pri30597_SM_ch05.qxd
8/2/08
1:21 PM
CHAPTER
Page 83
5
Chapter Opener:
Thinking Critically
Fast Facts
Adjustments and
the Worksheet
Students should suggest that accountants estimate the amount of wear and
tear on the equipment. This expense should be charged against the income
earned during that same period. The concept of adjustments and depreciation
can be introduced at this time.
❏
❏
❏
❏
❏
William Boeing founded Pacific Aero Products Company in 1916; the
name was changed to Boeing in 1917.
In 1917, the company employed 28 people. In 2007, Boeing employed
more than 150,000 people in 48 U.S. states and 70 foreign countries.
Boeing is the largest contractor working for NASA.
Along with the ISS, the Boeing Company manufactures and services
commercial airplanes, military aircraft, helicopters, a variety of electronic
defense systems, and advanced communication systems.
Boeing’s 2006 sales were $61.5 billion from customers in 145 countries.
International sales accounted for nearly 30 percent of total sales.
Managerial
Implications:
Thinking Critically
Assets are depreciated because they have a limited life and will be used up
over time. Depreciation is the allocation of the cost of the asset over its useful
life.
Discussion
Questions
These questions are designed to check students’ understanding of new terms,
concepts, and procedures presented in the chapter.
1. Equipment, buildings, and automobiles.
2. Charges off an equal amount of cost of asset during each accounting
period in asset’s useful life.
3. To keep a record of total depreciation taken; to reduce the book value of
asset.
4. Cost of asset less accumulated depreciation.
5. Contra asset accounts have a credit balance. Asset accounts have a debit
balance.
6. Asset cost, accumulated depreciation, book value.
7. To create a permanent record of any changes in account balances that are
shown on the worksheet.
8. a. none b. decrease c. none
9. a. none b. none c. none d. decrease
10. b, d, f, g, and i are depreciated. Only long-term tangible assets are subject
to depreciation.
11. Update supplies accounts at the end of a period to reflect amounts used.
12. Expense items that are acquired and paid for in advance of their use.
Supplies, prepaid rent, prepaid insurance, and advertising.
13. Debit Insurance Expense; credit Prepaid Insurance.
14. Debit Depreciation Expense—Machine, $250; Credit Accum.
Depr.—Machine, $250.
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
83
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 84
EXERCISE 5.1
1. Rent Expense, $750 Dr.
Prepaid Rent, $750 Cr.
($4,500 6 months $750 per month)
2. Supplies Expense, $2,950 Dr.
Supplies, $2,950 Cr.
($4,750 $1,800 $2,950)
3. Depreciation Expense—Equipment, $450 Dr.
Accumulated Depreciation—Equipment, $450 Cr.
($54,000 120 months $450)
EXERCISE 5.2
1. Insurance Expense, $125 Dr.
Prepaid Insurance, $125 Cr.
($3,000 24 months $125)
2. Advertising Expense, $900 Dr.
Prepaid Advertising, $900 Cr.
($10,800 12 months $900)
84
■ Chapter 5
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
14 4 0 0 00
181 0 0 0 00
19 2 0 0 00
19 7 0 0 00
Prepaid Insurance
Equipment
Accumulated Depreciation—Equipment
Accounts Payable
Robert Nixon, Capital
Fees Income
Rent Expense
Salaries Expense
Supplies Expense
Insurance Expense
Depreciation Expense—Equipment
Totals
4
5
6
7
8
9
10
11
12
13
14
15
20
21
22
21
22
19
19
20
18
15
14
13
12
11
10
9
8
7
6
18
420 4 5 0 00
224 0 0 0 00
161 9 0 0 00
31 4 0 0 00
3 1 5 0 00
5
4
17
420 4 5 0 00
3 1 5 0 00
3 6 0 0 00
10 4 0 0 00
19 7 0 0 00
19 2 0 0 00
181 0 0 0 00
10 8 0 0 00
3
17
17 1 5 0 00
3 1 5 0 00
3 6 0 0 00
5 6 0 0 00
2
1
16
17 1 5 0 00
3 1 5 0 00
(c)
(b)
(a) 10 4 0 0 00
43 0 0 0 00
124 0 0 0 00
ADJUSTED TRIAL BALANCE
DEBIT
CREDIT
16
417 3 0 0 00
(c)
224 0 0 0 00
16 0 0 0 00
Supplies
3
417 3 0 0 00
(b)
161 9 0 0 00
43 0 0 0 00
Accounts Receivable
2
3 6 0 0 00
(a) 10 4 0 0 00
31 4 0 0 00
124 0 0 0 00
ADJUSTMENTS
DEBIT
CREDIT
Cash
TRIAL BALANCE
DEBIT
CREDIT
1:21 PM
1
ACCOUNT NAME
8/2/08
Month Ended January 31, 2010
Worksheet (Partial)
Nixon Company
pri30597_SM_ch05.qxd
Page 85
EXERCISE 5.3
Chapter 5 ■
85
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 86
EXERCISE 5.4
Net Income Before Adjustments
$80,000
Less Adjustments:
Rent Expense
$6,000
Depreciation Expense
7,200
Supplies Expense
2,600
Total Adjustments for Expenses Not Made
15,800
Corrected Net Income
$64,200
If the adjusting entries are not made, total expenses will be understated by $15,800.
Net income will be overstated by $15,800.
EXERCISE 5.5
3
PAGE __________
GENERAL JOURNAL
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
Adjusting Entries
1
2
2010
3
Dec.
1
2
31 Supplies Expense
523
Supplies
4
5 0 0 0 00
121
3
5 0 0 0 00
5
6
5
31 Insurance Expense
521
Prepaid Insurance
7
3 6 0 0 00
131
6
3 6 0 0 00
8
9
7
8
31 Depreciation Expense—Equipment
Accumulated Depreciation—Equipment
10
11
86
4
517
142
2 4 0 0 00
9
2 4 0 0 00
10
11
■ Chapter 5
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 87
EXERCISE 5.5 (continued)
GENERAL LEDGER
Supplies
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
121
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Dec.
1
J1
31 Adjusting
8 0 0 0 00
8 0 0 0 00
J3
5 0 0 0 00
Prepaid Insurance
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
3 0 0 0 00
131
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Dec.
1
J1
31 Adjusting
21 6 0 0 00
21 6 0 0 00
J3
3 6 0 0 00
Accumulated Depreciation—Equipment
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
18 0 0 0 00
142
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Dec.
31 Adjusting
J3
2 4 0 0 00
Depreciation Expense—Equipment
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
2 4 0 0 00
517
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Dec.
31 Adjusting
J3
2 4 0 0 00
2 4 0 0 00
Insurance Expense
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
521
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Dec.
31 Adjusting
J3
3 6 0 0 00
3 6 0 0 00
Supplies Expense
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
523
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Dec.
31 Adjusting
J3
5 0 0 0 00
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
5 0 0 0 00
Chapter 5 ■
87
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 88
PROBLEM 5.1A
Dennis Company
Worksheet
Month Ended January 31, 2010
ACCOUNT NAME
TRIAL BALANCE
DEBIT
CREDIT
ADJUSTMENTS
DEBIT
CREDIT
1
Cash
52 0 0 0 00
2
Accounts Receivable
10 4 0 0 00
3
Supplies
19 2 0 0 00
(a) 16 0 0 0 00
4
Prepaid Insurance
30 0 0 0 00
(b) 5 0 0 0 00
5
Equipment
54 0 0 0 00
6
Accumulated Depreciation—Equipment
7
Accounts Payable
8
Charles Dennis, Capital
9
Charles Dennis, Drawing
(c) 1 1 0 0 00
12 4 0 0 00
126 0 0 0 00
7 2 0 0 00
10
Fees Income
51 6 0 0 00
11
Depreciation Expense—Equipment
(c) 1 1 0 0 00
12
Insurance Expense
(b) 5 0 0 0 00
13
Salaries Expense
14
Supplies Expense
15
Utilities Expense
16
Totals
17
Net Income
15 6 0 0 00
(a) 16 0 0 0 00
1 6 0 0 00
190 0 0 0 00
190 0 0 0 00
22 1 0 0 00
22 1 0 0 00
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
88
■ Chapter 5
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 89
PROBLEM 5.1A (continued)
ADJUSTED TRIAL BALANCE
DEBIT
CREDIT
INCOME STATEMENT
DEBIT
CREDIT
BALANCE SHEET
DEBIT
CREDIT
52 0 0 0 00
52 0 0 0 00
1
10 4 0 0 00
10 4 0 0 00
2
3 2 0 0 00
3 2 0 0 00
3
25 0 0 0 00
25 0 0 0 00
4
54 0 0 0 00
54 0 0 0 00
5
1 1 0 0 00
1 1 0 0 00
6
12 4 0 0 00
12 4 0 0 00
7
126 0 0 0 00
126 0 0 0 00
8
7 2 0 0 00
7 2 0 0 00
51 6 0 0 00
9
51 6 0 0 00
10
1 1 0 0 00
1 1 0 0 00
11
5 0 0 0 00
5 0 0 0 00
12
15 6 0 0 00
15 6 0 0 00
13
16 0 0 0 00
16 0 0 0 00
14
1 6 0 0 00
1 6 0 0 00
15
191 1 0 0 00
191 1 0 0 00
39 3 0 0 00
51 6 0 0 00
151 8 0 0 00
12 3 0 0 00
51 6 0 0 00
51 6 0 0 00
151 8 0 0 00
139 5 0 0 00
16
12 3 0 0 00
17
151 8 0 0 00
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
Analyze:
The adjustment to Prepaid Insurance decreased the account balance.
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
89
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 90
PROBLEM 5.2A
The University Bookstore
Worksheet (Partial)
Month Ended November 30, 2010
ACCOUNT NAME
TRIAL BALANCE
DEBIT
CREDIT
ADJUSTMENTS
DEBIT
CREDIT
1
Cash
45 1 5 0 00
2
Accounts Receivable
3
Supplies
12 0 0 0 00
(a) 4 8 0 0 00
4
Prepaid Rent
42 0 0 0 00
(b) 6 0 0 0 00
5
Equipment
54 0 0 0 00
6
Accumulated Depreciation—Equipment
7
Accounts Payable
16 0 0 0 00
8
Julie Acker, Capital
81 6 7 4 00
9
Julie Acker, Drawing
6 6 2 4 00
(c) 1 4 0 0 00
6 0 0 0 00
10
Fees Income
84 0 0 0 00
11
Depreciation Expense—Equipment
(c) 1 4 0 0 00
12
Rent Expense
(b) 6 0 0 0 00
13
Salaries Expense
14
Supplies Expense
15
Utilities Expense
16
Totals
15 0 0 0 00
(a) 4 8 0 0 00
9 0 0 00
181 6 7 4 00
181 6 7 4 00
12 2 0 0 00
12 2 0 0 00
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
90
■ Chapter 5
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 91
PROBLEM 5.2A (continued)
ADJUSTED TRIAL BALANCE
DEBIT
CREDIT
INCOME STATEMENT
DEBIT
CREDIT
BALANCE SHEET
DEBIT
CREDIT
45 1 5 0 00
1
6 6 2 4 00
2
7 2 0 0 00
3
36 0 0 0 00
4
54 0 0 0 00
5
1 4 0 0 00
6
16 0 0 0 00
7
81 6 7 4 00
8
6 0 0 0 00
9
84 0 0 0 00
10
1 4 0 0 00
11
6 0 0 0 00
12
15 0 0 0 00
13
4 8 0 0 00
14
9 0 0 00
15
183 0 7 4 00
183 0 7 4 00
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
Analyze:
The balance of the Prepaid Rent account prior to the adjusting entry for expired rent is $42,000.
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
91
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 92
PROBLEM 5.3A
Orange Corporation
Income Statement
Month Ended December 31, 2010
Revenue
Fees Income
79 5 0 0 00
Expenses
Salaries Expense
16 8 0 0 00
Utilities Expense
1 8 0 0 00
Supplies Expense
6 0 0 0 00
Advertising Expense
2 4 0 0 00
Depreciation Expense—Equipment
1 2 0 0 00
Total Expenses
28 2 0 0 00
Net Income
51 3 0 0 00
Orange Corporation
Statement of Owner’s Equity
Month Ended December 31, 2010
Ted Coe, Capital, December 1, 2010
Net Income for December
Less Withdrawals for December
Increase in Capital
Ted Coe, Capital, December 31, 2010
92
■ Chapter 5
108 0 0 0 00
51 3 0 0 00
7 2 0 0 00
44 1 0 0 00
152 1 0 0 00
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 93
PROBLEM 5.3A (continued)
Orange Corporation
Balance Sheet
December 31, 2010
Assets
Cash
77 2 0 0 00
Accounts Receivable
12 0 0 0 00
Supplies
4 1 0 0 00
Prepaid Advertising
12 0 0 0 00
Equipment
60 0 0 0 00
Less Accumulated Depreciation—Equipment
Total Assets
1 2 0 0 00
58 8 0 0 00
164 1 0 0 00
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
12 0 0 0 00
Owner’s Equity
Ted Coe, Capital
Total Liabilities and Owner’s Equity
Analyze:
152 1 0 0 00
164 1 0 0 00
Net Income would be $48,900.
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
93
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 94
PROBLEM 5.4A
Palmer Creative Designs
Worksheet
Month Ended January 31, 2010
ACCOUNT NAME
TRIAL BALANCE
DEBIT
CREDIT
ADJUSTMENTS
DEBIT
CREDIT
1
Cash
35 5 0 0 00
2
Accounts Receivable
12 6 0 0 00
3
Supplies
7 7 5 0 00
(a) 6 6 5 0 00
4
Prepaid Advertising
8 4 0 0 00
(b) 2 1 0 0 00
5
Prepaid Rent
19 2 0 0 00
(c) 1 6 0 0 00
6
Equipment
21 6 0 0 00
7
Accumulated Depreciation—Equipment
8
Accounts Payable
15 5 5 0 00
9
Sadie Palmer, Capital
60 0 0 0 00
(d)
10
Sadie Palmer, Drawing
11
Fees Income
12
Advertising Expense
(b) 2 1 0 0 00
13
Depreciation Expense—Equipment
(d)
14
Rent Expense
(c) 1 6 0 0 00
15
Salaries Expense
16
Supplies Expense
17
Utilities Expense
18
Totals
19
Net Income
1 8 0 00
7 0 0 0 00
47 6 0 0 00
1 8 0 00
9 7 0 0 00
(a) 6 6 5 0 00
1 4 0 0 00
123 1 5 0 00
123 1 5 0 00
10 5 3 0 00
10 5 3 0 00
20
21
22
23
24
25
26
27
28
29
30
31
32
94
■ Chapter 5
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 95
PROBLEM 5.4A (continued)
ADJUSTED TRIAL BALANCE
DEBIT
CREDIT
INCOME STATEMENT
DEBIT
CREDIT
BALANCE SHEET
DEBIT
CREDIT
35 5 0 0 00
35 5 0 0 00
1
12 6 0 0 00
12 6 0 0 00
2
1 1 0 0 00
1 1 0 0 00
3
6 3 0 0 00
6 3 0 0 00
4
17 6 0 0 00
17 6 0 0 00
5
21 6 0 0 00
21 6 0 0 00
6
1 8 0 00
1 8 0 00
7
15 5 5 0 00
15 5 5 0 00
8
60 0 0 0 00
60 0 0 0 00
9
7 0 0 0 00
7 0 0 0 00
47 6 0 0 00
10
47 6 0 0 00
11
2 1 0 0 00
2 1 0 0 00
12
1 8 0 00
1 8 0 00
13
1 6 0 0 00
1 6 0 0 00
14
9 7 0 0 00
9 7 0 0 00
15
6 6 5 0 00
6 6 5 0 00
16
1 4 0 0 00
1 4 0 0 00
17
123 3 3 0 00
123 3 3 0 00
21 6 3 0 00
47 6 0 0 00
101 7 0 0 00
25 9 7 0 00
47 6 0 0 00
47 6 0 0 00
101 7 0 0 00
75 7 3 0 00
18
25 9 7 0 00
19
101 7 0 0 00
20
21
22
23
24
25
26
27
28
29
30
31
32
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
95
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 96
PROBLEM 5.4A (continued)
Palmer Creative Designs
Income Statement
Month Ended January 31, 2010
Revenue
Fees Income
47 6 0 0 00
Expenses
Salaries Expense
9 7 0 0 00
Utilities Expense
1 4 0 0 00
Supplies Expense
6 6 5 0 00
Advertising Expense
2 1 0 0 00
Rent Expense
1 6 0 0 00
Depreciation Expense—Equipment
1 8 0 00
Total Expenses
21 6 3 0 00
Net Income
25 9 7 0 00
Palmer Creative Designs
Statement of Owner’s Equity
Month Ended January 31, 2010
Sadie Palmer, Capital, January 1, 2010
Net Income for January
Less Withdrawals for January
96
60 0 0 0 00
25 9 7 0 00
7 0 0 0 00
Increase in Capital
18 9 7 0 00
Sadie Palmer, Capital, January 31, 2010
78 9 7 0 00
■ Chapter 5
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 97
PROBLEM 5.4A (continued)
Palmer Creative Designs
Balance Sheet
January 31, 2010
Assets
Cash
35 5 0 0 00
Accounts Receivable
12 6 0 0 00
Supplies
1 1 0 0 00
Prepaid Advertising
6 3 0 0 00
Prepaid Rent
17 6 0 0 00
Equipment
21 6 0 0 00
Less Accumulated Depreciation—Equipment
Total Assets
1 8 0 00
21 4 2 0 00
94 5 2 0 00
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
15 5 5 0 00
Owner’s Equity
Sadie Palmer, Capital
Total Liabilities and Owner’s Equity
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
78 9 7 0 00
94 5 2 0 00
Chapter 5 ■
97
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 98
PROBLEM 5.4A (continued)
3
PAGE __________
GENERAL JOURNAL
DATE
3
DEBIT
CREDIT
Adjusting Entries
1
2
POST.
REF.
DESCRIPTION
1
2010
Jan.
2
31 Supplies Expense
517
Supplies
4
6 6 5 0 00
121
3
6 6 5 0 00
5
4
5
31 Advertising Expense
6
519
Prepaid Advertising
7
2 1 0 0 00
130
6
2 1 0 0 00
8
7
8
31 Rent Expense
9
520
Prepaid Rent
10
1 6 0 0 00
131
9
1 6 0 0 00
11
10
11
31 Depreciation Expense—Equipment
12
523
Accumulated Depreciation—Equipment
13
1 8 0 00
142
12
1 8 0 00
14
13
14
GENERAL LEDGER
Supplies
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
121
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
1
J1
31 Adjusting
7 7 5 0 00
J3
7 7 5 0 00
6 6 5 0 00
Prepaid Advertising
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
1 1 0 0 00
130
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
1
J1
31 Adjusting
8 4 0 0 00
J3
8 4 0 0 00
2 1 0 0 00
Prepaid Rent
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
6 3 0 0 00
131
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
1
31 Adjusting
98
■ Chapter 5
J1
J3
19 2 0 0 00
19 2 0 0 00
1 6 0 0 00
17 6 0 0 00
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 99
PROBLEM 5.4A (continued)
GENERAL LEDGER
Accumulated Depreciation—Equipment
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
142
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
31 Adjusting
J3
1 8 0 00
Supplies Expense
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
1 8 0 00
517
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
31 Adjusting
J3
6 6 5 0 00
6 6 5 0 00
Advertising Expense
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
519
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
31 Adjusting
J3
2 1 0 0 00
2 1 0 0 00
Rent Expense
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
520
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
31 Adjusting
J3
1 6 0 0 00
1 6 0 0 00
Depreciation Expense—Equipment
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
523
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
Analyze:
31 Adjusting
J3
1 8 0 00
1 8 0 00
If adjusting entries had not been made, net income would be overstated.
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
99
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 100
PROBLEM 5.1B
Torres Company
Worksheet
Month Ended February 28, 2010
ACCOUNT NAME
TRIAL BALANCE
DEBIT
CREDIT
ADJUSTMENTS
DEBIT
CREDIT
1
Cash
36 5 0 0 00
2
Accounts Receivable
3 2 0 0 00
3
Supplies
2 1 0 0 00
(a) 1 0 0 0 00
4
Prepaid Rent
12 0 0 0 00
(b) 1 0 0 0 00
5
Equipment
23 0 0 0 00
6
Accumulated Depreciation—Equipment
7
Accounts Payable
8
Paul Torres, Capital
9
Paul Torres, Drawing
(c)
5 0 0 00
6 0 0 0 00
49 2 5 0 00
1 5 0 0 00
10
Fees Income
27 0 0 0 00
11
Salaries Expense
3 1 5 0 00
12
Utilities Expense
8 0 0 00
13
Supplies Expense
(a) 1 0 0 0 00
14
Rent Expense
(b) 1 0 0 0 00
15
Depreciation Expense—Equipment
(c)
16
Totals
17
Net Income
82 2 5 0 00
82 2 5 0 00
5 0 0 00
2 5 0 0 00
2 5 0 0 00
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
100
■ Chapter 5
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 101
PROBLEM 5.1B (continued)
ADJUSTED TRIAL BALANCE
DEBIT
CREDIT
INCOME STATEMENT
DEBIT
CREDIT
BALANCE SHEET
DEBIT
CREDIT
36 5 0 0 00
36 5 0 0 00
1
3 2 0 0 00
3 2 0 0 00
2
1 1 0 0 00
1 1 0 0 00
3
11 0 0 0 00
11 0 0 0 00
4
23 0 0 0 00
23 0 0 0 00
5
5 0 0 00
5 0 0 00
6
6 0 0 0 00
6 0 0 0 00
7
49 2 5 0 00
49 2 5 0 00
8
1 5 0 0 00
1 5 0 0 00
27 0 0 0 00
9
27 0 0 0 00
10
3 1 5 0 00
3 1 5 0 00
11
8 0 0 00
8 0 0 00
12
1 0 0 0 00
1 0 0 0 00
13
1 0 0 0 00
1 0 0 0 00
14
5 0 0 00
5 0 0 00
15
82 7 5 0 00
82 7 5 0 00
6 4 5 0 00
27 0 0 0 00
76 3 0 0 00
20 5 5 0 00
27 0 0 0 00
27 0 0 0 00
76 3 0 0 00
55 7 5 0 00
16
20 5 5 0 00
17
76 3 0 0 00
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
Analyze:
No depreciation has been recorded for the fiscal period, or any previous fiscal period.
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
101
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 102
PROBLEM 5.2B
Dennis Ortiz, Attorney-At-Law
Worksheet (Partial)
Month Ended November 30, 2010
ACCOUNT NAME
TRIAL BALANCE
DEBIT
CREDIT
ADJUSTMENTS
DEBIT
CREDIT
1
Cash
35 0 5 0 00
2
Accounts Receivable
3
Supplies
10 4 0 0 00
(a) 3 6 0 0 00
4
Prepaid Rent
44 2 0 0 00
(b) 3 4 0 0 00
5
Equipment
66 0 0 0 00
6
Accumulated Depreciation—Equipment
7
Accounts Payable
17 0 0 0 00
8
Dennis Ortiz, Capital
80 0 0 0 00
9
Dennis Ortiz, Drawing
8 5 0 0 00
(c)
5 5 0 00
6 0 0 0 00
10
Fees Income
85 7 0 0 00
11
Salaries Expense
10 8 0 0 00
12
Utilities Expense
1 7 5 0 00
13
Supplies Expense
(a) 3 6 0 0 00
14
Rent Expense
(b) 3 4 0 0 00
15
Depreciation Expenses—Equipment
(c)
16
Totals
182 7 0 0 00
182 7 0 0 00
5 5 0 00
7 5 5 0 00
7 5 5 0 00
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
102
■ Chapter 5
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 103
PROBLEM 5.2B (continued)
ADJUSTED TRIAL BALANCE
DEBIT
CREDIT
INCOME STATEMENT
DEBIT
CREDIT
BALANCE SHEET
DEBIT
CREDIT
35 0 5 0 00
1
8 5 0 0 00
2
6 8 0 0 00
3
40 8 0 0 00
4
66 0 0 0 00
5
5 5 0 00
6
17 0 0 0 00
7
80 0 0 0 00
8
6 0 0 0 00
9
85 7 0 0 00
10
10 8 0 0 00
11
1 7 5 0 00
12
3 6 0 0 00
13
3 4 0 0 00
14
5 5 0 00
15
183 2 5 0 00
183 2 5 0 00
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
Analyze:
Accumulated Depreciation—Equipment
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
103
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 104
PROBLEM 5.3B
JT’s Accounting Services
Income Statement
Month Ended December 31, 2010
Revenue
Fees Income
62 6 6 0 00
Expenses
Salaries Expense
37 2 0 0 00
Supplies Expense
1 2 0 0 00
Utilities Expense
2 1 6 0 00
Rent Expense
7 0 0 0 00
Advertising Expense
1 6 0 0 00
Depreciation Expense—Fixtures
6 0 0 00
Total Expenses
49 7 6 0 00
Net Income
12 9 0 0 00
JT’s Accounting Services
Statement of Owner’s Equity
Month Ended December 31, 2010
Jason Taylor, Capital, December 1, 2010
Net Income for Year
Less Withdrawals for Year
Increase in Capital
Jason Taylor, Capital, December 31, 2010
104
■ Chapter 5
60 0 0 0 00
12 9 0 0 00
6 0 0 0 00
6 9 0 0 00
66 9 0 0 00
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 105
PROBLEM 5.3B (continued)
JT’s Accounting Services
Balance Sheet
December 31, 2010
Assets
Cash
33 9 0 0 00
Accounts Receivable
4 4 0 0 00
Supplies
1 8 0 0 00
Prepaid Advertising
6 4 0 0 00
Fixtures
36 0 0 0 00
Less Accumulated Depreciation
Total Assets
6 0 0 00
35 4 0 0 00
81 9 0 0 00
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
15 0 0 0 00
Owner’s Equity
Jason Taylor, Capital
Total Liabilities and Owner’s Equity
Analyze:
66 9 0 0 00
81 9 0 0 00
Adjusting entries decreased the assets of the company by $3,400.
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
105
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 106
PROBLEM 5.4B
Rojas Estate Planning and Investments
Worksheet
Month Ended June 31, 2010
ACCOUNT NAME
TRIAL BALANCE
DEBIT
CREDIT
ADJUSTMENTS
DEBIT
CREDIT
1
Cash
19 7 0 0 00
2
Accounts Receivable
6 1 0 0 00
3
Supplies
7 6 0 0 00
(a) 4 6 0 0 00
4
Prepaid Advertising
14 4 0 0 00
(b) 3 6 0 0 00
5
Prepaid Rent
36 0 0 0 00
(c) 3 0 0 0 00
6
Equipment
48 0 0 0 00
7
Accumulated Depreciation—Equipment
8
Accounts Payable
10 8 0 0 00
9
Raul Rojas, Capital
60 1 0 0 00
(d)
10
Raul Rojas, Drawing
11
Fees Income
12
Advertising Expense
(b) 3 6 0 0 00
13
Depreciation Expense—Equipment
(d)
14
Rent Expense
(c) 3 0 0 0 00
15
Salaries Expense
16
Supplies Expense
17
Utilities Expense
18
Totals
19
Net Income
8 0 0 00
4 0 0 0 00
73 8 0 0 00
8 0 0 00
7 6 0 0 00
(a) 4 6 0 0 00
1 3 0 0 00
144 7 0 0 00
144 7 0 0 00
12 0 0 0 00
12 0 0 0 00
20
21
22
23
24
25
26
27
28
29
30
31
32
106
■ Chapter 5
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 107
PROBLEM 5.4B (continued)
ADJUSTED TRIAL BALANCE
DEBIT
CREDIT
INCOME STATEMENT
DEBIT
CREDIT
BALANCE SHEET
DEBIT
CREDIT
19 7 0 0 00
19 7 0 0 00
1
6 1 0 0 00
6 1 0 0 00
2
3 0 0 0 00
3 0 0 0 00
3
10 8 0 0 00
10 8 0 0 00
4
33 0 0 0 00
33 0 0 0 00
5
48 0 0 0 00
48 0 0 0 00
6
8 0 0 00
8 0 0 00
7
10 8 0 0 00
10 8 0 0 00
8
60 1 0 0 00
60 1 0 0 00
9
4 0 0 0 00
4 0 0 0 00
73 8 0 0 00
10
73 8 0 0 00
11
3 6 0 0 00
3 6 0 0 00
12
8 0 0 00
8 0 0 00
13
3 0 0 0 00
3 0 0 0 00
14
7 6 0 0 00
7 6 0 0 00
15
4 6 0 0 00
4 6 0 0 00
16
1 3 0 0 00
1 3 0 0 00
17
145 5 0 0 00
145 5 0 0 00
20 9 0 0 00
73 8 0 0 00
124 6 0 0 00
52 9 0 0 00
73 8 0 0 00
73 8 0 0 00
124 6 0 0 00
71 7 0 0 00
18
52 9 0 0 00
19
124 6 0 0 00
20
21
22
23
24
25
26
27
28
29
30
31
32
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
107
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 108
PROBLEM 5.4B (continued)
Rojas Estate Planning and Investments
Income Statement
Month Ended June 30, 2010
Revenue
Fees Income
73 8 0 0 00
Expenses
Salaries Expense
7 6 0 0 00
Utilities Expense
1 3 0 0 00
Supplies Expense
4 6 0 0 00
Advertising Expense
3 6 0 0 00
Rent Expense
3 0 0 0 00
Depreciation Expense—Equipment
8 0 0 00
Total Expenses
20 9 0 0 00
Net Income
52 9 0 0 00
Rojas Estate Planning and Investments
Statement of Owner’s Equity
Month Ended June 30, 2010
Raul Rojas, Capital, June 1, 2010
Net Income for June
Less Withdrawals for June
Increase in Capital
Raul Rojas, Capital, June 30, 2010
108
■ Chapter 5
60 1 0 0 00
52 9 0 0 00
4 0 0 0 00
48 9 0 0 00
109 0 0 0 00
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 109
PROBLEM 5.4B (continued)
Rojas Estate Planning and Investments
Balance Sheet
June 30, 2010
Assets
Cash
19 7 0 0 00
Accounts Receivable
6 1 0 0 00
Supplies
3 0 0 0 00
Prepaid Advertising
10 8 0 0 00
Prepaid Rent
33 0 0 0 00
Equipment
48 0 0 0 00
Less Accumulated Depreciation—Equipment
Total Assets
8 0 0 00
47 2 0 0 00
119 8 0 0 00
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
10 8 0 0 00
Owner’s Equity
Raul Rojas, Capital
Total Liabilities and Owner’s Equity
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
109 0 0 0 00
119 8 0 0 00
Chapter 5 ■
109
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 110
PROBLEM 5.4B (continued)
3
PAGE __________
GENERAL JOURNAL
DATE
POST.
REF.
DESCRIPTION
DEBIT
CREDIT
Adjusting Entries
1
2
2010
3
June
1
2
30 Supplies Expense
517
Supplies
4
4 6 0 0 00
121
3
4 6 0 0 00
5
4
5
30 Advertising Expense
6
519
Prepaid Advertising
7
3 6 0 0 00
130
6
3 6 0 0 00
8
7
8
30 Rent Expense
9
520
Prepaid Rent
10
3 0 0 0 00
131
9
3 0 0 0 00
11
10
11
30 Depreciation Expense—Equipment
12
523
Accumulated Depreciation—Equipment
13
8 0 0 00
142
12
8 0 0 00
14
13
14
GENERAL LEDGER
Supplies
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
121
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
June
1
J1
30 Adjusting
7 6 0 0 00
J3
7 6 0 0 00
4 6 0 0 00
Prepaid Advertising
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
3 0 0 0 00
130
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
June
1
J1
30 Adjusting
14 4 0 0 00
J3
14 4 0 0 00
3 6 0 0 00
Prepaid Rent
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
10 8 0 0 00
131
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
June
1
30 Adjusting
110
■ Chapter 5
J1
J3
36 0 0 0 00
36 0 0 0 00
3 0 0 0 00
33 0 0 0 00
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 111
PROBLEM 5.4B (continued)
GENERAL LEDGER
Accumulated Depreciation—Equipment
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
142
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
June
30 Adjusting
J3
8 0 0 00
Supplies Expense
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
8 0 0 00
517
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
June
30 Adjusting
J3
4 6 0 0 00
4 6 0 0 00
Advertising Expense
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
519
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
June
30 Adjusting
J3
3 6 0 0 00
3 6 0 0 00
Rent Expense
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
520
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
June
30 Adjusting
J3
3 0 0 0 00
3 0 0 0 00
Depreciation Expense—Equipment
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
523
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
June
Analyze:
30 Adjusting
J3
8 0 0 00
8 0 0 00
Generally accepted accounting principles require that the original cost of the asset appear in the asset
account until the asset has been used up or disposed. A contra asset account is used to record
depreciation costs.
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
111
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 112
CRITICAL THINKING PROBLEM 5.1
Thatcher International Company
Worksheet
Month Ended January 31, 2010
ACCOUNT NAME
TRIAL BALANCE
DEBIT
CREDIT
ADJUSTMENTS
DEBIT
CREDIT
1
Cash
36 9 5 0 00
2
Accounts Receivable
6 8 0 0 00
3
Supplies
4 3 0 0 00
(a) 2 1 0 0 00
4
Prepaid Insurance
30 0 0 0 00
(b) 5 0 0 0 00
5
Equipment
48 0 0 0 00
6
Accumulated Depreciation—Equipment
7
Accounts Payable
12 0 0 0 00
8
Maggie Thatcher, Capital
80 0 0 0 00
9
Maggie Thatcher, Drawing
(c)
4 0 0 00
4 0 0 0 00
10
Fees Income
61 8 5 0 00
11
Advertising Expense
12
Depreciation Expense—Equipment
(c)
13
Insurance Expense
(b) 5 0 0 0 00
14
Rent Expense
15
Salaries Expense
16
Supplies Expense
17
Telephone Expense
18
Utilities Expense
19
Totals
20
Net Income
3 0 0 0 00
4 0 0 00
5 0 0 0 00
13 4 0 0 00
(a) 2 1 0 0 00
7 0 0 00
1 7 0 0 00
153 8 5 0 00
153 8 5 0 00
7 5 0 0 00
7 5 0 0 00
21
22
23
24
25
26
27
28
29
30
31
32
112
■ Chapter 5
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 113
CRITICAL THINKING PROBLEM 5.1 (continued)
ADJUSTED TRIAL BALANCE
DEBIT
CREDIT
INCOME STATEMENT
DEBIT
CREDIT
BALANCE SHEET
DEBIT
CREDIT
36 9 5 0 00
36 9 5 0 00
1
6 8 0 0 00
6 8 0 0 00
2
2 2 0 0 00
2 2 0 0 00
3
25 0 0 0 00
25 0 0 0 00
4
48 0 0 0 00
48 0 0 0 00
5
4 0 0 00
4 0 0 00
6
12 0 0 0 00
12 0 0 0 00
7
80 0 0 0 00
80 0 0 0 00
8
4 0 0 0 00
4 0 0 0 00
61 8 5 0 00
9
61 8 5 0 00
10
3 0 0 0 00
3 0 0 0 00
11
4 0 0 00
4 0 0 00
12
5 0 0 0 00
5 0 0 0 00
13
5 0 0 0 00
5 0 0 0 00
14
13 4 0 0 00
13 4 0 0 00
15
2 1 0 0 00
2 1 0 0 00
16
7 0 0 00
7 0 0 00
17
1 7 0 0 00
1 7 0 0 00
18
154 2 5 0 00
154 2 5 0 00
31 3 0 0 00
61 8 5 0 00
122 9 5 0 00
30 5 5 0 00
61 8 5 0 00
61 8 5 0 00
122 9 5 0 00
92 4 0 0 00
19
30 5 5 0 00
20
122 9 5 0 00
21
22
23
24
25
26
27
28
29
30
31
32
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
113
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 114
CRITICAL THINKING PROBLEM 5.1 (continued)
Thatcher International Company
Income Statement
Month Ended January 31, 2010
Revenue
Fees Income
61 8 5 0 00
Expenses
Advertising Expense
3 0 0 0 00
Depreciation Expense—Equipment
4 0 0 00
Insurance Expense
5 0 0 0 00
Rent Expense
5 0 0 0 00
Salaries Expense
13 4 0 0 00
Supplies Expense
2 1 0 0 00
Telephone Expense
7 0 0 00
Utilities Expense
1 7 0 0 00
Total Expenses
31 3 0 0 00
Net Income
30 5 5 0 00
Thatcher International Company
Statement of Owner’s Equity
Month Ended January 31, 2010
Maggie Thatcher, Capital, January 1, 2010
Net Income for January
Less Withdrawals for January
Increase in Capital
Maggie Thatcher, Capital, January 31, 2010
114
■ Chapter 5
80 0 0 0 00
30 5 5 0 00
4 0 0 0 00
26 5 5 0 00
106 5 5 0 00
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 115
CRITICAL THINKING PROBLEM 5.1 (continued)
Thatcher International Company
Balance Sheet
January 31, 2010
Assets
Cash
36 9 5 0 00
Accounts Receivable
6 8 0 0 00
Supplies
2 2 0 0 00
Prepaid Insurance
25 0 0 0 00
Equipment
48 0 0 0 00
Less Accumulated Depreciation—Equipment
Total Assets
4 0 0 00
47 6 0 0 00
118 5 5 0 00
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
12 0 0 0 00
Owner’s Equity
Maggie Thatcher, Capital
Total Liabilities and Owner’s Equity
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
106 5 5 0 00
118 5 5 0 00
Chapter 5 ■
115
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 116
CRITICAL THINKING PROBLEM 5.1 (continued)
3
PAGE __________
GENERAL JOURNAL
DATE
POST.
REF.
DESCRIPTION
DEBIT
CREDIT
Adjusting Entries
1
2
2010
3
Jan.
1
2
31 Supplies Expense
520
Supplies
4
2 1 0 0 00
121
3
2 1 0 0 00
5
4
5
31 Insurance Expense
6
517
Prepaid Insurance
7
5 0 0 0 00
131
6
5 0 0 0 00
8
7
8
31 Depreciation Expense—Equipment
9
514
Accumulated Depreciation—Equipment
10
4 0 0 00
142
9
4 0 0 00
11
10
11
GENERAL LEDGER
Supplies
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
121
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
1 Balance
✔
31 Adjusting
J3
4 3 0 0 00
4 3 0 0 00
2 1 0 0 00
Prepaid Insurance
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
2 2 0 0 00
131
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
1 Balance
✔
31 Adjusting
J3
30 0 0 0 00
30 0 0 0 00
5 0 0 0 00
Accumulated Depreciation—Equipment
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
25 0 0 0 00
142
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
116
31 Adjusting
■ Chapter 5
J3
4 0 0 00
4 0 0 00
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 117
CRITICAL THINKING PROBLEM 5.1 (continued)
GENERAL LEDGER
Depreciation Expense—Equipment
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
514
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
31 Adjusting
J3
4 0 0 00
4 0 0 00
Insurance Expense
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
517
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
31 Adjusting
J3
5 0 0 0 00
5 0 0 0 00
Supplies Expense
ACCOUNT ________________________________________________________________
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
520
ACCOUNT NO. ______________
BALANCE
DEBIT
CREDIT
2010
Jan.
Analyze:
31 Adjusting
J3
2 1 0 0 00
2 1 0 0 00
If the useful life of the equipment had been 12 years instead of 10 years, depreciation would have been
$333 rather than $400. Net Income would have been $67 greater.
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
117
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 118
CRITICAL THINKING PROBLEM 5.2
TO:
Billy Hatten, President
FROM:
Student’s Name
DATE:
Current Date
SUBJECT:
Effect on Financial Statements of Omitting Adjusting Entries
Adjusting entries are recorded to update the accounts at the end of the accounting period for previously
unrecorded items that belong to that period. If these entries are omitted, the net income will not be an accurate
measure of the operation of the company for the year and certain accounts on the balance sheet will not report
correct end-of-year balances.
In particular, Hatten Industries net income for the year will be overstated by $26,150; net income should be
$56,350 instead of $82,500. This amount represents a 32% decrease in net income over the amount that would
be reported if the adjusting entries were not made. ($26,150 $82,500 0.32).
This decrease in net income results from not making adjusting entries for the following unrecorded expenses:
1. Expense of Rent for the year
($21,000 6/12 $10,500 for 6 months)
$10,500
2. Expense of supplies used during the year
(Total supplies of $9,000 Ending Inventory of $1,750 $7,250 supplies used)
3. Depreciation expense for the year ($210,000 25 years $8,400 per year)
Total increase in expenses
7,250
8,400
$26,150
In addition to overstating the net income, the balances of Prepaid Rent and Supplies on the balance sheet
would be overstated and the book value of Building would also be overstated.
Preparation of the adjusting entries would permit the financial statements to present a more accurate measure of
the company’s operations for the year and its financial condition at the end of the year. Therefore, it is important
and the time is well spent to prepare adjusting entries so that the financial statements are up-to-date and
present an accurate picture of the business.
118
■ Chapter 5
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 119
Business Connections
Managerial Focus:
1. Accounting records generally reflect an asset’s historical or original cost, less accumulated depreciation
(not market value).
2. Depreciation Expense will offset income. Accumulated Depreciation will decrease the value of the asset.
3. Are necessary to present an accurate financial position of the firm.
4. Provides end-of-period adjusting entries and contains income statement and balance sheet accounts.
Ethical Dilemma:
If the company wanted to donate to a nonprofit organization they would write a check and get a tax deduction. It
is unethical to record higher costs than are actually incurred.
Streetwise:
1. Answers will vary. Accruals for interest expense, interest income, adjustments for depreciation, salaries,
deferral of income taxes, and accrual of sales tax payable.
2. $1,124 million. Current year depreciation expense increases the accumulated depreciation account.
Financial Statement Analysis:
1. 4.5% ($1,157 $25,719)
2. 59.2% ($15,221 $25,719)
3. 9.1 years ($10,498 $1,157)
Extending the Thought:
Students’ responses will vary. This situation extends the topic of adjusting entries to potentially uncollectible
accounts. Students may believe that the customer’s account receivable should be reduced to zero since the
likelihood of payment is low. Other students may suggest that the account be left intact until a determination is
made that the customer will not make the payment.
Business Communication:
Answers will vary, but students’ notes should reflect a diplomatic introduction of the topic when phoning the
owner. The accountant should recommend more frequent depreciation adjustments in order to provide up-to-date
records of the assets and expenses of the company.
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5 ■
119
pri30597_SM_ch05.qxd
8/2/08
1:21 PM
Page 120
Team Work:
Mr. Mincks has expenses that will appear on the income statement. He needs to match these expenses with
revenue. He can record the revenue as a receivable, other than accounts receivable, for the amount that he has
completed. In this case, he can record $15,000 or 15% of the price of the job.
Internet Connection:
Professional liability, surety bonds, umbrella policies, errors and omissions, product liability, fire, auto, dental,
workmens compensation, sexual harassment.
Chapter 5 Practice Test Answer Key
Part A True-False
1.
2.
3.
4.
5.
120
■ Chapter 5
T
F
T
T
T
6.
7.
8.
9.
10.
T
T
T
F
T
Part B Matching
1. d
2. b
3. c
4. f
5. e
6. a
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.