157 28395 EY111 2013 4 2 1 Chap003

Chapter 03 - Adjusting Accounts and Preparing Financial Statements
Chapter 3
Adjusting Accounts and Preparing
Financial Statements
QUESTIONS
1. The cash basis of accounting reports revenues when cash is received while the
accrual basis reports revenues when they are earned. The cash basis reports
expenses when cash is paid while the accrual basis reports expenses when they are
incurred and matched with revenues they generated.
2. The accrual basis of accounting generally provides a better indication of company
performance and financial condition than does the cash basis. Also, the accrual
basis increases the comparability of financial statements from one period to the
next. Thus, business decision makers generally prefer the accrual basis.
3. Businesses that have major seasonal variations in sales are most likely to select the
natural business year as the fiscal year.
4. A prepaid expense is an item paid for in advance of receiving its benefits. As such, it
is reported as an asset on the balance sheet.
5. Long-term tangible plant assets such as equipment, buildings, and machinery lead
to adjustments for depreciation. Generally, land is the only long-term tangible plant
asset that does not require depreciation.
6. The Accumulated Depreciation contra asset account is used for depreciation. It
provides financial statement users with additional information about the relative age
of the assets. Without the contra account information, the reader would not be able
to tell whether the assets are new or in need of replacement.
7. Unearned revenue refers to cash received in advance of providing products and
services. Another name for unearned revenue is deferred revenue. It is reported as
a liability on the balance sheet.
8. Accrued revenue is revenue that is earned but is not yet received in cash (and/or
other assets) and the customer has not been billed prior to the end of the period.
Therefore, end-of-period adjustments are made to record accrued revenue.
Examples are interest income that has been earned but not collected and revenues
from services performed that are neither collected nor billed.
9.A If prepaid expenses are initially recorded with debits to expense accounts, then the
prepaid expenses asset accounts are debited in the adjusting entries.
3-1
10. For Research In Motion, all of the accounts under the category of Property and
Equipment (except for Land), require adjusting entries. The expense related to the
Depreciation Expense account would be understated on the income statement if
Research In Motion fails to adjust these asset accounts. If the adjusting entries are
not made, net income would be overstated. Note: Students might also correctly
identify accounts receivable (for bad debts), Intangible assets (for amortization),
Inventories (for shrinkage), and Short- and Long-term investments (for fair value) as
needing adjustment.
11. Nokia reports 1,867 EUR (000,000s) for property, plant and equipment. For its
adjusting entry, it would need to record Depreciation Expense (debit) on the plant
and equipment and Accumulated Depreciation (credit) as the contra to the Property,
plant and equipment account.
12. The accrued wages would be reported as part of the liability “Other Accrued
Liabilities” on Palm’s balance sheet.
3-2
QUICK STUDIES
Quick Study 3-1 (10 minutes)
a. UR Unearned revenue
b. PE Prepaid expenses (Depreciation)
c. AE Accrued expenses
d. AR Accrued revenue
e. PE Prepaid expenses
a. Insurance Expense....................................................... 1,800

Prepaid Insurance................................................. 1,800
To record 6-month insurance coverage expired.
b. Supplies Expense......................................................... 2,700

Supplies.................................................................. 2,700
To record supplies used during the year.
($1,000 + $3,000 – [?] = $1,300)
a. Depreciation Expense—Equipment............................ 5,000

Accumulated Depreciation—Equipment............. 5,000
To record depreciation expense for the year.
($30,000 - $5,000) / 5 years = $5,000
3-3
b. No depreciation adjustments are made for land as it is expected to last

indefinitely.
a. Unearned Revenue........................................................ 15,000

Legal Revenue....................................................... 15,000
To recognize legal revenue earned (20,000 x 3/4).
b. Unearned Subscription Revenue................................ 2,400

Subscription Revenue........................................... 2,400
To recognize subscription revenue earned.
[100 x ($48 / 12 month) x 6 months]
3-4
Salaries Expense........................................................... 400

Salaries Payable.................................................... 400
To record salaries incurred but not yet paid.
[One student earns, $100 x 4 days, M-R]
Accounts Debited and Credited Financial Statement

a. Debit Unearned Revenue Balance Sheet
Credit Revenue Earned Income Statement
b. Debit Depreciation Expense Income Statement

Credit Accumulated Depreciation Balance Sheet
c. Debit Wages Expense Income Statement

Credit Wages Payable Balance Sheet
d. Debit Accounts Receivable Balance Sheet

Credit Revenue Earned Income Statement
e. Debit Insurance Expense Income Statement

Credit Prepaid Insurance Balance Sheet
3-5
Cash Accounting:
Revenues (cash receipts)....................................................... $33,000
Expenses (cash payments: $22,500 - $2,250 + $3,750)....... 24,000
Net income .............................................................................. $ 9,000
Accrual Accounting:
Revenues (earned) ................................................................. $39,000
Expenses (incurred) ............................................................... 22,500
Net income............................................................................... $16,500
The answer is c.
Explanation:
The debit balance in Prepaid Insurance was reduced by $400, implying a
$400 debit to Insurance Expense. The credit balance in Interest Payable
increased by $800, which implies an $800 debit to Interest Expense.
3-6
The answer is 2.
Explanation:
Insurance premium error:
Understates expenses (and overstates assets) by........... $1,600
Accrued salaries error:
Understates expenses (and understates liabilities) by.... 1,000
Combination of errors:
Understates expenses by..................................................... $2,600
Overstates assets by............................................................. $1,600
Understates liabilities by...................................................... $1,000
Adjusting entry Debit Credit
1. Accrue salaries expense b d
2. Adjust the Unearned Services Revenue account g c

to recognize earned revenue
3. Record the earning of services revenue for which h c

cash will be received the following period
Profit margin = $37,925 / $390,000 = 9.7%
Interpretation: For each one dollar that Yang Company records as revenue, it
earns 9.7 cents in net income. Yang’s 9.7% is markedly lower than the
competitors’ average profit margin of 15%. Thus, it must improve performance.
Quick Study 3-12A (5 minutes)
The answer is d.
a. Under IFRS, financial statements normally present assets from least

liquid to most liquid.
3-7
b. Under IFRS, financial statements normally present liabilities from

furthest from maturity to nearest to maturity.
3-8
EXERCISES
Exercise 3-1 (10 minutes)
1. B 4. F
2. E 5. D
3. C 6. A
a. Unearned Fee Revenue..................................................... 10,000

Fee Revenue.................................................................. 10,000
To record earned portion of fee received in advance.
b. Wages Expense................................................................. 9,000

Wages Payable.............................................................. 9,000
To record wages accrued but not yet paid.
c. Depreciation Expense—Equipment................................. 19,127

Accumulated Depreciation—Equipment..................... 19,127
d. Office Supplies Expense.................................................. 5,242

Office Supplies*............................................................. 5,242
To record office supplies used ($480 + $5,349 - $587).
e. Insurance Expense............................................................ 2,800

Prepaid Insurance**....................................................... 2,800
To record insurance coverage expired ($5,000 - $2,200).
f. Interest Receivable.......................................................... 750

Interest Revenue......................................................... 750
To record interest earned but not yet received.
g. Interest Expense.............................................................. 3,500

Interest Payable........................................................... 3,500
To record interest incurred but not yet paid.
Notes:
Office Supplies* Prepaid Insurance**
Beg. Bal. 480 Beg. Bal. 5,000
Purch. 5,349
? Used ? Used
3-9
End. Bal. 587 End. Bal. 2,200
3-10
a. Depreciation Expense—Equipment................................. 16,000

b. Insurance Expense............................................................ 5,960

Prepaid Insurance*........................................................ 5,960
To record insurance coverage that expired
($7,000 - $1,040).
c. Office Supplies Expense.................................................. 2,626

Office Supplies**............................................................ 2,626
To record office supplies used ($300 + $2,680 - $354).
d. Unearned Fee Revenue..................................................... 5,000

Fee Revenue.................................................................. 5,000
To record earned portion of fee received in advance
($10,000 x 1/2).
e. Insurance Expense............................................................ 4,600

Prepaid Insurance......................................................... 4,600
To record insurance coverage that expired.
f. Wages Expense................................................................. 4,000

Wages Payable.............................................................. 4,000
To record wages accrued but not yet paid.
Notes:
Prepaid Insurance* Office Supplies**
Bal. Bal. 7,000 Beg. Bal. 300
Purch. 2,680
? Used ? Used
End. Bal. 1,040 End. Bal. 354
3-11
a.
Apr. 30 Legal Fees Expense............................................ 2,500
Legal Fees Payable..................................... 2,500
To record accrued legal fees.
May 12 Legal Fees Payable............................................. 2,500

Cash.............................................................. 2,500
To pay accrued legal fees.
b.
Apr. 30 Interest Expense................................................. 2,080
Interest Payable........................................... 2,080
To record accrued interest expense (9.6% x
$780,000 x 10/360) or ($6,240 x 10/30).
May 20 Interest Payable.................................................. 2,080

Interest Expense................................................. 4,160
Cash............................................................. 6,240
To record payment of accrued and current
interest expense (9.6% x $780,000 x 20/360).
c.
Apr. 30 Salaries Expense................................................. 3,600
Salaries Payable.......................................... 3,600
To record accrued salaries
($9,000 x 2/5 week).
May 3 Salaries Payable.................................................. 3,600

Salaries Expense................................................. 5,400
Cash.............................................................. 9,000
To record payment of accrued and
current salaries ($9,000 x 3/5 week).
3-12
a. $ 1,650
b. $ 5,700
c. $10,080
d. $ 1,375
Proof:
(a) (b) (c) (d)
Supplies available – prior year-end......... $ 300 $1,600 $ 1,360 $1,375
Supplies purchased in current year........ 2,100 5,400 10,080 6,000
Total supplies available............................. 2,400 7,000 11,440 7,375
Supplies available – current year-end..... (750) (5,700) (1,840) (800)
Supplies expense for current year........... $1,650 $1,300 $ 9,600 $6,575
a. Adjusting entry:
2011
Dec. 31 Wages Expense..............................................................500
Wages Payable....................................................... 500
To record accrued wages for one day.
(5 workers x $100 x 1 day)
b. Payday entry:
2012
Jan. 4 Wages Expense.............................................................. 1,500
Wages Payable...............................................................500
Cash........................................................................ 2,000
To record accrued and current wages.
3-13
Dec. 31 Accounts Receivable............................................... 1,800

Fees Earned..................................................... 1,800
To record earned but unbilled fees
(30% x $6,000).
31 Unearned Fees
4,200
Fees Earned..................................................... 4,200
To record earned fees collected in
advance (70% x $6,000).
31 Depreciation Expense—Computers
1,500
Accumulated Depreciation—Computers...... 1,500
To record depreciation on computers.
31 Depreciation Expense—Office Furniture............... 1,750

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

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

Prepaid Insurance........................................... 1,300
To record expired prepaid insurance.
31 Office Supplies Expense......................................... 480

Office Supplies................................................ 480
To record use of office supplies.
31 Utilities Expense...................................................... 70
Utilities Payable............................................... 70
To record incurred and unpaid utility costs.
3-14
Balance Sheet Insurance Asset using Insurance Expense using

Accrual Cash Accrual Cash
* **
Basis Basis Basis Basis
Dec. 31, 2009....................
$11,700 $0 2009...................................
$ 4,500 $16,200
Dec. 31, 2010....................
6,300 0 2010...................................
5,400 0
Dec. 31, 2011....................
900 0 2011...................................
5,400 0
Dec. 31, 2012....................
0 0 2012...................................
900 0
Total...................................
$16,200 $16,200
EXPLANATIONS:
*
Accrual asset balance equals months left in the policy x $450 per month (monthly
cost is computed as $450, from $16,200 divided by 36 months).
Months Left Balance
12/31/2009.... 26 $11,700
12/31/2010.... 14 6,300
12/31/2011..... 2 900
12/31/2012.... 0 0
**
Accrual insurance expense equals months covered in the year x $450 per month.
Months Covered Expense
2009...................................
10 $ 4,500
2010...................................
12 5,400
2011...................................
12 5,400
2012...................................
2 900
$16,200
3-15
a. $5,390 / $44,830 = 12.0%

b. $87,644 / $398,954 = 22.0%
c. $93,385 / $257,082 = 36.3%
d. $55,234 / $1,458,999 = 3.8%
e. $70,158 / $435,925 = 16.1%
Analysis and Interpretation: Company c has the highest profitability

according to the profit margin ratio. Company c earns 36.3 cents in net
income for each one dollar of net sales recorded.
Exercise 3-10A (25 minutes)
a. Initial credit recorded in the Unearned Fees account:

July 1 Cash....................................................................... 2,000
Unearned Fees.............................................. 2,000
Received fees for work to be done.
6 Cash....................................................................... 8,400
Unearned Fees.............................................. 8,400
12 Unearned Fees...................................................... 2,000

Fees Earned................................................... 2,000
3-16
Completed work for customer.
18 Cash....................................................................... 7,500
Unearned Fees.............................................. 7,500
27 Unearned Fees...................................................... 8,400

Fees Earned................................................... 8,400
Completed work for customer.
31 No adjusting entries required.
b. Initial credit recorded in the Fees Earned account:
July 1 Cash....................................................................... 2,000

Fees Earned................................................... 2,000
6 Cash....................................................................... 8,400
Fees Earned................................................... 8,400
12 No entry required.
18 Cash....................................................................... 7,500
Fees Earned................................................... 7,500
27 No entry required.
31 Fees Earned.......................................................... 7,500

Unearned Fees.............................................. 7,500
Adjusted to reflect unearned fees for unfinished job.
3-17
Exercise 310A (Continued)
c. Under the first method (and using entries from a):

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

Unearned Fees = $7,500
Fees Earned = $2,000 + $8,400 + $7,500 - $7,500 = $10,400
[Note: Both procedures yield identical results in the financial statements.]
Exercise 3-11A (30 minutes)

a.
Dec. 1 Supplies Expense............................................ 3,000
Cash.......................................................... 3,000
Purchased supplies.
b.
Dec. 2 Insurance Expense.......................................... 1,440
Cash.......................................................... 1,440
Paid insurance premiums.
c.
Dec. 15 Cash.................................................................. 12,000
Remodeling Fees Earned........................ 12,000
d.
Dec. 28 Cash.................................................................. 3,600
Remodeling Fees Earned........................ 3,600
3-18
e.
Dec. 31 Supplies............................................................. 1,920
Supplies Expense.................................... 1,920
Adjust expenses for unused supplies.
f.
Dec. 31 Prepaid Insurance ($1,440 - $240)................. 1,200
Insurance Expense.................................. 1,200
Adjust expenses for unexpired coverage.
g.
Dec. 31 Remodeling Fees Earned .............................. 9,300
Unearned Remodeling Fees................... 9,300
Adjusted revenues for unfinished
projects ($12,000 + $3,600 - $6,300).
3-19
Exercise 312 (20 minutes)
adidas AG
Balance Sheet
December 31, 2009
(Euros in millions)
Assets
Noncurrent assets
Intangible assets.................................................... € 2,980
Tangible and other assets..................................... 1,410
Total noncurrent assets......................................... 4,390
Current assets
Other current assets.............................................. 486
Inventories.............................................................. 1,471
Receivables and financial assets......................... 1,753
Cash and cash equivalents................................... 775
Total current assets............................................... 4,485
Total assets............................................................... € 8,875
Equity
Total equity............................................................... € 3,776
Liabilities
Total noncurrent liabilities...................................... 2,263
Total current liabilities............................................. 2,836
Total liabilities.......................................................... 5,099
Total equity and liabilities....................................... € 8,875
3-20
PROBLEM SET A
Problem 3-1A (35 minutes)
Part 1
Adjustment (a)
Dec. 31 Office Supplies Expense.............................. 12,760
Office Supplies...................................... 12,760
To record cost of supplies used
($3,000 + $12,400 - $2,640).
Adjustment (b)
31 Insurance Expense....................................... 12,312
Prepaid Insurance................................. 12,312
To record annual insurance coverage expense.
Policy Cost per Month Months Active in 2011 2011 Cost

A $660 ($15,840/24 mo.) 12 $ 7,920
B 363 ($13,068/36 mo.) 9 3,267
C 225 ($ 2,700 /12 mo.) 5 1,125
Total $12,312
Adjustment (c)
31 Salaries Expense (2 days x $2,100)............. 4,200
Salaries Payable.................................... 4,200
To record accrued but unpaid wages.
Adjustment (d)
31 Depreciation Expense—Building................ 27,000
Accumulated Depreciation—Building. 27,000
To record annual depreciation expense
[($855,000 -$45,000) / 30 years = $27,000].
Adjustment (e)
31 Rent Receivable............................................ 2,400
Rent Earned........................................... 2,400
To record earned but unpaid Dec. rent.
Adjustment (f)
31 Unearned Rent.............................................. 4,350
Rent Earned........................................... 4,350
To record the amount of rent earned for
November and December (2 x 2,175).
3-21
Problem 3-1A (Continued)
Part 2
Cash Payment for (c)
Jan. 6 Salaries Payable........................................... 4,200

Salaries Expense*......................................... 6,300
Cash........................................................ 10,500
current salaries. *(3 days x $2,100)
Cash Payment for (e)

15 Cash............................................................... 4,800
Rent Receivable..................................... 2,400
Rent Earned........................................... 2,400
To record past due rent for two months.
1. G 5. G 9. F
2. E 6. C 10. D
3. I 7. H 11. A
4. B 8. E 12. D
3-22

Parts 1 and 2
Cash Equipment
Unadj. Bal. 26,000 Unadj. Bal. 70,000
Accumulated Depreciation—
Accounts Receivable Equipment
Unadj. Bal. 0 Unadj. Bal. 16,000
(f) 7,500 (c) 12,000
Adj. Bal. 7,500 Adj. Bal. 28,000
Teaching Supplies Accounts Payable

(b) 7,400
Adj. Bal. 2,600 Salaries Payable
Unadj. Bal. 0
Prepaid Insurance (g) 400
Unadj. Bal. 15,000 Adj. Bal. 400
(a) 3,000
Adj. Bal. 12,000 Unearned Training Fees
Unadj. Bal. 11,000
Prepaid Rent (e) 4,400
Unadj. Bal. 2,000 Adj. Bal. 6,600
(h) 2,000
Adj. Bal. 0 T. Watson, Capital
Unadj. Bal. 63,600
Professional Library
Unadj. Bal. 30,000 T. Watson, Withdrawals
Unadj. Bal. 40,000
Unadj. Bal. 9,000
(d) 6,000
Adj. Bal. 15,000
3-23
Tuition Fees Earned Rent Expense

(f) 7,500 (h) 2,000
Adj. Bal. 109,500 Adj. Bal. 24,000
Training Fees Earned Teaching Supplies Expense

Unadj. Bal. 38,000 Unadj. Bal. 0
(e) 4,400 (b) 7,400
Adj. Bal. 42,400 Adj. Bal. 7,400
Depreciation Expense—
Professional Library Advertising Expense
(d) 6,000
Adj. Bal. 6,000
Equipment Utilities Expense
(c) 12,000
Adj. Bal. 12,000
Salaries Expense
Unadj. Bal. 48,000
(g) 400
Adj. Bal. 48,400
Insurance Expense
Unadj. Bal. 0
(a) 3,000
Adj. Bal. 3,000
3-24

Part 2
Adjustment (a)
Dec. 31 Insurance Expense.......................................................
3,000
Prepaid Insurance.................................................. 3,000
To record the insurance expired.
Adjustment (b)
31 Teaching Supplies Expense........................................7,400
Teaching Supplies.................................................. 7,400
To record supplies used ($10,000-$2,600).
Adjustment (c)
31 Depreciation Expense—Equipment...........................
12,000
To record equipment depreciation.
Adjustment (d)
31 Depreciation Expense—Profess. Library...................
6,000
Accumul. Depreciation—Profess. Library................ 6,000
To record professional library depreciation.
Adjustment (e)
31 Unearned Training Fees...............................................
4,400
Training Fees Earned............................................. 4,400
To record training fees earned that were
collected in advance.
Adjustment (f)
31 Accounts Receivable...................................................
7,500
Tuition Fees Earned............................................... 7,500
To record tuition earned ($3,000 x 2 1/2 months).
Adjustment (g)
31 Salaries Expense..........................................................
400
Salaries Payable..................................................... 400
To record accrued salaries (2 days x $100 x 2).
Adjustment (h)
31 Rent Expense................................................................
2,000
Prepaid Rent........................................................... 2,000
To record expiration of prepaid rent.
3-25

Part 3
Watson Technical Institute

Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash..........................................................................
$ 26,000
Accounts receivable................................................ 7,500
Teaching supplies ................................................... 2,600
Prepaid insurance.................................................... 12,000
Prepaid rent.............................................................. 0
Professional library................................................. 30,000
Accumulated depreciation—Professional library.... $ 15,000
Equipment................................................................ 70,000
Accumulated depreciation—Equipment................ 28,000
Accounts payable.................................................... 36,000
Salaries payable....................................................... 400
Unearned training fees............................................ 6,600
T. Watson, Capital.................................................... 63,600
T. Watson, Withdrawals........................................... 40,000
Tuition fees earned.................................................. 109,500
Training fees earned................................................ 42,400
Depreciation expense—Professional library........ 6,000
Depreciation expense—Equipment....................... 12,000
Salaries expense ..................................................... 48,400
Insurance expense.................................................. 3,000
Rent expense............................................................ 24,000
Teaching supplies expense.................................... 7,400
Advertising expense................................................ 7,000
Utilities expense....................................................... 5,600 _______
Totals......................................................................... $301,500 $301,500
3-26

Part 4
WATSON TECHNICAL INSTITUTE

Income Statement
For Year Ended December 31, 2011
Revenues
Tuition fees earned............................................. $109,500
Training fees earned.......................................... 42,400
Total revenues.................................................... $151,900
Expenses
Depreciation expense—Professional library... 6,000
Depreciation expense—Equipment.................. 12,000
Salaries expense................................................ 48,400
Insurance expense............................................. 3,000
Rent expense...................................................... 24,000
Teaching supplies expense............................... 7,400
Advertising expense.......................................... 7,000
Utilities expense................................................. 5,600
Total expenses.................................................... 113,400
Net income............................................................ $ 38,500

Statement of Owner’s Equity
T. Watson, Capital, December 31, 2010.............. $ 63,600

Plus: Net income.................................................. 38,500
102,100
Less: Owner withdrawals.................................... 40,000
T. Watson, Capital, December 31, 2011.............. $ 62,100
3-27
Problem 3-3A (Concluded)

Balance Sheet
December 31, 2011
Assets
Cash................................................................................. $ 26,000
Accounts receivable...................................................... 7,500
Teaching supplies.......................................................... 2,600
Prepaid insurance.......................................................... 12,000
Professional library........................................................ $30,000
Accumulated depreciation—Professional library....... (15,000) 15,000
Equipment....................................................................... 70,000
Accumulated depreciation—Equipment...................... (28,000) 42,000
Total assets..................................................................... $105,100
Liabilities
Accounts payable........................................................... $ 36,000
Salaries payable............................................................. 400
Unearned training fees.................................................. 6,600
Total liabilities................................................................. 43,000
Equity
T. Watson, Capital........................................................... 62,100
Total liabilities and equity.............................................. $105,100
3-28
Problem 3-4A (45 minutes) — Part 1

Unadjusted Adjusted
Account Trial Balance Adjustments Trial Balance
Cash............................... $ 27,000 $ 27,000
Accounts receivable.......... 12,000 (a 10,460 22,460
)
Office supplies.................. 18,000 (b 15,000 3,000
)
Prepaid insurance............. 7,320 (c) 2,440 4,880
Office equipment............... 92,000 92,000
Accumulated depreciation
—Office equipment.......... $ 12,000 (d 6,000 $ 18,000
)
Accounts payable............. 9,300 (e) 900 10,200
Interest payable................. (f) 800 800
Salaries payable................ (g 6,600 6,600
)
Unearned consulting fees... 16,000 (h) 1,700 14,300
Long-term notes payable.... 44,000 44,000
J. Winner, Capital............... 28,420 28,420
J. Winner, Withdrawals....... 10,000 10,000
Consulting fees (a) 10,460
earned........................... 156,000 (h 1,700 168,160
)
Depreciation expense—
Office equipment............. (d) 6,000 6,000
Salaries expense............... 71,000 (g) 6,600 77,600
Interest expense................ 1,400 (f) 800 2,200
Insurance expense............ (c 2,440 2,440
)
Rent expense................... 13,200 13,200
Office supplies expense..... (b) 15,000 15,000
Advertising expense.......... 13,800 _______ (e 90 ______ 14,700 _______
) 0
Totals.............................. $265,720 $265,720 $43,900 $43,90 $290,480 $290,480
0
Adjustment description:
(a) Earned but uncollected revenues.
(b) Cost of consumed office supplies.
3-29
(c) Cost of expired insurance coverage.

(d) Depreciation expense on office equipment.
(e) Incurred but unpaid advertising expense.
(f) Incurred but unpaid interest expense.
(g) Incurred but unpaid salaries expense.
(h) Earned revenues previously received in advance.
3-30
Problem 34A
Part 2
JJW COMPANY
Income Statement
For Year Ended July 31, 2011
Revenues
Consulting fees earned ................................ $168,160
Expenses
Depreciation expense—Office equipment. . $ 6,000
Salaries expense .......................................... 77,600
Interest expense ........................................... 2,200
Insurance expense ....................................... 2,440
Rent expense ................................................ 13,200
Office supplies expense .............................. 15,000
Advertising expense .................................... 14,700
Total expenses............................................... 131,140
Net income....................................................... $ 37,020
3-31
JJW COMPANY
For Year Ended July 31, 2011
J. Winner, Capital, July 31, 2010.................... $28,420

Plus: Net income............................................. 37,020
65,440
Less: Owner withdrawals............................... 10,000
J. Winner, Capital, July 31, 2011.................... $55,440
Part 2 (concluded)
JJW COMPANY
Balance Sheet
July 31, 2011
Assets
Cash............................................................................. $ 27,000
Accounts receivable................................................... 22,460
Office supplies............................................................ 3,000
Prepaid insurance....................................................... 4,880
Office equipment......................................................... $92,000
Accumulated depreciation—Office equipment........ (18,000) 74,000
Total assets................................................................. $131,340
Liabilities
Accounts payable....................................................... $ 10,200
Interest payable........................................................... 800
Salaries payable.......................................................... 6,600
Unearned consulting fees.......................................... 14,300
Long-term notes payable........................................... 44,000
Total liabilities............................................................. 75,900
Equity
J. Winner, Capital........................................................ 55,440
Total liabilities and equity.......................................... $131,340
3-32

Part 1
CALLAHAY COMPANY
Income Statement
Revenues
Fees earned.............................................. $420,000
Interest earned.......................................... 16,000
Total revenues.......................................... $436,000
Expenses
Depreciation expense—Automobiles..... 18,000
Depreciation expense—Equipment........ 10,000
Salaries expense...................................... 180,000
Wages expense......................................... 32,000
Interest expense....................................... 24,000
Office supplies expense.......................... 26,000
Advertising expense................................ 50,000
Repairs expense—Automobiles............. 16,800
Total expenses.......................................... 356,800
Net income.................................................. $ 79,200
3-33
CALLAHAY COMPANY
Statement of Owner's Equity
J. Callahay, Capital, December 31, 2010. . $247,800

Plus: Net income....................................... 79,200
327,000
Less: Withdrawals by owner.................... 38,000
J. Callahay, Capital, December 31, 2011... $289,000
Part 1 (concluded)
CALLAHAY COMPANY
Balance Sheet
December 31, 2011
Assets
Cash......................................................................... $ 22,000
Accounts receivable.............................................. 44,000
Interest receivable.................................................. 10,000
Notes receivable (due in 90 days)........................ 160,000
Office supplies........................................................ 8,000
Automobiles............................................................ $160,000
Accumulated depreciation—Automobiles........... (42,000) 118,000
Equipment............................................................... 130,000
Accumulated depreciation—Equipment.............. (10,000) 120,000
Land......................................................................... 70,000
Total assets............................................................. $552,000
Liabilities
Accounts payable................................................... $ 88,000
Interest payable...................................................... 12,000
Salaries payable..................................................... 11,000
Unearned fees......................................................... 22,000
Long-term notes payable....................................... 130,000
Total liabilities......................................................... 263,000
Owner’s Equity
J. Callahay, Capital................................................. 289,000
3-34
Total liabilities and equity...................................... $552,000
Part 2
Profit margin = $79,200 / $436,000 = 18.2%
Problem 3-6AA (40 minutes)
Part 1
Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.
Nov. 1 Prepaid Advertising ........................................ 1,500

Cash.......................................................... 1,500
Paid for future advertising.
1 Prepaid Insurance........................................... 2,160

Cash.......................................................... 2,160
Paid insurance for one year.
30 Cash.................................................................. 3,300
Unearned Service Fees........................... 3,300
Received fees in advance.
Dec. 1 Prepaid Consulting Fees ............................... 2,700

Cash.......................................................... 2,700
Paid for future consulting.
15 Cash.................................................................. 7,650
31 Advertising Expense....................................... 600

Prepaid Advertising ................................ 600
To adjust prepaid advertising ($1,500-$900).
31 Insurance Expense.......................................... 360

Prepaid Insurance.................................... 360
To adjust prepaid insurance
($2,160 x 2/12).
3-35
31
......................................
Unearned Service Fees
......................................
......................................
2,100
Service Fees Earned................................ 2,100
To adjust unearned service fees
($3,300-$1,200).
31 Consulting Fees Expense .............................. 900
Prepaid Consulting Fees......................... 900
To adjust prepaid consulting fees
($2,700 x 1/3).
31 Unearned Service Fees .................................. 3,000

To adjust unearned service fees.
3-36
Problem 36AA (Continued)
Part 2
Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.
Nov.1 Advertising Expense....................................... 1,500

Cash.......................................................... 1,500
1 Insurance Expense.......................................... 2,160

Cash.......................................................... 2,160
30 Cash.................................................................. 3,300
Dec. 1 Consulting Fees Expense............................... 2,700

Cash.......................................................... 2,700
Paid for future consulting.
15 Cash.................................................................. 7,650
31 Prepaid Advertising......................................... 900

Advertising Expense............................... 900
To adjust for prepaid advertising.
31 Prepaid Insurance........................................... 1,800

Insurance Expense.................................. 1,800
To adjust for prepaid insurance.
31 Service Fees Earned....................................... 1,200

To adjust for unearned service fees.
31 Prepaid Consulting Fees................................ 1,800

Consulting Fees Expense....................... 1,800
To adjust for prepaid consulting fees.
31 Service Fees Earned....................................... 4,650

3-37
Problem 3-6AA (Concluded)
Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
Advertising expense for two months..................................... $ 600

Prepaid advertising as of December 31................................. 900
Insurance expense for two months........................................ 360
Prepaid insurance as of December 31................................... 1,800
Consulting fees expense (1/3 of total paid)........................... 900
Prepaid consulting fees........................................................... 1,800
Service fees earned for two months ($2,100 + $3,000)......... 5,100
Unearned service fees at 12/31 ($1,200 + $4,650)................. 5,850
When prepaid expenses and unearned revenues are recorded in balance

sheet accounts, the related adjusting entries are designed to generate the
correct asset, expense, liability, and revenue account balances. When
prepaid expenses and unearned revenues are recorded in income
statement accounts, the related adjusting entries are designed to
accomplish exactly the same result.
3-38
PROBLEM SET B
Problem 3-1B (30 minutes)
Part 1
Adjustment (a)
Oct. 31 Office Supplies Expense........................................ 3,450
Office Supplies................................................ 3,450
To record cost of supplies used
($500 + $3,650 - $700).
Adjustment (b)
31 Insurance Expense................................................. 2,675
Prepaid Insurance........................................... 2,675
To record annual insurance coverage expense.
Months Active 2011

Policy Cost per Month in 2011 Expense
A $125 ($3,000/24 mo.) 12 $1,500
B 100 ($3,600/36 mo.) 9 900
C 55 ( $660 / 12 mo.) 5 275
Total $2,675
Adjustment (c)
31 Salaries Expense.................................................... 800
Salaries Payable.............................................. 800
To record accrued but unpaid wages
(1 day x $800).
Adjustment (d)
31 Depreciation Expense—Building.......................... 5,400
Accumulated Depreciation—Building........... 5,400
To record annual depreciation
[($155,000-$20,000) / 25 years = $5,400].
3-39
Problem 3-1B (Concluded)
Adjustment (e)
Oct. 31 Rent Receivable...................................................... 600
Rent Earned..................................................... 600
To record earned but unpaid Oct. rent.
Adjustment (f)
31 Unearned Rent........................................................ 1,050
Rent Earned..................................................... 1,050
To record rent earned for September
and October (2 x $525).
Part 2
Cash Payment for (c)
Nov. 7 Salaries Payable..................................................... 800

Salaries Expense*................................................... 3,200
Cash.................................................................. 4,000
current salaries. *(4 days x $800)
Cash Payment for (e)
15 Cash......................................................................... 1,200
Rent Receivable............................................... 600
Rent Earned..................................................... 600
To record past due rent for two months.
3-40
1. E 5. D 9. F
2. H 6. B 10. I
3. G 7. F 11. A
4. C 8. I 12. B
Parts 1 and 2
Cash Accounts Payable

Accounts Receivable Salaries Payable

Unadj. Bal. 0 Unadj. Bal. 0
(f) 5,500 (g) 540
Adj. Bal. 5,500 Adj. Bal. 540
Teaching Supplies Unearned Training Fees

(b) 57,500 (e) 9,200
Adj. Bal. 2,500 Adj. Bal. 18,400
Prepaid Insurance M. Alcorn, Capital

(a) 6,400
Adj. Bal. 11,600
M. Alcorn, Withdrawals
Prepaid Rent Unadj. Bal. 20,000
Unadj. Bal. 2,600
(h) 2,600
Adj. Bal. 0
Unadj. Bal. 10,000
Unadj. Bal. 1,500
(d) 2,000
3-41
Adj. Bal. 3,500
Equipment
Unadj. Bal. 30,000
Equipment
Unadj. Bal. 16,000
(c) 4,000
Adj. Bal. 20,000
3-42
Problem 3-3B (Continued)

Parts 1 and 2
Tuition Fees Earned Advertising Expense
(f) 5,500
Adj. Bal. 110,500
Training Fees Earned Utilities Expense

(e) 9,200
Adj. Bal. 71,200
Unadj. Bal. 0
(d) 2,000
Adj. Bal. 2,000
Equipment
Unadj. Bal. 0
(c) 4,000
Adj. Bal. 4,000
Salaries Expense
Unadj. Bal. 43,200
(g) 540
Adj. Bal. 43,740
Insurance Expense
Unadj. Bal. 0
(a) 6,400
Adj. Bal. 6,400
Rent Expense
Unadj. Bal. 28,600
(h) 2,600
Adj. Bal. 31,200
Teaching Supplies Expense

Unadj. Bal. 0
(b) 57,500
Adj. Bal. 57,500
3-43

Part 2
Adjustment (a)
Dec. 31 Insurance Expense................................................ 6,400
Prepaid Insurance.......................................... 6,400
To record the insurance expired.
Adjustment (b)
31 Teaching Supplies Expense................................. 57,500
Teaching Supplies.......................................... 57,500
To record the cost of supplies used
($60,000-$2,500).
Adjustment (c)
31 Depreciation Expense—Equipment..................... 4,000
Accumulated Depreciation—Equipment..... 4,000
To record equipment depreciation.
Adjustment (d)
31 Depreciation Expense—Professional Library.... 2,000
Professional Library............................. 2,000
To record professional library depreciation.
Adjustment (e)
31 Unearned Training Fees........................................ 9,200
Training Fees Earned..................................... 9,200
To record training fees earned that
were collected in advance.
Adjustment (f)
31 Accounts Receivable............................................ 5,500
Tuition Fees Earned....................................... 5,500
To record tuition earned ($2,200 x 2 1/2 mo).
Adjustment (g)
31 Salaries Expense................................................... 540
Salaries Payable............................................. 540
To accrue salaries expense (3 days x $180).
Adjustment (h)
31 Rent Expense ........................................................ 2,600
Prepaid Rent................................................... 2,600
3-44
To record expiration of prepaid rent.
3-45

Part 3
ALCORN INSTITUTE
December 31, 2011
Debit Credit
Cash............................................................................... $ 50,000
Accounts receivable...................................................... 5,500
Teaching supplies.......................................................... 2,500
Prepaid insurance.......................................................... 11,600
Prepaid rent................................................................... 0
Professional library........................................................ 10,000
Accumulated depreciation—Professional library........... $ 3,500
Equipment..................................................................... 30,000
Accumulated depreciation—Equipment........................ 20,000
Accounts payable.......................................................... 12,200
Salaries payable............................................................. 540
Unearned training fees................................................... 18,400
M. Alcorn, Capital........................................................... 68,500
M. Alcorn, Withdrawals.................................................. 20,000
Tuition fees earned......................................................... 110,500
Training fees earned....................................................... 71,200
Depreciation expense—Professional library.................. 2,000
Depreciation expense—Equipment............................... 4,000
Salaries expense............................................................ 43,740
Insurance expense......................................................... 6,400
Rent expense................................................................. 31,200
Teaching supplies expense............................................ 57,500
Advertising expense...................................................... 18,000
Utilities expense............................................................. 12,400 _______
Totals............................................................................. $304,840 $304,840
3-46

Part 4
ALCORN INSTITUTE
Income Statement
Revenues
Tuition fees earned.................................................... $110,500
Training fees earned.................................................. 71,200
Total revenues............................................................ $181,700
Expenses
Depreciation expense—Professional library.......... 2,000
Depreciation expense—Equipment......................... 4,000
Salaries expense........................................................ 43,740
Insurance expense.................................................... 6,400
Rent expense.............................................................. 31,200
Teaching supplies expense...................................... 57,500
Advertising expense.................................................. 18,000
Utilities expense......................................................... 12,400
Total expenses........................................................... 175,240
Net income.................................................................... $ 6,460
ALCORN INSTITUTE
M. Alcorn, Capital, December 31, 2010............... $68,500

Plus: Net income.................................................. 6,460
74,960
M. Alcorn, Capital, December 31, 2011............... $54,960
3-47
ALCORN INSTITUTE
Balance Sheet
December 31, 2011
Assets
Cash.............................................................................. $50,000
Accounts receivable.................................................... 5,500
Teaching supplies........................................................ 2,500
Prepaid insurance........................................................ 11,600
Professional library..................................................... $10,000
Accumulated depreciation—Professional library........... (3,500) 6,500
Equipment.................................................................... 30,000
Accumulated depreciation—Equipment.................... (20,000) 10,000
Total assets.................................................................. $86,100
Liabilities
Accounts payable........................................................ $12,200
Salaries payable........................................................... 540
Unearned training fees................................................ 18,400
Total liabilities.............................................................. 31,140
Equity
M. Alcorn, Capital......................................................... 54,960
Total liabilities and equity........................................... $86,100
3-48
Problem 3-4B (45 minutes) — Part 1
Unadjusted Adjusted
Account Trial Balance Adjustments Trial Balance
Cash...................................$ 48,000 $ 48,000
Accounts receivable............. 70,000 (a) 6,660 76,660
Office supplies..................... 30,000 (b) 23,000 7,000
Prepaid insurance................ 13,200 (c) 4,600 8,600
Office equipment..................150,000 150,000
Accumulated depreciation—
$ 30,000 (d) 10,000 $ 40,000
Office equipment....................
Accounts payable................ 36,000 (e) 6,000 42,000
Interest payable.................... (f) 1,600 1,600
Salaries payable................... (g) 11,200 11,200
Unearned consulting fees..... 30,000 (h) 12,200 17,800
Long-term notes payable...... 80,000 80,000
D. Chen, Capital.................... 70,200 70,200
D. Chen, Withdrawals........... 10,000 10,000
(a) 6,660
Consulting fees earned........ 264,000 282,860
(h) 12,200
Depreciation expense—
Office equipment............... (d) 10,000 10,000
Salaries expense..................115,600 (g) 11,200 126,800
Interest expense................... 6,400 (f) 1,600 8,000
Insurance expense.............. (c) 4,600 4,600
Rent expense....................... 24,000 24,000
Office supplies expense........ (b) 23,000 23,000
Advertising expense............. 43,000 _______ (e) 6 ,000 ______ 49,000 _______
Totals..................................
$510,200 $510,200 $75,260 $75,260 $545,660 $545,660
Adjustment Descriptions:
(a) Earned but uncollected revenues.
(b) Cost of consumed office supplies.
(c) Cost of expired insurance coverage.
(d) Depreciation expense on office equipment.
(e) Incurred but unpaid advertising expense.
(f) Incurred but unpaid interest expense.
(g) Incurred but unpaid salaries expense.
(h) Earned revenues previously received in advance.
3-49
Problem 34B
Part 2
DAXU CONSULTING COMPANY
Income Statement
Revenues
Consulting fees earned ..................................... $282,860
Expenses
Depreciation expense—Office equipment....... $ 10,000
Salaries expense ............................................... 126,800
Interest expense ................................................ 8,000
Insurance expense ............................................ 4,600
Rent expense ..................................................... 24,000
Office supplies expense ................................... 23,000
Advertising expense ......................................... 49,000
Total expenses.................................................... 245,400
Net income............................................................ $ 37,460

D. Chen, Capital, December 31, 2010................. $ 70,200

Plus: Net income.................................................. 37,460
107,660
D. Chen, Capital, December 31, 2011................. $ 97,660
3-50

Part 2 (concluded)
Balance Sheet
December 31, 2011
Assets
Cash................................................................................ $ 48,000
Accounts receivable..................................................... 76,660
Office supplies............................................................... 7,000
Prepaid insurance......................................................... 8,600
Office equipment........................................................... $150,000
Accumulated depreciation—Office equipment.......... (40,000) 110,000
Total assets.................................................................... $250,260
Liabilities
Accounts payable.......................................................... $ 42,000
Interest payable............................................................. 1,600
Salaries payable............................................................ 11,200
Unearned consulting fees............................................ 17,800
Long-term notes payable.............................................. 80,000
Total liabilities................................................................ 152,600
Equity
D. Chen, Capital............................................................. 97,660
Total liabilities and equity............................................. $250,260
3-51

Part 1
LIGHTNING COURIER
Income Statement
Revenues
Delivery fees earned..................................... $580,000
Interest earned............................................... 24,000
Total revenues............................................... $604,000
Expenses
Depreciation expense—Trucks.................... 24,000
Depreciation expense—Equipment............. 46,000
Salaries expense........................................... 64,000
Wages expense.............................................. 290,000
Interest expense............................................ 25,000
Office supplies expense............................... 33,000
Advertising expense..................................... 26,400
Repairs expense—Trucks............................. 34,600
Total expenses............................................... 543,000
Net income....................................................... $ 61,000
LIGHTNING COURIER
Statement of Owner's Equity
J. Hallam, Capital, December 31, 2010.......... $115,000

Plus : Net income........................................... 61,000
176,000
Less: Withdrawals by owner......................... 40,000
J. Hallam, Capital, December 31, 2011.......... $136,000
3-52
Part 1 (concluded)
LIGHTNING COURIER
Balance Sheet
December 31, 2011
Assets
Cash....................................................................... $ 48,000
Accounts receivable............................................ 110,000
Interest receivable................................................ 6,000
Notes receivable (due in 90 days)......................... 200,000
Office supplies...................................................... 12,000
Trucks.................................................................... $124,000
Accumulated depreciation—Trucks................... (48,000) 76,000
Equipment............................................................. 260,000
Accumulated depreciation—Equipment............ (190,000) 70,000
Land....................................................................... 90,000
Total assets........................................................... $612,000
Liabilities
Accounts payable................................................. $124,000
Interest payable.................................................... 22,000
Salaries payable................................................... 30,000
Unearned delivery fees........................................ 110,000
Long-term notes payable..................................... 190,000
Total liabilities....................................................... 476,000
Equity
J. Hallam, Capital.................................................. 136,000
Total liabilities and equity.................................... $612,000
3-53
Part 2
Profit margin = $61,000 / $604,000 = 10.1%

Problem 3-6BA (40 minutes)
Part 1
Method that records prepaid expenses and unearned revenues in balance sheet accounts:
Apr. 1 Prepaid Consulting Fees..................................... 3,450

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

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

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

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

Prepaid Consulting Fees.............................. 1,500
To adjust prepaid consulting fees.
31 Insurance Expense............................................... 450

Prepaid Insurance......................................... 450
To adjust prepaid insurance.
31 Unearned Service Fees ....................................... 3,900

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

Prepaid Advertising...................................... 2,400
To adjust prepaid advertising.
3-54
31 Unearned Service Fees........................................ 4,500
3-55
................................................Service Fees Earned
................................................ 4,500
Problem 36BA (Continued)
Part 2
Method that records prepaid expenses and unearned revenues in income statement accounts:
Apr. 1 Consulting Fees Expense ................................. 3,450

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

Cash.............................................................. 2,700
30 Cash..................................................................... 7,500
Service Fees Earned................................... 7,500
May 1 Advertising Expense........................................... 3,450

Cash.............................................................. 3,450
23 Cash..................................................................... 9,450
Service Fees Earned................................... 9,450
31 Prepaid Consulting Fees.................................... 1,950

Consulting Fees Expense........................... 1,950
To adjust for prepaid consulting fees.
31 Prepaid Insurance .............................................. 2,250

Insurance Expense...................................... 2,250
To adjust for prepaid insurance.
31 Service Fees Earned........................................... 3,600

Unearned Service Fees .............................. 3,600
31 Prepaid Advertising............................................ 1,050

Advertising Expense................................... 1,050
To adjust for prepaid advertising.
31 Service Fees Earned........................................... 4,950

Unearned Service Fees .............................. 4,950
3-56
Problem 36BA (Concluded)
Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
Prepaid consulting fees as of May 31......................................... $ 1,950

Consulting fees expense for two months................................... 1,500
Insurance expense for two months............................................. 450
Prepaid insurance as of May 31................................................... 2,250
Unearned service fees as of May 31 ($3,600 + $4,950).............. 8,550
Service fees earned for two months ($3,900 + $4,500).............. 8,400
Prepaid advertising as of May 31................................................ 1,050
Advertising expense for two months.......................................... 2,400
When prepaid expenses and unearned revenues are recorded in balance

sheet accounts, the related adjusting entries are designed to generate the
correct asset, expense, liability, and revenue account balances. When
prepaid expenses and unearned revenues are recorded in income
statement accounts, the related adjusting entries are designed to
accomplish exactly the same result.
3-57
SERIAL PROBLEM – SP 3
Serial Problem, Business Solutions (180 minutes) — Part 1
<Note: The general ledger is displayed at the end of Part 6>
Journal entries
Dec. 2 Advertising Expense..................................655 1,025
Cash.....................................................101 1,025
Paid share of mall advertising costs.
3 Repairs Expense–Computer.....................684 500

Cash.....................................................101 500
Repaired the computer.
4 Cash.............................................................101 3,950
Accounts Receivable..........................106 3,950
Collected accounts receivable.
10 Wages Expense..........................................623 750

Cash.....................................................101 750
Paid employee for part-time work.
14 Cash.............................................................101 1,500
Unearned Computer Services Revenue...236 1,500
Received advance on work to be performed.
15 Computer Supplies....................................126 1,100

Accounts Payable...............................201 1,100
Purchased supplies on credit.
16 No entry recorded in the journal.
20 Cash.............................................................101 5,625
Computer Services Revenue.............403 5,625
Collected cash revenue from customer.
28 Cash.............................................................101 3,000
Accounts Receivable..........................106 3,000
Collected accounts receivable.
3-58
29 Mileage Expense........................................676 192

Cash.....................................................101 192
Reimbursed Rey for mileage.
31 S. Rey, Withdrawals...................................302 1,500

Cash.....................................................101 1,500
Paid cash for owner withdrawal.
3-59
Serial Problem, SP 3 (Continued)
Part 2
Adjusting entries
Dec. 31 Computer Supplies Expense .........................652 3,065

Computer Supplies .................................126 3,065
Adjustment for supplies used (supplies
balance less cost of supplies available).
31 Insurance Expense .........................................637 555

Prepaid Insurance ...................................128 555
Adjustment for expired insurance (1/4
of $2,220 original prepaid amount).
31 Wages Expense ..............................................623 500

Wages Payable ........................................210 500
Adjustment for accrued wages.
31 Depreciation Expense–Computer Equip.......613 1,250

Computer Equipment...........................168 1,250
Adjustment for computer equipment depreciation:
Cost.......................................................... $20,000
Predicted life............................................ 4 years
Annual depreciation (cost/life)............... $5,000
Expense for three months....................... $1,250
31 Depreciation Expense—Office Equip............612 400

Office Equipment ..................................164 400
Adjustment for office equipment depreciation:
Cost.......................................................... $8,000
Predicted life............................................ 5 years
Annual depreciation (cost/life)............... $1,600
Expense for three months....................... $400
31 Rent Expense ..................................................640 2,475

Prepaid Rent ............................................131 2,475
Adjustment for expired rent (3/4 of
$3,300 original prepaid amount).
3-60

Part 3
BUSINESS SOLUTIONS
December 31, 2011
Debit Credit
Cash ............................................................................ $ 48,372

Accounts receivable .................................................. 5,668
Computer supplies .................................................... 580
Prepaid insurance ..................................................... 1,665
Prepaid rent ................................................................ 825
Office equipment ....................................................... 8,000
Accumulated depreciation—Office equipment....... $ 400
Computer equipment ................................................ 20,000
Accumulated depreciation—Computer equipment. 1,250
Accounts payable ...................................................... 1,100
Wages payable ........................................................... 500
Unearned computer services revenue .................... 1,500
S. Rey, Capital............................................................. 73,000
S. Rey, Withdrawals.................................................... 7,100
Computer services revenue ..................................... 31,284
Depreciation expense—Office equipment .............. 400
Depreciation expense—Computer equipment........ 1,250
Wages expense .......................................................... 3,875
Insurance expense .................................................... 555
Rent expense ............................................................. 2,475
Computer supplies expense .................................... 3,065
Advertising expense.................................................. 2,753
Mileage expense ........................................................ 896
Miscellaneous expenses .......................................... 250
Repairs expense—Computer ................................... 1,305 _______
Totals........................................................................... $109,034 $109,034
3-61

Part 4
BUSINESS SOLUTIONS
Income Statement
For Three Months Ended December 31, 2011
Revenue
Computer services revenue....................................... $31,284
Expenses
Depreciation expense—Office equipment................ $ 400
Depreciation expense—Computer equipment......... 1,250
Wages expense........................................................... 3,875
Insurance expense...................................................... 555
Rent expense............................................................... 2,475
Computer supplies expense...................................... 3,065
Advertising expense................................................... 2,753
Mileage expense......................................................... 896
Miscellaneous expenses............................................ 250
Repairs expense—Computer..................................... 1,305
Total expenses............................................................ 16,824
Net income..................................................................... $14,460
Part 5
BUSINESS SOLUTIONS
For Three Months Ended December 31, 2011
S. Rey, Capital, October 1, 2011................................... $73,000

Plus: Net income.......................................................... 14,460
87,460
Less: Withdrawals........................................................ 7,100
S. Rey, Capital, December 31, 2011............................. $80,360
3-62

Part 6
BUSINESS SOLUTIONS
Balance Sheet
December 31, 2011
Assets
Cash ................................................................................ $ 48,372
Accounts receivable ..................................................... 5,668
Computer supplies ........................................................ 580
Prepaid insurance ......................................................... 1,665
Prepaid rent ................................................................... 825
Office equipment ........................................................... $ 8,000
Accumulated depreciation–Office equipment............. (400) 7,600
Computer equipment..................................................... 20,000
Accumulated depreciation–Computer equipment...... (1,250) 18,750
Total assets..................................................................... $ 83,460
Liabilities
Accounts payable........................................................... $ 1,100
Wages payable................................................................ 500
Unearned computer services revenue......................... 1,500
Total liabilities................................................................. 3,100
Equity
S. Rey, Capital................................................................. 80,360
Total liabilities and equity.............................................. $ 83,460
3-63
[Note: Ledger includes all entries from prior three months. The Working Papers shorten
the solution by showing account balances as of November 30.]
General Ledger
Cash Acct. No. 101

Date Explanation PR Debit Credit Balance
Oct. 1 45,000 45,000
2 3,300 41,700
5 2,220 39,480
8 1,420 38,060
15 4,800 42,860
17 805 42,055
20 1,728 40,327
22 1,400 41,727
31 875 40,852
31 3,600 37,252
Nov. 1 320 36,932
2 4,633 41,565
5 1,125 40,440
18 2,208 42,648
22 250 42,398
28 384 42,014
30 1,750 40,264
30 2,000 38,264
Dec. 2 1,025 37,239
3 500 36,739
4 3,950 40,689
10 750 39,939
14 1,500 41,439
20 5,625 47,064
28 3,000 50,064
29 192 49,872
31 1,500 48,372
3-64
Accounts Receivable Acct. No. 106

Oct. 6 4,800 4,800
12 1,400 6,200
15 4,800 1,400
22 1,400 0
28 5,208 5,208
Nov. 8 5,668 10,876
18 2,208 8,668
24 3,950 12,618
Dec. 4 3,950 8,668
28 3,000 5,668
Computer Supplies Acct. No. 126

Oct. 3 1,420 1,420
Nov. 5 1,125 2,545
Dec. 15 1,100 3,645
31 3,065 580
Prepaid Insurance Acct. No. 128

Oct. 5 2,220 2,220
Dec. 31 555 1,665
Prepaid Rent Acct. No. 131

Oct. 2 3,300 3,300
Dec. 31 2,475 825
Office Equipment Acct. No. 163

Oct. 1 8,000 8,000
Accumulated Depreciation—Office Equipment Acct. No. 164

Dec. 31 400 400
3-65
Computer Equipment Acct. No. 167

Oct. 1 20,000 20,000
Accumulated Depreciation—Computer Equipment Acct. No. 168

Dec. 31 1,250 1,250
Accounts Payable Acct. No. 201

Oct. 3 1,420 1,420
8 1,420 0
Dec. 15 1,100 1,100
Wages Payable Acct. No. 210

Dec. 31 500 500
Unearned Computer Services Revenue Acct. No. 236

Dec. 14 1,500 1,500
S. Rey, Capital Acct. No. 301

Oct. 1 73,000 73,000
S. Rey, Withdrawals Acct. No. 302

Oct. 31 3,600 3,600
Nov. 30 2,000 5,600
Dec. 31 1,500 7,100
3-66
Computer Services Revenue Acct. No. 403

Oct. 6 4,800 4,800
12 1,400 6,200
28 5,208 11,408
Nov. 2 4,633 16,041
8 5,668 21,709
24 3,950 25,659
Dec. 20 5,625 31,284
Depreciation Expense—Office Equipment Acct. No. 612

Dec. 31 400 400
Depreciation Expense—Computer Equipment Acct. No. 613

Dec. 31 1,250 1,250
Wages Expense Acct. No. 623

Oct. 31 875 875
Nov. 30 1,750 2,625
Dec. 10 750 3,375
31 500 3,875
Insurance Expense Acct. No. 637

Dec. 31 555 555
3-67
Serial Problem, SP 3 (Concluded)
Rent Expense Acct. No. 640

Dec. 31 2,475 2,475
Computer Supplies Expense Acct. No. 652

Dec. 31 3,065 3,065
Advertising Expense Acct. No. 655

Oct. 20 1,728 1,728
Dec. 2 1,025 2,753
Mileage Expense Acct. No. 676

Nov. 1 320 320
28 384 704
Dec. 29 192 896
Miscellaneous Expense Acct. No. 677

Nov. 22 250 250
Repairs Expense—Computer Acct. No. 684

Oct. 17 805 805
Dec. 3 500 1,305
3-68
Reporting in Action — BTN 3-1
1. The revenue recognition principle requires that revenue be recorded

when realized or realizable and earned, not before and not after. Most
companies earn revenue when they provide services and products to
customers.
2. Research In Motion provides information on revenue recognition in its

footnote 1 titled “Research In Motion Limited and Summary of
Significant Accounting Policies.” They report that “Revenue from the
sales of Blackberry devices is recognized when title is transferred to the
customer and all significant contractual obligations that affect the
customer’s final acceptance have been fulfilled. For hardware products
for which software is deemed not to be incidental, the Company
recognizes revenue in accordance with industry specific software
revenue recognition guidance.” Research In Motion also explains how it
estimates accruals for price protection commitments, incentive
programs, warranties and royalties related to sales of Blackberry
devices.
3. For fiscal year-end February 28, 2009, the profit margin is ($ millions):
$1,893 / $11,065 = 0.171 = 17.1%
For fiscal year-end February 27, 2010, the profit margin is ($ millions):
$2,457 / $14,953 = 0.164 = 16.4%
4. Solution depends on the financial statements accessed.
3-69
Comparative Analysis — BTN 3-2
1. Research In Motion
Current year, profit margin = $2,457 / $14,953 = 16.4%

Prior year, profit margin = $1,893 / $11,065 = 17.1%
Apple
Current year, profit margin = $8,235 / $42,905 = 19.2%

Prior year, profit margin = $6,119 / $37,491 = 16.3%
2. Apple is more successful on the basis of profit margin in the current

year relative to Research In Motion, but Research In Motion is more
successful based on the prior year profit margin. Research In Motion’s
profit margin declined in the current year while Apple’s increased. In
the current year, Research In Motion earned an average of 16.4 cents on
each dollar while Apple earned 19.2 cents on each dollar.
Ethics Challenge — BTN 3-3
1. GAAP requires that annual deprecation be accumulated in a contra-

asset account, called Accumulated Depreciation. While property, plant,
and equipment is often shown at its net value on the balance sheet (as
with Research In Motion’s balance sheet in Appendix A) the cost of
property, plant, and equipment along with its related accumulated
depreciation are reported in the footnotes. Thus, Bergez is correct with
her journal entry recommendation.
2. One strength of Welch’s method would be the ease of preparing the

balance sheet. The property, plant, and equipment balance in the
adjusted trial balance would be directly transferable to the balance sheet
when the preparer desired to show the amount at net. Welch’s approach
carries weaknesses in that financial statement users would not be able
to ascertain the original cost of the equipment or be able to know how
much of the original cost had been allocated to depreciation to date.
3. While both approaches would lead to the same total assets on the
balance sheet, GAAP requires Bergez’s approach. As a professional,
Bergez is required to uphold the standards of her profession and, thus,
the decision is an ethical one for her.
3-70
Communicating in Practice — BTN 3-4
This communication activity has no set solution. A class discussion of the

ratios can be conducted with emphasis on (1) return and profitability by
industries and (2) a contrast of debt financing between industries.
Taking It to the Net — BTN 3-5
1. The Gap’s main brands (stores) are The Gap, Old Navy, and Banana
Republic. It also has Piperlime and Athleta brands.
2. The Gap’s fiscal year-end is January 30, 2010. It appears that The Gap’s
fiscal year-end is consistently set as of the Saturday closest to January
31 – meaning it falls in the last week of January or first week of
February.
3. Net sales for the year ended January 30, 2010, are $14,197 million.
4. Net income for the year ended January 30, 2010, is $1,102 million.
5. Profit margin = $1,102 million / $14,197 million = 7.76%
6. The company probably chose a fiscal year-end as the end of January or

early February to have it be consistent with their natural year. For many
retailers, the highest amount of sales is in November and December
(with some residual in January including sales returns).
3-71
Teamwork in Action — BTN 3-6
Note that there is no specific solution to this activity. Still, the presentation
of each expert team should reflect the following summary points:
Before Adjusting
Balance Sheet Income Statement
Type Account Account Adjusting Entry
Prepaid expense Asset overstated Expense understated Dr. Expense

Cr. Asset*
Unearned revenues Liability overstated Revenue understated Dr. Liability

Cr. Revenue
Accrued Expenses Liability understated Expense understated Dr. Expense

Cr. Liability
Accrued Revenues Asset understated Revenue understated Dr. Asset

Cr. Revenue
* For depreciation, one would Credit the Accumulated Depreciation contra account.
Some implementation notes: This activity allows all students to be actively

involved in the learning process. Encourage students to take the opportunity
to ask questions in the small group environment the learning team provides.
Encourage the better students to serve as experts on unearned revenues. The
instructor’s observation of and reactions to expert teams’ development of
presentation material as well as the delivery to learning teams will have a
significant impact on the effectiveness of this activity.
3-72
Entrepreneurial Decision — BTN 3-7
1. a. To record the collection of cash from sale of the gift certificate in

advance of delivery of merchandise to the customer:
Cash..................................................................... 300
Unearned revenue....................................... 300
b.To record the delivery of merchandise to the customer when he/she

uses the gift certificate:
Unearned revenue............................................... 300

Revenue earned........................................... 300
2. Carrying less inventory would allows Cheezburger Network to save the

costs of carrying that added inventory; such as warehousing costs,
insurance, theft/damage, and other potential losses. Saving these
costs can increase income. By increasing income (via lower costs),
profit margin should increase.
3. If it carries additional inventory, Cheezburger Network can potentially

sell more merchandise and increase its profits. This might further fuel
increased sales as additional customers might be attracted to its
products. On the other hand, carrying inventory has risks. The most
important risk for a company like Cheezburger Network is that of
inventory obsolescence. Consumer tastes and trends are constantly
changing, and by carrying less inventory, the business can be more
flexible in quickly responding with products consistent with those
changing consumer trends.
3-73
Hitting the Road — BTN 3-8
There is no formal solution to this field activity. The instructor may wish to
tally students’ findings to see what companies were selected, who
responded, what was the response time, etc. The instructor can also
periodically ask students to bring in examples from their selected
companies at certain times, and then compare and contrast them with the
examples in the book.
Global Decision — BTN 3-9
1. Nokia’s Note 1 (Accounting Principles - Revenue Recognition) reports

that “Sales from the majority of the Group are recognized when the
significant risks and rewards of ownership have transferred to the
buyer, continuing managerial involvement usually associated with
ownership and effective control have ceased, the amount of revenue can
be measured reliably, it is probable that economic benefits associated
with the transaction will flow to the Group and the costs incurred or to
be incurred in respect of the transaction can be measured reliably.”
Subsequent text and paragraphs provide more details for revenue
recognition for specific sub-categories of revenues.
2. Profit margin = 260 EUR / 40,984 EUR = 0.6% (EUR in millions)
3-74

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Quick Study 3-2 (10 minutes)

a. Insurance Expense....................................................... 1,800

b. Supplies Expense......................................................... 2,700

Quick Study 3-3 (10 minutes)

a. Depreciation Expense—Equipment............................ 5,000

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

Quick Study 3-4 (15 minutes)

a. Unearned Revenue........................................................ 15,000

b. Unearned Subscription Revenue................................ 2,400

Quick Study 3-5 (10 minutes)

Salaries Expense........................................................... 400

Quick Study 3-6 (15 minutes)

Accounts Debited and Credited Financial Statement

b. Debit Depreciation Expense Income Statement

c. Debit Wages Expense Income Statement

d. Debit Accounts Receivable Balance Sheet

e. Debit Insurance Expense Income Statement

Quick Study 3-7 (10 minutes)

Quick Study 3-8 (10 minutes)

Quick Study 3-9 (15 minutes)

Quick Study 3-10 (15 minutes)

Adjusting entry Debit Credit

1. Accrue salaries expense b d

2. Adjust the Unearned Services Revenue account g c

3. Record the earning of services revenue for which h c

Quick Study 3-11 (10 minutes)

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

Quick Study 3-12A (5 minutes)

Quick Study 3-13 (10 minutes)

a. Under IFRS, financial statements normally present assets from least

b. Under IFRS, financial statements normally present liabilities from

Exercise 3-2 (30 minutes)

a. Unearned Fee Revenue..................................................... 10,000

b. Wages Expense................................................................. 9,000

c. Depreciation Expense—Equipment................................. 19,127

d. Office Supplies Expense.................................................. 5,242

e. Insurance Expense............................................................ 2,800

f. Interest Receivable.......................................................... 750

g. Interest Expense.............................................................. 3,500

End. Bal. 587 End. Bal. 2,200

Exercise 3-3 (25 minutes)

a. Depreciation Expense—Equipment................................. 16,000

b. Insurance Expense............................................................ 5,960

c. Office Supplies Expense.................................................. 2,626

d. Unearned Fee Revenue..................................................... 5,000

e. Insurance Expense............................................................ 4,600

f. Wages Expense................................................................. 4,000

Exercise 3-4 (25 minutes)

May 12 Legal Fees Payable............................................. 2,500

May 20 Interest Payable.................................................. 2,080

May 3 Salaries Payable.................................................. 3,600

Exercise 3-5 (15 minutes)

Exercise 3-6 (15 minutes)

Exercise 3-7 (25 minutes)

Dec. 31 Accounts Receivable............................................... 1,800

31 Depreciation Expense—Office Furniture............... 1,750

31 Salaries Expense...................................................... 2,450

31 Insurance Expense.................................................. 1,300

31 Office Supplies Expense......................................... 480

Exercise 3-8 (20 minutes)

Balance Sheet Insurance Asset using Insurance Expense using

Exercise 3-9 (10 minutes)