Ch03 SM 9e

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

Income statement Interest expense $ .8
Chapter 3 Accrual Accounting & Income 3- 1

Balance sheet Notes payable ($4.1 + $1.7 $1.6). $4.2
Interest payable. 0.3
3-2 Financial Accounting 9/e Solutions

(10 min.) S 3-3
At the end of each accounting period, the business reports its
performance through the preparation of financial statements. In order to
be useful to the various users of financial statements they must be up-
to-date. Accounts such as cash, Equipment, Accounts Payable,
Common Stock and Dividends are up-to date and require no adjustment
at the end of the accounting period. Accounts such as Accounts
Receivable, Supplies, Salary Expense and Salaries Payable may not be
up to date as of the last day of the accounting period. Why? Because
certain transactions that took place during the month may not have been
recorded.
The accrued salaries, which are owed to the employees but have not
been paid, are an expense related to the current period but also
represent a liability or debt that is owed by the business. The business
must make an adjusting entry to record the accrued salary owed as both
an increase in Salary Expense and an increase in Salaries Payable. If
the business does not make this adjustment, the expenses will be
understated, net income will be overstated, and liabilities will be
understated.

(10 min.) S 3-4
The large auto manufacturer should record sales revenue when the
revenue is earned by delivering automobiles to Budget or Hertz. The
large auto manufacturer should not record any revenue prior to delivery
of the vehicles, because the large auto manufacturer hasnt earned the
revenue yet. The revenue principle governs this decision.
When the large auto manufacturer records the revenue from the sale, at
that time not before or after the large auto manufacturer should also
record cost of goods sold, the expense. The expense recognition
principle tells when to record expenses.
(10 min.) S 3-5
Depreciation is the periodic allocation of the cost of a tangible long-lived
asset, less its estimated residual value, over its estimated useful life. All
long-lived or plant assets, except for land, decline in usefulness during
their life and this decline is an expense. Accountants must allocate the
cost of each plant asset, except for land, over the assets useful life.
Depreciation is the process of allocating the cost of a plant asset to
expense. Depreciation also decreases the book value of the asset to
reflect its usage.

(10 min.) S 3-6
a. The Expense Recognition Principle
b. The Time Period Concept
c. The Revenue Principle
d. The Revenue Principle
e. The Expense Recognition Principle
(10 min.) S 3-7
a.
Oct. 31 Rent Expense ($3,000 1/6)... 500

Prepaid Rent. 500
To record rent expense.
Prepaid Rent Rent Expense

Oct. 1 3,000 Oct. 31 500 Oct. 31 500
Bal. 2,500 Bal. 500
b.
Oct. 31 Supplies Expense ($950 $400) 550

Supplies.. 550
To record supplies expense.
Supplies Supplies Expense
Oct. 1 950 Oct. 31 550 Oct. 31 550
Bal. 400 Bal. 550
(10 min.) S 3-8
Req. 1
(a) Jan. 1 Computer Equipment... 50,000

Cash. 50,000
Purchased computer equipment.
(b) Dec. 31 Depreciation Expense

Computer Equipment ($50,000 / 5). 10,000
Accumulated Depreciation
Computer Equipment....... 10,000
Record depreciation expense.
Req. 2
Depreciation Expense
Computer Computer Equipment
Computer Equipment Equipment
Jan. 50,000 Dec. 31 10,000 Dec. 31 10,000
Bal. 50,000 Bal. 10,000 Bal. 10,000

Req. 3
Computer equipment. $50,000

Less: Accumulated depreciation (10,000)
Book value $40,000

(10 min.) S 3-9
(Amounts in millions)
Income statement: 2012

Salary expense ($42.4 + $2.2).. $44.6
Balance sheet: 2012

Salary payable......... $ 2.2
(10 min.) S 3-10
Req. 1
Oct. 31 Interest Expense.. 250

Interest Payable.. 250
To accrue interest expense for October.
Nov. 30 Interest Expense.. 250

Interest Payable.. 250
To accrue interest expense for November.
Dec. 31 Interest Expense... 250

Interest Payable 250
To accrue interest expense for December.
Req. 2
Interest Payable
Oct. 31 250
Nov. 30 250
Dec. 31 250

Bal. 750
Req. 3
Dec. 31 Interest Payable.......... 750

Cash.. 750
To pay interest.
(10 min.) S 3-11
Req. 1
Oct. 31 Interest Receivable 250

Interest Revenue.. 250
To accrue interest revenue for October.
Nov. 30 Interest Receivable 250

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

Interest Revenue...... 250
To accrue interest revenue for December.
Req. 2
Interest Receivable
Oct. 31 250
Nov. 30 250
Dec. 31 250

Bal. 750
Req. 3
Dec. 31 Cash. 750

Interest Receivable. 750
To collect interest.

(5-10 min.) S 3-12
Unearned revenues are liabilities because The World Star has received
cash from subscribers in advance of providing them with newspapers.
Receiving the cash in advance creates an obligation (a liability) for The
World Star. As The World Star delivers newspapers to subscribers, The
World Star earns the revenue, and the dollar amount of the unearned
revenue then goes into the revenue account.
a. Cash. 60,000
Unearned Subscription Revenue....... 60,000
Received cash for revenue in advance.
b. Unearned Subscription Revenue.................. 40,000

Subscription Revenue 40,000
To record the earning of subscription
revenue that was collected in advance.
(5-10 min.) S 3-13
Prepaid Rent at December 31:

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

c. Unadjusted amount $ -0-
d. Adjusted amount ($18,000 / 3). 6,000

(10 min.) S 3-14
a. Accounts Receivable... 55,000

Service Revenue.. 55,000
Cash. 35,000
Accounts Receivable. 35,000
b. Cash. 9,000
Unearned Service Revenue.. 9,000
Unearned Service Revenue 7,000

Service Revenue.. 7,000
(15-30 min.) S 3-15
Sparrow Sporting Goods Company

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

Statement of Retained Earnings

For the Year Ended March 31, 2012
Thousands
Retained earnings, March 31, 2011... $21,500
Add: Net income 10,500
Retained earnings, March 31, 2012... $32,000

(continued) S 3-15

Balance Sheet
March 31, 2012
Thousands
ASSETS
Current:
Cash........................................................ $ 20,800
Ac counts receivable.............................. 28,000
Inventories.............................................. 35,000
Other current assets.............................. 5,000
Total current assets.......................... 88,800
Property and equipment, net................. 6,300
Other assets............................................ 22,000
Total assets.................................................. $117,100
LIABILITIES
Total current liabilities........................... $ 55,100
Long-term liabilities............................... 7,500
Total liabilities.............................................. 62,600
STOCKHOLDERS EQUITY
Common stock....................................... 22,500
Retained earnings.................................. 32,000
Total stockholders equity........................... 54,500
Total liabilities and stockholders equity... $117,100

(5-10 min.) S 3-16
CLOSING ENTRIES
Thousands
Mar. 31 Net Revenues . 175,500
Retained Earnings....... 175,500
31 Retained Earnings. 165,000

Cost of Goods Sold. 136,000
All Other Expenses.. 29,000
Retained Earnings
Mar. 31, 2012 Expenses 165,000 Mar. 31, 2011 Bal. 21,500
Mar. 31, 2012 Revenues 175,500
Mar. 31, 2012 Bal. 32,000
Retained Earnings ending balance agrees with the amount reported on
the statement of retained earnings and the balance sheet (in S 3-15).

(5 min.) S 3-17
(Dollars in thousands)
Req. 1
Net working capital = Total current assets - Total current liabilities
$33,700 = $88,800 - $55,100
Req. 2
Total current assets $88,800

Current ratio = = = 1.61
Total current liabilities $55,100
Req. 3
Total liabilities $62,600

Debt ratio = = = 0.53
Total assets $117,100
Req. 4
Net working capital of $33,700 means current assets exceed current
liabilitiesa positive sign. The current ratio and debt ratio values are
strong.

(10 min.) S 3-18
1. Earned revenue of $10,000 on account:
a. Net working capital = $43,700 [($88,800 + $10,000)- $55,100]
$98,800
b. Current ratio = = 1.79
$55,100
$62,600
c. Debt ratio = = 0.49
$127,100 ($117,100 +$10,000)
2. Paid accounts payable of $10,000:

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

c. Debt ratio = = 0.49
$107,100 ($117,100 -$10,000)

Exercises
(5-10 min.) E 3-19A
Statement Reports (in millions)

1. Income statement Sales revenue $4,300
Operating expenses. 1,200
Balance sheet Accounts receivable $ 900

Accounts payable. 1,000
2. Cash basis would report only the cash collections of $4,500 from
customers and the payment of operating expenses ($1,200).
Their balance sheet should have included neither accounts
receivable nor accounts payable.
(5-10 min.) E 3-20A
a. Cash Basis b. Accrual Basis
Revenues... $540,000 $530,000

Expenses... 420,000 440,000
Net income $120,000 $ 90,000

The accrual basis measures net income better because its information
about revenues and expenses is more complete than the information
provided by the cash basis.

(5-10 min.) E 3-21A
Millions
a. Revenue. $840
The revenue principle says to record revenue when it has been

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

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

The statement of cash flows reports cash receipts and cash
payments.

(15-20 min.) E 3-22A
Req. 1
Adjusting Entries
DATE ACCOUNT TITLES DEBIT CREDIT
a. Insurance Expense................................................ 900

Prepaid Insurance ($400+$1,200$700).......... 900
b. Interest Receivable................................................ 1,600

Interest Revenue............................................... 1,600
c. Unearned Service Revenue ($1,100 $500)........ 600

Service Revenue............................................... 600
d. Depreciation Expense........................................... 4,800

Accumulated Depreciation.............................. 4,800
e. Salary Expense ($18,000 3/5)............................. 10,800

Salary Payable............................................... 10,800
f. Income Tax Expense ($21,000 .25).................... 5,250

Income Tax Payable...................................... 5,250
Req. 2
Net income understated by omission of:

Interest revenue $ 1,600
Service revenue.... 600
Total understatement.. $ (2,200)
Net income overstated by omission of:

Insurance expense $ 900
Depreciation expense.. 4,800
Salary expense.. 10,800
Income tax expense. 5,250
Total overstatement. 21,750
Overall effect net income overstated by $19,550
(10-15 min.) E 3-23A
Missing amounts in italics.
1 2 3 4
Beginning Supplies $ 500 $ 400 1,000 $1,000
Add: Payments for supplies
during the year 1,700 800 1,000 400
Total amount to account for 2,200 1,200 2,000 1,400
Less: Ending Supplies (500) (500) (700) (500)
Supplies Expense $1,700 $ 700 $1,300 $ 900
Journal entries:
Situation 1: Supplies......................................... 1,700

Cash............................................ 1,700
Situation 2: Supplies Expense............................. 700

Supplies..................................... 700

(10-20 min.) E 3-24A
Req. 1
Adjusting Entries
a. Interest Expense.................................................... 9,600

Interest Payable............................................. 9,600
b. Interest Receivable............................................ 4,900

Interest Revenue........................................ 4,900
c. Unearned Rent Revenue ($12,000 / 2 6/12)....... 3,000

Rent Revenue................................................ 3,000
d. Salary Expense ($1,900 3).............................. 7,600

Salary Payable............................................... 7,600
e. Supplies Expense.................................................. 1,800

Supplies ($3,200 $1,400)............................ 1,800
f. Depreciation Expense ($80,000 / 5)...................... 16,000

Accumulated Depreciation........................... 16,000
Req. 2
Book value = $64,000 ($80,000 $16,000)

(10-20 min.) E 3-25A
Accounts Receivable Supplies

Bal. 1,500 Bal. 500 (a) 200
(c) 900 Bal. 300
Bal. 2,400
Salary Payable Unearned Service Revenue

(b) 400 (d) 500 Bal. 600
Bal. 400 Bal. 100
Service Revenue Salary Expense

Bal. 4,200 Bal. 1,900
(c) 900 (b) 400
(d) 500 Bal. 2,300
Bal. 5,600
Supplies Expense
(a) 200
Bal. 200

(20-30 min.) E 3-26A
Honeyglazed Hams, Inc.

Income Statement
Year Ended December 31, 2012
Thousands
Revenues:
Sales revenue............................. $40,900
Expenses:
Cost of goods sold.................... $25,000
Selling, administrative, and
general expense.................. 10,300
Total expenses...................... 35,300
Income before tax........................... 5,600
Income tax expense.................... 2,100
Net income....................................... $ 3,500
Honeyglazed Hams, Inc..

Thousands
Retained earnings, December 31, 2011. $4,700
Add: Net income . 3,500
8,200
Less: Dividends.. (1,500)
Retained earnings, December 31, 2012. $6,700

(continued) E 3-26A
Honeyglazed Hams, Inc.

Balance Sheet
December 31, 2012
Thousands
ASSETS LIABILITIES
Cash. $ 3,700 Accounts payable $ 7,900
Accounts receivable 1,700 Income tax payable.. 500
Inventories. 1,600 Other liabilities.. 2,400
Prepaid expenses. 1,600 Total liabilities... 10,800
Prop., plant, equip. $ 6,800 STOCKHOLDERS
Less: Accum. EQUITY
deprec.. (2,800) 4,000 Common stock.. 4,600
Other assets.. 9,500 Retained earnings 6,700
Total stockholders equity 11,300
Total liabilities and
Total assets $22,100 stockholders equity... $22,100

(10-20 min.) E 3-27A
One mechanism for solving this exercise is to prepare the relevant T-
accounts, insert the given information, and solve for the unknown
amounts, shown in italics.
Amounts in millions
Receivables
Beg. bal. 220
Sales revenue 20,550 Collections 20,400
End. bal. 370
Prepaid Insurance
Beg. bal. 150
Payment 440 Insurance expense 420
End. bal. 170
Accrued Liabilities Payable

Beg. bal. 600
Other operating
Payments 4,300 expenses 4,400
End. bal. 700

(10-15 min.) E 3-28A
Req. 1
Millions
Income statement
Service revenue (430 80). 350
Balance sheet
Unearned service revenue... 80
Req. 2
Income statement
Service revenue (65 + 430 80).. 415
Balance sheet
Service revenue is greater in (2) because Bennett began the year owing
more phone service to customers. With collections for the year and the
amount of the ending liability unchanged, Bennett must have earned
more revenue in situation 2 than in situation 1.
Not required but helpful:
Unearned Service Revenue

Beg. bal. 65
Earned revenue 415 Collected cash 430

End. bal. 80

(10-20 min.) E 3-29A
Req. 1
Journal
Closing Entries
Dec. 31 Service Revenue........................................ 23,900
Other Revenue........................................... 400
Retained Earnings............................... 24,300
31 Retained Earnings..................................... 22,000

Cost of Services Sold.......................... 11,000
Selling, General, and Administrative
Expense........................................... 6,400
Depreciation Expense......................... 4,100
Income Tax Expense............................ 500
31 Retained Earnings..................................... 300

Dividends.............................................. 300
Net income for 2012 was $2,300 ($24,300 $22,000).
Req. 2
Retained Earnings
Dec. 31, 2011 2,600
Expenses 22,000
Dividends 300 Revenues 24,300
Dec. 31, 2012 4,600

(15-25 min.) E 3-30A
Journal
Adjusting Entries
Dec. 31 Unearned Service Revenue............................. 6,300
Service Revenue ($19,500 $13,200)........ 6,600
31 Salary Expense ($4,600 $4,300)................... 300

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

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

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

Income Tax Payable.................................... 1,500
Closing Entries
31 Service Revenue............................................... 19,500
Retained Earnings...................................... 19,500
31 Retained Earnings............................................ 8,400

Salary Expense........................................... 4,600
Rent Expense.............................................. 1,600
Depreciation Expense................................ 700
Income Tax Expense................................... 1,500
31 Retained Earnings............................................ 1,400

Dividends..................................................... 1,400

(20-30 min.) E 3-31A
Req. 1
Anderson Production Company

Balance Sheet
December 31, 2012
ASSETS
Current Assets:
Cash................................................................................ $14,100
Prepaid rent ($800 $300)............................................ 500
Total current assets.................................................. 14,600
Plant Assets:
Equipment...... $42,000
Less accumulated depreciation
($3,400 + $700). (4,100) 37,900
Total assets......................................................................... $52,500
LIABILITIES
Current:
Accounts payable.......................................................... $ 5,100
Salary payable ($4,600 $4,300).............................. 300
Unearned service revenue ($9,100 $6,300).............. 2,800
Income tax payable.................................................... 1,500
Total current liabilities.............................................. 9,700
Note payable, long-term..................................................... 16,000
Total liabilities..................................................................... 25,700
STOCKHOLDERS EQUITY

Common stock................................................................ 8,600
Retained earnings ($8,500 + $19,500 $4,600 $1,600
$700 $1,500 $1,400).......................................... 18,200
Total stockholders equity.............................................. 26,800
Total liabilities and stockholders equity.......................... $52,500
(continued) E 3-31A
Req. 2
Current Prior
Year Year
Net working = Total current assets - $14,600 -
capital current liabilities $9,700 = $4,900 $5,000
Current Total current assets $14,600

rati = Total current liabilities = $9,700 = 1.51 1.55
o
Both net working capital and the current ratio have decreased indicating
that the ability to pay current liabilities with current assets has
deteriorated.

Debt ratio = = = 0.49 0.30
The overall ability to pay total liabilities deteriorated a little.

(30 min.) E 3-32A
$50 $40 + $5
a. Current ratio = = 1.11 Debt ratio = = 0.60
$40 + $5 $70 + $5
The purchase of equipment on account hurts both ratios.
$50 $6 $40 $6
b. Current ratio = = 1.10 Debt ratio = = 0.53
$40 $70 $6
The payment of long-term debt hurts the current ratio and improves
the debt ratio.
$50 + $5 $40 + $5
c. Current ratio = = 1.22 Debt ratio = = 0.60
$40 + $5 $70 + $5
Collecting cash in advance hurts both ratios.
$50 $40 + $2
d. Current ratio = = 1.19 Debt ratio = = 0.60
$40 + $2 $70
Accruing an expense hurts both ratios.
$50 + $6 $40
e. Current ratio = = 1.40 Debt ratio = = .53
$40 $70 + $6
A cash sale improves both ratios.

(5-10 min.) E 3-33B
Statement Reports (in millions)

1. Income statement Sales revenue.. $4,400
Operating expenses... 1,300
Balance sheet Accounts receivable.. $ 700

Accounts payable.. 1,200
2. Cash basis would report only the cash collections of $4,600 from
customers and the payment of operating expenses ($1,300).The
balance sheet would include neither accounts receivable nor
accounts payable.
(5-10 min.) E 3-34B
a. Cash Basis b. Accrual Basis
Revenues... $510,000 $500,000

Expenses... 410,000 450,000
Net income $100,000 $ 50,000
The accrual basis measures net income better because its information
about revenues and expenses is more complete than the information
provided by the cash basis.

(5-10 min.) E 3-35B
Millions
a. Revenue. $780
The revenue principle says to record revenue when it has been

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

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

The statement of cash flows reports cash receipts and cash
payments.

(15-20 min.) E 3-36B
Req. 1
Adjusting Entries
a. Insurance Expense................................................... 700

Prepaid Insurance ($300 + $900 $500)............ 700
b. Interest Receivable................................................ 1,300

Interest Revenue.................................................. 1,300
c. Unearned Service Revenue ($1,200 $300)........... 900

Service Revenue............................................... 900
d. Depreciation Expense............................................... 4,400

Accumulated Depreciation.................................. 4,400

e. Salary Expense ($17,000 3/5)................................ 10,200
Salary Payable...................................................... 10,200
f. Income Tax Expense ($26,000 .25)....................... 6,500

Income Tax Payable............................................. 6,500
Req. 2
Net income understated by omission of:

Interest revenue.. $ 1,300
Service revenue............. 900
Total understatement $ (2,200)
Net income overstated by omission of:

Insurance expense $ 700
Depreciation expense.. 4,400
Salary expense.. 10,200
Income tax expense............ 6,500
Total overstatement............ 21,800
Overall effect net income overstated by. $19,600

(10-15 min.) E 3-37B
Missing amounts in italics.
1 2 3 4
Beginning Supplies $ 400 $ 600 $1,100 $ 900
Add: Payments for supplies
during the year 1,600 1,100 1,500 600
Total amount to account for 2,000 1,700 2,600 1,500
Less: Ending Supplies (200) (300) (1,000) (300)
Supplies Expense $1,800 $1,400 $1,600 $1,200
Journal entries:
Situation 1: Supplies. 1,600

Cash.. 1,600
Situation 2: Supplies Expense 1,400

Supplies....... 1,400

(10-20 min.) E 3-38B
Req. 1
Adjusting Entries
a. Interest Expense....................................................... 9,000

Interest Payable.................................................... 9,000
b. Interest Receivable................................................... 4,300

Interest Revenue.................................................. 4,300
c. Unearned Rent Revenue ($13,900 / 2 6/12).......... 3,475

Rent Revenue....................................................... 3,475
d. Salary Expense ($1,300 3)..................................... 3,900

Salary Payable...................................................... 3,900
e. Supplies Expense..................................................... 1,300

Supplies ($2,900 $1,600)................................... 1,300
f. Depreciation Expense ($140,000 / 5)....................... 28,000

Accumulated Depreciation.................................. 28,000
Req. 2
Book value = $112,000 ($140,000 $28,000)

(10-20 min.) E 3-39B
Accounts Receivable Supplies

Bal. 1,400 Bal. 300 (a) 200
(c) 500 Bal. 100
Bal. 1,900

(b) 700 (d) 200 1,000
Bal. 700 Bal. 800
Service Revenue Salary Expense

Bal. 4,600 Bal. 2,400
(c) 500 (b) 700
(d) 200 Bal. 3,100
Bal. 5,300
Supplies Expense
(a) 200
Bal. 200

(20-30 min.) E 3-40B
Honeybee Hams, Inc.

Income Statement
Thousands
Revenues:
Sales revenue.......................... $42,200
Expenses:
Cost of goods sold.................. $25,500
Selling, administrative, and
general expense................... 10,000
Total expenses................... 35,500
Income before tax............................. 6,700
Income tax expense.......................... 2,500
Net income......................................... $ 4,200
Honeybee Hams, Inc.

Thousands
Retained earnings, December 31, 2011.. $4,600
Add: Net income . 4,200
8,800
Less: Dividends (1,400)
Retained earnings, December 31, 2012.. $7,400

(continued) E 3-40B
Honeybee Hams, Inc.

Balance Sheet
December 31, 2012
Thousands
ASSETS LIABILITIES
Cash. $ 3,400 Accounts payable. $ 7,700
Accounts receivable 1,900 Income tax payable.. 600
Inventories. 1,700 Other liabilities.. 2,400
Prepaid expenses 1,700 Total liabilities... 10,700
Prop., plant, equip. $ 6,700 STOCKHOLDERS
Less: Accum. EQUITY
deprec. (2,500) 4,200 Common stock.. 4,500
Other assets.. 9,700 Retained earnings 7,400
Total assets $22,600 stockholders equity... $22,600

(10-20 min.) E 3-41B
One mechanism for solving this exercise is to prepare the relevant T-
accounts, insert the given information, and solve for the unknown
amounts, shown in italics.
Amounts in millions
Receivables
Beg. bal. 210
Sales revenue 21,010 Collections 20,900
End. bal. 320
Prepaid Insurance
Beg. bal. 160
Payment 470 Insurance expense 430
End. bal. 200
Accrued Liabilities Payable

Beg. bal. 640
Other operating
Payments 4,200 expenses 4,290
End. bal. 730

(10 min.) E 3-42B
Req. 1
Millions
Income statement
Service revenue (380 95).. 285
Balance sheet
Req. 2
Income statement
Service revenue (75 + 380 95) 360
Balance sheet
Service revenue is greater in (2) because Terra began the year owing
more phone service to customers. With collections for the year and the
amount of the ending liability unchanged, Terra must have earned more
revenue in situation 2 than in situation 1.

Not required but helpful:
Unearned Service Revenue

Beg. bal. 75
Earned revenue 360 Collected cash 380
End. bal. 95

(10-20 min.) E 3-43B
Req. 1
Journal
Closing Entries
Dec. 31 Service Revenue........................................... 24,300
Other Revenue........................................... 200
Retained Earnings................................... 24,500
31 Retained Earnings........................................ 22,500

Cost of Services Sold.............................. 11,400
Selling, General, and Administrative
Expense............................................ 6,000
Depreciation Expense............................. 4,500
Income Tax Expense................................ 600
31 Retained Earnings........................................ 400

Dividends.................................................. 400
Net income for 2012 was $2,000 ($24,500 $22,500).
Req. 2
Retained Earnings
Dec. 31, 2011 2,200
Expenses 22,500
Dividends 400 Revenues 24,500
Dec. 31, 2012 3,800

(15-25 min.) E 3-44B
Journal
Adjusting Entries
Dec. 31 Unearned Service Revenue.......................... 6,300
Service Revenue ($19,600 $13,300)..... 6,300
31 Salary Expense ($5,600 $4,700)................ 900

Salary Payable.......................................... 900
31 Rent Expense ($2,300 $1,500)................... 800

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

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

Income Tax Payable................................. 1,200
Closing Entries
31 Service Revenue........................................... 19,600
Retained Earnings................................... 19,600

Salary Expense........................................ 5,600
Rent Expense........................................ 2,300
Depreciation Expense............................. 600
Income Tax Expense................................ 1,200

Dividends.................................................. 1,100

(20-30 min.) E 3-45B
Req. 1
Durkin Production Company

Balance Sheet
December 31, 2011
ASSETS
Current:
Cash.... $14,200
Prepaid rent ($1,500 $800)......... 700
Total current assets 14,900
Plant:
Equipment.. $44,000
Less accumulated depreciation
($3,500 + $600)........ (4,100) 39,900
Total assets. $54,800
LIABILITIES
Current:
Accounts payable.................................................................. $ 4,700
Salary payable ($5,600 $4,700).......................................... 900
Unearned service revenue ($8,400 $6,300)....................... 2,100
Income tax payable................................................................ 1,200
Total current liabilities..................................................... 8,900
Note payable, long-term.......................................................... 17,000
Total liabilities.......................................................................... 25,900
STOCKHOLDERS EQUITY
Common stock............................................................................. 8,700
Retained earnings ($11,400 + $9,900* $1,100)........................ 20,200

Total stockholders equity.......................................................... 28,900
Total liabilities and stockholders equity................................... $54,800
* Net income = $9,900 ($19,600 $5,600 $2,300 $600 - $1,200)

(continued) E 3-45B
Req. 2
Current Prior
Year Year
capital current liabilities = $8,900 = $6,000 $7,000
Current Total current assets $14,900

rati = Total current liabilities = $8,900 = 1.67 1.70
o
Both net working capital and the current ratio have decreased indicating
that the ability to pay current liabilities with current assets has
deteriorated.

Debt ratio = = = 0.47 0.40
The overall ability to pay total liabilities deteriorated a little.

(30 min.) E 3-46B
$60 $70 + $8
a. Current ratio = = 1.03 Debt ratio = = 0.80
$50 + $8 $90 + $8
The purchase of equipment on account hurts both ratios.
$60 $5 $70 $5
b. Current ratio = = 1.10 Debt ratio = = 0.76
$50 $90 $5
The payment of long-term debt hurts the current ratio and improves
the debt ratio.
$60 + $4 $70 + $4
c. Current ratio = = 1.19 Debt ratio = = 0.79
$50 +$4 $90 + $4
Collecting cash in advance hurts both ratios.
$60 $70 + $4
d. Current ratio = = 1.11 Debt ratio = = 0.82
$50 + $4 $90
Accruing an expense hurts both ratios.
$60 + $8 $70
e. Current ratio = = 1.36 Debt ratio = = 0.71
$50 $90 + $8
A cash sale improves both ratios.

Serial Exercise
(3 hours) E 3-47
Reqs. 1, 2, 5, and 7
Cash Accounts Receivable

Jan. 2 11,000 Jan. 2 700 Jan. 18 1,500 Jan. 28 1,500
9 1,000 3 3,900 Bal. 0
21 2,400 12 200 Adj. 2,000
28 1,500 26 400 Bal. 2,000
31 1,200
Bal. 9,500
Supplies Equipment
Jan. 5 400 Adj. 200 Jan. 3 3,900
Bal. 200 Bal. 3,900
Equipment Furniture
Adj. 65 Jan. 4 4,700
Bal. 65 Bal. 4,700
Furniture Accounts Payable
Adj. 78 Jan. 26 400 Jan. 4 4,700

Bal. 78 5 400
Bal. 4,700

(continued) E 3-47
Reqs. 1, 2, 5, and 7

Adj. 500 Adj. 800 Jan. 21 2,400
Bal. 500 Bal. 1,600
Common Stock Retained Earnings

Jan. 2 11,000 Clo. 1,743 Clo. 5,300
Bal. 11,000 Clo. 1,200
Bal. 2,357
Dividends Service Revenue

Jan. 31 1,200 Clo. 1,200 Jan. 9 1,000
18 1,500
Bal. 2,500
Adj. 2,000
Adj. 800
Clo. 5,300 Bal. 5,300
Rent Expense Utilities Expense

Jan. 2 700 Clo. 700 Jan. 12 200 Clo. 200
Salary Expense Equipment
Adj. 500 Clo. 500 Adj. 65 Clo. 65

Furniture Supplies Expense
Adj. 78 Clo. 78 Adj. 200 Clo. 200

(continued) E 3-47
Req. 1
January 2 through 18 entries are repeated from Solution to E 2-36.
Journal
Jan. 2 Cash........................................................... 11,000
Common Stock...................................... 11,000
2 Rent Expense............................................ 700

Cash....................................................... 700
3 Equipment............................................. 3,900
Cash....................................................... 3,900
4 Furniture.................................................... 4,700
Accounts Payable................................. 4,700
5 Supplies.................................................... 400
Accounts Payable................................. 400
9 Cash........................................................... 1,000
Service Revenue................................... 1,000
12 Utilities Expense....................................... 200

Cash....................................................... 200
18 Accounts Receivable............................... 1,500

Service Revenue................................... 1,500
21 Cash............................................................ 2,400
Unearned Service Revenue................... 2,400
21 No entry; no transaction yet

26 Accounts Payable...................................... 400
Cash........................................................ 400
28 Cash............................................................ 1,500
Accounts Receivable............................. 1,500
31 Dividends................................................... 1,200
Cash...................................................... 1,200

(continued) E 3-47
Reqs. 3 and 4
Steve Ruiz, Certified Public Accountant, P.C.
Adjusted Trial Balance
January 31, 2012
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash 9,500 9,500
Accounts receivable (a) 2,000 2,000
Supplies 400 (c) 200 200
Equipment 3,900 3,900
Accumulated depr. equip. (d1) 65 65
Furniture 4,700 4,700
Accumulated depr. furn. (d2) 78 78
Accounts payable 4,700 4,700
Salary payable (e) 500 500
Unearned service revenue 2,400 (b) 800 1,600
Common stock 11,000 11,000
Retained earnings
Dividends 1,200 1,200
Service revenue 2,500 (a)2,000 5,300
(b) 800
Rent expense 700 700
Utilities expense 200 200
Salary expense (e) 500 500

Depreciation expense equip. (d1) 65 65
Depreciation expense furn. (d2) 78 78
Supplies expense (c) 200 200
20,600 20,600 3,643 3,643 23,243 23,243

(continued) E 3-47
Req. 5
Journal
Adjusting Entries
(a) Jan. 31 Accounts Receivable............................... 2,000
Service Revenue................................... 2,000
(b) 31 Unearned Service Revenue..................... 800

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

Supplies................................................. 200
(d1) 31 Depreciation Expense Equipment....... 65

Accumulated Depreciation Equip..... 65
(d2) 31 Depreciation Expense Furniture.......... 78

Accumulated Depreciation Furn....... 78
(e) 31 Salary Expense......................................... 500

Salary Payable....................................... 500

(continued) E 3-47
Req. 6

Income Statement
Month Ended January 31, 2012
Revenues:
Service revenue $5,300
Expenses:
Rent expense $700
Salary expense 500
Supplies expense 200
Utilities expense 200
Depreciation expense furniture 65
Depreciation expense equipment 78
Total expenses 1,743
Net income $3,557

Month Ended January 31, 2012
Retained earnings, January 1, 2012 $ 0
3,557
Retained earnings, January 31, 2012 $ 2,357

(continued) E 3-47
Req. 6

Balance Sheet
January 31, 2012
ASSETS LIABILITIES
Current assets: Current liabilities:
Cash $ 9,500 Accounts payable $ 4,700
Accounts receivable 2,000 Salary payable 500
Supplies 200 Unearned service
Total current assets 11,700 revenue 1,600
Plant assets: Total current liabilities 6,800
Equipment $3,900
Less: accum. STOCKHOLDERS EQUITY
depr. (65) 3,835 Common stock 11,000
Retained earnings 2,357
Furniture $4,700 Total stockholders equity 13,357
Less: accum.
depr. (78) 4,622 Total liabilities and ______
Total assets $20,157 stockholders' equity $20,157

(continued) E 3-47
Req. 7
Journal
Closing Entries
Jan. 31 Service Revenue 5,300
Retained Earnings.. 5,300
31 Retained Earnings 1,743

Rent Expense 700
Utilities Expense.. 200
Salary Expense 500
Depreciation Expense Equipment... 65
Depreciation Expense Furniture.. 78
Supplies Expense....... 200
31 Retained Earnings 1,200

Dividends.. 1,200

(continued) E 3-47
Req. 8

capital current liabilities $6,800 = $4,900


The company has an excess of current assets over its current liabilities.
The current and debt ratios indicate an excellent financial position. The
business has $1.72 in current assets for every $1.00 of current liabilities.
The debt ratio of 34% is not too high, which suggests that, overall, the
business should be able to pay its debts.

Quiz
Q3-48 b
Q3-49 b
Q3-50 c
Q3-51 d
Q3-52 a
Q3-53 b
Q3-54 b
Q3-55 a
Q3-56 b ($3,000 9/12 = $2,250)
Q3-57 d ($5,000 + $22,000 $15,000 = revenue of $12,000)
Q3-58 b
Q3-59 a
Q3-60 b
Q3-61 d
Q3-62 d Current ratio = $29,700 / $25,100 = 1.183
$25,100 + $113,000
Debt ratio = = .633
$29,700 + $188,500
Q3-63 $7,965 ($8,000 $510 $125 + $800 $200)
Q3-64 d Salary Payable

Beg. bal. 20,000
Payment 136,000 Salary exp. 122,000
End. bal. 6,000

Problems
(15-20 min.) P 3-65A
(All amounts in millions)
1. $40 x = $6 ; x = $34
2. Revenues.. $40
Expenses.. (34)
Net income... $ 6
3. Beginning receivables.. $ 10
Add: Revenues 40
Less: Collections... (25)
Ending receivables $25
Balance sheet
ASSETS
Current assets:
Receivables. $ 25
4. Beginning accounts payable. $ 7

Add: Expenses.. 34
Less: Payments.... (37)
Ending accounts payable $ 4
Balance sheet
LIABILITIES
Current liabilities:

Accounts payable $ 4

(20-30 min.) P 3-66A
Req. 1
Masters Consulting
Amount of Revenue (Expense) for July
Date Cash Basis Accrual Basis
July 1 Expense $(2,000) $ 0
4 Expense (1,000) 0
5 Revenue 800 800
8 Expense (700) (700)
11 Revenue 0 3,400
19 0 0
24 Revenue 3,400 0
26 Expense (2,000) 0
29 Expense (1,500) (1,500)
31 Expense 0 $2,000 5 = (400)
31 Revenue 0 1,000
ReReq. 2 Income (loss) before tax $ (3,000) $2,600
Req. 3
The accrual-basis measure of net income is preferable because it accounts
for revenues and expenses when they occur, not when they are received or
paid in cash. For example, on July 11, the company earned $3,400 of
revenue and increased its wealth as a result. The accrual basis records this
revenue, but the cash basis ignores it. On July 24, the business collected
the receivable that was created by the revenue earned on account at July
11. The accrual basis records no revenue on July 24 because the

companys increase in wealth occurred back on July 11. The cash basis
waits until cash is received, on July 24, to record the revenue. This is too
late.
(10-20 min.) P 3-67A
Journal
Dec. 31 a. Insurance Expense. 4,650*

Prepaid Insurance.. 4,650
To record insurance expense.
31 b. Salary Expense ($5,800 2/5).. 2,320

Salary Payable 2,320
To accrue salary expense.
31 c. Interest Receivable. 600

Interest Revenue 600
To accrue interest revenue.
31 d. Supplies Expense.. 6,300**

Supplies.. 6,300
31 e. Unearned Service Revenue

($12,100 60%)... 7,260
Service Revenue 7,260
To record revenue collected in advance.
31 f. Depreciation Expense Office 3,000

Furniture

Depreciation Expense Equipment.. 6,300
Office Furniture.. 3,000
Equipment 6,300
To record depreciation expense.
_____
* $1,050 + $4,800 $1,200 = $4,650
** $2,300 + $6,100 $2,100 = $6,300

(45-60 min.) P 3-68A
Req. 1
Lady, Inc.
July 31, 2012
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE
Cash 8,800 8,800
Accounts receivable 1,600 (a) 1,700 3,300
Prepaid rent 3,000 (b 1,000* 2,000
Supplies 2,100 (c) 1,630 470
Furniture 90,000 90,000
Accumulated depreciation 3,000 (d) 1,500** 4,500
Salary payable (e) 3,000*** 3,000
Retained earnings 75,060 75,060
Service revenue 17,000 (a) 1,700 18,700
Salary expense 2,400 (e) 3,000*** 5,400
Rent expense (b) 1,000* 1,000
Depreciation expense (d) 1,500** 1,500
Supplies expense (c) 1,630 _____ 1,630
112,260 112,260 8,830 8,830 118,460 118,460
_____
* $3,000 3 = $1,000
** $90,000 5 = $18,000 12 = $1,500
*** $5,000 3/5 = $3,000

(continued) P 3-68A
Req. 2
Lady, Inc.
Income Statement
Month Ended July 31, 2012
Revenues:
Expenses:
Salary expense $5,400
Supplies expense 1,630
Depreciation expense 1,500
Rent expense 1,000
Net income $ 8,710
Lady, Inc.
Month Ended July 31, 2012
Retained earnings, July 1, 2012 $75,060
83,770
Retained earnings, July 31, 2012 $79,870

(continued) P 3-68A
Req. 2 (continued)
Lady, Inc.
Balance Sheet
July 31, 2012
ASSETS LIABILITIES
Accounts receivable 3,300 Salary payable 3,000
Prepaid rent 2,000 Total current liabilities 6,200
Supplies 470
Furniture $90,000 STOCKHOLDERS EQUITY
Less: Accum. Common stock 14,000

deprec. (4,500) 85,500 Retained earnings 79,870
Total assets $100,070 stockholders equity $100,070

(10-20 min.) P 3-69A
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Apr. 30 Accounts Receivable ($6,830 $6,300).......... 530

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

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

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

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

($11,000 $9,100).. 1,900
30 Wage Expense ($2,300 $1,600)......... 700

Wages Payable ($700 $0)... 700
To accrue wage expense.
30 Unearned Rental Revenue ($1,700 $1,300).. 400

Rental Revenue*.. 400
To record revenue that was collected in advance.
_____
* ($20,630 - $19,700 - $530)

(continued) P 3-69A
Req. 2
Total assets = $80,230 ($8,200 + $6,830 + $500 + $4,900 +

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

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

$41,000 + $15,230 - $3,800)

(20-30 min.) P 3-70A
Req. 1
Simpson Corporation
Income Statement
Year Ended March 31, 2012
Revenues:
Expenses:
Rent expense 10,100
Insurance expense 4,000
Interest expense 2,700
Depreciation expense 1,300 60,300
Income before tax 45,200
Income tax expense 7,000
Net income $ 38,200
Simpson Corporation
Year Ended March 31, 2012
Retained earnings, March 31, 2011 $ 2,000
40,200

Retained earnings, March 31, 2012 $17,200
(continued) P 3-70A
Req. 1 (continued)
Simpson Corporation
Balance Sheet
March 31, 2012
ASSETS LIABILITIES
Accounts receivable 8,800 Interest payable 700
Supplies 2,000 Unearned service revenue 800
Prepaid rent 1,700 Income tax payable 2,400
Note payable 18,400
Equipment $36,000 Total liabilities 25,400
Less: Accum.
deprec. (4,600) 31,400 STOCKHOLDERS EQUITY
Common stock 3,000

Req. 2
$25,400
Debt ratio: = 0.56
$45,600
Simpson is in compliance with its debt agreement, which requires the
company to maintain a debt ratio no higher than 0.60.

(20 min.) P 3-71A
Req. 1
Journal
Closing Entries
Mar. 31 Service Revenue.. 94,100
Retained Earnings......... 94,100
31 Retained Earnings.. 35,200

Advertising Expense 11,000
Depreciation Expense.. 1,000
Interest Expense... 300
Salary Expense.. 17,900
Supplies Expense. 5,000
31 Retained Earnings.. 32,500

Dividends........ 32,500
Req. 2
Retained Earnings
Mar. 31, 2012 Dividends 32,500 Mar. 31, 2012 Revenues 94,100
Mar. 31, 2012 Bal. 45,900
Net income = $58,900 ($94,100 - $35,200)
Req. 3

Retained Earnings increased during the year because net income of
$58,900 exceeded dividends of $32,500.

(25-40 min.) P 3-72A
Req. 1
Mountain Lodge Service, Inc.

Balance Sheet
March 31, 2012
ASSETS
Current assets:
Cash $ 7,500
Accounts receivable 16,600
Prepaid expenses 5,000
Supplies 3,700
Plant assets:
Equipment $42,500
Less: Accumulated depreciation (6,700) 35,800
Other assets 13,700
LIABILITIES
Current portion of note payable $ 400
Accounts payable 14,100
Salary payable 2,500
Unearned service revenue 3,700
Total current liabilities 20,700
Note payable, long-term 5,700
Total liabilities 26,400
STOCKHOLDERS EQUITY

Common stock 10,000
Retained earnings 45,900*
Total liabilities and stockholders equity $82,300
(continued) P 3-72A
Req. 1 (continued)
*Retained earnings, March 31, 2011. $19,500

Add: Net income ($94,100 $11,000 $1,000
$300 $17,900 $5,000). 58,900
78,400
Less: Dividends........... (32,500)
Retained earnings, March 31, 2012 $45,900
Req. 2
2012 2011

Current ratio = = = 1.58 1.20
The increase in both working capital and the current ratio indicate that
the ability to pay current liabilities with current assets improved during
2012.

2012 2011
Debt ratio = = = 0.32 0.25
The overall debt position deteriorated a little during 2012. The
improvement in the current ratio is greater than the deterioration in the
debt ratio. However, Mountain Lodges overall debt position is strong
because a debt ratio of .32 is not troublesome.

(45-60 min.) P 3-73A
Req. 1
Total current assets $15.8

Total current liabilities $8.6
$13.9
Total liabilities $8.6 + $5.3

Total assets $32.1
Req. 2
Current Ratio Debt Ratio
$15.8 ($8.6 1/2) $13.9 ($8.6 1/2)

a. = 2.67 = 0.35
($8.6 1/2) $32.1 ($8.6 1/2)
$15.8 + $2.0 $13.9 + $2.0

b. = 2.07 = 0.47
$8.6 $32.1 + $2.0
$15.8 + $2.4 $13.9

c. = 2.12 = 0.40
$8.6 $32.1 + $2.4
$15.8 $.7 $13.9

d. = 1.75 = 0.44
$8.6 $32.1 $.7
$15.8 $13.9 + $0.5

e. = 1.74 = 0.45
$8.6 + $0.5 $32.1

$15.8 $1.5 $13.9 + $2.5
f. = 1.66 = 0.47
$8.6 $32.1 + $4.0 $1.5
$15.8 $13.9
g. = 1.84 = 0.44
$8.6 $32.1 $0.4

(continued) P 3-73A
Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a companys current ratio is greater than 1.0, as it is for Harrington,
paying off a current liability will always increase the current ratio.
f. Borrowing money on long-term debt will always increase the current
ratio and increase the debt ratio.

(15-20 min.) P 3-74B
1. $37 x = $7; x = $30
2. Revenues.. $37
Expenses.. 30
Net income... $ 7
3. Beginning receivables......... $ 11
Add: Revenues 37
Less: Collections.. (20)
Ending receivables $ 28
Balance sheet
ASSETS
Current assets:
Receivables $ 28
4. Beginning accounts payable.. $ 6

Add: Expenses 30
Less: Payments..... (35)
Ending accounts payable. $ 1
Balance sheet
LIABILITIES
Accounts payable $1

(20-30 min.) P 3-75B
Req. 1
Healthy Hearts Consulting

Amount of Revenue (Expense) for December
Date Cash Basis Accrual Basis
Dec. 1 Expense $ (3,500) Expense 0
4 Expense $(900) Expense 0
5 Revenue $500 Revenue $500
8 Expense $(200) Expense $(200)
11 Revenue 0 Revenue $3,100
19 Expense 0 Expense 0
24 Revenue $3,100 Revenue 0
26 Expense $(1,800) Expense 0
29 Expense $(800) Expense $(800)
31 Expense 0 Expense $(700)
31 Revenue 0 Revenue $400
Req. 2 Income (loss)
before tax $(3,600) Income before tax $2,300
Req. 3
The accrual-basis measure of net income is preferable because it accounts
for revenues and expenses when they occur, not when they are received or
paid in cash. For example, on Dec. 11, the company earned $3,100 of
revenue and increased its wealth as a result. The accrual basis records this
revenue, but the cash basis ignores it. On Dec. 24, the business collected
the receivable that was created by the revenue earned on account at Dec.
11. The accrual basis records no revenue on Dec. 24 because the
companys increase in wealth occurred back on Dec. 11. The cash basis
waits until cash is received, on Dec. 24, to record the revenue. This is too
late.
(10-20 min.) P 3-76B
Journal
Dec. 31 a. Insurance Expense............................ 3,500*

Prepaid Insurance......................... 3,500
To record insurance expense
31 b. Salary Expense ($6,200 1/5)............ 1,240

Salary Payable........................... 1,240
31 c. Interest Receivable............................. 500

Interest Revenue........................... 500
31 d. Supplies Expense............................... 6,800**

Supplies......................................... 6,800
31 e. Unearned Service Revenue

($11,900 70%)................................... 8,330
Service Revenue........................... 8,330
To record revenue that was collected
in advance.

31 f. Depreciation Expense Office .........
Furniture................................... 3,500
Depreciation Expense Equipment.. 5,800
Office Furniture........................ 3,500
Equipment................................. 5,800
_____
* $800 + $3,600 $900 = $3,500
** $2,700 + $6,400 $2,300 = $6,800

(45-60 min.) P 3-77B
Req. 1
Princess, Inc.
August 31, 2012
ADJUSTED
TRIAL BALANCE ADJUSTMENTS TRIAL BALANCE
Cash 8,300 8,300
Accounts receivable 1,900 (a) 2,100 4,000
Prepaid rent 2,100 (b) 700* 1,400
Supplies 2,400 (c) 2,090 310
Furniture 63,000 63,000
Accumulated depreciation 3,700 (d) 1,750** 5,450
Salary payable (e) 3,060*** 3,060
Retained earnings 53,430 53,430
Service revenue 11,000 (a) 2,100 13,100
Salary expense 2,600 (e) 3,060*** 5,660
Rent expense (b) 700* 700
Depreciation expense (d) 1,750** 1,750

Supplies expense (c) 2,090 _____ 2,090
85,130 85,130 9,700 9,700 92,040 92,040
* $2,100 3 = $700
** $63,000 3 = $21,000 12 = $1,750
*** $5,100 3/5 = $3,060

(continued) P 3-77B
Req. 2 (continued)
Princess, Inc.
Income Statement
Month Ended August 31, 2012
Revenues:
Expenses:
Depreciation expense 1,750
Rent expense 700
Net income $2,370
Princess, Inc.
Month Ended August 31, 2012
Retained earnings, August 1, 2012 $53,430
55,800
Retained earnings, August 31, 2012 $51,500
3-110 Financial Accounting 9/e Solutions Manual

(continued) P 3-77B
Req. 2 (continued)
Princess, Inc.
Balance Sheet
August 31, 2012
ASSETS LIABILITIES
Cash $8,300 Accounts payable $ 4,000
Accounts receivable 4,000 Salary payable 3,060
Prepaid rent 1,400 Total current liabilities 7,060
Supplies 310
Furniture $63,000 STOCKHOLDERS EQUITY
Less: Accum. Common stock 13,000
deprec. (5,450) 57,550 Retained earnings 51,500
______ Total liabilities and ______
Chapter 3 Accrual Accounting and Income 3-111

(10-20 min.) P 3-78B
Req. 1
Journal
Apr. 30 Accounts Receivable ($6,800 $6,300). 500

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

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

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

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

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

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

Rental Revenue*.. 200
To record revenue that was collected in
advance.
_____
* ($15,700 - $15,000 - $500)

(continued) P 3-78B
Req. 2
Total assets = $75,200 ($8,400 + $6,800 + $400 + $5,300 + $600

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

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

+ $9,200 - $3,500)

(20-30 min.) P 3-79B
Req. 1
Nicholl Corporation
Income Statement
Year Ended May 31, 2012
Revenues:
Expenses:
Rent expense 10,300
Insurance expense 3,600
Interest expense 2,600
Depreciation expense 1,200 60,400
Income before tax 37,400
Income tax expense 7,100
Net income $30,300
Nicholl Corporation
Year Ended May 31, 2012
Retained earnings, May 31, 2011 $ 4,000
34,300

Retained earnings, May 31, 2012 $14,300

(continued) P 3-79B
Req. 1 (continued)
Nicholl Corporation.
Balance Sheet
May 31, 2012
ASSETS LIABILITIES
Accounts receivable 8,600 Unearned service
Supplies 2,200 revenue 900
Prepaid rent 1,800 Interest payable 500
Income tax payable 2,100
Equipment $37,300 Note payable 18,800
Less: Accum. Total liabilities 26,000
deprec. (4,100) 33,200
STOCKHOLDERS EQUITY
Common stock 7,000
Req. 2
Debt ratio: $26,000 = 0.55

$47,300
Nicholl Corporations debt ratio of 0.55 is in compliance with the lenders

debt restriction.
(20 min.) P 3-80B

Req. 1
Journal
Closing Entries
Mar. 31 Service Revenue 91,500
Retained Earnings 91,500

Salary Expense.. 17,700
Supplies Expense. 4,800
Advertising Expense 11,400
Depreciation Expense. 2,000
Interest Expense... 400

Dividends 32,500
Req. 2
Retained Earnings

Mar. 31, 2012 Dividends 32,500 Mar. 31, 2012 Revenues 91,500
Mar. 31, 2012 Bal. 42,700
Net income = $55,200 ($91,500 - $36,300)
Req. 3
Retained Earnings increased during the year because net income of

$55,200 exceeded dividends of $32,500.

(30-40 min.) P 3-81B
Req. 1
Cool River Service, Inc.

Balance Sheet
March 31, 2012
ASSETS
Current assets:
Cash....................................................................... $ 7,400
Accounts receivable............................................. 17,000
Prepaid expenses.................................................. 3,000
Supplies................................................................. 5,500
Total current assets.......................................... 32,900
Plant assets:
Equipment..............................................................
$42,800
Less: accumulated depreciation..........................(6,900) 35,900
Other assets................................................................ 14,000
Total assets................................................................. $82,800
LIABILITIES
Accounts payable.................................................. $14,400
Current portion of note payable........................... 700
Salary payable....................................................... 2,600
Unearned service revenue.................................... 3,600
Total current liabilities...................................... 21,300
Note payable, long-term............................................. 5,600
Total liabilities............................................................. 26,900

STOCKHOLDERS EQUITY
Common stock............................................................ 13,200
Retained earnings .................................................. 42,700*
Total stockholders equity...................................... 55,900
Total liabilities and stockholders equity.................. $82,800

(continued) P 3-81B
Req. 1 (continued)
_____
*Computation:
Retained earnings, March 31, 2011.. $ 20,000
Add: Net income ($91,500 $11,400 $2,000
$400 $17,700 $4,800).......... 55,200
75,200
Less: Dividends.. (32,500)
Retained earnings, March 31, 2012.. $42,700
Req. 2
2012 2011

Current ratio = = = 1.54 1.30
The increase in both working capital and the current ratio indicate that
the ability to pay current liabilities with current assets improved during
2012.

Debt ratio = = = 0.32 0.35
Cool River Services overall debt position improved a bit from 2011 to
2012.

(45-60 min.) P 3-82B
Req. 1
Total current assets $15.4

Total current liabilities $9.4
$14.9
Total liabilities $9.4 + $5.5

Total assets $31.2
Req. 2
Current Ratio Debt Ratio
$15.4 ($9.4 1/2) $14.9 ($9.4 1/2)

a. = 2.28 = 0.38
($9.4 1/2) $31.2 ($9.4 1/2)
$15.4 + $3.0 $14.9 + $3.0

b. = 1.96 = 0.52
$9.4 $31.2 + $3.0
$15.4 + $2.4 $14.9

c. = 1.89 = 0.44
$9.4 $31.2 + $2.4
$15.4 $.6 $14.9

d. = 1.57 = 0.49
$9.4 $31.2 $.6
$15.4 $14.9 + $0.3

e. = 1.59 = 0.49
$9.4 + $0.3 $31.2
$15.4 $2.0 $14.9 + $2.9

f. = 1.43 = 0.52
$9.4 $31.2 + $4.9 $2.0

$15.4 $14.9
g. = 1.64 = 0.49
$9.4 $31.2 $0.9

(continued) P 3-82B
Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a companys current ratio is greater than 1.0, as for Hiaport, paying
off a current liability will always increase the current ratio.
f. Borrowing money on long-term debt will always increase the current
ratio and increase the debt ratio.

Challenge Exercises and Problem
(20-25 min.) E 3-83
(Dollar amounts in thousands)
December 31, 2011
Current assets = $11,100 ($1,500 + $5,900 + $2,700 + $1,000)
Current liabilities = $6,100 ($2,600 + $1,600 + $1,900)

Net working capital = $5,000 ($11,100 - $6,100)
Current $11,100
= = 1.82
ratio $6,100
December 31, 2012
Current assets = $10,700 ($9001 + $6,8002 + $2,7003 + $3004)
Current liabilities = $5,200 ($1,2005 + $1,6006 + $2,4007)

Net working capital = $5,500 ($10,700 - $5,200)
Current $10,700
= = 2.06
ratio $5,200
_____
Computations of December 31, 2012 balances:
1
Cash = $1,500 $7,300 + $8,100 $1,400 = $900
2
Receivables = $5,900 + $9,000 $8,100 = $6,800
3
No change in the Inventory balance.
4
Prepaid expenses = $1,000 $700 = $300
5
Accounts payable = $2,600 $1,400 = $1,200
6
No change in the Unearned Revenues balance.
7
Accrued expenses payable = $1,900 + $500 = $2,400
Conclusion: Valley Forges net working capital and current ratio

improved during 2012. The companys current ratio is
very strong.
(60 min.) E 3-84
a. Net income:
Service revenue:
($161,000 + $1,650 + $32,200). $194,850
Expenses:
Salary ($37,000 + $3,500). $ 40,500
Depreciation building 2,600
Supplies... 3,100
Insurance. 1,500
Advertising.. 7,300
Utilities. 2,000
57,000
Net income.. $137,850
b. Total assets:
Cash $ 7,300
Accounts receivable ($7,500 + $32,200) 39,700
Supplies ($4,600 $3,100) 1,500
Prepaid insurance ($3,500 $1,500). 2,000
Building $110,000
Less: Accum. Depr.

(18,200) 91,800
($15,600 + $2,600)..
53,000
Land
$195,300
Total assets.

(continued) E 3-84
c. Total liabilities:
Accounts payable.......................................... $ 6,100

Salary payable............................................... 3,500
Unearned service revenue
($5,500 $1,650)....................................... 3,850
Total liabilities............................................... $ 13,450
d.
Total stockholders equity:
Common stock.............................................. $ 14,000

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

$195,300 = $13,450 + $181,850

(20 min.) P 3-85
Express Detail Inc.
Balance Sheet
December 31, 2012
ASSETS LIABILITIES
Cash (a) $ 15,300 Accounts payable (g) $ 3,000
Accounts receivable (c) 1,400 Advertising payable(h) 500
Supplies (d) 1,000 Salary payable (i) 500
Total current assets 17,700 Unearned gift certificate
revenue (b) 1,200
Equipment (e) $35,000 Total liabilities 5,200
Less: Accum.
deprec.(f)(12,000) 23,000
STOCKHOLDERS EQUITY
Common stock (j) 18,000
Retained earnings (k) 17,500
Total stockholders 35,500
equity
$40,700
Total assets stockholders equity $40,700

(continued) P 3-85
Supporting computations
(a) Cash
Bal. 12/31/2011 1,300
Cash collections from 12,500 Salaries paid
customers 31,000 500 Dividends paid
Issuance of common stock 8,000 5,000 Purchase of equipment
5,500 Payments of accounts
payable
1,500 Advertising paid
1,500
Bal. 1/31/2012 15,300
(b) Unearned Gift Certificate Revenue

800 Bal. 12/31/2011
Gift certificate revenue earned 600 1,000 Sale of gift certificates
1,200 Bal. 1/31/2012 (given)
(c) Accounts Receivable

Bal. 12/31/2011 2,000
Revenue on account 29,400 30,000 Collections from customers*
Bal. 1/31/2012 1,400
* Excludes the $1,000 for gift certificates which was received in advance, not on
account
(d) Supplies
Bal. 12/31/2011 1,500
Purchase of supplies 3,500 4,000 Supplies expense
Bal. 1/31/2012 1,000
(e) Equipment -- $35,000 ($30,000 + $5,000)

(f) Accumulated depreciation -- $12,000 ($6,000 + $6,000)

(continued) P 3- 85
(g) Accounts payable

5,000 Bal. 12/31/2011
Payments on account 5,500 3,500 Purchase of supplies
3,000 Bal. 1/31/2012
(h) $2,000 Advertising expense - $1,500 advertising paid
(i) Salary Payable

1,000 Bal. 12/31/2011
Salaries paid 12,500 12,000 Salary expense
500 Bal. 1/31/2012
(j) Common Stock--$18,000 ($10,000 + $8,000)
(k) Retained Earnings

12,000 Bal. 12/31/2011
Dividends 500 6,000 Net income
17,500 Bal. 1/31/2012

Decision Cases
(25 min.) Decision Case 1
Req. 1 Unadjusted trial balance:

Debit Credit
Cash.. $ 8,000
Accounts receivable. 4,200
Supplies... 800
Prepaid rent 1,200
Land.. 43,000
Accounts payable.. $12,000
Salary payable 0
Unearned service revenue.. 700
Note payable, due in 3 years.. 23,400
Common stock.. 5,000
Retained earnings. 9,300
Service revenue. 9,100
Salary expense... 3,400
Rent expense.. 0
Advertising expense. 900
Supplies expense.. 0
Totals $61,500 $59,500
Out of balance $2,000

(continued) Decision Case 1
Req. 2 Adjusted trial balance:

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

Current ratio =
$12,000 + $1,000 + $200

$13,700
= = 1.04
$13,200
We might have trouble sleeping at night with a current ratio of 1.04. To
be safe, the current ratio should be around 1.50 or higher.

(20-30 min.) Decision Case 2
Eagle Restaurant, Inc.

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

Month Ended October 31, 2012
Retained earnings, October 1, 2012................... $ 0
Add: Net income................................................. 9,000
Less: Dividends.................................................. (3,000)
Retained earnings, October 31, 2012................. $6,000


Balance Sheet
October 31, 2012
ASSETS LIABILITIES
Food inventory 5,000 Unearned revenue 3,000
Prepaid insurance 1,000 10,000
Dishes, silver 4,000
Fixtures OWNERS EQUITY

$24,000
Less: Accum. Common stock $25,000
deprec. (1,000) 23,000 Retained earnings 6,000 31,000
Total assets $41,000 Total liabilities and equity $41,000
Recommendation: Do not expand the business. It is not meeting
Marks goals for net income or for total assets.

(30-40 min.) Decision Case 3
Req. 1 (your highest price)
Advertising revenue ($22,000 + $4,000) $26,000

Expenses:
Salary $4,000
Utilities 900
Other (unrecorded) 1,100
Salary of your manager 5,000 11,000
Your expected monthly net income $15,000
Multiplier to compute price X 16
Your highest price $240,000
Req. 2 (Williams asking price)
SW Advertising, Inc.
Statement of Retained Earnings and Common Stock
June 30, 2012
Beginning retained earnings $ 93,000
Add: Net income
Revenue ($22,000 + $4,000) $26,000
Less: Expenses ($4,000 +
$900 + $1,100) (6,000) 20,000
113,000
Ending retained earnings $104,000
Common stock 50,000

Stockholders equity, June 30, 2012 $154,000
Multiplier to compute price X 2__
Williams asking price $308,000

Req. 3
You may start by offering Williams approximately $225,000 for the
business. His asking price is $308,000 so you are starting out quite far
apart. If Williams appears especially eager to sell out, you may be able
to buy the firm for closer to your highest price of $240,000. However, if
he is not so eager to sell and if you want the business badly enough, you
may have to pay somewhere between $240,000 and $308,000. It might
pay to hire an expert to value the businesss assets. You may find that
Williams price is inflated based on the value of its assets. You can
always raise your offer, but you cannot decrease it, so start the
negotiating process with an offer around $225,000.

Ethical Issues
Ethical Issue 1
1. The journal entry to record the revenue is:
Dec. Accounts Receivable... XXX

Sales Revenue.. XXX
The debit to Accounts Receivable will increase total current assets

and, as a result, increase (improve) the current ratio.
The credit to Sales Revenue will increase total owner equity and, as a
result, decrease (improve) the debt ratio.
2. a. c. The issue is whether it is ethical to record the revenue in the

current year. The contract has been signed, but the implication is that
the company will not have done everything it needs to do in order to
earn the revenue in the current year. The stakeholders are the
company, the bank, the stockholders, and the companys other
creditors. From an economic standpoint, the entry would obviously
improve the companys short term financial position. However, the
advantage would probably be short-lived. When the bank finds out
about this entry, they will likely protest, and demand immediate
payment, so the longer-term economic impact will likely be negative.
From a legal standpoint, to record this transaction in December
violates GAAP by violating the revenue principle. In this case Cross
Timbers has not made the sale (has not delivered the merchandise) to
the customer and, therefore, has not earned the revenue prior to
December 31 of the current year. From an ethical standpoint,
recording this revenue violates the banks rights for proper disclosure
of the companys income and assets. Revenue should be recorded
no earlier than when it is earned. Cross Timbers expects to earn the
revenue in January of next year. Cross Timbers clearly cannot record
this revenue until it is earned. To do so is not in their best economic,
legal (GAAP) or ethical best interests.
(continued) Ethical Issue 1
3. The authors would suggest either of two actions. Cross Timbers can
either:
a. Report the current ratio of 1.47 and the debt ratio of .51 because
these are the true values. Then tell the bank of the signed contract
for additional work and the hope for a better set of ratio values next
year. In some cases, banks will agree to sign a waiver of the terms
of loan covenants, meaning that, although the company is in
violation, the bank will not move to enforce the covenant. They
may give Cross Timbers a grace period to cure the violation in
the covenant.
b. Pay off some current liabilities before year end. This will improve
both the current ratio and the debt ratio. This may enable Cross
Timbers to bring its ratio values into compliance with the banks
requirements.

Ethical Issue 2
1. These transactions overstate the reported income of the company by
$21,000 ($10,000 + $10,000 + $1,000).
2. It appears that Almond wants to improve the companys reported
income in order to borrow on favorable terms. Her action is unethical
and probably illegal as well because she is deliberately overstating
the companys reported income.
Almond appears to be letting the potential short term economic
advantage of these deliberate misstatements take precedence. She
needs to remember that these misstatements violate GAAP, and that,
depending on what use is made of the financial statements, could
subject the company to civil or criminal legal proceedings. If this
happens, the short term economic gains ($21,000) would not even
come close to the long-term economic costs associated with the legal
actions, not to mention the negative publicity. The business will
need a bank loan, and perhaps the money would be used to pay bills,
expand the business, and so on. However, based on Almonds lack of
integrity, the money may be destined for her own use. Regardless of
its use, the money is obtained under false pretenses and cannot be
headed for a good outcome.
The bank is harmed by Almonds and Lails actions. Lending
money to Almond under false pretenses may lead the bank to charge
an unrealistically low interest rate that robs the banks owners of
interest revenue. In the extreme, the public is robbed if taxpayers
wind up financing the bailout of a failed institution.
3. Personal advice will vary from student to student. The purpose of
asking this question is to challenge students to take the high road of
ethical conduct by having nothing to do with Almonds scheme. The
authors would advise Lail, the accountant, to take these actions, in
order:
a. Refuse to take any part in Almonds scheme, explaining that the
result is overstatement of reported income. This is both illegal and
unethical, and will ultimately have a negative economic impact on
the company, as well. Accountants are bound to standards of
ethical conduct that these actions violate. The can go to prison
when caught falsifying financial statements.
b. To remain ethical, the accountant must be willing to lose his/her
job. It is better to protect ones reputation even if that causes a
short-term hardship.

Focus on Financials: Amazon.com, Inc.
(15-20 min.)
Req. 1
Accrued expenses are expenses that have been incurred but that have
not yet been paid as of the balance sheet date. The accrual and
matching concepts require that all expenses be recognized (recorded)
during the period in which they are incurred in order to earn revenue,
regardless of when they are paid.
Req. 2 and Req. 4 (balances in millions at December 31, 2008)
Accrued expenses and other

Beg. Bal. $1,759
(a) 1,759 (b) 2,321
End. Bal. $2,321

(continued) Focus on Financials: Amazon.com, Inc.
Req. 3 (amounts in millions)
Journal
a. Accrued expenses and other. 1,759

Cash.. 1,759
b. Operating expenses.. 6,237

Cash..... 3,916
Accrued expenses and other 2,321
The balance of Accrued Expenses and Other agrees with the financial
statements at December 31, 2010.

(continued) Focus on Financials: Amazon.com, Inc.
Req. 5
Current ratio:
2010 2009
(Dollar amounts in millions)
Total current assets $13,747 $9,797
= = 1.33 = 1.33
Total current liabilities $10,372 $7,364
Working Capital:
2010 2009
Current Assets $13,747- $9,797 -
= = $3,375 = $2,433
Current liabilities $10,372 $7,364
Debt ratio:
2010 2009
Total liabilities $11,933* $8,556**
= = 0.64 = 0.62
Total assets $18,797 $13,813
*10,372 + 1,561 **7,364
+ 1,192
The current ratio did not change, working capital increased
substantially, and the debt ratio slightly worsened during 2010. This
reveals slightly weakening leverage but with sustained liquidity. Also,
the size of the firm overall has increased (indicated by total assets) and
its working capital has increased as well to support Amazon.com now
that it is a larger firm.

Focus on Analysis: RadioShack, Corp.
(15-20 min.)
Req. 1
The beginning balance of Accounts Receivable, $322.5 million
represents revenue earned in fiscal 2009 but not received until fiscal
2010 The ending balance of Accounts Receivable, $377.5 million,
represents revenue earned in fiscal 2010 but not received until fiscal
2011.
According to footnote 3, the receivables are due from vendors, trade
accounts receivables, and other receivables. The amount due from
vendors likely represents deposits made by RadioShack whereas the
trade accounts receivables are likely due from customers.
Req. 2
Since Deferred Income Taxes is a current asset, it is most likely similar
to a prepaid asset, meaning taxes have been paid but will be expensed
sometime in the future. When the taxes are expensed in the future, the
asset, Deferred Income Taxes will decrease as in the following entry:
Journal
Income Tax Expense... 8
Deferred Income Taxes.... 8
Req. 3
Since depreciation expense increases Accumulated Depreciation $70
million, a decrease of $49 million ($799 + $70 - $820) must have occurred
(continued) Focus on Analysis
as well. The decrease is most likely from the sale of property, plant, and
equipment.
Req. 4
Accrued Advertising Payable represents an accrued liability account.
When the company incurs advertising expense, this current liability
account is credited. When the company pays the advertising company,
these amounts are debited to Accrued Advertising Payable.
The expense relating to this accrued advertising was recorded in the
year the expense was incurredwhen the advertising first takes place
(Note 2) Accordingly, the $26.9 million accrued advertising represents
advertising incurred in fiscal 2010 but not paid until fiscal 2011.

From 2009 to 2010, RadioShack, Corp.s advertising expense increased
from $193 million to $206 million.(Note 2). By reconstructing the accrued
liability account, the amount RadioShack paid for advertising during
fiscal 2010 can be derived.
Accrued Advertising Expense (Payable)

Beg. Bal. $31.4
Adv. Paid $211.6 Adv. Exp. 206.1
End. Bal. 26.9

Group Project
(45 min.)
Req. 1
Trozo Lawn Service, Inc.

Income Statement
Four Months Ended August 31
Service revenue ($5,600 + $600) $6,200
Expenses:
Wage expense ($1,900 + $200) $2,100
Rent expense ($600 4/6) 400
Supplies expense ($400 $50) 350
Repair expense 300
Depreciation expense ($300 1/3) 100
Net income $2,950

(continued) Group Project
Req. 2

Balance Sheet
August 31
ASSETS LIABILITIES
Current: Current:
Cash $2,640 Wages payable $ 200
Accounts receivable 600 Total current liabilities 200
Receivable from Ludwig
(or Prepaid rent) 200
Supplies 50 STOCKHOLDERS
Total current assets 2,890 EQUITY
Long-term: Common stock 1,060
Trailer $300 Retained earnings
Less accum. ($2,950 $460) 2,490
deprec. (100) 200 Total stockholders equity 2,890

(continued) Group Project
Req. 3

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

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

Issued note payable to father.................... $ 1,500
Repayment of loan to father (1,500)
Payment of dividends................................. (460)
Issuance of common stock........................ 1,000
Net cash used for financing activities...... 540
Net increase in cash... $ 2,640
Cash balance, beginning.. -0-
Cash balance, ending $ 2,640
Req. 4
Matt was successful because his lawn service was profitable and had a
positive cash flow from operating activities. Matt was also able to pay
off his loan and pay a dividend.

Ch03 SM 9e

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Chapter 3

Accrual Accounting & Income

(10 min.) S 3-1

(10 min.) S 3-2

Statement Reports (Amounts in millions)

Chapter 3 Accrual Accounting & Income 3- 1

3-2 Financial Accounting 9/e Solutions

At the end of each accounting period, the business reports its

performance through the preparation of financial statements. In order to

be useful to the various users of financial statements they must be up-

to-date. Accounts such as cash, Equipment, Accounts Payable,

at the end of the accounting period. Accounts such as Accounts

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

up to date as of the last day of the accounting period. Why? Because

represent a liability or debt that is owed by the business. The business

an increase in Salary Expense and an increase in Salaries Payable. If

understated, net income will be overstated, and liabilities will be

Chapter 3 Accrual Accounting & Income 3- 3

revenue is earned by delivering automobiles to Budget or Hertz. The

revenue yet. The revenue principle governs this decision.

record cost of goods sold, the expense. The expense recognition

principle tells when to record expenses.

(10 min.) S 3-5

Depreciation is the periodic allocation of the cost of a tangible long-lived

long-lived or plant assets, except for land, decline in usefulness during

Depreciation is the process of allocating the cost of a plant asset to

expense. Depreciation also decreases the book value of the asset to

reflect its usage.

Chapter 3 Accrual Accounting & Income 3- 5

b. The Time Period Concept

c. The Revenue Principle

d. The Revenue Principle

e. The Expense Recognition Principle

(10 min.) S 3-7

Oct. 31 Rent Expense ($3,000 1/6)... 500

Prepaid Rent Rent Expense

Oct. 31 Supplies Expense ($950 $400) 550

(10 min.) S 3-8

(a) Jan. 1 Computer Equipment... 50,000

(b) Dec. 31 Depreciation Expense

Jan. 50,000 Dec. 31 10,000 Dec. 31 10,000

Bal. 50,000 Bal. 10,000 Bal. 10,000

3-8 Financial Accounting 9/e Solutions

Computer equipment. $50,000

Chapter 3 Accrual Accounting & Income 3- 9

Income statement: 2012

Balance sheet: 2012

(10 min.) S 3-10

Oct. 31 Interest Expense.. 250

Nov. 30 Interest Expense.. 250

Dec. 31 Interest Expense... 250

3-10 Financial Accounting 9/e Solutions

Dec. 31 Interest Payable.......... 750

(10 min.) S 3-11

Oct. 31 Interest Receivable 250

Nov. 30 Interest Receivable 250

Dec. 31 Interest Receivable 250

Chapter 3 Accrual Accounting & Income 3- 11

Dec. 31 Cash. 750

3-12 Financial Accounting 9/e Solutions

cash from subscribers in advance of providing them with newspapers.

Receiving the cash in advance creates an obligation (a liability) for The

World Star. As The World Star delivers newspapers to subscribers, The

revenue then goes into the revenue account.