Module 3

Constructing Financial Statements and Analyzing Transactions

QUESTIONS
Q3-1 The fiscal year is the annual accounting period that a firm adopts. A firm that uses December 31 year end is on a calendar-year basis. Traditionally, fiscal years that end in January through the end of May, are labelled as the prior calendar year. For example, a fiscal year ending January 31, 2008 would be labelled fiscal 2007 because the bulk of the operations occurred in calendar 2007 rather than in 2008. A journal entry records a transaction in a companys general journal. A general journal is a book of original entry for the initial recording of any type of transaction or accrual. It contains space for dates and for accounts to be debited and credited, columns for the amounts of the debits and credits, and a posting reference column for numbers of the accounts that are posted. Most companies have electronic journals but the basics are the same. Posting means including the transaction amount in the affected general ledger accounts. This procedure enables company personnel to trace amounts in the ledger back to the originating journal entry and to determine which entries have been added to the ledger so that account totals are updated. 1. Prepaid Expenses Allocating assets to expense to reflect expenses incurred during the period. Example: Recording supplies used by debiting Supplies Expense and crediting Supplies or recording depreciation expense and reducing PPE (or increasing accumulated depreciation). 2. Unearned Revenues Adjusting unearned revenues to reflect revenues earned during the period. Example: Recording service fees earned by debiting Unearned Service Fees and crediting Service Fees Earned. 3. Accrued Expenses Accruing expenses to reflect expenses incurred during the period that are not yet paid or recorded. Example: Recording unpaid wages by debiting Wages Expense and crediting Wages Payable or recording interest owing on loans. 4. Accrued Revenues Accruing revenues to reflect revenues earned during the period that are not yet received or invoiced. Example: Recording commissions earned by debiting Commissions Receivable and crediting Commissions Earned.

Q3-2

Q3-3

Q3-4

Solutions Manual, Module 3

Cambridge Business Publishers, 2008 3-1

Q3-5 Jan. 31 Insurance Expense........................................................ Prepaid Insurance ....................................................

To record insurance expense for January ($1,872 / 24 = $78).

78 78

Q3-6

(a)

Supplies Expense of $455 must be recorded for the period. This will reduce the asset account and increase the expense account by $455. ($825+$260-$630=$455) If the adjustment is not made, Supplies Expense is understated by $455, Supplies (asset) and Equity are both overstated by $455 on the January 31 balance sheet.

(b) Q3-7

Balance Sheet
Transaction
Cash UR 9,720 9,720

Income Statement -ses = Income

Expen Net

Cash Noncash + Asset Assets

LiabilContrib. Earned Rev+ + ities Capital Capital enues

Cash 9,720 UR 9,720

Received $9,720 cash in +9,720 advance for Cash subscriptions

+9,720
Unearned Revenue

UR 405 Sales 405

UR 405 Sales 405

Delivered $405 of magazines

-405
Unearned Revenue

+405
Retained Earnings

+405
Sales

= +405

Q3-8 (a) Jan. 1

Cash................................................................................ Subscriptions Received in Advance ...................... To record receipt of two-year subscriptions. Subscriptions Received in Advance ............................ Subscriptions Revenue........................................... To record subscription revenue earned during January ($9,720 / 24 = $405).

9,720 9,720

(b) Jan. 31

405 405

Q3-9

Jan. 31

Wages Expense ............................................................. Wages Payable......................................................... To record unpaid wages for Jan. 3031 [($475 / 5) 2 = $190].

190 190

Cambridge Business Publishers, 2008 3-2 Financial Accounting for MBAs, 3rd Edition

Q3-10 On January 31, the interest receivable account and the interest income account both should be increased by $360 to reflect the fact that the company has earned interest but not yet received it. The journal entry would be as follows: Jan. 31 Interest Receivable........................................................ Interest Income ........................................................ To record interest earned during January.

360 360

Q3-11 All temporary accounts are closed at year-end. They consist of the income statement accounts (expense and revenue accounts) and the dividend account. Step 1) Close revenue accounts: Debit each revenue account for an amount equal to its balance, and credit retained earnings for the total of revenues. Step 2) Close expense accounts: Credit each expense account for an amount equal to its balance, and debit retained earnings for the total of expenses. Step 3) Close the dividend account: Credit the dividend account for an amount equal to its balance, and debit retained earnings.

Solutions Manual, Module 3

Cambridge Business Publishers, 2008 3-3

M3-16 (10 minutes) a.

Balance Sheet
Transactio n
Cash UR 20,100 20,100

Income Statement

Cash Noncash Liabil- Contrib Earned RevExpenNet + = + + = Asset Assets ities . Capital Capital enues ses Income +20,100 = Unearne
d Revenue

Cash 20,100 UR 20,100

Received $20,100 in +20,100 advance for Cash contract work

b.
Balance Sheet
Transaction
UR 3,350 Rev 3,350
UR 3,350 Rev 3,350

Income Statement

Cash Noncash Liabil- Contrib. Earned RevExpenNet + = + + = Asset Assets ities Capital Capital enues ses Income -3,350 = Unearne

Adjusting entry for work completed by Jan. 31* * $20,100/6 = $3,350

+3,350
Revenue

d Revenue

= +3,350

c.
Balance Sheet
AR Rev 570 570

Income Statement

Transactio Cash Noncash Liabil- Contrib Earned RevExpenNet + = + + = n Asset Assets ities . Capital Capital enues ses Income Adjusting entry for fees earned but not billed

AR 570 Rev 570

+570
Fees Receivable

+570 =

+570

Retained Service Earnings Revenue

= +570

Cambridge Business Publishers, 2008 3-12 Financial Accounting for MBAs, 3rd Edition

M3-17 (10 minutes) Jan. 1 Cash Unearned Service Fees

To cash received for service fees.

20,100 20,100 3,350 3,350

Jan. 31

Unearned Service Fees Service Fees Earned

To reflect January service fees earned on contract ($20,100/6 = $3,350).

Jan. 31

Fees Receivable Service Fees Earned

To record unbilled service fees earned at January 31.

570 570

M3-18 (25 minutes) a.

Balance Sheet Income Statement
Net Transactio Cash Noncash Liabil- Contrib. Earned RevExpen+ = + + = Incom n Asset Assets ities Capital Capital enues ses e
IE PPI 185 185

IE 185 PPI 185

Adjusting entry for prepaid insurance

-185
Prepaid Insurance

-185 =
Retained Earnings

+185 Insurance =
Expense

-185

b.
Balance Sheet
Transaction
SUPE SUP 1,080 1,080

Income Statement

Cash Noncash Liabil- Contrib. Earned RevExpenNet + = + + = Asset Assets ities Capital Capital enues ses Income

SUPE 1,080 SUP 1,080

Adjusting entry for supplies used

-1,080
Supplies

-1,080 =
Retained Earnings

+1,080 -1,080 Supplies =

Expense

Solutions Manual, Module 3

Cambridge Business Publishers, 2008 3-13

M3-18continued c.
Balance Sheet
Transaction
DE AD
DE 62 AD 62

Income Statement

Cash Noncash Liabil- Contrib. Earned RevExpenNet + = + + = Asset Assets ities Capital Capital enues ses Income -62
Accum. Depreciation

62 62

Adjusting entry for depreciation of equipment

-62 =
Retained Earnings

+62 Deprecia- =
tion Expense

-62

d.
Balance Sheet Income Statement
Net Cash Noncash LiabilContrib. Earned RevExpen+ = + + = Incom Asset Assets ities Capital Capital enues ses e -875 = Unearned
Rent Revenue

Transaction
UR Rev
UR 875 Rev 875

875 875

Adjusting entry for rent revenue earned

+875

+875 = +875

Retained Rent Earnings Revenue

e.
Balance Sheet
Transaction
WE WP
WE 490 WP 490

Income Statement

Net Cash Noncash Liabil- Contrib. Earned RevExpen+ = + + = Incom Asset Assets ities Capital Capital enues ses e

490 490

Adjusting entry for accrued salaries

+490 = Wages
Payable

-490
Retained Earnings

+490
Wages Expense

-490

Cambridge Business Publishers, 2008 3-14 Financial Accounting for MBAs, 3rd Edition

EXERCISES
E3-26 (30 minutes)
Balance Sheet
Cash Noncash + = Asset Assets

Income Statement

Transaction
DE AD
DE 610 AD 610

Net LiabilContrib. Earned RevExpen+ + = Incom ities Capital Capital enues ses e -610 +610 Deprecia- =
tion Expense

610 610

a. Adjusting entry for depreciation of equipment

-610
Accum. Depreciation

Retained Earnings

-610

SUPE SUP

1,890 1,890

SUPE 1,890 SUP 1,890

b. Adjusting entry for supplies expense

-1,890
Supplies

-1,890 =
Retained Earnings

+1,890 Supplies = -1,890

Expense

UE AP
UE 390

390 390

AP 390

c. Adjusting entry for utilities expense

+390 =
Accounts (Utilities) Payable

-390
Retained Earnings

+390 Utilities =
Expense

-390

RNTE 700 PPRNT 700

RNTE 700 PPRNT 700

d. Adjusting entry for rent expense

-700
Prepaid Rent

-700 =
Retained Earnings

+700
Rent Expense

-700

UR Rev
UR 468

468 468

Rev 468

e. Adjusting entry for premium revenues

-468 =
Unearned premium revenue

+468

+468 = +468

Retained Premium Earnings Revenue

WE WP
WE 965

965 965

WP 965

f. Adjusting entry for wages expense

+965 =
Wages Payable

-965
Retained Earnings

+965 Wages
Expense

-965

Solutions Manual, Module 3

Cambridge Business Publishers, 2008 3-21

E3-26continued
AR OI
AR 300 OI 300

300 300

g. Adjusting entry for interest earned

+300
Interest receivable

Interest Retained (Other) Earnings Income

+300

+300 = +300

E3-27 (30 minutes) a. Depreciation ExpenseEquipment ................... Accumulated DepreciationEquipment ......

To record depreciation for the period.

610 610 1,890 1,890

b.

Supplies Expense Supplies

To record supplies expense for the period ($2,990 $1,100 = $1,890).

c.

Utilities Expense Utilities Payable

To record accrued utilities expense

390 390 700 700

d.

Rent Expense Prepaid Rent

To record rent expense for the month ($2,800 / 4 = $700).

e.

Unearned Premium Revenue Premium Revenue

To record premium revenue earned [($624 / 12) 9 = $468].

468 468

f.

Wages Expense Wages Payable

To accrue wages at the end of the period.

965 965 300 300

g.

Interest Receivable Interest Income

To accrue interest earned but not yet received.

Cambridge Business Publishers, 2008 3-22 Financial Accounting for MBAs, 3rd Edition

PROBLEMS
P3-39 (35 minutes)
Balance Sheet
Transaction
WE WP 720 720

Income Statement
ExpenNet = ses Income

Cash Noncash Liabil- Contrib. Earned Rev+ = + + Asset Assets ities Capital Capital enues

WE 720 WP 720

1. Accrue salary expense

+720 = Wages
Payable

-720
Retained Earnings

+720
Wage E xpense

-720

IE IP

200 200
IE 200 IP 200

2. Accrue Interest expense

+200 = Interest
Payable

-200
Retained Earnings

+200
Interest Expense

-200

AR 900 Rev 900

AR 900 Rev 900

3. Accrue fees receivable

+900
Fees (Accounts) Receivable

Printing Retained Fees Earnings Revenue

+900

+900 = +900

OE 400 PPD 400

OE 400 PPD 400

4. Accrue maintenance expense

-400
Prepaid Maintenance

-400 =
Retained Earnings

+400
Maintenance = (Operating) Expense

-400

AE 300 PPDA 300

AE 300 PPDA 300

5. Accrue advertising expense

-300
Prepaid Advertising

-300 =
Retained Earnings

+300 Advertisting =
Expense

-300

RNTE RNTP

160 160

RNTE 160 RNTP 160

6. Accrue rent expense

+160 =
Rent Payable

-160
Retained Earnings

+160
Rent Expense

-160

AR OI

38 38
AR 38 OI 38

7. Accrue interest revenue

+38
Interest (Accounts) Receivable

Interest Retained (Other) Earnings income

+38

+38 = +38

Cambridge Business Publishers, 2008 3-32 Financial Accounting for MBAs, 3rd Edition

P3-39continued
DE AD 2,175 2,175

DE 2,175 AD 2,175

8. Record depreciation expense

-2,175
Accum. Depreciation

-2,175 =
Retained Earnings

+2,175 Deprecia- = -2,175

tion E xpense

P3-40 (20 minutes) Date Dec 31 Description Salaries Expense Salaries Payable
To accrue salaries at December 31 ($1,800 2/5 = $720).

Debit 720

Credit 720

31

Interest Expense Interest Payable

To accrue interest expense at December 31.

200 200 900 900 400 400 300 300

31

Fees Receivable Printing Revenue

To record revenue earned but not yet billed.

31

Maintenance Expense Prepaid Maintenance

To record December maintenance expense.

31

Advertising Expense Prepaid Advertising

To record December advertising expense ($900 1/3 = $300).

31

Rent Expense Rent Payable

To accrue one-half month's rent expense [(400 $0.80)/2 = $160].

160 160

31

Interest Receivable Interest Income

To accrue interest earned in December.

38 38

31

Depreciation ExpenseEquipment 2,175 Accumulated DepreciationEquipment ......

To record annual depreciation on equipment.

2,175

Solutions Manual, Module 3

Cambridge Business Publishers, 2008 3-33

P3-44 (25 minutes) a.

Balance Sheet
n
Cash CS 11,500 11,500

Income Statement

Transactio Cash Noncash Liabil- Contrib. Earned RevExpenNet + = + + = Asset Assets ities Capital Capital enues ses Income +11,500 =
Common stock

Cash 11,500 CS 11,500

Apr. 1. Cash +11,500 received for Cash stock

PPE 6,100 Cash 6,100

PPE 6,100 Cash 6,100

Apr. 2. Purchase truck for cash

-6,100
Cash

+ 6,100 =
Truck

PPE 3,100 AP 2,100 Cash 1,000

PPE 3,100 AP 2,100 Cash 1,000

Apr. 2. Purchase equipment

-1,000
Cash

+3,100
Equipment

+2,100 = Accounts
Payable

PPI 2,880 Cash 2,880

PPI 2,880 Cash 2,880

Apr. 3. Purchase liability insurance

-2,880
Cash

+2,880
Prepaid insurance

SUP AP

1,200 1,200

SUP 1,200 AP 1,200

Apr. 5. Purchase supplies on account

+ 1,200
Supplies

+1,200 = Accounts
Payable

Cash UR

1,800 1,800

Cash 1,800 UR 1,800

Apr. 5. Cash in advance +1,800 Cash for roofing repairs

+1,800 = Unearned
roofing fees

Solutions Manual, Module 3

Cambridge Business Publishers, 2008 3-41

P3-44continued
Balance Sheet
Transaction
AR 5,500 Rev 5,500
AR 5,500 Rev 5,500

Income Statement

Cash Noncash Liabil- Contrib. Earned RevExpenNet + = + + = Asset Assets ities Capital Capital enues ses Income +5,500
Roofing Fees Revenue

Apr. 12. Bill customers for services.

+5,500
Accounts Receivable

+5,500 =
Retained Earnings

= +5,500

Cash AR

4,900 4,900

Cash 4,900 AR 4,900

Apr. 18. Cash +4,900 collected on Cash account

-4,900
Accounts Receivable

OE Cash

675 675

OE 675 Cash 675

Apr. 29. Paid -675 cash for fuel Cash

-675 =
Retained Earnings

+675
Fuel = (Operating) Expense

-675

AE Cash

100 100

AE 100 Cash 100

Apr. 30. Paid -100 cash for ads Cash

-100 =
Retained Earnings

+100 Advertising =
Expense

-100

WE Cash

2,500 2,500

WE 2,500 Cash 2,500

Apr. 30. paid -2,500 cash wages Cash

-2,500 =
Retained Earnings

+2,500
Wages Expense

= -2,500

AR Rev

4,000 4,000

AR 4,000 Rev 4,000

Apr. 30. Bill customers for services

+4,000
Accounts Receivable

+4,000 =
Retained Earnings

+4,000
Roofing Fees Revenue

= +4,000

Cambridge Business Publishers, 2008 3-42 Financial Accounting for MBAs, 3rd Edition

P3-44continued b.
Balance Sheet
Cash + Asset Noncash Assets

Income Statement
Net Expen= Incom ses e

Transaction
IE PPI
INSE 120 PPI 120

LiabilContrib. Earned Rev+ + ities Capital Capital enues

120 120

1. Recognize one month of insurance expense

-120
Prepaid Insurance

-120 =
Retained Earnings

+120 Insurance =
Expense

-120

SUPE SUP
SUPE 800

800 800

SUP 800

2. Recognize supplies expense

-800
Supplies

-800 =
Retained Earnings

+800
Supplies Expense

-800

DE AD

125 125
DE 125 AD 125

3. Recognize depreciation expense Trucks

-125
Accum. Deprn --Trucks*

-125 =
Retained Earnings

+125 Depreciation =
Expense

-125

DE AD

35 35
DE 35 AD 35

4. Recognize depreciation expense Equipment

-35
Accum. Deprn --Equipment*

-35
Retained Earnings

+35 Depreciation =
Expense

-35

UR Rev

450 450

UR 450 Rev 450

5. Recognize roofing fees earned

-450 =
Unearned Roofing Fees

Roofing Retained Fees Earnings Revenue

+450

+450 = +450

Solutions Manual, Module 3

Cambridge Business Publishers, 2008 3-43

P3-45 (25 minutes) a. Pownall Photomake Company Unadjusted Trial Balance December 31, 2008 Debit Cash.............................................................. $2,150 Accounts Receivable .................................. 3,800 Prepaid Rent ................................................ 12,600 Prepaid Insurance ....................................... 2,970 Supplies........................................................ 4,250 Equipment.................................................... 22,800 Accounts Payable ....................................... Unearned Photography Fees ..................... Common Stock............................................ Photography Fees Earned.......................... Wages Expense ........................................... 11,000 Utilities Expense.......................................... 3,420 Totals ............................................................ $62,990 b.
Balance Sheet
Transaction
AR Rev 925 925

Credit

$1,910 2,600 24,000 34,480 ______ $62,990

Income Statement
Expenses = Net Income

Cash Noncash Liabil- Contrib. Earned Rev+ = + + Asset Assets ities Capital Capital enues +925
Fees (Accounts) Receivable

AR 925 Rev 925

1. Fees earned but not received

+925 =
PhotoRetained graphy Earnings Fees Earned

+925

+925

DE AD

2,280 2,280

DE 2,280 AD 2,280

2. Recognize depreciation expense for one year

-2,280
Accum. Depreciation Equipment

-2,280 =
Retained Earnings

+2,280 Depreciation = -2,280

expense

OE ACC

400 400

OE 400 ACC 400

3. Recognize utilities expense

+400 = Utilities
Payable

-400
Retained Earnings

+400
Utilities Expense

-400

Cambridge Business Publishers, 2008 3-44 Financial Accounting for MBAs, 3rd Edition

P3-45continued
Balance Sheet
Transaction
RNTE 6,300 PPRNT 6,300
RNTE 6,300 PPRNT 6,300

Income Statement

Cash Noncash + = Asset Assets

LiabilContrib. Earned RevExpenNet + + = ities Capital Capital enues ses Income

4. Recognize rent expense for year

-6,300
Prepaid Rent

-6,300
Retained Earnings

+6,300
Rent Expense

= -6,300

UR Rev

2,600 2,600

UR 2,600 Rev 2,600

5. Recognize photo revenues

-2,600 =
Unearned photo. fees

+2,600 +2,600 PhotoRetained graphy Earnings Fees Earned

= +2,600

IE PPI

990 990
INSE 990 PPI 990

6. Recognize insurance expense

-990
Prepaid insurance

-990 =
Retained Earnings

+990 Insurance =
expense

-990

SUPE SUP

2,730 2,730

SUPE 2,730 SUP 2,730

7. Recognize supplies expense

-2,730
Supplies

-2,730 =
Retained Earnings

+2,730 Supplies = -2,730

expense

WE WP

375 375

WE 375 WP 375

8. Recognize wages expense

+375 =
Wages payable

-375
Retained Earnings

+375
Wages expense

-375

Solutions Manual, Module 3

Cambridge Business Publishers, 2008 3-45

P3-47 (40 minutes) a. BensEx Unadjusted Trial Balance December 31, 2008 Debit $ 2,300 5,120 1,680 6,270 42,240 $

Credit

Cash Accounts Receivable Prepaid Advertising Supplies Equipment Notes Payable Accounts Payable Common Stock Mailing Fees Earned Wages Expense Rent Expense Utilities Expense Totals b.

7,500 2,700 9,530 86,000

38,800 6,300 3,020 $105,730

________ $105,730

Balance Sheet

Income Statement
Net = Incom e

Transaction
AE 1,540 PPDA 1,540
AE 1,540 PPDA 1,540

Cash Noncash Liabil- Contrib. Earned RevExpen+ = + + Asset Assets ities Capital Capital enues ses

1. Recognize advertising expense

-1,540
Prepaid advertising

-1,540 =
Retained Earnings

+1,540 Advertising = -1,540

expense

DE AD

5,280 5,280

DE 5,280 AD 5,280

2. Recognize depreciation expense

-5,280
Accum. Deprn equipment

-5,280 =
Retained Earnings

+5,280 Depreciation = -5,280

expense

OE AP

325 325
OE 325 AP 325

3. Recognize utilities expense

+325 = Accounts
Payable

-325
Retained Earnings

+325
Utilities expense

-325

Cambridge Business Publishers, 2008 3-48 Financial Accounting for MBAs, 3rd Edition

P3-47continued
Balance Sheet
Transaction
WE WP 1,200 1,200

Income Statement

Cash Noncash Liabil- Contrib. Earned RevExpenNet + = + + = Asset Assets ities Capital Capital enues ses Income

WE 1,200 WP 1,200

4. Accrue wages expense

+1,200 = Wages
payable

-1,200
Retained Earnings

+1,200
Wages expense

= -1,200

SUPE SUP

4,750 4,750

SUPE 4,750 SUP 4,750

5. Record supplies expense

Supplies

-4,750 =

-4,750
Retained Earnings

+4,750 Supplies = -4,750

Expense

IE IP

450 450
IE 450 IP 450

6. Accrue interest expense

+450 = Interest
payable

-450
Retained Earnings

+450 Interest =
Expense

-450

RNTE AP

430 430

RNTE 430 AP 430

7. Recognize rent expense*

+430 = Accounts
Payable

-430
Retained Earnings

+430
Rent Expense

-430

* (1/2% $86,000 = $430). The rent for the year (6,300 = $525 x 12) has already been recognized in the accounts. See the beginning balances given in the problem statement.

Solutions Manual, Module 3

Cambridge Business Publishers, 2008 3-49