FGGFFD

Chapter 3
Accrual Accounting & Income

Short Exercises
(10 min.) S 3-1
Sales revenue.
Cost of goods sold
All other expenses
Net income..
Millions
850
(290)
(325)
$ 235
Beginning cash..
Collections ($850 $27)..
Payments for: inventory.
everything else.
Ending cash
$ 75
823
(380)
(255)
$ 263
(10 min.) S 3-2

Statement
Income statement
Reports (Amounts in millions)

Interest expense
Chapter 3
$ .8
3- 1
Balance sheet
3-2
Notes payable ($4.1 + $1.7 $1.6).
$4.2
Interest payable.
0.3
Financial Accounting 9/e Solutions
(10 min.) S 3-3

At the end of each accounting period, the business reports its
performance through the preparation of financial statements. In order to
be useful to the various users of financial statements they must be upto-date.
Accounts such as cash, Equipment, Accounts Payable,
Common Stock and Dividends are up-to date and require no adjustment
at the end of the accounting period.
Accounts such as Accounts
Receivable, Supplies, Salary Expense and Salaries Payable may not be

up to date as of the last day of the accounting period. Why? Because
certain transactions that took place during the month may not have been
recorded.
The accrued salaries, which are owed to the employees but have not
been paid, are an expense related to the current period but also
represent a liability or debt that is owed by the business. The business
must make an adjusting entry to record the accrued salary owed as both
an increase in Salary Expense and an increase in Salaries Payable. If
the business does not make this adjustment, the expenses will be
understated, net income will be overstated, and liabilities will be
understated.
Chapter 3
3- 3
3-4
(10 min.) S 3-4

The large auto manufacturer should record sales revenue when the
revenue is earned by delivering automobiles to Budget or Hertz. The
large auto manufacturer should not record any revenue prior to delivery
of the vehicles, because the large auto manufacturer hasnt earned the
revenue yet. The revenue principle governs this decision.
When the large auto manufacturer records the revenue from the sale, at
that time not before or after the large auto manufacturer should also
record cost of goods sold, the expense. The expense recognition
principle tells when to record expenses.
(10 min.) S 3-5
Depreciation is the periodic allocation of the cost of a tangible long-lived
asset, less its estimated residual value, over its estimated useful life. All
long-lived or plant assets, except for land, decline in usefulness during
their life and this decline is an expense. Accountants must allocate the
cost of each plant asset, except for land, over the assets useful life.
Depreciation is the process of allocating the cost of a plant asset to
expense. Depreciation also decreases the book value of the asset to
reflect its usage.
Chapter 3
3- 5
3-6
(10 min.) S 3-6
a. The Expense Recognition Principle

b. The Time Period Concept
c.
The Revenue Principle
d. The Revenue Principle

e.
The Expense Recognition Principle
(10 min.) S 3-7

a.
Oct. 31
Rent Expense ($3,000 1/6)...

Prepaid Rent.
To record rent expense.
Prepaid Rent
Oct. 1
3,000 Oct. 31
Bal.
2,500
500
500
Rent Expense
500
Oct. 31
500
Bal.
500
b.
Oct. 31
Supplies Expense ($950 $400)

Supplies..
To record supplies expense.
Chapter 3
550
550
3- 7
Supplies
Oct. 1
950 Oct. 31
Bal.
400
Supplies Expense
550
Oct. 31
550
Bal.
550
(10 min.) S 3-8

Req. 1
(a)
Jan. 1
Computer Equipment...
Cash.
Purchased computer equipment.
(b) Dec. 31 Depreciation Expense

Computer Equipment ($50,000 / 5).
Accumulated Depreciation
Computer Equipment.......
Record depreciation expense.
50,000
50,000
10,000
10,000
Req. 2
Computer Equipment
Jan. 50,000
Bal.
3-8
50,000
Accumulated
Depreciation
Computer
Equipment
Depreciation
Expense
Computer Equipment
Dec. 31 10,000
Dec. 31 10,000
Bal.
Bal.
10,000
10,000
Req. 3
Computer equipment.
$50,000
Less: Accumulated depreciation
(10,000)
Book value
$40,000
Chapter 3
3- 9
(10 min.) S 3-9

(Amounts in millions)
Income statement:
Salary expense ($42.4 + $2.2)..
2012
$44.6
Balance sheet:
Salary payable.........
2012
$ 2.2
(10 min.) S 3-10

Req. 1
Oct. 31
Nov. 30
Dec. 31
Interest Expense..
Interest Payable..
To accrue interest expense for October.
250
Interest Expense..
Interest Payable..
To accrue interest expense for November.
250
Interest Expense...
Interest Payable
To accrue interest expense for December.
250
Req. 2
Interest Payable
Oct.
3-10
31
250
Nov. 30
250
Dec. 31
250
250
250
250
Bal.
750
Req. 3
Dec. 31
Interest Payable..........
Cash..
To pay interest.
750
750
(10 min.) S 3-11

Req. 1
Oct. 31 Interest Receivable
Interest Revenue..
To accrue interest revenue for October.
250
Nov. 30 Interest Receivable

Interest Revenue...
To accrue interest revenue for November.
250
Dec. 31 Interest Receivable

Interest Revenue......
To accrue interest revenue for December.
250
Req. 2
Interest Receivable
Oct. 31
250
Nov. 30
250
Dec. 31
250
Chapter 3
3- 11
250
250
250
Bal.
750
Req. 3
Dec. 31
3-12
Cash.
Interest Receivable.
To collect interest.
750
750
(5-10 min.) S 3-12

Unearned revenues are liabilities because The World Star has received
cash from subscribers in advance of providing them with newspapers.
Receiving the cash in advance creates an obligation (a liability) for The
World Star. As The World Star delivers newspapers to subscribers, The
World Star earns the revenue, and the dollar amount of the unearned
revenue then goes into the revenue account.
a.
Cash.
Unearned Subscription Revenue.......
Received cash for revenue in advance.
b. Unearned Subscription Revenue..................

Subscription Revenue
To record the earning of subscription
revenue that was collected in advance.
60,000
60,000
40,000
40,000
(5-10 min.) S 3-13

Prepaid Rent at December 31:
a.
Unadjusted amount.
$18,000
b.
Adjusted amount ($18,000 $6,000)..
12,000
Rent Expense at December 31:

Chapter 3
3- 13
c.
Unadjusted amount
d.
Adjusted amount ($18,000 / 3).
3-14
-06,000
(10 min.) S 3-14

a.
b.
Accounts Receivable...
Service Revenue..
55,000
Cash.
Accounts Receivable.
35,000
Cash.
Unearned Service Revenue..
9,000
Unearned Service Revenue

Service Revenue..
7,000
55,000
35,000
9,000
7,000
(15-30 min.) S 3-15

Sparrow Sporting Goods Company
Income Statement
For the Year Ended March 31, 2012
Thousands
Net revenues.
$175,500
Cost of goods sold.
136,000
All other expenses..
29,000
Net income
$ 10,500

Statement of Retained Earnings
Chapter 3
3- 15
For the Year Ended March 31, 2012

Thousands
3-16
Retained earnings, March 31, 2011...
$21,500
Add: Net income
10,500
Retained earnings, March 31, 2012...
$32,000
(continued) S 3-15
Balance Sheet
March 31, 2012
Thousands
ASSETS
Current:
Cash........................................................
$ 20,800
Ac counts receivable..............................
28,000
Inventories..............................................
35,000
Other current assets..............................
5,000
Total current assets..........................
88,800
Property and equipment, net.................
6,300
Other assets............................................
22,000
Total assets..................................................
$117,100
LIABILITIES
Total current liabilities...........................
$ 55,100
Long-term liabilities...............................
7,500
Total liabilities..............................................
62,600
STOCKHOLDERS EQUITY
Common stock.......................................
22,500
Retained earnings..................................
32,000
Total stockholders equity...........................
54,500
Total liabilities and stockholders equity...
$117,100
Chapter 3
3- 17
(5-10 min.) S 3-16

CLOSING ENTRIES
Mar. 31
Net Revenues .
Retained Earnings.......
31
Retained Earnings.
Cost of Goods Sold.
All Other Expenses..
Thousands
175,500
175,500
165,000
136,000
29,000
Retained Earnings
Mar. 31, 2012 Expenses
165,000 Mar. 31, 2011 Bal.

Mar. 31, 2012 Revenues
Mar. 31, 2012 Bal.
21,500
175,500
32,000
Retained Earnings ending balance agrees with the amount reported on

the statement of retained earnings and the balance sheet (in S 3-15).
3-18
(5 min.) S 3-17
(Dollars in thousands)
Req. 1
Net working capital
$33,700
Total current assets - Total current liabilities

$88,800
$55,100
Req. 2
Current ratio
Total current assets

Total current liabilities
$88,800
$55,100
1.61
Total liabilities
Total assets
$62,600
$117,100
0.53
Req. 3
Debt ratio
Req. 4
Net working capital of $33,700 means current assets exceed current
liabilitiesa positive sign. The current ratio and debt ratio values are
strong.
Chapter 3
3- 19
(10 min.) S 3-18

1. Earned revenue of $10,000 on account:
a.
Net working capital = $43,700 [($88,800 + $10,000)- $55,100]
b. Current ratio
$98,800
$55,100
1.79
c.
$62,600
$127,100 ($117,100 +$10,000)
0.49
Debt ratio
2. Paid accounts payable of $10,000:

a. Net working capital = $33,700 [($88,800 - $10,000) - ($55,100- $10,000)]
3-20
b. Current ratio
$78,800
$45,100
1.74
c.
$52,600 ($62,600 - $10,000)

$107,100 ($117,100 -$10,000)
0.49
Debt ratio
Exercises
(5-10 min.) E 3-19A

Statement
1.
Income statement
Balance sheet
2.
Reports (in millions)

Sales revenue
$4,300
Operating expenses.
1,200
Accounts receivable
$ 900
Accounts payable.
1,000
Cash basis would report only the cash collections of $4,500 from
customers and the payment of operating expenses ($1,200).
Their balance sheet should have included neither accounts
receivable nor accounts payable.
(5-10 min.) E 3-20A

a. Cash Basis
b. Accrual Basis
Revenues...
$540,000
$530,000
Expenses...
420,000
440,000
Net income
$120,000
$ 90,000
Chapter 3
3- 21
The accrual basis measures net income better because its information
about revenues and expenses is more complete than the information
provided by the cash basis.
3-22
(5-10 min.) E 3-21A

Millions
a.
Revenue.
$840
The revenue principle says to record revenue when it has been

earned, regardless of when cash is collected. Therefore, report
the amount of revenue earned, regardless of when the company
collects cash.
b.
Total expense...
$500
The expense recognition principle governs accounting for

expenses.
c.
The income statement reports revenues and expenses.

The statement of cash flows reports cash receipts and cash
payments.
Chapter 3
3- 23
(15-20 min.) E 3-22A
Req. 1
Adjusting Entries
DATE
ACCOUNT TITLES
DEBIT CREDIT
a. Insurance Expense................................................
Prepaid Insurance ($400+$1,200$700)..........
900
b. Interest Receivable................................................
Interest Revenue...............................................
1,600
c. Unearned Service Revenue ($1,100 $500)........

Service Revenue...............................................
600
d. Depreciation Expense...........................................
Accumulated Depreciation..............................
4,800
e. Salary Expense ($18,000 3/5).............................

Salary Payable...............................................
10,800
f. Income Tax Expense ($21,000 .25)....................

Income Tax Payable......................................
5,250
900
1,600
600
4,800
10,800
5,250
Req. 2
Net income understated by omission of:
Interest revenue
Service revenue....
Total understatement..
Net income overstated by omission of:
Insurance expense
3-24
$ 1,600
600
$ (2,200)
$ 900
Depreciation expense..
Salary expense..
Income tax expense.
Total overstatement.
4,800
10,800
5,250
21,750
Overall effect net income overstated by
$19,550
(10-15 min.) E 3-23A

Missing amounts in italics.
1
Beginning Supplies
$ 500
$ 400
1,000
$1,000
1,700
800
1,000
400
2,200
1,200
2,000
1,400
Add: Payments for supplies

during the year
Total amount to account for
Less: Ending Supplies
Supplies Expense
(500)
$1,700
(500)
$ 700
(700)
$1,300
(500)
$ 900
Journal entries:
Situation 1:
Supplies.........................................
Cash............................................
1,700
Situation 2:
Supplies Expense.............................
Supplies.....................................
700
Chapter 3
1,700
700
3- 25
3-26
(10-20 min.) E 3-24A

Req. 1
Adjusting Entries
DATE
ACCOUNT TITLES
DEBIT
a. Interest Expense....................................................
Interest Payable.............................................
9,600
b. Interest Receivable............................................
Interest Revenue........................................
4,900
c. Unearned Rent Revenue ($12,000 / 2 6/12).......

Rent Revenue................................................
3,000
d. Salary Expense ($1,900 3)..............................

Salary Payable...............................................
7,600
e. Supplies Expense..................................................
Supplies ($3,200 $1,400)............................
1,800
f. Depreciation Expense ($80,000 / 5)......................

Accumulated Depreciation...........................
16,000
CREDIT
9,600
4,900
3,000
7,600
1,800
16,000
Req. 2
Book value = $64,000 ($80,000 $16,000)

Chapter 3
3- 27
(10-20 min.) E 3-25A

Accounts Receivable
Bal.
(c)
Bal.
Supplies
1,500
Bal.
500 (a)
900
Bal.
300
2,400
Salary Payable
(b)
400
Bal.
400
(d)
Service Revenue
Bal.
4,200
200
Bal.
200
Bal.
900
(b)
(d)
500
Bal.
5,600
Supplies Expense
(a)
500 Bal.
600
Bal.
100
Salary Expense
(c)
Bal.
3-28
200
1,900
400
2,300
(20-30 min.) E 3-26A

Honeyglazed Hams, Inc.
Income Statement
Year Ended December 31, 2012
Thousands
Revenues:
Sales revenue.............................
$40,900
Expenses:
Cost of goods sold....................
$25,000
Selling, administrative, and

general expense..................
10,300
Total expenses......................
35,300
Income before tax...........................
5,600
Income tax expense....................
2,100
Net income.......................................
$ 3,500
Honeyglazed Hams, Inc..

Thousands
Retained earnings, December 31, 2011.
$4,700
Add: Net income .
3,500
8,200
Less: Dividends..
(1,500)
Retained earnings, December 31, 2012.
$6,700
Chapter 3
3- 29
3-30
(continued) E 3-26A
Honeyglazed Hams, Inc.
Balance Sheet
December 31, 2012
Thousands
ASSETS
LIABILITIES
Cash. $ 3,700 Accounts payable
$ 7,900
Accounts receivable
1,700 Income tax payable..
500
Inventories.
1,600 Other liabilities..
2,400
Prepaid expenses.
1,600 Total liabilities...
10,800
Prop., plant, equip. $ 6,800
STOCKHOLDERS
Less: Accum.
EQUITY
deprec.. (2,800)
4,000 Common stock..
4,600
Other assets..
9,500 Retained earnings
6,700
Total stockholders equity 11,300

Total liabilities and
Total assets $22,100
Chapter 3
stockholders equity...
$22,100
3- 31
(10-20 min.) E 3-27A

One mechanism for solving this exercise is to prepare the relevant Taccounts, insert the given information, and solve for the unknown
amounts, shown in italics.
Amounts in millions
Receivables
Beg. bal.
Sales revenue
220
20,550 Collections
End. bal.
20,400
370
Prepaid Insurance
Beg. bal.
150
Payment
440 Insurance expense
End. bal.
170
420
Accrued Liabilities Payable

Beg. bal.
Payments
Other operating
expenses
4,300
End. bal.
3-32
600
4,400
700
Chapter 3
3- 33
(10-15 min.) E 3-28A

Req. 1
Income statement
Service revenue (430 80).
Balance sheet
Unearned service revenue...
Millions
350
80
Req. 2
Income statement
Service revenue (65 + 430 80)..
415
Balance sheet
80
Service revenue is greater in (2) because Bennett began the year owing
more phone service to customers. With collections for the year and the
amount of the ending liability unchanged, Bennett must have earned
more revenue in situation 2 than in situation 1.
Not required but helpful:
Earned revenue
3-34
Beg. bal.
65
415 Collected cash
430
End. bal.
Chapter 3
80
3- 35
(10-20 min.) E 3-29A

Req. 1
Journal
ACCOUNT TITLES
DATE
Closing Entries
Dec. 31 Service Revenue........................................
Other Revenue...........................................
Retained Earnings...............................
DEBIT CREDIT
23,900
400
24,300
31 Retained Earnings.....................................
Cost of Services Sold..........................
Selling, General, and Administrative
Expense...........................................
Depreciation Expense.........................
Income Tax Expense............................
22,000
31 Retained Earnings.....................................
Dividends..............................................
300
6,400
4,100
500
300
Net income for 2012 was $2,300 ($24,300 $22,000).
Req. 2
Retained Earnings
Dec. 31, 2011
Expenses
3-36
2,600
22,000
Dividends
300 Revenues
11,000
24,300
Dec. 31, 2012
Chapter 3
4,600
3- 37
(15-25 min.) E 3-30A
DATE
Journal
ACCOUNT TITLES
DEBIT CREDIT
Adjusting Entries
Dec.
31 Unearned Service Revenue.............................

Service Revenue ($19,500 $13,200)........
6,300
31 Salary Expense ($4,600 $4,300)...................

Salary Payable.............................................
300
31 Rent Expense ($1,600 $1,300)......................

Prepaid Rent................................................
300
31 Depreciation Expense ($700 $0)..................

Accumulated Depreciation.........................
700
31 Income Tax Expense ($1,500 $0)..................

Income Tax Payable....................................
1,500
6,600
300
300
700
1,500
Closing Entries
3-38
31 Service Revenue...............................................
Retained Earnings......................................
19,500
31 Retained Earnings............................................
Salary Expense...........................................
Rent Expense..............................................
Depreciation Expense................................
Income Tax Expense...................................
8,400
31 Retained Earnings............................................
Dividends.....................................................
1,400
19,500
4,600
1,600
700
1,500
1,400
Chapter 3
3- 39
(20-30 min.) E 3-31A

Req. 1
Anderson Production Company
Balance Sheet
December 31, 2012
ASSETS
Current Assets:
Cash................................................................................
$14,100
Prepaid rent ($800 $300)............................................
500
Total current assets..................................................
14,600
Plant Assets:
Equipment......
$42,000
Less accumulated depreciation

($3,400 + $700).
(4,100)
Total assets.........................................................................
37,900
$52,500
LIABILITIES
Current:
Accounts payable..........................................................
$ 5,100
Salary payable ($4,600 $4,300)..............................
300
Unearned service revenue ($9,100 $6,300)..............
2,800
Income tax payable....................................................
1,500
Total current liabilities..............................................
9,700
Note payable, long-term.....................................................
16,000
Total liabilities.....................................................................
25,700
STOCKHOLDERS EQUITY
3-40
Common stock................................................................
8,600
Retained earnings ($8,500 + $19,500 $4,600 $1,600

$700 $1,500 $1,400)..........................................
18,200
Total stockholders equity..............................................
26,800
Total liabilities and stockholders equity..........................
$52,500
(continued) E 3-31A
Req. 2
Current
Year
Net working =
capital
Total current assets current liabilities
$14,600 $9,700 = $4,900

$14,600
Current
rati = Total current liabilities = $9,700 =
o
1.51
Prior
Year
$5,000
1.55
Both net working capital and the current ratio have decreased indicating
that the ability to pay current liabilities with current assets has
deteriorated.
Debt ratio =
Total liabilities
Total assets
$25,700
=
$52,500
0.49
0.30
The overall ability to pay total liabilities deteriorated a little.
Chapter 3
3- 41
(30 min.) E 3-32A

a. Current ratio =
$50
= 1.11
$40 + $5
$40 + $5
$70 + $5
Debt ratio =
= 0.60
The purchase of equipment on account hurts both ratios.
b. Current ratio =
$50 $6
$40
$40 $6
= 0.53
$70 $6
= 1.10 Debt ratio =
The payment of long-term debt hurts the current ratio and improves
the debt ratio.
c. Current ratio =
$50 + $5
$40 + $5
$40 + $5
= 0.60
$70 + $5
= 1.22 Debt ratio =
Collecting cash in advance hurts both ratios.
d. Current ratio =
$50
$40 + $2
= 1.19
Debt ratio =
$40 + $2
= 0.60
$70
Accruing an expense hurts both ratios.
e. Current ratio =
$50 + $6
$40
= 1.40
A cash sale improves both ratios.
3-42
Debt ratio
$40
= .53
$70 + $6
(5-10 min.) E 3-33B

Statement
1.
Income statement
Balance sheet
2.
Reports (in millions)

Sales revenue..
$4,400
Operating expenses...
1,300
Accounts receivable..
$ 700
Accounts payable..
1,200
Cash basis would report only the cash collections of $4,600 from
customers and the payment of operating expenses ($1,300).The
balance sheet would include neither accounts receivable nor
accounts payable.
(5-10 min.) E 3-34B

a. Cash Basis
b. Accrual Basis
Revenues...
$510,000
$500,000
Expenses...
410,000
450,000
Net income
$100,000
$ 50,000
The accrual basis measures net income better because its information
about revenues and expenses is more complete than the information
provided by the cash basis.
Chapter 3
3- 43
(5-10 min.) E 3-35B

Millions
a.
Revenue.
$780
The revenue principle says to record revenue when it has been

earned, regardless of when cash is collected. Therefore, report
the amount of revenue earned, regardless of when the company
collects cash.
b.
Total expense...
$530
The expense recognition principle governs accounting for

expenses.
c.
3-44
The income statement reports revenues and expenses.

The statement of cash flows reports cash receipts and cash
payments.
(15-20 min.) E 3-36B
Req. 1
Adjusting Entries
DATE
ACCOUNT TITLES
DEBIT CREDIT
a. Insurance Expense...................................................
Prepaid Insurance ($300 + $900 $500)............
700
b. Interest Receivable................................................
Interest Revenue..................................................
1,300
c. Unearned Service Revenue ($1,200 $300)...........

Service Revenue...............................................
900
d. Depreciation Expense...............................................
Accumulated Depreciation..................................
4,400
Chapter 3
700
1,300
900
4,400
3- 45
e. Salary Expense ($17,000 3/5)................................

Salary Payable......................................................
10,200
f. Income Tax Expense ($26,000 .25).......................

Income Tax Payable.............................................
6,500
10,200
6,500
Req. 2
Net income understated by omission of:
Interest revenue..
Service revenue.............
Total understatement
Net income overstated by omission of:
Insurance expense
Depreciation expense..
Salary expense..
Income tax expense............
Total overstatement............
Overall effect net income overstated by.
3-46
$ 1,300
900
$ (2,200)
700
4,400
10,200
6,500
21,800
$19,600
(10-15 min.) E 3-37B

Missing amounts in italics.
1
Beginning Supplies
$ 400
$ 600
$1,100
$ 900
1,600
1,100
1,500
600
2,000
1,700
2,600
1,500
Add: Payments for supplies

during the year
Total amount to account for
Less: Ending Supplies
Supplies Expense
(200)
$1,800
(300)
$1,400
(1,000)
$1,600
(300)
$1,200
Journal entries:
Situation 1:
Supplies.
Cash..
1,600
Situation 2:
Supplies Expense
Supplies.......
1,400
Chapter 3
1,600
1,400
3- 47
3-48
(10-20 min.) E 3-38B
Req. 1
Adjusting Entries
DATE
ACCOUNT TITLES
DEBIT
a. Interest Expense.......................................................
Interest Payable....................................................
9,000
b. Interest Receivable...................................................
Interest Revenue..................................................
4,300
c. Unearned Rent Revenue ($13,900 / 2 6/12)..........

Rent Revenue.......................................................
3,475
d. Salary Expense ($1,300 3).....................................

Salary Payable......................................................
3,900
e. Supplies Expense.....................................................
Supplies ($2,900 $1,600)...................................
1,300
CREDIT
9,000
4,300
3,475
3,900
1,300
f. Depreciation Expense ($140,000 / 5)....................... 28,000

Accumulated Depreciation..................................
28,000
Req. 2
Book value = $112,000 ($140,000 $28,000)
Chapter 3
3- 49
3-50
(10-20 min.) E 3-39B

Accounts Receivable
Bal.
(c)
Bal.
Supplies
1,400
Bal.
300 (a)
500
Bal.
100
200
1,900
Salary Payable
(b)
700
Bal.
700
(d)
200
Bal.
Service Revenue
Bal.
800
Salary Expense
4,600
Bal.
(c)
500
(b)
(d)
200
Bal.
Bal.
1,000
2,400
700
3,100
5,300
Supplies Expense
(a)
200
Bal.
200
Chapter 3
3- 51
(20-30 min.) E 3-40B

Honeybee Hams, Inc.
Income Statement
Thousands
Revenues:
Sales revenue..........................
$42,200
Expenses:
Cost of goods sold..................
$25,500
Selling, administrative, and

general expense...................
10,000
Total expenses...................
35,500
Income before tax.............................
6,700
Income tax expense..........................
2,500
Net income.........................................
$ 4,200
Honeybee Hams, Inc.

Thousands
Retained earnings, December 31, 2011..
$4,600
Add: Net income .
4,200
8,800
3-52
Less: Dividends
(1,400)
Retained earnings, December 31, 2012..
$7,400
Chapter 3
3- 53
(continued) E 3-40B
Honeybee Hams, Inc.
Balance Sheet
December 31, 2012
Thousands
ASSETS
LIABILITIES
Cash. $ 3,400 Accounts payable. $ 7,700

Accounts receivable
1,900 Income tax payable..
600
Inventories.
1,700 Other liabilities..
2,400
Prepaid expenses
1,700 Total liabilities...
10,700
Prop., plant, equip. $ 6,700
STOCKHOLDERS
Less: Accum.
EQUITY
deprec. (2,500)
4,200 Common stock..
4,500
Other assets..
7,400
Total stockholders equity 11,900

Total assets $22,600
3-54
stockholders equity...
$22,600
(10-20 min.) E 3-41B

One mechanism for solving this exercise is to prepare the relevant Taccounts, insert the given information, and solve for the unknown
amounts, shown in italics.
Amounts in millions
Receivables
Beg. bal.
Sales revenue
End. bal.
210
21,010 Collections
20,900
320
Prepaid Insurance
Beg. bal.
160
Payment
470 Insurance expense
End. bal.
200
430
Accrued Liabilities Payable

Beg. bal.
Payments
Other operating
4,200
expenses
End. bal.
Chapter 3
640
4,290
730
3- 55
(10 min.) E 3-42B

Req. 1
Income statement
Service revenue (380 95)..
Balance sheet
Millions
285
95
Req. 2
Income statement
Service revenue (75 + 380 95)
360
Balance sheet
95
Service revenue is greater in (2) because Terra began the year owing
more phone service to customers. With collections for the year and the
amount of the ending liability unchanged, Terra must have earned more
revenue in situation 2 than in situation 1.
3-56
Not required but helpful:

Earned revenue
Beg. bal.
75
360 Collected cash
380
End. bal.
95
Chapter 3
3- 57
(10-20 min.) E 3-43B

Req. 1
Journal
ACCOUNT TITLES
DATE
Closing Entries
Dec. 31 Service Revenue...........................................
Other Revenue...........................................
Retained Earnings...................................
DEBIT CREDIT
24,300
200
24,500
31 Retained Earnings........................................
Cost of Services Sold..............................
Selling, General, and Administrative
Expense............................................
Depreciation Expense.............................
Income Tax Expense................................
22,500
Dividends..................................................
400
6,000
4,500
600
400
Net income for 2012 was $2,000 ($24,500 $22,500).
Req. 2
Retained Earnings
Dec. 31, 2011
Expenses
3-58
2,200
22,500
Dividends
400 Revenues
11,400
24,500
Dec. 31, 2012
Chapter 3
3,800
3- 59
(15-25 min.) E 3-44B
DATE
Dec.
Journal
ACCOUNT TITLES
Adjusting Entries
31 Unearned Service Revenue..........................
Service Revenue ($19,600 $13,300).....
6,300
31 Salary Expense ($5,600 $4,700)................

Salary Payable..........................................
900
31 Rent Expense ($2,300 $1,500)...................

Prepaid Rent.............................................
800
31 Depreciation Expense ($600 $0)...............

Accumulated Depreciation......................
600
31 Income Tax Expense ($1,200 $0)..............

Income Tax Payable.................................
1,200
Closing Entries
31 Service Revenue...........................................
Retained Earnings...................................
3-60
DEBIT CREDIT
900
800
600
19,600
Salary Expense........................................
Rent Expense........................................
Depreciation Expense.............................
Income Tax Expense................................
9,700
Dividends..................................................
1,100
6,300
1,200
19,600
5,600
2,300
600
1,200
1,100
Chapter 3
3- 61
(20-30 min.) E 3-45B
Req. 1
Durkin Production Company
Balance Sheet
December 31, 2011
ASSETS
Current:
Cash....
$14,200
Prepaid rent ($1,500 $800).........
700
14,900
Plant:
Equipment..
$44,000
Less accumulated depreciation

($3,500 + $600)........
(4,100)
Total assets.
39,900
$54,800
LIABILITIES
Current:
Accounts payable..................................................................
$ 4,700
Salary payable ($5,600 $4,700)..........................................
900
Unearned service revenue ($8,400 $6,300).......................
2,100
Income tax payable................................................................
1,200
Total current liabilities.....................................................
8,900
Note payable, long-term..........................................................
17,000
Total liabilities..........................................................................
25,900
STOCKHOLDERS EQUITY
Common stock.............................................................................
8,700
Retained earnings ($11,400 + $9,900* $1,100)........................
20,200
3-62
Total stockholders equity..........................................................
28,900
Total liabilities and stockholders equity...................................
$54,800
* Net income = $9,900 ($19,600 $5,600 $2,300 $600 - $1,200)
Chapter 3
3- 63
(continued) E 3-45B
Req. 2
Current
Year
Net working =
capital
Total current assets current liabilities
$14,900 = $8,900 = $6,000

$14,900
Current
rati = Total current liabilities = $8,900 =
o
1.67
Prior
Year
$7,000
1.70
Both net working capital and the current ratio have decreased indicating
that the ability to pay current liabilities with current assets has
deteriorated.
Debt ratio =
Total liabilities
Total assets
$25,900
=
$54,800
0.47
The overall ability to pay total liabilities deteriorated a little.
3-64
0.40
(30 min.) E 3-46B

a. Current ratio
$60
= 1.03
$50 + $8
Debt ratio
$70 + $8
= 0.80
$90 + $8
The purchase of equipment on account hurts both ratios.
b. Current ratio
$60 $5
= 1.10
$50
Debt ratio
$70 $5
= 0.76
$90 $5
The payment of long-term debt hurts the current ratio and improves
the debt ratio.
c. Current ratio
$60 + $4
= 1.19
$50 +$4
Debt ratio
$70 + $4
= 0.79
$90 + $4
$70 + $4
= 0.82
$90
$70
= 0.71
$90 + $8
Collecting cash in advance hurts both ratios.
d. Current ratio
$60
= 1.11
$50 + $4
Debt ratio
Accruing an expense hurts both ratios.
e. Current ratio
$60 + $8
= 1.36
$50
Debt ratio
A cash sale improves both ratios.
Chapter 3
3- 65
Serial Exercise
(3 hours) E 3-47
Reqs. 1, 2, 5, and 7
Cash
Jan.
Accounts Receivable
11,000
Jan. 2
700
1,000
3,900
Bal.
21
2,400
12
200
Adj.
2,000
28
1,500
26
400
Bal.
2,000
31
1,200
Bal.
Jan. 18
1,500
9,500
Supplies
Jan. 5
400 Adj.
Bal.
200
Equipment
200
Jan. 3
3,900
Bal.
3,900
Equipment
Furniture
Adj.
65
Jan. 4
4,700
Bal.
65
Bal.
4,700
Furniture
Adj.
3-66
1,500 Jan. 28
Accounts Payable
78
Jan. 26
400 Jan. 4
4,700
Bal.
78
5
Bal.
Chapter 3
400
4,700
3- 67
(continued) E 3-47
Reqs. 1, 2, 5, and 7
Salary Payable
Adj.
500
Bal.
500
Adj.
Common Stock
800 Jan. 21
2,400
Bal.
1,600
Retained Earnings
Jan. 2
11,000
Clo.
1,743 Clo.
Bal.
11,000
Clo.
1,200
5,300
Bal.
Dividends
Jan. 31
1,200 Clo.
Service Revenue
1,200
Clo.
Rent Expense
Jan. 2
700 Clo.
3-68
500 Clo.
Jan. 9
1,000
18
1,500
Bal.
2,500
Adj.
2,000
Adj.
800
5,300 Bal.
5,300
Utilities Expense
700
Jan. 12
200 Clo.
200
Depreciation Expense
Equipment
Salary Expense
Adj.
2,357
500
Adj.
65 Clo.
65
Depreciation Expense
Furniture
Adj.
78 Clo.
Supplies Expense
78
Adj.
Chapter 3
200 Clo.
200
3- 69
(continued) E 3-47
Req. 1
January 2 through 18 entries are repeated from Solution to E 2-36.
Journal
DATE
Jan.
ACCOUNT TITLES
Cash...........................................................
Common Stock......................................
11,000
700
Equipment.............................................
Cash.......................................................
3,900
Furniture....................................................
Accounts Payable.................................
4,700
Supplies....................................................
Accounts Payable.................................
400
Cash...........................................................
Service Revenue...................................
1,000
12 Utilities Expense.......................................
Cash.......................................................
200
18 Accounts Receivable...............................
Service Revenue...................................
1,500
21 Cash............................................................
Unearned Service Revenue...................
2,400
21 No entry; no transaction yet

CREDIT
11,000
Rent Expense............................................
Cash.......................................................
3-70
DEBIT
700
3,900
4,700
400
1,000
200
1,500
2,400
26 Accounts Payable......................................
Cash........................................................
400
28 Cash............................................................
Accounts Receivable.............................
1,500
31
1,200
Dividends...................................................
Cash......................................................
Chapter 3
400
1,500
1,200
3- 71
(continued) E 3-47
Reqs. 3 and 4
Steve Ruiz, Certified Public Accountant, P.C.
Adjusted Trial Balance
January 31, 2012
ACCOUNT TITLE
Cash
Accounts receivable
Supplies
Equipment
Accumulated depr. equip.
Furniture
Accumulated depr. furn.
Accounts payable
Salary payable
Unearned service revenue
Common stock
Retained earnings
Dividends
Service revenue
Rent expense
Utilities expense
Salary expense
3-72
TRIAL BALANCE
DEBIT
CREDIT
9,500
400
3,900
4,700
1,200
700
200
ADJUSTMENTS
DEBIT
CREDIT
(a) 2,000
(c) 200
(d1) 65
4,700
2,400
11,000
(d2) 78
(b) 800
2,500
9,500
2,000
200
3,900
4,700
(e) 500
(a)2,000
(b) 800
(e) 500
ADJUSTED TRIAL BALANCE

DEBIT
CREDIT
1,200
700
200
500
65
78
4,700
500
1,600
11,000
5,300
Depreciation expense equip.

Depreciation expense furn.
Supplies expense
20,600
Chapter 3
20,600
(d1) 65
(d2) 78
(c) 200
3,643
3,643
3- 73
65
78
200
23,243
23,243
(continued) E 3-47
Req. 5
DATE
(a) Jan.
(b)
Journal
ACCOUNT TITLES
Adjusting Entries
31 Accounts Receivable...............................
Service Revenue...................................
DEBIT
2,000
31 Unearned Service Revenue.....................

Service Revenue...................................
800
(c)
31 Supplies Expense ($400 $200).............

Supplies.................................................
200
(d1)
31 Depreciation Expense Equipment.......

Accumulated Depreciation Equip.....
65
(d2)
31 Depreciation Expense Furniture..........

Accumulated Depreciation Furn.......
78
(e)
31 Salary Expense.........................................
Salary Payable.......................................
500
3-74
CREDIT
2,000
800
200
65
78
500
(continued) E 3-47
Req. 6
Income Statement
Month Ended January 31, 2012
Revenues:
Service revenue
$5,300
Expenses:
Rent expense
$700
Salary expense
500
Supplies expense
200
Utilities expense
200
Depreciation expense furniture
65
Depreciation expense equipment
78
Total expenses
1,743
Net income
$3,557

Month Ended January 31, 2012
Retained earnings, January 1, 2012
Add: Net income
0
3,557
3,557
Less:
Dividends
(1,200)
Retained earnings, January 31, 2012

Chapter 3
$ 2,357
3- 75
3-76
(continued) E 3-47
Req. 6
Balance Sheet
January 31, 2012
ASSETS
LIABILITIES
Current assets:
Current liabilities:
Cash
$ 9,500
Accounts receivable
Supplies
2,000
200
revenue
500
1,600
6,800
$3,900
STOCKHOLDERS EQUITY
(65)
3,835 Common stock

Retained earnings
Furniture
$ 4,700
Unearned service
Less: accum.
depr.
Salary payable
11,700
Plant assets:
Equipment
Accounts payable
$4,700
Total stockholders equity
11,000
2,357
13,357
Less: accum.
depr.
Total assets
(78)
4,622 Total liabilities and

$20,157
stockholders' equity
Chapter 3
______
$20,157
3- 77
(continued) E 3-47
Req. 7
DATE
Journal
ACCOUNT TITLES
Closing Entries
Jan. 31 Service Revenue
Retained Earnings..
3-78
DEBIT CREDIT
5,300
31 Retained Earnings
Rent Expense
Utilities Expense..
Salary Expense
Depreciation Expense Equipment...
Depreciation Expense Furniture..
Supplies Expense.......
1,743
31 Retained Earnings
Dividends..
1,200
5,300
700
200
500
65
78
200
1,200
(continued) E 3-47
Req. 8
Net working
capital
= Total current assets current liabilities
Current ratio
Debt ratio
$11,700 $6,800 = $4,900

Total liabilities
Total assets
$11,700
$6,800
$6,800
$20,157
= 1.72
0.34
The company has an excess of current assets over its current liabilities.
The current and debt ratios indicate an excellent financial position. The
business has $1.72 in current assets for every $1.00 of current liabilities.
The debt ratio of 34% is not too high, which suggests that, overall, the
business should be able to pay its debts.
Chapter 3
3- 79
Quiz
Q3-48
Q3-49
Q3-50
Q3-51
Q3-52
Q3-53
Q3-54
Q3-55
Q3-56
Q3-57
Q3-58
Q3-59
Q3-60
Q3-61
Q3-62
b
b
c
d
a
b
b
a
b
d
b
a
b
d
d
($3,000 9/12 = $2,250)

($5,000 + $22,000 $15,000 = revenue of $12,000)
Current ratio = $29,700 / $25,100 = 1.183

Debt ratio
Q3-63
$7,965
Q3-64
$25,100 + $113,000
$29,700 + $188,500
= .633
($8,000 $510 $125 + $800 $200)

Salary Payable
Payment
3-80
136,000
Beg. bal.
Salary exp.
End. bal.
20,000
122,000
6,000
Problems
(15-20 min.) P 3-65A

(All amounts in millions)
1.
$40 x = $6 ; x = $34
2.
Revenues..
$40
Expenses..
(34)
Net income...
$ 6
3.
4.
Beginning receivables..
$ 10
Add: Revenues
40
Less: Collections...
(25)
Ending receivables
$25
Balance sheet
ASSETS
Current assets:
Receivables.
$ 25
Beginning accounts payable.
$ 7
Add: Expenses..
34
Less: Payments....
(37)
Ending accounts payable
$ 4
Balance sheet
LIABILITIES
Chapter 3
3- 81
Accounts payable
3-82
$ 4
(20-30 min.) P 3-66A

Req. 1
Date
July 1
Masters Consulting
Amount of Revenue (Expense) for July
Cash Basis
Accrual Basis
Expense
$(2,000)
$
0
Expense
(1,000)
Revenue
800
800
Expense
(700)
(700)
11
Revenue
19
3,400
24
Revenue
3,400
26
Expense
(2,000)
29
Expense
(1,500)
31
Expense
31
Revenue
ReReq. 2
Income (loss) before tax
$ (3,000)
(1,500)
$2,000 5 =
(400)
1,000
$2,600
Req. 3
The accrual-basis measure of net income is preferable because it accounts
for revenues and expenses when they occur, not when they are received or
paid in cash. For example, on July 11, the company earned $3,400 of
revenue and increased its wealth as a result. The accrual basis records this
revenue, but the cash basis ignores it. On July 24, the business collected
the receivable that was created by the revenue earned on account at July
11. The accrual basis records no revenue on July 24 because the
Chapter 3
3- 83
companys increase in wealth occurred back on July 11. The cash basis
waits until cash is received, on July 24, to record the revenue. This is too
late.
(10-20 min.) P 3-67A

Journal
DATE
ACCOUNT TITLES
Dec. 31 a. Insurance Expense.

Prepaid Insurance..
To record insurance expense.
4,650*
31 b. Salary Expense ($5,800 2/5)..

Salary Payable
To accrue salary expense.
2,320
31 c. Interest Receivable.
Interest Revenue
To accrue interest revenue.
600
31 d. Supplies Expense..
Supplies..
6,300**
31 e. Unearned Service Revenue

($12,100 60%)...
Service Revenue
To record revenue collected in advance.
31 f. Depreciation Expense Office
Furniture
3-84
DEBIT
CREDIT
4,650
2,320
600
6,300
7,260
7,260
3,000
Depreciation Expense Equipment..

Office Furniture..
Equipment
To record depreciation expense.
6,300
3,000
6,300
_____
* $1,050 + $4,800 $1,200 = $4,650

** $2,300 + $6,100 $2,100 = $6,300
Chapter 3
3- 85
(45-60 min.) P 3-68A

Req. 1
Lady, Inc.
July 31, 2012
ACCOUNT TITLE
Cash
Accounts receivable
Prepaid rent
Supplies
Furniture
Accumulated depreciation
Accounts payable
Salary payable
Common stock
Retained earnings
Dividends
Service revenue
Salary expense
Rent expense
Utilities expense
Depreciation expense
Supplies expense
3-86
TRIAL BALANCE
DEBIT
CREDIT
8,800
1,600
3,000
2,100
90,000
ADJUSTMENTS
DEBIT
CREDIT
(a) 1,700
(b 1,000*
(c) 1,630
3,000
3,200
(d) 1,500**
ADJUSTED TRIAL BALANCE

DEBIT
CREDIT
8,800
3,300
2,000
470
90,000
(e) 3,000***
14,000
75,060
3,900
2,400
460
17,000
(a) 1,700
(e) 3,000***
(b) 1,000*
(d) 1,500**
(c) 1,630
_____
3,900
5,400
1,000
460
1,500
1,630
4,500
3,200
3,000
14,000
75,060
18,700
112,260
112,260
8,830
8,830
_____
* $3,000 3 = $1,000
** $90,000 5 = $18,000 12 = $1,500
*** $5,000 3/5 = $3,000
Chapter 3
3- 87
118,460
118,460
(continued) P 3-68A
Req. 2
Lady, Inc.
Income Statement
Month Ended July 31, 2012
Revenues:
Service revenue
$18,700
Expenses:
Salary expense
$5,400
Supplies expense
1,630
1,500
Rent expense
1,000
Utilities expense
460
Total expenses
Net income
9,990
$ 8,710
Lady, Inc.
Month Ended July 31, 2012
Retained earnings, July 1, 2012
Add: Net income
$75,060
8,710
83,770
Less: Dividends
Retained earnings, July 31, 2012
3-88
(3,900)
$79,870
(continued) P 3-68A
Req. 2 (continued)
Lady, Inc.
Balance Sheet
July 31, 2012
ASSETS
Current assets:
Cash
LIABILITIES
$ 8,800
Accounts payable
$ 3,200
Accounts receivable
3,300
Salary payable
3,000
Prepaid rent
2,000
6,200
Supplies
470

Furniture
14,570
$90,000
STOCKHOLDERS EQUITY
Less: Accum.
deprec.
Common stock
(4,500)

14,000
79,870
93,870

Total assets
$100,070
stockholders equity
Chapter 3
$100,070
3- 89
(10-20 min.) P 3-69A

Req. 1
Journal
DATE
Apr.
3-90
ACCOUNT TITLES AND EXPLANATION
DEBIT CREDIT
30 Accounts Receivable ($6,830 $6,300)..........

Rental Revenue.
To accrue rental revenue.
530
30 Interest Receivable ($500 $0)..

Interest Revenue ($1,300 $800).
500
30 Supplies Expense ($400 $0)

Supplies ($1,200 $400)
400
30 Insurance Expense ($1,400 $0)..

Prepaid Insurance ($2,400 $1,000)..
1,400
30 Depreciation Expense ($1,900 $0).

($11,000 $9,100)..
1,900
30 Wage Expense ($2,300 $1,600).........

Wages Payable ($700 $0)...
To accrue wage expense.
700
30 Unearned Rental Revenue ($1,700 $1,300)..

Rental Revenue*..
400
530
500
400
1,400
1,900
700
400
_____
To record revenue that was collected in advance.
* ($20,630 - $19,700 - $530)
Chapter 3
3- 91
(continued) P 3-69A
Req. 2
Total assets
$80,230 ($8,200 + $6,830 + $500 + $4,900 +

$800 + $1,000 + $69,000 $11,000)
Total liabilities
$8,800 ($6,800 + $700 + $1,300)
Net income
$15,230 ($20,630 + $1,300 $1,900 $400

$100 $2,300 $600 $1,400)
Total equity
$71,430 ($80,230 $8,800) or ($19,000 +

$41,000 + $15,230 - $3,800)
3-92
(20-30 min.) P 3-70A

Req. 1
Simpson Corporation
Income Statement
Year Ended March 31, 2012
Revenues:
Service revenue
$105,500
Expenses:
Salary expense
$39,800
Rent expense
10,100
Insurance expense
4,000
Interest expense
2,700
Supplies expense
2,400
1,300
Income before tax
60,300
45,200
Income tax expense
7,000
Net income
$ 38,200
Simpson Corporation
Year Ended March 31, 2012
Retained earnings, March 31, 2011
Add: Net income
$ 2,000
38,200
40,200
Less: Dividends
(23,000)
Chapter 3
3- 93
$17,200
(continued) P 3-70A
Req. 1 (continued)
Simpson Corporation
Balance Sheet
March 31, 2012
ASSETS
Cash
LIABILITIES
$ 1,700 Accounts payable
$ 3,100
Accounts receivable
8,800 Interest payable
700
Supplies
2,000 Unearned service revenue
800
Prepaid rent
1,700 Income tax payable
2,400
Note payable
18,400
Total liabilities
25,400
Equipment
$36,000
Less: Accum.
deprec.
(4,600) 31,400
STOCKHOLDERS EQUITY
Common stock
3,000
Retained earnings
17,200
20,200

Total assets
3-94
$45,600
stockholders equity
$45,600
Req. 2
Debt ratio:
$25,400
$45,600
0.56
Simpson is in compliance with its debt agreement, which requires the

company to maintain a debt ratio no higher than 0.60.
Chapter 3
3- 95
(20 min.) P 3-71A

Req. 1
DATE
Mar.
Journal
ACCOUNT TITLES
Closing Entries
31 Service Revenue..
Retained Earnings.........
DEBIT
94,100
31 Retained Earnings..
Advertising Expense
Depreciation Expense..
Interest Expense...
Salary Expense..
Supplies Expense.
35,200
31 Retained Earnings..
Dividends........
32,500
CREDIT
94,100
11,000
1,000
300
17,900
5,000
32,500
Req. 2
Retained Earnings
35,200 Mar. 31, 2011 Bal.
19,500
Mar. 31, 2012 Dividends
32,500 Mar. 31, 2012 Revenues
94,100
Mar. 31, 2012 Bal.
45,900
Net income = $58,900 ($94,100 - $35,200)
Req. 3
3-96
Retained Earnings increased during the year because net income of

$58,900 exceeded dividends of $32,500.
Chapter 3
3- 97
(25-40 min.) P 3-72A

Req. 1
Mountain Lodge Service, Inc.
Balance Sheet
March 31, 2012
ASSETS
Current assets:
Cash
$ 7,500
Accounts receivable
16,600
Prepaid expenses
5,000
Supplies
3,700
32,800
Plant assets:
Equipment
$42,500
Less: Accumulated depreciation
(6,700)
35,800
Other assets
13,700
Total assets
$82,300
LIABILITIES
Current portion of note payable
Accounts payable
400
14,100
Salary payable
2,500
3,700
20,700
Note payable, long-term

Total liabilities
5,700
26,400
STOCKHOLDERS EQUITY
3-98
Common stock
10,000
Retained earnings
45,900*
55,900
Total liabilities and stockholders equity
$82,300
(continued) P 3-72A
Req. 1 (continued)
*Retained earnings, March 31, 2011.
$19,500
Add: Net income ($94,100 $11,000 $1,000

$300 $17,900 $5,000).
58,900
78,400
Less: Dividends...........
(32,500)
$45,900
Req. 2
2012
Net working = Total current assets - $32,800 capital
current liabilities
$20,700 =
Current ratio =
2011
$12,100 $11,800

$32,800
=
= 1.58
$20,700
1.20
The increase in both working capital and the current ratio indicate that
the ability to pay current liabilities with current assets improved during
2012.
Chapter 3
3- 99
Debt ratio
Total liabilities
Total assets
2012
2011
$26,400
= 0.32
$82,300
0.25
The overall debt position deteriorated a little during 2012. The

improvement in the current ratio is greater than the deterioration in the
debt ratio. However, Mountain Lodges overall debt position is strong
because a debt ratio of .32 is not troublesome.
3-100
(45-60 min.) P 3-73A

Req. 1
Current ratio

$15.8
$8.6
1.84
$13.9
Debt ratio
Total liabilities
Total assets
$8.6 + $5.3
$32.1
= 0.43
Req. 2
Current Ratio
Debt Ratio
a.
$15.8 ($8.6 1/2)

($8.6 1/2)
= 2.67
$13.9 ($8.6 1/2)

$32.1 ($8.6 1/2)
0.35
b.
$15.8 + $2.0
$8.6
= 2.07
$13.9 + $2.0
$32.1 + $2.0
0.47
c.
$15.8 + $2.4
$8.6
= 2.12
$13.9
$32.1 + $2.4
0.40
d.
$15.8 $.7
$8.6
= 1.75
$13.9
$32.1 $.7
0.44
e.
$15.8
$8.6 + $0.5
= 1.74
$13.9 + $0.5
$32.1
0.45
Chapter 3
3- 101
f.
$15.8 $1.5
$8.6
= 1.66
$13.9 + $2.5
$32.1 + $4.0 $1.5
0.47
g.
$15.8
$8.6
= 1.84
$13.9
$32.1 $0.4
0.44
3-102
(continued) P 3-73A
Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a companys current ratio is greater than 1.0, as it is for Harrington,
paying off a current liability will always increase the current ratio.
f. Borrowing money on long-term debt will always increase the current
ratio and increase the debt ratio.
Chapter 3
3- 103
(15-20 min.) P 3-74B

1.
$37 x = $7; x = $30
2.
Revenues..
$37
Expenses..
30
Net income...
$ 7
3.
Beginning receivables.........
$ 11
Add: Revenues
37
Less:
4.
3-104
Collections..
(20)
Ending receivables
$ 28
Balance sheet
ASSETS
Current assets:
Receivables
$ 28
Beginning accounts payable..
$ 6
Add: Expenses
30
Less: Payments.....
(35)
Ending accounts payable.
$ 1
Balance sheet
LIABILITIES
Accounts payable
$1
(20-30 min.) P 3-75B

Req. 1
Date
Dec.
Healthy Hearts Consulting

Amount of Revenue (Expense) for December
Cash Basis
Accrual Basis
1 Expense
$ (3,500)
Expense
4 Expense
$(900)
Expense
5 Revenue
$500
Revenue
$500
8 Expense
$(200)
Expense
$(200)
11 Revenue
Revenue
$3,100
19 Expense
Expense
24 Revenue
$3,100
Revenue
26 Expense
$(1,800)
Expense
29 Expense
$(800)
Expense
$(800)
Expense
$(700)
Revenue
$400
31 Expense
31 Revenue
Req. 2
Income (loss)
before tax
$(3,600)
Income before tax
$2,300
Req. 3
The accrual-basis measure of net income is preferable because it accounts
for revenues and expenses when they occur, not when they are received or
paid in cash. For example, on Dec. 11, the company earned $3,100 of
revenue and increased its wealth as a result. The accrual basis records this
revenue, but the cash basis ignores it. On Dec. 24, the business collected
the receivable that was created by the revenue earned on account at Dec.
Chapter 3
3- 105
11. The accrual basis records no revenue on Dec. 24 because the

companys increase in wealth occurred back on Dec. 11. The cash basis
waits until cash is received, on Dec. 24, to record the revenue. This is too
late.
(10-20 min.) P 3-76B
DATE
Dec. 31 a.
31 b.
31 c.
31 d.
31 e.
3-106
Journal
DEBIT
Insurance Expense............................
Prepaid Insurance.........................
To record insurance expense
3,500*
Salary Expense ($6,200 1/5)............

Salary Payable...........................
1,240
Interest Receivable.............................
Interest Revenue...........................
500
Supplies Expense...............................
Supplies.........................................
6,800**

($11,900 70%)...................................
Service Revenue...........................
To record revenue that was collected
in advance.
CREDIT
3,500
1,240
500
6,800
8,330
8,330
31 f.
Depreciation Expense Office .........

Furniture...................................
Depreciation Expense Equipment..
Office Furniture........................
Equipment.................................
3,500
5,800
3,500
5,800
_____
* $800 + $3,600 $900 = $3,500

** $2,700 + $6,400 $2,300 = $6,800
Chapter 3
3- 107
(45-60 min.) P 3-77B

Req. 1
Princess, Inc.
August 31, 2012
ACCOUNT TITLE
Cash
Accounts receivable
Prepaid rent
Supplies
Furniture
Accumulated depreciation
Accounts payable
Salary payable
Common stock
Retained earnings
Dividends
Service revenue
Salary expense
Rent expense
Utilities expense
3-108
TRIAL BALANCE
DEBIT
CREDIT
8,300
1,900
2,100
2,400
63,000
ADJUSTMENTS
DEBIT
CREDIT
(a) 2,100
(b)
(c)
3,700
4,000
700*
2,090
(d) 1,750**
ADJUSTED
TRIAL BALANCE
DEBIT
CREDIT
8,300
4,000
1,400
310
63,000
(e) 3,060***
13,000
53,430
4,300
2,600
530
11,000
(a) 2,100
(e) 3,060***
(b) 700*
(d) 1,750**
4,300
5,660
700
530
1,750
5,450
4,000
3,060
13,000
53,430
13,100
Supplies expense
85,130
85,130
(c) 2,090
9,700
_____
9,700
* $2,100 3 = $700
** $63,000 3 = $21,000 12 = $1,750
*** $5,100 3/5 = $3,060
Chapter 3
3- 109
2,090
92,040
92,040
(continued) P 3-77B
Req. 2 (continued)
Princess, Inc.
Income Statement
Month Ended August 31, 2012
Revenues:
Service revenue
$13,100
Expenses:
Salary expense
$5,660
Supplies expense
2,090
1,750
Rent expense
700
Utilities expense
530
Total expenses
Net income
10,730
$2,370
Princess, Inc.
Month Ended August 31, 2012
Retained earnings, August 1, 2012
Add: Net income
$53,430
2,370
55,800
Less: Dividends
Retained earnings, August 31, 2012
3-110 Financial Accounting 9/e Solutions Manual
(4,300)
$51,500
(continued) P 3-77B
Req. 2 (continued)
Princess, Inc.
Balance Sheet
August 31, 2012
ASSETS
LIABILITIES
Current assets:
Cash
$8,300
Accounts payable
Accounts receivable
4,000
Prepaid rent
1,400 Total current liabilities
Supplies
$63,000
STOCKHOLDERS EQUITY
Common stock
(5,450)

Total assets
7,060
14,010
Less: Accum.
deprec.
3,060
310

Furniture
Salary payable
$ 4,000
13,000
51,500
64,500
______ Total liabilities and
______
$71,560
$71,560
stockholders equity
Chapter 3
Accrual Accounting and Income
3-111
(10-20 min.) P 3-78B
Req. 1
Journal
DATE
Apr.
DEBIT CREDIT
30 Accounts Receivable ($6,800 $6,300).

Rental Revenue.
To accrue rental revenue.
500
30 Interest Receivable ($400 $0).

Interest Income ($400 $0).........
400
30 Supplies Expense ($700 $0)..........

Supplies ($1,300 $600).......
700
30 Insurance Expense ($1,500 $0)..

Prepaid Insurance ($2,400 $900)..
1,500
30 Depreciation Expense ($1,400 $0)....

($10,200 $8,800)
1,400
30 Wage Expense ($2,500 $1,300).

Wages Payable ($1,200 $0)...
1,200
30 Unearned Rental Revenue ($2,000 $1,800).

Rental Revenue*..
To record revenue that was collected in
advance.
200
500
400
700
1,500
1,400
1,200
200
_____
* ($15,700 - $15,000 - $500)
Chapter 3
3-113
(continued) P 3-78B
Req. 2
Total assets
$75,200 ($8,400 + $6,800 + $400 + $5,300 + $600

+ $900 + $63,000 $10,200)
Total liabilities
$9,300 ($6,300 + $1,200 + $1,800)
Net income
$9,200 ($15,700 + $700 $1,400 $700 $400

$2,500 $700 $1,500)
Total equity
$65,900 ($75,200 $9,300) or ($9,300 + $46,200

+ $9,200 - $3,500)
(20-30 min.) P 3-79B

Req. 1
Nicholl Corporation
Income Statement
Year Ended May 31, 2012
Revenues:
Service revenue
$97,800
Expenses:
Salary expense
$40,200
Rent expense
10,300
Insurance expense
3,600
Interest expense
2,600
Supplies expense
2,500
1,200
Income before tax
60,400
37,400
Income tax expense
7,100
Net income
$30,300
Nicholl Corporation
Year Ended May 31, 2012
Retained earnings, May 31, 2011
$ 4,000
Add: Net income
30,300
34,300
Less: Dividends
(20,000)
Chapter 3
3-115
Retained earnings, May 31, 2012
$14,300
(continued) P 3-79B
Req. 1 (continued)
Nicholl Corporation.
Balance Sheet
May 31, 2012
ASSETS
Cash
LIABILITIES
Accounts receivable
8,600 Unearned service
Supplies
2,200
Prepaid rent
1,800 Interest payable
revenue
900
Income tax payable

Equipment
$37,300
Less: Accum.
deprec.
(4,100)
$ 3,700
500
2,100
Note payable
18,800
Total liabilities
26,000
33,200
STOCKHOLDERS EQUITY
Common stock
7,000
Retained earnings
14,300
21,300

Total assets
$47,300
stockholders equity
$47,300
Req. 2
Debt ratio:
$26,000
Chapter 3
0.55
3-117
$47,300
Nicholl Corporations debt ratio of 0.55 is in compliance with the lenders
debt restriction.
(20 min.) P 3-80B
Req. 1
Journal
DATE
ACCOUNT TITLES
DEBIT
Closing Entries
Mar. 31 Service Revenue
Retained Earnings
CREDIT
91,500
91,500
31 Retained Earnings.
Salary Expense..
Supplies Expense.
Advertising Expense
Depreciation Expense.
Interest Expense...
36,300
31 Retained Earnings.
Dividends
32,500
17,700
4,800
11,400
2,000
400
32,500
Req. 2
Retained Earnings
36,300 Mar. 31, 2011 Bal.
20,000
Mar. 31, 2012 Dividends
32,500 Mar. 31, 2012 Revenues

Mar. 31, 2012 Bal.
91,500
42,700
Net income = $55,200 ($91,500 - $36,300)

Req. 3
Retained Earnings increased during the year because net income of
$55,200 exceeded dividends of $32,500.
Chapter 3
3-119
(30-40 min.) P 3-81B
Req. 1
Cool River Service, Inc.
Balance Sheet
March 31, 2012
ASSETS
Current assets:
Cash.......................................................................
$ 7,400
Accounts receivable.............................................
17,000
Prepaid expenses..................................................
3,000
Supplies.................................................................
5,500
Total current assets..........................................
32,900
Plant assets:
Equipment..............................................................
$42,800
Less: accumulated depreciation..........................(6,900)
35,900
Other assets................................................................
14,000
Total assets.................................................................
$82,800
LIABILITIES
Accounts payable..................................................
$14,400
Current portion of note payable...........................
700
Salary payable.......................................................
2,600
Unearned service revenue....................................
3,600
Total current liabilities......................................
21,300
Note payable, long-term.............................................
5,600
Total liabilities.............................................................
26,900
STOCKHOLDERS EQUITY
Common stock............................................................
13,200
Retained earnings ..................................................
42,700*
Total stockholders equity......................................
55,900
Total liabilities and stockholders equity..................
$82,800
Chapter 3
3-121
(continued) P 3-81B
Req. 1 (continued)
_____
*Computation:
Retained earnings, March 31, 2011..
Add: Net income ($91,500 $11,400 $2,000
$400 $17,700 $4,800)..........
$ 20,000
55,200
75,200
(32,500)
$42,700
Less: Dividends..
Retained earnings, March 31, 2012..
Req. 2
2012
Net working = Total current assets capital

current liabilities
$32,900 $21,300 =

Current ratio =
2011
$11,600 $11,000
$32,900
= 1.54
$21,300
1.30
The increase in both working capital and the current ratio indicate that
the ability to pay current liabilities with current assets improved during
2012.
Debt ratio
Total liabilities
Total assets
$26,900
$82,800
= 0.32
0.35
Cool River Services overall debt position improved a bit from 2011 to
2012.
Chapter 3
3-123
(45-60 min.) P 3-82B
Req. 1
Current ratio

$15.4
= 1.64
$9.4
$14.9
Debt ratio
Total liabilities
Total assets
$9.4 + $5.5
$31.2
= 0.48
Req. 2
Current Ratio
a.
$15.4 ($9.4 1/2)

($9.4 1/2)
Debt Ratio
=
2.28
$14.9 ($9.4 1/2)

$31.2 ($9.4 1/2)
0.38
b.
$15.4 + $3.0
$9.4
1.96
$14.9 + $3.0
$31.2 + $3.0
0.52
c.
$15.4 + $2.4
$9.4
1.89
$14.9
$31.2 + $2.4
0.44
d.
$15.4 $.6
$9.4
1.57
$14.9
$31.2 $.6
0.49
e.
$15.4
$9.4 + $0.3
1.59
$14.9 + $0.3
$31.2
0.49
f.
$15.4 $2.0
$9.4
1.43
0.52
$14.9 + $2.9
$31.2 + $4.9 $2.0
g.
$15.4
$9.4
$14.9
$31.2 $0.9
1.64
Chapter 3
0.49
3-125
(continued) P 3-82B
Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a companys current ratio is greater than 1.0, as for Hiaport, paying
off a current liability will always increase the current ratio.
f. Borrowing money on long-term debt will always increase the current
ratio and increase the debt ratio.
Challenge Exercises and Problem

(20-25 min.) E 3-83
(Dollar amounts in thousands)
December 31, 2011
Current assets = $11,100 ($1,500 + $5,900 + $2,700 + $1,000)
Current liabilities = $6,100 ($2,600 + $1,600 + $1,900)
Net working capital = $5,000 ($11,100 - $6,100)
Current
ratio
$11,100
=
$6,100
1.82
December 31, 2012

Current assets = $10,700 ($9001 + $6,8002 + $2,7003 + $3004)
Current liabilities = $5,200 ($1,2005 + $1,6006 + $2,4007)
Net working capital = $5,500 ($10,700 - $5,200)
Current
ratio
_____
$10,700
=
$5,200
2.06
Computations of December 31, 2012 balances:

1
Cash = $1,500 $7,300 + $8,100 $1,400 = $900
Receivables = $5,900 + $9,000 $8,100 = $6,800
No change in the Inventory balance.
Prepaid expenses = $1,000 $700 = $300
Accounts payable = $2,600 $1,400 = $1,200
No change in the Unearned Revenues balance.

Chapter 3
3-127
Accrued expenses payable = $1,900 + $500 = $2,400
Conclusion:
Valley Forges net working capital and current ratio

improved during 2012. The companys current ratio is
very strong.
(60 min.) E 3-84
a. Net income:
Service revenue:
($161,000 + $1,650 + $32,200).
$194,850
Expenses:
Salary ($37,000 + $3,500).
$ 40,500
Depreciation building
2,600
Supplies...
Insurance.
3,100
Advertising..
7,300
Utilities.
1,500
2,000
57,000
Net income..
$137,850
b. Total assets:
Cash
$ 7,300
Accounts receivable ($7,500 + $32,200)
39,700
Supplies ($4,600 $3,100)
1,500
Prepaid insurance ($3,500 $1,500).
2,000
Building
Less: Accum. Depr.
$110,000
(18,200)
($15,600 + $2,600)..
Land
Total assets.
Chapter 3
91,800
53,000
$195,300
3-129
(continued) E 3-84
c. Total liabilities:
d.
Accounts payable..........................................
Salary payable...............................................
($5,500 $1,650).......................................
Total liabilities...............................................
6,100
3,500
3,850
$ 13,450
Total stockholders equity:

Common stock..............................................
Retained earnings, beginning......................
Add: Net income...........................................
Less: Dividends............................................
Total stockholders equity............................
$ 46,000
137,850
197,850
(16,000
$ 14,000
167,850
$181,850
e. Total assets = Total liabilities + Total stockholders equity

$195,300
=
$13,450 +
$181,850
(20 min.) P 3-85

Express Detail Inc.
Balance Sheet
December 31, 2012
ASSETS
Cash (a)
LIABILITIES
$ 15,300
Accounts payable (g)
$ 3,000
Accounts receivable (c) 1,400
Advertising payable(h)
500
Supplies (d)
Salary payable (i)
500
1,000

Equipment (e)
17,700
$35,000
Unearned gift certificate

revenue (b)
1,200
Total liabilities
5,200
Less: Accum.
deprec.(f)(12,000)
23,000
STOCKHOLDERS EQUITY
Total assets
$40,700
Common stock (j)
18,000
Retained earnings (k)
17,500
Total stockholders
equity
35,500

stockholders equity
Chapter 3
$40,700
3-131
(continued) P 3-85
Supporting computations
(a)
Bal. 12/31/2011
Cash
1,300
Cash collections from

customers
12,500 Salaries paid

31,000
Issuance of common stock
8,000
500 Dividends paid

5,000 Purchase of equipment
5,500 Payments of accounts
payable
1,500 Advertising paid
1,500
Bal. 1/31/2012
(b)
15,300
Unearned Gift Certificate Revenue

800 Bal. 12/31/2011
Gift certificate revenue earned
600
1,000 Sale of gift certificates

1,200 Bal. 1/31/2012 (given)
(c)
Accounts Receivable
Bal. 12/31/2011
Revenue on account
Bal. 1/31/2012
2,000
29,400
30,000 Collections from customers*
1,400
* Excludes the $1,000 for gift certificates which was received in advance, not on
account
(d)
Supplies
Bal. 12/31/2011
1,500
Purchase of supplies
3,500
Bal. 1/31/2012
1,000
(e)
4,000 Supplies expense
Equipment -- $35,000 ($30,000 + $5,000)
(f)
Accumulated depreciation -- $12,000 ($6,000 + $6,000)
Chapter 3
3-133
(continued) P 3- 85
(g)
Accounts payable
5,000 Bal. 12/31/2011
Payments on account
5,500
3,500 Purchase of supplies

3,000 Bal. 1/31/2012
(h) $2,000 Advertising expense - $1,500 advertising paid

(i)
Salary Payable
1,000 Bal. 12/31/2011
Salaries paid
12,500
12,000 Salary expense

500 Bal. 1/31/2012
(j)
Common Stock--$18,000 ($10,000 + $8,000)
(k)
Retained Earnings
12,000 Bal. 12/31/2011
Dividends
500
6,000 Net income

17,500 Bal. 1/31/2012
Decision Cases
(25 min.) Decision Case 1
Req. 1 Unadjusted trial balance:
Debit
Cash..
$ 8,000
Accounts receivable.
4,200
Supplies...
800
Prepaid rent
1,200
Land..
43,000
Accounts payable..
Credit
$12,000
Salary payable
Unearned service revenue..
700
Note payable, due in 3 years..
23,400
Common stock..
5,000
Retained earnings.
9,300
Service revenue.
9,100
Salary expense...
Rent expense..
Advertising expense.
Supplies expense..
Totals
3,400
0
900
0
$61,500
$59,500
Out of balance $2,000
Chapter 3
3-135
(continued) Decision Case 1

Req. 2 Adjusted trial balance:
Debit
Cash...
Credit
$8,000
Accounts receivable..
4,200
Supplies ($800 - $400)...
400
Prepaid rent ($1,200 x 11/12)
1,100
Land ($41,000 + $2,000).
43,000
Accounts payable...
12,000
Salary payable.
1,000
Unearned service revenue ($700 - $500)..
200
Note payable, due in 3 years...
25,400
Common stock
5,000
Retained earnings..
9,300
Service revenue ($9,100 + $500).
9,600
Salary expense ($3,400 + $1,000)
4,400
Rent expense ($1,200 x 1/12)..
100
Advertising expense..
900
Supplies expense...
400
Total
$62,500
$62,500
Req. 3
Current ratio
$8,000 + $4,200 + $400 + $1,100

$12,000 + $1,000 + $200
$13,700
$13,200
1.04
We might have trouble sleeping at night with a current ratio of 1.04. To

be safe, the current ratio should be around 1.50 or higher.
Chapter 3
3-137
(20-30 min.) Decision Case 2

Eagle Restaurant, Inc.
Income Statement
Month Ended October 31, 2012
Sales revenue...........................................
$32,000
Cost of goods sold...................................
$12,000
Wages expense........................................
5,000
Rent expense............................................
4,000
Insurance expense...................................
1,000
Depreciation expense..............................
1,000
23,000
Net income................................................
$ 9,000

Month Ended October 31, 2012
Retained earnings, October 1, 2012...................
Add: Net income.................................................
9,000
Less: Dividends..................................................
(3,000)
Retained earnings, October 31, 2012.................
$6,000

Balance Sheet
October 31, 2012
ASSETS
LIABILITIES
Cash
$ 7,000
Food inventory
5,000 Unearned revenue
3,000
Prepaid insurance
1,000
Dishes, silver
4,000
Fixtures
$24,000
OWNERS EQUITY
Less: Accum.
Common stock
deprec. (1,000)
Total assets
Recommendation:
10,000
$25,000
6,000
$41,000 Total liabilities and equity
31,000
$41,000
Do not expand the business. It is not meeting

Marks goals for net income or for total assets.
Chapter 3
3-139
(30-40 min.) Decision Case 3

Req. 1 (your highest price)
Advertising revenue ($22,000 + $4,000)
Expenses:
Salary
Utilities
Other (unrecorded)
Salary of your manager
Your expected monthly net income
Multiplier to compute price
Your highest price
$26,000
$4,000
900
1,100
5,000
11,000
$15,000
X 16
$240,000
Req. 2 (Williams asking price)

SW Advertising, Inc.
Statement of Retained Earnings and Common Stock
June 30, 2012
Beginning retained earnings
$ 93,000
Add: Net income
Revenue ($22,000 + $4,000)
$26,000
Less: Expenses ($4,000 +

$900 + $1,100)
(6,000)
20,000
113,000
Less: Dividends
Ending retained earnings
Common stock
(9,000)
$104,000
50,000
Stockholders equity, June 30, 2012

Multiplier to compute price
$154,000
X 2__
Williams asking price
$308,000
Chapter 3
3-141

Req. 3
You may start by offering Williams approximately $225,000 for the
business. His asking price is $308,000 so you are starting out quite far
apart. If Williams appears especially eager to sell out, you may be able
to buy the firm for closer to your highest price of $240,000. However, if
he is not so eager to sell and if you want the business badly enough, you
may have to pay somewhere between $240,000 and $308,000. It might
pay to hire an expert to value the businesss assets. You may find that
Williams price is inflated based on the value of its assets. You can
always raise your offer, but you cannot decrease it, so start the
negotiating process with an offer around $225,000.
Ethical Issues
Ethical Issue 1
1. The journal entry to record the revenue is:
Dec.
Accounts Receivable...
Sales Revenue..
XXX
XXX
The debit to Accounts Receivable will increase total current assets

and, as a result, increase (improve) the current ratio.
The credit to Sales Revenue will increase total owner equity and, as a
result, decrease (improve) the debt ratio.
2. a. c. The issue is whether it is ethical to record the revenue in the
current year. The contract has been signed, but the implication is that
the company will not have done everything it needs to do in order to
earn the revenue in the current year. The stakeholders are the
company, the bank, the stockholders, and the companys other
creditors. From an economic standpoint, the entry would obviously
improve the companys short term financial position. However, the
advantage would probably be short-lived. When the bank finds out
about this entry, they will likely protest, and demand immediate
payment, so the longer-term economic impact will likely be negative.
From a legal standpoint, to record this transaction in December
violates GAAP by violating the revenue principle. In this case Cross
Timbers has not made the sale (has not delivered the merchandise) to
the customer and, therefore, has not earned the revenue prior to
December 31 of the current year. From an ethical standpoint,
recording this revenue violates the banks rights for proper disclosure
of the companys income and assets. Revenue should be recorded
no earlier than when it is earned. Cross Timbers expects to earn the
revenue in January of next year. Cross Timbers clearly cannot record
Chapter 3
3-143
this revenue until it is earned. To do so is not in their best economic,

legal (GAAP) or ethical best interests.
(continued) Ethical Issue 1
3. The authors would suggest either of two actions. Cross Timbers can
either:
a. Report the current ratio of 1.47 and the debt ratio of .51 because
these are the true values. Then tell the bank of the signed contract
for additional work and the hope for a better set of ratio values next
year. In some cases, banks will agree to sign a waiver of the terms
of loan covenants, meaning that, although the company is in
violation, the bank will not move to enforce the covenant. They
may give Cross Timbers a grace period to cure the violation in
the covenant.
b. Pay off some current liabilities before year end. This will improve
both the current ratio and the debt ratio. This may enable Cross
Timbers to bring its ratio values into compliance with the
banks
requirements.
Ethical Issue 2
1. These transactions overstate the reported income of the company by
$21,000 ($10,000 + $10,000 + $1,000).
2. It appears that Almond wants to improve the companys reported
income in order to borrow on favorable terms. Her action is unethical
and probably illegal as well because she is deliberately overstating
the companys reported income.
Almond appears to be letting the potential short term economic
advantage of these deliberate misstatements take precedence. She
needs to remember that these misstatements violate GAAP, and that,
depending on what use is made of the financial statements, could
subject the company to civil or criminal legal proceedings. If this
happens, the short term economic gains ($21,000) would not even
come close to the long-term economic costs associated with the legal
actions, not to mention the negative publicity.
The business will
need a bank loan, and perhaps the money would be used to pay bills,
expand the business, and so on. However, based on Almonds lack of
integrity, the money may be destined for her own use. Regardless of
its use, the money is obtained under false pretenses and cannot be
headed for a good outcome.
The bank is harmed by Almonds and Lails actions. Lending
money to Almond under false pretenses may lead the bank to charge
Chapter 3
3-145
an unrealistically low interest rate that robs the banks owners of

interest revenue. In the extreme, the public is robbed if taxpayers
wind up financing the bailout of a failed institution.
3. Personal advice will vary from student to student. The purpose of
asking this question is to challenge students to take the high road of
ethical conduct by having nothing to do with Almonds scheme. The
authors would advise Lail, the accountant, to take these actions, in
order:
a. Refuse to take any part in Almonds scheme, explaining that the
result is overstatement of reported income. This is both illegal and
unethical, and will ultimately have a negative economic impact on
the company, as well. Accountants are bound to standards of
ethical conduct that these actions violate. The can go to prison
when caught falsifying financial statements.
b. To remain ethical, the accountant must be willing to lose his/her
job. It is better to protect ones reputation even if that causes a
short-term hardship.
Focus on Financials: Amazon.com, Inc.

(15-20 min.)
Req. 1
Accrued expenses are expenses that have been incurred but that have
not yet been paid as of the balance sheet date.
The accrual and
matching concepts require that all expenses be recognized (recorded)

during the period in which they are incurred in order to earn revenue,
regardless of when they are paid.
Req. 2 and Req. 4 (balances in millions at December 31, 2008)
Accrued expenses and other
Beg. Bal.
(a)
1,759
(b)
$1,759
2,321
End. Bal.
Chapter 3
$2,321
3-147
(continued) Focus on Financials: Amazon.com, Inc.

Req. 3 (amounts in millions)
Journal
DATE ACCOUNT TITLES
DEBIT
a. Accrued expenses and other.

Cash..
1,759
b. Operating expenses..
Cash.....
Accrued expenses and other
6,237
CREDIT
1,759
3,916
2,321
The balance of Accrued Expenses and Other agrees with the financial
statements at December 31, 2010.
(continued) Focus on Financials: Amazon.com, Inc.

Req. 5
Current ratio:
2010
2009
(Dollar amounts in millions)

Working Capital:
Current Assets
Current liabilities
$13,747
= 1.33
$10,372
$9,797
= 1.33
$7,364
2010
2009
$13,747$9,797 = $3,375
= $2,433
$10,372
$7,364
Debt ratio:
2010
Total liabilities
Total assets
$11,933*
2009
= 0.64
$18,797
$8,556**
$13,813
*10,372 + 1,561
+ 1,192
The
current
= 0.62
**7,364
ratio
did
not
change,
working
capital
increased
substantially, and the debt ratio slightly worsened during 2010. This
reveals slightly weakening leverage but with sustained liquidity. Also,
the size of the firm overall has increased (indicated by total assets) and
its working capital has increased as well to support Amazon.com now
that it is a larger firm.
Chapter 3
3-149
Focus on Analysis: RadioShack, Corp.

(15-20 min.)
Req. 1
The
beginning
balance
of
Accounts
Receivable,
$322.5
million
represents revenue earned in fiscal 2009 but not received until fiscal
2010
The ending balance of Accounts Receivable, $377.5 million,
represents revenue earned in fiscal 2010 but not received until fiscal
2011.
According to footnote 3, the receivables are due from vendors, trade

accounts receivables, and other receivables.
The amount due from
vendors likely represents deposits made by RadioShack whereas the

trade accounts receivables are likely due from customers.
Req. 2
Since Deferred Income Taxes is a current asset, it is most likely similar
to a prepaid asset, meaning taxes have been paid but will be expensed
sometime in the future. When the taxes are expensed in the future, the
asset, Deferred Income Taxes will decrease as in the following entry:
DATE
Journal
Income Tax Expense...
DEBIT
8
CREDIT
Deferred Income Taxes....
Req. 3
Since depreciation expense increases Accumulated Depreciation $70
million, a decrease of $49 million ($799 + $70 - $820) must have occurred
(continued) Focus on Analysis
as well. The decrease is most likely from the sale of property, plant, and
equipment.
Req. 4
Accrued Advertising Payable represents an accrued liability account.
When the company incurs advertising expense, this current liability
account is credited. When the company pays the advertising company,
these amounts are debited to Accrued Advertising Payable.
The expense relating to this accrued advertising was recorded in the

year the expense was incurredwhen the advertising first takes place
(Note 2) Accordingly, the $26.9 million accrued advertising represents
advertising incurred in fiscal 2010 but not paid until fiscal 2011.
Chapter 3
3-151
From 2009 to 2010, RadioShack, Corp.s advertising expense increased

from $193 million to $206 million.(Note 2). By reconstructing the accrued
liability account, the amount RadioShack paid for advertising during
fiscal 2010 can be derived.
Accrued Advertising Expense (Payable)
Adv. Paid
$211.6
Beg. Bal.
$31.4
Adv. Exp.
206.1
End. Bal.
26.9
Group Project
(45 min.)
Req. 1
Trozo Lawn Service, Inc.
Income Statement
Four Months Ended August 31
Service revenue ($5,600 + $600)
$6,200
Expenses:
Wage expense ($1,900 + $200)
$2,100
Rent expense ($600 4/6)
400
Supplies expense ($400 $50)
350
Repair expense
300
Depreciation expense ($300 1/3)
100
Total expenses
3,250
Net income
$2,950
Chapter 3
3-153
(continued) Group Project

Req. 2
Balance Sheet
August 31
ASSETS
LIABILITIES
Current:
Current:
Cash
$2,640
Accounts receivable
600
Wages payable
$ 200
200
Receivable from Ludwig

(or Prepaid rent)
200
Supplies
50
2,890
Long-term:
Trailer
EQUITY
Common stock
$300
(100)
1,060
Retained earnings
Less accum.
deprec.
STOCKHOLDERS
($2,950 $460)
2,490
200 Total stockholders equity
2,890

Total assets
$3,690
stockholders equity
$3,690
(continued) Group Project

Req. 3
Statement of Cash Flows
Four Months Ended August 31
Cash flows from operating activities:
Collections from customers
$ 5,600
Payments:
For supplies.................................................
$ 400
To employees..............................................
1,900
For rent........................................................
600
For repairs...................................................
300
Net cash provided by operating activities
3,200
2,400
Cash flows from investing activities:

Purchase of trailer......................................
$(300)
Net cash used for investing activities
(300)
Cash flows from financing activities:

Issued note payable to father....................
Repayment of loan to father
$ 1,500
(1,500)
Payment of dividends.................................
(460)
Issuance of common stock........................
1,000
Net cash used for financing activities......

Net increase in cash...
540
$ 2,640
Cash balance, beginning..
-0-
Cash balance, ending
$ 2,640
Chapter 3
3-155
Req. 4
Matt was successful because his lawn service was profitable and had a
positive cash flow from operating activities. Matt was also able to pay
off his loan and pay a dividend.

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Chapter 3

Accrual Accounting & Income

(10 min.) S 3-2

Reports (Amounts in millions)

Accrual Accounting & Income

Notes payable ($4.1 + $1.7 $1.6).

Financial Accounting 9/e Solutions

(10 min.) S 3-3

Accounts such as cash, Equipment, Accounts Payable,

Accounts such as Accounts

Receivable, Supplies, Salary Expense and Salaries Payable may not be

Accrual Accounting & Income

Financial Accounting 9/e Solutions

(10 min.) S 3-4

Accrual Accounting & Income

Financial Accounting 9/e Solutions

(10 min.) S 3-6

a. The Expense Recognition Principle

The Revenue Principle

d. The Revenue Principle

The Expense Recognition Principle

(10 min.) S 3-7

Rent Expense ($3,000 1/6)...

Supplies Expense ($950 $400)

Accrual Accounting & Income

(10 min.) S 3-8

(b) Dec. 31 Depreciation Expense

Less: Accumulated depreciation

Accrual Accounting & Income

(10 min.) S 3-9

(10 min.) S 3-10

Financial Accounting 9/e Solutions

(10 min.) S 3-11

Nov. 30 Interest Receivable

Dec. 31 Interest Receivable

Accrual Accounting & Income

Financial Accounting 9/e Solutions

(5-10 min.) S 3-12

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

(5-10 min.) S 3-13

Adjusted amount ($18,000 $6,000)..

Rent Expense at December 31:

Accrual Accounting & Income

Adjusted amount ($18,000 / 3).

Financial Accounting 9/e Solutions

(10 min.) S 3-14

Unearned Service Revenue

(15-30 min.) S 3-15

Cost of goods sold.

All other expenses..

Sparrow Sporting Goods Company

Accrual Accounting & Income

For the Year Ended March 31, 2012

Retained earnings, March 31, 2011...

Add: Net income

Retained earnings, March 31, 2012...

Financial Accounting 9/e Solutions

Other current assets..............................

Total current assets..........................

Property and equipment, net.................

Total stockholders equity...........................

Total liabilities and stockholders equity...