Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
CHAPTER 4
Accrual Accounting Concepts
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
Exercises
A
Problems
B
Problems
*1.
Explain the revenue
recognition principle and
the matching principle.
1, 2, 3, 4
1
1, 2
1A
1B
*2.
Differentiate between
the cash basis and the
accrual basis of accounting.
5
2
3
2A, 3A
2B, 3B
*3.
Explain why adjusting
entries are needed, and
identify the major types
of adjusting entries.
6, 7
3
4
*4.
Prepare adjusting entries
for prepayments.
8, 9, 10, 11,
12, 17, 18,
19
4, 5, 6, 7,11 4, 5, 6, 7, 8, 2A, 3A, 4A,
10, 11
5A, 6A, 7A,
8A, 9A, 10A,
11A, 12A
2B, 3B, 4B
5B, 6B, 7B
8B, 9B, 10B,
11B, 12B
*5.
Prepare adjusting entries
for accruals.
13, 14, 15,
16, 17, 18,
19
8,9,10,11
4, 5, 6, 7, 8, 2A, 3A, 4A,
9, 10, 11
5A, 6A, 7A,
8A, 9A, 10A,
11A, 12A
2B, 3B, 4B,
5B, 6B, 7B,
8B, 9B, 10B,
11B, 12B
*6.
Describe the nature and
purpose of the adjusted
trial balance.
20
12, 13
10, 11, 12
8A, 9A, 10A, 8B, 9B, 10B,
11A, 12A
11B, 12B
*7.
Explain the purposes of
closing entries.
21, 22, 23
14, 15
13
9A, 10A,
12A
9B, 10B,
12B
8.
Describe the required
steps in the accounting
cycle.
24, 25
12A
12B
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
Simple
10-15
1A
Identify accounting assumptions, principles, and
constraints.
2A
Convert earnings from cash to accrual basis.
Complex
30-40
3A
Convert earnings from cash to accrual basis; prepare
accrual-based financial statements.
Complex
40-50
4A
Prepare original and adjusting entries.
Simple
20-30
5A
Prepare adjusting entries.
Simple
20-30
6A
Prepare original and adjusting entries.
Simple
20-30
7A
Prepare adjusting entries and corrected statement of
earnings.
Moderate
40-50
8A
Prepare adjusting entries, post, and prepare adjusted
trial balance.
Moderate
30-40
9A
Prepare adjusting entries, post, prepare adjusted trial
balance, financial statements, and closing entries.
Moderate
50-60
10A
Prepare adjusting entries and financial statements;
identify accounts to be closed.
Moderate
40-50
11A
Complete accounting cycle through to preparation of
financial statements.
Moderate
70
12A
Complete all steps in accounting cycle.
Moderate
70
1B
Identify accounting assumptions, principles, and
constraints.
Simple
10-15
2B
Convert earnings from cash to accrual basis.
Complex
30-40
3B
Convert earnings from cash to accrual basis; prepare
accrual-based financial statements.
Complex
40-50
4B
Prepare original and adjusting entries.
Simple
20-30
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Kimmel, Weygandt, Kieso, Trenholm
Problem
Number
5B
Financial Accounting, Second Canadian Edition
Description
Prepare adjusting entries.
Difficulty
Level
Simple
Time
Allotted (min.)
20-30
Simple
20-30
6B
Prepare original and adjusting entries.
7B
Prepare adjusting entries and corrected statement of
earnings.
Moderate
40-50
8B
Prepare adjusting entries, post, and prepare adjusted
trial balance.
Moderate
30-40
9B
Prepare adjusting entries, post, prepare adjusted trial
balance, financial statements, and closing entries.
Moderate
50-60
10B
Prepare adjusting entries and financial statements;
identify accounts to be closed.
Moderate
40-50
11B
Complete accounting cycle through to preparation of
financial statements.
Moderate
70
12B
Complete all steps in accounting cycle.
Moderate
70
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
ANSWERS TO QUESTIONS
1.
(a)
(b)
Under the time period assumption, an accountant is required to determine the
relevance of each accounting transaction to specific accounting periods.
An accounting time period of one year in length is referred to as a fiscal year.
2.
The two generally accepted accounting principles that pertain to adjusting the accounts
are (1) the revenue recognition principle, which states that revenue should be recognized
in the time period in which it is earned, and (2) the matching principle, which states that
efforts (expenses) must be matched with accomplishments (revenues).
3.
The law firm should recognize the revenue in April. The revenue recognition principle
states that revenue should be recognized in the accounting period in which it is earned. In
this case, the revenue was earned in April when the work was performed.
4.
Expenses of $4,500 should be deducted from the revenues in April. Under the matching
principle efforts (expenses) should be matched in the same period as accomplishments
(revenues). The $2,000 of expense incurred in March would be recorded as a prepaid expense until April.
5.
(a)
(b)
Information presented on an accrual basis is useful because it reveals important information about the relationship between efforts and results. This information is
useful in predicting future results. Trends in revenues and expenses are thus more
meaningful.
Information presented on a cash basis is useful for predicting the future availability
of cash. Cash basis financial statements provide useful information about a company's sources and uses of cash.
6.
The financial information in a trial balance may not be up-to-date because:
(1)
Some events are not journalized daily because it is unnecessary and inexpedient
to do so.
(2)
The expiration of some costs occurs with the passage of time rather than as a result of recurring daily transactions.
(3)
Some items may be unrecorded because the transaction data are not known.
7.
The two categories of adjusting entries are prepayments and accruals. Prepayments consist of revenues and expenses paid before they are earned or incurred such as prepaid
expenses and unearned revenues. Accruals consist of revenues and expenses earned or
incurred prior to payment.
8.
In a prepaid expense adjusting entry, expenses are debited and assets are credited.
9.
No. Amortization is the process of allocating the cost of an asset to expense over its useful life. Amortization results in the presentation of the book value of the asset, not its market value.
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Questions (Continued)
10.
Amortization expense is an expense account whose normal balance is a debit. This account shows the cost of a long-lived asset that has expired during the current accounting
period. Accumulated amortization is a contra asset account whose normal balance is a
credit. The balance in this account is the amortization that has been recognized from the
date of acquisition to the balance sheet date.
11.
1st Fiscal Year-end
Equipment ……………………………………………………… $12,000
Less: Accumulated Amortization……………………………...
4,000
$8,000
2nd Fiscal Year-end
Equipment ……………………………………………………… $12,000
Less: Accumulated Amortization……………………………...
8,000
$4,000
12.
In an unearned revenue adjusting entry, liabilities are debited and revenues are credited.
13.
Accrued revenues affect asset and revenue accounts. An asset is debited and revenue is
credited.
14.
Accrued liabilities affect liability and expense accounts. An expense is debited and a liability is credited.
15.
Net earnings was understated $300 because prior to adjustment revenues are understated by $900 and expenses are understated by $600. The difference in this case is $300
($900 – $600).
16.
The entries are:
Dec. 31
Jan. 9
Salaries Expense………………………………..
Salaries Payable………………………… ....
1,700
Salaries Payable………………………………..
Salaries Expense…………………………… .....
Cash…………………………………….. ......
1,700
3,300
Salaries Payable
Accumulated Amortization
Interest Expense
(d)
(e)
(f)
1,700
5,000
17.
(a)
(b)
(c)
Supplies Expense
Service Revenue
Service Revenue
18.
Disagree. An adjusting entry affects only one balance sheet account and one statement of
earnings account.
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Financial Accounting, Second Canadian Edition
Questions (Continued)
19.
Adjusting entries never involve the Cash account. In making adjusting entries for prepayments the cash has already been paid or received and recorded. The adjusting journal entry must be prepared to reflect the fact that the related revenue or expense has not yet
been earned or incurred. An accrual entry reflects the fact that although the cash has not
been paid or received, either revenue has been earned or an expense has been incurred.
Again there is no impact on the Cash account because cash has not yet been received or
paid.
20.
Financial statements can be prepared from an adjusted trial balance because the balances of all accounts have been adjusted to show the effects of all financial events that have
occurred during the accounting period.
21.
(1)
(2)
(3)
(4)
(Dr) Individual revenue accounts and (Cr.) Income Summary
(Dr) Income Summary and (Cr.) Individual expense accounts
(Dr) Income Summary and (Cr.) Retained Earnings (for net earnings)
(Dr) Retained earnings and (Cr) Income Summary (for net loss)
(Dr) Retained Earnings and (Cr.) Dividends
22.
The post-closing trial balance contains only balance sheet accounts. Its purpose is to
prove the equality of the permanent account balances that are carried forward into the
next accounting period.
23.
The accounts that will not appear in the post-closing trial balance are Amortization Expense, Dividends, and Service Revenue.
24.
The steps that involve journalizing are (1) journalize the transactions, (2) journalize the adjusting entries, and (3) journalize the closing entries.
25.
The three trial balances are the (1) trial balance, (2) adjusted trial balance, and (3) postclosing trial balance.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 4-1
The revenue recognition principle dictates that revenue must be recognized in the period in
which it is earned. In a service environment, such as a university, revenue is considered earned
at the time the service is performed. Once the term starts, ¼ of the tuition should be recognized
each month and matched against the cost of providing this service (e.g., salaries, utilities, etc.).
BRIEF EXERCISE 4-2
(a)
(b)
(c)
(d)
(e)
(f)
Cash
-$100
0
0
+800
–2,500
0
Net Earnings
$0
–50
+1,000
0
0
–500
BRIEF EXERCISE 4-3
Item
(1)
Type of Adjustment
(2)
Accounts Before Adjustment
(a)
Prepaid Expenses
Assets Overstated
Expenses Understated
(b)
Accrued Revenues
Assets Understated
Revenues Understated
(c)
Accrued Revenues
Assets Understated
Revenues Understated
(d)
Unearned Revenues
Liabilities Overstated
Revenues Understated
(e)
Prepaid Expenses
Assets Overstated
Expenses Understated
(f)
Accrued Expenses
Expenses Understated
Liabilities Understated
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BRIEF EXERCISE 4-4
Dec. 31
Advertising Supplies Expense ........................................
Advertising Supplies ..............................................
Advertising Supplies
Dec. 31
8,800 Dec. 31
Dec. 31 Bal. 1,500
7,300
7,300
Advertising Supplies Expense
Dec. 31
7,300
7,300
BRIEF EXERCISE 4-5
Dec. 31
Amortization Expense—Equipment ................................
Accumulated Amortization—Equipment.................
Amortization Expense—
Equipment
Dec. 31
4,400
4,400
4,400
Accumulated Amortization—
Equipment
Dec. 31
4,400
SHAH CORPORATION
Balance Sheet (partial)
December 31
Assets
Property, plant, and equipment
Equipment ...........................................................................
Less: Accumulated amortization.........................................
$22,000
4,400
$17,600
BRIEF EXERCISE 4-6
June
1
Dec. 31
Prepaid Insurance ...........................................................
Cash ......................................................................
12,000
Insurance Expense ($12,000 x 7/12) ..............................
Prepaid Insurance ..................................................
7,000
Prepaid Insurance
June 1
12,000 Dec. 31
Dec. 31 Bal. 5,000
7,000
Dec. 31
12,000
7,000
Insurance Expense
7,000
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BRIEF EXERCISE 4-7
June
1
Dec. 31
Cash ...............................................................................
Unearned Insurance Revenue ...............................
12,000
Unearned Insurance Revenue ........................................
Insurance Revenue ................................................
7,000
Unearned Insurance Revenue
Dec. 31
7,000 June 1
12,000
Dec. 31 Bal. 5,000
12,000
7,000
Insurance Revenue
Dec. 31
7,000
BRIEF EXERCISE 4-8
(a)
(b)
(c)
Dec. 28
Dec. 31
Jan.
4
Salaries Expense ...................................................
Cash .............................................................
5,000
Salaries Expense ...................................................
Salaries Payable ...........................................
1,000
Salaries Expense ...................................................
Salaries Payable ....................................................
Cash .............................................................
4,000
1,000
5,000
1,000
5,000
BRIEF EXERCISE 4-9
(a)
(b)
(c)
July 1, 2004
Dec. 31, 2004
Dec. 31, 2005
Vehicle – Truck .............................................
Note Payable .........................................
Cash .....................................................
40,000
Interest Expense ($22,000 X 6% X 6/12) ......
Interest Payable .....................................
660
Note Payable ................................................
Interest Payable ............................................
Interest Expense ($22,000 X 6%) .................
Cash ......................................................
22,000
660
1,320
22,000
18,000
660
23,980
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BRIEF EXERCISE 4-10
(a)
$2,500 ($2,500 - $0)
(b)
$4,500 ($2,500 + $3,500 - $1,500)
(c)
$3,000 ($1,500 - $2,000 – X = $2,500)
Income Tax Payable
0
0 Expense
2,500
2004 Bal. (a) 2,500
Payment (b) 4,500 Expense
3,500
2005 Bal.
1,500
Payment
2,000 Expense (c) 3,000
2006 Bal.
2,500
Payment
BRIEF EXERCISE 4-11
Account
(1)
Type of Adjustment
(2)
Related Account
(a)
Accounts Receivable
Accrued Revenues
Service Revenue
(b)
Prepaid Insurance
Prepaid Expenses
Insurance Expense
(c)
Equipment
No adjustment required
N/A
(d)
Accum. Amortization—
Equipment
Prepaid Expenses
Amortization Expense
(e)
Notes Payable
No adjustment required
N/A
(f)
Interest Payable
Accrued Expenses
Interest Expense
(g)
Unearned Service Revenue
Unearned Revenues
Service Revenue
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BRIEF EXERCISE 4-12
LUMAS CORPORATION
Statement of Earnings
Year Ended December 31, 2004
Revenues
Service revenue ...................................................................
Expenses
Salaries expense ..................................................................
Rent expense .......................................................................
Insurance expense ...............................................................
Supplies expense .................................................................
Amortization expense ...........................................................
Total expenses ............................................................
Earnings before income taxes .......................................................
Income tax expense ......................................................................
Net earnings ..................................................................................
$37,000
$13,000
3,500
2,000
1,500
1,000
21,000
16,000
6,400
$ 9,600
BRIEF EXERCISE 4-13
LUMAS CORPORATION
Statement of Retained Earnings
Year Ended December 31, 2004
Retained earnings, January 1 ..............................................................................
Add: Net earnings...............................................................................................
Less: Dividends ...................................................................................................
Retained earnings, December 31 .........................................................................
$15,600
9,600
25,200
6,000
$19,200
BRIEF EXERCISE 4-14
The accounts that will appear in the post-closing trial balance are:
Accumulated Amortization
Retained Earnings
Supplies
Accounts Payable
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BRIEF EXERCISE 4-15
July 31 Green Fees....................................................
Income Summary ....................................
26,000
July 31 Income Summary ..........................................
Salaries Expense ....................................
Maintenance Expense ............................
Income tax Expense ...............................
16,700
July 31 Income Summary ..........................................
Retained Earnings ..................................
9,300
Green Fees
July 31
26,000 July 31 Bal.
July 31 Bal.
0
8,200
Maintenance Expense
July 31 Bal. 2,500 July 31
July 31 Bal.
0
2,500
Income Tax Expense
July 31 Bal. 6,000 July 31
July 31 Bal.
0
6,000
July 31
July 31
Retained Earnings
July 1
July 31
July 31 Bal.
8,200
2,500
6,000
9,300
26,000
Salaries Expense
July 31 Bal. 8,200 July 31
July 31 Bal.
0
Income Summary
16,700 July 31
9,300
July 31 Bal.
26,000
26,000
0
50,000
9,300
59,300
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SOLUTIONS TO EXERCISES
EXERCISE 4-1
(a)
Since the sales effort is not complete until the flight actually occurs, revenue should not be
recognized until December. Air Canada should recognize the revenue in December when
the customer has been provided with the flight.
(b)
If Leon’s is reasonably certain of collection, revenue should be recognized at the time
of sale. If the company has concerns over the collectibility of the accounts receivable,
revenue should not be recognized until the time that collection is reasonably assured.
(c)
Revenue should be recognized on a per game basis over the season from April to October.
(d)
Interest revenue should be accrued and recognized by RBC evenly over the term of
the loan.
(e)
Revenue should be recognized when the sweater is shipped to the customer in September provided there is reasonable assurance of collectibility.
EXERCISE 4-2
(a)
(b)
(c)
(d)
(e)
Revenue recognition principle
Going concern assumption
Time period assumption
Cost principle
Economic entity assumption
EXERCISE 4-3
(a) and (b)
Service revenue
Less:
Operating expenses
Insurance expense
Earnings before income taxes
Less: Income tax expense
Net earnings
Cash Basis
$22,000
Accrual Basis
$26,000
013,500
2,500
16,000
—
$ 6,000
015,000
—
011,000
4,400
$ 6,600
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EXERCISE 4-3 (Continued)
(c)
The accrual basis of accounting provides more useful information for decision makers because it recognizes revenues when earned and expenses when incurred. By recognizing
revenue when it is earned and properly matching revenue and expenses, the accrual basis
provides a better measurement of performance.
EXERCISE 4-4
Item
(1)
Type of Adjustment
(2)
Accounts Before Adjustment
1.
Accrued Revenues
Assets: Accounts Receivable understated by $600
Revenues: Service Revenue understated by $600
2.
Prepaid Expenses
Assets: Supplies overstated by $1,700
Expenses: Supplies Expense understated by
$1,700
3.
Accrued Expenses
Expenses: Income Tax Expense understated by
$225
Liabilities: Income Tax Payable understated by
$225
4.
Unearned Revenues
Liabilities: Unearned Revenue overstated by $260
Revenues: Service Revenue understated by $260
5.
Accrued Expenses
Expenses: Salaries Expense understated by $800
Liabilities: Salaries Payable understated by $800
6.
Prepaid Expenses
Assets: Prepaid Insurance overstated $350
Expenses: Insurance Expense understated by
$350
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Financial Accounting, Second Canadian Edition
EXERCISE 4-5
1.
2.
3.
4.
5.
6.
Mar. 031
31
31
31
31
31
Amortization Expense ($500 X 3)................................
Accumulated Amortization—Equipment .............
1,500
Unearned Rent Revenue ............................................
Rent Revenue ($10,200 X 1/3)...........................
3,400
Interest Expense .........................................................
Interest Payable .................................................
600
Supplies Expense .......................................................
Supplies ($4,000 – $850) ...................................
3,150
Insurance Expense ($200 X 3) ....................................
Prepaid Insurance ..............................................
600
Income Tax Expense ..................................................
Income Tax Payable ..........................................
15,000
Accounts Receivable...................................................
Service Revenue ................................................
900
Utilities Expense..........................................................
Utilities Payable ..................................................
5,200
Amortization Expense .................................................
Accumulated Amortization—Dental Equipment..
600
Interest Expense ($60,000 X 8% X 1/12) ....................
Interest Payable .................................................
400
Insurance Expense ($5,000 ÷ 12) ...............................
Prepaid Insurance ..............................................
417
Supplies Expense ($1,800 – $500) .............................
Supplies .............................................................
1,300
1,500
3,400
600
3,150
600
15,000
EXERCISE 4-6
1.
2.
3.
Jan. 31
31
31
31
4.
5.
31
31
900
5,200
600
400
417
1,300
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Financial Accounting, Second Canadian Edition
EXERCISE 4-7
WELLER CORP.
Statement of Earnings
Month Ended July 31, 2005
Revenues
Service revenue ($5,500 + $750) .............................................
Expenses
Wages expense ($2,300 + $300) .............................................
Supplies expense ($1,000 – $400) ...........................................
Utilities expense .......................................................................
Insurance expense ...................................................................
Amortization expense ...............................................................
Total expenses ................................................................
Earnings before income taxes ...........................................................
Income tax expense ..........................................................................
Net earnings ......................................................................................
$6,250
$2,600
600
800
300
150
4,450
1,800
600
$1,200
EXERCISE 4-8
(a)
July
10
14
15
20
31
(b)
July
31
31
31
31
Supplies ......................................................................
Cash ...................................................................
300
Cash ...........................................................................
Service Revenue ................................................
3,000
Salaries Expense ........................................................
Cash ...................................................................
1,200
Cash ...........................................................................
Unearned Service Revenue ...............................
700
Cash ...........................................................................
Service Revenue ................................................
800
Supplies Expense .......................................................
Supplies .............................................................
700
Accounts Receivable...................................................
Service Revenue ................................................
500
Salaries Expense ........................................................
Salaries Payable ................................................
1,200
Unearned Service Revenue ........................................
Service Revenue ................................................
1,200
300
3,000
1,200
700
800
700
500
1,200
1,200
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EXERCISE 4-9
(a)
(b)
Income Tax Expense ([$750 X 12] – $12,000) ...............................
Income Tax Payable ...........................................................
3,000
Utilities Expense ...........................................................................
Utilities Payable ..................................................................
900
Salaries Expense ($1,500 X 3/5 days)...........................................
Salaries Payable .................................................................
900
Interest Expense ($10,000 X 6% X 1/12).......................................
Interest Payable ..................................................................
50
3,000
900
900
50
Arsenault’s accrued expenses reported on its year-end classified balance sheet would
be ($3,000 +$900 + $900 + $50) $4,850. They would be classified as current liabilities.
EXERCISE 4-10
Answer
Calculation
(a)
Supplies balance = $900
Supplies expense
Add: Supplies (Jan. 31)
Less: Supplies purchased
Supplies (Jan. 1)
(b)
Total premium = $7,200
Total premium = Monthly premium X 12; $600
X 12 = $7,200
Purchase date = June 1, 2003
Purchase date: On Jan. 31, there are 4
months coverage remaining ($600
X 4). Thus, the purchase date was 8 months
earlier on June 1, 2003.
Salaries payable = $1,900
Cash paid
Salaries payable (Jan. 31, 2004)
(c)
Less: Salaries expense
Salaries payable (Dec. 31, 2003)
(d)
Service revenue = $1,650
Service revenue
Unearned revenue (Jan. 31, 2004)
Cash received in Jan.
Unearned revenue (Dec. 31, 2003)
$950)
800)
(850)
$900)
$2,500
1,200
3,700
1,800
$1,900
$2,500
750
3,250
1,600
$1,650
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Financial Accounting, Second Canadian Edition
EXERCISE 4-11
Aug.
31
31
31
31
31
31
31
Accounts Receivable ...........................................................
Service Revenue ........................................................
700
Office Supplies Expense .....................................................
Office Supplies ...........................................................
1,600
Insurance Expense ..............................................................
Prepaid Insurance ......................................................
1,500
Amortization Expense..........................................................
Accumulated Amortization—Office Equipment ...........
1,200
Salaries Expense.................................................................
Salaries Payable .........................................................
1,000
Income Tax Expense ...........................................................
Income Tax Payable ...................................................
3,500
Unearned Rent Revenue .....................................................
Rent Revenue.............................................................
800
700
1,600
1,500
1,200
1,000
3,500
800
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EXERCISE 4-12
INUIT INC.
Statement of Earnings
Year Ended August 31, 2004
Revenues
Service revenue ...................................................................
Rent revenue ........................................................................
Total revenues .............................................................
Expenses
Salaries expense ..................................................................
Rent expense .......................................................................
Office supplies expense .......................................................
Insurance expense ...............................................................
Amortization expense ...........................................................
Total expenses ............................................................
Earnings before income taxes .......................................................
Income tax expense ......................................................................
Net earnings ..................................................................................
$34,700
11,800
46,500
$18,000
15,000
1,600
1,500
1,200
37,300
9,200
3,500
$ 5,700
INUIT INC.
Statement of Retained Earnings
Year Ended August 31, 2004
Retained earnings, September 1, 2003 ................................................................
Add: Net earnings...............................................................................................
Less: Dividends ...................................................................................................
Retained earnings, August 31, 2004 ....................................................................
$ 5,600
5,700
11,300
800
$10,500
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Financial Accounting, Second Canadian Edition
EXERCISE 4-12 (Continued)
INUIT INC.
Balance Sheet
August 31, 2004
Assets
Current assets
Cash .....................................................................................
Accounts receivable .............................................................
Office supplies ......................................................................
Prepaid insurance ................................................................
Total current assets .....................................................
Property, plant, and equipment
Office equipment ..................................................................
Less: Accum. amortization—office equipment.....................
Total assets .................................................................
$ 9,600
9,500
700
2,500
22,300
$14,000
4,800
9,200
$31,500
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ........................................................................................
Salaries payable ..........................................................................................
Income tax payable .....................................................................................
Unearned rent revenue ...............................................................................
Total current liabilities .........................................................................
Shareholders’ equity
Common shares ..........................................................................................
Retained earnings .......................................................................................
Total shareholders’ equity ..................................................................
Total liabilities and shareholders’ equity .............................................
$ 5,800
1,000
3,500
700
11,000
10,000
10,500
20,500
$31,500
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EXERCISE 4-13
Aug.
31
31
031
31
Service Revenue ............................................................
Rent Revenue.................................................................
Income Summary ..................................................
34,700
11,800
Income Summary ...........................................................
Salaries Expense ...................................................
Office Supplies Expense .......................................
Rent Expense ........................................................
Insurance Expense ................................................
Amortization Expense ............................................
Income Tax Expense .............................................
40,800
Income Summary ...........................................................
Retained Earnings .................................................
5,700
Retained Earnings ..........................................................
Dividends ...............................................................
800
46,500
18,000
1,600
15,000
1,500
1,200
3,500
5,700
800
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SOLUTIONS TO PROBLEMS
PROBLEM 4-1A
(a) 2.
Going concern assumption
(b) 3.
Monetary unit assumption
(c) 9.
Materiality
(d) 4.
Time period assumption
(e) 6.
Revenue recognition principle
(f)
Cost-benefit
10.
(g) 1.
Economic entity assumption
(h) 5.
Full disclosure principle
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PROBLEM 4-2A
$45,000
-1,400
Cash basis earnings
Accounts receivable arise from sales that have been made, thus
revenue must be recognized for balance outstanding at the end of
the current year
Accounts receivable collected in current year, for sales made in
previous year must be deducted from earnings
Prepaid expenses at year end should be set up as an asset rather
than expensed, this increases earnings
Prepaid expenses at the end of the previous year should be expensed this year, this decreases earnings
Accounts payable owing at the end of the current year should be
accrued, thus reducing earnings
Accounts payable owed at the end of the previous year should not
be deducted from the current year’s earnings, thus increasing
earnings
Unearned revenue at the end of the current year should be accrued, thus reducing earnings.
+1,500
Unearned revenue at the end of the previous year should not be
deducted from the current year’s income, thus increasing earnings
+3,600
-2,700
+1,500
-1,300
-1,500
+2,200
$46,900
Accrual basis earnings.
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PROBLEM 4-3A
(a)
THE RADICAL EDGE LTD.
Statement of Earnings
Six Months Ended April 30, 2004
Revenues
Repair services ($32,150 + $650) .....................
Expenses
Wage expense ($2,600 + $220) ........................
Rent expense ($1,225 - $175) ...........................
Advertising expense ..........................................
Amortization expense ($9,200 ÷ 5 x 6/12) .........
Utilities expense ................................................
Total expenses ..........................................
Earnings before taxes ...............................................
Income tax expense..................................................
Net earnings .............................................................
$32,800
$2,820
1,050
375
920
970
6,135
26,665
10,000
$16,665
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PROBLEM 4-3A (Continued)
(b)
THE RADICAL EDGE LTD.
Balance Sheet
April 30, 2004
Assets
Current assets
Cash ............................................................
Rent deposit .................................................
Accounts receivable ....................................
Total current assets ..............................
Property, plant, and equipment
Equipment ....................................................
Less: Accumulated amortization..................
Total assets .........................................................
$27,780
175
650
28,605
$9,200
920
8,280
$36,885
Liabilities and Shareholders’ Equity
Current liabilities
Wages payable ............................................
Shareholders’ equity
Common shares ...........................................
Retained earnings ........................................
Total shareholders’ equity.....................
Total liabilities and shareholders’ equity...............
$
220
$20,000
16,665
36,665
$36,885
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Chapter 4
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PROBLEM 4-4A
1.
Jan. 2
Dec. 31
2.
Aug. 1
Dec. 31
3.
4.
Dec. 15
Office Supplies ..................................................
Cash .......................................................
2,800
Supplies Expense ($2,800 – $300) .................
Office Supplies ........................................
2,500
Prepaid Insurance ..........................................
Cash .......................................................
3,600
Insurance Expense ($3,600 x 5/12) ................
Prepaid Insurance ...................................
1,500
Prepaid Rent ..................................................
Cash .......................................................
500
2,800
2,500
3,600
1,500
500
Dec. 31
No entry required
Nov. 15
Cash ...............................................................
Unearned Revenue .................................
1,200
Unearned Revenue ($400 x 2) .......................
Revenue .................................................
800
Dec. 31
1,200
800
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PROBLEM 4-5A
1.
2.
3.
4.
Dec. 31
31
31
31
Salaries Expense........................................
Salaries Payable .................................
(6 X $800 X 2/5 = $1,920)
(2 X $500 X 2/5 = $400)
2,320
Unearned Rent Revenue ............................
Rent Revenue .....................................
(5 X $4,000 X 2 = $40,000)
(4 X $8,500 X 1 =
34,000)
Total rent earned $74,000)
74,000
Advertising Expense ...................................
Prepaid Advertising .............................
(A650 – $500 per month
for 8 months = $4,000)
(B974 – $300 per month
for 5 months = 1,500)
$5,500
5,500
Interest Expense ........................................
Interest Payable ..................................
($80,000 X 9% X 8/12)
4,800
2,320
74,000
5,500
4,800
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Financial Accounting, Second Canadian Edition
PROBLEM 4-6A
1. (a)
(b) Dec. 31
2. (a) June 1
(b) Dec. 31
3.
Dec. 31
4. (a) July 1
(b) Dec. 31
5.
Dec. 31
Office Supplies .............................................
Cash .......................................................
1,500
Supplies Expense ($300 + $1,500 – $500) ..
Office Supplies ........................................
1,300
Cash ............................................................
Note Payable ..........................................
4,000
Interest Expense ..........................................
Interest Payable ($4,000 X 8% x 7/12) ....
187
Utilities Expense ..........................................
Accounts Payable ...................................
1,400
Truck ............................................................
Cash .......................................................
38,000
Amortization Expense ($7,600 X 6/12) .........
Accumulated Amortization – Truck..........
3,800
Income Tax Expense ($13,000 - $10,000) ...
Income Tax Payable ...............................
3,000
1,500
1,300
4,000
187
1,400
38,000
3,800
3,000
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Financial Accounting, Second Canadian Edition
PROBLEM 4-7A
(a)
1.
2.
3.
4.
5.
6.
March 31 Travel Service Fees ...............................
Unearned Fees...............................
28,000
31 Supplies Expense ...................................
Supplies ($3,200 – $800) ...............
2,400
31 Insurance Expense ($1,200 x 3/12) ........
Prepaid Insurance ..........................
300
31 Utilities Expense .....................................
Accounts Payable...........................
180
31 Salaries Expense ($175 x 3 x 2) .............
Salaries Payable ............................
1,050
31 Interest Expense (10,000 x 5% x 1/12) ...
Interest Payable .............................
42
28,000
2,400
300
180
1,050
42
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Financial Accounting, Second Canadian Edition
PROBLEM 4-7A (Continued)
(b)
TRY- US TRAVEL AGENCY LTD.
Statement of Earnings
Quarter Ended March 31, 2004
Revenues
Travel service fees ($50,000 – $28,000) ...........
Expenses
Advertising expense ..........................................
Amortization expense ........................................
Salaries expense ($6,000 + $1,050)..................
Utilities expense ($400 + $180) .........................
Supplies expense ..............................................
Insurance expense ............................................
Interest expense ...............................................
Total expenses ..........................................
Earnings before income taxes ..................................
Income tax expense..................................................
Net earnings .............................................................
(c)
$22,000
$2,600
400
7,050
580
2,400
300
42
13,372
8,628
1,500
$ 7,128
The generally accepted accounting principles pertaining to the statement of
earnings not recognized by Paul were the revenue recognition principle and
the matching principle.
The revenue recognition principle states that revenue is recognized when it is
earned. The fees of $28,000 for summer rentals have not been earned and,
therefore, should not be reported in earnings for the quarter ended March 31.
The matching principle dictates that efforts (expenses) be matched with accomplishments (revenue) whenever it is reasonable and practicable to do so.
This means that the expenses should include amounts incurred in March but
not paid until April, and any other costs related to the operations of the business during the period January—March.
The difference in reported expenses was $3,972 ($13,372 + $1,500 $10,900). The overstatement of revenues ($28,000) plus the understatement
of expenses ($3,972) equals the difference in reported earnings of $31,972
($39,100 - $7,128).
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PROBLEM 4-8A
(a)
Date
1.
2.
3.
4.
5.
6.
7.
8.
Account Titles
Dec. 31 Accounts Receivable
Service Revenue
31 Insurance Expense
Prepaid Insurance
($3,600 ÷ 2 years)
31 Amortization Expense
Accumulated Amortization—Auto.
Debit
11,500
11,500
1,800
1,800
11,600
11,600
31 Interest Expense
Interest Payable
2,250
31 Unearned Service Revenue
Service Revenue
1,000
31 Salaries Expense (4 x $900)
Salaries Payable
3,600
31 Repairs Expense
Accounts Payable
31 Income Tax Expense
Income Taxes Payable
Credit
2,250
1,000
3,600
650
650
2,600
2,600
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-8A (Continued)
(b)
Cash
Dec. 31 Bal. 12,400
Unearned Service Revenue
Dec. 31
1,000 Dec. 31 Bal. 2,500
Dec. 31 Bal. 1,500
Accounts Receivable
Dec. 31 Bal. 3,200
Dec. 31
11,500
Dec. 31 Bal. 14,700
Common Shares
Dec. 31 Bal. 18,000
Prepaid Insurance
Dec. 31 Bal. 3,600 Dec. 31
Dec. 31 Bal. 1,800
Service Revenue
Dec. 31 Bal. 96,000
Dec. 31
11,500
Dec. 31
1,000
Dec. 31 Bal.108,500
1,800
Automobiles
Dec. 31 Bal. 58,000
Accumulated Amortization—
Automobiles
Dec. 31
11,600
Dec. 31 Bal. 11,600
Accounts Payable
Dec. 31
Dec. 31 Bal.
650
650
Notes Payable
Dec. 31
045,000
Dec. 31 Bal. 45,000
Salaries Expense
Dec. 31 Bal. 57,000
Dec. 31
3,600
Dec. 31 Bal. 60,600
Repairs Expense
Dec. 31 Bal. 6,000
Dec. 31
650
Dec. 31 Bal. 6,650
Rent Expense
Dec. 31 Bal. 12,000
Gas and Oil Expense
Dec.31 Bal. 09,300
Salaries Payable
Dec. 31
Dec. 31 Bal.
03,600
3,600
Amortization Expense
Dec. 31
11,600
Dec. 31 Bal. 11,600
Interest Payable
Dec. 31
Dec. 31 Bal.
0 2,250
0 2,250
Insurance Expense
Dec. 31
1,800
Dec. 31 Bal. 1,800
Income Taxes Payable
Dec. 31
Dec. 31 Bal.
2,600
2,600
Dec. 31
Dec. 31 Bal.
Interest Expense
2,250
2,250
Income Tax Expense
Dec. 31
2,600
Dec. 31 Bal. 2,600
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PROBLEM 4-8A (Continued)
(c)
ORTEGA LIMO SERVICE LTD.
Adjusted Trial Balance
December 31, 2004
Cash ....................................................................
Accounts Receivable ...........................................
Prepaid Insurance ................................................
Automobiles .........................................................
Accumulated Amortization—Automobiles ............
Accounts Payable ................................................
Interest Payable ...................................................
Salaries Payable ..................................................
Income Taxes Payable.........................................
Unearned Service Revenue .................................
Notes Payable .....................................................
Common Shares ..................................................
Service Revenue..................................................
Salaries Expense .................................................
Rent Expense ......................................................
Repairs Expense..................................................
Gas and Oil Expense ...........................................
Amortization Expense ..........................................
Insurance Expense ..............................................
Interest Expense ..................................................
Income Tax Expense ...........................................
Totals
Debit
$ 12,400
14,700
1,800
58,000
Credit
$ 11,600
650
2,250
3,600
2,600
1,500
45,000
18,000
108,500
60,600
12,000
6,650
9,300
11,600
1,800
2,250
00
2,600 _____ __
$193,700 $193,700
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PROBLEM 4-9A
(a) 1. Aug. 31
2.
3.
31
31
31
4.
5.
6.
7.
8.
31
31
31
31
31
Insurance Expense ($300 X 3) .................
Prepaid Insurance ............................
900
Supplies Expense ($4,300 – $1,200) .......
Supplies ...........................................
3,100
Amortization Expense—Cottages ............
($6,000 X 3/12)
Accum. Amort.—Cottages ................
1,500
Amortization Expense—Furniture ............
($5,000 X 3/12)
Accum. Amort.—Furniture ................
1,250
Unearned Rent Revenue .........................
Rent Revenue ..................................
5,000
Salaries Expense .....................................
Salaries Payable ..............................
400
Accounts Receivable................................
Rent Revenue ..................................
1,800
Interest Expense ......................................
Interest Payable ...............................
[($90,000 X 8%) X 1/12]
600
Income Tax Expense ...............................
Income Tax Payable .........................
4,000
900
3,100
1,500
1,250
5,000
400
1,800
600
4,000
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PROBLEM 4-9A (Continued)
(b)
Cash
Aug. 31 Bal. 15,600
Aug. 31 Bal.
400
Interest Payable
Aug. 31
Aug. 31 Bal.
600
600
Income Tax Payable
Aug. 31 Bal.
Aug. 31
Aug. 31 Bal.
5,000
4,000
9,000
Accounts Receivable
Aug. 31
1,800
Aug. 31 Bal. 1,800
Prepaid Insurance
Aug. 31 Bal. 5,400 Aug. 31
Aug. 31 Bal. 4,500
Aug. 31 Bal.
Aug. 31 Bal.
Supplies
4,300 Aug. 31
1,200
900
3,100
Mortgage Payable
Aug. 31 Bal. 90,000
Common Shares
Aug. 31 Bal. 100,000
Land
Aug. 31 Bal. 50,000
Cottages
Aug. 31 Bal. 125,000
Aug. 31 Bal.
Aug. 31 Bal.
Accumulated Amortization—
Cottages
Aug. 31
1,500
Aug. 31 Bal. 1,500
Furniture
Aug. 31 Bal. 26,000
Accumulated Amortization—
Furniture
Aug. 31
1,250
Aug. 31 Bal. 1,250
Accounts Payable
Aug. 31 Bal.
Unearned Rent Revenue
Aug. 31
5,000 Aug. 31 Bal.
Aug. 31 Bal.
Salaries Payable
Aug. 31
Dividends
5,000
5,000
Rent Revenue
Aug. 31 Bal. 90,000
Aug. 31
5,000
Aug. 31
1,800
Aug. 31 Bal. 96,800
Salaries Expense
Aug. 31 Bal. 51,000
Aug. 31
400
Aug. 31 Bal. 51,400
Aug. 31 Bal.
Utilities Expense
9,400
Aug. 31 Bal.
Repair Expense
3,600
6,500
6,800
1,800
Insurance Expense
Aug. 31
900
Aug. 31 Bal.
900
400
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PROBLEM 4-9A (Continued)
(b)
(Continued)
Financial Accounting, Second Canadian Edition
Amortization Expense—
Cottages
Aug. 31
1,500
Aug. 31 Bal. 1,500
Supplies Expense
Aug. 31
3,100
Aug. 31 Bal. 3,100
Amortization Expense—
Furniture
Aug. 31
1,250
Aug. 31 Bal. 1,250
Income Tax Expense
Aug. 31 Bal. 3,000
Aug. 31
00 4,000
Aug. 31 Bal. 7,000
Interest Expense
Aug. 31
600
Aug. 31 Bal.
600
PROBLEM 4-9A (Continued)
(c)
HIGHLAND COVE RESORT INC.
Adjusted Trial Balance
August 31, 2005
Cash .................................................................
Accounts Receivable ...........................................
Prepaid Insurance ................................................
Supplies ...............................................................
Land.....................................................................
Cottages ..............................................................
Accumulated Amortization—Cottages ..................
Furniture ..............................................................
Accumulated Amortization—Furniture ..................
Accounts Payable ................................................
Unearned Rent Revenue .....................................
Salaries Payable ..................................................
Interest Payable ...................................................
Income Tax Payable ............................................
Mortgage Payable ................................................
Common Shares ..................................................
Debit
$ 15,600
1,800
4,500
1,200
50,000
125,000
Credit
$
1,500
26,000
1,250
6,500
1,800
400
600
9,000
90,000
100,000
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Dividends .............................................................
Rent Revenue ......................................................
Salaries Expense .................................................
Utilities Expense ..................................................
Repair Expense ...................................................
Insurance Expense ..............................................
Income Tax Expense ...........................................
Supplies Expense ................................................
Amortization Expense—Cottages ........................
Amortization Expense—Furniture ........................
Interest Expense ..................................................
Totals
5,000
96,800
51,400
9,400
3,600
900
7,000
3,100
1,500
1,250
600
$307,850
0000,
_____ __
$307,850
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-9A (Continued)
(d)
HIGHLAND COVE RESORT INC.
Statement of Earnings
Three Months Ended August 31, 2005
Revenues
Rent revenue ..................................................
Expenses
Salaries expense.............................................
Utilities expense ..............................................
Repair expense ...............................................
Supplies expense ............................................
Amortization expense—cottages .....................
Insurance expense ..........................................
Interest expense..............................................
Amortization expense—furniture .....................
Total expenses ........................................
Earnings before income tax ....................................
Income tax expense ................................................
Net earnings ...........................................................
$96,800
$51,400
9,400
3,600
3,100
1,500
900
600
1,250
71,750
25,050
7,000
$18,050
HIGHLAND COVE RESORT INC.
Statement of Retained Earnings
Three Months Ended August 31, 2005
Retained earnings, June 1 .........................................................
Add: Net earnings ....................................................................
Less: Dividends ........................................................................
Retained earnings, August 31 ....................................................
$
0
18,050
18,050
5,000
$13,050
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Financial Accounting, Second Canadian Edition
PROBLEM 4-9A (Continued)
(d)
(Continued)
HIGHLAND COVE RESORT INC.
Balance Sheet
August 31, 2005
Assets
Current assets
Cash ..........................................................
Accounts receivable ...................................
Prepaid insurance ......................................
Supplies .....................................................
Total current assets ..............................
Property, plant and equipment
Land ...........................................................
Cottages.....................................................
Less: Accum. amortization—cottages .......
Furniture.....................................................
Less: Accum. amortization—furniture ........
Total property, plant, and equipment .....
Total assets .......................................................
$15,600
1,800
4,500
1,200
$23,100
$ 50,000
$125,000
1,500
123,500
$ 26,000
1,250
24,750
198,250
$221,350
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Financial Accounting, Second Canadian Edition
PROBLEM 4-9A (Continued)
(d)
(Continued)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable .........................................
Salaries payable...........................................
Interest payable............................................
Unearned rent revenue ................................
Income tax payable ......................................
Total current liabilities...................................
Mortgage payable ................................................
Total liabilities .......................................
Shareholders’ equity
Common shares ...........................................
Retained earnings ........................................
Total shareholders’ equity .....................
Total liabilities and shareholders’ equity
(e)
Aug. 31
31
031
31
$6,500
400
600
1,800
9,000
$ 18,300
90,000
108,300
100,000
13,050
113,050
$221,350
Rent Revenue....................................................
Income Summary .......................................
96,800
Income Summary...............................................
Salaries Expense .......................................
Utilities Expense.........................................
Repair Expense .........................................
Insurance Expense ....................................
Interest Expense ........................................
Supplies Expense ......................................
Amortization Expense - Cottages ...............
Amortization Expense - Furniture ...............
Income Tax Expense .................................
78,750
Income Summary...............................................
Retained Earnings......................................
18,050
Retained Earnings .............................................
Dividends ...................................................
5,000
96,800
51,400
9,400
3,600
900
600
3,100
1,500
1,250
7,000
18,050
5,000
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-10A
(a) Dec. 31
31
31
31
31
31
31
31
Accounts Receivable ......................................
Advertising Revenue ...............................
3,500
Art Supplies Expense .....................................
Art Supplies ............................................
2,400
Insurance Expense.........................................
Prepaid Insurance...................................
850
Amortization Expense ....................................
Accumulated Amortization ......................
7,000
Interest Expense ............................................
Interest Payable ......................................
225
Unearned Advertising Revenue ......................
Advertising Revenue ...............................
400
Salaries Expense ...........................................
Salaries Payable .....................................
1,300
Income Tax Expense ......................................
Income tax Payable ................................
2,500
3,500
2,400
850
7,000
225
400
1,300
2,500
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-10A (Continued)
(b)
GRANT ADVERTISING AGENCY LIMITED
Statement of Earnings
Year Ended December 31, 2004
Revenues
Advertising revenue ..........................................
Expenses
Salaries expense...............................................
Amortization expense ........................................
Rent expense ....................................................
Art supplies expense .........................................
Insurance expense ............................................
Interest expense................................................
Total expenses ..........................................
Earnings before income tax expense ........................
Income tax expense ..................................................
Net earnings .............................................................
$62,500
$11,300
7,000
14,000
2,400
850
225
35,775
26,725
10,000
$16,725
GRANT ADVERTISING AGENCY LIMITED
Statement of Retained Earnings
Year Ended December 31, 2004
Retained earnings, January 1 ....................................................
Add: Net earnings ....................................................................
Less: Dividends ........................................................................
Retained earnings, December 31 ..............................................
$11,650
16,725
28,375
12,000
$16,375
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-10A (Continued)
(b)
(Continued)
GRANT ADVERTISING AGENCY LIMITED
Balance Sheet
December 31, 2004
Assets
Current assets
Cash ...............................................................
Accounts receivable ........................................
Art supplies .....................................................
Prepaid insurance ...........................................
Total current assets .........................................
Property, plant, and equipment
Printing equipment ..........................................
Less: Accumulated amortization .....................
Total assets ............................................................
$11,000
21,500
6,000
2,500
41,000
$60,000
35,000
25,000
$66,000
Liabilities and Shareholders’ Equity
Current liabilities
Notes payable .................................................
Accounts payable ............................................
Interest payable...............................................
Unearned advertising revenue ........................
Income tax payable .........................................
Salaries payable..............................................
Total current liabilities ..............................
Shareholders’ equity
Common shares ..............................................
Retained earnings ...........................................
Total shareholders’ equity ........................
Total liabilities and shareholders’ equity .................
$15,000
5,000
225
5,600
2,500
1,300
29,625
20,000
16,375
36,375
$66,000
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-10A (Continued)
(c) Advertising Revenue, Salaries Expense, Amortization Expense, Rent Expense, Art Supplies Expense, Insurance Expense, Interest Expense, Income Tax Expense and Dividends.
(d) Interest expense = $5,000 x ?% x 3/12 = $225
Interest rate = 18%
(e) Salaries Expense, $11,300, less Salaries Payable 12/31/04, $1,300 =
$10,000. Total payments, $13,500 – $10,000 = $3,500 Salaries Payable
12/31/03.
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-11A
(a), (c) and (e)
Cash
Sept. 1 Bal. 4,880 Sept. 8
Sept. 10
1,200 Sept. 20
Sept. 12
3,400 Sept. 22
Sept. 29
650 Sept. 25
Sept. 30
Sept. 30 Bal. 2,330
Accounts Receivable
Sept. 1 Bal. 3,720 Sept. 10
Sept. 27
900
Sept. 30 Bal. 3,420
Supplies
Sept. 1 Bal.
800 Sept. 30
Sept. 17
1,500
Sept. 30 Bal. 1,800
1,100
4,500
500
1,200
500
1,200
500
Store Equipment
Sept. 1 Bal. 15,000
Sept. 15
3,000
Sept. 30 Bal. 18,000
Accumulated Amortization
Sept. 1 Bal.
Sept. 30
Sept. 30 Bal.
1,500
250
1,750
Accounts Payable
4,500 Sept. 1 Bal.
Sept. 15
Sept. 17
Sept. 30 Bal.
3,100
3,000
1,500
3,100
Sept. 20
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-11A (Continued)
(a), (c), and (e) (Continued)
Sept. 30
Sept. 8
Unearned
Service Revenue
350 Sept. 1 Bal.
Sept. 29
Sept. 30 Bal.
Salaries Payable
700 Sept. 1 Bal.
Sept. 30
Sept. 30 Bal.
400
650
700
700
400
400
Common Shares
Sept. 1 Bal. 10,000
Sept. 30 Bal. 10,000
Retained Earnings
Sept. 1 Bal.
Sept. 30 Bal.
8,700
8,700
Service Revenue
Sept. 12
Sept. 27
Sept. 30
Sept. 30 Bal.
3,400
900
350
4,650
Salaries Expense
Sept. 8
400
Sept. 25
1,200
Sept. 30
400
Sept. 30 Bal. 2,000
Rent Expense
Sept. 22
500
Sept. 30 Bal.
500
Income Tax Expense
Sept. 30
500
Sept. 30 Bal.
500
Amortization Expense
Sept. 30
250
Sept. 30 Bal.
250
Supplies Expense
Sept. 30
500
Sept. 30 Bal.
500
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-11A (Continued)
(b)
General Journal
Date
Sept. 8
10
12
15
17
20
22
25
27
29
30
Account Titles
Debit
Credit
Salaries Payable ............................................
700
Salaries Expense ..............................................................
400
Cash ..........................................................................
1,100
Cash .............................................................. ..................
1,200
Accounts Receivable ..............................
1,200
Cash .............................................................. ..................
3,400
Service Revenue ....................................
3,400
Store Equipment ............................................
Accounts Payable ...................................
3,000
3,000
Supplies .........................................................
Accounts Payable ...................................
1,500
Accounts Payable ..........................................
Cash .......................................................
4,500
Rent Expense ................................................
Cash .......................................................
500
Salaries Expense ...........................................
Cash .......................................................
1,200
Accounts Receivable......................................
Service Revenue ....................................
900
1,500
4,500
500
1,200
900
Cash .............................................................. ..................
650
Unearned Service Revenue....................
650
Income Tax Expense .....................................
Cash .......................................................
500
500
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-11A (Continued)
(d) and (f)
RIJO EQUIPMENT REPAIR CORP.
Trial Balance
September 30, 2004
Cash ............................................
Accounts Receivable ...................
Supplies .......................................
Store Equipment ..........................
Accumulated Amortization ...........
Accounts Payable ........................
Unearned Service Revenue .........
Salaries Payable ..........................
Common Shares ..........................
Retained Earnings .......................
Service Revenue .........................
Amortization Expense ..................
Supplies Expense ........................
Salaries Expense .........................
Income Tax Expense ...................
Rent Expense ..............................
Totals
(e) 1. Sept. 30
2.
3.
4.
30
30
30
Before
After
Adjustment
Adjustment
Dr.
Cr.
Dr.
Cr.
$ 2,330
$ 2,330
3,420
3,420
2,300
1,800
18,000
18,000
$ 1,500
$ 1,750
3,100
3,100
1,050
700
400
10,000
10,000
8,700
8,700
4,300
4,650
250
500
1,600
2,000
500
000
500
00
500 __ ____
500 ____ __
$28,650 $28,650 $29,300 $29,300
Supplies Expense......................................
Supplies ($2,300 – $1,800) ................
500
Salaries Expense ......................................
Salaries Payable ................................
400
Amortization Expense ...............................
Accumulated Amortization .................
250
Unearned Service Revenue ......................
Service Revenue ...............................
350
500
400
250
350
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Financial Accounting, Second Canadian Edition
PROBLEM 4-11A (Continued)
(g)
RIJO EQUIPMENT REPAIR CORP.
Statement of Earnings
Month Ended September 30, 2004
Revenues
Service revenue ...................................................
Expenses
Salaries expense..................................................
Supplies expense .................................................
Rent expense .......................................................
Amortization expense ...........................................
Total expenses .............................................
Earnings before income tax .........................................
Income tax expense .....................................................
Net earnings ................................................................
$4,650
$2,000
500
500
250
3,250
1,400
500
$ 900
RIJO EQUIPMENT REPAIR CORP.
Statement of Retained Earnings
Month Ended September 30, 2004
Retained earnings, September 1 .................................................
Add: Net earnings ......................................................................
Retained earnings, September 30 ...............................................
$8,700
900
$9,600
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Chapter 4
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 4-11A (Continued)
(g)
(Continued)
RIJO EQUIPMENT REPAIR CORP.
Balance Sheet
September 30, 2004
Assets
Current assets
Cash ...............................................................
Accounts receivable ........................................
Supplies ..........................................................
Total current assets .........................................
Property, plant, and equipment
Store equipment ..............................................
Less: Accumulated amortization .....................
Total assets ............................................................
$ 2,330
3,420
1,800
7,550
$18,000
1,750
16,250
$23,800
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ...............................................................
Salaries payable.................................................................
Unearned service revenue .................................................
Total current liabilities .................................................
Shareholders’ equity
Common shares .................................................................
Retained earnings ..............................................................
Total shareholders’ equity ...........................................
Total liabilities and shareholders’ equity .....................................
$ 3,100
400
700
4,200
10,000
9,600
19,600
$23,800
Solutions Manual
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Chapter 4
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 4-12A
(a)
Date
Mar. 1
1
2
3
5
14
18
20
21
28
31
General Journal
Account Titles
Debit
Cash ................................................................
Common Shares ......................................
10,000
Equipment .......................................................
Cash ........................................................
Note Payable ...........................................
26,000
Rent Expense ..................................................
Cash ........................................................
500
Cleaning Supplies ............................................
Accounts Payable ....................................
1,200
Prepaid Insurance ...........................................
Cash ........................................................
1,800
Accounts Receivable .......................................
Service Revenue ......................................
4,800
Accounts Payable ............................................
Cash ........................................................
500
Salaries Expense .............................................
Cash ........................................................
1,500
Cash ................................................................
Accounts Receivable................................
2,600
Accounts Receivable .......................................
Service Revenue ......................................
3,500
Gas & Oil Expense ..........................................
Cash ........................................................
350
Credit
10,000
6,000
20,000
500
1,200
1,800
4,800
500
1,500
2,600
3,500
350
Solutions Manual
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12A (Continued)
(a)
(Continued)
Mar. 31
Dividends .........................................................
Cash ........................................................
900
900
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12A (Continued)
(b), (e) and (h)
Cash
10,000 Mar. 1
2,600 Mar. 2
Mar. 5
Mar. 18
Mar. 20
Mar. 31
Mar. 31
Mar. 31 Bal. 1,050
Mar. 1
Mar. 21
Accounts Receivable
Mar. 14
4,800 Mar. 21
Mar. 28
3,500
Mar. 31
600
Mar. 31 Bal. 6,300
Cleaning Supplies
Mar. 3
1,200 Mar. 31
Mar. 31 Bal.
400
Mar. 5
Mar. 31 Bal.
Prepaid Insurance
1,800 3/31
1,650
2,600
Mar. 18
Accounts Payable
500 Mar. 3
Mar. 31 Bal.
500
500
Interest Payable
Mar. 31
Mar. 31 Bal.
133
133
Income Tax Payable
Mar. 31
Mar. 31 Bal.
1,600
1,600
Notes Payable
Mar. 1
20,000
Mar. 31 Bal. 20,000
800
Common Shares
Mar. 1
10,000
Mar. 31 Bal. 10,000
150
Mar. 31
Equipment
Mar. 1
26,000
Mar. 31 Bal. 26,000
Accumulated Amortization—
Equipment
Mar. 31
Mar. 31 Bal.
Salaries Payable
Mar. 31
Mar. 31 Bal.
6,000
500
1,800
500
1,500
350
900
Retained Earnings
900 Mar. 31
Mar. 31 Bal.
Mar. 31
Mar. 31 Bal.
400
400
Mar. 31
Mar. 31
1,200
700
Dividends
900 Mar. 31
0
Income Summary
5,933 Mar. 31
2,967
Mar. 31 Bal.
2,967
2,067
900
8,900
0
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12A (Continued)
(b), (e), and (h) (Continued)
Mar. 31
Service Revenue
8,900 Mar. 14
Mar. 28
Mar. 31
Mar. 31 Bal.
4,800
3,500
600
0
Salaries Expense
Mar. 20
1,500 Mar. 31
Mar. 31
500
Mar. 31 Bal.
0
2,000
350
400
Gas & Oil Expense
Mar. 31
350 Mar. 31
Mar. 31 Bal.
0
133
150
Interest Expense
Mar. 31
133 Mar. 31
Mar. 31 Bal.
0
Cleaning Supplies Expense
Mar. 31
800 Mar. 31
Mar. 31 Bal.
0
800
Income Tax Expense
Mar. 31
1,600 Mar. 31
Mar. 31 Bal.
0
Rent Expense
Mar. 2
500 Mar. 31
Mar. 31 Bal.
0
500
Amortization Expense
Mar. 31
400 Mar. 31
Mar. 31 Bal.
0
Insurance Expense
Mar. 31
150 Mar. 31
Mar. 31 Bal.
0
1,600
Solutions Manual
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12A (Continued)
(c) and (f)
EWOK’S CARPET CLEANERS LTD.
Trial Balance
March 31, 2004
Cash....................................................
Accounts Receivable ...........................
Cleaning Supplies ...............................
Prepaid Insurance ...............................
Equipment ...........................................
Accumulated Amortization ...................
Accounts Payable................................
Salaries Payable .................................
Interest Payable ..................................
Income Taxes Payable
Note Payable .......................................
Common Shares .................................
Dividends ............................................
Service Revenue .................................
Gas & Oil Expense ..............................
Salaries Expense ................................
Amortization Expense .........................
Insurance Expense..............................
Cleaning Supplies Expense .................
Rent Expense ......................................
Interest Expense .................................
Income Tax Expense ...........................
Totals
Before
Adjustment
Debit
Credit
$ 1,050
5,700
1,200
1,800
26,000
$
700
20,000
10,000
900
8,300
350
1,500
500
___ ___ ____ __
$39,000 $39,000
After
Adjustment
Debit
Credit
$ 1,050
6,300
400
1,650
26,000
$ 400
700
500
133
1,600
20,000
10,000
900
8,900
350
2,000
400
150
800
55500
133
1,600 ____ __
$42,233 $42,233
Solutions Manual
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12A (Continued)
(d)
1.
2.
3.
4.
5.
6.
7.
General Journal
Date
Account Titles
March 31
Accounts Receivable ..............................
Service Revenue .............................
600
Amortization Expense .............................
Accumulated Amortization...............
400
Interest Expense ($20,000 X 8% X 1/12)
Interest Payable ..............................
133
Insurance Expense .................................
Prepaid Insurance ($1,800 X 1/12)..
150
Cleaning Supplies Expense ....................
Cleaning Supplies ($1,200 – $400) .
800
Salaries Expense ....................................
Salaries Payable .............................
500
Income Tax Expense ..............................
Income Tax Payable .......................
1,600
31
31
31
31
31
31
Debit
Credit
600
400
133
150
800
500
1,600
Solutions Manual
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Chapter 4
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12A (Continued)
(g)
EWOK’S CARPET CLEANERS LTD.
Statement of Earnings
Month Ended March 31, 2004
Revenues
Service revenue .................................................
Expenses
Salaries expense................................................
Cleaning supplies expense ................................
Amortization expense .........................................
Gas & oil expense ..............................................
Rent expense .....................................................
Interest expense ................................................
Insurance expense .............................................
Total expenses ...........................................
Earnings before income tax .......................................
Income tax expense ...........................................
Net earnings ..............................................................
$8,900
$2,000
800
400
350
500
133
150
4,333
4,567
1,600
$2,967
EWOK’S CARPET CLEANERS LTD.
Statement of Retained Earnings
Month Ended March 31, 2004
Retained earnings, March 1 ......................................
Add: Net earnings ...................................................
Less: Dividends .......................................................
Retained earnings, March 31 ....................................
$
0
2,967
2,967
900
$2,067
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12A (Continued)
(g)
(Continued)
EWOK’S CARPET CLEANERS LTD.
Balance Sheet
March 31, 2004
Assets
Current assets
Cash .................................................................
Accounts receivable ..........................................
Cleaning supplies ..............................................
Prepaid insurance .............................................
Total current assets ...................................
Property, plant, and equipment
Equipment .........................................................
Less: Accumulated amortization.......................
Total assets ..............................................................
$ 1,050
6,300
400
1,650
9,400
$26,000
400
25,600
$35,000
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ..............................................
Interest payable ................................................
Income tax payable ...........................................
Salaries payable ...............................................
Total current liabilities ................................
Long-term liabilities
Note payable .....................................................
Total liabilities ............................................
Shareholders’ equity
Common shares ................................................
Retained earnings .............................................
Total shareholders’ equity..........................
Total liabilities and shareholders’ equity....................
$
700
133
1,600
500
2,933
20,000
22,933
10,000
2,067
12,067
$35,000
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12A (Continued)
(h)
General Journal
Date
Account Titles
Debit
Mar. ............................................................
Service Revenue .............................................
31
Income Summary .....................................
8,900
............................................................
Income Summary ............................................
31
Salaries Expense .....................................
Amortization Expense ..............................
Insurance Expense ..................................
Cleaning Supplies Expense .....................
Gas & Oil Expense ...................................
Income Tax Expense ...............................
Interest Expense ......................................
Rent Expense ..........................................
5,933
............................................................
Income Summary ............................................
31
Retained Earnings ...................................
2,967
............................................................
Retained Earnings ...........................................
31
Dividends .................................................
900
Credit
8,900
2,000
400
150
800
350
1,600
133
500
2,967
900
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12A (Continued)
(i)
EWOK’S CARPET CLEANERS LTD.
Post-Closing Trial Balance
March 31, 2004
Cash ....................................................................
Accounts Receivable ...........................................
Prepaid Insurance ................................................
Cleaning Supplies ................................................
Equipment ...........................................................
Accumulated Amortization—Equipment ...............
Accounts Payable ................................................
Salaries Payable ..................................................
Interest Payable ...................................................
Income Taxes Payable ........................................
Note Payable .......................................................
Common Shares ..................................................
Retained Earnings ...............................................
Totals
Debit
$ 1,050
6,300
1,650
400
26,000
Credit
$
___ ___
$35,400
400
700
500
133
1,600
20,000
10,000
2,067
$35,400
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Financial Accounting, Second Canadian Edition
PROBLEM 4-1B
(a)
7.
Matching principle
(b)
10. Cost-benefit
(c)
3.
Monetary unit assumption
(d)
4.
Time period assumption
(e)
8.
Cost principle
(f)
1.
Economic entity assumption
(g)
5.
Full disclosure principle
(h)
9.
Materiality
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Financial Accounting, Second Canadian Edition
PROBLEM 4-2B
$35,190
+2,500
-3,400
+1,160
-1,300
-2,400
+1,200
$32,950
Cash basis earnings
Accounts receivable arise from sales that have been made, thus
revenue must be recognized for balance outstanding at the end of
the current year
Accounts receivable collected in current year, for sales made in
previous year must be deducted from earnings
Supplies at year end should be set up as an asset rather than expensed, this increases earnings
Supplies at the end of the previous year should be expensed this
year, this decreases earnings
Wages payable owing at the end of the current year should be accrued, thus reducing earnings
Wages payable owed at the end of the previous year should not be
deducted from the current year’s earnings, thus increasing earnings
Accrual basis earnings
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Financial Accounting, Second Canadian Edition
PROBLEM 4-3B
(a)
CREATIVE DESIGNS LTD.
Statement of Earnings
Year Ended December 31, 2004
Revenues
Design revenue ($61,500 + (6) $3,800).............
Expenses
Wage expense ($18,400 + (5) $400) .................
Supplies expense ($6,200 – (2) $1,800)............
Rent expense ($9,600 – (3) $600).....................
Automobile expense ((7) 10,000 X $0.30)) ........
Advertising expense ..........................................
Amortization expense ($16,400 ÷ (1) 5) ...........
Telephone expense...........................................
Insurance expense ...........................................
Total expenses ..........................................
Earnings before tax...................................................
Income tax expense..................................................
Net earnings .............................................................
$65,300
$18,800
4,400
9,000
3,000
3,600
3,280
980
1,800
44,860
20,440
4,000
$16,440
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Financial Accounting, Second Canadian Edition
PROBLEM 4-3B (Continued)
(b)
CREATIVE DESIGNS LTD.
Balance Sheet
December 31, 2004
Assets
Current assets
Cash ............................................................
Rent deposit (3) ...........................................
Accounts receivable (6) ................................
Supplies (2) ..................................................
Total current assets......................................
Property, plant and equipment
Equipment ....................................................
Less: Accumulated amortization—equip. (1)
Total assets .........................................................
$ 16,520
600
3,800
1,800
22,720
$16,400
3,280
13,120
$35,840
Liabilities and Shareholders’ Equity
Current liabilities
Wages payable (5) .......................................
Accounts payable ((7) $10,000 X $0.30) ......
Total current liabilities ..................................
Shareholders’ equity
Common shares ...........................................
Retained earnings ($16,440 – $4,000) .........
Total shareholders’ equity.....................
Total liabilities and shareholders’ equity...............
$
400
3,000
3,400
$20,000
12,440
32,440
$35,840
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Financial Accounting, Second Canadian Edition
PROBLEM 4-4B
1.
Jan. 2
Dec. 31
2.
Sept. 1
Dec. 31
3.
Nov. 15
Dec. 31
4.
Dec. 1
Dec. 31
Office Supplies ...............................................
Cash .......................................................
4,500
Supplies Expense ($4,500 – $500) .................
Office Supplies ........................................
4,000
Prepaid Insurance ..........................................
Cash .......................................................
3,600
Insurance Expense ($3,600 X 4/12) ...............
Prepaid Insurance ...................................
1,200
Cash ...............................................................
Unearned Revenue .................................
1,200
Unearned Revenue .......................................
Service Revenue.....................................
600
Cash ...............................................................
Unearned Rent Revenue ........................
920
Unearned Rent Revenue ($920 ÷ 2) ...............
Rental Revenue ......................................
460
4,500
4,000
3,600
1,200
1,200
600
920
460
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Financial Accounting, Second Canadian Edition
PROBLEM 4-5B
1.
2.
3.
4.
Jan. 31
Jan. 31
Jan. 31
Jan. 31
Insurance Expense .........................................
Prepaid Insurance ...................................
[($9,600 ÷ 2)
=$4,800
[($4,800 X 12/18) = 3,200
$8,000]
8,000
Unearned Subscription Revenue ....................
Subscription Revenue .............................
[Nov. 200 X $50 X 3/12 = $2,500
[Dec. 300 X $50 X 2/12 = 2,500
[Jan. 480 X $50 X 1/12 = 2,000
$7,000]
7,000
Interest Expense ............................................
Interest Payable ......................................
($50,000 X 7% X 5/12)
1,458
Salaries Expense............................................
Salaries Payable .....................................
[5 X $600 X 2/5 = $ 1,200
[3 X $800 X 2/5 =
960
$2,160]
2,160
8,000
7,000
1,458
2,160
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Financial Accounting, Second Canadian Edition
PROBLEM 4-6B
1. (a)
Office Supplies ...............................................
Cash .......................................................
1,460
(b) Dec. 31 Supplies Expense ($1,460 + $640 – $740) .....
Office Supplies ........................................
1,360
2. (a) Feb. 1 Cash ...............................................................
Note Payable ..........................................
10,000
(b) Dec. 31 Interest Expense (Long-Term) ........................
Interest Payable ($10,000 X 6% X 1/12) .
50
Dec. 31 Telephone Expense........................................
Accounts Payable ...................................
400
4. (a) Jan. 1 Truck ..............................................................
Cash .......................................................
28,000
(b) Dec. 31 Amortization Expense .....................................
Accumulated Amortization – Truck..........
5,600
5. (a) Dec. 31 Wage Expense ...............................................
Wages Payable ($3,000 X 4/6) ...............
2,000
3.
1,460
1,360
10,000
50
400
28,000
5,600
2,000
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Financial Accounting, Second Canadian Edition
PROBLEM 4-7B
(a) 1.
2.
3.
March 31 Travel Court Rental Fees ........................
Unearned Fee Revenue .................
28,000
31 Supplies Expense ...................................
Supplies ($5,200 – $1,300) ............
3,900
31 Insurance Expense ($7,200 X 3/5) ..........
Prepaid Insurance ..........................
4,320
28,000
3,900
4,320
Note: If we assume that adjusting entries are made quarterly, then the
balance of $7,200 in the Prepaid Insurance account is the balance adjusted to December 31. Therefore, there are 5 months remaining in the policy
(January 1 – May 31) at December 31, of which three are now expired
(January 1 – March 31).
4.
5.
6.
7.
31 Advertising Expense ...............................
Repairs Expense.....................................
Utilities Expense .....................................
Accounts Payable...........................
410
4,260
380
31 Wages Expense ($350 x 3) .....................
Wages Payable ..............................
1,050
31 Interest Expense ($12,000 x 5% x 3/12) .
Interest Payable .............................
150
31 Income Tax Expense ..............................
Income Tax Payable .......................
6,000
5,050
1,050
150
6,000
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Financial Accounting, Second Canadian Edition
PROBLEM 4-7B (Continued)
(b)
HOLIDAY TRAVEL COURT LTD.
Statement of Earnings
Quarter Ended March 31, 2004
Revenues
Travel court rental fees ($95,000 – $28,000).....
Expenses
Wages expense ($29,800 + $1,050) .................
Advertising expense ($5,200 + $410) ................
Supplies expense ..............................................
Repairs expense ($4,000 + $4,260) ..................
Insurance expense ............................................
Utilities expense ($900 + $380) .........................
Amortization expense ........................................
Interest expense ...............................................
Total expenses ..........................................
Earnings before income taxes ..................................
Income tax expense..................................................
Net earnings .............................................................
$67,000
$30,850
5,610
3,900
8,260
6,000
1,280
800
150
56,850
10,150
6,000
$ 4,150
(c) The generally accepted accounting principles pertaining to the statement of
earnings not recognized by Alice were the revenue recognition principle and
the matching principle.
The revenue recognition principle states that revenue is recognized when it is
earned. The fees of $28,000 for summer rentals have not been earned and,
therefore, should not be reported in earnings for the quarter ended March 31.
The matching principle dictates that efforts (expenses) be matched with
accomplishments (revenue). This means that the expenses should include
amounts incurred in March but not paid until April, and any other costs related
to the operations of the business during the period January – March.
The difference in reported expenses was $22,150 ($56,850 + $6,000 $40,700). The overstatement of revenues ($28,000) plus the understatement
of expenses ($22,150) equals the difference in reported earnings of $50,150
($54,300 - $4,150).
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Financial Accounting, Second Canadian Edition
PROBLEM 4-8B
(a)
Date
1.
2.
3.
4.
5.
6.
7.
2005
June 30
30
30
30
30
30
30
Account Titles
Debit
Insurance Expense ......................................
Prepaid Insurance
($7,200 ÷ 12 months) ............................
600
Amortization Expense ..................................
Accum. Amortization - Office Equip. .....
Accum. Amortization – Buses ...............
2,550
Interest Expense ..........................................
Interest Payable ...................................
310
Unearned Revenue......................................
Tour Revenue ($1,500 X 6 tours) .........
9,000
Salaries Expense .........................................
Salaries Payable ..................................
1,600
Accounts Receivable ...................................
Tour Revenue ......................................
1,200
Income Tax Expense ...................................
Income Taxes Payable .........................
2,000
Credit
600
50
2,500
310
9,000
1,600
1,200
2,000
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Financial Accounting, Second Canadian Edition
PROBLEM 4-8B (Continued)
(b)
Jun. 30 Bal.
Cash
3,000
Jun. 30
Accounts Receivable
Jun. 30
1,200
Jun. 30 Bal. 1,200
Prepaid Insurance
Jun. 30 Bal. 7,200 Jun. 30
Jun. 30 Bal. 6,600
Jun. 30 Bal.
600
Office Equipment
1,800
Accum. Amortiz. – Office Equip.
Jun. 30
Jun. 30 Bal.
50
50
15,000
6,000
Common Shares
Jun. 30 Bal.
70,000
Tour Revenue
Jun. 30 Bal.
Jun. 30
Jun. 30
Jun. 30 Bal.
15,900
9,000
1,200
26,100
Salaries Expense
Jun. 30 Bal. 9,000
Jun. 30
1,600
Jun. 30 Bal. 10,600
Advertising Expense
Jun. 30 Bal.
800
Buses
Jun. 30 Bal. 140,000
Accum. Amortiz.—Buses
Jun. 30
Jun. 30 Bal.
Unearned Revenue
9,000 Jun. 30 Bal.
Jun. 30 Bal.
2,500
2,500
Amortization Expense
Jun. 30
2,550
Jun. 30 Bal. 2,550
Gas and Oil Expense
Jun. 30
1,100
Jun. 30 Bal. 1,100
Notes Payable
Jun. 30 Bal.
62,000
Interest Payable
Jun. 30
Jun. 30 Bal.
310
310
Salaries Payable
Jun. 30
Jun. 30 Bal.
1,600
1,600
Income Tax Expense
Jun. 30
2,000
Jun. 30 Bal. 0 2,000
Income Taxes Payable
Jun. 30
Jun. 30 Bal.
2,000
2,000
Insurance Expense
Jun. 30
600
Jun. 30 Bal.
600
Interest Expense
Jun. 30
310
Jun. 30 Bal.
310
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Financial Accounting, Second Canadian Edition
PROBLEM 4-8B (Continued)
(c)
SCENIC TOURS LIMITED
Adjusted Trial Balance
June 30, 2005
Cash ....................................................................
Accounts Receivable ...........................................
Prepaid Insurance ................................................
Office Equipment .................................................
Accumulated Amortization—Office Equipment .....
Buses ...................................................................
Accumulated Amortization—Buses ......................
Notes Payable .....................................................
Interest Payable ...................................................
Income Taxes Payable.........................................
Salaries Payable ..................................................
Unearned Service Revenue .................................
Common Shares ..................................................
Tour Revenue ......................................................
Salaries Expense .................................................
Advertising Expense ............................................
Amortization Expense ..........................................
Interest Expense ..................................................
Income Tax Expense ...........................................
Gas and Oil Expense ...........................................
Insurance Expense ..............................................
Totals
Debit
$ 3,000
1,200
6,600
1,800
Credit
$
50
140,000
2,500
62,000
310
2,000
1,600
6,000
70,000
26,100
10,600
800
2,550
310
2,000
1,100
600 00 00000
$170,560 $170,560
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Financial Accounting, Second Canadian Edition
PROBLEM 4-9B
(a) 1. May 31
2.
3.
31
31
31
4.
5.
6.
7.
31
31
31
31
Insurance Expense ...................................
Prepaid Insurance .............................
300
Supplies Expense .....................................
Supplies ............................................
($2,600 – $1,350)
1,250
Amortization Expense—Lodge..................
($3,500 X 1/12)
Accumulated Amortization—Lodge ...
292
Amortization Expense—Furniture .............
($3,360 X 1/12)
Accumulated Amortization—Furniture
280
Interest Expense .......................................
Interest Payable ................................
[($35,000 X 7%) X 1/12]
204
Unearned Rent Revenue ..........................
Rent Revenue ...................................
1,500
Salaries Expense ......................................
Salaries Payable ...............................
500
Income Tax Expense ................................
Income Taxes Payable ......................
1,700
300
1,250
292
280
204
1,500
500
1,700
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Financial Accounting, Second Canadian Edition
PROBLEM 4-9B (Continued)
(b)
May 31 Bal.
Cash
2,500
May 31
Prepaid Insurance
May 31 Bal. 1,800 May 31
May 31 Bal. 1,500
May 31 Bal.
May 31 Bal.
Supplies
2,600 May 31
1,350
Unearned Rent Revenue
1,500 May 31 Bal.
May 31 Bal.
4,500
3,000
Salaries Payable
May 31
May 31 Bal.
500
500
Interest Payable
May 31
May 31 Bal.
204
204
Mortgage Payable
May 31 Bal.
35,000
Common Shares
May 31 Bal.
60,000
Rent Revenue
May 31 Bal.
May 31
May 31 Bal.
9,000
1,500
10,500
300
1,250
Land
May 31 Bal. 15,000
Lodge
May 31 Bal. 70,000
Accum. Amortization—Lodge
May 31
May 31 Bal.
292
292
Furniture
May 31 Bal. 16,800
Accum. Amortization—Furniture
May 31
280
May 31 Bal.
280
Salaries Expense
May 31 Bal. 3,000
May 31
500
May 31 Bal. 3,500
Accounts Payable
May 31 Bal.
4,700
May 31 Bal.
Utilities Expense
1,000
Income Taxes Payable
May 31
May 31 Bal.
1,700
1,700
Advertising Expense
May 31 Bal.
500
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Financial Accounting, Second Canadian Edition
PROBLEM 4-9B (Continued)
(b) (Continued)
Interest Expense
May 31
204
May 31 Bal.
204
Income Tax Expense
May 31
1,700
May 31 Bal.
1,700
Supplies Expense
May 31
1,250
May 31 Bal.
1,250
Amortization Expense—Lodge
May 31
292
May 31 Bal.
292
Amortization Expense—Furniture
May 31
280
May 31 Bal.
280
Insurance Expense
May 31
300
May 31 Bal.
300
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Financial Accounting, Second Canadian Edition
PROBLEM 4-9B (Continued)
(c)
RIVER RUN MOTEL LTD.
Adjusted Trial Balance
May 31, 2004
Debit
Cash ....................................................................
Prepaid Insurance ................................................
Supplies ...............................................................
Land.....................................................................
Lodge ...................................................................
Accumulated Amortization—Lodge ......................
Furniture ..............................................................
Accumulated Amortization—Furniture ..................
Accounts Payable ................................................
Unearned Rent Revenue .....................................
Salaries Payable ..................................................
Interest Payable ...................................................
Income Taxes Payable.........................................
Mortgage Payable ................................................
Common Shares ..................................................
Rent Revenue ......................................................
Salaries Expense .................................................
Utilities Expense ..................................................
Advertising Expense ............................................
Interest Expense ..................................................
Income Tax Expense ...........................................
Insurance Expense ..............................................
Supplies Expense ................................................
Amortization Expense—Lodge .............................
Amortization Expense—Furniture ........................
Totals ...............................................................
$
Credit
2,500
1,500
1,350
15,000
70,000
$
292
16,800
280
4,700
3,000
500
204
1,700
35,000
60,000
10,500
3,500
1,000
500
204
1,700
300
1,250
292
280
$116,176
000000 0
$116,176
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Financial Accounting, Second Canadian Edition
PROBLEM 4-9B (Continued)
(d)
RIVER RUN MOTEL LTD.
Statement of Earnings
Month Ended May 31, 2004
Revenues
Rent revenue ....................................................
Expenses
Salaries expense...............................................
Utilities expense ................................................
Supplies expense ..............................................
Advertising expense ..........................................
Interest expense................................................
Insurance expense ............................................
Amortization expense—lodge............................
Amortization expense—furniture .......................
Total expenses ..........................................
Earnings before income taxes...................................
Income tax expense ..................................................
Net earnings .............................................................
$10,500
$3,500
1,000
1,250
500
204
300
292
280
7,326
3,174
1,700
$ 1,474
RIVER RUN MOTEL LTD.
Statement of Retained Earnings
Month Ended May 31, 2004
Retained earnings, May 1 ..........................................................
Add: Net earnings ....................................................................
Retained earnings, May 31 ........................................................
$
0
1,474
$1,474
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Financial Accounting, Second Canadian Edition
PROBLEM 4-9B (Continued)
(d)
(Continued)
RIVER RUN MOTEL LTD.
Balance Sheet
May 31, 2004
Assets
Current assets
Cash ............................................................
Prepaid insurance ........................................
Supplies .......................................................
Total current assets ...................................
Property, plant, and equipment
Land .............................................................
Lodge ...........................................................
Less: Accumulated amortization—lodge .....
Furniture.......................................................
Less: Accumulated amortization—furniture .
Total property, plant, and equipment .........
Total assets .........................................................
$ 2,500
1,500
1,350
5,350
$15,000
$70,000
292
69,708
$16,800
280
16,520
101,228
$106,578
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Financial Accounting, Second Canadian Edition
PROBLEM 4-9B (Continued)
(d) (Continued)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable .........................................
Unearned rent revenue ................................
Salaries payable...........................................
Interest payable............................................
Income taxes payable ..................................
Total current liabilities...................................
Mortgage payable ................................................
Total liabilities .......................................
Shareholders’ equity
Common shares ...........................................
Retained earnings ........................................
Total shareholders’ equity .....................
Total liabilities and shareholders’ equity ...............
$ 4,700
3,000
500
204
1,700
10,104
35,000
45,104
$60,000
1,474
61,474
$106,578
(e)
May 31
31
031
Rent Revenue....................................................
Income Summary .......................................
10,500
Income Summary...............................................
Salaries Expense .......................................
Utilities Expense.........................................
Advertising Expense ..................................
Insurance Expense ....................................
Interest Expense ........................................
Supplies Expense ......................................
Amortization Expense - Lodge ...................
Amortization Expense - Furniture ...............
Income Tax Expense .................................
9,026
Income Summary...............................................
Retained Earnings......................................
1,474
10,500
3,500
1,000
500
300
204
1,250
292
280
1,700
1,474
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Financial Accounting, Second Canadian Edition
PROBLEM 4-10B
(a) Sept. 30
30
30
30
30
30
30
30
Accounts Receivable.......................................
Commission Revenue .............................
400
Rent Expense .................................................
Prepaid Rent ...........................................
1,100
Supplies Expense ...........................................
Supplies ..................................................
200
Amortization Expense .....................................
Accum. Amortization—Equipment ...........
350
Interest Expense .............................................
Interest Payable ......................................
50
Unearned Rent Revenue ................................
Rent Revenue .........................................
300
Salaries Expense ............................................
Salaries Payable .....................................
600
Income Tax Expense ......................................
Income Taxes Payable ............................
1,000
400
1,100
200
350
50
300
600
1,000
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Financial Accounting, Second Canadian Edition
PROBLEM 4-10B (Continued)
(b)
OZAKI CORP.
Statement of Earnings
Quarter Ended September 30, 2004
Revenues
Commission revenue.........................................
Rent revenue ....................................................
Total revenues ...........................................
Expenses
Salaries expense...............................................
Rent expense ....................................................
Utilities expense ................................................
Amortization expense ........................................
Supplies expense ..............................................
Interest expense................................................
Total expenses ..........................................
Earnings before income taxes...................................
Income tax expense ..................................................
Net earnings .............................................................
$14,400
700
15,100
$9,400
2,000
510
350
200
50
12,510
2,590
1,000
$ 1,590
OZAKI CORP.
Statement of Retained Earnings
Quarter Ended September 30, 2004
Retained earnings, July 1 ............................................................
Add: Net earnings ......................................................................
Less: Dividends ..........................................................................
Retained earnings, September 30 ...............................................
$
0
1,590
1,590
600
$ 990
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Financial Accounting, Second Canadian Edition
PROBLEM 4-10B (Continued)
(b)
(Continued)
OZAKI CORP.
Balance Sheet
September 30, 2004
Assets
Current assets
Cash ...............................................................
Accounts receivable ........................................
Prepaid rent ....................................................
Supplies ..........................................................
Total current assets .........................................
Property, plant, and equipment
Equipment .......................................................
Less: Accum. amortization—equipment .........
Total assets ............................................................
$ 6,700
800
900
1,000
9,400
$15,000
350
14,650
$24,050
Liabilities and Shareholders’ Equity
Current liabilities
Note payable ...................................................
Accounts payable ............................................
Salaries payable..............................................
Interest payable...............................................
Income tax payable .........................................
Unearned rent revenue ...................................
Total current liabilities ..............................
Shareholders’ equity
Common shares ..............................................
Retained earnings ...........................................
Total shareholders’ equity ........................
Total liabilities and shareholders’ equity ..................
$ 5,000
1,710
600
50
1,000
700
9,060
$14,000
990
14,990
$24,050
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Financial Accounting, Second Canadian Edition
PROBLEM 4-10B (Continued)
(c) The following accounts would be closed: Commission Revenue, Rent Revenue, Salaries Expense, Rent Expense, Utilities Expense, Amortization Expense, Supplies Expense, Interest Expense, Income Tax Expense and Dividends.
(d) Interest of 6% per year equals a monthly rate of 0.5%; monthly interest is $25
($5,000 X 0.5%). Since total interest expense is $50, the note has been outstanding two months.
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Financial Accounting, Second Canadian Edition
PROBLEM 4-11B
(a), (c) and (e)
Nov. 1 Bal.
Nov. 10
Nov. 12
Nov. 29
Cash
2,790 Nov. 8
1,200 Nov. 20
1,700 Nov. 22
550 Nov. 25
Nov. 30 Bal.
1,240
Accounts Receivable
Nov. 1 Bal.
2,910 Nov. 10
Nov. 27
700
Nov. 30 Bal. 2,410
Nov. 1 Bal.
Nov. 17
Nov. 30 Bal.
Supplies
1,000 Nov. 30
1,300
1,600
1,100
2,500
300
1,100
Nov. 30
1,200
Nov. 8
700
2,300
3,000
1,300
4,100
Unearned
Service Revenue
300 Nov. 1 Bal.
Nov. 29
Nov. 30 Bal.
400
550
650
Salaries Payable
500 Nov. 1 Bal.
Nov. 30
Nov. 30 Bal.
500
500
500
Common Shares
Nov. 1 Bal. 10,000
Nov. 30 Bal. 10,000
Store Equipment
Nov. 1 Bal. 10,000
Nov. 15
3,000
Nov. 30 Bal. 13,000
Accumulated Amortization—
Store Equipment
Nov. 1 Bal.
Nov. 30
Nov. 30 Bal.
Nov. 20
Accounts Payable
2,500 Nov. 1 Bal.
Nov. 15
Nov. 17
Nov. 30 Bal.
Retained Earnings
Nov. 1 Bal.
Nov. 30 Bal.
3,000
3,000
500
250
750
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(a), (c) and (e) (Continued)
PROBLEM 4-11B (Continued)
Service Revenue
Nov. 12
Nov. 27
Nov. 30
Nov. 30 Bal.
Amortization Expense
Nov. 30
250
Nov. 30 Bal.
250
1,700
700
300
2,700
Nov. 8
Nov. 25
Nov. 30
Nov. 30 Bal.
Salaries Expense
600
1,100
500
2,200
Rent Expense
Nov. 22
300
Nov. 30 Bal.
300
Supplies Expense
Nov. 30
700
Nov. 30 Bal.
700
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Financial Accounting, Second Canadian Edition
PROBLEM 4-11B (Continued)
(b)
General Journal
Date
Account Titles
Nov. 8
Salaries Payable .............................................
Salaries Expense ............................................
Cash ........................................................
500
600
Cash ...............................................................
Accounts Receivable ...............................
1,200
Cash ...............................................................
Service Revenue .....................................
1,700
Store Equipment .............................................
Accounts Payable ....................................
3,000
Supplies ..........................................................
Accounts Payable ....................................
1,300
Accounts Payable ...........................................
Cash ........................................................
2,500
Rent Expense .................................................
Cash ........................................................
300
Salaries Expense ............................................
Cash ........................................................
1,100
Accounts Receivable .......................................
Service Revenue .....................................
700
Cash ...............................................................
Unearned Service Revenue .....................
550
10
12
15
17
20
22
25
27
29
Debit
Credit
1,100
1,200
1,700
3,000
1,300
2,500
300
1,100
700
550
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Financial Accounting, Second Canadian Edition
PROBLEM 4-11B (Continued)
(d) and (f)
ALOU EQUIPMENT REPAIR CORP.
Trial Balance
November 30, 2004
Before
Adjustment
Dr.
Cr.
Cash ............................................
Accounts Receivable ...................
Supplies .......................................
Store Equipment ..........................
Accumulated Amortization ...........
Accounts Payable ........................
Unearned Service Revenue .........
Salaries Payable ..........................
Common Shares ..........................
Retained Earnings .......................
Service Revenue .........................
Salaries Expense .........................
Rent Expense ..............................
Supplies Expense ........................
Amortization Expense ..................
Totals ........................................
$ 1,240
2,410
2,300
13,000
$ 1,240
2,410
1,600
13,000
$
500
4,100
950
10,000
3,000
2,400
1,700
300
After
Adjustment
Dr.
Cr.
$
750
4,100
650
500
10,000
3,000
2,700
00
2,200
300
700
000 000 0000 00 0 00250 00 0000
$20,950 $20,950 $21,700 $21,700
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Financial Accounting, Second Canadian Edition
PROBLEM 4-11B (Continued)
(e)
1. Nov. 30
2.
3.
4.
30
30
30
Supplies Expense.............................................
Supplies ($2,300 – $1,600) .......................
700
Salaries Expense .............................................
Salaries Payable .......................................
500
Amortization Expense ......................................
Accum. Amort.—Store Equipment ............
250
Unearned Service Revenue .............................
Service Revenue ......................................
300
700
500
250
300
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Financial Accounting, Second Canadian Edition
PROBLEM 4-11B (Continued)
(g)
ALOU EQUIPMENT REPAIR CORP.
Statement of Earnings
Month Ended November 30, 2004
Revenues
Service revenue ................................................
Expenses
Salaries expense...............................................
Supplies expense ..............................................
Rent expense ....................................................
Amortization expense ........................................
Total expenses ..........................................
Net loss.....................................................................
($2,700
$2,200
700
300
250
( 3,450
$ (750)
ALOU EQUIPMENT REPAIR CORP.
Statement of Retained Earnings
Month Ended November 30, 2004
Retained earnings, November 1 ................................................
Less: Net loss ...........................................................................
Retained earnings, November 30 ..............................................
$3,000
(750)
$2,250
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 4-11B (Continued)
(g)
(Continued)
ALOU EQUIPMENT REPAIR CORP.
Balance Sheet
November 30, 2004
Assets
Current assets
Cash ...............................................................
Accounts receivable ........................................
Supplies ..........................................................
Total current assets .................................
Property, plant, and equipment
Store equipment ..............................................
$13,000
Less: Accumulated amortization. ....................
750
Total assets ...............................................................................
$ 1,240
2,410
1,600
5,250
12,250
$17,500
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ...............................................................
Salaries payable.................................................................
Unearned service revenue .................................................
Total current liabilities .................................................
Shareholders’ equity
Common shares .................................................................
Retained earnings ..............................................................
Total shareholders’ equity ...........................................
Total liabilities and shareholders’ equity .....................................
$ 4,100
500
650
5,250
10,000
2,250
12,250
$17,500
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12B
(a)
Date
July 1
1
3
5
12
18
20
21
25
31
31
31
General Journal
Account Titles
Cash ................................................................
Common Shares ......................................
Debit
24,000
Credit
24,000
Equipment .......................................................
Cash ........................................................
Note Payable ...........................................
36,000
Cleaning Supplies ............................................
Accounts Payable ....................................
800
Prepaid Insurance ...........................................
Cash ........................................................
1,200
Accounts Receivable .......................................
Service Revenue ......................................
4,500
Accounts Payable ............................................
Cash ........................................................
500
Salaries Expense .............................................
Cash ........................................................
1,600
Cash ................................................................
Accounts Receivable................................
1,500
Accounts Receivable .......................................
Service Revenue ......................................
2,000
Gas & Oil Expense ..........................................
Cash ........................................................
250
Income Tax Expense .......................................
Cash ........................................................
1,200
Dividends .........................................................
Cash ........................................................
600
16,000
20,000
800
1,200
4,500
500
1,600
1,500
2,000
250
1,200
600
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12B (Continued)
(b), (e) and (h)
Jul. 1
Jul. 21
Jul. 31 Bal.
Cash
24,000 Jul. 1
1,500 Jul. 5
Jul. 18
Jul. 20
Jul. 31
Jul. 31
Jul. 31
4,150
Accounts Receivable
Jul. 12
4,500 Jul. 21
Jul. 25
2,000
Jul. 31
1,500
Jul. 31 Bal.
6,500
Cleaning Supplies
Jul. 3
800 Jul. 31
Jul. 31 Bal.
600
16,000
1,200
500
1,600
250
1,200
600
1,500
Jul. 1
Jul. 31 Bal.
Jul. 31
Jul. 31 Bal.
Jul. 31
Jul. 31
300
300
Jul. 31
Jul. 18
Accounts Payable
500 Jul. 3
Salaries Payable
Jul. 31
Jul. 31 Bal.
400
400
Interest Payable
Jul. 31
Jul. 31 Bal.
133
133
Note Payable
Jul. 1
Jul. 31 Bal.
20,000
20,000
Common Shares
Jul. 1
Jul. 31 Bal.
24,000
24,000
Retained Earnings
600 Jul. 31
Jul. 31 Bal.
3,817
3,217
100
Equipment
36,000
36,000
Accumulated Amortization—
Equipment
Jul. 31
Jul. 31 Bal.
300
200
Jul. 31
Prepaid Insurance
Jul. 5
1,200 Jul. 31
Jul. 31 Bal.
1,100
Jul. 31 Bal.
800
Dividends
600 Jul. 31
0
Income Summary
4,183 Jul. 31
3,817
Jul. 31 Bal.
Service Revenue
8,000 Jul. 12
Jul. 25
Jul. 31
Jul. 31 Bal.
600
8,000
0
4,500
2,000
1,500
0
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12B (Continued)
(b), (e) and (h) (Continued)
Gas & Oil Expense
Jul. 31
250 Jul. 31
Jul. 31 Bal.
0
250
Cleaning Supplies Expense
Jul. 31
200 Jul. 31
Jul. 31 Bal.
0
200
Amortization Expense
Jul. 31
300 Jul. 31
Jul. 31 Bal.
0
300
Jul. 31
Jul. 31 Bal.
Insurance Expense
100 Jul. 31
0
Salaries Expense
Jul. 20
1,600 Jul. 31
Jul. 31
400
Jul. 31 Bal.
0
Income Tax Expense
Jul. 31
1,200 Jul. 31
Jul. 31 Bal.
0
Interest Expense
Jul. 31
133 Jul. 31
Jul. 31 Bal.
0
100
2,000
1,200
133
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12B (Continued)
(c) and (f)
CORELLIAN WINDOW WASHING INC.
Trial Balance
July 31, 2004
Cash ....................................................
Accounts Receivable ...........................
Cleaning Supplies ...............................
Prepaid Insurance ...............................
Equipment ...........................................
Accumulated Amort.—Equipment ........
Accounts Payable ................................
Salaries Payable .................................
Interest Payable ..................................
Note Payable .......................................
Common Shares .................................
Dividends ............................................
Service Revenue .................................
Salaries Expense ................................
Gas & Oil Expense ..............................
Amortization Expense..........................
Insurance Expense ..............................
Income Tax Expense ...........................
Cleaning Supplies Expense .................
Interest Expense .................................
Totals ..............................................
Before
Adjustment
Debit
Credit
$ 4,150
5,000
800
1,200
36,000
$ 300
20,000
24,000
600
6,500
1,600
250
1,200
000
0000 00 0000 00
$50,800 $50,800
After
Adjustment
Debit
Credit
$ 4,150
6,500
600
1,100
36,000
$ 300
300
400
133
20,000
24,000
600
8,000
2,000
250
300
100
1,200
200
133 000 000
$53,133 $53,133
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12B (Continued)
(d)
1.
2.
3.
4.
5.
6.
General Journal
Date
Account Titles
July 31
Accounts Receivable..................................
Service Revenue ................................
1,500
Amortization Expense ................................
Accumulated Amort.—Equipment. ......
300
Insurance Expense ....................................
Prepaid Insurance ..............................
100
Cleaning Supplies Expense .......................
Cleaning Supplies ..............................
200
Salaries Expense .......................................
Salaries Payable ................................
400
Interest Expense ($20,000 X 8% X 1/12) ...
Interest Payable .................................
133
31
31
31
31
31
Debit
Credit
1,500
300
100
200
400
133
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12B (Continued)
(g)
CORELLIAN WINDOW WASHING INC.
Statement of Earnings
Month Ended July 31, 2004
Revenues
Service revenue .................................................
Expenses
Salaries expense................................................
Cleaning supplies expense ................................
Amortization expense .........................................
Gas & oil expense ..............................................
Interest expense.................................................
Insurance expense .............................................
Total expenses ...........................................
Earnings before income taxes....................................
Income tax expense ...................................................
Net earnings ..............................................................
$8,000
$2,000
200
300
250
133
100
2,983
5,017
1,200
$3,817
CORELLIAN WINDOW WASHING INC.
Statement of Retained Earnings
Month Ended July 31, 2004
Retained earnings, July 1 ...........................................................
Add: Net earnings .....................................................................
Less: Dividends .........................................................................
Retained earnings, July 31 .........................................................
$
0
3,817
3,817
600
$3,217
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12B (Continued)
(g) (Continued)
CORELLIAN WINDOW WASHING INC.
Balance Sheet
July 31, 2004
Assets
Current assets
Cash .................................................................
Accounts receivable ..........................................
Cleaning supplies ..............................................
Prepaid insurance .............................................
Total current assets ...................................
Property, plant, and equipment
Equipment .........................................................
Less: Accumulated amortization.......................
Total assets ..............................................................
$ 4,150
6,500
600
1,100
12,350
$36,000
300
35,700
$48,050
Liabilities and Shareholders’ Equity
Current liabilities
Note payable .....................................................
Accounts payable ..............................................
Interest payable.................................................
Salaries payable................................................
Total current liabilities ................................
Shareholders’ equity
Common shares ................................................
Retained earnings .............................................
Total shareholders’ equity ..........................
Total liabilities and shareholders’ equity ....................
$20,000
300
133
400
20,833
$24,000
3,217
27,217
$48,050
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12B (Continued)
(h)
General Journal
Date
Account Titles
July 31
Service Revenue .............................................
Income Summary .....................................
8,000
Income Summary ............................................
Salaries Expense .....................................
Amortization Expense ..............................
Insurance Expense ..................................
Cleaning Supplies Expense .....................
Gas & Oil Expense ...................................
Income Tax Expense ...............................
Interest Expense ......................................
4,183
Income Summary ............................................
Retained Earnings....................................
3,817
Retained Earnings ...........................................
Dividends .................................................
600
31
31
31
Debit
Credit
8,000
2,000
300
100
200
250
1,200
133
3,817
600
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Financial Accounting, Second Canadian Edition
PROBLEM 4-12B (Continued)
(i)
CORELLIAN WINDOW WASHING INC.
Post-Closing Trial Balance
July 31, 2004
Cash ....................................................................
Accounts Receivable ...........................................
Cleaning Supplies ................................................
Prepaid Insurance ................................................
Equipment............................................................
Accumulated Amortization—Equipment ...............
Note Payable .......................................................
Interest Payable ...................................................
Accounts Payable ................................................
Salaries Payable ..................................................
Common Shares ..................................................
Retained Earnings ...............................................
Totals ...............................................................
Debit
$ 4,150
6,500
600
1,100
36,000
000 00
$48,350
Credit
$ 300
20,000
133
300
400
24,000
3,217
$48,350
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 4-1 FINANCIAL REPORTING PROBLEM
(a)
Items that may have resulted in adjusting entries for prepayments are:
a.
b.
Prepaid expenses and other assets
Fixed assets
(b)
Accrual adjusting entries are often made for interest expense and income taxes.
(c)
Income tax expense was $414 million in 2002 and $372 million in 2001. There are income
taxes payable of $179 at the end of 2002.
(d)
The cash paid for interest in 2002 was $185 million. The interest expense reported on the
statement of earnings was $161 million. The difference ($24 million) is presumably included
in accounts payable and accrued liabilities in the balance sheet.
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Financial Accounting, Second Canadian Edition
BYP 4-2 COMPARATIVE ANALYSIS PROBLEM
Accounts that provide evidence of the use of accrual accounting are:
Balance Sheet
Statement of Earnings
(a) Sobeys
1.
2.
3.
4.
Receivables
Prepaid expenses
Income taxes payable
Accounts payable and accrued liabilities
1.
2.
3.
4.
Sales
Income tax expense
Miscellaneous expense
Miscellaneous expense
1.
2.
3.
4.
Insurance (rent) expense
Amortization expense
Sales
Miscellaneous expense
(b) Loblaws
1.
2.
3.
4.
Prepaid expenses and other assets
Fixed assets
Accounts receivable
Accounts payable and accrued liabilities
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 4-3 RESEARCH CASE
(a)
Cisco closes its books quarterly. Currently, it takes Cisco 2 days to close its books.
(b)
The closing process at Cisco, prior to the current changes, took up to 10 days.
(c)
A ”virtual close” is the ability of the company to close its books within a day on any day
in the quarter. A “virtual close” is advantageous to the company because it would allow Cisco to know where it is financially at all times and, because the close is performed so quickly, the amount of valuable time spent by employees performing the
close is greatly reduced. According to CEO Larry Carter, this would allow Cisco to
employ its human resources in more effective activities such as mining data for business intelligence.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 4-4 INTERPRETING FINANCIAL STATEMENTS
(a)
Unearned revenue is an example of a prepayment because the cash is received before it
is actually earned.
(b)
Cash would be debited and a liability account called unearned service revenue would be
credited.
(c)
The revenue from the subscriber deposits should be recognized when Rogers Cable Inc.
provides the related services to the customer. When the revenue is recognized, the unearned revenue account should be debited to reduce the liability (since the company is no
longer owes any services relating to the deposit) and, since the revenue has now been
earned, the service revenue account should be credited. If the journal entry were omitted,
liabilities would be overstated and revenues (equity) would be understated.
(d)
Rogers is following the revenue recognition principle and the matching principle. The revenue recognition principle requires that revenue not be recognized until the accounting
period in which it is earned. Rogers follows the revenue recognition principle in that the
company does not recognize revenue from monthly fees until the services relating to
those fees are provided. The matching principle requires that expenses must be matched
with revenues. Rogers Cable Inc matches the direct selling costs incurred to the revenue
generated from installations.
In calculating its earnings for any period Rogers uses the revenue recognition principle to
determine the amount of revenue to record as earned. They then apply the matching principle to determine the related expenses that should be recorded. Once the company has
identified all revenues and matched the related expenses the statement of earnings can
be prepared.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 4-5 A GLOBAL FOCUS
(a)
IIJ reports income on an accrual basis. Under accrual accounting revenue is recognized
when earned, not when the cash is received. Expenses are matched to revenue and may
not coincide with the payment of cash. For example, the company could have a positive
cash flow and a net loss by having collected cash in advance from customers and not
recognized the revenue until the cash had actually been earned or the company may have
incurred expenses and not yet paid cash for these expenses.
As well, the company could have raised cash through non-operating activities such as
selling assets, issuing debt or by issuing share capital.
(b)
The company could have generated positive cash from operating activities and have a
decline in cash overall if they used significant amounts of cash for financing and investing
activities. The company may have purchased assets, repaid debt or paid dividends, which
would have caused the overall cash balance to decrease.
(c)
Beginning accounts receivable ....................................
Add: Revenues ...........................................................
Less: Ending accounts receivable ..............................
Cash collections during the year ..................................
¥ 5,417
39,905
(8,982)
¥36,340 millions of yen
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 4-6 FINANCIAL ANALYSIS ON THE WEB
Due to the frequency of change with regard to information available on the world wide web, the
Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found online in the Instructor Resources section of our home
page <www.wiley.com/canada/kimmel>.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 4-7 COLLABORATIVE LEARNING ACTIVITY
(a)
Option 1 Record revenue when the seat sale is advertised – this will result in early recognition of revenue. In order to properly match expenses with revenue the cost of providing
the flight would have to be estimated and accrued. Net earnings would be reported early.
The overall impact on the company’s net earnings would depend on the increase in volume from year to year. Assuming volume is increasing, net earnings would increase. If
expenses are not accrued to match with revenue net earnings will be overstated.
Option 2 Record revenue when the passengers pick up their tickets and have paid for
their flights. In this case the revenue will be recognized before the service is provided and
to properly match expenses with revenue the cost of providing the flight would have to be
estimated and accrued. Net earnings would be reported early. The overall impact on the
company’s net earnings would depend on the increase in volume from year to year. Assuming volume is increasing, net earnings would increase. If expenses are not accrued to
match with revenue net earnings will be overstated.
Option 3 Record revenue when the boarding passes are collected. At this point the expenses will have been identified and it will be easier to match them with the revenue. Expenses will be recorded when they occur and net earnings appropriately measured.
Option 4 Record revenue when the passengers get off the plane. In terms of the accounting process this is essentially the same point as collection of the boarding passes. At this
point the expenses will have been incurred and it will be easier to match them with the
revenue. Expenses will be recorded when they occur and net earnings appropriately
measured.
(b)
Option 1 recognizes revenue at the earliest point. Both options 1 and 2 require estimating
and accruing expenses to match with revenue – a process that may be difficult. Option 3
and 4 are essentially the same in terms of timing.
I think the Air Canada should recognize revenue from ticket sales when the passengers
get off the plane. This is the earliest point at which all of the criteria for revenue recognition are met. The service has been performed, and the expenses (fuel, salaries, etc.) supporting the service have been incurred.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 4-8 COMMUNICATION ACTIVITY
Memo
To:
From:
Accrual basis accounting records the events that change an entity’s financial statements in the
periods in which the events occur, rather than in the periods in which the entity receives or pays
cash. Information presented on an accrual basis is useful because it reveals relationships that
are likely to be important in predicting future results. Conversely, under cash basis accounting,
revenue is recorded only when cash is received, and an expense is recognized only when cash
is paid. As a result, the cash basis of accounting often leads to misleading financial statements.
It is possible for management to manipulate earnings. For example, management may decide not
to accrue wages that have been incurred but not yet paid. This would cause reported earnings to
be higher.
It is possible for management to manipulate cash flows. For example, management may delay
the payment of an accounts payable to increase its cash flow position as presented in the financial statements.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 4-9 ETHICS CASE
(a)
The stakeholders in this situation are:



(b)
(c)
Carole Denton, controller.
The president of Die Hard Corporation.
Die Hard Corporation shareholders.
1.
It is unethical for the president to place pressure on Carole to misstate net earnings
by requesting her to prepare incorrect adjusting entries.
2.
It is customary for adjusting entries to be dated as of the balance sheet date although
the entries are prepared at a later date. Carol did nothing unethical by dating the adjusting entries December 31.
Carol can accrue revenues and defer expenses through the preparation of adjusting entries
and be ethical so long as the entries reflect economic reality. Intentionally misrepresenting
the company’s financial condition and its results of operations is unethical (it is also illegal).
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Financial Accounting, Second Canadian Edition
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