Professional Documents
Culture Documents
The cash basis of accounting reports revenues when cash is received while the
accrual basis reports revenues when they are earned. The cash basis reports
expenses when cash is paid while the accrual basis reports expenses when they are
incurred (and matched with revenues they generated).
2.
3.
Businesses that have major seasonal variations in sales are most likely to select the
natural business year as the fiscal year.
4.
5.
6.
7.
8.
An accrued revenue is revenue that is earned but is not yet received in cash (and/or
other assets) and the customer has not been billed prior to the end of the period.
Therefore, end-of-period adjustments are made to record accrued revenue.
Examples are interest income that has been earned but not collected and revenues
from services performed that are neither collected nor billed.
9.
If prepaid expenses are initially recorded with debits to expense accounts, then the
prepaid expenses asset accounts are debited in the adjusting entries.
10. For Krispy Kreme, the two accounts of Prepaid Expenses and Property and
Equipment require adjusting entries. The expense account(s) related to the prepaid
account and the depreciation expense account would be understated on the income
statement if Krispy Kreme fails to adjust these two asset accounts. If the adjusting
entries are not made, net income would be overstated. Note: Students might also
correctly identify accounts receivable, deferred income taxes and intangible assets
as needing adjustment.
McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3
119
QUICK STUDIES
Quick Study 3-1 (10 minutes)
a.
b.
c.
d.
e.
UR
PE
AE
AR
PE
Unearned revenue
Prepaid expenses (Depreciation)
Accrued expenses
Accrued revenue
Prepaid expenses
1,800
1,800
b. Supplies Expense.........................................................
Supplies..................................................................
2,700
2,700
5,000
5,000
15,000
15,000
2,400
2,400
400
400
Financial Statement
Balance Sheet
Income Statement
b.
Debit
Credit
Depreciation Expense
Accumulated Depreciation
Income Statement
Balance Sheet
c.
Debit
Credit
Wages Expense
Wages Payable
Income Statement
Balance Sheet
d.
Debit
Credit
Accounts Receivable
Revenue Earned
Balance Sheet
Income Statement
e.
Debit
Credit
Insurance Expense
Prepaid Insurance
Income Statement
Balance Sheet
a.
Debit
Credit
121
$1,600
1,000
$2,600
$1,600
$1,000
123
Interpretation: For every one dollar that Yang Company records as revenue,
it earns 9.7 cents in net income. Yangs 9.7% is markedly lower than
competitors average profit margin of 15%it must improve performance.
Quick Study 3-12A (5 minutes)
The answer is d.
EXERCISES
Exercise 3-1 (15 minutes)
1.
2.
3.
B.
E.
C.
4.
5.
6.
F
D
A.
10,000
10,000
b. Wages Expense..............................................................
Wages Payable...........................................................
9,000
9,000
c.
Depreciation ExpenseEquipment..............................
Accumulated DepreciationEquipment..................
19,127
19,127
5,242
5,242
e.
Insurance Expense........................................................
Prepaid Insurance*.....................................................
2,800
2,800
f.
Interest Receivable.......................................................
Interest Revenue.......................................................
750
750
g. Interest Expense...........................................................
Interest Payable........................................................
3,500
3,500
Prepaid Insurance*
5,000
?
End. Bal.
2,200
Beg. Bal.
Purch.
Used
End. Bal.
Office Supplies**
480
5,349
?
587
Used
125
Depreciation ExpenseEquipment..............................
Accumulated DepreciationEquipment..................
To record depreciation expense for the year.
16,000
b. Insurance Expense........................................................
Prepaid Insurance*.....................................................
To record insurance coverage that expired
($7,000 - $1,040).
5,960
c.
2,626
5,000
e.
Insurance Expense........................................................
Prepaid Insurance......................................................
To record insurance coverage that expired.
4,600
Wages Expense..............................................................
Wages Payable...........................................................
To record wages accrued but not yet paid.
4,000
f.
16,000
5,960
2,626
5,000
4,600
4,000
Notes:
Prepaid Insurance*
Bal. Bal.
7,000
?
End. Bal.
1,040
Used
Office Supplies**
Beg. Bal.
300
Purch.
2,680
?
End. Bal.
354
Used
Wages Expense................................................
Wages Payable..............................................
500
500
b. Payday entry:
2006
Jan. 4
Wages Expense................................................
Wages Payable..................................................
Cash...............................................................
1,500
500
2,000
$1,650
$5,700
$10,080
$1,375
Proof:
(a)
(b)
(c)
(d)
$ 300
$1,600
$ 1,360
$1,375
2,100
5,400
10,080
6,000
2,400
7,000
11,440
7,375
(750)
$1,650
(5,700)
$1,300
(1,840)
$ 9,600
(800)
$6,575
127
2,500
2,500
2,500
2,500
b.
Apr. 30 Interest Expense.................................................
Interest Payable...........................................
2,080
2,080
2,080
4,160
6,240
c.
Apr. 30 Salaries Expense.................................................
Salaries Payable..........................................
3,600
3,600
May 3
Salaries Payable..................................................
Salaries Expense.................................................
Cash..............................................................
3,600
5,400
9,000
6,300
2004.........
5,400
900
2005.........
5,400
2006.........
900
Total........
$16,200
$16,200
EXPLANATIONS:
*
Accrual asset balance equals months left in the policy x $450 per month (monthly
cost is computed as $450, from $16,200 divided by 36 months).
Months Left Balance
12/31/2003...
26
$11,700
12/31/2004...
14
6,300
12/31/2005...
2
900
12/31/2006...
0
0
**
Accrual insurance expense equals months covered in the year x $450 per month.
Months Covered
Expense
2003......
10
$ 4,500
2004......
12
5,400
2005......
12
5,400
2006......
2
900
$16,200
129
1,800
4,200
1,500
1,750
2,450
1,300
480
31 Utilities Expense......................................................
Utilities Payable...............................................
To record incurred and unpaid utility costs.
70
480
70
$5,390
$87,644
$93,385
$55,234
$70,158
/
/
/
/
/
$44,830
$398,954
$257,082
$1,458,999
$435,925
= 12.0%
= 22.0%
= 36.3%
= 3.8%
= 16.1%
3,000
3,000
Purchased supplies.
b.
Dec. 2
Insurance Expense..........................................
Cash..........................................................
1,440
1,440
c.
Dec.15 Cash.................................................................. 12,000
Remodeling Fees Earned........................
12,000
d.
Dec.28 Cash..................................................................
Remodeling Fees Earned........................
3,600
3,600
e.
Dec.31 Supplies...........................................................
Supplies Expense....................................
1,920
1,920
f.
Dec.31 Prepaid Insurance ($1,440 - $240).................
Insurance Expense..................................
1,200
1,200
g.
Dec.31 Remodeling Fees Earned ..............................
Unearned Remodeling Fees...................
9,300
9,300
131
2,000
Cash.......................................................................
Unearned Fees..............................................
8,400
8,400
12
Unearned Fees......................................................
Fees Earned...................................................
2,000
2,000
18
Cash.......................................................................
Unearned Fees..............................................
7,500
7,500
27
Unearned Fees......................................................
Fees Earned...................................................
8,400
8,400
31
b.
Initial credit recorded in the Fees Earned account:
July 1 Cash.......................................................................
Fees Earned...................................................
2,000
2,000
Cash.......................................................................
Fees Earned...................................................
8,400
8,400
12
18
No entry required.
Cash.......................................................................
Fees Earned...................................................
7,500
7,500
27
31
No entry required.
Fees Earned..........................................................
Unearned Fees..............................................
7,500
7,500
133
PROBLEM SET A
Problem 3-1A (15 minutes)
1.
2.
3.
G.
E.
I.
4.
5.
6.
B.
G.
C.
7.
8.
9.
H.
E.
F.
10.
11.
12.
D.
A.
D.
12,760
12,760
31
Adjustment (b)
Insurance Expense..................................
Prepaid Insurance............................
12,312
12,312
31
Months Active
in 2005
12
9
5
Adjustment (c)
Salaries Expense (2 days x $2,100)........
Salaries Payable...............................
2005 Cost
$ 7,920
3,267
1,125
$12,312
4,200
4,200
31
Adjustment (d)
Depreciation ExpenseBuilding...........
Accumulated DepreciationBuilding
27,000
27,000
2,400
2,400
Adjustment (f)
31
Unearned Rent.........................................
Rent Earned......................................
4,350
4,350
Part 2
Cash Payment for (c)
Jan. 6
Salaries Payable......................................
Salaries Expense*....................................
Cash...................................................
4,200
6,300
10,500
15
4,800
2,400
2,400
135
Cash
26,000
Unadj. Bal.
Accumulated Depreciation
Equipment
Unadj. Bal.
16,000
(c)
12,000
Adj. Bal.
28,000
Accounts Receivable
Unadj. Bal.
0
(f)
7,500
Adj. Bal.
7,500
Unadj. Bal.
Adj. Bal.
Teaching Supplies
10,000
(b)
2,600
Equipment
70,000
Accounts Payable
Bal.
Salaries Payable
Unadj. Bal.
Prepaid Insurance
Unadj. Bal.
15,000
(a)
Adj. Bal.
12,000
(g)
Adj. Bal.
Adj. Bal.
Prepaid Rent
2,000
(h)
0
11,000
4,400
Adj. Bal.
6,600
2,000
T. Watson, Capital
Bal.
Bal.
0
400
400
3,000
Unadj. Bal.
Unadj. Bal.
36,000
7,400
Professional Library
30,000
Bal.
63,600
T. Watson, Withdrawals
40,000
Accumulated Depreciation
Professional Library
Unadj. Bal.
9,000
(d)
6,000
Adj. Bal.
15,000
(f)
Adj. Bal.
102,000
7,500
109,500
(e)
Adj. Bal.
38,000
4,400
42,400
Unadj. Bal.
(h)
Adj. Bal.
Rent Expense
22,000
2,000
24,000
Depreciation Expense
Professional Library
Unadj. Bal.
0
(d)
6,000
Adj. Bal.
6,000
Bal.
Advertising Expense
7,000
Depreciation Expense
Equipment
Unadj. Bal.
0
(c)
12,000
Adj. Bal.
12,000
Bal.
Utilities Expense
5,600
Unadj. Bal.
(g)
Adj. Bal.
Unadj. Bal.
(a)
Adj. Bal.
Salaries Expense
48,000
400
48,400
Insurance Expense
0
3,000
3,000
137
Part 2
Dec. 31
Adjustment (a)
Insurance Expense.........................................
Prepaid Insurance.....................................
3,000
3,000
Adjustment (b)
31 Teaching Supplies Expense..........................
Teaching Supplies....................................
7,400
7,400
Adjustment (c)
31 Depreciation ExpenseEquipment..............
12,000
12,000
Accumulated DepreciationEquipment......
To record equipment depreciation.
Adjustment (d)
31 Depreciation ExpenseProfess. Library.....
Accumul. DepreciationProfess. Library...
6,000
6,000
Adjustment (e)
31 Unearned Training Fees.................................
Training Fees Earned...............................
4,400
4,400
Adjustment (f)
31 Accounts Receivable......................................
Tuition Fees Earned.................................
7,500
7,500
Adjustment (g)
31 Salaries Expense............................................
Salaries Payable.......................................
400
400
Adjustment (h)
31 Rent Expense..................................................
Prepaid Rent..............................................
2,000
2,000
Debit
$ 26,000
7,500
2,600
12,000
0
30,000
Credit
$ 15,000
70,000
28,000
36,000
400
6,600
63,600
40,000
109,500
42,400
6,000
12,000
48,400
3,000
24,000
7,400
7,000
5,600
$301,500
_______
$301,500
139
$151,900
113,400
$ 38,500
$ 63,600
38,500
102,100
40,000
$ 62,100
$ 26,000
7,500
2,600
12,000
15,000
42,000
$105,100
$ 36,000
400
6,600
43,000
62,100
$105,100
141
Unadjusted
Trial Balance
Adjusted
Trial Balance
Adjustments
Cash............................... $ 27,000
Accounts receivable..........
12,000
Office supplies..................
18,000
Prepaid insurance.............
7,320
92,000
Office equipment...............
(a
)
Accumulated depreciation
Office equipment..........
$ 12,000
Accounts payable.............
9,300
10,460
Interest payable.................
Salaries payable................
Unearned consulting fees...
16,000 (h)
44,000
28,420
71,000
1,400
2,440
4,880
92,000
(d
)
(e)
(f)
(g
)
6,000
$ 18,000
900
800
6,600
10,200
800
6,600
14,300
44,000
28,420
(a)
(h
)
10,460
1,700
6,000
6,000
(g)
6,600
800
2,440
77,600
2,200
2,440
13,200
(b)
13,800
_______
Totals.............................. $265,720
$265,720
168,160
(d)
(f)
(c
)
3,000
1,700
156,000
Insurance expense............
Rent expense...................
15,000
10,000
Depreciation expense
Office equipment.............
Interest expense................
(b
)
(c)
10,000
Consulting fees
earned...........................
Salaries expense...............
$ 27,000
22,460
(e
)
15,000
90
0
$43,900
13,200
15,000
14,700
_______
$43,90 $290,480
$290,480
______
(a)
(b)
Adjustment description:
Earned but uncollected revenues.
Cost of consumed office supplies.
(c)
(d)
(e)
(f)
(g)
(h)
143
Problem 3-4A
Part 2
JJW COMPANY
Income Statement
For Year Ended July 31, 2005
Revenues
Consulting fees earned ................................
Expenses
Depreciation expenseOffice equipment. .
Salaries expense ..........................................
Interest expense ...........................................
Insurance expense .......................................
Rent expense ................................................
Office supplies expense ..............................
Advertising expense ....................................
Total expenses..............................................
Net income.......................................................
$168,160
$ 6,000
77,600
2,200
2,440
13,200
15,000
14,700
131,140
$ 37,020
JJW COMPANY
Statement of Owners Equity
For Year Ended July 31, 2005
J. Winner, Capital, July 31, 2004....................
Plus: Net income.............................................
Less: Owner withdrawals...............................
J. Winner, Capital, July 31, 2005....................
$28,420
37,020
65,440
10,000
$55,440
$ 27,000
22,460
3,000
4,880
74,000
$131,340
Liabilities
Accounts payable......................................................
Interest payable..........................................................
Salaries payable.........................................................
Unearned consulting fees.........................................
Long-term notes payable..........................................
Total liabilities............................................................
$ 10,200
800
6,600
14,300
44,000
75,900
Equity
J. Winner, Capital.......................................................
Total liabilities and equity.........................................
55,440
$131,340
145
$436,000
356,800
$ 79,200
CALLAHAY COMPANY
Statement of Owner's Equity
For Year Ended December 31, 2005
J. Callahay, Capital, December 31, 2004. .
Plus: Net income.......................................
Less: Withdrawals by owner....................
J. Callahay, Capital, December 31, 2005. .
$247,800
79,200
327,000
38,000
$289,000
$ 22,000
44,000
10,000
160,000
8,000
$160,000
(42,000)
130,000
(10,000)
118,000
120,000
70,000
$552,000
Liabilities
Accounts payable.................................................
Interest payable.....................................................
Salaries payable....................................................
Unearned fees.......................................................
Long-term notes payable.....................................
Total liabilities.......................................................
$ 88,000
12,000
11,000
22,000
130,000
263,000
Equity
J. Callahay, Capital...............................................
Total liabilities and equity....................................
289,000
$552,000
Part 2
Profit margin = $79,200 / $436,000 = 18.2%
147
1,500
1,500
1 Prepaid Insurance...........................................
Cash..........................................................
2,160
2,160
30 Cash..................................................................
Unearned Service Fees...........................
3,300
3,300
2,700
2,700
15 Cash..................................................................
Unearned Service Fees...........................
7,650
7,650
31 Advertising Expense.......................................
Prepaid Advertising ................................
600
600
31 Insurance Expense..........................................
Prepaid Insurance....................................
360
360
2,100
2,100
900
900
3,000
3,000
Nov. 1
Advertising Expense.......................................
Cash..........................................................
1,500
1,500
Insurance Expense..........................................
Cash..........................................................
2,160
2,160
30
Cash..................................................................
Service Fees Earned................................
3,300
3,300
Dec. 1
2,700
2,700
15
Cash..................................................................
Service Fees Earned................................
7,650
7,650
31
Prepaid Advertising........................................
Advertising Expense...............................
900
900
31
Prepaid Insurance...........................................
Insurance Expense..................................
1,800
1,800
31
1,200
1,200
31
1,800
1,800
31
4,650
4,650
149
$ 600
900
360
1,800
900
1,800
5,100
5,850
PROBLEM SET B
Problem 3-1B (15 minutes)
1.
2.
3.
E.
H.
G.
4.
5.
6.
C.
D.
B.
7.
8.
9.
F.
I.
F.
10.
11.
12.
I.
A.
B.
3,450
3,450
Adjustment (b)
31 Insurance Expense.................................................
Prepaid Insurance...........................................
2,365
2,365
Months Active
in 2005
12
7
3
2005
Expense
$1,500
700
165
$2,365
Adjustment (c)
31 Salaries Expense....................................................
Salaries Payable..............................................
800
800
Adjustment (d)
31 Depreciation ExpenseBuilding..........................
Accumulated DepreciationBuilding...........
5,400
5,400
151
600
600
Adjustment (f)
31 Unearned Rent........................................................
Rent Earned.....................................................
1,050
1,050
Part 2
Cash Payment for (c)
Nov. 7
Salaries Payable.....................................................
Salaries Expense*...................................................
Cash..................................................................
800
3,200
4,000
Cash.........................................................................
Rent Receivable...............................................
Rent Earned.....................................................
1,200
600
600
Bal.
Accounts Payable
Bal.
Accounts Receivable
0
(f)
5,500
Adj. Bal.
5,500
Salaries Payable
Unadj. Bal.
Unadj. Bal.
Adj. Bal.
Unadj. Bal.
Adj. Bal.
Unadj. Bal.
Adj. Bal.
Bal.
Teaching Supplies
60,000
(b)
2,500
Prepaid Insurance
18,000
(a)
11,600
Prepaid Rent
2,600
(h)
0
12,200
Unadj. Bal.
(g)
Adj. Bal.
0
540
540
(e)
Unadj. Bal.
27,600
Adj. Bal.
18,400
9,200
M. Alcorn, Capital
Bal.
68,500
6,400
Bal.
M. Alcorn, Withdrawals
20,000
2,600
Professional Library
10,000
Accumulated Depreciation
Professional Library
Unadj. Bal.
1,500
(d)
2,000
Adj. Bal.
3,500
Bal.
Equipment
30,000
Accumulated Depreciation
Equipment
Unadj. Bal. 16,000
(c)
4,000
Adj. Bal.
20,000
153
(f)
Adj. Bal.
105,000
5,500
110,500
Bal.
Advertising Expense
18,000
62,000
9,200
71,200
Bal.
Utilities Expense
12,400
(e)
Adj. Bal.
Depreciation Expense
Professional Library
Unadj. Bal.
0
(d)
2,000
Adj. Bal.
2,000
Depreciation Expense
Equipment
Unadj. Bal.
0
(c)
4,000
Adj. Bal.
4,000
Salaries Expense
Unadj. Bal.
43,200
(g)
540
Adj. Bal.
43,740
Insurance Expense
Unadj. Bal.
0
(a)
6,400
Adj. Bal.
6,400
Unadj. Bal.
(h)
Adj. Bal.
Rent Expense
28,600
2,600
31,200
6,400
6,400
Adjustment (b)
31 Teaching Supplies Expense................................. 57,500
Teaching Supplies.........................................
57,500
Adjustment (c)
31 Depreciation ExpenseEquipment.....................
Accumulated DepreciationEquipment.....
4,000
4,000
Adjustment (d)
31 Depreciation ExpenseProfessional Library....
Accumulated Depreciation
Professional Library.............................
2,000
2,000
Adjustment (e)
31 Unearned Training Fees........................................
Training Fees Earned.....................................
9,200
9,200
Adjustment (f)
31 Accounts Receivable............................................
Tuition Fees Earned.......................................
5,500
5,500
Adjustment (g)
31 Salaries Expense...................................................
Salaries Payable.............................................
540
540
Adjustment (h)
31 Rent Expense ........................................................
2,600
155
Prepaid Rent..............................................................
2,600
Debit
$ 50,000
5,500
2,500
11,600
0
10,000
Credit
$ 3,500
30,000
20,000
12,200
540
18,400
68,500
20,000
110,500
71,200
2,000
4,000
43,740
6,400
31,200
57,500
18,000
12,400
$304,840
_______
$304,840
157
$181,700
175,240
$ 6,460
ALCORN INSTITUTE
Statement of Owners Equity
For Year Ended December 31, 2005
M. Alcorn, Capital, December 31, 2004..............
Plus: Net income..................................................
Less: Owner withdrawals....................................
M. Alcorn, Capital, December 31, 2005..............
$68,500
6,460
74,960
20,000
$54,960
$50,000
5,500
2,500
11,600
6,500
10,000
$86,100
$12,200
540
18,400
31,140
54,960
$86,100
159
Account
Cash............................... $ 48,000
Accounts receivable......... 70,000
Office supplies................. 30,000
Prepaid insurance............ 13,200
Office equipment.............. 150,000
Adjusted
Trial Balance
Adjustments
(a)
6,660
(b)
(c)
23,000
4,600
$ 48,000
76,660
7,000
8,600
150,000
Accumulated depreciation
Office equipment................
$ 30,000
(d)
10,000
$ 40,000
Accounts payable............
Interest payable................
Salaries payable...............
Unearned consulting fees.
Long-term notes payable. .
D. Chen, Capital...............
D. Chen, Withdrawals.......
Consulting fees earned....
36,000
(e)
(f)
(g)
6,000
1,600
11,200
42,000
1,600
11,200
17,800
80,000
70,200
(a)
(h)
6,660
12,200
30,000 (h)
80,000
70,200
10,000
10,000
264,000
Depreciation expense
Office equipment............
Salaries expense.............. 115,600
Interest expense...............
6,400
Insurance expense..........
Rent expense.................. 24,000
Office supplies expense....
Advertising expense......... 43,000 _______
Totals.............................. $510,200 $510,200
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
12,200
282,860
(d)
10,000
10,000
(g)
(f)
(c)
11,200
1,600
4,600
(b)
(e)
23,000
6 ,000
$75,260
126,800
8,000
4,600
24,000
23,000
______
49,000 _______
$75,260 $545,660 $545,660
Adjustment Descriptions:
Earned but uncollected revenues.
Cost of consumed office supplies.
Cost of expired insurance coverage.
Depreciation expense on office equipment.
Incurred but unpaid advertising expense.
Incurred but unpaid interest expense.
Incurred but unpaid salaries expense.
Earned revenues previously received in advance.
Problem 3-4B
Part 2
DAXU CONSULTING COMPANY
Income Statement
For Year Ended December 31, 2005
Revenues
Consulting fees earned .....................................
Expenses
Depreciation expenseOffice equipment....... $ 10,000
Salaries expense ............................................... 126,800
Interest expense ................................................
8,000
Insurance expense ............................................
4,600
Rent expense ..................................................... 24,000
Office supplies expense ................................... 23,000
Advertising expense ......................................... 49,000
Total expenses...................................................
Net income............................................................
$282,860
245,400
$ 37,460
$ 70,200
37,460
107,660
10,000
$ 97,660
161
$ 42,000
1,600
11,200
17,800
80,000
152,600
Equity
D. Chen, Capital..........................................................
Total liabilities and equity..........................................
97,660
$250,260
$604,000
543,000
$ 61,000
LIGHTNING COURIER
Statement of Owner's Equity
For Year Ended December 31, 2005
J. Hallam, Capital, December 31, 2004..........
Plus : Net income...........................................
Less: Withdrawals by owner.........................
J. Hallam, Capital, December 31, 2005..........
$115,000
61,000
176,000
40,000
$136,000
163
$124,000
22,000
30,000
110,000
190,000
476,000
Equity
J. Hallam, Capital................................................
Total liabilities and equity..................................
136,000
$612,000
Part 2
Profit margin = $61,000 / $604,000 = 10.1%
Apr. 1
3,450
2,700
30
Cash....................................................................... 7,500
Unearned Service Fees................................
7,500
May 1
3,450
23
9,450
31
1,500
31
Insurance Expense...............................................
Prepaid Insurance.........................................
450
450
31
3,900
31
2,400
31
4,500
165
Apr. 1
3,450
3,450
Insurance Expense.............................................
Cash..............................................................
2,700
2,700
30
Cash.....................................................................
Service Fees Earned...................................
7,500
7,500
May 1
Advertising Expense...........................................
Cash..............................................................
3,450
3,450
23
Cash.....................................................................
Service Fees Earned...................................
9,450
9,450
31
1,950
1,950
31
2,250
2,250
31
3,600
3,600
31
Prepaid Advertising............................................
Advertising Expense...................................
1,050
1,050
31
4,950
4,950
167
Serial Problem
Serial Problem, Success Systems (120 minutes) Part 1
Journal entries:
Dec. 2
Advertising Expense..................................655
Cash.....................................................101
1,025
1,025
Repairs ExpenseComputer....................684
Cash.....................................................101
500
500
Cash.............................................................101
Accounts Receivable..........................106
3,950
3,950
10
Wages Expense..........................................623
Cash.....................................................101
750
750
14
Cash.............................................................101
Unearned Computer Services Revenue...236
1,500
1,500
15
Computer Supplies....................................126
Accounts Payable...............................201
1,100
1,100
16
20
5,625
5,625
28
Cash.............................................................101
Accounts Receivable..........................106
3,000
3,000
29
Mileage Expense........................................676
Cash.....................................................101
192
192
31
K. Breeze, Withdrawals..............................302
Cash.....................................................101
1,500
1,500
3,065
3,065
555
555
500
500
1,250
1,250
400
400
$8,000
5 years
$1,600
$400
2,475
2,475
169
Nov.
Dec.
Explanation
1
2
5
8
15
17
20
22
31
31
1
2
5
18
22
28
30
30
2
3
4
10
14
20
28
29
31
PR
Debit
55,000
4,800
1,400
4,633
2,208
3,950
1,500
5,625
3,000
Nov.
Dec.
Date
Oct.
Nov.
Dec.
Date
Oct.
Dec.
Date
Oct.
Dec.
Date
Oct.
Date
Dec.
6
12
15
22
28
8
18
24
4
28
3
5
15
31
5
31
2
31
Accounts Receivable
Explanation
PR
Debit
4,800
1,400
5,208
5,668
3,950
Computer Supplies
Explanation
PR
Debit
1,420
1,125
1,100
Prepaid Insurance
Explanation
PR
Debit
2,220
Prepaid Rent
Explanation
PR
Debit
3,300
Office Equipment
Explanation
PR
Debit
8,000
171
Computer Equipment
Explanation
PR
Debit
20,000
Date
Oct.
Dec.
Date
Dec.
Date
Dec.
Date
Oct.
Date
Oct.
Nov.
Dec.
Accounts Payable
Explanation
PR
Debit
3
8
15
1,420
Wages Payable
Explanation
PR
Debit
31
Unearned Computer Services Revenue
Explanation
PR
Debit
14
K. Breeze, Capital
Explanation
PR
Debit
31
30
31
K. Breeze, Withdrawals
Explanation
PR
Debit
3,600
2,000
1,500
Date
Dec.
31
Date
Dec.
Wages Expense
Explanation
PR
31
30
10
31
Debit
875
1,750
750
500
31
Insurance Expense
Explanation
PR
Debit
555
Rent Expense
Explanation
PR
Date
Oct.
Nov.
Dec.
Date
Dec.
Date
Dec.
31
Debit
2,475
173
Date
Oct.
Dec.
Date
Nov.
Dec.
Date
Nov.
Date
Oct.
Dec.
31
20
2
Advertising Expense
Explanation
PR
Debit
1,940
1,025
Mileage Expense
Explanation
PR
1
28
29
Debit
320
384
192
22
Miscellaneous Expenses
Explanation
PR
Debit
250
17
3
Repairs ExpenseComputer
Explanation
PR
Debit
805
500
Credit
400
1,250
1,100
500
1,500
83,000
31,284
_______
$119,034
175
$31,284
$ 400
1,250
3,875
555
2,475
3,065
2,965
896
250
1,305
17,036
$14,248
Part 5
SUCCESS SYSTEMS
Statement of Owners Equity
For Three Months Ended December 31, 2004
K. Breeze, Capital, October 1, 2004.................
Plus: Owner investment..........
Net income..............................................
Less: Owner withdrawals..................................
K. Breeze, Capital, December 31, 2004............
83,000
14,248
97,248
7,100
$90,148
$58,160
5,668
580
1,665
825
7,600
18,750
$93,248
Liabilities
Accounts payable...........................................................
Wages payable...............................................................
Unearned computer services revenue.........................
Total liabilities................................................................
$ 1,100
500
1,500
3,100
Equity
K. Breeze, Capital...........................................................
Total liabilities and equity.............................................
90,148
$93,248
177
Reporting in Action
BTN 3-1
Comparative Analysis
BTN 3-2
1. Krispy Kreme
Current year, profit margin = $33,478 / $491,549 = 6.8%
Prior year, profit margin = $26,378 / $394,354 = 6.7%
Tastykake
Current year, profit margin = $2,000 / $162,263 = 1.2%
Prior year, profit margin = $8,048 / $166,245 = 4.8%
2. Krispy Kreme is more successful on the basis of profit margin. In the
most current year, Krispy Kreme earned an average of 6.8 cents on the
dollar while Tastykake earned 1.2 cents on the dollar. For the prior
years, Krispy Kreme earned 6.7 cents on the dollar compared to 4.8
cents for Tastykake.
Ethics Challenge
BTN 3-3
1. GAAP requires that annual deprecation be accumulated in a contraasset account, called Accumulated Depreciation. While property, plant,
and equipment is often shown at its net value on the balance sheet (as
in Krispy Kremes balance sheet in Appendix A) the cost of property,
plant, and equipment along with its related accumulated depreciation
are reported in the footnotes. Thus, Bergez is correct with her journal
entry recommendation.
2. One strength of Welchs method would be the ease of preparing the
balance sheet. The property, plant, and equipment balance in the
adjusted trial balance would be directly transferable to the balance sheet
when the preparer desired to show the amount at net. Welchs approach
carries weaknesses in that financial statement users would not be able
to ascertain the original cost of the equipment or be able to know how
much of the original cost had been allocated to depreciation to date.
3. While both approaches would lead to the same total assets on the
balance sheet, GAAP requires Bergezs approach. As a professional,
Bergez is required to uphold the standards of her profession and thus
the decision is an ethical one for her.
McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3
179
Communicating in Practice
BTN 3-4
BTN 3-5
Teamwork in Action
BTN 3-6
Type
Before Adjusting
Balance Sheet
Income Statement
Account
Account
Prepaid expense
Asset overstated
Expense understated
Unearned revenues
Liability overstated
Revenue understated
Accrued Expenses
Accrued Revenues
Asset understated
Revenue understated
Adjusting Entry
Dr. Expense
Cr. Asset*
Dr. Liability
Cr. Revenue
Dr. Expense
Cr. Liability
Dr. Asset
Cr. Revenue
* For depreciation, one would Credit the Accumulated Depreciation contra account.
181
BTN 3-7
1. Herz personally favors a move toward what is known as principlesbased accounting. This type of accounting would require a vast
simplification of accounting standards where professionals would be
asked to comply with broad goals and objectives. Such accounting
would be a move away from a lengthy list of rules and exceptions.
2. Herz believes that breaking the rules is at the core of most of the
scandals. When a person or company just outright violates standards
and commits fraud, it is hard to say the standard is wrong. Its like when
someone robs a bank: You cant really say that the law against bank
robbing was part of the problem.
3. A principles-based system is one where the accounting standard
simply lays out objectives of good reporting in an area. It may include
some rules, based on the objectives, but it does not try to answer every
question or provide a rule for every situation. So a typical standard
would be more like 10-to-12 pages in length rather than 200 pages.
4. Principles-based accounting requires the exercise of good judgment
by both companies and auditors. Those who dont like the principlesbased approach say, I dont trust people to do that. They think people
need rules to follow or they will try to find a way to make an objective fit
almost any situation.
Entrepreneurial Decision
BTN 3-8
3.
BTN 3-9
There is no formal solution to this field activity. The instructor may wish to
tally students findings to see what companies were selected, who
responded, what was the response time, etc. The instructor can also
periodically ask students to bring in examples from their selected
companies at certain times, and then compare and contrast them with the
examples in the book.
183
Global Decision
BTN 3-10
d. Office equipment
b. Manufacturing equipment
e. Computer equipment
c. Vehicles
Land, construction-in-progress, and machinery-in-transit are not
depreciated.
3. Grupo Bimbo profit margin (in thousands of pesos):
2002 profit margin = 1,002,664 / 41,373,269 = 2.4%
2001 profit margin = 1,682,025 / 34,968,097 = 4.8%