CHAPTER # 3

Problem#1

1. Interest Expense............................................................... 400

Interest Payable............................................................ 400
($10,000 X 12% X 4/12)
2. Supplies Expense ......................................................... 1,550
Supplies ..................................................................... 1,550
($2,450 – $900)
3. Depreciation Expense.................................................... 1,000
Accumulated Depreciation—Equipment......... 1,000
4. Insurance Expense.......................................................... 1,225
Prepaid Insurance.................................................... 1,225
($2,100 X 7/12)
5. Unearned Consulting Revenue...................................... 7,500
Consulting Revenue................................................... 7,500
($30,000 X 1/4)
6. Accounts Receivable ...................................................... 4,200
Consulting Revenue................................................... 4,200
7. Salaries Expense............................................................. 5,400
Salaries Payable......................................................... 5,400
($9,000 X 3/5)
Problem#2
Jordan Insurance Agency prepares monthly financial statements. Presented below is an income
statement for the month of June that is correct on the basis of information considered.

JORDAN INSURANCE AGENCY

Income Statement
For the Month Ended June 30
______________________________________________________________________________
Revenues
Premium Commission Revenue ................................................. $40,000
Expenses
Salary expense ........................................................................ $6,000
Advertising expense ................................................................ 800
Rent expense .......................................................................... 4,200
Depreciation expense .............................................................. 2,800
Total expenses ........................................................................ 13,800
Net income ..................................................................................... $26,200
Additional Data: When the income statement was prepared, the company accountant neglected
to take into consideration the following information:
1. A utility bill for $2,000 was received on the last day of the month for electric and gas service
for the month of June.
2. A company insurance salesman sold a life insurance policy to a client for a premium of
$20,000. The agency billed the client for the policy and is entitled to a commission of 20%.
3. Supplies on hand at the beginning of the month were $3,000. The agency purchased
additional supplies during the month for $2,500 in cash and $1,000 of supplies were on
hand at June 30.
4. The agency purchased a new car at the beginning of the month for $19,200 cash. The car
will depreciate $3,600 per year.
5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid
on July 5.

Instructions
Prepare a correct income statement.
Solution
JORDAN INSURANCE AGENCY
Income Statement
For the Month Ended June 30
____________________________________________________________________________
Revenues
Premium Commission Revenue ($40,000 + $4,000)............................... $44,000
Expenses
Salary expense ($6,000 + $5,300) ........................................................... $11,300
Advertising expense ............................................................................... 800
Rent expense .......................................................................................... 4,200
Depreciation expense ($2,800 + $300) ................................................... 3,100
Utilities expense ($0 + $2,000) ............................................................... 2,000
Supplies expense ($0 + $4,500) .............................................................. 4,500
Total expenses .............................................................................. 25,900
Net income $18,100
Problem#3

Solution:

a. Supplies Expense ......................................................... 5,171

Supplies ..................................................................... 5,171
($2,350 + $4,218– $1,397=$5,171)

b. Insurance Expense.......................................................... 6,874

Prepaid Insurance.................................................... 6,874
[4,720+(4,200X5/12)+(7,272X2/36)= 6,874]

c. Depreciation Expense.................................................... 56,000

Accumulated Depreciation……………......... 56,000
Problem#4

1. Dec. 31 Insurance Expense .............................................. 4,890

Prepaid Insurance ....................................... 4,890
[($7,920 ÷ 3) = $2,640
[($4,500 ÷ 2) = 2,250
$4,890]
2. Dec. 31 Unearned Rent .................................... 84,000
Rent Revenue ............................................. 84,000
[[Nov. 5 X $5000 X 2 months = 50,000
[Dec. 4 X $8500 X 1month = 34,000
$84,000]
3. Dec. 31 Interest Expense................................................... 1,800
Interest Payable ........................................... 1,800
($120,000 X 9% X 2/12)
4. Dec. 31 Salaries Expense.................................................. 2,000
Salaries Payable .......................................... 2,000
[5 X $700 X 2/5 = $1,400
[3 X $500 X 2/5 = 600
$2,000]

Problem#5
Kreutz Co. was organized on April 1, 2012. The company prepares quarterly financial statements. The adjusted trial
balance amounts at June 30 are shown below.

a) The net income is determined by adding revenues and subtracting expenses. The net income is
computed as follows:

Revenues
Commission revenue............................................... $11,360
Rent revenue .......................................................... 1,100
Total revenues................................................................... $12,460

Expenses
Salaries expense ....................................................... $7,400
Rent expense.............................................................. 1,200
Depreciation expense.............................................. 700
Utilities expense........................................................ 410
Supplies expense...................................................... 160
Interest expense........................................................ 40
Total expenses.................................................. 9,910
Net income ........................................................................... $ 2,550
(b) Total assets and liabilities are computed as follows:
Assets
Cash.............................................................................. $ 5,360
Accounts receivable................................................ 480
Prepaid rent ................................................................ 720
Supplies....................................................................... 920
Equipment................................................................... $12,000
Less: Accumulated depreciation......................... 700 11,300
Total assets ....................................................... $18,780

Liabilities
Notes payable ............................................................ $ 4,000
Accounts payable..................................................... 790
Salaries payable........................................................ 300
Interest payable......................................................... 40
Unearned rent ............................................................ 400
Total Liabilities ................................................. $ 5,530

c) Kreutz Co., Capital at June 30, 2012, is as follows:

Kreutz Co., Capital, April 1 .......................................... $ –0–

Add: Investments .............................................................. $11,200
Net income................................................................ 2,550 13,750
Less: Drawings................................................................... 500
John Danks, Capital, June 30........................................ $13,250