Solutions - Chapter 3

CHAPTER 3
Adjusting Accounts
for Financial Statements
Learning Objectives – coverage by question

Mini- Cases
Exercises Problems
Exercises and Projects
LO1 – Identify the major steps in the

accounting cycle.
40 - 42, 46,
LO2 – Review the process of 21 - 23, 25, 33, 35,
47, 49, 55 - 58
journalizing and posting transactions. 29, 30 36, 38
52 - 54
40 - 43,
LO3 – Describe the adjusting 23, - 25, 32 - 36,
process and illustrate adjusting 46 - 49, 55 - 58
entries. 29, 30 38
52 - 54
40 - 42,
LO4 – Prepare financial statements
from adjusted accounts. 26 39 44, 47, 49, 55, 58
50, 53, 54
42, 44, 45,
LO5 – Describe the process of 31, 33,
27, 28, 30 49 - 51 55
closing temporary accounts. 37, 39
53, 54
LO6 – Analyzing changes in balance 40, 42, 49

24, 25, 29 34 - 36, 38 55, 56, 58
sheet accounts. 52 - 54
©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 3 3-1
QUESTIONS
Q3-1. The five major steps in the accounting cycle are:
1. Analyze business activity using transaction analysis based on the related

source documents.
2. Record results of the transaction analysis chronologically in the general
journal and create a trial balance.
3. Adjust the recorded data to update all accounts for expense and revenue
recognition not previously recognized.
4. Report the adjusted financial data in the form of financial statements.
5. Close the books by posting the adjusting and closing entries, which “zero
out” the temporary accounts.
Q3-2. The fiscal year is the annual accounting period adopted by a firm. A firm using a
fiscal year ending on December 31 is on a calendar-year basis.
Q3-3. Examples of source documents that underlie business transactions are invoices
sent to customers, invoices received from suppliers, bank checks, bank deposit
slips, cash receipt forms, and written contracts.
Q3-4. A general journal is a book of original entry that may be used for the initial
recording of any type of transaction. It contains space for dates and for accounts
to be debited and credited, columns for the amounts of the debits and credits, and
a posting reference column for numbers of the accounts that are posted.
Q3-5. When entries are posted, the page number and identifying initials of the
appropriate journal are placed next to the amounts in the appropriate accounts.
The account number is entered beside the related amount posted in the journal's
posting reference column. This procedure enables interested users to trace
amounts in the ledger back to the originating journal entry and permits us to know
which entries have been posted.
Q3-6. An adjusting journal entry is a journal entry made at the end of an accounting
period to reflect accural accounting. It usually affects a balance sheet account
and an income statement account and rarely involves cash.
Q3-7. A chart of accounts is a list of the accounts appearing in the general ledger, with
the account numbering system indicated. Normally the accounts are classified as
asset, liability, owners' equity, revenue, and expense accounts, and often the
numbering system identifies the account classification. For example, a coding
system might assign the numbers 100–199 to assets, 200–299 to liabilities, and
so on.

3-2 Financial Accounting, 6th Edition
Q3-8. Many of the transactions reflected in the accounting records through the first two
steps of the accounting cycle affect the net income of more than one period.
Therefore, adjustments to the account balances are ordinarily necessary at the
end of each accounting period to record the proper amount of revenue and to
match expenses with revenue properly. This process is also intended to achieve
a more accurate picture of financial position by adjusting balance sheet amounts
to show unexpired costs, up-to-date amounts of obligations, and so on.
Q3-9. 1. Allocating assets to expense to reflect expenses incurred during the period.
Example: Recording supplies used by debiting Supplies Expense and
crediting Supplies.
2. Allocating payments received in advance by crediting the revenue account to

reflect revenues earned during the period. Example: Recording service fees
earned by debiting Unearned Service Fees and crediting Service Fees
Earned.
3. Accruing expenses to reflect expenses incurred during the period that are not
yet paid or recorded. Example: Recording unpaid wages by debiting Wages
Expense and crediting Wages Payable.
4. Accruing revenues to reflect revenues earned during the period that are not
yet received or recorded. Example: Recording commissions earned by
debiting Commissions Receivable and crediting Commissions Earned.
Q3-10. Jan. 31 Insurance expense (+E, -SE) 78

Prepaid insurance (-A) 78
To record insurance expense for January ($1,872/24 = $78).
Q3-11. A contra account is an account that is related to, and deducted from, another
account when financial statements are prepared or when book values are
computed. Accumulated depreciation is deducted from the cost of a depreciable
asset in computing and portraying the asset's book value.
Q3-12. The building is five years old by the end of 2015, so the accumulated depreciation
of $800,000 represents five years of depreciation at an annual rate of $160,000
($800,000/5). If the annual depreciation is $160,000, then the expected life of the
building must be 25 years.
At the end of 2022, the building will be twelve years old, and the accumulated
depreciation will be 12×$160,000, or $1,920,000. The book value of the building
(defined as original cost less accumulated depreciation) will be $2,080,000.

Q3-13. (a) Jan. 1 Cash (+A) 9,720
Subscriptions received in advance (+L) 9,720
To record receipt of two-year subscriptions.
(b) Jan. 31 Subscriptions received in advance (-L) 405

Subscriptions revenue (+R,+SE) 405
To record subscription revenue earned during
January ($9,720/24 = $405).
Q3-14. Jan. 31 Wages expense (+E, -SE) 190

Wages payable (+L) 190
To record unpaid wages for Jan. 30–31
[($475/5)  2 = $190].
Q3-15. Jan. 31 Interest receivable (+A) 360

Interest income (+R,+SE) 360
To record interest earned during January.
Q3-16. The temporary accounts—sometimes called nominal accounts—are closed at

year-end. They consist principally of the income statement accounts (expense
and revenue accounts). (The Income Summary account and the Dividend
account are also closed if they are used.)
Q3-17. Step 1) Close revenue accounts: Debit each revenue account for an amount
equal to its balance, and credit the Retained Earnings account for the
total of revenues.
Step 2) Close expense accounts: Credit each expense account for an amount
equal to its balance, and debit the Retained Earnings account for the
total of expenses.
Q3-18. A post-closing trial balance ensures that an equality of debits and credits has
been maintained throughout the adjusting and closing procedures and that the
general ledger is in balance to start the next period. Only balance sheet accounts
appear in a post-closing trial balance. Depreciation Expense and Supplies
Expense are temporary accounts that should have been closed and should not
appear in the post-closing trial balance.

Q3-19. The cost principle and the matching concept support Dehning's handling of its
catalog costs. Prepaid Catalog Costs is an asset account that is initially recorded
at the amount that the catalogs cost Dehning. This is consistent with the cost
principle that states that assets are initially recorded at the amounts paid to
acquire the assets. The catalogs help Dehning generate sales revenues. The
matching concept states that the catalog costs should be matched as expenses
with the revenues they help generate. Dehning does this by expensing the
catalog costs over their estimated useful lives.
Q3-20. (a) Supplies Expense ($825 + $260  $630 = $455) for the period is omitted from
the income statement, overstating net income by $455 (ignoring taxes).
(b) Both Supplies and Owners' Equity are overstated by $455 on the January 31
balance sheet (again, before considering taxes).

MINI EXERCISES
M3-21. (45 minutes)

LO 2
a.
Balance Sheet Income Statement
Cash Noncash Contrib. Earned Net
Transaction Asset + Assets = Liabilities + Capital + Capital Revenues - Expenses = Income
June 1. Invested +12,000 +12,000
$12,000 = - =
Cash Common
cash.
Stock
June 2. Paid $950 -950 -950 +950

cash for = - = -950
Cash Retained Rent
June rent.
Earnings Expense
June 3 Purchased +6,400 +6,400
$6,400 of
Office Accounts
office = Payable - =
Equipment
equipment
on account.
June 6. Purchased -1,800 +3,800 +2,000

$3,800 of
Cash Supplies Accounts
supplies;
$1,800 cash, = Payable - =
$2,000 on
account.
June 11. $4,700 billed +4,700 +4,700 +4,700

for services.
Accounts Retained Service
= - = +4,700
Receivable Earnings Fees
Earned
June 17. Collected +3,250 -3,250

$3,250 on = - =
Cash Accounts
accounts.
Receivable
June 19. Paid $3,000 -3,000 -3,000

on office
Cash = Accounts - =
equipment
Payable
account.
June 25. Paid cash -900 -900

dividend = - =
Cash Retained
of $900.
Earnings
June 30. Paid $350 -350 -350 +350

utilities. = - = -350
Cash Retained Utilities
Earnings Expense
June 30. Paid $2,500 -2,500 -2,500 +2,500

salaries. -2,500
Cash = Retained - Salaries =
Earnings Expense
TOTALS 5,750 + 11,650 = 5,400 + 12,000 + 0 4,700 - 3,800 = 900

b. June 1 Cash (+A) 12,000
Common stock (+SE) 12,000
Owner invested cash for stock.
2 Rent expense (+E, -SE) 950

Cash (-A) 950
Paid June rent.
3 Office equipment (+A) 6,400

Accounts payable (+L) 6,400
Purchased office equipment on account.
6 Supplies (+A) 3,800

Cash (-A) 1,800
Purchased $3,800 of supplies; paid $1,800 down
with balance due in 30 days.
11 Accounts receivable (+A) 4,700

Service fees earned (+R,+SE) 4,700
Billed clients for services.
17 Cash (+A) 3,250

Accounts receivable (-A) 3,250
Collections from clients on account.
19 Accounts payable (-L) 3,000

Cash (-A) 3,000
Payment on account.
25 Retained earnings (-SE) 900

Cash (-A) 900
Issued dividends.
30 Utilities expense (+E, -SE) 350

Cash (-A) 350
Paid utilities bill for June.
30 Salaries expense (+E, -SE) 2,500

Cash (-A) 2,500
Paid salaries for June.

c.
+ Cash (A) - + Supplies (A) -
June 1 12,000 950 June 2 June 6 3,800
17 3,250 1,800 6
3,000 19
900 25
350 30 + Office Equipment (A) -
2,500 30 June 3 6,400
+ Accounts Receivable (A) - - Accounts Payable (L) +

June 11 4,700 3,250 June 17 June 19 3,000 6,400 June 3
2,000 June 6
- Common Stock (SE) + - Retained Earnings (SE) +

12,000 June 1 June 25 900
+ Rent Expense (E) -

June 2 950
- Service Fees Earned (R) + + Utilities Expense (E) -

4,700 June 11 June 30 350
+ Salaries Expense (E) -

June 30 2,500

M3-22. (45 minutes)
LO 2
a.
April 1 Invested +9,000 +9,000
$9,000 in = - =
Cash Common
cash.
Stock
April 2 Paid -2,850 +2,850

$2,850
Cash Prepaid = - =
cash for
Van Lease
lease.
April 3 Borrowed +10,000 +10,000
$10,000. = - =
Cash Note
Payable
April 3 Purchased -2,500 +5,500 +3,000

$5,500
Cash Equipment Accounts
equipment
Payable
for $2,500 = - =
cash with
rest on
account.
April 4 Paid -4,300 +4,300
$4,300
Cash Supplies = - =
cash for
supplies.
April 7 Paid $350 -350 -350 +350
cash for -350
Cash = Retained - Ad. =
ad.
Earnings Expense
April 21 Billed +3,500 +3,500 +3,500

$3,500 for +3,500
Accounts = Retained Cleaning - =
services
Receivable Earnings Fees
Earned
April 23 Paid -3,000 -3,000
$3,000
Cash = Accounts - =
cash on
Payable
account.
April 28 Collected +2,300 -2,300
$2,300 on = - =
Cash Accounts
account.
Receivable
April 29 Paid -1,000 -1,000

$1,000
Cash = Retained - =
cash
Earnings
dividend.
April 30 Paid -1,750 -1,750 +1,750
$1,750 -1,750
Cash = Retained - Wages =
cash for
Earnings Expense
wages.
April 30 Paid $995 -995 -995 +995
cash for -995
Cash = Retained - Van Fuel =
gas.
Earnings Expense
TOTALS 4,555 + 13,850 = 10,000 + 9,000 + -595 3,500 - 3,095 = 405

b. April 1 Cash (+A) 9,000
Common stock (+SE) 9,000
Owner invested cash for stock.
2 Prepaid van lease (+A) 2,850
Cash (-A) 2,850
Paid six months' lease on van.
3 Cash (+A) 10,000
Notes payable (+L) 10,000
Borrowed money from bank for one year at
10% interest.
3 Equipment (+A) 5,500
Cash (-A) 2,500
Purchased $5,500 of equipment; paid $2,500 down
with balance due in 30 days.
4 Supplies (+A) 4,300
Cash (-A) 4,300
Purchased supplies for cash.
7 Advertising expense (+E, -SE) 350
Cash (-A) 350
Paid for April advertising.
21 Accounts receivable (+A) 3,500
Cleaning fees earned (+R, +SE) 3,500
Billed customers for services.
23 Accounts payable (-L) 3,000
Cash (-A) 3,000
Payment on account.
28 Cash (+A) 2,300
Accounts receivable (-A) 2,300
Collections from customers on account.
29 Retained earnings (-SE) 1,000
Cash (-A) 1,000
Issued cash dividends.
30 Wages expense (+E, -SE) 1,750
Cash (-A) 1,750
Paid wages for April.
30 Van fuel expense (+E, -SE) 995
Cash (-A) 995
Paid for gasoline used in April.

c.
+ Cash (A) - + Accounts Receivable (A) -
April 1 9,000 2,850 April 2 April 21 3,500 2,300 April 28
3 10,000 2,500 3
28 2,300 4,300 4
350 7 + Prepaid Van Lease (A) -
3,000 23 April 2 2,850
1,000 29
1,750 30 + Equipment (A) -
995 30 April 3 5,500
+ Supplies (A) - - Notes Payable (L) +

April 4 4,300 10,000 April 3
- Accounts Payable (L) + - Retained Earnings (SE) +

April 23 3,000 3,000 April 3 April 29 1,000
- Common Stock (SE) + - Cleaning Fees Earned (R) +

9,000 April 1 3,500 April 21
+ Advertising Expense (E) - + Wages Expense (E) -

April 7 350 April 30 1,750
+ Van Fuel Expense (E) -

April 30 995

M3-23. (20 minutes)
LO 2, 3
a.
1. Received +20,100 +20,100
$20,100 in Cash Unearned
advance for = Service - =
contract Fees
work.
Jan. 1 Cash (+A) 20,100

Unearned service fees (+L) 20,100
To record fee received in advance.
b.
2. Adjusting -3,350 +3,350 +3,350
entry for Unearned Retained Service
work = Service Earnings Fees - = +3,350
completed Fees
by Jan. 31.
Jan. 31 Unearned service fees (-L) 3,350

Service fees (+R, +SE) 3,350
To reflect January service fees earned on
contract ($20,100/6 = $3,350).
c.
3. Adjusting +570 +570 +570
entry for Fees Retained Service
fees earned Receivable = Earnings Fees - = +570
but not
billed.
Jan. 31 Fees receivable (+A) 570

Service fees (+R, +SE) 570
To record unbilled service fees earned
at January 31.

M3-24. (15 minutes)
LO 3, 6
1.
1. Adjusting -185 -185 +185
entry for Prepaid Retained Insurance
prepaid Insurance = Earnings - Expense = -185
insurance
Jan. 31 Insurance expense (+E, -SE) 185

Prepaid insurance (-A) 185
To record January insurance expense
($6,660/36 = $185).
2.
2. Adjusting -1,080 -1,080 +1,080
entry for Supplies Retained Supplies
supplies Inventory = Earnings - Expense = -1,080
used
Jan. 31 Supplies expense (+E, -SE) 1,080

Supplies inventory (-A) 1,080
To record January supplies expense
($1,930  $850 = $1,080).
3.
Cash Noncash Contra Liabil- Contrib. Earned Net
Transaction - = + + Revenues - Expenses =
Asset + Assets Assets ities Capital Capital Income
3. Adjusting +62 -62 +62
entry for Accum. Retained Deprec. -62
deprecia- - Deprecn. Earnings - Expense =
tion of
equipment.
Jan. 31 Depreciation expense—Equipment (+E, -SE) 62

Accumulated depreciation—Equipment (+XA, -A) 62
To record January depreciation on office equipment
($5,952/96 = $62).
Continued next page

4.
4. Adjusting -875 +875 +875
entry for Unearned Retained Rent
rent = Rent Earnings Revenue - = +875
Liability
Jan. 31 Unearned rent liability (-L) 875

Rent liability (+R, +SE) 875
To record portion of advance rent earned in January.
5.
5. Adjusting +490 -490 +490
entry for Salaries Retained Salaries
accrued = Payable Earnings - Expense = -490
salaries
Jan. 31 Salaries expense (+E, -SE) 490

Salaries payable (+L) 490
To record accrued salaries at January 31.
M3-25. (15 minutes)

LO 2, 3, 6
(All amounts in thousands of Mexican pesos.)

a.
Inventory +78,023,979 +78,023,979
purchases Inventory = Accounts - =
(total) Payable
Inventories (+A)……………………………………. 78,023,979

Accounts payable (+L)……………………… 78,023,979
To record total purchases made at various dates.
b. Beginning AP balance + Purchases – Payments = Ending AP balance.
So, $15,210,743 + $78,023,979 - Payments = $22,535,802.

Thus, Payments = $70,698,920.

c.
Adjusting entry –73,387,487 –73,387,487 +73,387,487
for cost of Inventory Retained Cost of
= - = –73,387,487
goods sold for Earnings Goods Sold
2013.
* Beginning Inv balance + Purchases – Cost of goods sold = Ending Inv balance.
So, $13,849,931 + $78,023,979 – COGS = $18,486,423.
Thus, COGS = $73,387,487
Cost of goods sold (+E, -SE)…………………................... 73,387,487

Inventories (-A)………………………………… 73,387,487
To record cost of goods sold for the year ended 12/31/2017.
(Note: the COGS figure can be verified from the firm’s financial statements. Purchases cannot be so
determined, but could be established by working backwards. See M3-29.)
M3-26. (15 minutes)

LO 4
ARCHITECT SERVICES COMPANY

Statement of Stockholders’ Equity
For Year Ended December 31, 2018
Common Retained Total
Stock Earnings Stockholders’ Equity
Balance at December 31, 2017...............$30,000 $18,000 $48,000
Stock issuance...................................... 6,000 6,000
Dividends............................................... (9,700) (9,700)
Net income............................................ _____ 29,900 29,900
Balance at December 31, 2018...............$36,000 $38,200 $74,200
M3-27. (5 minutes)
LO 5
Ending balance = Beginning balance + Credit from closing revenue – Debit from closing
expenses: $137,600 = $99,000 + $347,400 - $308,800

M3-28. (15 minutes)
LO 5
a.
DATE 2018 DESCRIPTION DEBIT
CREDIT
Dec. 31 Commissions revenue (-R) 84,900
Retained earnings (+SE) 84,900
To close the revenue account.
Wages expense (-E) 36,000
Insurance expense (-E) 1,900
Utilities expense (-E) 8,200
Depreciation expense (-E) 9,800
To close the expense accounts.
Closing the revenue and expense accounts into retained earnings has the effect of
increasing the retained earnings balance by an amount equal to net income (revenue
minus expenses). The balance of Smith’s Retained Earnings after closing entries are
posted is: $101,100 credit ($72,100 + $84,900 - $55,900).
b.
+ Wages Expense (E) - + Utilities Expense (E) -
Bal. 36,000 36,000 (2) Dec. 31 Bal. 8,200 8,200 (2) Dec. 31
Bal. 0 Bal. 0
+ Insurance Expense (E) - - Commissions Revenue (R) +

Bal. 1,900 1,900 (2) Dec. 31 (1) Dec. 31 84,900 84,900 Bal.
Bal. 0 0 Bal.
+ Depreciation Expense (E) - - Retained Earnings (SE) +

Bal. 9,800 9,800 (2) Dec. 31 (2) Dec. 31 55,900 72,100 Bal.
Bal. 0 84,900 (1) Dec.31
101,100 Bal. Dec.31

M3-29. (30 minutes)
LO 2, 3, 6
(All amounts in $ millions.)
a.
Recognize cost -111,934 -111,934 +111,934
of goods sold Merchandise = Retained - Cost of = -111,934
Inventory Earnings Goods Sold
Cost of goods sold (+E,-SE)...................................................... 111,934

Merchandise Inventory(-A).................................................... 111,934
To recognize the cost of goods sold.
b. Beginning Inv balance + Purchases – Cost of goods sold = Ending Inv balance. So
$11,461 + Purchases - $111,934 = $16,047. Thus purchases = $116,520

Recording +116,520 +116,520
inventory Merchandise = Account - =
purchases. Inventory Payable
Merchandise inventory(+A)....................................................... 116,520

Accounts payable (+L).......................................................... 116,520
To recognize the purchases on account.
c. Beginning AP balance + Purchases – Payments = Ending AP balance
So, $25,309 + $116,520 - Payments = $34,616. Thus, Payments = $107,213

M3-30 (10 minutes)
LO 2, 3, 5
a.
a. Dec. 31 +600 +600 +600
Interest Interest = Retained Interest - = +600
earned. Receivable Earnings Income
Dec. 31 Interest receivable (+A) 600

Interest income (+R, +SE) 600
To record accrued interest income.
b. Dec. 31 Interest income (-R) 2,400

To close the Interest Income account.
c.
c. Jan. 31 +900 -600 +300 +300
Receipt of Cash Interest Retained Interest
= - = +300
$900 Receivable Earnings Income
interest
2019
Jan. 31 Cash (+A) 900
Interest income (+R, +SE) 300
Interest receivable (-A)
600
To record cash receipt of interest.

EXERCISES
E3-31. (30 minutes)

LO 5
a. Dec. 31 Service fees earned (-R) 80,300

To close the revenue account.

Rent expense (-E) 20,800
Salaries expense (-E) 45,700
Supplies expense (-E) 5,600
b.
+ Rent Expense (E) - + Supplies Expense (E) -
Bal. 20,800 20,800 (2) Bal. 5,600 5,600 (2)
Bal. 0 Bal. 0
+ Depreciation Expense (E) -
Bal. 10,200 10,200 (2)
Bal. 0
+ Salaries Expense (E) - - Service Fees Earned (R) +

Bal. 45,700 45,700 (2) (1) 80,300 80,300 Bal.
Bal. 0 0 Bal.
- Retained Earnings (SE) +

(2) 82,300 67,000 Bal.
80,300 (1)
65,000 Bal.
Brooks Consulting earned a loss during the period (expenses exceeded revenues
by €2,000), so the ending retained earnings is lower than the beginning retained
earnings (even though no dividends were paid).

E3-32. (30 minutes)
LO 3
a.
Cash Noncash Contra Contrib. Earned Net
Transaction Asset + Assets - Assets = Liabilities + Capital + Capital Revenues - Expenses = Income
1. Adjusting - +610 = -610 - +610 = -610
entry for
Accum. Retained Deprecia-
depreciate-
Deprecia- Earnings tion
ion:
tion Expense
equipment.
2. Adjusting - = +390 -390 - +390 = -390
entry for
Utilities Retained Utilities
utilities
Payable Earnings Expense
expense.
3. Adjusting -700 - = -700 - +700 = -700
entry for
Prepaid Retained Rent
rent
Rent Earnings Expense
expense.
4. Adjusting - = -468 +468 +468 - = +468
entry for
Contract Retained Premium
premium
Liabilities Earnings Revenue
revenues.
5. Adjusting - = +965 -965 - +965 = -965
entry for
Wages Retained Wages
wage
expense.
6. Adjusting +300 - = +300 +300 - = +300
entry for
Interest Retained Interest
interest
Receiv- Earnings Income
earned.
able
TOTALS 0 + -400 - 610 = 887 + 0 + -1,897 768 - 2,665 = -1,897
b. 1. Depreciation expense—Equipment (+E,-SE) 610

Accumulated depreciation—Equip (+XA, -A) 610
To record depreciation for the period.
2. Utilities expense (+E, - SE) 390

Utilities payable (+L) 390
To record accrued utilities expense.
3. Rent expense (+E,-SE) 700

Prepaid rent (-A) 700
To record rent expense for the month ($2,800/4 = $700).
4. Contract liabilities (-L) 468

Premium revenue (+R,+SE) 468
To record premium revenue earned [($624/12)  9 = $468].
Continued next page

b. continued
5. Wages expense (+E,-SE) 965

Wages payable (+L) 965
To record accrued wages at the end of the period.
6. Interest receivable (+A) 300

Interest income (+R,+SE) 300
To accrue interest earned but not yet received.
E3-33. (15 minutes)

LO 2, 3, 5
a.
a. Adjusting +4,700 -4,700 +4,700 -4,700
entry for Salaries Retained Salaries
= - =
salaries Payable Earnings Expense
expense.
2018
Dec. 31 Salaries expense (+E,-SE) 4,700
Salaries payable (+L) 4,700
To record accrued salaries payable.
b. 31 Retained earnings (-RE) 250,000

To close the Salaries Expense account.
c.
c. Paid -12,000 +4,700 -7,300 +7,300 -7,300
salaries. Cash = Salaries Retained - Salaries =
2019
Jan. 7 Salaries payable (-L) 4,700
Salaries expense (+E,-SE) 7,300
Cash (-A) 12,000
To record payment of salaries.

E3-34. (20 minutes)
LO 3, 6
a. Balance, January 1 = $960 + $800  $620 = $1,140.
b. Amount of premium = $82  12 = $984.

Therefore, five months' premium ($984  $574 = $410) has expired by January 31.
The policy term began on and has been in effect since September 1, 2018.
c. Wages paid in January = $3,200  $500 = $2,700.
d. Monthly depreciation expense = $8,700/60 months = $145.

Fields has owned the truck for 18 months ($2,610/$145 = 18).
E3-35. (30 minutes)

LO 2, 3, 6
a.
1.7/31 Adjusting -475 = -475 - +475 = -475
entry for
Prepaid Retained Rent
rent
Rent Earnings Expense
expense.
2. 7/31 Adjusting -210 = - 210 - +210 = -210

entry for
Prepaid Retained Advertising
ad.
Advertising Earnings Expense
expense.
3. 7/31 Adjusting -1,900 -1,900 - +1,900 = -1,900

entry for Supplies
Retained Supplies
supplies Inventory
Earnings Expense
expense.
4. 7/31 Adjusting +800 +800 +800 - = +800

entry for
Fees Retained Refinish.
fees
Receivable Earnings Revenue
revenue.
5. 7/31 Adjusting -300 +300 +300 - = +300

entry for
Performance Retained Refinish.
fees
Obligation Earnings Revenue
revenue.
Liability
TOTALS 0 + -1,785 = -300 + 0 + -1,485 1,100 - 2,585 = -1,485

b. July 31 Rent expense (+E,-SE) 475
Prepaid rent (-A) 475
To record July rent expense ($5,700/12 = $475).
31 Advertising expense (+E,-SE) 210

Prepaid advertising (-A) 210
To record July advertising expense ($630/3 = $210).
31 Supplies expense (+E,-SE) 1,900

Supplies inventory (-A) 1,900
To record supplies expense for July
($3,000  $1,100 = $1,900).
31 Fees receivable (+A) 800

Refinishing fees revenue (+R,+SE) 800
To record unbilled revenue earned during July.
31 Performance obligation liability (-L) 300

Refinishing fees revenue (+R,+SE) 300
To record portion of advance fees earned in July ($600/2 = $300).
c.
+ Prepaid Rent (A) - + Supplies (A) -
Bal. 5,700 475 (1) Bal. 3,000 1,900 (3)
Bal. 5,225 Bal. 1,100
+ Prepaid Advertising (A) - - Performance Obligation Liability (L) +

Bal. 630 210 (2) (5) 300 600 Bal.
Bal. 420 300 Bal.
+ Fees Receivable (A) - - Refinishing Fees Revenue (R) +

(4) 800 2,500 Bal.
800 (4)
300 (5)
3,600 Bal.
+ Supplies Expense (E) -

(3) 1,900
+ Advertising Expense(E) -
(2) 210
+ Rent Expense (E) -

(1) 475

E3-36. (30 minutes)
LO 2, 3, 6
(All amounts in $ thousands.)

a.
Recognize +1,433,446 +1,433,446
inventory Inventory = Accounts - =
purchases Payable
Inventory (+A)...........................................................................1,433,446*
Accounts payable (+L).......................................................... 1,433,446
To recognize inventory purchases.
* Beginning Inv balance + Purchases – Cost of goods sold = Ending Inv. So, $399,795 + Purchases -
$1,408,848 = $424,393. Thus, purchases = $1,433,446
b. Beginning compensation payable + Compensation expense – Compensation paid =

Ending compensation payable, so
$37,235 + $650,000 – Payments = $65,045
Payments = $622,190
c. The balances of accrued compensation on February 3, 2018 and January 28, 2017 are
reported as a current liability.
E3-37. (30 minutes)

LO 5
a. Dec. 31 Service fees revenue (-R) 92,500

Interest income (-R) 2,200
To close the revenue accounts.

Advertising expense (-E) 4,300
Income tax expense (-E) 9,900

b.
- Retained Earnings (SE) + - Service Fees Revenue (R) +
(2) 64,700 42,700 Bal. (1) 92,500 92,500 Bal.
94,700 (1) 0 Bal.
72,700 Bal. - Interest Income (R) +
(1) 2,200 2,200 Bal.
0 Bal.
+ Salaries Expense (E) - + Advertising Expense (E) -

Bal. 41,800 41,800 (2) Bal. 4,300 4,300 (2)
Bal. 0 Bal. 0
+ Depreciation Expense (E) - + Income Tax Expense (E) -
Bal. 8,700 8,700 (2) Bal. 9,900 9,900 (2)
Bal. 0 Bal. 0
E3-38. (15 minutes)

LO 2, 3, 6
a.
(1) Collect +200,000 = +200,000 - =
deposits Cash Customer
from Deposits
customers.
(2) Recognize +565,387 = -197,998 +763,385 +763,385 - = +763,385

income on Cash Customer Retained Sales
completed Deposits Earnings Revenue
customer
orders.
(1) Cash (+A) ……………………………………………… 200,000

Customer deposits* (+L) ……………………… 200,000
To record unearned customer deposits.
(2) Customer deposits* (-L)............................................................

197,998 **
Cash (+A)………………………………………………… 565,387
Sales revenue (+R, +SE)...................................................... 763,385
To record sales revenue and recognized deposits earned.
* Also sometimes called Unearned Customer Deposits
** $60,958 + $200,000 – Deposits earned = $62,960; Deposits earned = $197,998.

b.
Record +330,822 +330,822
inventory Inventory = Accounts - =
purchases Payable
Inventory (+A).......................................................................... 330,822

Accounts Payable (+L)....................................................... 330,822
To recognize inventory purchases.
BI +Purchases – EI = COGS.
So $162,323 + Purchases - $149,483 = $343,662.
Thus: Cost of acquiring inventory =$330,822
c. Customer Deposits are reported as a current liability.
E3-39. (40 minutes)

LO 4, 5
a.
SOLOMON CORPORATION
Income Statement
Service fees revenue................................................................................ $71,000
Rent expense........................................................................................... (18,000)
Salaries expense...................................................................................... (37,100)
Depreciation expense………………………………. (7,000
……………..
Net income............................................................................................... $ 8,900
SOLOMON CORPORATION
Statement of Stockholders’ Equity
Total
Common Retained Stockholders’
Stock Earnings Equity
Balance at December 31, 2017............... $43,000 $20,600* $63,600
Stock issuance.........................................
Dividends................................................. (8,000) (8,000)
Net income............................................... _______ 8,900 8,900
Balance at December 31, 2018............... $43,000 $21,500 $64,500
*12,600 + 8,000 The dividend was paid and debited to retained earnings prior to the end of the period.
continued next page

a. continued
SOLOMON CORPORATION
Balance Sheet
December 31, 2018
Assets Liabilities
Cash $ 4,000
Notes payable $10,000
Accounts receivable 6,500
Total Liabilities 10,000
Equipment $78,000
Less:Accumulated
depreciation 14,000 64,000
Owners’ Equity
Common stock 43,000
Retained earnings 21,500
Total Liabilities and Owners’
Total Assets $74,500Equity $74,500
b.
1. Service fees revenue (-R)........................................................
71,000
Retained earnings (+SE)..................................................... 71,000
2. Retained earnings (-SE)...........................................................

18,000
Rent expense (-E)................................................................ 18,000
3. Retained earnings (-SE)...........................................................

37,100
Salaries expense (-E).......................................................... 37,100
4. Retained earnings (-SE)...........................................................7,000

Depreciation expense (-E) .................................................. 7,000
The cash dividend has already been paid and is already reflected in the adjusted trial
balance.
c. Only the T-accounts affected by closing process are shown here.
+ Depreciation Expense (E) - - Service Fees Revenue (R) +

Bal. 7,000 7,000 (4) (1) 71,000 71,000 Bal.
Bal 0 0 Bal.
+ Salaries Expense (E) - + Rent Expense (E) -

Bal. 37,100 37,100 (3) Bal. 18,000 18,000 (2)
Bal. 0 Bal 0
- Retained Earnings (SE) +

(2-4) 62,100 12,600 Bal. (1)
71,000
21,500 Bal.


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CHAPTER 3

Learning Objectives – coverage by question

LO1 – Identify the major steps in the

LO6 – Analyzing changes in balance 40, 42, 49

©Cambridge Business Publishers, 2020

Q3-1. The five major steps in the accounting cycle are:

1. Analyze business activity using transaction analysis based on the related

©Cambridge Business Publishers, 2020

2. Allocating payments received in advance by crediting the revenue account to

Q3-10. Jan. 31 Insurance expense (+E, -SE) 78

©Cambridge Business Publishers, 2020

(b) Jan. 31 Subscriptions received in advance (-L) 405

Q3-14. Jan. 31 Wages expense (+E, -SE) 190

Q3-15. Jan. 31 Interest receivable (+A) 360

Q3-16. The temporary accounts—sometimes called nominal accounts—are closed at

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

M3-21. (45 minutes)

June 2. Paid $950 -950 -950 +950

June 6. Purchased -1,800 +3,800 +2,000

June 11. $4,700 billed +4,700 +4,700 +4,700

June 17. Collected +3,250 -3,250

June 19. Paid $3,000 -3,000 -3,000

June 25. Paid cash -900 -900

June 30. Paid $350 -350 -350 +350

June 30. Paid $2,500 -2,500 -2,500 +2,500

TOTALS 5,750 + 11,650 = 5,400 + 12,000 + 0 4,700 - 3,800 = 900

©Cambridge Business Publishers, 2020

2 Rent expense (+E, -SE) 950

3 Office equipment (+A) 6,400

6 Supplies (+A) 3,800

11 Accounts receivable (+A) 4,700

17 Cash (+A) 3,250

19 Accounts payable (-L) 3,000

25 Retained earnings (-SE) 900

30 Utilities expense (+E, -SE) 350

30 Salaries expense (+E, -SE) 2,500

©Cambridge Business Publishers, 2020

+ Accounts Receivable (A) - - Accounts Payable (L) +

- Common Stock (SE) + - Retained Earnings (SE) +

+ Rent Expense (E) -

- Service Fees Earned (R) + + Utilities Expense (E) -

+ Salaries Expense (E) -

©Cambridge Business Publishers, 2020

April 2 Paid -2,850 +2,850

April 3 Purchased -2,500 +5,500 +3,000

April 21 Billed +3,500 +3,500 +3,500

April 29 Paid -1,000 -1,000

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

+ Supplies (A) - - Notes Payable (L) +

- Accounts Payable (L) + - Retained Earnings (SE) +

- Common Stock (SE) + - Cleaning Fees Earned (R) +

+ Advertising Expense (E) - + Wages Expense (E) -

+ Van Fuel Expense (E) -

©Cambridge Business Publishers, 2020

Jan. 1 Cash (+A) 20,100

Jan. 31 Unearned service fees (-L) 3,350

Jan. 31 Fees receivable (+A) 570

©Cambridge Business Publishers, 2020

Jan. 31 Insurance expense (+E, -SE) 185

Jan. 31 Supplies expense (+E, -SE) 1,080

Jan. 31 Depreciation expense—Equipment (+E, -SE) 62