Chapter 03 - Reporting Operating Results on the Income Statement

Chapter 3
Reporting Operating Results on the Income
Statement
ANSWERS TO MINI-EXERCISES
M3-9
Amount of Revenue Earned in February
a.

$15,000

b. No revenue earned in February; gift card

recorded as unearned revenue until used
by customer.
c. No revenue earned in February; cash
collections in February related to revenues
earned in January.
d. No revenue earned in February; the
revenues will be earned when the golf
lessons are provided. Record as unearned
revenue.
e. $125
M3-10
Amount of Expense Incurred in February
f. $4,750
g. Not an expense incurred in February; cash
payments in February relate to expenses in
January.
h. $800

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Chapter 03 - Reporting Operating Results on the Income Statement

M3-11
a.
b.
c.
d.
e.

dr Cash (+A).........................................................................
cr Lesson Revenue (+R, +SE)........................................

15,000

dr Cash (+A).........................................................................
cr Unearned Revenue (+L).............................................

150

dr Cash (+A).........................................................................
cr Accounts Receivable (A)............................................

4,000

dr Cash (+A).........................................................................
cr Unearned Revenue (+L).............................................

2,250

dr Accounts Receivable (+A)................................................

cr Lesson Revenue (+R, +SE)........................................

125

15,000
150
4,000
2,250
125

M3-12
f.

g.
h.

dr Wages Expense (+E, SE)...............................................

cr Cash (A).....................................................................

4,750

dr Accounts Payable (L).....................................................

cr Cash (A).....................................................................

1,750

dr Utilities Expense (+E, SE)..............................................

cr Accounts Payable (+L)................................................

800

3-2

4,750
1,750
800

Chapter 03 - Reporting Operating Results on the Income Statement

M3-16
a.
dr Cash (+A)
cr Note Payable (+L)

150,000
150,000

b.
dr Accounts Receivable (+A)
cr Repair/Service Revenue (+R, +SE)

2,000
2,000

c.
dr Rent Expense (+E, -SE)
cr Cash (-A)

600

dr Cash (+A)
cr Repair/Service Revenue (+R, +SE)

450

dr Advertising Expense (+E, -SE)

cr Accounts Payable (+L)

400

600

d.
450

e.
400

M3-18
Assets

Liabilities

Stockholders Equity

f.

4,750

NE

Wages Expense (+E) 4,750

g.

1,750

1,750

NE

h.

NE

+800

Utilities Expense (+E)

3-3

800

Chapter 03 - Reporting Operating Results on the Income Statement

ANSWERS TO EXERCISES
E3-11
Req. 1
Included with Req. 3 on the next page.
Req. 2

a.

b.

c.

d.

e.

f.

dr Cash (+A) .........................................................................

cr Unearned Revenue (+L) .........................................

500

dr Cash (+A) .........................................................................

cr Rent Revenue (+R, +SE) .......................................

300

dr Cash (+A) .........................................................................

cr Piano Rebuilding Revenue (+R, +SE) ....................

14,500

dr Accounts Receivable (+A) ................................................

cr Piano Rebuilding Revenue (+R, +SE) ....................

7,000

dr Cash (+A) .........................................................................

cr Accounts Receivable (A) .......................................

6,000

dr Utilities Expense (+E, SE) ...............................................

cr Accounts Payable (+L) ...........................................

350

500

300

14,500

7,000

6,000

350

g.

No transaction because there has been no exchange.

h.

dr Accounts Payable (-L) ......................................................

cr Cash (-A) ................................................................

1,700

dr Wages Expense (+E, -SE) ...............................................

cr Cash (-A) ................................................................

10,000

dr Supplies (+A) ....................................................................

cr Cash (-A) ................................................................

800

i.

j.

3-4

1,700

10,000

800

Chapter 03 - Reporting Operating Results on the Income Statement

E3-11 (continued)
Req. 1 and 3
dr+ Cash (A) cr-

dr+ Accounts Receivable (A) cr-

Beg. 6,000 1,700 (h)

(a)
500 10,000 (i)
(b)
300
800 (j)
(c) 14,500
(e) 6,000
14,800
dr+ Equipment (A) cr-

Beg. 25,000 6,000

(d) 7,000

(e)

26,000
Beg.

8,000
dr- Accounts Payable (L) cr+

2,000

dr- Contributed Capital (SE) cr+

Beg. 22,000

6,000

22,000

dr- Unearned Revenue (L) cr+

dr- Retained Earnings (SE) cr+

9,000 Beg.

8,000

9,000
(b)

dr- Notes Payable (L) cr+

3,200 Beg.
500 (a)
3,700

8,000 Beg.

dr- Rent Revenue (R) cr+

dr+ Building (A) cr-

6,000

(h) 1,700 8,000 Beg.

350 (f)
6,650

300

Beg. 1,200
(j)
800

dr+ Land (A) cr-

Beg. 8,000

300

dr+ Supplies (A) cr-

dr+ Wages Expense (E) cr-

(i) 10,000

40,000 Beg.
40,000
dr -

14,500 (c)
7,000 (d)
21,500
dr+ Utilities Expense (E) cr-

(f)

10,000

Piano Rebuilding
Revenue (R)
cr +

350
350

Item (g) is not a transaction; there has been no exchange.

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Chapter 03 - Reporting Operating Results on the Income Statement

E3-12
RICKYS PIANO REBUILDING COMPANY
Unadjusted Trial Balance
At January 31, 2010
Debit
Cash
$14,800
Accounts Receivable
26,000
Supplies
2,000
Equipment
8,000
Land
6,000
Building
22,000
Accounts Payable
Unearned Revenue
Notes Payable
Contributed Capital
Retained Earnings
Piano Rebuilding Revenue
Rent Revenue
Wages Expense
10,000
Utilities Expense
350
Total

$89,150

3-6

Credit

$ 6,650
3,700
40,000
8,000
9,000
21,500
300

$89,150

Chapter 03 - Reporting Operating Results on the Income Statement

E3-21
Req. 1
a
.
b
.
c
.
d
.
e
.
f.
g
.
h
.
i.

Assets
Cash
Accounts
Receivable

= Liabilities
+50,000
-50,000

= No change

Cash

+25,000 =

Equipment
Cash

+33,500
Note
=
-10,000
Payable

Cash

-10,000 =

Cash
Accounts
Receivable
No Change
Cash
Supplies
Cash

+ Stockholders Equity

Advertising
Expense (+E)

-10,000

Subscription
+225,000
Revenue (+R)

=
=

+25,000

+23,500

+112,500
+112,500

Licensing
Revenue (+R)

Accounts
Payable

+5,350

-378,000 =
Accounts
Payable
Accounts
-3,000 =
Payable

+3,000 =

3-7

+3,000
-3,000

Utilities
Expense (+E)
Wages Expense
(+E)

-5,350
-378,000

Chapter 03 - Reporting Operating Results on the Income Statement

E3-21 (continued)
Req. 2
a.

b.

c.

d.

e.

f.

g.

h.

i.

dr Cash (+A) .........................................................................

cr Accounts Receivable (-A) .......................................

50,000

dr Cash (+A) .........................................................................

cr Licensing Revenue (+R, +SE) ................................

25,000

dr Equipment (+A) ................................................................

cr Cash (-A) ................................................................
cr Note Payable (+L) ..................................................

33,500

dr Advertising Expense(+E, -SE) .........................................

cr Cash (-A) ................................................................

10,000

dr Cash (+A) .........................................................................

dr Accounts Receivable (+A) ................................................
cr Subscription Revenue (+R, +SE) ...........................

112,500
112,500

dr Utilities Expense (+E, -SE) ...............................................

cr Accounts Payable (+L) ...........................................

5,350

dr Wages Expense (+E, -SE) ...............................................

cr Cash (-A) ................................................................

378,000

dr Supplies (+A) ....................................................................

cr Accounts Payable (+L) ...........................................

3,000

dr Accounts Payable (-L) ......................................................

cr Cash (-A) ................................................................

3,000

3-8

50,000

25,000

10,000
23,500

10,000

225,000

5,350

378,000

3,000

3,000

Chapter 03 - Reporting Operating Results on the Income Statement

E3-21 (continued)
Req. 3
1/1/10
a.
b.
e.

dr+ Cash (A) cr1,500,000

50,000 10,000
25,000 10,000
112,500 378,000
3,000
1,286,500

c.
d.
g.
i.

dr+ Equipment (A) cr 1/1/10

874,500
c.
33,500
908,000
dr- Accounts Payable (L) cr+
108,000
1/1/10
i.
3,000
5,350
f.
3,000
h.
113,350

dr+ Accounts Receivable (A) cr 1/1/10 150,000

e.
112,500
50,000
a.

212,500

1/1/10

17,700

dr+ Building (A) cr422,000

1/1/10

422,000
dr- Unearned Revenue (L) cr+
73,500
1/1/10

dr+ Land (A) cr 1,200,00

0
1,200,000

dr- Notes Payable (L) cr+

60,000
1/1/10
23,500
c.

73,500

dr- Contributed Capital (SE) cr+

2,500,000 1/1/10 1

83,500

dr- Retained Earnings (SE) cr+

1,419,700 1/1/10

2,500,000

1,419,700

dr- Subscription Revenue (R) cr+

0
1/1/10
225,000
e.
225,000
dr+ Wages Expense (E) cr1/1/10
0
g.
378,000
378,000

dr+ Supplies (A) cr 1/1/10

14,700
h.
3,000

dr- Licensing Revenue (R) cr+

0 1/1/10
25,000
b.
25,000

dr+ Advertising Expense (E) cr 1/1/10

0
d.
10,000
10,000

3-9

dr+ Utilities Expense (E) cr 1/1/10

0
f.
5,350
5,350

Chapter 03 - Reporting Operating Results on the Income Statement

E3-21 (continued)
Req. 4
VANISHING GAMES CORPORATION
Unadjusted Trial Balance
At January 31, 2010
Debit
$1,286,500
212,500
17,700
908,000
422,000
1,200,000

Cash
Accounts Receivable
Supplies
Equipment
Building
Land
Accounts Payable
Unearned Revenue
Notes Payable
Contributed Capital
Retained Earnings
Subscription Revenue
Licensing Revenue
Wages Expense
Advertising Expense
Utilities Expense
Total

Credit

$ 113,350
73,500
83,500
2,500,000
1,419,700
225,000
25,000
378,000
10,000
5,350
$4,440,050 $4,440,050

Req. 5
VANISHING GAMES CORPORATION
Income Statement
For the Month Ended January 31, 2010
Revenues:
Subscription Revenue
Licensing Revenue
Total Revenues
Expenses:
Wages Expense
Advertising Expense
Utilities Expense
Total Expenses
Net Income (Loss)

$ 225,000
25,000
$ 250,000
378,000
10,000
5,350
393,350
$ (143,350)

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Chapter 03 - Reporting Operating Results on the Income Statement

E3-21 (continued)
Req. 6
VANISHING GAMES CORPORATION
Statement of Retained Earnings
For the Month Ended January 31, 2010
Retained Earnings, January 1, 2010
Add (Subtract): Net Income (Loss)
Subtract: Dividends

$ 1,419,700
(143,350)
0

Retained Earnings, January 31, 2010

$ 1,276,350

Req. 7
VANISHING GAMES CORPORATION
Balance Sheet
At January 31, 2010
Assets
Current Assets
Cash

$
1,286,500
212,500
17,700
1,516,700
908,000
422,000
1,200,000
$
4,046,700

Accounts Receivable
Supplies
Total Current Assets
Equipment
Building
Land
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Unearned Revenue
Total Current Liabilities
Long-term Notes Payable
Total Liabilities
Stockholders Equity
Contributed Capital
Retained Earnings
Total Stockholders Equity
Total Liabilities and Stockholders Equity

113,350
73,500
186,850
83,500
270,350
2,500,000
1,276,350
3,776,350
$
4,046,700

Req. 8
The income statement total (a net loss of $143,350) does not equal the change in cash
(a decrease of $213,500) because the income statement uses accrual accounting,
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Chapter 03 - Reporting Operating Results on the Income Statement

which records revenues when earned and expenses when incurred, rather than when
cash is received and paid.

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Chapter 03 - Reporting Operating Results on the Income Statement

ANSWERS TO SKILLS DEVELOPMENT CASES

S3-5
This type of ethical dilemma occurs frequently. It requires you to weigh one
ethical principle (loyalty) against another (honesty). The situation is difficult personally
because of the possible repercussions to you if you do not fulfill your bosss request. At
the same time, the ethical and professional response is to follow the revenue principle
and account for the cash collection as unearned revenue (as was done). To record the
collection as revenue overstates income in the current period.
In the short run, Mr. Lynch would benefit by receiving a larger bonus. You also
benefit in the short run because you would not experience any negative repercussions
from your boss. However, there is the risk that sometime in the future, perhaps through
an audit, the error will be found. At that point, both you and Mr. Lynch could be
implicated in a fraud. In addition, this may be the first instance where you are being
asked to account for a transaction in violation of accepted principles or company
policies. There is a very strong possibility Mr. Lynch may ask you for additional favors
in the future if you demonstrate your willingness at this point.
In the larger picture, stockholders are harmed by the misleading income figures
by relying on them to purchase stock at inflated prices. In addition, creditors may lend
funds to the insurance company based on the misleading information. The negative
impact of the discovery of misleading financial information will cause stock prices to fall,
causing stockholders to lose on their investment. Creditors will be concerned about
future debt repayment. You will also experience diminished self-respect because of the
violation of your integrity.
Managers are supposed to be agents for stockholders. To act in ways that
benefit the manager to the detriment of the stockholders is inappropriate. Therefore,
the ethically correct response is to fail to comply with Mr. Lynch's request. Although
standing up to Mr. Lynch will not be easy, you will need to explain that the appropriate
accounting treatment is clear. Your companys income statement reports the results of
actually providing services to its customers during the period and, at this point in time,
no services (insurance coverage) have been provided. You should explain that although
recording the transaction as revenue is a simple thing to do, its impact on financial
statement users can be severe (as described above). You may want to add that you
understand the reason for his request, but cannot ethically or professionally comply.

3-13