Depreciation Expense (+E) 1,000 g = Income Tax Payable +9,000* Income Tax Expense (+E) 9,000 * Income tax expense incurred but not paid: Income before income taxes 30,000 Income tax rate x 30% Income tax expense $ 9,000

÷ 6 months = $800 per month x 4 months. This entry reduces (debits) the liability for the amount earned and records the revenue.

entry records an asset for the amount due from customers and recognizes the revenue because it was earned in 2015

÷ 12 months = $350 per month x 2 months of coverage. This entry reduces the asset (Prepaid Insurance) because part of it has been used and only $3,500 represents future benefits (an asset) to the company.

increased (debited) because this expense was incurred in 2015. A liability (Salaries and Wages Payable) is credited because this amount is owed to the employees.

a. Interest Expense (+E, SE)…………………………. 700 Interest Payable (+L)………………………… 700 To accrue interest expense incurred but not paid. b Unearned Revenue ( L) 3,200 Rent Revenue (+R, +SE).................................. 3,200 $4,800

c Accounts Receivable (+A) 3,300 Service Revenue (+R,

3,300 This

d Insurance Expense (+E, SE) 700 Prepaid Insurance ( A).................................... 700 $4,200

e. Salaries and Wages Expense (+E, SE).................... 1,100 Salaries and Wages Payable (+L) 1,100 Salaries and Wages Expense

f. Depreciation Expense (+E, SE)................................. 1,000 Accumulated Depreciation–Equipment (+xA, A) 1,000 To record depreciation for the truck for the year (amount is given). g Income Tax Expense (+E, SE) 9,000 Income Tax Payable (+L).................................... 9,000 To accrue income tax expense incurred but not paid: Income before income taxes 30,000 Income tax rate x 30% Income tax expense $ 9,000

CP4–2 (continued) Req. 2

+SE)..............................

Fundamentals of Financial Accounting, 5/e 4–43 © 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. CP4–3 Assets Liabilities Stockholders’ Equity a. NE Interest Payable+700 Interest Expense (+E) 700 b NE Unearned Revenue –3,200 Rent Revenue (+R) +3,200 c Accounts Receivable +3,300 NE Service Revenue (+R) +3,300 d Prepaid Insurance –700 NE Insurance Expense (+E) –700 e NE Salaries and Wages Payable +1,100 Salaries and Wages Expense (+E) –1,100 f Acc. Depn.–Equip. (+xA) –1,000 NE Depreciation Expense (+E) –1,000 g NE Income Tax Payable +9,000 Income Tax Expense (+E) –9,000 CP4–4 Req. 1 GOLF ACADEMY, INC. Unadjusted Income Statement For the Year Ended December 31, 2015 Service Revenue $ 51,500 Salaries and Wages Expense 36,100 Supplies Expense 2,400 Interest Expense 0 Income Tax Expense 0 Total Expenses 38,500 Net Income $ 13,000

CP4–4 (continued)

Req. 2

The pairs of accounts that require adjustment include:

Adj. Explanation

(1) Adjust to supplies count ($600 - $200 = $400 used up).

(2) $3,000 was earned so that amount should be moved into Service Revenue, leaving $500 unearned

(3) Owe employees $100/ day for two days of work ($200 = $100 x 2).

(4) Interest owed on note payable (given).

(5) Adjusted income before tax x Tax rate = ($54,500 – 36,300 – 2,800 – 100) x 30% = $4,590.

without the prior written consent of McGraw-Hill Education

Adj. Balance sheet account Related income statement account Amount (1) Supplies Supplies Expense -/+ $ 400 (2) Unearned Revenue Service Revenue -/+ 3,000 (3) Salaries and Wages Payable Salaries and Wages Expense +/+ 200 (4) Interest Payable Interest Expense +/+ 100 (5) Income Tax Payable Income Tax Expense +/+ 4,590

CP4–4 (continued)

The adjustments in requirement 3 caused Net Income to decrease from $13,000 to $10,710, which is a difference of $2,290.

Education.

without the prior written consent of McGraw-Hill

Req 3 a) Supplies Expense (+E, –SE) 400 Supplies (–A) 400 b) Unearned Revenue (–L) 3,000 Service Revenue (+R, +SE) 3,000 c) Salaries and Wages Expense (+E, –SE) 200 Salaries and Wages Payable (+L) 200 d) Interest Expense (+E, –SE) 100 Interest Payable (+L) 100 e) Income Tax Expense (+E, –SE) 4,590 Income Tax Payable (+L) 4,590 Req. 4 GOLF ACADEMY, INC. Income Statement For the Year Ended December 31, 2015 Service Revenue $ 54,500 Salaries and Wages Expense 36,300 Supplies Expense 2,800 Interest Expense 100 Income Tax Expense 4,590 Total Expenses 43,790 Net Income $ 10,710