Fap Chapter 3 Solution Manual

Chapter 3
Adjusting Accounts and Preparing

Financial Statements
QUESTIONS
1.
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.
The accrual basis of accounting generally provides a better indication of company

performance and financial condition than does the cash basis. Also, the accrual
basis increases the comparability of financial statements from one period to the
next. Thus, business decision makers generally prefer the accrual basis.
3.
Businesses that have major seasonal variations in sales are most likely to select the
natural business year as the fiscal year.
4.
A prepaid expense is reported as an asset on the balance sheet.
5.
Depreciable plant assets (such as equipment, buildings, and machinery) lead to

adjustments for depreciation.
6.
The Accumulated Depreciation contra account is used for depreciation. It provides

financial statement users with additional information about the relative age of the
assets. Without the contra account information, the reader would not be able to tell
whether the assets are new or in need of replacement.
7.
An unearned revenue is reported as a liability on the balance sheet.
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
11. In addition to prepayments, Tastykake must make adjusting entries to Property,

Plant and Equipment, Deferred Income Taxes, Accrued Payroll and Employee
Benefits, and possibly other assets and liabilities such as Receivables (for bad
debts).
12. The Accrued Wages Expense would be reported as part of Accrued Expenses and
Other Liabilities on Harley-Davidsons balance sheet.
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

a. Insurance Expense.......................................................
Prepaid Insurance.................................................
1,800
1,800
To record 6-month insurance coverage expired.
b. Supplies Expense.........................................................
Supplies..................................................................
2,700
2,700
To record supplies used during the year.

($1,000 + $3,000 [?] = $1,300)

a. Depreciation ExpenseEquipment............................
Accumulated DepreciationEquipment.............
5,000
5,000
To record depreciation expense for the year.

($30,000 - $5,000) / 5 years = $5,000
b. No depreciation adjustments are made for land as it is expected to last

indefinitely.

120
Fundamental Accounting Principles, 17th Edition

a. Unearned Revenue........................................................
Legal Revenue.......................................................
15,000
15,000
To recognize legal revenue earned (20,000 x 3/4).
b. Unearned Subscription Revenue................................

Subscription Revenue...........................................
2,400
2,400
To recognize subscription revenue earned.

[100 x ($48 / 12 month) x 6 months]

Salaries Expense...........................................................
Salaries Payable....................................................
400
400
To record salaries incurred but not yet paid.

[One student earns, $100 x 4 days, M-R]

Accounts Debited and Credited
Debit
Unearned Revenue
Credit Revenue Earned
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.

Adjusting entry
Debit
Credit
1. Accrue salaries expense
2. Adjust the Unearned Services Revenue account

121
to recognize earned revenue

3. Record the earning of services revenue for which
cash will be received the following period

122

The answer is c.
Explanation:
The debit balance in Prepaid Insurance was reduced by $400, implying a
$400 debit to Insurance Expense. The credit balance in Interest Payable
increased by $800, implying an $800 debit to Interest Expense.
Cash Accounting:
Revenues (cash receipts)....................................................... $33,000
Expenses (cash payments: $22,500 - $2,250 + $3,750)....... 24,000
Net income .............................................................................. $ 9,000
Accrual Accounting:
Revenues (earned) ................................................................. $39,000
Expenses (incurred) ............................................................... 22,500
Net income............................................................................... $16,500
The answer is 2.
Explanation:
Insurance premium error:
Understates expenses (and overstates assets) by...........
Accrued salaries error:
Understates expenses (and understates liabilities) by....
Combination of errors:
Understates expenses by...................................................
Overstates assets by..........................................................
Understates liabilities by....................................................
$1,600
1,000
$2,600
$1,600
$1,000

Profit margin = $37,925 / $390,000 = 9.7%

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.

124
EXERCISES
Exercise 3-1 (15 minutes)
1.
2.
3.
B.
E.
C.
4.
5.
6.
F
D
A.

a.
Unearned Fee Revenue.................................................

Fee Revenue...............................................................
10,000
10,000
To record earned portion of fee received in advance.
b. Wages Expense..............................................................
Wages Payable...........................................................
9,000
9,000
To record wages accrued but not yet paid.
c.
Depreciation ExpenseEquipment..............................
Accumulated DepreciationEquipment..................
19,127
19,127
d. Office Supplies Expense...............................................

Office Supplies**.........................................................
5,242
5,242
To record office supplies used ($480 + $5,349 - $587).
e.
Insurance Expense........................................................
Prepaid Insurance*.....................................................
2,800
2,800
To record insurance coverage expired ($5,000 - $2,200).
f.
Interest Receivable.......................................................
Interest Revenue.......................................................
750
750
To record interest earned but not yet received.
g. Interest Expense...........................................................
Interest Payable........................................................
3,500
3,500
To record interest incurred but not yet paid.

Notes:
Beg. Bal.
Prepaid Insurance*
5,000
?
End. Bal.
2,200
Beg. Bal.
Purch.
Used
End. Bal.
Office Supplies**
480
5,349
?
587
Used

125

a.
Depreciation ExpenseEquipment..............................
Accumulated DepreciationEquipment..................
16,000
b. Insurance Expense........................................................
Prepaid Insurance*.....................................................
To record insurance coverage that expired
($7,000 - $1,040).
5,960
c.
Office Supplies Expense...............................................

Office Supplies**.........................................................
To record office supplies used ($300 + $2,680 - $354).
2,626
d. Unearned Fee Revenue.................................................

Fee Revenue...............................................................
To record earned portion of fee received in advance
($10,000 x 1/2).
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

126

a. Adjusting entry:
2005
Dec. 31
Wages Expense................................................
Wages Payable..............................................
500
500
To record accrued wages for one day.

(5 workers x $100)
b. Payday entry:
2006
Jan. 4
Wages Expense................................................
Wages Payable..................................................
Cash...............................................................
1,500
500
2,000
To record accrued and current wages.

a.
b.
c.
d.
$1,650
$5,700
$10,080
$1,375
Proof:
(a)
(b)
(c)
(d)
Supplies available prior year-end.......
$ 300
$1,600
$ 1,360
$1,375
Supplies purchased in current year.......
2,100
5,400
10,080
6,000
Total supplies available...........................
2,400
7,000
11,440
7,375
Supplies available current year-end...

Supplies expense for current year.........
(750)
$1,650
(5,700)
$1,300
(1,840)
$ 9,600
(800)
$6,575

127

a.
Apr. 30 Legal Fees Expense............................................
Legal Fees Payable.....................................
2,500
2,500
To record accrued legal fees.
May 12 Legal Fees Payable.............................................

Cash..............................................................
2,500
2,500
To pay accrued legal fees.
b.
Apr. 30 Interest Expense.................................................
Interest Payable...........................................
2,080
2,080
To record accrued interest expense

(9.6% x $780,000 x 10/360) or ($6,240 x 10/30).
May 20 Interest Payable...................................................

Interest Expense.................................................
Cash..............................................................
2,080
4,160
6,240
To record payment of accrued and current

interest expense (9.6% x $780,000 x 20/360).
c.
Apr. 30 Salaries Expense.................................................
Salaries Payable..........................................
3,600
3,600
To record accrued salaries

($9,000 x 2/5 week).
May 3
Salaries Payable..................................................
Salaries Expense.................................................
Cash..............................................................
3,600
5,400
9,000
To record payment of accrued and

current salaries ($9,000 x 3/5 week).

128

Balance Sheet Insurance Asset using
Accrual
Cash
*
Basis
Basis
Dec. 31, 2003 $11,700
$0
Insurance Expense using

Accrual
Cash
**
Basis
Basis
2003.........
$ 4,500
$16,200
Dec. 31, 2004
6,300
2004.........
5,400
Dec. 31, 2005
900
2005.........
5,400
Dec. 31, 2006
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

Dec. 31 Accounts Receivable.............................................. 1,800
Fees Earned.....................................................
To record earned but unbilled fees
(30% x $6,000).
31 Unearned Fees......................................................... 4,200
Fees Earned.....................................................
To record earned fees collected in
advance (70% x $6,000).
1,800
4,200
31 Depreciation ExpenseComputers....................... 1,500

Accumulated DepreciationComputers......
To record depreciation on computers.
1,500
31 Depreciation ExpenseOffice Furniture................ 1,750

Accumulated DepreciationOffice Furniture....
To record depreciation on office furniture.
1,750
31 Salaries Expense.................................................... 2,450

Salaries Payable..............................................
To record accrued salaries.
2,450
31 Insurance Expense.................................................. 1,300

Prepaid Insurance...........................................
To record expired prepaid insurance.
1,300
31 Office Supplies Expense.........................................

Office Supplies................................................
To record use of office supplies.
480
31 Utilities Expense......................................................
Utilities Payable...............................................
To record incurred and unpaid utility costs.
70
480
70

130

a.
b.
c.
d.
e.
$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%
Analysis and Interpretation: Company c has the highest profitability

according to the profit margin ratio. Company c earns 36.3 cents in net
income for each one dollar of net sales recorded.
Exercise 3-10A (30 minutes)
a.
Dec. 1 Supplies Expense............................................
Cash..........................................................
3,000
3,000
Purchased supplies.
b.
Dec. 2
Insurance Expense..........................................
Cash..........................................................
1,440
1,440
Paid insurance premiums.
c.
Dec.15 Cash.................................................................. 12,000
Remodeling Fees Earned........................
12,000
Received fees for work to be done.
d.
Dec.28 Cash..................................................................
Remodeling Fees Earned........................
3,600
3,600
e.
Dec.31 Supplies...........................................................
Supplies Expense....................................
1,920
1,920
Adjust expenses for unused supplies.
f.
Dec.31 Prepaid Insurance ($1,440 - $240).................
Insurance Expense..................................
1,200
1,200
Adjust expenses for unexpired coverage.
g.
Dec.31 Remodeling Fees Earned ..............................
Unearned Remodeling Fees...................
9,300
9,300
Adjusted revenues for unfinished

projects ($12,000 + $3,600 - $6,300).

131
Exercise 3-11A (25 minutes)

a.
Initial credit recorded in the Unearned Fees account:
July 1 Cash.......................................................................
2,000
Unearned Fees..............................................
2,000
Cash.......................................................................
Unearned Fees..............................................
8,400
8,400
12
Unearned Fees......................................................
Fees Earned...................................................
2,000
2,000
Completed work for customer.
18
Cash.......................................................................
Unearned Fees..............................................
7,500
7,500
27
Unearned Fees......................................................
Fees Earned...................................................
8,400
8,400
Completed work for customer.
31
No adjusting entries required.
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
Adjusted to reflect unearned fees for unfinished job.
c. Under the first method (and using entries from a):

Unearned Fees = $2,000 + $8,400 - $2,000 + $7,500 - $8,400 = $7,500
Fees Earned = $2,000 + $8,400 = $10,400
Under the second method (and using entries from b):
Unearned Fees = $7,500

132
Fees Earned = $2,000 + $8,400 + $7,500 - $7,500 = $10,400

[Note: Both procedures yield identical results in the financial statements.]

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.

Part 1
Adjustment (a)
Dec.31 Office Supplies Expense.........................
Office Supplies.................................
12,760
12,760
To record cost of supplies used

($3,000 + $12,400 - $2,640).
31
Adjustment (b)
Prepaid Insurance............................
12,312
12,312
To record annual insurance coverage cost.

Policy
A
B
C
Total
31
Cost per Month

$660 ($15,840/24 mo.)
363 ($13,068/36 mo.)
225 ($ 2,700 /12 mo.)
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
To record accrued but unpaid wages.
31
Adjustment (d)
Depreciation ExpenseBuilding...........
Accumulated DepreciationBuilding
27,000
27,000
To record annual depreciation expense

[($855,000 -$45,000) / 30 years = $27,000]

134
Problem 3-2A (Continued)

Adjustment (e)
Dec.31 Rent Receivable.......................................
Rent Earned......................................
2,400
2,400
To record earned but unpaid Dec. rent.
Adjustment (f)
31
Unearned Rent.........................................
Rent Earned......................................
4,350
4,350
To record the amount of rent earned for

November and December (2 x $2,175).
Part 2
Cash Payment for (c)
Jan. 6
Salaries Payable......................................
Salaries Expense*....................................
Cash...................................................
4,200
6,300
10,500

current salaries. *(3 days x $2,100)
15
Cash Payment for (e)

Cash..........................................................
Rent Receivable................................
Rent Earned......................................
4,800
2,400
2,400
To record past due rent for two months.

135

Parts 1 and 2
Unadj. Bal.
Cash
26,000
Unadj. Bal.
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
Unearned Training Fees

(e)
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
Unadj. Bal.
9,000
(d)
6,000
Adj. Bal.
15,000

136

Tuition Fees Earned
Unadj. Bal.
(f)
Adj. Bal.
102,000
7,500
109,500
Training Fees Earned

Unadj. Bal.
(e)
Adj. Bal.
38,000
4,400
42,400
Unadj. Bal.
(h)
Adj. Bal.
Rent Expense
22,000
2,000
24,000
Teaching Supplies Expense

Unadj. Bal.
0
(b)
7,400
Adj. Bal.
7,400
Unadj. Bal.
0
(d)
6,000
Adj. Bal.
6,000
Bal.
Advertising Expense
7,000
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
To record the insurance expired.
Adjustment (b)
31 Teaching Supplies Expense..........................
Teaching Supplies....................................
7,400
7,400
To record supplies used ($10,000-$2,600).
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
To record professional library depreciation.
Adjustment (e)
31 Unearned Training Fees.................................
Training Fees Earned...............................
4,400
4,400
To record training fees earned that were

collected in advance.
Adjustment (f)
31 Accounts Receivable......................................
Tuition Fees Earned.................................
7,500
7,500
To record tuition earned ($3,000 x 2 1/2 months).
Adjustment (g)
31 Salaries Expense............................................
Salaries Payable.......................................
400
400
To record accrued salaries (2 days x $100 x 2).
Adjustment (h)
31 Rent Expense..................................................
Prepaid Rent..............................................
2,000
2,000
To record expiration of prepaid rent.

138

Part 3
Watson Technical Institute
Adjusted Trial Balance
December 31, 2005
Cash.........................................................................
Accounts receivable..............................................
Teaching supplies .................................................
Prepaid insurance..................................................
Prepaid rent............................................................
Professional library................................................
Accumulated depreciationProfessional library. .
Equipment...............................................................
Accumulated depreciationEquipment..............
Accounts payable...................................................
Salaries payable.....................................................
Unearned training fees..........................................
T. Watson, Capital..................................................
T. Watson, Withdrawals.........................................
Tuition fees earned................................................
Training fees earned..............................................
Depreciation expenseProfessional library.......
Depreciation expenseEquipment......................
Salaries expense ...................................................
Insurance expense.................................................
Rent expense..........................................................
Teaching supplies expense...................................
Advertising expense..............................................
Utilities expense.....................................................
Totals.......................................................................
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

Part 4
WATSON TECHNICAL INSTITUTE
Income Statement
For Year Ended December 31, 2005
Revenues
Tuition fees earned............................................ $109,500
Training fees earned..........................................
42,400
Total revenues....................................................
Expenses
Depreciation expenseProfessional library...
6,000
Depreciation expenseEquipment..................
12,000
Salaries expense................................................
48,400
Insurance expense.............................................
3,000
Rent expense......................................................
24,000
Teaching supplies expense...............................
7,400
Advertising expense..........................................
7,000
Utilities expense.................................................
5,600
Total expenses...................................................
Net income............................................................
$151,900
113,400
$ 38,500

Statement of Owners Equity
T. Watson, Capital, December 31, 2004..............
Plus: Net income..................................................
Less: Owner withdrawals....................................
T. Watson, Capital, December 31, 2005..............
$ 63,600
38,500
102,100
40,000
$ 62,100

140
Problem 3-3A (Concluded)

Balance Sheet
December 31, 2005
Assets
Cash.................................................................................
Accounts receivable......................................................
Teaching supplies..........................................................
Prepaid insurance..........................................................
Professional library........................................................ $30,000
Accumulated depreciationProfessional library....... (15,000)
Equipment....................................................................... 70,000
Accumulated depreciationEquipment...................... (28,000)
Total assets.....................................................................
Liabilities
Accounts payable...........................................................
Salaries payable.............................................................
Unearned training fees..................................................
Total liabilities................................................................
Equity
T. Watson, Capital..........................................................
Total liabilities and equity.............................................
$ 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
Problem 3-4A (45 minutes) Part 1

Account
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
Long-term notes payable....

J. Winner, Capital..............
J. Winner, Withdrawals.......
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
)
Office supplies expense.....

Advertising expense..........
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.

142
(c)
(d)
(e)
(f)
(g)
(h)
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.

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
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

144

Part 2
JJW COMPANY
Balance Sheet
July 31, 2005
Assets
Cash............................................................................
Accounts receivable..................................................
Office supplies...........................................................
Prepaid insurance......................................................
Office equipment........................................................ $92,000
Accumulated depreciationOffice equipment....... (18,000)
Total assets................................................................
$ 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

Part 1
CALLAHAY COMPANY
Income Statement
Revenues
Fees earned.............................................. $420,000
Interest earned.......................................... 16,000
Total revenues..........................................
Expenses
Depreciation expenseAutomobiles..... 18,000
Depreciation expenseEquipment........ 10,000
Salaries expense...................................... 180,000
Wages expense........................................ 32,000
Interest expense....................................... 24,000
Office supplies expense.......................... 26,000
Advertising expense................................ 50,000
Repairs expenseAutomobiles............. 16,800
Total expenses.........................................
Net income..................................................
$436,000
356,800
$ 79,200
CALLAHAY COMPANY
Statement of Owner's Equity
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

146

CALLAHAY COMPANY
Balance Sheet
December 31, 2005
Assets
Cash........................................................................
Accounts receivable.............................................
Interest receivable.................................................
Notes receivable (due in 90 days).......................
Office supplies......................................................
Automobiles..........................................................
Accumulated depreciationAutomobiles..........
Equipment..............................................................
Accumulated depreciationEquipment.............
Land........................................................................
Total assets...........................................................
$ 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
Problem 3-6AA (40 minutes)

Part 1
Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.
Nov. 1 Prepaid Advertising .......................................

Cash..........................................................
1,500
1,500
Paid for future advertising.
1 Prepaid Insurance...........................................
Cash..........................................................
2,160
2,160
Paid insurance for one year.
30 Cash..................................................................
Unearned Service Fees...........................
3,300
3,300
Received fees in advance.
Dec. 1 Prepaid Consulting Fees ...............................

Cash..........................................................
2,700
2,700
Paid for future consulting.
15 Cash..................................................................
7,650
7,650
31 Advertising Expense.......................................
Prepaid Advertising ................................
600
600
To adjust prepaid advertising ($1,500-$900).
31 Insurance Expense..........................................
Prepaid Insurance....................................
360
360
To adjust prepaid insurance

($2,160 x 2/12).
31 Unearned Service Fees ..................................

Service Fees Earned................................
2,100
2,100
To adjust unearned service fees

($3,300-$1,200).
31 Consulting Fees Expense ..............................

Prepaid Consulting Fees.........................
900
900
To adjust prepaid consulting fees

($2,700 x 1/3).
31 Unearned Service Fees ..................................

3,000
3,000
To adjust unearned service fees.

148
Problem 3-6AA (Continued)

Part 2
Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.
Nov. 1
Advertising Expense.......................................
Cash..........................................................
1,500
1,500
Insurance Expense..........................................
Cash..........................................................
2,160
2,160
30
Cash..................................................................
3,300
3,300
Dec. 1
Consulting Fees Expense...............................

Cash..........................................................
2,700
2,700
Paid for future consulting.
15
Cash..................................................................
7,650
7,650
31
Prepaid Advertising........................................
Advertising Expense...............................
900
900
To adjust for prepaid advertising.
31
1,800
1,800
To adjust for prepaid insurance.
31
Service Fees Earned.......................................

1,200
1,200
To adjust for unearned service fees.
31
Prepaid Consulting Fees................................

Consulting Fees Expense.......................
1,800
1,800
To adjust for prepaid consulting fees.
31
Service Fees Earned.......................................

4,650
4,650

149
Problem 3-6AA (Concluded)

Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
Advertising expense for two months...................................
Prepaid advertising as of December 31...............................
Insurance expense for two months.....................................
Prepaid insurance as of December 31.................................
Consulting fees expense (1/3 of total paid).........................
Prepaid consulting fees........................................................
Service fees earned for two months ($2,100 + $3,000)......
Unearned service fees at 12/31 ($1,200 + $4,650)...............
$ 600
900
360
1,800
900
1,800
5,100
5,850
When prepaid expenses and unearned revenues are recorded in balance

sheet accounts, the related adjusting entries are designed to generate the
correct asset, expense, liability, and revenue account balances. When
prepaid expenses and unearned revenues are recorded in income
statement accounts, the related adjusting entries are designed to
accomplish exactly the same result.

150
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.

Part 1
Adjustment (a)
Oct. 31 Office Supplies Expense........................................
Office Supplies................................................
3,450
3,450
To record cost of supplies used

($500 + $3,650 - $700).
Adjustment (b)
31 Insurance Expense.................................................
2,365
2,365
To record annual insurance coverage cost.

Policy
A
B
C
Total
Cost per Month

$125 ($3,000/24 mo.)
100 ($3,600/36 mo.)
55 ( $660 / 12 mo.)
Months Active
in 2005
12
7
3
2005
Expense
$1,500
700
165
$2,365
Adjustment (c)
31 Salaries Expense....................................................
Salaries Payable..............................................
800
800
To record accrued but unpaid wages

(1 day x $800).
Adjustment (d)
31 Depreciation ExpenseBuilding..........................
Accumulated DepreciationBuilding...........
5,400
5,400
To record annual depreciation

[($155,000-$20,000) / 25 years = $5,400].

151
Problem 3-2B (Concluded)

Adjustment (e)
Oct. 31 Rent Receivable......................................................
Rent Earned.....................................................
600
600
To record earned but unpaid Oct. rent.
Adjustment (f)
31 Unearned Rent........................................................
Rent Earned.....................................................
1,050
1,050
To record rent earned for September

and October (2 x $525).
Part 2
Cash Payment for (c)
Nov. 7
Salaries Payable.....................................................
Salaries Expense*...................................................
Cash..................................................................
800
3,200
4,000

current salaries. *(4 days x $800)
Cash Payment for (e)

15
Cash.........................................................................
Rent Receivable...............................................
Rent Earned.....................................................
1,200
600
600
To record past due rent for two months.

152

Parts 1 and 2
Cash
50,000
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
Unearned Training Fees

57,500
(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
10,000
Unadj. Bal.
1,500
(d)
2,000
Adj. Bal.
3,500
Bal.
Equipment
30,000
Equipment
Unadj. Bal. 16,000
(c)
4,000
Adj. Bal.
20,000

153
Problem 3-3B (Continued)

Parts 1 and 2
Tuition Fees Earned
Unadj. Bal.
(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
Training Fees Earned

Unadj. Bal.
(e)
Adj. Bal.
Unadj. Bal.
0
(d)
2,000
Adj. Bal.
2,000
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
Teaching Supplies Expense

0
(b)
57,500
Adj. Bal.
57,500
Unadj. Bal.

154

Part 2
Adjustment (a)
Dec. 31 Insurance Expense................................................
Prepaid Insurance..........................................
6,400
6,400
To record the insurance expired.
Adjustment (b)
31 Teaching Supplies Expense................................. 57,500
Teaching Supplies.........................................
57,500
To record the cost of supplies used

($60,000-$2,500).
Adjustment (c)
31 Depreciation ExpenseEquipment.....................
Accumulated DepreciationEquipment.....
4,000
4,000
To record equipment depreciation.
Adjustment (d)
31 Depreciation ExpenseProfessional Library....
Professional Library.............................
2,000
2,000
To record professional library depreciation.
Adjustment (e)
31 Unearned Training Fees........................................
Training Fees Earned.....................................
9,200
9,200
To record training fees earned that

were collected in advance.
Adjustment (f)
31 Accounts Receivable............................................
Tuition Fees Earned.......................................
5,500
5,500
To record tuition earned ($2,200 x 2 1/2 mo).
Adjustment (g)
31 Salaries Expense...................................................
Salaries Payable.............................................
540
540
To accrue salaries expense (3 days x $180).
Adjustment (h)
31 Rent Expense ........................................................
2,600

155
Prepaid Rent..............................................................
2,600
To record expiration of prepaid rent.

156

Part 3
ALCORN INSTITUTE
December 31, 2005
Cash............................................................................
Accounts receivable....................................................
Teaching supplies.......................................................
Prepaid insurance.......................................................
Prepaid rent.................................................................
Professional library.....................................................
Accumulated depreciationProfessional library........
Equipment...................................................................
Accumulated depreciationEquipment.....................
Accounts payable.......................................................
Salaries payable..........................................................
Unearned training fees................................................
M. Alcorn, Capital........................................................
M. Alcorn, Withdrawals...............................................
Tuition fees earned......................................................
Training fees earned....................................................
Depreciation expenseProfessional library...............
Depreciation expenseEquipment.............................
Salaries expense.........................................................
Insurance expense......................................................
Rent expense..............................................................
Teaching supplies expense.........................................
Advertising expense...................................................
Utilities expense..........................................................
Totals..........................................................................
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

Part 4
ALCORN INSTITUTE
Income Statement
Revenues
Tuition fees earned.................................................... $110,500
Training fees earned..................................................
71,200
Total revenues............................................................
Expenses
Depreciation expenseProfessional library..........
2,000
Depreciation expenseEquipment.........................
4,000
Salaries expense........................................................
43,740
Insurance expense....................................................
6,400
Rent expense..............................................................
31,200
Teaching supplies expense......................................
57,500
Advertising expense..................................................
18,000
Utilities expense........................................................
12,400
Total expenses...........................................................
Net income....................................................................
$181,700
175,240
$ 6,460
ALCORN INSTITUTE
M. Alcorn, Capital, December 31, 2004..............
Plus: Net income..................................................
M. Alcorn, Capital, December 31, 2005..............
$68,500
6,460
74,960
20,000
$54,960

158

ALCORN INSTITUTE
Balance Sheet
December 31, 2005
Assets
Cash..............................................................................
Accounts receivable....................................................
Teaching supplies.......................................................
Prepaid insurance........................................................
Professional library..................................................... $10,000
Accumulated depreciationProfessional library........... (3,500)
Equipment.................................................................... 30,000
Accumulated depreciationEquipment.................... (20,000)
Total assets..................................................................
Liabilities
Accounts payable........................................................
Salaries payable...........................................................
Unearned training fees................................................
Total liabilities..............................................................
Equity
M. Alcorn, Capital.........................................................
Total liabilities and equity...........................................
$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
Problem 3-4B (45 minutes) Part 1

Unadjusted
Trial Balance
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.

160
Problem 3-4B
Part 2
DAXU CONSULTING COMPANY
Income Statement
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

D. Chen, Capital, December 31, 2004.................
Plus: Net income..................................................
D. Chen, Capital, December 31, 2005.................
$ 70,200
37,460
107,660
10,000
$ 97,660

161

Part 2
Balance Sheet
December 31, 2005
Assets
Cash.............................................................................
$ 48,000
Accounts receivable...................................................
76,660
Office supplies............................................................
7,000
Prepaid insurance.......................................................
8,600
Office equipment......................................................... $150,000
Accumulated depreciationOffice equipment........
(40,000) 110,000
Total assets.................................................................
$250,260
Liabilities
Accounts payable.......................................................
Interest payable...........................................................
Salaries payable..........................................................
Unearned consulting fees..........................................
Long-term notes payable...........................................
Total liabilities.............................................................
$ 42,000
1,600
11,200
17,800
80,000
152,600
Equity
D. Chen, Capital..........................................................
Total liabilities and equity..........................................
97,660
$250,260

162

Part 1
LIGHTNING COURIER
Income Statement
Revenues
Delivery fees earned..................................... $580,000
Interest earned............................................... 24,000
Total revenues...............................................
Expenses
Depreciation expenseTrucks.................... 24,000
Depreciation expenseEquipment............. 46,000
Salaries expense........................................... 64,000
Wages expense............................................. 290,000
Interest expense............................................ 25,000
Office supplies expense............................... 33,000
Advertising expense..................................... 26,400
Repairs expenseTrucks............................ 34,600
Total expenses..............................................
Net income.......................................................
$604,000
543,000
$ 61,000
LIGHTNING COURIER
Statement of Owner's Equity
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

LIGHTNING COURIER
Balance Sheet
December 31, 2005
Assets
Cash......................................................................
$ 48,000
Accounts receivable...........................................
110,000
Interest receivable...............................................
6,000
Notes receivable (due in 90 days)........................
200,000
Office supplies....................................................
12,000
Trucks................................................................... $ 124,000
Accumulated depreciationTrucks..................
(48,000)
76,000
Equipment............................................................
260,000
Accumulated depreciationEquipment...........
(190,000)
70,000
Land......................................................................
90,000
Total assets.........................................................
$612,000
Liabilities
Accounts payable...............................................
Interest payable...................................................
Salaries payable..................................................
Unearned delivery fees.......................................
Long-term notes payable...................................
Total liabilities.....................................................
$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%

164
Problem 3-6BA (40 minutes)

Part 1
Method that records prepaid expenses and unearned revenues in balance sheet accounts:
Apr. 1
Prepaid Consulting Fees..................................... 3,450

Cash...............................................................
3,450
Paid for future consulting services.
Prepaid Insurance................................................ 2,700

Cash...............................................................
2,700
30
Cash....................................................................... 7,500
Unearned Service Fees................................
7,500
May 1
Prepaid Advertising............................................. 3,450

Cash...............................................................
3,450
23
Cash ..................................................................... 9,450

Unearned Service Fees...............................
9,450
31
Consulting Fees Expense.................................... 1,500

Prepaid Consulting Fees..............................
1,500
To adjust prepaid consulting fees.
31
Insurance Expense...............................................
Prepaid Insurance.........................................
450
450
To adjust prepaid insurance.
31
Unearned Service Fees ....................................... 3,900

Service Fees Earned.....................................
3,900
31
Advertising Expense............................................ 2,400

Prepaid Advertising......................................
2,400
To adjust prepaid advertising.
31
Unearned Service Fees........................................ 4,500

Service Fees Earned.....................................
4,500

165
Problem 3-6BA (Continued)

Part 2
Method that records prepaid expenses and unearned revenues in income statement accounts:
Apr. 1
Consulting Fees Expense .................................

Cash..............................................................
3,450
3,450
Paid for future consulting services.
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
Prepaid Consulting Fees....................................

Consulting Fees Expense...........................
1,950
1,950
To adjust for prepaid consulting fees.
31
Prepaid Insurance ..............................................

Insurance Expense......................................
2,250
2,250
To adjust for prepaid insurance.
31
Service Fees Earned...........................................

Unearned Service Fees ..............................
3,600
3,600
31
Prepaid Advertising............................................
Advertising Expense...................................
1,050
1,050
To adjust for prepaid advertising.
31
Service Fees Earned...........................................

Unearned Service Fees ..............................
4,950
4,950

166
Problem 3-6BA (Concluded)

Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
Prepaid consulting fees as of May 31.................................... $ 1,950
Consulting fees expense for two months.............................. 1,500
Insurance expense for two months........................................
450
Prepaid insurance as of May 31.............................................. 2,250
Unearned service fees as of May 31 ($3,600 + $4,950)......... 8,550
Service fees earned for two months ($3,900 + $4,500)......... 8,400
Prepaid advertising as of May 31............................................ 1,050
Advertising expense for two months..................................... 2,400
When prepaid expenses and unearned revenues are recorded in balance
sheet accounts, the related adjusting entries are designed to generate the
correct asset, expense, liability, and revenue account balances. When
prepaid expenses and unearned revenues are recorded in income
statement accounts, the related adjusting entries are designed to
accomplish exactly the same result.

167
Serial Problem
Serial Problem, Success Systems (120 minutes) Part 1
Journal entries:
Dec. 2
Advertising Expense..................................655
Cash.....................................................101
1,025
1,025
Paid share of mall advertising costs.
Repairs ExpenseComputer....................684
Cash.....................................................101
500
500
Repaired the computer.
Cash.............................................................101
Accounts Receivable..........................106
3,950
3,950
Collected accounts receivable.
10
Wages Expense..........................................623
Cash.....................................................101
750
750
Paid employee for part-time work.
14
Cash.............................................................101
Unearned Computer Services Revenue...236
1,500
1,500
Received advance on work to be performed.
15
Computer Supplies....................................126
Accounts Payable...............................201
1,100
1,100
Purchased supplies on credit.
16
20
No entry recorded in the journal.

Cash.............................................................101
Computer Services Revenue.............403
5,625
5,625
Collected cash revenue from customer.
28
Cash.............................................................101
Accounts Receivable..........................106
3,000
3,000
Collected accounts receivable.
29
Mileage Expense........................................676
Cash.....................................................101
192
192
Reimbursed Breeze for mileage.
31
K. Breeze, Withdrawals..............................302
Cash.....................................................101
1,500
1,500
Owner withdraws cash.

168
Serial Problem (Continued)

Part 2
Adjusting entries:
Dec. 31 Computer Supplies Expense .........................652
Computer Supplies .................................126
3,065
3,065
Adjustment for supplies used (supplies

balance less cost of supplies available).
31 Insurance Expense .........................................637

Prepaid Insurance ...................................128
555
555
Adjustment for expired insurance (1/4

of original prepaid amount).
31 Wages Expense ..............................................623

Wages Payable ........................................210
500
500
Adjustment for accrued wages.
31 Depreciation ExpComputer Equip.............613

Computer Equipment...........................168
1,250
1,250
Adjustment for computer equipment depreciation:

Cost.........................................................
$20,000
Predicted life...........................................
4 years
Annual depreciation (cost/life)..............
$5,000
Expense for three months.....................
$1,250
31 Depreciation ExpenseOffice Equip............612

Office Equipment ..................................164
400
400
Adjustment for office equipment depreciation:

Cost..........................................................
Predicted life............................................
Annual depreciation (cost/life)...............
Expense for three months.......................
$8,000
5 years
$1,600
$400
31 Rent Expense ..................................................640

Prepaid Rent ............................................131
2,475
2,475
Adjustment for expired rent (3/4 of

original prepaid amount).

169

Parts 1 and 2
Posting to the accounts:
Cash
Date
Oct.
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
Acct. No. 101

Credit
Balance
55,000
3,300
51,700
2,220
49,480
1,420
48,060
52,860
805
52,055
1,940
50,115
51,515
875
50,640
3,600
47,040
320
46,720
51,353
1,125
50,228
52,436
250
52,186
384
51,802
1,750
50,052
2,000
48,052
1,025
47,027
500
46,527
50,477
750
49,727
51,227
56,852
59,852
192
59,660
1,500
58,160

170

Parts 1 and 2
Date
Oct.
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
Acct. No. 106

Credit
Balance
4,800
6,200
4,800
1,400
1,400
0
5,208
10,876
2,208
8,668
12,618
3,950
8,668
3,000
5,668
Computer Supplies
Explanation
PR
Debit
1,420
1,125
1,100
Acct. No. 126

Credit
Balance
1,420
2,545
3,645
3,065
580
Prepaid Insurance
Explanation
PR
Debit
2,220
Acct. No. 128

Credit
Balance
2,220
555
1,665
Prepaid Rent
Explanation
PR
Debit
3,300
Acct. No. 131

Credit
Balance
3,300
2,475
825
Office Equipment
Explanation
PR
Debit
8,000
Acct. No. 163

Credit
Balance
8,000
Accumulated DepreciationOffice Equipment

Acct. No. 164
Explanation
PR
Debit
Credit
Balance
31
400
400

171

Parts 1 and 2
Date
Oct.
Computer Equipment
Explanation
PR
Debit
20,000
Accumulated DepreciationComputer Equipment

Date
Explanation
PR
Debit
Dec.
31
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
Acct. No. 167

Credit
Balance
20,000
Acct. No. 168
Credit
Balance
1,250
1,250
Acct. No. 201
Credit
Balance
1,420
1,420
0
1,100
1,100
Acct. No. 210
Credit
Balance
500
500
Acct. No. 236
Credit
Balance
1,500
1,500
Acct. No. 301
Credit
Balance
83,000
83,000
Acct. No. 302
Credit
Balance
3,600
5,600
7,100

172

Parts 1 and 2
Date
Oct.
Nov.
Dec.
Computer Services Revenue

Explanation
PR
Debit
6
12
28
2
8
24
20
Acct. No. 403

Credit
Balance
4,800
4,800
1,400
6,200
5,208
11,408
4,633
16,041
5,668
21,709
3,950
25,659
5,625
31,284
Date
Dec.
31
Depreciation ExpenseOffice Equipment

Explanation
PR
Debit
400
Acct. No. 612

Credit
Balance
400
Date
Dec.
Depreciation ExpenseComputer Equipment

Explanation
PR
Debit
31
1,250
Acct. No. 613

Credit
Balance
1,250
Wages Expense
Explanation
PR
31
30
10
31
Debit
875
1,750
750
500
Acct. No. 623

Credit
Balance
875
2,625
3,375
3,875
31
Insurance Expense
Explanation
PR
Debit
555
Acct. No. 637

Credit
Balance
555
Rent Expense
Explanation
PR
Acct. No. 640

Credit
Balance
2,475
Date
Oct.
Nov.
Dec.
Date
Dec.
Date
Dec.
31
Debit
2,475

173

Parts 1 and 2
Date
Dec.
Date
Oct.
Dec.
Date
Nov.
Dec.
Date
Nov.
Date
Oct.
Dec.
31
Computer Supplies Expense

Explanation
PR
Debit
3,065
Acct. No. 652

Credit
Balance
3,065
20
2
Advertising Expense
Explanation
PR
Debit
1,940
1,025
Acct. No. 655

Credit
Balance
1,940
2,965
Mileage Expense
Explanation
PR
1
28
29
Debit
320
384
192
Acct. No. 676

Credit
Balance
320
704
896
22
Miscellaneous Expenses
Explanation
PR
Debit
250
Acct. No. 677

Credit
Balance
250
17
3
Repairs ExpenseComputer
Explanation
PR
Debit
805
500
Acct. No. 684

Credit
Balance
805
1,305

174

Part 3
SUCCESS SYSTEMS
December 31, 2004
Debit
Cash ............................................................................ $ 58,160
Accounts receivable ..................................................
5,668
Computer supplies ....................................................
580
Prepaid insurance .....................................................
1,665
Prepaid rent ................................................................
825
Office equipment .......................................................
8,000
Accumulated depreciationOffice equipment.......
Computer equipment ................................................ 20,000
Accumulated depreciationComputer equipment.
Accounts payable ......................................................
Wages payable ...........................................................
Unearned computer services revenue ....................
K. Breeze, Capital.......................................................
K. Breeze, Withdrawals..............................................
7,100
Computer services revenue .....................................
Depreciation expenseOffice equipment ..............
400
Depreciation expenseComputer equipment........
1,250
Wages expense ..........................................................
3,875
Insurance expense ....................................................
555
Rent expense .............................................................
2,475
Computer supplies expense ....................................
3,065
Advertising expense..................................................
2,965
Mileage expense ........................................................
896
Miscellaneous expenses ..........................................
250
Repairs expenseComputer ...................................
1,305
Totals........................................................................... $119,034
Credit
400
1,250
1,100
500
1,500
83,000
31,284
_______
$119,034

175

Part 4
SUCCESS SYSTEMS
Income Statement
For Three Months Ended December 31, 2004
Revenue
Computer services revenue.......................................
Expenses
Depreciation expenseOffice equipment................
Depreciation expenseComputer equipment.........
Wages expense...........................................................
Insurance expense......................................................
Rent expense...............................................................
Computer supplies expense......................................
Advertising expense...................................................
Mileage expense.........................................................
Miscellaneous expenses............................................
Repairs expenseComputer.....................................
Total expenses............................................................
Net income.....................................................................
$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
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

176

Part 6
SUCCESS SYSTEMS
Balance Sheet
December 31, 2004
Assets
Cash ................................................................................
Accounts receivable .....................................................
Computer supplies ........................................................
Prepaid insurance .........................................................
Prepaid rent ...................................................................
Office equipment ........................................................... $ 8,000
Accumulated depreciationOffice equipment...........
(400)
Computer equipment..................................................... 20,000
Accumulated depreciationComputer equipment.... (1,250)
Total assets.....................................................................
$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
1. The revenue recognition principle requires that revenue be recorded

when earned, not before and not after. Most companies earn revenue
when they provide services and products to customers.
2. Krispy Kreme provides information related to revenue recognition in
footnote 2 discussing the Nature of Business and Significant
Accounting Policies. A policy on revenue recognition is stated for
each segment of the company.
Company Store operations revenue is derived from the sale of
doughnuts and related items to on-premises and off-premises
customers. Revenue is recognized at the time of sale for on-premises
sales and at the time of delivery for off premises sales.
Franchise Operations revenue is derived from: (1) development and
franchise fees from the opening of new stores; and (2) royalties
charged to franchisees based on sales. Development and franchise
fees are charged for certain new stores and are deferred until the
store is opened. The royalties recognized in each period are based on
the sales in that period.
KKM&D revenue is derived from the sale of doughnut-making
equipment, mix and other supplies needed to operate a doughnut
store to Company-owned and franchised stores. Revenue is
recognized at the time the title and risk of loss pass to the customer,
generally upon delivery of the goods.
3. For fiscal year-end February 2, 2003, the profit margin is:
$33,478,000 / $491,549,000 = 0.068 = 6.8%
For fiscal year-end February 3, 2002, the profit margin is:
$26,378,000 / $394,354,000 = 0.067 = 6.7%
4. Solution depends on the financial statements accessed.

178
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.
179
Communicating in Practice
BTN 3-4
This communication activity has no set solution. A class discussion of the

ratios can be conducted with emphasis on (1) return and profitability by
industries and (2) a contrast of debt financing between industries.
Taking It to the Net
BTN 3-5
1. Cannondales primarily sells mountain bikes.

2. Review 10-K.
3. Recent fiscal years have ended on June 29, 2002, June 30, 2001 and July
1, 2000. While Cannondale labels these endings as 12 months ended
they appear to be reporting as of the end of the 52nd week.
4. Net sales for the fiscal year ended June 29, 2002, is $156,655,000.
5. Net loss for the fiscal year ended June 29, 2002, is $15,440,000.
6. Profit margin is: $(15,440) / $156,655 = -0.099 = -9.8% (or non-interpretable)
7. Cannondales fiscal year-end appears to (but does not necessarily)
correspond to its natural business year. The difficulty in reaching a

definitive answer to this question is the lack of information in
Cannondales statements. The quarterly sales data does reveal that the
3 months ending in June has reported the highest sales of the four
quarters for the last two years reported. Management does discuss
seasonality as a factor affecting business. The bottom line is
Cannondales fiscal year-end appears to correspond to its natural
business year, but we cannot be certain.

180
Teamwork in Action
BTN 3-6
Note that there is no specific solution to this activity. Nevertheless, the

presentation of each expert team should reflect the following summary points:
Type
Before Adjusting
Balance Sheet
Income Statement
Account
Account
Prepaid expense
Asset overstated
Expense understated
Unearned revenues
Liability overstated
Revenue understated
Accrued Expenses
Liability understated Expense understated
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.
Some implementation notes: This activity allows all students to be actively

involved in the learning process. Encourage students to take the opportunity to
ask questions in the small group environment the learning team provides.
Encourage the better students to serve as experts on unearned revenues. The
instructors observation of and reactions to expert teams development of
presentation material as well as the delivery to learning teams will have a
significant impact on the effectiveness of this activity.

181
Business Week Activity
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.

182
Entrepreneurial Decision
BTN 3-8
1. Many businesses find it cheaper to use outside collection agencies

rather than hire in-house staff to handle past-due account collections.
Additionally, owners of collection agencies are usually experts in the art of
collection and may be able to collect on accounts that the businesses
themselves never would be able to. Although a 50% commission seems
steep, it must be weighed against the possibility that zero collections may
be realized if the account is not turned over.
Mellies net income = Income x Profit margin = $40,000,000 x 0.08 =
$3,200,000.
2.
3.
Current commission expense = $40,000,000 x 0.02 = $800,000.
4. If the commission fee charged can be negotiated down from 50% to

40%, this will be a 20% reduction in commission expense. This is
computed as: (50% - 40%) / 50% = 20%. Specifically, the commission
expense would change from $800,000 to 80% of $800,000 or $640,000 (also
computed as $40,000,000 x 0.02 x (40%/50%)).
The $160,000 reduction from $800,000 to $640,000 represents a 20% decline
from $800,000.
5. Net income would be $160,000 higher since commission expense would
be reduced by $160,000. Net income would change to $3,360,000
[$3,200,000 + $160,000].
Profit margin would then equal: $3,360,000/$40,000,000 = 8.4%.
Hitting the Road
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
1. Grupo Bimbo states under its Significant Accounting Policies in its

annual report that revenue is recognized when the product is shipped.
2. The five types of assets that are depreciated by Grupo Bimbo are:
a. Buildings
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%

184

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Chapter 3

Adjusting Accounts and Preparing

The accrual basis of accounting generally provides a better indication of company

A prepaid expense is reported as an asset on the balance sheet.

Depreciable plant assets (such as equipment, buildings, and machinery) lead to

The Accumulated Depreciation contra account is used for depreciation. It provides

An unearned revenue is reported as a liability on the balance sheet.

11. In addition to prepayments, Tastykake must make adjusting entries to Property,

Quick Study 3-2 (10 minutes)

To record 6-month insurance coverage expired.

To record supplies used during the year.

Quick Study 3-3 (10 minutes)

To record depreciation expense for the year.

b. No depreciation adjustments are made for land as it is expected to last

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Quick Study 3-4 (15 minutes)

To recognize legal revenue earned (20,000 x 3/4).

b. Unearned Subscription Revenue................................

To recognize subscription revenue earned.

Quick Study 3-5 (10 minutes)

To record salaries incurred but not yet paid.

Quick Study 3-6 (15 minutes)

Quick Study 3-7 (10 minutes)

1. Accrue salaries expense

2. Adjust the Unearned Services Revenue account

McGraw-Hill Companies, Inc., 2005

to recognize earned revenue

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Quick Study 3-8 (10 minutes)

Quick Study 3-11 (10 minutes)

McGraw-Hill Companies, Inc., 2005

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Exercise 3-2 (30 minutes)

Unearned Fee Revenue.................................................

To record earned portion of fee received in advance.

To record wages accrued but not yet paid.

To record depreciation expense for the year.

d. Office Supplies Expense...............................................

To record office supplies used ($480 + $5,349 - $587).

To record insurance coverage expired ($5,000 - $2,200).

To record interest earned but not yet received.

To record interest incurred but not yet paid.

McGraw-Hill Companies, Inc., 2005

Exercise 3-3 (25 minutes)

Office Supplies Expense...............................................

d. Unearned Fee Revenue.................................................

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Exercise 3-4 (15 minutes)

To record accrued wages for one day.

To record accrued and current wages.

Exercise 3-5 (15 minutes)

Supplies available prior year-end.......

Supplies purchased in current year.......

Total supplies available...........................

Supplies available current year-end...

McGraw-Hill Companies, Inc., 2005

Exercise 3-6 (25 minutes)

To record accrued legal fees.

May 12 Legal Fees Payable.............................................