Marshall 11e Ch04 PDF

CHAPTER
The Bookkeeping Process and

4 Transaction Analysis
SOLUTIONS:
M4.1.
Transaction/Adjustment A = L + SE Net Income
a. Issued common stock to the initial + Cash + Common

stockholders in exchange for their Stock
cash investment……………………..
b. Signed a lease for office space and + Prepaid

paid the first three months of rent in Rent
advance……………………………… – Cash
c. Purchased office equipment and + Equipment

shelving for cash…………………..... – Cash
d. Purchased merchandise inventory; + Merch. + Accounts

made a partial payment in cash, and Inventory Payable
agreed to pay the balance within 30 – Cash
days………………………………….
e. Sold merchandise inventory on + Acc. Rec. + Sales

account for an amount greater than – Merch. – Cost of
the cost of the inventory sold………... Inventory Goods Sold
f. Paid employees for the first two – Cash – Wages

weeks of the month………………….. Expense
g. At the end of the month, accrued + Wages – Wages

wages owed to employees for the Payable Expense
second two weeks of the month………
h. Recognized rent expense for one – Prepaid – Rent

month of the payment of rent in Rent Expense
advance in transaction b (as a
reclassification adjusting entry)………
© McGraw-Hill Education, 2017 4-1

Chapter 4 The Bookkeeping Process and Transaction Analysis
M4.2.
a. Paid wages that had been accrued – Cash – Wages

at the end of the prior month………… Payable
b. Collected accounts receivable from + Cash

sales recorded in the prior month…… – Acc. Rec.
c. Paid accounts payable owed for – Cash – Accounts

purchases made in the prior month…. Payable
d. Borrowed cash from a local bank + Cash + Notes

on a short-term promissory note……. Payable
e. Purchased merchandise inventory + Merch. Inv.

for cash……………………………… – Cash
f. Incurred and paid utilities expense – Cash – Utilities

for the month………………………… Expense
g. At the end of the month, accrued + Interest – Interest

interest on the short-term promissory Payable Expense
note recorded in transaction d……….
h. Recognized rent expense for one – Prepaid – Rent

month of the 3-month payment of rent Rent Expense
in advance made in the prior month (as
a reclassification adjusting entry)…….
M4.3.
a. Accounts Payable

Instructor’s Manual / Solutions Manual
Beginning balance 9,000

Payments to suppliers ? . Purchases on account 18,300
Ending balance 10,200
Solution: $9,000 + $18,300 - ? = $10,200

Payments to suppliers during the month = $17,100
b. Accounts Receivable
Beginning balance 10,700 Collections from

Credit sales ? customers 38,000
Solution: $10,700 + ? - $38,000 = $9,900

Credit sales during the month = $37,200
M4.4.
a. Supplies

Supplies purchased 15,600 Supplies used ?
Solution: $4,800 + $15,600 - ? = $6,400

Supplies used during the month = $14,000
b. Wages Payable
Beginning balance ?
Wages paid 56,000 Wages accrued 59,000
Solution: $ ? + $59,000 - $56,000 = $11,600

Wages Payable at the beginning of the month = $8,600
E4.5.
Assets = Liabilities + Stockholders’ Equity
Accounts Merchandise Notes Accounts Paid-in Retained
Cash + Receivable + Inventory + Equipment = Payable + Payable + Capital + Earnings + Rev - Exp
a. +16,000 +16,000
b. +10,000 +10,000
© The McGraw-Hill Companies, Inc., 2014 4-3

c. -3,500 +3,500
d. -2,800 -2,800
e. -18,000 +30,000 +12,000
f. +13,000 -8,000 +13,000 -8,000
g. +200 -200
h. -2,400 +8,400 +6,000
i. +7,800 +19,200 -18,000 +27,000 - 18,000
j. +3,700 * -3,700
k. +6,320 -6,320
l. -9,440 -9,440
______ ______ ______ _____ ______ ______ ______ _____ ______ ______
16,980 + 12,880 + 12,400 + 3,500 = 10,000 + 12,460 + 16,000 + + 40,000 - 32,700
Month-end totals: Assets $45,760 = Liabilities $22,460 + Stockholders' equity $23,300
Net income for the month: Revenues $40,000 - Expenses $32,700 = Net income $7,300
* Ordinarily, the Wages Payable account would be increased for employee wage expense
that has been incurred but not yet paid.
Optional Continuation:
BLUE CO. STORES, INC.
Income Statement
Sales……………………………………………………………….. $40,000
Cost of goods sold…………………………………………………. (26,000)
Gross profit………………………………………………………… $14,000
Rent expense………………………………………………………. (2,800)
Wages expense…………………………………………………….. (3,700)
Advertising expense……………………………………………….. (200)
Net income (this exercise ignores income taxes)………………….. $ 7,300

E4.5. (continued)
BLUE CO. STORES, INC.
Balance Sheet
Assets:
Cash………………………………………………………………... $16,980
Accounts receivable……………………………………………….. 12,880
Merchandise inventory…………………………………………….. 12,400
Total current assets………………………………………………… $42,260
Equipment (this exercise ignores depreciation)…………………… 3,500
Total assets………………………………………………………… $45,760
Liabilities:
Notes payable……………………………………………………… $10,000
Accounts payable………………………………………………….. 12,460
Total liabilities…………………………………………………….. $22,460
Stockholders’ Equity:
Paid-in Capital……………………………………………………... $16,000
Retained earnings *………………………………………………... 7,300
Total stockholders’ equity…………………………………………. $23,300
Total liabilities and stockholders’ equity………………………….. $45,760
* Since this was the first month of operations, the Retained Earnings account would have
a $0 beginning balance. Thus, the net income for the month creates a positive balance in
retained earnings.
E4.6.
Assets = Liabilities + Stockholders Equity
Trans- Accounts Notes Accounts Paid-in Retained

action Cash + Receivable + Supplies + Equipment = Payable + Payable + Capital + Earnings + Rev - Exp
a. +6,000 +6,000
b. +9,000 +9,000
c. -8,900 +8,900
d. -900 +900
e. +1,700 -1,700
f. +4,650 +2,400 +7,050
g. -4,200 -4,200
h. -1,100 +1,100
i. +3,750 +5,450 +9,200
j. +5,100* -5,100
k. -1,700 -1,700
l. +1,500 -1,500
_____ ______ _____
9,800 + 6,350 + 300 + 8,900 = 9,000 + 6,800 + 6,000 + + 16,250 - 12,700

E4.6. (continued)
Month-end totals: Assets $25,350 = Liabilities $15,800 + Stockholders' Equity $9,550
Net income (loss) for the month: Revenues $16,250 - Expenses $12,700 = Net Income $3,550
* Ordinarily, the Wages Payable account would be increased for employee wage expense that has been
incurred but not yet paid.
Optional Continuation:
CARDINAL MOWING SERVICES, INC.

Income Statement
Service revenue ......... ........... ........... ........... ........... ........... ........... $16,250
Gasoline, oil, and trash bags (i.e, cost of services provided) ........... (1,700)
Wages expense .......... ........... ........... ........... ........... ........... ........... (9,300)
Advertising expense .. ........... ........... ........... ........... ........... ........... (1,700)
Net income (this exercise ignores income taxes) ...... ........... ........... $ 3,550
CARDINAL MOWING SERVICES, INC.

Balance Sheet
Assets:
Cash .. ........... ........... ........... ........... ........... ........... ........... ........... $ 9,800
Accounts receivable .. ........... ........... ........... ........... ........... ........... 6,350
Supplies ......... ........... ........... ........... ........... ........... ........... ........... 300
Total current assets .... ........... ........... ........... ........... ........... ........... $16,450
Equipment (this exercise ignores depreciation) ........ ........... ........... 8,900
Total assets .... ........... ........... ........... ........... ........... ........... ........... $25,350
Liabilities:
Notes payable ........... ........... ........... ........... ........... ........... ........... $ 9,000
Accounts payable ...... ........... ........... ........... ........... ........... ........... 6,800
Total liabilities .......... ........... ........... ........... ........... ........... ........... $15,800
Paid-in Capital........... ........... ........... ........... ........... ........... ........... $ 6,000
Retained earnings * ... ........... ........... ........... ........... ........... ........... 3,550
Total stockholders’ equity ..... ........... ........... ........... ........... ........... $ 9,550
Total liabilities and stockholders’ equity ...... ........... ........... ........... $25,350
* Since this was the first month of operations, the Retained Earnings account would have
a $0 beginning balance. Thus, the net income for the month creates a positive balance in
retained earnings.

E4.7.
a. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 16,000
Cr. Paid-In Capital ....... ........... ........... ........... ........... ........... 16,000
b. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 10,000
Cr. Note Payable .......... ........... ........... ........... ........... ........... 10,000
c. Dr. Equipment ......... ........... ........... ........... ........... ........... ........... 3,500
Cr. Cash ........... ........... ........... ........... ........... ........... ........... 3,500
d. Dr. Rent Expense .... ........... ........... ........... ........... ........... ........... 2,800
Cr. Cash ........... ........... ........... ........... ........... ........... ........... 2,800
e. Dr. Merchandise Inventory . ........... ........... ........... ........... ........... 30,000

Cr. Cash ........... ........... ........... ........... ........... ........... ........... 18,000
Cr. Accounts Payable ... ........... ........... ........... ........... ........... 12,000
f. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 13,000
Cr. Sales Revenue ........ ........... ........... ........... ........... ........... 13,000
Dr. Cost of Goods Sold ....... ........... ........... ........... ........... ........... 8,000
Cr. Merchandise Inventory....... ........... ........... ........... ........... 8,000
g. Dr. Advertising Expense ..... ........... ........... ........... ........... ........... 200
Cr. Accounts Payable ... ........... ........... ........... ........... ........... 200
h. Dr. Merchandise Inventory . ........... ........... ........... ........... ........... 8,400

Cr. Cash ........... ........... ........... ........... ........... ........... ........... 2,400
i. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 7,800
Dr. Accounts Receivable ..... ........... ........... ........... ........... ........... 19,200
Cr. Sales Revenue ........ ........... ........... ........... ........... ........... 27,000
Dr. Cost of Goods Sold ...... ........... ........... ........... ........... ........... 18,000
Cr. Merchandise Inventory....... ........... ........... ........... ........... 18,000
j. Dr. Wages Expense . ........... ........... ........... ........... ........... ........... 3,700
Cr. Accounts (or Wages) Payable ....... ........... ........... ........... 3,700
k. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 6,320
Cr. Accounts Receivable .......... ........... ........... ........... ........... 6,320
l. Dr. Accounts Payable ........... ........... ........... ........... ........... ……… 9,440
Cr. Cash ........... ........... ........... ........... ........... ........... ……… 9,440
E4.8.
a. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 6,000
Cr. Paid-in Capital....... ........... ........... ........... ........... ........... 6,000

b. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 9,000
Cr. Note Payable ......... ........... ........... ........... ........... ........... 9,000
c. Dr. Equipment ......... ........... ........... ........... ........... ........... ........... 8,900
Cr. Cash ........... ........... ........... ........... ........... ........... ........... 8,900
d. Dr. Supplies . ........... ........... ........... ........... ........... ........... ........... 900
Cr. Cash ........... ........... ........... ........... ........... ........... ........... 900
e. Dr. Advertising Expense ..... ........... ........... ........... ........... ........... 1,700
f. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 4,650
Cr. Service Revenue ..... ........... ........... ........... ........... ........... 7,050
g. Dr. Wages Expense . ........... ........... ........... ........... ........... ........... 4,200
Cr. Cash ........... ........... ........... ........... ........... ........... ........... 4,200
h. Dr. Supplies . ........... ........... ........... ........... ........... ........... ........... 1,100
Cr. Cash ........... ........... ........... ........... ........... ........... ........... 1,100
i. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 3,750
j. Dr. Wages Expense . ........... ........... ........... ........... ........... ........... 5,100
Cr. Accounts (or Wages) Payable ....... ........... ........... ........... 5,100
k. Dr. Supplies Expense .......... ........... ........... ........... ........... ........... 1,700
Cr. Supplies ...... ........... ........... ........... ........... ........... ........... 1,700
l. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 1,500
E4.9.

a. Example transaction…………………… Supplies Supplies Exp

-2,800 -2,800
b. Paid an insurance premium of $960 Prepaid

for the coming year. An asset, prepaid Insurance
insurance, was debited………………… +960
Cash -960
c. Paid $6,400 of wages for the Cash Wages Exp

current month ... ............ ............ ……… -6,400 -6,400
d. Received $500 of interest income Cash Interest Inc

for the current month .... ............ ............ +500 +500
e. Accrued $1,400 of commissions payable Commissions Commissions

to sales staff for the current month ......... Payable +1,400 Expense -1,400
f. Accrued $260 of interest expense Interest Pay Interest Exp

at the end of the month . ………… ......... +260 -260
g. Received $4,200 on accounts receivable Cash +4,200

accrued at the end of the prior month….. Accounts Rec
-4,200
h. Purchased $1,200 of merchandise Merch Accounts

inventory from a supplier on account….. Inventory Payable
+1,200 +1,200
i. Paid $320 of interest expense for Cash Interest Exp

the month ......... ............ ............ ............ -320 -320
j. Accrued $1,600 of wages at the end Wages Pay Wages Exp

of the current month...... ............ ............ +1,600 -1,600
k. Paid $1,000 of accounts payable………. Cash Accounts Pay

-1,000 -1,000
E4.9. (continued)
Journal entries:
a. Dr. Supplies Expense ........... ........... ........... ........... ........... ........... 2,800
Cr. Supplies ....... ........... ........... ........... ........... ........... ……… 2,800
b. Dr. Prepaid Insurance ........... ........... ........... ........... ........... ……… 960
Cr. Cash .. ........... ........... ........... ........... ........... ........... ……… 960

c. Dr. Wages Expense .. ........... ........... ........... ........... ........... ........... 6,400
Cr. Cash .. ........... ........... ........... ........... ........... ........... ........... 6,400
d. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 500
Cr. Interest Income ......... ........... ........... ........... ........... ........... 500
e. Dr. Commissions Expense .. ........... ........... ........... ........... ........... 1,400

Cr. Commissions Payable .......... ........... ........... ........... ........... 1,400
f. Dr. Interest Expense . ........... ........... ........... ........... ........... ........... 260
Cr. Interest Payable ........ ........... ........... ........... ........... ........... 260
g. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 4,200
Cr. Accounts Receivable ........... ........... ........... ........... ........... 4,200
h. Dr. Merchandise Inventory .. ........... ........... ........... ........... ........... 1,200

Cr. Accounts Payable ..... ........... ........... ........... ........... ........... 1,200
i. Dr. Interest Expense . ........... ........... ........... ........... ........... ........... 320
Cr. Cash .. ........... ........... ........... ........... ........... ........... ........... 320
j. Dr. Wages Expense .. ........... ........... ........... ........... ........... ........... 1,600
Cr. Wages Payable ....... ........... ........... ........... ........... ........... 1,600
k. Dr. Accounts Payable .......... ........... ........... ........... ........... ........... 1,000
Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 1,000
E4.10.

a. Example transaction…………….. Supplies Supplies Exp

+1,400 +1,400
b. During the month, the board of Dividends Retained

directors declared a cash dividend Payable Earnings
of $28,800, payable next month +28,800 -28,800
c. Employees were paid $21,000 in

wages for their work during the Cash Wages Exp
first three weeks of the month ... -21,000 -21,000
d. Employee wages of $7,200 for the Wages Wages Exp

last week of the month have not Payable -7,200
been recorded ... ............ ............ +7,200
e. Revenues of $44,400 were earned Cash Service

during the month. Cash of $18,600 +18,600 Revenue
was received, and the balance is Acc. Rec. +44,400
due in 30 days .. ............ ............ +25,800
f. Newspaper ad costing $2,400 ran Accounts Advertising

this month, but will not be paid Payable Expense
for until next month ...... ............ +2,400 -2,400
g. Merchandise costing $9,300 was Cash +6,600 Sales +17,600

sold for $17,600. Cash of $6,600 Acc. Rec. +11,000
was received, and the balance is Cost Goods
due within 30 days ........ ............ Merch. Inv. -9,300 Sold -9,300
h. During the month, supplies were Supplies Supplies

purchased at a cost of $2,460, and -1,980 Expense
debited to the Supplies account. -1,980
$1,980 of supplies were used .....
i. Interest of $1,080 has been earned Interest Interest

on a note receivable, but has not Receivable Revenue
yet been received .......... ............ +1,080 +1,080
E4.10. (continued)

j. Issued 2,400 shares of $10 par value Cash Common

common stock for $52,800 in cash. +52,800 Stock
+52,800 *
* Alternative solution: The “Additional Paid-In Capital” account has not been introduced in
Chapter 4 (our attempt to keep it as simple as possible), but this is an opportunity to discuss the
concept (for instructors who are so inclined):
j. Issued 2,400 shares of $10 par value Cash Common

common stock for $52,800 in cash. +52,800 Stock
+24,000
Additional
Paid-In Capital
+28,800
The point to emphasize at this early stage is the difference between the paid-in capital and
retained earnings components of stockholders’ equity.
Journal entries:
a. Dr. Supplies . ........... ........... ........... ........... ........... ........... ……… 1,400
Cr. Supplies Expense .... ........... ........... ........... ........... ........... 1,400
b. Dr. Retained Earnings ......... ........... ........... ........... ........... ........... 28,800
Cr. Dividends Payable... ........... ........... ........... ........... ........... 28,800
c. Dr. Wages Expense .. ........... ........... ........... ........... ........... ........... 21,000
Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 21,000
d. Dr. Wages Expense .. ........... ........... ........... ........... ........... ........... 7,200
Cr. Wages Payable ........ ........... ........... ........... ........... ........... 7,200
e. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 18,600
Dr. Accounts Receivable...... ........... ........... ........... ........... ........... 25,800
Cr. Service Revenue ...... ........... ........... ........... ........... ........... 44,400
f. Dr. Advertising Expense ...... ........... ........... ........... ........... ........... 2,400
Cr. Accounts Payable .... ........... ........... ........... ........... ........... 2,400
E4.10. (continued)
g. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 6,600
Dr. Accounts Receivable ...... ........... ........... ........... ........... ........... 11,000
Cr. Sales ........... ........... ........... ........... ........... ........... ……… 17,600
Dr. Cost of Goods Sold ........ ........... ........... ........... ........... ........... 9,300
Cr. Merchandise Inventory........ ........... ........... ........... ........... 9,300

h. Dr. Supplies Expense .......... ........... ........... ........... ........... ........... 1,980
Cr. Supplies ....... ........... ........... ........... ........... ........... ........... 1,980
i. Dr. Interest Receivable ......... ........... ........... ........... ........... ........... 1,080
Cr. Interest Revenue ...... ........... ........... ........... ........... ........... 1,080
j. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 52,800
Cr. Common Stock ....... ........... ........... ........... ........... ........... 52,800
Alternative solution: The “Additional Paid-In Capital” account has not been introduced
in Chapter 4 (our attempt to keep it as simple as possible), but this is an opportunity to
discuss the concept for instructors who are so inclined:
j. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 52,800
Cr. Common Stock ....... ........... ........... ........... ........... ........... 24,000
Cr. Additional Paid-in Capital .. ........... ........... ........... ........... 28,800

E4.11.
a. Example transaction...... ............ ............ . +1,100 +1,100

b. Paid an insurance premium of
$720 for the coming year. An asset, -720
"prepaid insurance" was debited… ......... +720
c. Recognized insurance for one month
from the above premium via a
reclassification adjusting entry… ........... -60 -60
d. Paid $1,600 of wages accrued at the

end of the prior month .. ............ ………. -1,600 -1,600
e. Paid $5,200 of wages for the

current month ... ............ ............ ............ -5,200 -5,200
f. Accrued $1,200 of wages at the end

of the current month...... ............ ............ +1,200 -1,200
g. Received cash of $3,000 on accounts +3,000

receivable accrued in prior month .......... -3,000
Journal entries:
a. Dr. Accounts Receivable ...... ........... ........... ........... ........... ........... 1,100
b. Dr. Prepaid Insurance ........... ........... ........... ........... ........... ……… 720
Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 720
c. Dr. Insurance Expense ......... ........... ........... ........... ........... ........... 60

Cr. Prepaid Insurance .... ........... ........... ........... ........... ........... 60
d. Dr. Wages Payable .. ........... ........... ........... ........... ........... ........... 1,600
Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 1,600
e. Dr. Wages Expense .. ........... ........... ........... ........... ........... ........... 5,200
Cr. Cash ........... ........... ........... ........... ........... ........... ........... 5,200
f. Dr. Wages Expense .. ........... ........... ........... ........... ........... ........... 1,200
Cr. Wages Payable ........ ........... ........... ........... ........... ........... 1,200
g. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 3,000
Cr. Accounts Receivable ........... ........... ........... ........... ……… 3,000
E4.12.

a. Example transaction .. ........... ……… +700 +700
b. During the month supplies was

debited $2,600 for supplies purchased.
The total cost of supplies actually used
during the month was $1,900 ........... -1,900 -1,900
c. Received $1,700 of cash from clients

for services provided during the
current month ........... ........... ........... +1,700 +1,700
d. Paid $950 of accounts payable .......... -950 -950
e. Received $750 of cash from clients

for revenues accrued at the end of +750
the prior month .......... ........... ........... -750
f. Received $400 of interest income +400

accrued in prior month .......... ........... -400
g. Received $825 of interest income

for the current month . ........... ........... +825 +825
h. Accrued $370 of interest income

earned in the current month... ........... +370 +370
i. Paid $2,100 of interest expense

for the month . ........... ........... ........... -2,100 -2,100
j. Accrued $740 of interest expense

at the end of the month .......... ........... +740 -740
k. Accrued $1,600 of commissions

payable to sales staff for the current
month ........... ........... ........... ........... +1,600 -1,600

E4.12. (continued) Journal entries:

a. Dr. Supplies . ........... ........... ........... ........... ........... ........... ........... 700
Cr. Supplies Expense .... ........... ........... ........... ........... ........... 700
b. Dr. Supplies Expense ........... ........... ........... ........... ........... ……… 1,900
Cr. Supplies ....... ........... ........... ........... ........... ........... ........... 1,900
c. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 1,700
Cr. Service Revenue ...... ........... ........... ........... ........... ........... 1,700
d. Dr. Accounts Payable .......... ........... ........... ........... ........... ........... 950
Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 950
e. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 750
Cr. Accounts Receivable ........... ........... ........... ........... ……… 750
f. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 400
Cr. Interest Receivable .. ........... ........... ........... ........... ........... 400
g. Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 825
Cr. Interest Income ........ ........... ........... ........... ........... ........... 825
h. Dr. Interest Receivable ......... ........... ........... ........... ........... ........... 370
Cr. Interest Income ........ ........... ........... ........... ........... ........... 370
i. Dr. Interest Expense . ........... ........... ........... ........... ........... ........... 2,100
Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 2,100
j. Dr. Interest Expense . ........... ........... ........... ........... ........... ........... 740
Cr. Interest Payable ......... ........... ........... ........... ........... ........... 740
k. Dr. Commissions Expense ... ........... ........... ........... ........... ........... 1,600
Cr. Commissions Payable ......... ........... ........... ........... ........... 1,600
E4.13.

Prepare an analysis of the change in stockholders' equity for the month, showing the
effects of the net loss and dividends:
Balance, February 1, 2016 .... ........... ........... ........... ........... $315,000
Revenues ....... ........... ........... ........... ........... ........... ........... $ 61,000
Expenses........ ........... ........... ........... ........... ........... ........... (65,000) (4,000)
Dividends ...... ........... ........... ........... ........... ........... ........... (6,000)
Balance, February 28, 2016 .. ........... ........... ........... ........... $ 305,000
E4.14.
a. (Revenues - $312,000 Expenses) = $84,000 Net income
Revenues = $396,000
b. Cash receipts are not revenues. Revenues are earned from selling products or
delivering services. The cash receipt from a revenue transaction may occur before
the revenue has been earned (i.e., prepayments from customers for magazine
subscriptions) or after the revenue has been earned (i.e., collection of an account
receivable).
E4.15.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity  Net income = Revenues - Expenses
a. Receipt of note on April 1, 2016:
Notes Receivable
+18,000
Account Receivable
-18,000
b. Accrual of 9 month's interest at December 31, 2016:

Interest Interest
Receivable Revenue
+2,025 +2,025
c. Collection of note and interest at March 31, 2017:

Cash Interest
+20,700 Revenue
Note Receivable +675
-18,000
Interest Receivable
-2,025
E4.15. (continued)
Journal entries:
a. 4/1/2016
Dr. Note Receivable ........... ........... ........... ........... ........... ……… 18,000

b. 12/31/2016
Dr. Interest Receivable ........ ........... ........... ........... ........... ........... 2,025
Cr. Interest Revenue ($18,000 * 15% * 9/12) .. ........... ........... 2,025
c. 3/31/2017
Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 20,700
Cr. Note Receivable ..... ........... ........... ........... ........... ........... 18,000
Cr. Interest Receivable . ........... ........... ........... ........... ……… 2,025
Cr. Interest Revenue ..... ........... ........... ........... ........... ........... 675
In entry c, only $2,025 of the total interest of $2,700 had been accrued, so the Interest
Receivable account is reduced by the $2,025 that had been accrued in 2016; the other
$675 that is received is recorded as interest revenue for 2017, the year in which it was
earned.
E4.16.
a. Converted account payable to a note payable on February 1:
Accounts Payable
-42,000
Note Payable
+42,000
b. Accrued interest expense for February and March ($42,000 * 7% * 2/12)

Interest Payable Interest
+490 Expense
-490
c. Paid note and accrued interest, including interest for April and May, on May 31:
Cash Note Payable Interest
-42,980 -42,000 Expense
Interest Payable -490
-490
E4.16. (continued)
Journal entries:
a. February 1
Dr. Accounts Payable .......... ........... ........... ........... ........... ........... 42,000
Cr. Note Payable ......... ........... ........... ........... ........... ........... 42,000
b. March 31
Dr. Interest Expense ........... ........... ........... ........... ........... ........... 490
Cr. Interest Payable ($42,000 * 7% * 2/12) ..... ........... ........... 490

c. May 31
Dr. Interest Expense ........... ........... ........... ........... ........... ……… 490
Dr. Interest Payable ........... ........... ........... ........... ........... ……… 490
Dr. Note Payable .... ........... ........... ........... ........... ........... ........... 42,000
Cr. Cash .......... ........... ........... ........... ........... ........... ........... 42,980
E4.17.
a. Net income for October would be overstated, because an expense was not recorded.
b. Net income for November would be understated, because November expenses would
include an expense from October.
c. There wouldn't be any effect on net income for the two months combined, because
the overstatement and understatement offset.
d. To match revenues and expenses, which results in more accurate financial

statements.
E4.18.
Retained
Net Income Earnings
Amounts before adjustment .. ........... ........... ........... ........... $118,000 $455,000
Revenue increase adjustment ........... ........... ........... ........... 25,000 25,000
Expense increase adjustment. ........... ........... ........... ........... (42,000) (42,000)
Amounts after adjustment ..... ........... ........... ........... ........... $101,000 $438,000

E4.19.
a. $6,000 + ? - $7,500 = $10,500. Thus, the February 28 adjustment = $12,000
b. The Cash account would most likely have been credited for the amount of the February
transactions, and would represent the payment of previously accrued interest.
c. The Interest Expense account would most likely have been debited for the February
adjustment, and would represent the accrual of interest expense for February.
d. The entry would have been made to make the income statement and balance sheet more
accurate. The adjustment resulted in a better matching of revenue and expense for
February.
E4.20.
a. Accounts Receivable
Beginning balance 8,100 Collections from

Sales revenue for month 45,000 customers during month ?
Solution: $8,100 + $45,000 - ? = $3,300
Cash collected from customers during month = $49,800

Revenue for credit sales:
Accounts Sales
Receivable +45,000
+45,000
Collections from customers:
Cash
+49,800
Accounts
Receivable
-49,800
Dr. Accounts Receivable ..... ........... ........... ........... ........... ……… 45,000
Cr. Sales Revenue ........ ........... ........... ........... ........... ........... 45,000
Revenue from credit sales.
Dr. Cash ...... ........... ........... ........... ........... ........... ........... ........... 49,800
Collections from customers.
E4.20. (continued)
b. Supplies

Beginning balance 17,500 Cost of supplies used 76,100

Cost of supplies purchased ?
Solution: $17,500 + ? - $76,100 = $23,300

Cost of supplies purchased during the month = $81,900

Supplies purchased during month:
Supplies
+81,900
Cash Accounts
-81,900 or Payable
+81,900
Supplies used during month:

Supplies Supplies
-76,100 Expense
-76,100
Dr. Supplies . ........... ........... ........... ........... ........... ........... ........... 81,900
Cr. Cash or Accounts Payable .. ........... ........... ........... ……… 81,900
Supplies purchased during month.
Dr. Supplies Expense .......... ........... ........... ........... ........... ........... 76,100
Cr. Supplies ...... ........... ........... ........... ........... ……… .......... 76,100
Supplies used during month.
c. Wages Payable

Wages paid 62,000 Wages accrued 78,000
Ending balance ? .
Solution: $15,200 + $78,000 - $62,000 = ?

Wages payable at the end of the month = $31,200
E4.20. (continued)

c. Wage expense accrued during month:

Wages Wages
Payable Expense
+78,000 -78,000
Wages paid during month:

Cash Wages
-62,000 Payable
-62,000
Dr. Wages Expense ........... ........... ........... ........... ........... ……… 78,000
Cr. Wages Payable ....... ........... ........... ........... ........... ........... 78,000
Wage expense accrued during month.
Dr. Wages Payable . ........... ........... ........... ........... ........... ……… 62,000
Cr. Cash ........... ........... ........... ........... ........... ........... ……… 62,000
Wages paid during month.
P4.21.
a. Cash Common Stock
+500,000 +500,000
b. Cash Notes Payable

+250,000 +250,000
c. Cash Salaries Exp

-190,000 -190,000
d. Merch Accounts
Inventory Payable
+320,000 +320,000
e. Accounts Rec Sales

+455,000 +455,000 Cost of
Merch Inv Goods Sold
-290,000 -290,000
P4.21. (continued)

f. Cash Rent Exp

-55,000 -55,000
g. Equip Accounts
+75,000 Payable
Cash +50,000
-25,000
h. Cash Accounts
-360,000 Payable
-360,000
i. Cash Utilities Exp
-18,000 -18,000
j. Cash
+412,000
Accounts Rec
-412,000
k. Interest Payable Interest Exp

+30,000 -30,000
l. Rent Payable Rent Exp

+5,000 -5,000
Journal entries:
a. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 500,000
Cr. Common Stock ........ ........... ........... ........... ........... ........... 500,000
b. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 250,000
Cr. Notes Payable .......... ........... ........... ........... ........... ........... 250,000
c. Dr. Salaries Expense ........... ........... ........... ........... ........... ........... 190,000
Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 190,000
d. Dr. Merchandise Inventory .. ........... ........... ........... ........... ........... 320,000

P4.21. (continued)

e. Dr. Accounts Receivable ...... ........... ........... ........... ........... ........... 455,000
Cr. Sales ........... ........... ........... ........... ........... ........... ........... 455,000
Dr. Cost of Goods Sold ........ ........... ........... ........... ........... ........... 290,000
Cr. Merchandise Inventory.......... ........... ........... ........... ........... 290,000
f. Dr. Rent Expense ..... ........... ........... ........... ........... ........... ........... 55,000
Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 55,000
g. Dr. Equipment .......... ........... ........... ........... ........... ........... ........... 75,000
Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 25,000
h. Dr. Accounts Payable ........... ........... ........... ........... ........... ……… 360,000
Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 360,000
i. Dr. Utilities Expense ........... ........... ........... ........... ........... ........... 18,000
Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 18,000
j. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 412,000
k. Dr. Interest Expense . ........... ........... ........... ........... ........... ........... 30,000
Cr. Interest Payable ....... ........... ........... ........... ........... ........... 30,000
l. Dr. Rent Expense ..... ........... ........... ........... ........... ........... ........... 5,000
Cr. Rent Payable (or Accounts Payable) ........... ........... ……… 5,000

P4.22.
a. Solution approach: Prepare a T-account to determine the Cash account balance, and
then review the results of the horizontal model representations (or journal entries above).
Since there are a limited number of transactions in Problem 4.21, the balances of all of
the other accounts should be easy to determine.
Cash
a. 500,000 c. 190,000
b. 250,000 f. 55,000
j. 412,000 g. 25,000
h. 360,000
i. 18,000
514,000
P4.22. (continued)
a. KISSICK CO.
Income Statement
Sales .. ........... ........... ........... ........... ........... ........... ........... ........... $ 455,000
Cost of goods sold ..... ........... ........... ........... ........... ........... ........... (290,000)
Gross profit ... ........... ........... ........... ........... ........... ........... ........... $ 165,000
Rent expense . ........... ........... ........... ........... ........... ........... ........... (60,000)
Utilities expense ........ ........... ........... ........... ........... ........... ........... (18,000)
Salaries expense ........ ........... ........... ........... ........... ........... ........... (190,000)
Loss from operations . ........... ........... ........... ........... ........... ........... $(103,000)
Interest expense ......... ........... ........... ........... ........... ........... ........... (30,000)
Net loss (the problem ignores income taxes) ........... ........... ........... $(133,000)

KISSICK CO.
Balance Sheet
Assets:
Cash .. ........... ........... ........... ........... ........... ........... ........... ........... $ 514,000
Accounts receivable .. ........... ........... ........... ........... ........... ........... 43,000
Merchandise inventory .......... ........... ........... ........... ........... ........... 30,000
Total current assets .... ........... ........... ........... ........... ........... ........... $ 587,000
Equipment (the problem ignores depreciation) ......... ........... ........... 75,000
Total assets .... ........... ........... ........... ........... ........... ........... ........... $ 662,000
Liabilities:
Accounts payable ...... ........... ........... ........... ........... ........... ........... $ 10,000
Interest payable ......... ........... ........... ........... ........... ........... ........... 30,000
Rent payable .. ........... ........... ........... ........... ........... ........... ........... 5,000
Total current liabilities .......... ........... ........... ........... ........... ........... $ 45,000
Notes payable ........... ........... ........... ........... ........... ........... ........... 250,000
Total liabilities .......... ........... ........... ........... ........... ........... ........... $ 295,000
Common stock ......... ........... ........... ........... ........... ........... ........... $ 500,000
Deficit * ......... ........... ........... ........... ........... ........... ........... ........... (133,000)
Total stockholders’ equity ..... ........... ........... ........... ........... ........... $ 367,000
Total liabilities and stockholders’ equity ...... ........... ........... ........... $ 662,000
* Since this was the first year of operations, the Retained Earnings account would have a
$0 beginning balance. Thus, the net loss for the year creates a deficit.
P4.22. (continued)
b. Note to Instructor: Students should be able to determine the net loss amount
because there are so few transactions to analyze in Problem 4-21 (the solution to these
transactions is provided on the text’s website). Begin the in-class discussion by asking,
“What do you think went wrong that caused such a large net loss?”
 Point out that it is not unusual for a start-up company to show a significant net
loss in the first year of operations—because of the cost of organizing the
business, and because the revenue-generating process may be delayed for several
months (or longer) until the firm’s products can be successfully marketed.
 Kissick Co. is a merchandising firm (not a manufacturer) because it has

purchased $320,000 of Merchandise Inventory. The company must be renting its
store location because it has incurred rent expense of $60,000, but owns no land
or buildings.
 Note that the Cash account represents approximately 78% of Kissick Co.’s total
assets!

 Much of the firm’s cash was borrowed on a three-year, 12% note payable (as
opposed to generating cash flows from operations). Thus, interest and principal
payments will be substantial in the firm’s second and third year of operations—
and this adds risk to the firm’s already shaky earnings prospects.
 Some of the excess cash may be only temporarily available. For example, much
of the excess cash is likely to be needed for the acquisition of sales facilities, so
that the firm will be able to reduce its rent expense in future years.
 Alternatively, if there are no immediate plans for long-term asset acquisitions,

then most or all of the $250,000 note payable should be repaid to eliminate the
substantial interest obligation (especially at such a high interest rate of 12%).
 Any remaining excess cash that is not needed in the day-to-day operations of the
firm should be invested in short-term securities (to earn a return on investment of
some kind).
 Salary expense of $190,000 seems to be extremely high for a firm with less than
$500,000 in sales.
P4.23.
a. Net sales ....... ........... ........... ........... ........... ........... ........... ........... ........... $372,000
Cost of goods sold ..... ........... ........... ........... ........... ........... ........... ........... (166,000)
Gross profit ... ........... ........... ........... ........... ........... ........... ........... ……… $206,000
General and administrative expenses ........... ........... ........... ........... ……… (41,000)
Advertising expense .. ........... ........... ........... ........... ........... ........... ……… (38,000)
Other selling expenses........... ........... ........... ........... ........... ........... ........... (21,000)
Income from operations (operating income) . ........... ........... ........... ……… $106,000
b. Income from operations (operating income) . ........... ........... ........... ……… $106,000
Interest expense ......... ........... ........... ........... ........... ........... ........... ……… (31,000)
Income before taxes . ........... ........... ........... ........... ........... ........... ……… $ 75,000
Income tax expense ... ........... ........... ........... ........... ........... ........... ……… (19,000)
Net income .... ........... ........... ........... ........... ........... ........... ........... ........... $ 56,000
P4.24.
a. Net sales ........ ........... ........... ........... ........... ........... ........... ........... ........... $210,000
Cost of goods sold ..... ........... ........... ........... ........... ........... ........... ........... (78,000)
Gross profit ... ........... ........... ........... ........... ........... ........... ........... ........... $132,000
Selling, general and administrative expenses ........... ........... ........... ……… (31,000)
Research and development expenses ........... ........... ........... ........... ……… (8,000)
Income from operations (operating income) . ........... ........... ........... ……… $ 93,000

b. Income from operations (operating income) . ........... ........... ........... ……… $ 93,000
Interest expense ......... ........... ........... ........... ........... ........... ........... ........... (16,000)
Income before taxes .. ........... ........... ........... ........... ........... ........... ……… $ 77,000
Provision for income taxes .... ........... ........... ........... ........... ........... ........... (19,000)
Net income .... ........... ........... ........... ........... ........... ........... ........... ........... $ 58,000

P4.25.
a. 1/10/16. Record as an expense the cost of paper napkins purchased for cash:
Cash Supplies
-4,800 (Note: An increase in Supplies Expense
Expense decreases Net Income.) -4,800
b. 1/31/16. Remove from the expense account and set up as an asset the cost of the paper
napkins on hand January 31.
Supplies Supplies
+3,850 (Note: A decrease in Supplies Expense
Expense increases Net Income.) +3,850
c. 1/10/16. Set up as an asset the cost of paper napkins purchased for cash.
Supplies
+4,800
Cash
-4,800
d. 1/31/16. Record the cost of paper napkins used in January.

Supplies Supplies
-950 Expense
-950
Journal entries:
a. 1/10/16
Dr. Paper Napkin Expense (or Supplies Expense) .. ........... ........... 4,800
Cr. Cash ........... ........... ........... ........... ........... ........... ……… 4,800
To record as an expense the cost of paper napkins purchased for cash.
b. 1/31/16
Dr. Paper Napkins on Hand (or Supplies) .. ........... ........... ……… 3,850
Cr. Paper Napkin Expense (or Supplies Expense) ..... ........... 3,850
To remove from the expense account and set up as an asset the cost
of paper napkins on hand January 31.
c. 1/10/16
Dr. Paper Napkins on Hand (or Supplies).. ........... ........... ……… 4,800
Cr. Cash ........... ........... ........... ........... ........... ........... ........... 4,800
To set up as an asset the cost of paper napkins purchased for cash.
P4.25. (continued)

d. 1/31/16
Dr. Paper Napkin Expense (or Supplies Expense) . ........... ........... 950
Cr. Paper Napkins on Hand ..... (or Supplies) .. ........... ........... 950
To record the cost of paper napkins used in January.
e. Each approach results in the same expense for January ($950) and the same asset
amount ($3,850) reported on the January 31 balance sheet.
P4.26.
a. Cash Rent Exp.
-18,000 -18,000
b. Prepaid Rent Rent Exp.

+12,000 +12,000
c. Prepaid Rent
+18,000
Cash
-18,000
d. Prepaid Rent Rent Exp.

-6,000 -6,000
e. Prepaid Rent Rent Exp.

-6,000 -6,000
Journal entries:
a. Dr. Rent Expense .... ........... ........... ........... ........... ........... ........... 18,000
Cr. Cash ........... ........... ........... ........... ........... ........... ……… 18,000
b. Dr. Prepaid Rent ..... ........... ........... ........... ........... ........... ........... 12,000
Cr. Rent Expense ......... ........... ........... ........... ........... ........... 12,000
c. Dr. Prepaid Rent ..... ........... ........... ........... ........... ........... ........... 18,000
Cr. Cash ........... ........... ........... ........... ........... ........... ........... 18,000
d. Dr. Rent Expense .... ........... ........... ........... ........... ........... ........... 6,000
Cr. Prepaid Rent ........... ........... ........... ........... ........... ……… 6,000
P4.26. (continued)
e. Dr. Rent Expense ... ........... ........... ........... ........... ........... ........... 6,000
Cr. Prepaid Rent ........... ........... ........... ........... ........... ........... 6,000

f. The payment should be initially recorded with a debit to Prepaid Rent (as in part c),
because this would allow the bookkeeper to make the same adjusting entry every month.
P4.27.
Note: The key to this problem is for students to see that transactions have a direct
effect on the financial statements. To answer the questions in part b, students should be
thinking about how Campbell would record each of the transactions. To answer the
questions in part c, solve for the missing amounts in T-accounts for inventories, accounts
receivable, and “payable to suppliers and others” (i.e., accounts payable).
Assets Liabilities Revenues Expenses .
Cash and Accounts Payable to Cost of Marketing,

Cash Receivable, Inven- Suppliers Net Products Selling, and
Equivalents net tories & Others Sales Sold Administrative
a. Beginning balance . ………… 635 925 523

b. Net sales ............... ………… +8,268 +8,268
Cost of products sold ............. -5,370 -5,370
Marketing, selling, and
administrative expenses….. +1,508 -1,508
c. Purchases of inventory
on account ........... ............... +5,461 +5,461
Collections of accounts
receivable ............ ............... +8,233 -8,233
Payments to suppliers
and others............ ............... -6,965 -6,965
a. Ending balance ...... ………... $ 670 $1,016 $ 527
Note to Instructors: In this problem, it is assumed that Campbell runs all marketing, general, and administrative
expenses through the “payable to suppliers and others” category. It may well be that some of these types of expenses
were paid directly as cash payments without ever having been accrued prior to payment. It is also probable that some
of these expenses were run through the “accrued liabilities” caption, as shown on Campbell’s statement of earnings.
Likewise, it is possible that some of Campbell’s “research and development expenses” and “restructuring charges”
were run through the “payable to suppliers and others” caption. Thus, the answer for “payments to suppliers and
others” in part c is a crude approximation at best.
The $6,965 answer would need to be adjusted down (reduced) for any marketing, general and administrative expenses
that did not go through “payable to suppliers and others” and for any of these same expenses that were run though
other current liability accounts (such as the “accrued liabilities” caption mentioned above). The $6,965 answer would
need to be adjusted up (increased) for any of Campbell’s research and development expenses and restructuring charges
(or other types of expenses) that were run through the “payable to suppliers and others” caption.
Similarly, the accounts receivable and inventory captions as shown on Campbell’s balance sheet may well have been
affected by other transactions in addition to those included in this simplified model. Some accounts receivable may
have been reclassified as notes receivable, others may have been written off as uncollectible accounts or factored with
a finance company. Some inventory may have been lost, stolen, damaged, or written down under the lower of cost or
market rule. The point being that with some basic assumptions about Campbell’s transaction processing, we can arrive
at approximate—but never exact—results for the questions in part c of this problem.

P4.28.
a. BIG BLUE RENTAL CORP. Adjustments / Corrections .
Income Statement—August 2016 Preliminary Debit Credit Final
Commission revenue . ........... ........... ........... $27,000 $ $a)1,500 $28,500

Interest revenue ......... ........... ........... ........... 5,100 f ) 840 5,940
Total revenues ......... ........... ........... ........... $32,100 $ $ 2,340 $34,440
Rent expense . ........... ........... ........... ........... $ 3,060 $ $e)2,040 $ 1,020
Wages expense .......... ........... ........... ........... 7,140 d) 780 7,920
Supplies expense ....... ........... ........... ........... -- b)1,080 1,080
Interest expense ......... ........... ........... ........... -- c) 120 120
Total expenses ......... ........... ........... ........... $10,200 $ 1,980 $ 2,040 $10,140
Net income .... ........... ........... ........... ........... $21,900 $ 1,980 $ 4,380 $24,300
BIG BLUE RENTAL CORP. Adjustments / Corrections .

Balance Sheet—August 31, 2016 Preliminary Debit Credit Final
Cash ... ........... ........... ........... ........... ........... $ 2,400 $ $ $ 2,400
Notes receivable ........ ........... ........... ........... 78,000 78,000
Commissions receivable........ ........... ........... -- a)1,500 1,500
Interest receivable ..... ........... ........... ........... -- f ) 840 840
Prepaid rent ... ........... ........... ........... ........... -- e)2,040 2,040
Supplies ......... ........... ........... ........... ........... 3,900 b)1,080 2,820
Total assets .... ........... ........... ........... ........... $84,300 $ 4,380 $ 1,080 $87,600
Accounts payable ...... ........... ........... ........... $ 720 $ $ $ 720

Note payable.. ........... ........... ........... ........... 14,400 14,400
Interest payable ......... ........... ........... ........... 240 c) 120 360
Wages payable .......... ........... ........... ........... -- d) 780 780
Dividend payable ...... ........... ........... ........... -- g) 8,400 8,400
Total liabilities .......... ........... ........... ........... $15,360 $ $ 9,300 $24,660
Paid-in capital ........... ........... ........... ........... $14,400 $ $ $14,400

Retained earnings:
Balance, August 1 ..... ........... ........... ........... $32,640 $ $ $32,640
Net income .... ........... ........... ........... ........... 21,900 1,980 4,380 24,300
Dividends ...... ........... ........... ........... ........... -- g) 8,400 (8,400)
Balance, August 31 ... ........... ........... ........... $54,540 $ 10,380 $ 4,380 $48,540
Total stockholders' equity ..... ........... ........... $68,940 $ 10,380 $ 4,380 $62,940
Total liabilities and stockholders’ equity ...... $84,300 $ 10,380 $13,680 $87,600
Note: The net income line from the income statement is transferred down to the retained earnings
section of the balance sheet. Remember, net income increases retained earnings, and net income
is the link between the income statement and balance sheet

P4.28. (continued)
a. Calculation for item c:
$14,400 Notes payable * 10% interest rate * 1/12 = $120 accrued interest, one month.
Thus, the $240 preliminary balance in the Interest Payable account makes sense because
it represents interest for two months on the note payable that had been accrued between
the last interest payment date (May 31) and the end of last month (July 31).
Calculation for item e:

Too much was recorded as Rent Expense in August because the $3,060 rent payment
included a prepayment of the rent for September and October. Thus, the Prepaid Rent
(asset) account should be debited for $2,040 (2/3 * $3,060), and the Rent Expense
account should be credited for the same amount.
b. Adjustments are made at the end of an accounting period to properly reflect accrual
accounting in the financial statements. The accrual of a revenue item (i.e., an income
statement account) that has been earned but not yet collected will also result in an
increase to an asset account (i.e., a balance sheet account).
In this problem, items (a, commissions) and (f, interest) are examples of revenue accruals
that also result in increases to the related receivable accounts. Likewise, adjustments that
are made to accrue expenses (i.e., income statement accounts) result in increases to
liability accounts (i.e., balance sheet accounts). Items (c, interest) and (d, wages) are
examples of expense accruals that also increase the related payable accounts. For
reclassification-type adjustments, the same logic holds true. For example, the increase to
supplies expense on the income statement in item (b) is a result of the "using up" of an
asset on the balance sheet (i.e., Supplies).
c. Accrual accounting recognizes revenues and expenses as they occur, even though the cash
receipt from the revenue or the cash disbursement related to the expense may occur before
or after the event that causes revenue or expense recognition. Another way of stating this
would be to say that most adjustments are caused by either 1) the early or late receipt of
cash relative to when the revenue is earned, or 2) the early or late payment of cash relative
to when the expense is incurred. That is, all revenues need to be recorded in the period
earned, even if the company has not yet received the cash (i.e., items (a) and (f) in this
problem). The fact that cash has not yet been received is what caused the need for the
adjustment to begin with — so the Cash account itself cannot be affected! Likewise,
expenses must be recorded when incurred, such as items (c) and (d), even though cash has
not yet been paid. The cash payments will not be recorded until the next accounting
period when the interest and wages are paid.

P4.28. (continued)
c. When cash is received before the related revenue is earned, or when cash is paid before the
related expense has been incurred, reclassification-type adjustments are necessary. An
example of this is item (e). In this case, too much rent expense had been recorded initially
relative to the amount of rent expense actually incurred during the month. As a result, the
required adjustment is to reduce the amount of rent expense to be reported on the income
statement, which also results in an increase to prepaid rent on the balance sheet. Other
examples of adjustments might include depreciation expense, or the accrual of advertising
expense, for example.

Marshall 11e Ch04 PDF

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Marshall 11e Ch04 PDF

Hochgeladen von

Copyright:

Verfügbare Formate

CHAPTER

The Bookkeeping Process and

a. Issued common stock to the initial + Cash + Common

b. Signed a lease for office space and + Prepaid

c. Purchased office equipment and + Equipment

d. Purchased merchandise inventory; + Merch. + Accounts

e. Sold merchandise inventory on + Acc. Rec. + Sales

f. Paid employees for the first two – Cash – Wages

g. At the end of the month, accrued + Wages – Wages

h. Recognized rent expense for one – Prepaid – Rent

© McGraw-Hill Education, 2017 4-1

a. Paid wages that had been accrued – Cash – Wages

b. Collected accounts receivable from + Cash

c. Paid accounts payable owed for – Cash – Accounts

d. Borrowed cash from a local bank + Cash + Notes

e. Purchased merchandise inventory + Merch. Inv.

f. Incurred and paid utilities expense – Cash – Utilities

g. At the end of the month, accrued + Interest – Interest

h. Recognized rent expense for one – Prepaid – Rent

© McGraw-Hill Education, 2017 4-2

Beginning balance 9,000

Solution: $9,000 + $18,300 - ? = $10,200

Beginning balance 10,700 Collections from

Solution: $10,700 + ? - $38,000 = $9,900

Beginning balance 4,800

Solution: $4,800 + $15,600 - ? = $6,400

Solution: $ ? + $59,000 - $56,000 = $11,600

© The McGraw-Hill Companies, Inc., 2014 4-3

Month-end totals: Assets $45,760 = Liabilities $22,460 + Stockholders' equity $23,300

© McGraw-Hill Education, 2017 4-4

Trans- Accounts Notes Accounts Paid-in Retained

© The McGraw-Hill Companies, Inc., 2014 4-5

CARDINAL MOWING SERVICES, INC.

CARDINAL MOWING SERVICES, INC.

© McGraw-Hill Education, 2017 4-6

e. Dr. Merchandise Inventory . ........... ........... ........... ........... ........... 30,000

h. Dr. Merchandise Inventory . ........... ........... ........... ........... ........... 8,400

© The McGraw-Hill Companies, Inc., 2014 4-7

© McGraw-Hill Education, 2017 4-8

Transaction/Adjustment A = L + SE Net Income

a. Example transaction…………………… Supplies Supplies Exp

b. Paid an insurance premium of $960 Prepaid

c. Paid $6,400 of wages for the Cash Wages Exp

d. Received $500 of interest income Cash Interest Inc

e. Accrued $1,400 of commissions payable Commissions Commissions

f. Accrued $260 of interest expense Interest Pay Interest Exp

g. Received $4,200 on accounts receivable Cash +4,200

h. Purchased $1,200 of merchandise Merch Accounts

i. Paid $320 of interest expense for Cash Interest Exp

j. Accrued $1,600 of wages at the end Wages Pay Wages Exp

k. Paid $1,000 of accounts payable………. Cash Accounts Pay

© The McGraw-Hill Companies, Inc., 2014 4-9

e. Dr. Commissions Expense .. ........... ........... ........... ........... ........... 1,400

h. Dr. Merchandise Inventory .. ........... ........... ........... ........... ........... 1,200

© McGraw-Hill Education, 2017 4-10

Transaction/Adjustment A = L + SE Net Income

a. Example transaction…………….. Supplies Supplies Exp

b. During the month, the board of Dividends Retained

c. Employees were paid $21,000 in

d. Employee wages of $7,200 for the Wages Wages Exp

e. Revenues of $44,400 were earned Cash Service

f. Newspaper ad costing $2,400 ran Accounts Advertising

g. Merchandise costing $9,300 was Cash +6,600 Sales +17,600