Chap 004

Chapter 4
Completing the Accounting Cycle

QUESTIONS
1.
Closing entries at the end of the current period prepare the revenues (and gains),
expenses (and losses), and withdrawals accounts for the next period by giving them
zero balances. Closing entries also update the owners capital account for the
events of the year just finished. Closing entries do not affect the asset and liability
accounts.
2.
(i)Closing entries prepare the temporary accountsrevenue and expense (and gain
and loss) accounts and owner withdrawalsfor the next period by giving them zero
balances. (ii) Closing entries also update the owners capital account for the events
of the period just completed.
3.
The four-step closing entry process is: (i) close the revenue (and gain) accounts,
(ii) close the expense (and loss) accounts, (iii) close the Income Summary account,
and (iv) close the withdrawals account.
4.
The Income Summary account is used to summarize the periods revenues and
expenses. As a result, it temporarily has a balance equal to the net income (or net
loss) for the period. (Instructor note: Closing can be accomplished without the
Income Summary account by closing revenue and expense accounts directly to the
owners capital account.)
5.
Yes, an error would have occurred because a post-closing trial balance should only
include permanent accounts, and Depreciation Expense is a temporary account that
should have been closed. If an expense appears on the post-closing trial balance,
the amounts of net income, total assets, and equity are all in error (overstated).
6.
A work sheet can be used to collect and organize data for preparing (i) adjusting
entries, (ii) closing entries, and (iii) financial statements. A work sheet can also be
used for what if analysis, for help with audit adjustments, and for preparing interim
financial statements.
7.
The adjustments in the Adjustments columns of a work sheet are identified by letter
to link the debits with the credits to ensure that the entries are complete and in
balance (debits = credits) and for reference purposes (audit trail). The letters can
also be used to identify the reasons for the entries and help simplify preparation of
the actual adjusting journal entries.
McGraw-Hill Companies, Inc., 2005

Solutions Manual, Chapter 4
181
8.
A companys operating cycle is the normal time between paying cash for
merchandise inventory or for employee salaries in providing customer services and
the receipt of cash from customers in exchange for those products or services.
9.
Assets on a typical classified balance sheet include current assets and

noncurrent assetswhere noncurrent assets usually include long-term investments,
plant assets, and intangible assets. Liabilities are typically classified as current and
noncurrent. Note that the terms short-term and long-term are sometimes used for
current and noncurrent.
10.
Unearned revenue is reported as a liabilityusually a current liability.
11.
Plant assets (also called property, plant and equipment) are tangible long-lived
assets used to produce or sell goods or services.
12.A Reversing entries simplify subsequent entries for accrued expenses and accrued
revenues by eliminating the need to record the removal of the accrued liability or
accrued receivable when the accrual is settled.
13.A The following reversing entry could be made. This entry would be recorded after the
post-closing trial balance is completed and financial statements are prepared. The
entry is normally dated as of the first day of the next accounting period.
Salaries Payable.........................................................
500
Salaries Expense
................................................................
500
14.
The five categories of noncurrent assets on Krispy Kremes balance sheet are:
Property and equipment, net; Long-term investments; Investment in
unconsolidated joint ventures; Intangible assets; and Other assets.
15.
Tastykake has six current liability accounts: Current obligations under capital
leases; Notes payable, banks; Accounts payable; Accrued payroll and employee
benefits; Reserve for restructures; and Other.
16.
The closing entry recorded on December 31, 2002, to transfer the companys net
income to its Retained Earnings account would likely have been (in thousands):
Income Summary......................................................... 580,217
Retained Earnings.............................................
580,217

182
Fundamental Accounting Principles, 17th Edition
QUICK STUDIES
Quick Study 4-1 (10 minutes)
Income Summary balance after closing revenues and expenses:
Revenues: $35,000 + $3,500............................
Expenses: $19,000 + $4,000 + $2,300.............
Credit balance...................................................
=
=
=
$38,500
- 25,300
$13,200
Cr.
Dr.
Cr.
D. Argosy, Capital balance after all closing entries:

Beginning balance................................
Plus net income....................................
$14,000
13,200
27,200
6,000
$21,200
Less withdrawals..................................
Ending balance.....................................

1.
2.
3.
4.
5.
6.
7.
8.
9.
(f)
(i)
(b)
(h)
(c)
(d)
(g)
(e)
(a)
Analyzing transactions.
Journalizing transactions.
Posting the journal entries.
Preparing the unadjusted trial balance.
Journalizing and posting adjusting entries.
Preparing the adjusted trial balance.
Preparing the financial statements.
Journalizing and posting closing entries.
Preparing the post-closing trial balance.

1.
2.
D
A
3.
4.
B
F
5.
6.
A
E
7.
8.
C
E

183

Current assets:
Cash
Accounts receivable..................................
Office supplies...........................................
Prepaid insurance......................................
Total current assets...................................
Current liabilities:
Accounts payable......................................
Unearned services revenue......................
Total current liabilities...............................
$ 6,000
15,000
1,800
2,500
$25,300
$10,000
4,000
$14,000
Current ratio = $25,300 / $14,000 = 1.81

Computation of K. Wayman, Capital for the Dec. 31, 2005, balance sheet:
K. Wayman, Capital (beginning).......................
$ 65,000
Add net income ($174,000 - $115,000)............. 59,000
124,000
Less withdrawals...............................................(32,000)
K. Wayman, Capital (ending)............................
$ 92,000
a.
b.
c.
IS
BS
BS
d.
e.
f.

a. 3
b. 1
c. 2
d. 4
e. 5
IS
BS
BS

TURNER COMPANY
Work Sheet
Account Title
Prepaid rent...................
Unadjusted
Trial Balance
Dr.
Cr.
Adjustments
Dr.
Cr.
800
Services revenue...........
Adjusted
Trial Balance
Dr.
Cr.
11,600
(a)
240
(b)
180
560
(c)
160
5,160
Accounts receivable.......
(b)
180
180
Rent expense.................
(c)
(a)
240
560
11,780
Wages expense............. 5,000
Wages payable..............
Balance Sheet &

Income
Statement of
Statement
Owners Equity
Dr.
Cr.
Dr.
Cr.
160
11,780
5,160
180
160
240
160
240

Dec. 31 Services Revenue.........................................
Income Summary..................................
To close the revenue account.
10,000
31 Income Summary.........................................
Wages Expense.....................................
Rent Expense.........................................
To close the expense accounts.
6,000
31 Income Summary.........................................
L. Avril, Capital .....................................
To close Income Summary.
4,000
31 L. Avril, Capital ............................................

L. Avril, Withdrawals ............................
To close the withdrawals account.
400
10,000
5,200
800
4,000
400

Account(s) in post-closing trial balance: L. Avril, Capital
Quick Study 4-11A (10 minutes)

2005
Jan. 1 Management Fees Earned ............................
Accounts Receivable ...........................
To reverse accrued revenue.
16 Cash ...............................................................
Management Fees Earned ...................
To record collection of management fees.
6,700
6,700
15,500
15,500
EXERCISES
Exercise 4-1 (35 minutes)
Closing entries:
(1)
Services Revenue.........................................
Income Summary..................................
74,000
74,000
(2)
Income Summary..........................................
Rent Expense.........................................
Salaries Expense...................................
Insurance Expense................................
Depreciation Expense...........................
52,100
9,600
21,000
4,500
17,000
(3)
Income Summary..........................................
M. Mallon, Capital .................................
21,900
21,900
To close income summary.
(4)
M. Mallon, Capital .........................................

M. Mallon, Withdrawals.........................
25,000
25,000
Posted accounts:
M. Mallon, Capital
Date PR
Debit
Mar.31
(3)
(4)
25,000
No. 301
Credit
Balance
42,000
21,900
63,900
38,900
M. Mallon, Withdrawals
Date PR
Debit
Mar.31
(4)
No. 302
Credit
Balance
25,000
25,000
0
Services Revenue
Date PR
Debit
Credit
Mar.31
(1)
74,000
No. 401
Balance
74,000
0
Salaries Expense
Date PR Debit
Mar.31
(2)
Insurance Expense
Date PR
Debit
Mar.31
(2)
Rent Expense
Date PR Debit
Mar.31
(2)
Depreciation Expense
Income Summary
Date PR
Date PR
Mar.31
(2)
Debit
No. 603
Credit
Balance
17,000
17,000
0
Debit
(1)
(2)
(3)
52,100
21,900
No. 622
Credit
Balance
21,000
21,000
0
No. 637
Credit
Balance
4,500
4,500
0
No. 640
Credit
Balance
9,600
9,600
0
No. 901
Credit
Balance
74,000
74,000
21,900
0
No.
Account Title
Adjusted
Trial Balance
Dr.
Cr.
Closing Entry Information

Dr.
Cr.
Post-Closing
Trial Balance
Dr.
Cr.
101 Cash...............................
8,200
8,200
106 Accounts receivable..........
24,000
24,000
153 Equipment.......................
41,000
41,000
154 Accumulated depre-
ciationEquipment.........
193 Franchise........................
16,500
16,500
30,000
30,000
201 Accounts payable.............
14,000
14,000
209 Salaries payable...............
3,200
3,200
233 Unearned fees..................
2,600
2,600
301 C. Schwepker, Capital........
64,500
(3)
16,800
(4)
14,400
11,000
(2)
11,000
622 Salaries expense..............
31,500
(2)
31,500
640 Rent expense...................
12,000
(2)
12,000
677 Miscellaneous expense.....
7,700
(2)
7,700
(1)
79,000
(4)
14,400
302 C. Schwepker,
Withdrawals...................
14,400
401 Marketing fees earned.......
79,000
(1)
79,000
611 Depreciation expense
Equipment.....................
901 Income summary.............
______
______
Totals.............................. 179,800
179,800
66,900
(2)
62,200
(3)
16,800
______
______
______
172,400
172,400
103,200
103,200

1.
2005
Dec. 31 Services Revenue .......................................

Income Summary .................................
36,000
36,000
31 Income Summary ........................................

Depreciation Expense--Equipment......
Salaries Expense ..................................
Insurance Expense ...............................
Rent Expense ........................................
Supplies Expense .................................
28,100
2,000
21,000
1,500
2,400
1,200
31 Income Summary.........................................
R. Showers, Capital ..............................
7,900
7,900
31 R. Showers, Capital ....................................

R. Showers, Withdrawals .....................
6,000
6,000
2.
SHOWERS COMPANY
Post-Closing Trial Balance
December 31, 2005
Cash................................................................
Supplies..........................................................
Prepaid insurance..........................................
Equipment.......................................................
Accumulated depreciationEquipment.......
R. Showers, Capital*......................................
Totals...............................................................
*$46,600 + $7,900 - $6,000 = $48,500
Debit
$18,000
12,000
2,000
23,000
$55,000
Credit
$ 6,500
48,500
$55,000

WEBB TRUCKING COMPANY
Balance Sheet
December 31, 2005
Assets
Current assets
Cash................................................................
Accounts receivable.....................................
Office supplies...............................................
Total current assets......................................
Plant assets
Trucks............................................................. $170,000
Accumulated depreciation-Trucks.............. (35,000)
Land................................................................
Total plant assets..........................................
Total assets......................................................
7,000
16,500
2,000
25,500
135,000
75,000
210,000
$235,500
Liabilities
Current liabilities
Accounts payable..........................................
Interest payable.............................................
Total current liabilities..................................
Long-term notes payable................................
Total liabilities..................................................
$ 11,000
3,000
14,000
52,000
66,000
Equity
K. Webb, Capital .............................................
Total liabilities and equity...............................
169,500
$235,500
K. Webb, Capital is computed as:

Beginning balance..................................................................................... $161,000
Plus: Net income ($128,000 - $22,500 - $60,000 - $7,000 - $11,000)....... 27,500
Less: Withdrawals...................................................................................... (19,000)
Ending balance........................................................................................... $169,500

Income Statement
For Year Ended December 31, 2005
Trucking fees earned................................................
Expenses
Depreciation expenseTrucks........................... $22,500
Salaries expense.................................................. 60,000
Office supplies expense...................................... 7,000
Repairs expenseTrucks.................................... 11,000
Total expenses......................................................
Net income.................................................................
$128,000
100,500
$ 27,500

Statement of Owners Equity
K. Webb, Capital, December 31, 2004......................
$161,000
Plus: Net income.......................................................
27,500
Less: Owner withdrawals.........................................
188,500
(19,000)
K. Webb, Capital, December 31, 2005......................
$169,500

Current assets:
Cash.................................................
Accounts receivable......................
Office supplies................................
Total current assets.......................
$ 7,000
16,500
2,000
$25,500
Current liabilities:
Accounts payable...........................
Interest payable..............................
Total current liabilities...................
$11,000
3,000
$14,000
Current ratio =
Current assets
Current liabilities
$25,500
$14,000
= 1.82
Interpretation: This companys current ratio of 1.82 exceeds the industry norm of
1.5. This implies the company is in a slightly better liquidity position than its
competitors. Moreover, if we review the makeup of the current ratio, we see that
current assets consist primarily of cash and accounts receivable. The existence
of these more liquid assets is a positive attribute for liquidity purposes.

Current
Assets
Current
Liabilities
Current
Ratio
Case 1
$ 78,000
$31,000
2.52
Case 2
104,000
75,000
1.39
Case 3
44,000
48,000
0.92
Case 4
84,500
80,600
1.05
Case 5
60,000
99,000
0.61
Analysis: Company 1 is in the strongest liquidity position. It has about $2.52 of

current assets for each $1 of current liabilities. The only potential concern is that
Company 1 may be carrying too much in current assets that could be better spent
on more productive assets (note that its remaining competitors current ratios
range from 1.39 to 0.61).

(a)
Insurance ExpenseOffice Equipment..............

Insurance ExpenseStore Equipment...............
Prepaid Insurance..........................................
432
468
900
To record expired insurance.
(b)
Office Supplies Expense.......................................

Office Supplies...............................................
1,650
1,650
To record consumed supplies.
(c)
Depreciation ExpenseOffice Equipment..........

Accumulated DepreciationOffice Equip...
3,300
3,300
To record depreciation of office equip.
(d)
Interest Receivable................................................
Interest Revenue............................................
580
580
To record accrued interest income.
(e)
Office Salaries Expense........................................

Salaries Payable.............................................
660
660
To record accrued salaries.

1.
5.
9.
13.
2.
6.
10.
14.
3.
7.
11.
15.
4.
8.
12.
16.

Adjusted
Trial Balance
Dr.
Cr.
Income Statement
Dr.
Cr.
Balance Sheet &

Statement of
Owners Equity
Dr.
Cr.
No.
Account
101
Cash..................................
6,000
6,000
106
Accounts receivable.............
26,200
26,200
153
Trucks...............................
41,000
41,000
154
Accumulated depreciation
Trucks..............................
183
Land..................................
201
Accounts payable................
14,000
14,000
209
Salaries payable..................
3,200
3,200
233
Unearned fees.....................
2,600
2,600
301
J. Poppe, Capital..................
64,500
64,500
302
J. Poppe, Withdrawals..........
401
Plumbing fees earned...........
611
Depreciation expense
Trucks..............................
5,500
5,500
622
Salaries expense.................
37,000
37,000
640
Rent expense......................
12,000
12,000
677
Miscellaneous expense........
7,700
______
7,700
______
Totals................................. 179,800
179,800
62,200
79,000
Net income.........................
16,800
______
_______
16,80
0
Totals.................................
79,000
79,000
117,600
117,600
16,500
16,500
30,000
30,000
14,400
14,400
79,000
79,000
_______
______
117,600 100,800

1.
Account Title
Rent earned............................................
Salaries expense...................................
Insurance expense................................
Dock rental expense.............................
Boat supplies expense.........................
Depreciation expenseBoats..............
Totals......................................................
Net income.............................................
Totals......................................................
Debit
Credit
102,000
45,300
6,400
15,000
3,200
19,500
89,400
12,600
102,000
102,000
102,000
2. Closing entries
(1)
(2)
(3)
Rent Earned................................................... 102,000

Income Summary..................................
Income Summary..........................................
Dock Rental Expense............................
Boat Supplies Expense.........................
Depreciation ExpenseBoats.............
89,400
Income Summary..........................................
L. Welch, Capital ...................................
12,600
102,000
45,300
6,400
15,000
3,200
19,500
12,600

DALTON DELIVERY COMPANY
Work Sheet
Unadjusted
Trial Balance
Dr.
Cr.
Account Title
Cash...........................................14,000
Dr.
Adjustments
Cr.
Accounts receivable.......................33,000
Office supplies.............................. 4,000
(c)
3,000
Trucks.........................................
340,000
Accum. DepreciationTrucks.........
70,000
(a)
Income
Statement
Dr.
Cr.
14,000
33,000
33,000
1,000
1,000
340,000
340,000
105,000
105,000
150,000
Accounts payable..........................
22,000
Interest payable.............................
6,000
Long-term notes payable................

V. Dalton, Capital............................
150,000
22,000
22,000
8,000
8,000
104,000
104,000
104,000
322,000
322,000
322,000
(b
)
2,000
V. Dalton, Withdrawals....................38,000
38,000
256,000
Depreciation expenseTrucks........45,000
38,000
256,000
(a)
35,000
Salaries expense...........................
120,000
256,000
80,000
80,000
120,000
120,000
Office supplies expense..................14,000
(c)
3,000
17,000
17,000
Interest expense............................ 6,000
(b
)
2,000
8,000
8,000
Repairs expenseTrucks...............16,000
______
_____
_____
16,000
______
Totals..........................................
780,000
780,000
40,000
40,000
817,000
817,000
Net Income...................................
Balance Sheet
& Statement of
Owners Equity
Dr.
Cr.
14,000
35,000
Land...........................................
150,000
Delivery fees earned.......................
Adjusted
Trial Balance
Dr.
Cr.
16,000
______
______ ______
241,000 256,000
576,000 561,000
15,000
______
______
15,000
Totals..........................................
256,000 256,000
576,000 576,000
Exercise 4-12 (Continued)

2.
Closing entries:
Delivery Fees Earned...................................
Income Summary..................................
256,000
256,000
To close the revenue accounts.
Income Summary..........................................
Depreciation ExpenseTrucks...........
Office Supplies Expense......................
Interest Expense...................................
Repairs ExpenseTrucks....................
241,000
80,000
120,000
17,000
8,000
16,000
Income Summary..........................................
V. Dalton, Capital...................................
15,000
15,000
V. Dalton, Capital..............................................
V. Dalton, Withdrawals .........................
38,000
38,000
V. Dalton, Capital on the balance sheet:

Beginning balance........................................
$322,000
Add: Net income..........................................
15,000
337,000
Less: Owner withdrawals.............................

Ending balance.............................................
(38,000)
$299,000
Exercise 4-13A (30 minutes)

1. Adjusting entries:
Oct. 31 Rent Expense................................................
Rent Payable..........................................
3,200
3,200
To record accrued rent expense.
31 Rent Receivable............................................
Rent Earned...........................................
750
750
To record accrued rent income.
2. Subsequent entries without reversing:

Nov. 5 Rent Payable.................................................
Rent Expense................................................
Cash........................................................
3,200
3,200
6,400
To record payment of 2 months rent.
8 Cash...............................................................
Rent Receivable.....................................
Rent Earned...........................................
1,500
750
750
To record collection of 2 months rent.
3. Reversing entries and subsequent entries:

Nov. 1 Rent Payable.................................................
Rent Expense.........................................
3,200
3,200
To reverse accrual of rent expense.
1 Rent Earned...................................................
Rent Receivable.....................................
750
750
To reverse accrual of rent income.
5 Rent Expense................................................
Cash........................................................
6,400
6,400
To record payment of 2 months rent.
8 Cash...............................................................
Rent Earned...........................................
To record collection of 2 months rent.
1,500
1,500
Exercise 4-14A (10 minutes)

Reversing entries are appropriate for accounting adjustments (a) and (e):
Sept. 1 Service Fees Earned.....................................
Accounts Receivable............................
5,000
5,000
To reverse accrued revenues.
1 Salaries Payable...........................................
To reverse accrued salaries.
PROBLEM SET A
Problem 4-1A (15 minutes)
1.
C.
11.
Z.
2.
A.
12.
A.
3.
C.
13.
A.
4.
A.
14.
E.
5.
C.
15.
C.
6.
C.
16.
F.
7.
Z.
17.
E.
8.
A.
18.
A.
9.
E.
19.
G.
10.
B.
20.
E.
2,400
2,400

INSTRUCTOR NOTE: Ledger accounts are shown at the end of Part 7 as they would appear after
all entries are posted.
Part 2 Transactions for April

April 1 Cash...............................................................101
Computer Equipment...................................167
Stafford, Capital.....................................301
20,000
40,000
60,000
Owner invested in the business..
2 Rent Expense................................................640
Cash........................................................101
1,700
1,700
Paid one months rent.
3 Office Supplies...............................................124
Cash........................................................101
1,100
1,100
Acquired office supplies.
10 Prepaid Insurance..........................................128
Cash........................................................101
3,600
3,600
Paid 12 months premium in advance.
14 Salaries Expense...........................................622
Cash........................................................101
1,800
1,800
Paid two weeks salaries.
24 Cash...............................................................101
Commissions Earned............................405
7,900
7,900
Collected commissions from airlines.
28 Salaries Expense..........................................622
Cash........................................................101
1,800
1,800
Paid two weeks salaries.
29 Repairs Expense...........................................684
Cash........................................................101
250
250
Repaired the computer.
30 Telephone Expense......................................688
Cash........................................................101
650
650
Paid the telephone bill.
30 J. Stafford, Withdrawals...............................302
Cash........................................................101
Owner withdrew cash for personal use.
1,500
1,500
Problem 4-2A (Continued)

Part 3
SEE-IT-NOW TRAVEL
Unadjusted Trial Balance
April 30, 2005
No.
101
106
124
128
167
168
209
301
302
405
612
622
637
640
650
684
688
Account Title
Cash...........................................
Accounts receivable.................
Office supplies..........................
Prepaid insurance.....................
Computer equipment................
Computer equipment...............
Salaries payable........................
J. Stafford, Capital....................
J. Stafford, Withdrawals...........
Commissions earned...............
Computer equipment...............
Salaries expense.......................
Insurance expense...................
Rent expense.............................
Office supplies expense...........
Repairs expense.......................
Telephone expense...................
Totals..........................................
Debit
$15,500
0
1,100
3,600
40,000
Credit
0
0
60,000
1,500
7,900
0
3,600
0
1,700
0
250
650
$67,900
$67,900

Part 4
Adjusting entries:
(a) Apr
30 Insurance Expense............................................... 637
200
Prepaid Insurance.......................................... 128
200
To record expired insurance (2/3 x $300 per month).

(b)
30 Office Supplies Expense....................................... 650

Office Supplies............................................... 124
400
400
To record cost of supplies used ($1,100 - $700).

(c)
30 Depreciation ExpComputer Equipment........... 612

Accumulated Depreciation
Computer Equipment .................................... 168
600
600
To record depreciation.
(d)
30 Salaries Expense................................................... 622

Salaries Payable............................................. 209
320
320

(e)
30 Accounts Receivable............................................ 106

Commissions Earned.................................... 405
1,650
1,650
To record accrued commissions.
Part 5
SEE-IT-NOW TRAVEL
Income Statement
For Month Ended April 30, 2005
Commissions earned..................................................
Expenses
Depreciation expenseComputer equipment........
Salaries expense........................................................
Insurance expense....................................................
Rent expense..............................................................
Office supplies expense............................................
Repairs expense........................................................
Telephone expense....................................................
Total expenses...........................................................
Net income....................................................................
$9,550
$ 600
3,920
200
1,700
400
250
650
7,720
$1,830

Part 5continued
SEE-IT-NOW TRAVEL
For Month Ended April 30, 2005
J. Stafford, Capital, April 1, 2005...................
Plus: Investment by owner............................
60,000
Net income............................................
1,830
61,830
Less: Owner withdrawals...............................

J. Stafford, Capital, April 30, 2005.................
(1,500)
$60,330
SEE-IT-NOW TRAVEL
Balance Sheet
April 30, 2005
Assets
Cash..................................................................................
Accounts receivable........................................................
Office supplies.................................................................
Prepaid insurance...........................................................
Computer equipment...................................................... $40,000
Accumulated depreciationComputer equipment.......
(600)
Total assets......................................................................
$15,500
1,650
700
3,400
39,400
$60,650
Liabilities
Salaries payable..............................................................
Equity
J. Stafford, Capital...........................................................
Total liabilities and equity...............................................
60,330
$60,650
320

Part 6
Closing entries:
April 30 Commissions Earned...................................405
Income Summary..................................901
9,550
9,550
30 Income Summary..........................................901
Depreciation ExpComputer Equip.....612
Salaries Expense...................................622
Insurance Expense................................637
Rent Expense.........................................640
Office Supplies Expense......................650
Repairs Expense...................................684
Telephone Expense...............................688
7,720
600
3,920
200
1,700
400
250
650
30 Income Summary..........................................901
J. Stafford, Capital.................................301
1,830
1,830
To close the Income Summary account.
30 J. Stafford, Capital........................................301
J. Stafford, Withdrawals.......................302
1,500
1,500
Part 7
SEE-IT-NOW TRAVEL
April 30, 2005
Debit
Cash.......................................................... $15,500
Accounts receivable................................
1,650
Office supplies.........................................
700
Prepaid insurance....................................
3,400
Computer equipment............................... 40,000
Computer equipment.............................
Salaries payable.......................................
J. Stafford, Capital...................................
Totals......................................................... $61,250
Credit
600
320
60,330
$61,250

Part 7continued
Ledger as of April 30:
Cash
Date
April 1
2
3
10
14
24
28
29
30
30
Date
April 30
Date
April 3
30
Date
April 10
30
Date
April 1
Date
April 30
Date
April 30
Explanation
PR
Debit
20,000
7,900
Explanation
Adjusting
Explanation
Accounts Receivable
PR
Debit
1,650
Office Supplies
PR
Explanation
Debit
1,100
Debit
3,600
Acct. No. 128

Credit Balance
3,600
200
3,400
Adjusting
Explanation
Computer Equipment
PR
Acct. No. 106

Credit Balance
1,650
Acct. No. 124
Credit Balance
1,100
400
700
Adjusting
Prepaid Insurance
PR
Acct. No. 101

Credit Balance
20,000
1,700 18,300
1,100 17,200
3,600 13,600
1,800
11,800
19,700
1,800 17,900
250 17,650
650 17,000
1,500 15,500
Debit
40,000
Acct. No. 167

Credit Balance
40,000
Accumulated DepreciationComputer Equipment

Acct. No. 168
Explanation
PR
Debit
Credit Balance
Adjusting
600
600
Explanation
Adjusting
Salaries Payable
PR
Debit
Acct. No. 209

Credit Balance
320
320

Date
April 1
30
30
Date
April 30
30
Date
April 24
30
30
Date
April 30
30
Date
April 14
28
30
30
Date
April 30
30
Explanation
J. Stafford, Capital
PR
Closing
Closing
Explanation
Debit
1,500
J. Stafford, Withdrawals
PR
Debit
1,500
Closing
9,550
Depreciation ExpenseComputer Equipment

Explanation
PR
Debit
Adjusting
600
Closing
Acct. No. 612

Credit Balance
600
600
0
Adjusting
Closing
Explanation
Salaries Expense
PR
Adjusting
Closing
Explanation
Adjusting
Closing
Insurance Expense
PR
Debit
Debit
1,800
1,800
320
Acct. No. 622

Credit Balance
1,800
3,600
3,920
3,920
0
Debit
200
Acct. No. 637

Credit Balance
200
200
0
Rent Expense
Date
Explanation
April 2
April 30
Closing
Date
April 30
30
Acct. No. 302

Credit Balance
1,500
1,500
0
Acct. No. 405
Credit Balance
7,900
7,900
1,650
9,550
0
Explanation
Commissions Earned
PR
Acct. No. 301

Credit Balance
60,000 60,000
1,830 61,830
60,330
PR
Acct. No. 640
Debit
Credit Balance
1,700
Office Supplies Expense
Explanation
PR
Debit
Adjusting
400
Closing
1,700
1,700
0
Acct. No. 650

Credit Balance
400
400
0
Problem 4-2A (Concluded)

Date
April 29
30
Date
April 30
30
Date
April 30
30
30
Explanation
Repairs Expense
PR
Debit
250
Acct. No. 684

Credit Balance
250
250
0
Debit
650
Acct. No. 688

Credit Balance
650
650
0
Closing
Explanation
Telephone Expense
PR
Closing
Explanation
Closing
Closing
Closing
Income Summary
PR
Debit
7,720
1,830
Acct. No. 901

Credit Balance
9,550
9,550
1,830
0

Part 1
KOBE REPAIRS
Income Statement
Repair fees earned.....................................
Expenses
Depreciation expenseEquipment........
Wages expense.........................................
Insurance expense...................................
Rent expense............................................
Office supplies expense..........................
Utilities expense.......................................
Total expenses.........................................
Net income..................................................
$77,750
$ 4,000
36,500
700
9,600
2,600
1,700
55,100
$22,650
KOBE REPAIRS
Statement of Owner's Equity
S. Kobe, Capital, Jan. 1, 2005....................
$40,000
Add net income .........................................
22,650
62,650
Less withdrawals........................................
(15,000)
S. Kobe, Capital, Dec. 31, 2005.................
$47,650

KOBE REPAIRS
Balance Sheet
December 31, 2005
Assets
Current assets
Cash..............................................................
Office supplies.............................................
Prepaid insurance........................................
Total current assets.....................................
Plant assets
Equipment.....................................................
Accumulated depreciationEquipment....
Total assets.....................................................
$13,000
1,200
1,950
$16,150
48,000
(4,000)
44,000
$60,150
Liabilities
Current liabilities
Accounts payable........................................
Wages payable.............................................
Total current liabilities.................................
Equity
S. Kobe, Capital .............................................
Total liabilities and equity.............................
$12,000
500
12,500
47,650
$60,150

Parts 2 and 3
KOBE REPAIRS
No.
Account Title
Adjusted
Trial Balance
Dr.
Cr.

Dr.
Cr.
Post-Closing
Trial Balance
Dr.
Cr.
101 Cash...................................
13,000
13,000
124 Office supplies......................
1,200
1,200
128 Prepaid insurance .................
1,950
1,950
167 Equipment...........................
48,000
48,000
168 Accumulated depreciation
4,000
4,000
201 Accounts payable.................
12,000
12,000
210 Wages payable.....................
500
500
Equipment.........................
301 S. Kobe, Capital...................
15,000 (3)
22,650
(4)
15,000
4,000
(2)
4,000
623 Wages expense...................
36,500
(2)
36,500
637 Insurance expense...............
700
(2)
700
640 Rent expense......................
9,600
(2)
9,600
650 Office supplies expense........
2,600
(2)
2,600
690 Utilities expense..................
1,700
(2)
1,700
55,10 (1)
0
22,650
77,750
302 S. Kobe, Withdrawals...........
40,000 (4)
15,000
401 Repair fees earned..............

612 Depreciation expense
Equipment........................
77,750 (1)
901 Income summary................
77,750
(2)
______
Totals................................. 134,250
______ (3)
134,250
47,650
170,500
______ ______
170,500
64,150
Closing entries (all dated December 31, 2005):

(1)
Repair Fees Earned......................................

Income Summary..................................
77,750
77,750
______
64,150

(2)
(3)
(4)
Income Summary..........................................
Depreciation Expense, Equipment......
Wages Expense.....................................
Rent Expense.........................................
Office Supplies Expense......................
Utilities Expense....................................
55,100
Income Summary..........................................
S. Kobe, Capital.....................................
22,650
S. Kobe, Capital.............................................
S. Kobe, Withdrawals............................
15,000
4,000
36,500
700
9,600
2,600
1,700
22,650
15,000
Part 4
(a) If none of the $700 insurance expense had expired, the income
statement would not report any insurance expense and net income
would be increased by $700.
(b) If there were no earned and unpaid wages (meaning Wages Payable
equals zero), wages expense would be $500 less and net income would
be $500 more.
Financial Statement Changes:
The income statement would reflect the following:
Net income would be increased by $700 + $500 = $1,200.
The balance sheet would reflect the following:
Prepaid insurance and total assets would be increased by $700.
There would not be any wages payable.
Total current liabilities would be $500 less.
Total equity would be increased by $1,200.
Total liabilities would be decreased by $500.

Part 1
SHARP CONSTRUCTION
Income Statement
Revenues
Professional fees earned................................... $96,000
Rent earned......................................................... 13,000
Dividends earned...............................................
1,900
Interest earned....................................................
1,000
Total revenues....................................................
Expenses
Depreciation expenseBuilding...................... 10,000
Depreciation expenseEquipment..................
5,000
Wages expense................................................... 31,000
Interest expense.................................................
4,100
Insurance expense.............................................
9,000
Rent expense...................................................... 12,400
Supplies expense...............................................
6,400
Postage expense................................................
3,200
Property taxes expense.....................................
4,000
Repairs expense.................................................
7,900
Telephone expense............................................
2,200
Utilities expense.................................................
3,600
Total expenses....................................................
Net income............................................................
SHARP CONSTRUCTION
J. Sharp, Capital, December 31, 2004.................
Add: Investments by owner............................... $50,000
Net income.................................................. 13,100
Less: Withdrawals by owner...............................
J. Sharp, Capital, December 31, 2005.................
$111,900
98,800
$ 13,100
$32,700
63,100
95,800
(12,000)
$83,800

SHARP CONSTRUCTION
Balance Sheet
December 31, 2005
Assets
Current assets
Cash.....................................................................
Short-term investments.....................................
Supplies..............................................................
Prepaid insurance..............................................
Total current assets...........................................
Plant assets
Equipment...........................................................
Accumulated depreciationEquipment..........
Building...............................................................
Accumulated depreciationBuilding..............
Land.....................................................................
Total plant assets...............................................
Total assets...........................................................
$ 4,000
22,000
7,100
6,000
$ 39,100
39,000
(20,000)
130,000
(55,000)
19,000
75,000
45,000
139,000
$178,100
Liabilities
Current liabilities
Accounts payable............................................... $ 15,500
Interest payable..................................................
1,500
Rent payable.......................................................
2,500
Wages payable....................................................
1,500
Property taxes payable......................................
800
Unearned professional fees..............................
6,500
Current portion of long-term note payable...
6,600
Total current liabilities.......................................
$ 34,900
Long-term liabilities
Long-term notes payable...................................
59,400
Total liabilities.......................................................
94,300
Equity
J. Sharp, Capital ..................................................
83,800
Total liabilities and equity....................................
$178,100

Part 2
(1)
(2)
(3)
(4)
Professional Fees Earned............................

Rent Earned...................................................
Dividends Earned.........................................
Interest Earned..............................................
Income Summary..................................
96,000
13,000
1,900
1,000
Income Summary..........................................
Depreciation Expense, Building..........
Wages Expense.....................................
Interest Expense....................................
Rent Expense.........................................
Supplies Expense..................................
Postage Expense...................................
Property Taxes Expense.......................
Repairs Expense...................................
Telephone Expense...............................
98,800
Income Summary..........................................
J. Sharp, Capital....................................
To close the income summary account.
13,100
J. Sharp, Capital ...........................................

J. Sharp, Withdrawals...........................
12,000
111,900
10,000
5,000
31,000
4,100
9,000
12,400
6,400
3,200
4,000
7,900
2,200
3,600
13,100
Part 3
a. Return on assets = $13,100/[($200,000 + $178,100)/2] = 6.93%
b. Debt ratio = $94,300/$178,100 = 0.53
c. Profit margin = $13,100/$111,900 =11.7%
d. Current ratio = $39,100/$34,900 = 1.12
12,000
Problem 4-5A (90 minutes) Part 1

ADAMS CONSTRUCTION CO.
Work Sheet
For Year Ended June 30, 2005
No.
101
126
128
167
168
201
203
208
210
213
251
301
302
401
612
623
633
637
640
652
683
684
690
Unadjusted
Trial Balance
Account Title
Dr.
Cr.
Cash...........................................
17,500
Supplies.......................................
8,900
Prepaid insurance..........................
6,200
Equipment...................................
131,000
Equipment..................................
25,250
5,800
Rent payable.................................
Wages payable..............................
Property taxes payable...................
24,000
S. Adams, Capital...........................
77,660
S. Adams, Withdrawals...................
30,000
Construction fees earned................
134,000
Equipment..................................
Wages expense.............................
45,860
Interest expense............................
2,640
Insurance expense.........................
Rent expense................................
13,200
Supplies expense..........................
Property taxes expense..................
4,600
Repairs expense............................
2,810
Utilities expense............................
4,000 ______
Totals..........................................
266,710 266,710
Net Income...................................
Totals..........................................
Dr.
Adjustments
Cr.
(a)
(b)
5,700
3,900
(c)
(d)
(h)
(f)
(e)
(g)
8,500
550
240
200
1,600
900
Adjusted
Trial Balance
Dr.
Cr.
Income
Statement
Dr.
Cr.
17,500
3,200
2,300
131,000
17,500
3,200
2,300
131,000
33,750
6,350
240
200
1,600
900
24,000
77,660
33,750
6,350
240
200
1,600
900
24,000
77,660
30,000
30,000
134,000
(c)
(e)
(h)
(b)
(f)
(a)
(g)
8,500
1,600
240
3,900
200
5,700
900
(d)
550
21,590
_____
21,590
Balance Sheet &

Statement of
Owners Equity
Dr.
Cr.
8,500
47,460
2,880
3,900
13,400
5,700
5,500
2,810
4,550
278,700
______
278,700
134,000
8,500
47,460
2,880
3,900
13,400
5,700
5,500
2,810
4,550
94,700
39,300
134,000
______
134,000
______
134,000
______ ______
184,000 144,700
______ 39,300
184,000 184,000

Part 2
Adjusting entries (all dated June 30, 2005):
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Supplies Expense.........................................
Supplies.................................................
To record consumption of supplies.
5,700
Insurance Expense.......................................
Prepaid Insurance.................................
To record expiration of insurance.
3,900
Depreciation Expense, Equipment..............

Accumulated Depreciation, Equipment
8,500
5,700
3,900
8,500
Utilities Expense...........................................
Accounts Payable.................................
To record accrued utilities costs.
550
Wages Expense.............................................
Wages Payable......................................
To record accrued wages.
1,600
Rent Expense................................................
Rent Payable..........................................
To record remainder of annual rent.
200
Property Taxes Expense..............................

Property Taxes Payable........................
To record additional property taxes.
900
Interest Expense (1% x $24,000).................

Interest Payable.....................................
To record prior months interest expense.
240
550
1,600
200
900
240

Closing entries (all dated June 30, 2005):
(1)
(2)
(3)
(4)
Construction Fees Earned........................... 134,000

Income Summary..................................
Income Summary..........................................
Wages Expense.....................................
Rent Expense.........................................
Repairs Expense...................................
94,700
Income Summary..........................................
S. Adams, Capital..................................
39,300
S. Adams, Capital..........................................
S. Adams, Withdrawals.........................
30,000
134,000
8,500
47,460
2,880
3,900
13,400
5,700
5,500
2,810
4,550
39,300
30,000

Part 3
Income Statement
Construction fees earned.................................
Expenses
Depreciation expenseEquipment...............
Wages expense................................................
Interest expense..............................................
Insurance expense..........................................
Rent expense....................................................
Supplies expense............................................
Property taxes expense..................................
Repairs expense..............................................
Utilities expense...............................................
Total expenses.................................................
Net income.........................................................
$134,000
$ 8,500
47,460
2,880
3,900
13,400
5,700
5,500
2,810
4,550
94,700
$ 39,300

S. Adams, Capital, June 30, 2004.....................
$ 52,660
Add: Investment by owner............................... $25,000

Net income................................................
Less: Withdrawals by owner............................
S. Adams, Capital, June 30, 2005.....................
39,300
64,300
116,960
(30,000)
$ 86,960

Balance Sheet
June 30, 2005
Assets
Current assets
Cash.......................................................................
$ 17,500
Supplies.................................................................
3,200
Prepaid insurance.................................................
2,300
Total current assets..............................................
$ 23,000
Plant assets
Equipment.............................................................
131,000
Accumulated depreciationEquipment.............
(33,750)
Total assets.............................................................
97,250
$120,250
Liabilities
Current liabilities
Accounts payable.................................................
$ 6,350
Interest payable.....................................................
240
Rent payable..........................................................
200
Wages payable......................................................
1,600
Property taxes payable........................................
900
Current portion of long-term note payable........
5,000
Total current liabilities..........................................
$ 14,290
Noncurrent liabilities
Long-term note payable (less current portion)..
19,000
Total liabilities.........................................................
33,290
Equity
S. Adams, Capital....................................................
86,960
Total liabilities and equity......................................
$120,250

Part 4
(a) This error enters the wrong amount in the correct accounts. The
ending balance of the Supplies account should be $3,200, but the
entry reduces Supplies by $3,200. Because its unadjusted balance
was $8,900, the adjusted balance will be $5,700 ($8,900 - $3,200),
which is $2,500 greater than the correct $3,200 balance. In addition,
the Supplies Expense account balance will be only $3,200 instead of
$5,700.
The adjusted trial balance columns in the work sheet will be equal,
but the error will cause the work sheets net income to be overstated
by $2,500 because of the understatement of the expense. In
addition, the balance sheet columns will include the overstated
balance for the Supplies account.
This error is not likely to be detected as a result of completing the
work sheet. If it is not, the income statement will overstate net
income by $2,500, and the balance sheet will overstate the cost of
the supplies available and the total equity by $2,500.
(b) This error inserts a credit in the adjusted trial balance when a debit
should have been inserted. As a result, the trial balance will not
balance (the credit column will be greater than the debit column by
$35,000), and the error will be tracked down and corrected before
going on with the next step in the work sheet.
Because the error will be detected and corrected before preparing
the financial statements, the statements will not be affected.
Problem 4-6AA (40 minutes)

Part 1
BULLSEYE RANGES
Account Title
Unadjusted
Trial Balance
Dr.
Cr.
Adjusted
Trial Balance
Dr.
Cr.
Adjustments
Dr.
Cr.
Cash................................ 13,000
13,000
(e)
Accounts receivable...........
9,100
Supplies............................ 5,500
9,100
(b)
2,800
Equipment........................130,000
Accumulated
depreciation--Equipment.....
2,700
130,000
(f)
12,500
37,500
Interest payable..................
(c)
1,250
1,250
Salaries payable.................
(a)
900
90
0
25,000
(d)
Unearned member fees.......
14,000
8,400
5,600
Notes payable....................
50,000
50,000
T. Allen, Capital...................
58,250
58,250
T. Allen, Withdrawals........... 20,000

Member fees earned...........
20,000
(d)
(e)
53,000
8,400
9,100
70,500
Equipment.......................
(f)
12,500
12,500
Salaries expense................ 28,000
(a)
900
28,900
Interest expense................. 3,750
(c)
1,250
5,000
(b)
2,800
_____
2,800
______
34,950
34,950
224,000
224,000
Supplies expense............... ______
______
Totals................................200,250
200,250
Problem 4-6AA (Continued)

Part 2 (all adjusting entries dated December 31, 2005)
(a)
(b)
(c)
(d)
(e)
(f)
Salaries Expense..........................................
Salaries Payable....................................
900
Supplies.................................................
To record cost of consumed supplies.
2,800
Interest Expense...........................................
To record accrued interest expense.
1,250
Unearned Member Fees...............................

Member Fees Earned............................
To record earned fees.
8,400
Accounts Receivable....................................
Membership Fees Earned.....................
To record accrued revenues.
9,100

12,500
900
2,800
1,250
8,400
9,100
12,500
Part 3 (all reversing entries dated January 1, 2006)

(a)
(c)
(e)
Salaries Payable...........................................
To reverse accrued salaries.
900
Interest Payable............................................
To reverse accrued interest expense.
1,250
Member Fees Earned....................................

9,100
900
1,250
9,100
Problem 4-6AA (Concluded)

Part 4
2006
Jan. 4
Salaries Expense.........................................
Cash........................................................
To record payroll.
1,600
Interest Expense..........................................
Cash........................................................
To record interest payment.
1,500
31 Cash ($9,100 + $8,000).................................

Member Fees Earned............................
17,100
15
To record collection of membership fees.
PROBLEM SET B
Problem 4-1B (15 minutes)
1. C.
11.
A.
2. A.
12.
E.
3. E.
13.
G.
4. A.
14.
A.
5. A.
15.
C.
6. C.
16.
E.
7. D.
17.
Z.
8. Z.
18.
E.
9. Z.
19.
C.
10. B.
20.
F.
1,600
1,500
17,100

INSTRUCTOR NOTE: Ledger accounts are shown at the end of Part 7 as they would
appear after all entries are posted.
Part 2
Transactions for July:
July 1 Cash...............................................................101
20,000
Buildings........................................................173 120,000
L. Fogle, Capital.....................................301
140,000
Owner invested in the business.
2 Rent Expense................................................640
Cash........................................................101
1,800
1,800
Paid one months rent.
5 Office Supplies..............................................124
Cash........................................................101
2,300
2,300
Acquired office supplies.
10
Prepaid Insurance.........................................128
Cash........................................................101
5,400
5,400
Paid 12 months premium in advance.
14
Salaries Expense..........................................622
Cash........................................................101
900
900
Paid two weeks salary.
24
Cash...............................................................101
Storage Fees Earned.............................401
8,800
8,800
Collected fees from customers.
28
Salaries Expense..........................................622
Cash........................................................101
900
900
Paid two weeks salary.
29
Repairs Expense...........................................684
Cash........................................................101
850
850
Repaired the roof.
30
Telephone Expense......................................688
Cash........................................................101
300
300
Paid the telephone bill.
31
L. Fogle, Withdrawals...................................302
Cash........................................................101
Owner withdrew cash..
1,600
1,600
Problem 4-2B (Continued)

Part 3
KEEPSAFE CO.
Unadjusted Trial Balance
July 31, 2005
No. Account Title
Debit
101 Cash................................................... $ 14,750
106 Accounts receivable........................
124 Office supplies..................................
2,300
128 Prepaid insurance............................
5,400
Credit
173 Buildings........................................... 120,000

174 Accum. depreciationBuildings......
209 Salaries payable...............................
301 L. Fogle, Capital................................
140,000
302 L. Fogle, Withdrawals......................
1,600
401 Storage fees earned.........................
8,800
606 Depreciation expenseBuildings....
622 Salaries expense..............................
1,800
637 Insurance expense...........................
640 Rent expense....................................
1,800
650 Office supplies expense..................
684 Repairs expense...............................
850
688 Telephone expense..........................
300
Totals.................................................$148,800
$148,800

Part 4
Adjusting entries:
July 31 Insurance Expense.........................................637
Prepaid Insurance.................................128
300
300
To record expired insurance (2/3 x $450

per month).
31 Office Supplies Expense................................650

Office Supplies......................................124
750
750
To record the cost of consumed

supplies ($2,300 - $1,550).
31 Depreciation ExpenseBuildings................606 1,200

Accum. DepreciationBuildings.........174
1,200
31 Salaries Expense............................................622
Salaries Payable....................................209
180
180
31 Accounts Receivable......................................106
Storage Fees Earned.............................401
950
950
To record accrued storage fees.
Part 5
KEEPSAFE CO.
Income Statement
For Month Ended July 31, 2005
Storage fees earned...................................
Expenses
Depreciation expenseBuildings............ $1,200
Salaries expense......................................
1,980
300
Rent expense............................................
1,800
Office supplies expense..........................
750
Repairs expense.......................................
850
Telephone expense..................................
300
Total expenses..........................................
Net income..................................................
$9,750
7,180
$ 2,570

KEEPSAFE CO.
For Month Ended July 31, 2005
L. Fogle, Capital, July 1, 2005...................
Add: Investments by owner...................
140,000
Net income.........................................
2,570
142,570
Less: Owner withdrawals..........................

L. Fogle, Capital, July 31, 2005.................
KEEPSAFE CO.
Balance Sheet
July 31, 2005
Assets
Cash.............................................................
Office supplies............................................
Buildings..................................................... $120,000
Accumulated depreciation--Buildings.....
(1,200)
Total assets.................................................
(1,600)
$140,970
$ 14,750
950
1,550
5,100
118,800
$141,150
Liabilities
Salaries payable.........................................
Equity
L. Fogle, Capital..........................................
Total liabilities and equity..........................
140,970
$141,150
180

Part 6
Closing entries
July 31
Storage Fees Earned.................................401

Income Summary..................................901
9,750
9,750
31
Income Summary.......................................901
Depreciation ExpBuildings...............606
Salaries Expense...................................622
Insurance Expense................................637
Rent Expense.........................................640
Office Supplies Expense......................650
Repairs Expense...................................684
Telephone Expense...............................688
7,180
1,200
1,980
300
1,800
750
850
300
31
Income Summary.......................................901 2,570

L. Fogle, Capital.....................................301
2,570
To close the Income Summary.
31
L. Fogle, Capital..........................................301 1,600

L. Fogle, Withdrawals...........................302
1,600
To close the Withdrawals account..
Part 7
KEEPSAFE CO.
July 31, 2005
Debit
Cash............................................................. $ 14,750
950
Office supplies............................................
1,550
5,100
Credit
Buildings..................................................... 120,000
Accumulated depreciationBuildings......
1,200
Salaries payable.........................................
180
L. Fogle, Capital..........................................
140,970
Totals........................................................... $142,350
$142,350
Date
July 1
2
5
10
14
24
28
29
30
31
Date
July 31
Date
July 5
31
Date
July 10
31
Explanation
Ledger as of July 31:

Cash
PR
Debit
20,000
8,800
Accounts Receivable
Explanation
PR
Debit
Adjusting
950
Explanation
Office Supplies
PR
Explanation
Debit
2,300
Debit
5,400
Acct. No. 128

Credit Balance
5,400
300
5,100
Adjusting
Buildings
Date
July 1
Date
July 31
Date
July 31
Explanation
PR
Acct. No. 106

Credit Balance
950
Acct. No. 124
Credit Balance
2,300
750
1,550
Adjusting
Prepaid Insurance
PR
Acct. No. 101

Credit Balance
20,000
1,800 18,200
2,300 15,900
5,400 10,500
900
9,600
18,400
900 17,500
850 16,650
300 16,350
1,600 14,750
Debit
120,000
Acct. No. 173

Credit Balance
120,000
Accumulated DepreciationBuildings
Acct. No. 174
Explanation
PR
Debit Credit Balance
Adjusting
1,200
1,200
Explanation
Adjusting
Salaries Payable
PR
Debit
Acct. No. 209

Credit Balance
180
180

Date
July 1
31
31
Date
July 31
31
Explanation
L. Fogle, Capital
PR
Closing
Closing
Acct. No. 301

Debit Credit Balance
140,000 140,000
2,570 142,570
1,600
140,970
L. Fogle, Withdrawals
Explanation
PR
Debit
1,600
Closing
Date
July 24
31
31
Adjusting
Closing
9,750
Acct.No. 401
Credit Balance
8,800
8,800
950
9,750
0
Date
July 31
31
Depreciation ExpenseBuildings
Explanation
PR
Debit
Adjusting
1,200
Closing
Acct. No. 606

Credit Balance
1,200
1,200
0
Date
July 14
28
31
31
Date
July 31
31
Date
July 2
31
Explanation
Explanation
Storage Fees Earned

PR
Debit
Acct. No. 302

Credit Balance
1,600
1,600
0
Salaries Expense
PR
Adjusting
Closing
Explanation
Adjusting
Closing
Explanation
Closing
Insurance Expense
PR
Rent Expense
PR
Debit
900
900
180
Acct. No. 622

Credit Balance
900
1,800
1,980
1,980
0
Debit
300
Acct. No. 637

Credit Balance
300
300
0
Debit
1,800
Acct. No. 640

Credit Balance
1,800
1,800
0
Problem 4-2B (Concluded)

Date
July 31
31
Date
July 29
31
Date
July 30
31
Date
July 31
31
31
Office Supplies Expense

Explanation
PR
Debit
Adjusting
750
Closing
Explanation
Repairs Expense
PR
Debit
850
Acct. No. 684

Credit Balance
850
850
0
Debit
300
Acct. No. 688

Credit Balance
300
300
0
Closing
Explanation
Telephone Expense
PR
Closing
Explanation
Closing
Closing
Closing
Income Summary
PR
Acct. No. 650

Credit Balance
750
750
0
Debit
7,180
2,570
Acct. No. 901

Credit Balance
9,750
9,750
2,570
0

Part 1
HEEL-TO-TOE SHOES
Income Statement
Repair fees earned.....................................
Expenses
Depreciation expenseEquipment........
Wages expense.........................................
Rent expense............................................
Store supplies expense...........................
Utilities expense.......................................
Total expenses..........................................
Net income..................................................
$62,000
$ 3,000
28,400
1,100
2,400
1,300
1,860
38,060
$23,940
HEEL-TO-TOE SHOES
P. Holt, Capital, December 31, 2004..........
$31,650
Add: Net income.........................................
23,940
55,590
Less: Owner withdrawals..........................
(16,000)
P. Holt, Capital, December 31, 2005..........
$39,590

HEEL-TO-TOE SHOES
Balance Sheet
December 31, 2005
Assets
Current assets
Cash........................................................... $13,450
Store supplies...........................................
4,140
Prepaid insurance....................................
2,200
Total current assets.................................
Plant assets
Equipment................................................. 33,000
Accumulated depreciation, equipment. .
(9,000)
Total assets.................................................
$19,790
24,000
$43,790
Liabilities
Current liabilities
Accounts payable.....................................
Wages payable..........................................
Total current liabilities.............................
Equity
Paul Holt, Capital .......................................
Total liabilities and equity..........................
$ 1,000
3,200
4,200
39,590
$43,790

Parts 2 and 3
HEEL-TO-TOE SHOES
Work Sheet
No.
Adjusted
Trial Balance
Dr.
Cr.
Account Title

Dr.
Cr.
Post-Closing
Trial Balance
Dr.
Cr.
101
Cash................................ 13,450
13,450
125
Store supplies.................... 4,140
4,140
128
Prepaid insurance.............. 2,200
2,200
167
Equipment........................ 33,000
33,000
168
Accumulated depreciationEquipment..............
9,000
9,000
201
Accounts payable..............
1,000
1,000
210
Wages payable..................
3,200
3,200
301
Paul Holt, Capital................
302
Paul Holt, Withdrawals........ 16,000
401
Repair fees earned..............
612
16,000 (3)
23,940
(4)
16,000
3,000
Equipment......................
(2)
3,000
623
Wages expense................. 28,400
(2)
28,400
637
Insurance expense............. 1,100
(2)
1,100
640
Rent expense.................... 2,400
(2)
2,400
651
Store supplies expense....... 1,300
(2)
1,300
690
Utilities expense................. 1,860
(2)
1,860
901
Income summary...............
38,060 (1)
23,940
62,000
______
______
Totals...............................106,850
31,650 (4)
62,000 (1)
(2)
______ (3)
106,850
39,590
62,000
140,000
_____
_____
140,000 52,790
52,790

Part 3
(1)
Repair Fees Earned......................................

Income Summary..................................
62,000
62,000
(2)
Income Summary..........................................
Wages Expense.....................................
Rent Expense.........................................
Store Supplies Expense.......................
38,060
3,000
28,400
1,100
2,400
1,300
1,860
(3)
Income Summary..........................................
Paul Holt, Capital...................................
23,940
23,940
(4)
Paul Holt, Capital..........................................

Paul Holt, Withdrawals..........................
16,000
16,000
Part 4
(a) If none of the $1,100 insurance expense had expired, the income
statement would not report any insurance expense and net income
would be increased by $1,100.
(b) If there were no earned and unpaid wages (meaning Wages Payable
equals zero), wages expense would be $3,200 less.
Financial Statement Changes:
The income statement would reflect the following:
Net income would be increased by $1,100 + $3,200 = $4,300.
The balance sheet would reflect the following:
Prepaid insurance and total assets would be increased by $1,100.
There would not be any wages payable.
Total liabilities would be decreased by $3,200.
Owner's equity would be increased by $4,300.

Part 1
GIOVANNI CO.
Income Statement
Revenues
Professional fees earned................................... $47,000
Rent earned.........................................................
3,600
Dividends earned...............................................
500
Interest earned....................................................
1,120
Total revenues....................................................
Expenses
Depreciation expenseBuilding......................
2,000
Depreciation expenseEquipment..................
1,000
Wages expense................................................... 17,500
1,200
Insurance expense.............................................
1,425
Rent expense......................................................
1,800
900
Postage expense................................................
310
3,825
Repairs expense.................................................
579
Telephone expense............................................
421
1,820
Total expenses....................................................
Net income............................................................
GIOVANNI CO.
J. Giovanni, Capital, December 31, 2004...........
Net income.................................................. 19,440
J. Giovanni, Capital, December 31, 2005...........
$52,220
32,780
$19,440
$ 61,800
49,440
111,240
(6,000)
$105,240

GIOVANNI CO.
Balance Sheet
December 31, 2005
Assets
Current assets
Cash.....................................................................
$ 6,400
Short-term investments.....................................
10,200
Supplies..............................................................
3,600
800
$ 21,000
Plant assets
Equipment........................................................... $18,000
Accumulated depreciationEquipment.......... (3,000) 15,000
Building............................................................... 90,000
Accumulated depreciationBuilding.............. (9,000) 81,000
Land.....................................................................
28,500
Total plant assets...............................................
124,500
Total assets...........................................................
$145,500
Liabilities
Current liabilities
Accounts payable...............................................
Rent payable.......................................................
Wages payable....................................................
Unearned professional fees..............................
Current portion of long-term note payable......
Long-term notes payable...................................
Equity
J. Giovanni, Capital..............................................
$ 2,500
1,400
200
1,180
2,330
650
6,400
$ 14,660
25,600
40,260
105,240
$145,500

Part 2
(1)
(2)
(3)
(4)
Professional Fees Earned............................

Rent Earned...................................................
Dividends Earned.........................................
Interest Earned..............................................
Income Summary..................................
47,000
3,600
500
1,120
Income Summary..........................................
Depreciation ExpenseBuilding.........
Depreciation ExpenseEquipment....
Wages Expense.....................................
Rent Expense.........................................
Postage Expense...................................
Repairs Expense...................................
Telephone Expense...............................
32,780
Income Summary..........................................
J. Giovanni, Capital...............................
19,440
J. Giovanni, Capital......................................
J. Giovanni, Withdrawals......................
6,000
52,220
2,000
1,000
17,500
1,200
1,425
1,800
900
310
3,825
579
421
1,820
19,440
Part 3
a.
Return on assets = $19,440/[($150,000 + $145,500)/2] = 13.2%
b.
Debt ratio = $40,260/$145,500 = 0.28
c.
Profit margin = $19,440/$52,220 = 37.2%
d.
Current ratio = $21,000/$14,660 = 1.43
6,000
Problem 4-5B (90 minutes) Part 1

CRUSH DEMOLITION COMPANY
Work Sheet
For Year Ended April 30, 2005
Unadjusted
Trial Balance
No.
101
126
128
167
168
201
203
208
210
213
251
301
302
401
612
623
633
637
640
652
683
684
690
Account Title
Dr.
Cr.
Cash...........................................
9,000
Supplies.......................................
18,000
Prepaid insurance..........................
14,600
Equipment...................................
140,000
10,000
Equipment..................................
16,000
Rent payable.................................
Wages payable..............................
Property taxes payable...................
20,000
J. Bonar, Capital.............................
66,900
J. Bonar, Withdrawals.....................
24,000
Demolition fees earned...................
177,000
Equipment..................................
Wages expense.............................
51,400
Interest expense............................
2,200
Insurance expense.........................
Rent expense................................
8,800
Supplies expense..........................
Property taxes expense..................
8,400
Repairs expense............................
6,700
Utilities expense............................
6,800 ______
Totals..........................................
289,900 289,900
Net Income...................................
Totals..........................................
Adjusted
Trial Balance
Adjustments
Dr.
Cr.
Dr.
Cr.
Income
Statement
Dr.
Cr.
9,000
8,100
3,100
140,000
9,000
8,100
3,100
140,000
(a)
(b)
9,900
11,500
(c)
18,000
28,000
28,000
(d)
(h)
(f)
(e)
(g)
700
200
5,360
2,200
450
16,700
200
5,360
2,200
450
20,000
66,900
16,700
200
5,360
2,200
450
20,000
66,900
24,000
(c)
(e)
(h)
(b)
(f)
(a)
(g)
18,000
2,200
200
11,500
5,360
9,900
450
(d)
700
48,310
Balance Sheet and

Statement of
Owners Equity
Dr.
Cr.
______
48,310
24,000
177,000
177,000
18,000
53,600
2,400
11,500
14,160
9,900
8,850
6,700
7,500 ______
316,810 316,810
18,000
53,600
2,400
11,500
14,160
9,900
8,850
6,700
7,500 ______
132,610 177,000
44,390 ______
177,000 177,000
______ ______
184,200 139,810
______ 44,390
184,200 184,200

Part 2
Adjusting entries (all on April 30, 2005):
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Supplies.................................................
To record consumption of supplies.
9,900
Insurance Expense.......................................
Prepaid Insurance.................................
To record expiration of insurance.
11,500

18,000
9,900
11,500
18,000
Utilities Expense...........................................
Accounts Payable.................................
To record accrued utilities costs.
700
Wages Expense.............................................
Wages Payable......................................
2,200
Rent Expense................................................
Rent Payable..........................................
To record remainder of annual rent.
5,360
Property Taxes Expense..............................

Property Taxes Payable........................
To record additional property taxes.
450
Interest Expense (1% x $20,000).................

To record Aprils interest expense.
200
700
2,200
5,360
450
200

Closing entries (all on April 30, 2005):
(1)
(2)
(3)
(4)
Demolition Fees Earned............................... 177,000

Income Summary..................................
177,000
Income Summary.......................................... 132,610

Wages Expense.....................................
Rent Expense.........................................
Repairs Expense...................................
18,000
53,600
2,400
11,500
14,160
9,900
8,850
6,700
7,500
Income Summary..........................................
J. Bonar, Capital....................................
44,390
44,390
J. Bonar, Capital............................................
J. Bonar, Withdrawals...........................
24,000
24,000

241

Part 3
Income Statement
Demolition fees earned........................................
Expenses
Depreciation expenseEquipment.................. $18,000
Wages expense................................................... 53,600
2,400
Insurance expense............................................. 11,500
Rent expense...................................................... 14,160
9,900
8,850
Repairs expense.................................................
6,700
7,500
Total expenses....................................................
Net income............................................................
$177,000
132,610
$ 44,390

J. Bonar, Capital, April 30, 2004..........................
$ 36,900

Net income..................................................
J. Bonar, Capital, April 30, 2005..........................

242
44,390
74,390
111,290
(24,000)
$ 87,290

Balance Sheet
April 30, 2005
Assets
Current assets
Cash..................................................................... $ 9,000
Supplies..............................................................
8,100
3,100
$ 20,200
Plant assets
Equipment........................................................... 140,000
Accumulated depreciationEquipment.......... (28,000)
112,000
Total assets...........................................................
$132,200
Liabilities
Current liabilities
Accounts payable............................................... $ 16,700
200
Rent payable.......................................................
5,360
Wages payable....................................................
2,200
450
Current portion of long-term note payable..
4,000
Long-term note payable (less current portion)
Equity
J. Bonar, Capital...................................................
$ 28,910
16,000
44,910
87,290
$132,200

243

Part 4
(a) This error enters the wrong amount in the correct accounts. The
ending balance of the Prepaid Insurance account should be $3,100,
but the entry reduces that account by $3,100. Because its
unadjusted balance was $14,600, the adjusted balance will be
$11,500 ($14,600 - $3,100), which is $8,400 greater than the correct
$3,100 balance. In addition, the Insurance Expense account balance
will be only $3,100 instead of $11,500.
The adjusted trial balance columns in the work sheet will be equal,
but the error will cause the work sheets net income to be overstated
by $8,400 because of the understatement of the expense. In
addition, the balance sheet columns will include the overstated
balance for the Prepaid Insurance account.
This error is not likely to be detected as a result of completing the
work sheet. If it is not, the income statement will overstate net
income by $8,400, and the balance sheet will overstate the cost of
the unexpired insurance and total equity by $8,400.
(b) This error inserts a debit in the balance sheet columns instead of the
income statement columns. In the unlikely event that this error is not
immediately detected, it will cause the work sheet measure of net
income to be overstated because the total debits will incorrectly omit
the $6,700 expense for repairs.
In all likelihood, the error will be discovered in the process of
drafting the balance sheet because the accountant will realize that
repairs expense is not an asset. If it is detected and corrected, the
financial statements will be unaffected. However, if the repairs
expense is erroneously included on the balance sheet, the reported
net income will be overstated by $6,700. On the balance sheet, a
nonexistent asset will be reported for the repairs expense and
owner's equity will be overstated by $6,700.

244
Problem 4-6BA (40 minutes)

Part 1
SOLUTIONS CO.
Partial Work Sheet
December 31, 2005
Unadjusted
Trial Balance
Dr.
Cr.
Adjusted
Trial Balance
Dr.
Cr.
Adjustments
Dr.
Cr.
Cash........................................... 9,000
9,000
(e)
Accounts receivable......................
2,350
Supplies...................................... 6,600
2,350
(b)
4,150
Machinery...................................40,100
Machinery..................................
2,450
40,100
(f)
3,800
19,600
Interest payable............................
(c)
500
500
Salaries payable...........................
(a)
420
420
15,800
Unearned rental fees.....................
5,200
Notes payable..............................
20,000
20,000
G. Clay, Capital.............................
13,200
13,200
(d)
2,100
3,100
G. Clay, Withdrawals......................10,500
Rental fees earned........................
10,500
37,000
(d)
(e)
2,100
2,350
41,450
Machinery.................................
(f)
3,800
3,800
Salaries expense..........................23,500
(a)
420
23,920
Interest expense........................... 1,500
(c)
500
2,000
(b)
4,150
______
4,150
______
13,320
13,320
98,270
98,270
Supplies expense.........................______
______
Totals..........................................91,200
91,200

245
Problem 4-6BA (Continued)

Part 2 (all adjusting entries dated December 31, 2005)
(a)
(b)
(c)
(d)
(e)
(f)
Salaries Payable....................................
420
Supplies.................................................
To record cost of consumed supplies.
4,150
To record accrued interest expense.
500
Unearned Rental Fees..................................

Rental Fees Earned...............................
To record earned fees.
2,100
Accounts Receivable....................................
To record accrued revenues.
2,350
Depreciation Expense, Machinery..............

Accumulated Depreciation,
Machinery.............................................
3,800
420
4,150
500
2,100
2,350
3,800
Part 3 (all reversing entries dated January 1, 2006)

(a)
(c)
(e)
Salaries Payable...........................................
To reverse accrued wages.
420
Interest Payable............................................
To reverse accrued interest expense.
500
Rental Fees Earned......................................

2,350

246
420
500
2,350
Problem 4-6BA (Concluded)

Part 4
2006
Jan. 4
15
31
Cash........................................................
To record payroll.
1,250
Cash........................................................
To record interest payment.
600
Cash ($2,350 + $4,400)..................................

To record collection of rental fees.
6,750
1,250
600
6,750

247
SERIAL PROBLEM
Serial Problem, Success Systems (150 minutes) Part 1
Closing entries:
2004
Dec. 31 Computer Services Revenue .......................... 403 31,284

Income Summary...................................... 901
31,284
31 Income Summary.............................................. 901 17,036

Depreciation ExpOffice Equipment....... 612
Depreciation ExpComputer Equipment... 613
Wages Expense ........................................ 623
Insurance Expense .................................. 637
Rent Expense ........................................... 640
Computer Supplies Expense .................. 652
Advertising Expense ................................ 655
Mileage Expense ...................................... 676
Miscellaneous Expenses ......................... 677
Repairs ExpenseComputer ................. 684
400
1,250
3,875
555
2,475
3,065
2,965
896
250
1,305
31
Income Summary.............................................. 901 14,248

K. Breeze, Capital...................................... 301
14,248
31
K. Breeze, Capital............................................. 301

K. Breeze, Withdrawals............................. 302
7,100
7,100
Note: All accounts with numbers that start with the digits 1 or 2 (the permanent
accounts) are unaffected by the closing process.

248
Serial Problem (Continued)

[Note: This solution includes all entries from the prior three months. The Working Papers
shorten the solution by showing the balances of the accounts as of December 31,
2004.]
General Ledger
Cash
Date
Oct.
Nov.
Dec.
Explanation
1
2
5
8
15
17
20
22
31
31
1
2
5
18
22
28
30
30
2
3
4
10
14
20
28
29
31
PR
Debit
55,000
4,800
1,400
4,633
2,208
3,950
1,500
5,625
3,000
Acct. No. 101

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

249

Date
Oct.
Nov.
Dec.
Date
Oct.
Nov.
Dec.
Date
Oct.
Dec.
Date
Oct.
Dec.
Date
Oct.
Date
Dec.
6
12
15
22
28
8
18
24
4
28
Accounts Receivable
Explanation
PR
Debit
4,800
1,400
5,208
5,668
3,950
Computer Supplies
Explanation
PR
3
5
15
31
Prepaid Insurance
Explanation
PR
5
31
Prepaid Rent
Explanation
PR
2
31
Office Equipment
Explanation
PR
1
Acct. No. 106

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

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

Credit
Balance
2,220
555
1,665
Debit
3,300
Acct. No. 131

Credit
Balance
3,300
2,475
825
Debit
8,000
Acct. No. 163

Credit
Balance
8,000
Accumulated DepreciationOffice Equipment

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

250

Date
Oct.
Date
Dec.
Date
Oct.
Dec.
Date
Dec.
Date
Dec.
Date
Oct.
Dec.
Date
Oct.
Nov.
Dec.
Dec.
Computer Equipment
Explanation
PR
Debit
20,000
Acct. No. 167

Credit
Balance
20,000
Accumulated DepreciationComputer Equipment

Acct. No. 168
Explanation
PR
Debit
Credit
Balance
31
1,250
1,250
Accounts Payable
Explanation
PR
Debit
3
8
15
1,420
Explanation
Wages Payable
PR
Debit
31
Acct. No. 210

Credit
Balance
500
500
Unearned Computer Services Revenue

Explanation
PR
Debit
Acct. No. 236

Credit
Balance
1,500
1,500
K. Breeze, Capital
Explanation
PR
Acct. No. 301

Credit
Balance
83,000
83,000
14,248
97,248
90,148
Acct. No. 302
Credit
Balance
3,600
5,600
7,100
7,100
0
14
1
31
31
31
30
31
31
Acct. No. 201

Credit
Balance
1,420
1,420
0
1,100
1,100
Debit
7,100
K. Breeze, Withdrawals
Explanation
PR
Debit
3,600
2,000
1,500
Closing

251

Date
Oct.
Nov.
Dec.
Date
Dec.
Date
Dec.
Date
Oct.
Nov.
Dec.
Date
Dec.
Date
Dec.
Computer Services Revenue

Explanation
PR
Debit
Acct. No. 403

Credit
Balance
4,800
4,800
1,400
6,200
5,208
11,408
4,633
16,041
5,668
21,709
3,950
25,659
5,625
31,284
0
6
12
28
2
8
24
20
31
Closing
31
31
Depreciation ExpenseOffice Equipment

Acct. No. 612
Explanation
PR
Debit
Credit
Balance
400
400
Closing
400
0
31,284
Depreciation ExpenseComputer Equipment

Acct. No. 613
Explanation
PR
Debit
Credit
Balance
31
1,250
1,250
31
Closing
1,250
0
Wages Expense
Explanation
PR
31
30
10
31
31
Debit
875
1,750
750
500
Closing
Acct. No. 623

Credit
Balance
875
2,625
3,375
3,875
3,875
0
31
31
Insurance Expense
Explanation
PR
Debit
555
Closing
Acct. No. 637

Credit
Balance
555
555
0
Explanation
31
31
Closing

252
Rent Expense
PR
Debit
2,475
Acct. No. 640

Credit
Balance
2,475
2,475
0

Date
Dec.
Date
Oct.
Dec.
Date
Nov.
Dec.
Date
Nov.
Dec.
Date
Oct.
Dec.
Date
Dec.
31
31
Computer Supplies Expense

Explanation
PR
Debit
3,065
Closing
Acct. No. 652

Credit
Balance
3,065
3,065
0
20
2
31
Advertising Expense
Explanation
PR
Debit
1,940
1,025
Closing
Acct. No. 655

Credit
Balance
1,940
2,965
2,965
0
Mileage Expense
Explanation
PR
1
28
29
31
Debit
320
384
192
Closing
Acct. No. 676

Credit
Balance
320
704
896
896
0
22
31
Miscellaneous Expense
Explanation
PR
Debit
250
Closing
Acct. No. 677

Credit
Balance
250
250
0
17
3
31
Repairs ExpenseComputer
Explanation
PR
Debit
805
500
Closing
Acct. No. 684

Credit
Balance
805
1,305
1,305
0
31
31
31
Income Summary
Explanation
PR
Debit
Closing
Closing
17,036
Closing
14,248
Acct. No. 901

Credit
Balance
31,284
31,284
14,248
0

253
Serial Problem (Concluded)

Part 8
SUCCESS SYSTEMS
December 31, 2004
Debit
Cash............................................................................... $58,160
Accounts receivable.....................................................
5,668
Computer supplies........................................................
580
Prepaid insurance.........................................................
1,665
Prepaid rent...................................................................
825
Office equipment...........................................................
8,000
Accumulated depreciationOffice equipment..........
Computer equipment.................................................... 20,000
Accumulated depreciationComputer equipment...
Accounts payable.........................................................
Wages payable..............................................................
Unearned computer services revenue........................
K. Breeze, Capital..........................................................
Totals.............................................................................. $94,898

254
Credit
400
1,250
1,100
500
1,500
90,148
$94,898
Reporting in Action
BTN 4-1
1. The total revenues that would be credited to Income Summary as step 1

in the closing entry process must be computed. Krispy Kremes sales
revenue for the fiscal year-ended February 2, 2003, is $491,549,000, and
its interest income is $1,966,000. Thus, its total revenue that is closed
to Income Summary is $493,515,000.
2. The total expenses that would be debited to Income Summary as step 2
in the closing entry process must be computed. Krispy Kremes total
expenses for the fiscal year-ended February 2, 2003, are:
Operating expenses........................................................
$381,489,000
General and administrative............................................
28,897,000
Depreciation and amortization.......................................
12,271,000
Arbitration award.............................................................
9,075,000
Interest expense..............................................................
1,781,000
Joint venture equity loss................................................
2,008,000
Minority interest..............................................................
2,287,000
Loss on sale of property and equipment......................
934,000
Income tax expense........................................................
21,295,000
Total expenses................................................................. $460,037,000
3. The balance of Income Summary before it is closed as of February 2,
2003, equals the net income for Krispy Kreme of $33,478,000.
4. The amount of cash paid to common stockholders for the fiscal year
ended February 2, 2003, was $0.
5. Solution depends on the Krispy Kreme annual report information
obtained.

255
Comparative Analysis
BTN 4-2
1. Krispy Kremes current ratios:

Current year......... $141,128 / $59,687 = 2.36
Prior year.............. $101,769 / $52,533 = 1.94
Tastykakes current ratios:
Current year......... $36,095 / $19,307 = 1.87
Prior year.............. $35,169 / $16,885 = 2.08
2. In the current year, Krispy Kreme has the higher current ratio (2.36 vs.
1.87), suggesting a better ability to pay short-term obligations.
However, in the prior year, Tastykake had a slightly superior current
ratio (2.08 vs. 1.94). Overall, neither company is in immediate danger of
failing to make payment on short-term obligations.
3
Krispy Kremes current ratio improved, moving from 1.94 to 2.36.

Tastykakes current ratio declined from 2.08 to 1.87.
4. Both Krispy Kreme and Tastykake exceed the industry average of about
1.0 to 1.2. (Food Stores ratio is about 1.2 and Retail TradeEating &
Drinking is about 1.0; see http://bizstats.com/currentratios.htm.)
Ethics Challenge
BTN 4-3
1. There are several courses of action that Jennifer could have taken:
a.
She could have consulted with the president and told him that finalized
financial statements would not be ready by the time of the meeting.
She could explain that delay in financial statement preparation is a
normal event given the need to wait for final information to prepare
accurate adjustments. Possibly the meeting could be rescheduled or
Jennifer could have asked how the president preferred her to proceed.
b. The estimation decision was not a bad choice in itself. But she should
have informed the president. Jennifer probably should have used
worst-case estimates instead of recording expenses on the low side.
Users of financial statements usually prefer knowing worst-case
scenarios over best case outcomes. Use of estimates gets the financial
statements closer to their final form than ignoring the adjustments
completely.
256
Ethics Challenge (Continued)

2.
Students may offer one of the above alternatives or another response they
may think of given the situation. Try to generate a discussion of ethical
concerns and the impact of her decisions on the well-being of users (such as
the bankers and the investors in the banks).
Communicating in Practice
BTN 4-4
TO:
_____________________
FROM:
_____________________
DATE:
______________________
SUBJECT:CLARIFICATIONSTHE OBJECTIVE OF THE CLOSING PROCESS
[Note: The following is a sample of what the memorandums contents might include.]
When we speak of closing the books or the closing process we are not talking about
ending or closing the business nor doing anything that reflects this thinking in the
financial statements. Let me use an analogy to explain the concept of the closing
process and then you will see the distinction more clearly.
Scoreboards are used to temporarily hold information that will allow us to determine who
won or lost in an athletic game or event. When the athletic event is over the result of the
game is permanently recorded elsewhere--probably in the teams record book. If the
scoreboard was not cleared before the start of a new game the scores from the second
game would be combined with scores from the first game. As a result, the scoreboard
would reflect data or scores that were not relevant to either game. You can see that the
scoreboard must be zeroed out to prepare it for accumulating data to determine the
outcome of the next game.
The revenue and expense accounts temporarily hold the information to determine if the
owner(s) won or lost in the game of business. Each fiscal period should be viewed as a
separate game. After the data in these accounts has allowed us to determine if the
owner(s) won or lost, in other words, the net income or loss, these accounts must be
cleared to accumulate data for the next game or period. We record the score of the game
of business, or the net income or loss, in the permanent recordbook or the capital
account. A win or net income increases capital and a loss or net loss decreases capital.
I hope this memo clarifies the objective of the closing process.
[Note: The memorandum need not discuss the income summary account since the assignment
requires explaining the concept, not the procedure.]

257
Taking It to the Net
BTN 4-5
1. The Motley Fool states that a benchmark of 1.5 is generally regarded as

sufficient to meet near-term operating needs.
2. One should always check a companys current ratio (as well as any
other ratio) against its main competitors in a given industry.
3. A current ratio that is too high can suggest that a company is hoarding
assets instead of using them to grow the businessnot the worst thing
in the world, but potentially something that could impact long-term
returns.
Teamwork in Action
BTN 4-6
[Note: Each team member will be working on a different component of the solution and will
ultimately combine information and verify the final check figures using the accounting equation.]
1. Accounts and adjusted balances to be extended to Balance Sheet columns:

Trial Balance
Account Title
Debit
Credit
Cash...................................$15,000
Accounts receivable.........
Supplies............................. 11,000
Prepaid insurance............. 2,000
Equipment......................... 24,000
Acc. deprecEquip..........
$ 6,000
Accounts payable.............
2,000
D. Noseworthy, Capital.....
31,000
D. Noseworthy,
Withdrawals..................... 5,000
Adjustments
Debit
Credit
(d) 500
(c) 7,000
(a) 1,200
(b) 3,000
Balance Sheet
Debit
Credit
$15,000
500
4,000
800
24,000
9,000
2,000
31,000
5,000
Total Assets = $44,300 - $9,000 = $35,300

(Cash + AR + Supplies + Prepaid Ins. + Equipment - Accum. Depreciation)
Total Liabilities = $2,000 (only accounts payable)

258
Teamwork in Action (Continued)

2. Adjusted revenue account balance:
Trial Balance
Title
Debit
Credit
Investigation Fees
Earned.....................................
32,000
Income
Statement
Debit
Credit
Adjustments
Debit
Credit
(d) 500
32,500
Closing entry:
Account Titles and Explanation
Debit
Investigation Fees Earned..................................................... 32,500
Income Summary...................................................
To close revenue accounts to Income Summary
Credit
32,500
3. Adjusted balances of expense accounts:

Title
Trial Balance
Debit
Credit
Rent Expense.....................14,000
Insurance Expense............
Depreciation Expense.......
Supplies Expense..............
Adjustments
Debit
Credit
(a) 1,200
(b) 3,000
(c) 7,000
Income
Statement
Debit
Credit
14,000
1,200
3,000
7,000
Closing entry:
Debit
Income Summary................................................................... 25,200
Rent Expense.........................................................
Insurance Expense................................................
Depreciation Expense............................................
Supplies Expense..................................................
To close expense accounts to Income Summary
Credit
14,000
1,200
3,000
7,000

259
Teamwork in Action (Continued)

4.
(4)
D. Noseworthy, Capital
5,000 31,000
7,300
(3)
33,300 Ending
Income Summary
25,200
32,500 (1)
7,300
(2)
(3)
Third and Fourth closing entries:

Debit
Income Summary................................................................... 7,300
D. Noseworthy, Capital..........................................
To close Income Summary to Capital
D. Noseworthy, Capital..........................................................
D. Noseworthy, Withdrawals.................................
To close Withdrawals to Capital
Credit
7,300
5,000
5,000
5. Proving the Accounting Equation:

ASSETS = LIABILITIES + OWNERS EQUITY
$35,300 = $2,000
+ $ 33,300
Hitting the Road
BTN 4-7
There is no formal solution to this field activity. The instructor may wish to
tally students findings to show results across companies as to use of work
sheets, software preferences, and time it takes to prepare finalized annual
financial statements.

260
Business Week Activity
BTN 4-8
1. Several screens were imposed on the database of 7,000 companies with

respect to their debt levels. The test criteria required long-term debt of
less than $5 billion and a debt-to-capital ratio of 15% or less.
2. The current ratio for the 12 companies ranged from a low of 1.6 (HarteHanks HHS) to a high of 4.7 (Electronics for Imaging EFII).
3. The return on assets for the 12 companies ranged from a low of 5.4%
(Electronics for Imaging EFII) to a high of 18.7% (BJ Services BJS).
4. The litigation (potential) liability for tobacco and asbestos-related
companies can be a more important risk than the debt carried by the
companies on their balance sheets.
Entrepreneurial Decision
BTN 4-9
1. Andy Wolf states that one goal was to keep the price of the snowskates
under $100 retail. We can arrive at a conservative estimate of the units
sold by setting the unit sales price at $100. The opening article states
that retail sales will top $3 million in 2002. By dividing the $3 million in
sales by the unit retail price of $100 we can approximate unit sales at
30,000 units.
2. By reviewing Chapters 1-4 we can see that the two of the most relevant
ratios for monitoring a companys performance would be return on
assets and the profit margin. By calculating return on assets Andy can
judge whether the assets he has invested in his company are returning
a healthy percentage for the risk he is taking. If Andy calculates profit
margin he can see what percentage profit he is earning on every dollar
of sales.
3. Andy should direct his attention to the current liabilities and long-term
liabilities sections of the classified balance sheet to see what amounts
are owed and whether they are coming due in the short-term or the
long-term.
4. Closing procedures will accomplish two objectives for Andy. First, the
temporary accounts will be reset to zero and be readied for use in the
next accounting period. Second, the profitability of the period will be
updated to the companys equity account.

261
Global Decision
BTN 4-10
1. The current ratio for the recent two years of Grupo Bimbo follows:
Current year............................
$7,155 / $5,409 = 1.32
Prior year.................................
$4,867 / $4,026 = 1.21
2. Generally, analysts in this industry like to see a current ratio at the level
of 1.5 or higher. Grupo Bimbos current ratio is below this industryaccepted benchmark. We could also compare Grupo Bimbos current
ratio to direct competitors within the baking industry to see if it is in
line with those companies or higher or lower than that benchmark.
We should also note that Grupo Bimbos current ratio improved in the
current year (1.32) relative to the prior year ratio of 1.21.

262

Chap 004

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chap 004

Uploaded by

Copyright:

Available Formats

Chapter 4

Completing the Accounting Cycle

McGraw-Hill Companies, Inc., 2005

Assets on a typical classified balance sheet include current assets and

Unearned revenue is reported as a liabilityusually a current liability.

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

D. Argosy, Capital balance after all closing entries:

Quick Study 4-2 (5 minutes)

Quick Study 4-3 (5 minutes)

McGraw-Hill Companies, Inc., 2005

Quick Study 4-4 (5 minutes)

Current ratio = $25,300 / $14,000 = 1.81

Quick Study 4-7 (5 minutes)

Quick Study 4-8 (15 minutes)

Wages expense............. 5,000

Balance Sheet &

Quick Study 4-9 (15 minutes)

31 L. Avril, Capital ............................................

Quick Study 4-10 (5 minutes)

Quick Study 4-11A (10 minutes)

To close the revenue account.

To close the expense accounts.

To close income summary.

M. Mallon, Capital .........................................

To close the withdrawals account.

Exercise 4-2 (40 minutes)

Closing Entry Information

106 Accounts receivable..........

154 Accumulated depre-

201 Accounts payable.............

209 Salaries payable...............

233 Unearned fees..................

301 C. Schwepker, Capital........

622 Salaries expense..............

640 Rent expense...................

677 Miscellaneous expense.....

401 Marketing fees earned.......

611 Depreciation expense

901 Income summary.............

Exercise 4-3 (30 minutes)

Dec. 31 Services Revenue .......................................

To close the revenue account.

31 Income Summary ........................................

To close the expense accounts.

To close Income Summary.

31 R. Showers, Capital ....................................

To close the withdrawals account.

Exercise 4-4 (20 minutes)

K. Webb, Capital is computed as:

Exercise 4-5 (20 minutes)

WEBB TRUCKING COMPANY

Plus: Net income.......................................................

Less: Owner withdrawals.........................................

K. Webb, Capital, December 31, 2005......................

Exercise 4-6 (15 minutes)

Exercise 4-7 (15 minutes)

Analysis: Company 1 is in the strongest liquidity position. It has about $2.52 of

Exercise 4-8 (20 minutes)

Insurance ExpenseOffice Equipment..............

To record expired insurance.

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

To record consumed supplies.

Depreciation ExpenseOffice Equipment..........