Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
Chapter 4
Adjustments, Financial Statements, and the
Quality of Earnings
ANSWERS TO QUESTIONS
1. Adjusting entries are made at the end of the accounting period to record all
revenues and expenses that have not been recorded but belong in the current
period. They update the balance sheet and income statement accounts at the end
of the accounting period.
2. The four different types are adjustments for:
(1) Deferred revenues -- previously recorded liabilities that need to be adjusted at
the end of the period to reflect revenues that have been earned (e.g., Unearned
Ticket Revenue must be adjusted for the portion of ticket revenues earned in
the current period).
(2) Accrued revenues -- revenues that have been earned by the end of the
accounting period but which will be collected in a future accounting period (e.g.,
recording Interest Receivable for interest revenues not yet collected).
(3) Deferred expenses -- previously recorded assets that need to be adjusted at
the end of the period to reflect incurred expenses (e.g., Prepaid Insurance must
be adjusted for the portion of insurance expense incurred in the current period).
(4) Accrued expenses -- expenses that have been incurred by the end of the
accounting period but which will be paid in a future accounting period (e.g.,
recording Utilities Payable for utilities expense incurred during the period that
has not yet been paid).
3. A contra-asset is an account related to an asset that is an offset or reduction to the
asset's balance. Accumulated Depreciation is a contra-account to the equipment
and buildings accounts.
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
4. The net income on the income statement is included in determining ending retained
earnings on the statement of stockholders’ equity and the balance sheet. The
change in the cash account on the balance sheet is analyzed and categorized on
the statement of cash flows into cash from operating activities, investing activities,
and financing activities.
5. (a) Income statement: Revenues (and gains) - Expenses (and losses) = Net Income
(b) Balance sheet: Assets = Liabilities + Stockholders' Equity
(c) Statement of stockholders' equity: Ending Stockholders' Equity = (Beginning
Contributed Capital + Stock Issuances - Stock Repurchases) + (Beginning
Retained Earnings + Net Income - Dividends Declared)
6. Adjusting entries have no effect on cash. For deferred revenues and deferred
expenses, cash was received or paid at some point in the past. For accruals, cash
will be received or paid in a future accounting period. At the time of the adjusting
entry, there is no cash being received or paid.
7. Earnings per share = Net income ÷ average number of shares of stock outstanding
during the period.
Earnings per share measures the average amount of net income for the year
attributable to one share of common stock.
8. Total asset turnover ratio = Sales (or Operating) Revenues ÷ Average Total Assets
The total asset turnover ratio measures sales generated during the period per dollar
of assets – how effective the company is at generating sales by utilizing assets.
9. The closing entry is made at the end of the accounting period to (1) transfer the
balances in the temporary income statement accounts to retained earnings and (2)
reduce the revenue, gain, expense, and loss accounts to a zero balance so that
they can be used for the accumulation process during the next period. A closing
entry must be entered into the system through the journal and posted to the ledger
accounts to state properly the temporary and permanent account balances (i.e.,
zero balances in the temporary accounts).
10. (a) Permanent accounts -- balance sheet accounts; that is, the asset, liability, and
stockholders’ equity accounts (these are not closed at the end of each period).
(b) Temporary accounts -- income statement accounts; that is, revenues, gains,
expenses, and losses (these are closed at the end of each period).
(c) Real accounts -- another name for permanent accounts.
(d) Nominal accounts -- another name for temporary accounts.
4-2
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
11. The income statement accounts are closed at the end of the accounting period
because, in effect, they are temporary subaccounts to retained earnings (i.e., a part
of stockholders' equity). They are used only for accumulation during the accounting
period. When the period ends, these accumulated accounts must be transferred
(closed) to retained earnings. The closing process serves:
(1) to correctly state retained earnings, and
(2) to clear out the balances of the temporary accounts for the year just ended so
that these subaccounts can be used again during the next period for
accumulation and classification purposes.
Balance sheet accounts are not closed at the end of the period because they reflect
permanent accumulated balances of assets, liabilities, and stockholders' equity.
Permanent accounts show the entity's financial position at the end of the period and
are the beginning amounts for the next period.
12. A post-closing trial balance is a listing taken from the ledger after the adjusting and
closing entries have been journalized and posted. It is not a necessary part of the
accounting information processing cycle but it is useful because it demonstrates the
equality of the debits and credits in the ledger after the closing entry has been
journalized and posted and that all temporary accounts have zero balances.
Financial Accounting, 8/e
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
ANSWERS TO MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
4-4
c
b
b
b
b
c
c
c
c
c
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
Authors' Recommended Solution Time
(Time in minutes)
Mini-exercises
No.
Time
1
5
2
5
3
3
4
5
5
5
6
5
7
5
8
5
9
5
10
5
11
5
12
3
Exercises
No. Time
1
10
2
10
3
10
4
15
5
10
6
20
7
20
8
20
9
15
10
20
11
10
12
20
13
15
14
15
15
20
16
20
17
20
18
20
19
10
20
15
Problems
No.
Time
1
15
2
20
3
20
4
20
5
20
6
25
7
30
Alternate
Comprehensive
Problems
Problems
No.
Time
No.
Time
1
15
1
60
2
20
2
60
3
20
4
20
5
20
6
25
7
30
Cases and
Projects
No.
Time
1
25
2
25
3
25
4
20
5
25
6
40
7
35
8
50
9
25
10
*
Continuing
Case
1
15
* Due to the nature of this project, it is very difficult to estimate the amount of time
students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research
skills, we devote class time to discussing research strategies. When we want the
students to focus on a real accounting issue, we offer suggestions about possible
companies or industries.
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
MINI-EXERCISES
M4–1.
Hagadorn Company
Adjusted Trial Balance
At June 30, 2014
Debit
Cash
Accounts receivable
Inventories
Prepaid expenses
Buildings and equipment
Accumulated depreciation
Land
Accounts payable
Accrued expenses payable
Income taxes payable
Unearned fees
Long-term debt
Common stock
Additional paid-in capital
Retained earnings
Sales revenue
Interest income
Cost of sales
Salaries expense
Rent expense
Depreciation expense
Interest expense
Income taxes expense
Totals
$
Credit
175
420
710
30
1,400
$
250
300
250
160
50
90
1,460
100
300
150
2,400
60
780
640
460
150
70
135
$ 5,270
$ 5,270
M4–2.
(1) D
(2) C
(3) A
(4) D
(5) A
(6) B
(7) B
(8) C
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
M4–3.
(1) D
(2) C
(3) A
(4) B
M4–4.
(a) 1. Rent revenue is now earned.
2. Cash was received in the past – a deferred revenue was recorded.
3. Amount: $1,200  4 months = $300 earned
Adjusting entry –
Unearned rent revenue (L).........................
Rent revenue (+R, +SE) .......................
300
300
(b) 1. Depreciation Expense on the equipment is now incurred.
2. Cash was paid in the past when the equipment was purchased -- a
deferred expense was recorded. The net book value of the equipment is
overstated. Accumulated Depreciation (the contra-account) needs to be
increased for the amount used during the period.
3. Amount: $3,200 given
Adjusting entry –
Depreciation expense (+E, SE) .................. 3,200
Accumulated depreciation (+XA, A) ....
3,200
(c) 1. Insurance expense was incurred in the period.
2. Cash was paid for the insurance in the past – a deferred expense was
recorded.
3. Amount: $5,000 x 6/24 = $1,250
Adjusting entry –
Insurance expense (+E, SE) ......................
Prepaid insurance (A) ..........................
Financial Accounting, 8/e
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1,250
4-7
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
M4–5.
Balance Sheet
Stockholders’
Liabilities
Equity
–300
+300
Income Statement
Revenues Expenses
+300
NE
Net
Income
+300
Transaction
a.
Assets
NE
b.
–3,200
NE
–3,200
NE
+3,200
–3,200
c.
–1,250
NE
–1,250
NE
+1,250
–1,250
M4–6.
(a) 1. Utilities Expense is incurred.
2. Cash will be paid in the future for utilities used in the current period – an
accrued expense needs to be recorded.
3. Amount: $450 given
Adjusting entry –
Utilities expense (+E, SE) ...........................
Utilities payable (+L) ..............................
450
450
(b) 1. Interest revenue is now earned on the note receivable.
2. Cash for the interest will be received in the future – an accrued revenue
needs to be recorded.
3. Amount: $6,000 principal x .14 annual rate x 4/12 of a year = $280
Adjusting entry –
Interest receivable (+A) ................................
Interest revenue (+R, +SE)....................
280
280
(c) 1. Wages expense was incurred in the period.
2. Cash will be paid in the future to the employees who worked in the current
period – an accrued expense needs to be recorded.
3. Amount: 10 employees x 4 days x $200 per day = $8,000
Adjusting entry –
Wages expense (+E, SE) ...........................
Wages payable (+L) ..............................
4-8
8,000
8,000
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
M4–7.
Balance Sheet
Stockholders’
Liabilities
Equity
+450
–450
Income Statement
Revenues Expenses
NE
+450
Net
Income
–450
Transaction
a.
Assets
NE
b.
+280
NE
+280
+280
NE
+280
c.
NE
+8,000
–8,000
NE
+8,000
–8,000
M4–8.
ROMNEY’S MARKETING COMPANY
Income Statement
For the Year Ended December 31, 2015
Operating Revenues:
Sales revenue
Total operating revenues
Operating Expenses:
Wages expense
Depreciation expense
Utilities expense
Insurance expense
Rent expense
Total operating expenses
Operating Income
Other Items:
Interest revenue
Rent revenue
Pretax Income
Income tax expense
Net Income
$ 38,500
38,500
19,500
1,800
380
750
9,000
31,430
7,070
$
Earnings per share*
100
800
7,970
2,700
5,270
$9.58
* calculated as $5,270  [(300 + 800)  2] = $5,270  550 = $9.58
Average number of shares
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
M4–9.
ROMNEY’S MARKETING COMPANY
Statement of Stockholders’ Equity
For the Year Ended December 31, 2015
Balance, January 1, 2015
Share issuance
Net income
Dividends declared
Balance, December 31, 2015
4-10
Total
Stockholders’
Equity
$ 2,700
3,000
5,270
5,270
(0)
(0)
$ 80
$ 3,620
$ 7,270
$ 10,970
*From the trial balance.
Work backwards
Common
Stock
$ 30
50
Additional
Paid-in
Capital
$ 670
2,950
Retained
Earnings
$ 2,000*
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
M4–10.
Req. 1
ROMNEY’S MARKETING COMPANY
Balance Sheet
At December 31, 2015
Assets
Current Assets:
Cash
Accounts receivable
Interest receivable
Prepaid insurance
Total current assets
Notes receivable
Equipment (net of accumulated depreciation, $3,000)
Total Assets
Liabilities
Current Liabilities:
Accounts payable
Accrued expenses payable
Income taxes payable
Unearned rent revenue
Total current liabilities
Stockholders’ Equity
Common stock ($0.10 par value)
Additional paid-in capital
Retained earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$
1,500
2,200
100
1,600
5,400
2,800
12,290
$ 20,490
$ 2,400
3,920
2,700
500
9,520
80
3,620
7,270
10,970
$ 20,490
Req. 2
The adjustments in M4–4 and M4–6 have no effect on the operating, investing, and
financing activities on the statement of cash flows because no cash is paid or received
at the time of the adjusting entries.
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
M4–11.
Assets:
Cash
Accounts receivable
Interest receivable
Prepaid insurance
Notes receivable
Equipment
Accumulated depreciation
Total assets
$ 1,500
2,200
100
1,600
2,800
15,290
(3,000)
$ 20,490
Total asset turnover = Sales (or Operating) revenues  Average total assets
= $38,500  $18,270 = 2.11
($16,050 + $20,490)/2 = $18,270
M4–12.
Sales revenue (R) ................................................
Interest revenue (R) .............................................
Rent revenue (R) ..................................................
Retained earnings (+SE) ..............................
Wages expense (E) ...................................
Depreciation expense (E) ..........................
Utilities expense (E) ...................................
Insurance expense (E) ..............................
Rent expense (E) ......................................
Income tax expense (E) ............................
4-12
38,500
100
800
5,270
19,500
1,800
380
750
9,000
2,700
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
EXERCISES
E4–1.
Paige Consultants, Inc.
Unadjusted Trial Balance
At September 30, 2015
Debit
Cash
Accounts receivable
Supplies
Prepaid expenses
Investments
Buildings and equipment
Accumulated depreciation
Land
Accounts payable
Accrued expenses payable
Unearned consulting fees
Income taxes payable
Notes payable
Common stock
Additional paid-in capital
Retained earnings *
Consulting fees revenue
Investment income
Gain on sale of land
Wages and benefits expense
Utilities expense
Travel expense
Rent expense
Professional development expense
Other operating expenses
General and administrative expenses
Interest expense
Totals
Credit
$ 153,000
225,400
12,200
10,200
145,000
323,040
$
18,100
60,000
96,830
25,650
32,500
3,030
160,000
3,370
220,000
144,510
2,564,200
10,800
6,000
1,610,000
25,230
23,990
152,080
18,600
188,000
321,050
17,200
$3,284,990 $3,284,990
* Since debits are supposed to equal credits in a trial balance, the balance in Retained
Earnings is determined as the amount in the credit column necessary to make debits
equal credits (a “plugged” figure).
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–2.
Req. 1
Types
Deferred Revenues:
Deferred Revenue may need to be
adjusted for any revenue earned
during the period
Accounts to be Adjusted
Deferred Revenue (L) and Product
Revenue and/or Service Revenue (R)
Accrued Revenues:
Interest may be earned on Short-term Interest Receivable (A) and Interest
Investments
Revenue (R)
Any unrecorded sales or services
provided will need to be recorded
Accounts Receivable (A) and Product
Revenue and/or Service Revenue (R)
Deferred Expenses:
Other Current Assets may include
supplies, prepaid rent, prepaid
insurance, or prepaid advertising
Other Current Assets (A) and Selling,
General, and Administrative Expense
(E)
Any additional use of Property, Plant,
and Equipment during the period
will need to be recorded
Accrued Expenses:
Interest incurred on Short-term Note
Payable and Long-term Debt will
need to be recorded
Accumulated Depreciation (XA) and
Cost of Products and/or Cost of
Services (E)
Accrued Liabilities (L) and Interest
Expense (E)
There are likely many other accrued
expenses to be recorded,
including wages, warranties, and
utilities; pension, and
contingencies
Accrued Liabilities (L) and Selling,
General, and Administrative
Expenses (among other expenses)
(E); Other Liabilities (L) (pension and
contingencies among other expenses)
Income taxes must be computed for
the period and accrued
Income Tax Payable (L) and Income Tax
Expense (E)
Req. 2
Temporary accounts that accumulate during the period are closed at the end of the
year to the permanent account Retained Earnings. These include: Product revenue,
service revenue, interest revenue, cost of products, cost of services, interest expense,
research and development expense, selling, general, and administrative expense, other
expenses, and income tax expense.
4-14
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–3.
Req. 1
The annual reporting period for this company is January 1 through December 31, 2014.
Req. 2 (Adjusting entries)
Both transactions are accruals because revenue has been earned and expenses
incurred but no cash has yet been received or paid.
(a) 1. Wages expense is incurred.
2. Cash will be paid in the next period to employees who worked in the
current period – an accrued expense needs to be recorded.
3. Amount: $4,000 given
Adjusting entry – December 31, 2014
Wages expense (+E, SE) ..........................
Wages payable (+L)..............................
To record wages accrued at year-end.
4,000
4,000
(b) 1. Interest revenue is now earned.
2. Cash will be received in the future – an accrued revenue needs to be
recorded.
3. Amount: $1,500 given
Adjusting entry – December 31, 2014
Interest receivable (+A) ................................ 1,500
Interest revenue (+R, +SE)....................
To record interest earned at year-end.
1,500
Req. 3
Adjusting entries are necessary at the end of the accounting period to ensure that all
revenues earned and expenses incurred and the related assets and liabilities are
measured properly. The entries above are accruals; entry (a) is an accrued expense
(incurred but not yet recorded) and entry (b) is an accrued revenue (earned but not yet
recorded). In applying the accrual basis of accounting, revenues should be recognized
when earned and measurable and expenses should be recognized when incurred in
generating revenues.
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–4.
Req. 1
Prepaid Insurance is a deferred expense that needs to be adjusted each period for the
amount used during the period.
The amount of expense is computed as follows: $4,800 x 3/24 = $600 used
Adjusting entry:
Insurance expense (+E, SE).....................................
Prepaid insurance (A) ....................................
600
600
Req. 2
Shipping Supplies is a deferred expense that needs to be adjusted at the end of the
period for the amount of supplies used during the period.
The amount is computed as follows: Beginning balance
Supplies purchased
Supplies on hand at end
Supplies used
Adjusting entry:
Shipping supplies expense (+E, SE) ........................
Shipping supplies (A) .....................................
$13,000
75,000
(20,000)
$68,000
68,000
68,000
Req. 3
Prepaid Insurance
4,800
AJE 600
End.
4,200
Insurance Expense
10/1
Shipping Supplies
Beg. 13,000
Purch. 75,000 AJE 68,000
End. 20,000
AJE
End.
600
600
Shipping Supplies Expense
AJE 68,000
End. 68,000
2014 Income statement:
Insurance expense
$ 600
Shipping supplies expense $68,000
Req. 4
2014 Balance sheet:
Prepaid insurance $ 4,200
Shipping supplies $20,000
4-16
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–5.
Transaction Assets
E4–3 (a)
NE
E4–3 (b)
+1,500
E4–4 (a)
–600
E4–4 (b)
–68,000
Balance Sheet
Stockholders’
Liabilities
Equity
+4,000
–4,000
NE
+1,500
NE
–600
NE
–68,000
Income Statement
Net
Revenues Expenses Income
NE
+4,000
–4,000
+1,500
NE
+1,500
NE
+600
–600
NE
+68,000
–68,000
E4–6.
Req. 1
a.
b.
c.
d.
e.
f.
g.
Accrued expense
Deferred expense
Accrued revenue
Deferred expense
Deferred expense
Deferred revenue
Accrued revenue
Req. 2
a.
2,700
Wages expense (+E, SE) ..........................................
Wages payable (+L) .......................................... 2,700
b.
675
Office supplies expense (+E, SE)..............................
Office supplies (A) ...........................................
675
Computations
Given
$450 + $500
- $275 = $675 used
c.
Rent receivable (+A)....................................................
1,120
Rent revenue (+R, +SE) .................................... 1,120
$560 x 2 months
= $1,120 earned
d.
12,100
Depreciation expense (+E, SE) .................................
12,100
Accumulated depreciation (+XA, A)
Given
e.
600
Insurance expense (+E, SE) .....................................
Prepaid insurance (A) ......................................
$2,400 x 6/24 =
$600 used
600
f.
3,200
Unearned rent revenue (L) ........................................
Rent revenue (+R, +SE) .................................... 3,200
$9,600 x 2/6 =
$3,200 earned
g.
Repair accounts receivable (+A) .................................
800
Repair shop revenue (+R, +SE) ........................
Given
Financial Accounting, 8/e
800
4-17
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–7.
Req. 1
a.
b.
c.
d.
e.
f.
g.
Accrued revenue
Deferred expense
Accrued expense
Deferred revenue
Deferred expense
Deferred expense
Accrued expense
Req. 2
a.
Accounts receivable (+A) ............................................
3,300
Service revenue (+R, +SE)................................ 3,300
Computations
Given
b.
1,650
Advertising expense (+E, SE)....................................
Prepaid advertising (A) .................................... 1,650
$2,200 x 9/12 =
$1,650 used
c.
5,500
Interest expense (+E, SE) .........................................
Interest payable (+L) ......................................... 5,500
$300,000 x 0.11
x 2/12 (since last
payment) = $5,500
incurred
d.
750
Unearned storage revenue (L) ..................................
Storage revenue (+R, +SE) ...............................
$4,500 x 1/6 =
$750 earned
750
e.
18,000
Depreciation expense (+E, SE) .................................
18,000
Accumulated depreciation (+XA, A)
Given
f.
48,500
Supplies expense (+E, SE) .......................................
Supplies (A) .....................................................48,500
$18,900 +
$45,200 – $15,600
= $48,500 used
g.
5,600
Wages expense (+E, SE) ..........................................
Wages payable (+L) .......................................... 5,600
Given
4-18
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–8.
Balance Sheet
Stockholders’
Liabilities
Equity
Income Statement
Revenues Expenses
Net
Income
Transaction
Assets
(a)
NE
+2,700
–2,700
NE
+2,700
–2,700
(b)
–675
NE
–675
NE
+675
–675
(c)
+1,120
NE
+1,120
+1,120
NE
+1,120
(d)
–12,100
NE
–12,100
NE
+12,100
–12,100
(e)
–600
NE
–600
NE
+600
–600
(f)
NE
–3,200
+3,200
+3,200
NE
+3,200
(g)
+800
NE
+800
+800
NE
+800
E4–9.
Balance Sheet
Stockholders’
Liabilities
Equity
Income Statement
Revenues Expenses
Net
Income
Transaction
Assets
(a)
+3,300
NE
+3,300
+3,300
NE
+3,300
(b)
–1,650
NE
–1,650
NE
+1,650
–1,650
(c)
NE
+5,500
–5,500
NE
+5,500
–5,500
(d)
NE
–750
+750
+750
NE
+750
(e)
–18,000
NE
–18,000
NE
+18,000
–18,000
(f)
–48,500
NE
–48,500
NE
+48,500
–48,500
(g)
NE
+5,600
–5,600
NE
+5,600
–5,600
\
Financial Accounting, 8/e
4-19
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–10.
a.
Independent Situations
Accrued wages, unrecorded and unpaid at
year-end, $400 (example).
Debit
Code Amount
N
400
Credit
Code Amount
G
400
b.
Service revenue earned but not yet
collected at year-end, $600.
C
600
L
600
c.
Dividends declared and paid during the
year, $900.
K
900
A
900
d.
Office supplies on hand during the year,
$400; supplies on hand at year-end, $160.
Q
240
B
240
e.
Service revenue collected in advance and
not yet earned, $800.
A
800
I
800
f.
Depreciation expense for the year, $1,000.
O
1,000
E
1,000
g.
At year-end, interest on note payable not
yet recorded or paid, $220.
P
220
H
220
h.
Balance at year-end in Service Revenue
account, $56,000. Prepare the closing
entry at year-end.
L
56,000
K
56,000
i.
Balance at year-end in Interest Expense
account, $460. Prepare the closing entry
at year-end.
K
460
P
460
E4–11.
Selected Balance Sheet Amounts at December 31, 2015
Assets:
Equipment (recorded at cost per cost principle)
Accumulated depreciation (for one year, as given)
Net book value of equipment (difference)
$25,000
(2,500)
22,500
Office supplies (on hand, as given)
800
Prepaid insurance (remaining coverage, $1,000 x 18/24
months)
750
Selected Income Statement Amounts for the Year Ended December 31, 2015
Expenses:
Depreciation expense (for one year, as given)
$ 2,500
Office supplies expense (used, $3,000 - $800 on hand)
2,200
Insurance expense (for 6 months, $1,000 x 6/24 months)
250
4-20
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–12.
Date
Note 1:
April 1, 2014
December 31, 2014a
March 31, 2015b
Note 2:
August 1, 2014
December 31, 2014c
January 31, 2015d
Balance Sheet
Income Statement
Stockholders’
Net
Assets Liabilities
Equity
Revenues Expenses Income
+30,000/
–30,000
+ 2,250
+33,000/
–32,250
NE
NE
NE
NE
NE
NE
+ 2,250
+ 2,250
NE
+ 2,250
NE
+ 750
+750
NE
+ 750
NE
NE
NE
NE
+ 30,000 + 30,000
NE
+ 1,500
- 1,500
NE
+ 1,500
- 1,500
- 31,800
- 31,500
- 300
NE
+ 300
- 300
(a) $30,000 principal x .10 annual interest rate x 9/12 of a year = $2,250
(b) Additional interest revenue in 2015: $30,000 x .10 x 3/12 = $750. Cash
received was $33,000 ($30,000 principal + $3,000 interest for 12 months);
receivables decreased by the $30,000 note receivable and $2,250 interest
receivable accrued in 2014.
(c) $30,000 principal x .12 annual interest rate x 5/12 of a year = $1,500
(d) Additional interest expense in 2015: $30,000 x .12 x 1/12 = $300. Cash paid
was $31,800 ($30,000 principal + $1,800 interest for 6 months); payables
decreased by the $30,000 note payable and $1,500 interest payable accrued in
2014.
Financial Accounting, 8/e
4-21
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–13.
Req. 1
(a)
Cash paid on accrued income taxes payable.
(b)
Accrual of additional income tax expense.
(c)
Cash paid on dividends payable.
(d)
Amount of dividends declared for the period.
(e)
Cash paid on accrued interest payable.
(f)
Accrual of additional interest expense.
Req. 2 Computations:
(a)
Beg. Bal. +
accrued income taxes
$154
+
1,424
-
cash paid
?
?
=
=
=
(c)
Beg. Bal.
$127
dividends declared
634
-
cash paid
?
?
=
=
=
End. bal.
$168
$593 paid
accrued interest expense
?
?
-
cash paid
759
=
=
=
End. bal.
$191
$760 accrued
+
+
(f)
Beg. Bal. +
$190
+
4-22
End. bal.
$166
$1,412 paid
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–14.
Req. 1 Adjusting entries that were or should have been made at December 31:
(a) No entry was made. Entry that should have been made:
Rent receivable (+A) ...................................................
Rent revenue (+R, +SE) ..................................
1,400
(b) No entry was made. Entry that should have been made:
Depreciation expense (+E, SE) ................................
Accumulated depreciation (+XA, A) …………
15,000
(c) No entry was made. Entry that should have been made:
Unearned fee revenue (L) ........................................
Fee revenue (+R, +SE) ....................................
1,500
1,400
15,000
1,500
(d) Entry that was already made:
Interest expense (+E, SE) .......................................
Interest payable (+L) .......................................
($17,000 x .09 x 12/12 months)
1,530
1,530
Entry that should have been made:
Interest expense (+E, SE) ........................................
Interest payable (+L) ........................................
($17,000 x .09 x 2/12 months)
255
255
(e) No entry was made. Entry that should have been made:
Insurance expense (+E, SE).....................................
Prepaid insurance (A) ....................................
650
650
Req. 2
Balance Sheet
Stockholders’
Liabilities
Equity
Income Statement
Assets
(a)
U 1,400
NE
U 1,400
U 1,400
NE
U 1,400
(b)
O 15,000
NE
O 15,000
NE
U 15,000
O 15,000
(c)
NE
O 1,500
U 1,500
U 1,500
NE
U 1,500
(d)
NE
O 1,275
U 1,275
NE
O 1,275
U 1,275
(e)
O 650
NE
O 650
NE
U 650
O 650
Financial Accounting, 8/e
Revenues Expenses
Net
Income
Transaction
4-23
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–15.
Items
Balances reported
Additional adjustments:
a. Wages
b. Depreciation
c. Rent revenue
Adjusted balances
d. Income taxes
Correct balances
Net
Income
$65,000
(37,000)
(19,000)
3,500
12,500
(3,750)
$ 8,750
Total
Assets
$185,000
Total
Liabilities
$90,000
Stockholders’
Equity
$95,000
37,000
(37,000)
(19,000)
3,500
42,500
(3,750)
$38,750
(19,000)
166,000
$166,000
(3,500)
123,500
3,750
$127,250
Computations:
a.
Given, $37,000 accrued and unpaid.
b.
Given, $19,000 depreciation expense.
c.
$10,500 x 1/3 = $3,500 rent revenue earned. The remaining $7,000 in unearned
revenue is a liability for two months of occupancy "owed'' to the renter.
d.
$12,500 income before taxes x 30% = $3,750.
4-24
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–16.
Req. 1
a.
b.
c.
Rent receivable (+A) ...................................
Revenues (rent) (+R, +SE) ..................
2,500
Expenses (depreciation) (+E, SE) ............
Accumulated depreciation (+XA, A)...
4,500
Income tax expense (+E, SE) ...................
Income taxes payable (+L) ..................
5,100
2,500
4,500
5,100
Req. 2
Effects of
Adjusting
Entries
As
Prepared
Income statement:
Revenues
Expenses
Income tax expense
Net income
Balance Sheet:
Assets
Cash
Accounts receivable
Rent receivable
Equipment
Accumulated depreciation
Liabilities
Accounts payable
Income taxes payable
Stockholders' Equity
Common stock
Additional paid-in capital
Retained earnings
Financial Accounting, 8/e
$97,000
(73,000)
a
b
c
$24,000
$2,500
(4,500)
(5,100)
(7,100)
$20,000
22,000
50,000
(10,000)
$82,000
$99,500
(77,500)
(5,100)
$16,900
a
2,500
b
(4,500)
(2,000)
$20,000
22,000
2,500
50,000
(14,500)
$80,000
c
5,100
$10,000
5,100
(7,100)
(2,000)
10,000
30,000
24,900
$80,000
$10,000
10,000
30,000
32,000
$82,000
Corrected
Amounts
4-25
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–17.
Req. 1
a.
b.
c.
d.
e.
Salaries and wages expense (+E, SE) ................
Salaries and wages payable (+L) ...................
730
Utilities expense (+E, SE)....................................
Utilities payable (+L) .......................................
440
Depreciation expense (+E, SE) ...........................
Accumulated depreciation (+XA, A) .............
24,000
Interest expense (+E, SE) ...................................
Interest payable (+L) ......................................
($15,000 x .08 x 3/12)
300
Maintenance expense (+E, SE)...........................
Maintenance supplies (A) .............................
1,100
f.
No adjustment is needed because the revenue
will not be earned until January (next year).
g.
Income tax expense (+E, SE)..............................
Income tax payable (+L) .................................
4-26
730
440
24,000
300
1,100
5,800
5,800
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–17. (continued)
Req. 2
JAY, INC.
Income Statement
For the Year Ended December 31, 2014
Operating Revenue:
Rental revenue
Operating Expenses:
Salaries and wages ($26,500 + $730)
Maintenance expense ($12,000 + $1,100)
Rent expense
Utilities expense ($4,300 + $440)
Gas and oil expense
Depreciation expense
Miscellaneous expenses
Total expenses
Operating Income
Other Item:
Interest expense ($15,000 x .08 x 3/12)
Pretax income
Income tax expense
Net income
Earnings per share: $21,030 ÷ 7,000 shares
$109,000
$27,230
13,100
8,800
4,740
3,000
24,000
1,000
81,870
27,130
300
26,830
5,800
$ 21,030
$3.00
Req. 3
Total asset turnover ratio = Sales (or Operating) Revenues  Average Total Assets
= $109,000  [($58,020 + $65,180)/2]
= $109,000  $61,600 = 1.77
The total asset turnover ratio indicates that, for every $1 of assets, Jay earns $1.77 in
rental revenue. This ratio is lower than the industry average total asset turnover of
2.31, implying that Jay is less effective at utilizing assets to generate revenue than the
average company in the industry.
Financial Accounting, 8/e
4-27
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–18.
Req. 1
(a)
(b)
(c)
(d)
Insurance expense (+E, SE) ....................................
Prepaid insurance (A) ....................................
7
Wages expense (+E, SE) .........................................
Wages payable (+L) ........................................
4
Depreciation expense (+E, SE) ................................
Accumulated depreciation (+XA, A) ...............
9
Income tax expense (+E, SE) ...................................
Income tax payable (+L) ..................................
11
7
4
9
11
Req. 2
GREEN VALLEY COMPANY
Trial Balance
December 31, 2014
(in thousands of dollars)
Account Titles
Cash
Accounts receivable
Prepaid insurance
Machinery
Accumulated depreciation
Accounts payable
Wages payable
Income taxes payable
Common stock
Additional paid-in capital
Retained earnings
Revenues (not detailed)
Expenses (not detailed)
Totals
4-28
Unadjusted
Debit
Credit
20
13
8
85
Adjustments
Debit
Credit
a
7
c
9
11
b 4
d 11
4
67
6
82
32
164
164
a 7
b 4
c 9
d 11
31
31
Adjusted
Debit
Credit
20
13
1
85
9
11
4
11
4
67
6
82
63
188
188
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–19.
GREEN VALLEY COMPANY
Income Statement
For the Year Ended December 31, 2014
(in thousands of dollars)
Revenues (not detailed)
Expenses ($32 + $7 + $9 + $4)
Pretax income
Income tax expense
Net income
$82
52
30
11
$19
EPS ($19,000 ÷ 4,000 shares)
$4.75
GREEN VALLEY COMPANY
Statement of Stockholders' Equity
For the Year Ended December 31, 2014
(in thousands of dollars)
Additional
Common
Paid-in
Retained
Stock
Capital
Earnings
Beginning balances, 1/1/2014
$ 0
$ 0
$ 0
Stock issuance
4
67
Net income
19
Dividends declared
(6) *
Ending balances, 12/31/2014
$ 4
$ 67
$ 13
Total
Stockholders'
Equity
$ 0
71
19
(6)
$ 84
* The amount of dividends declared can be inferred because the unadjusted trial
balance amount for retained earnings is a negative $6. Since this is the first year of
operations, we can assume the entire amount is due to a dividend declaration.
GREEN VALLEY COMPANY
Balance Sheet
At December 31, 2014
(in thousands of dollars)
Assets
Current Assets:
Cash
Accounts receivable
Prepaid insurance ($8 - $7)
Total current assets
Machinery
Accumulated depreciation
Total assets
Financial Accounting, 8/e
$ 20
13
1
34
85
(9)
$110
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable
$ 11
Wages payable
4
Income taxes payable
11
Total current liabilities
26
Stockholders' Equity:
Common stock
4
Additional paid-in capital
67
Retained earnings
13
Total liabilities and
stockholders' equity
$110
4-29
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–20.
Req. 1
The purposes of “closing the books” at the end of the accounting period are to:
 Transfer the balance in the temporary accounts to a permanent account
(Retained Earnings).
 Create a zero balance in each of the temporary accounts for accumulation of
activities in the next accounting period.
Req. 2
Revenues (R) ...........................................................
Expenses ($32 + $7 + $9 + $4 + $11) (E)......
Retained earnings (+SE) .................................
4-30
82
63
19
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
PROBLEMS
P4–1.
Req. 1
Dell Inc.
Adjusted Trial Balance
At January 31, 2015
(in millions of dollars)
Debit
Cash
$ 13,852
Marketable securities
966
Accounts receivable
9,803
Inventories
1,404
Property, plant, and equipment
4,934
Accumulated depreciation
Other assets
16,384
Accounts payable
Accrued expenses payable
Long-term debt
Other liabilities
Common stock and additional paid-in capital
Retained earnings
Sales revenue
Other expenses
191
Cost of sales
48,260
Selling, general, and administrative expenses
8,524
Research and development expense
856
Income tax expense
748
Totals
$ 105,922
Credit
$ 2,810
11,656
3,934
6,387
13,639
187
5,238
62,071
$ 105,922
Req. 2
Since debits are supposed to equal credits in a trial balance, the balance in Retained
Earnings is determined as the amount in the credit column necessary to make debits
equal credits (a “plugged” figure).
Financial Accounting, 8/e
4-31
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
P4–2.
Req. 1
a.
Deferred revenue
e.
Deferred expense
b.
Accrued expense
f.
Accrued revenue
c.
Deferred expense
g.
Accrued expense
d.
Deferred revenue
h.
Accrued expense
Req. 2
a.
b.
c.
d.
e.
f.
g.
h.
4-32
Unearned rent revenue (L) .........................................
Rent revenue (+R, +SE).....................................
($8,400 ÷ 6 months = $1,400 per month x 4 months)
5,600
Interest expense (+E, SE) ..........................................
Interest payable (+L) ............................................
($18,000 x .12 x 3/12)
540
Depreciation expense (+E, SE) ..................................
Accumulated depreciation (+XA, A) ..................
2,500
Unearned service revenue (L) ....................................
Service revenue (+R, +SE) .................................
($3,000 x 2/12)
500
5,600
540
2,500
500
1,500
Insurance expense (+E, SE) ......................................
Prepaid insurance (A) .....................................
($9,000 ÷ 12 months = $750 per month x 2 months of coverage)
Accounts receivable (+A) .............................................
Service revenue (+R, +SE) ................................
4,000
Wage expense (+E, SE) ............................................
Wages payable (+L) ...........................................
14,000
Property tax expense (+E, SE)...................................
Property tax payable (+L) .....................................
500
1,500
4,000
14,000
500
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
P4–3.
Req. 1
a.
Deferred expense
e.
Accrued revenue
b.
Deferred expense
f.
Deferred expense
c.
Accrued expense
g.
Accrued expense
d.
Accrued expense
h.
Accrued expense
Req. 2
a.
b.
c.
d.
e.
f.
g.
h.
Depreciation expense (+E, SE) ..................................
Accumulated depreciation (+XA, A) ..................
3,500
3,500
1,350
Supplies expense (+E, SE) ........................................
Supplies (A) .....................................................
(Beg. Inventory of $500 + Purchases $1,000 – Ending Inventory $150)
Repairs expense (+E, SE)..........................................
Accounts payable (+L) .......................................
2,600
Property tax expense (+E, SE)...................................
Property tax payable (+L) .....................................
1,800
Accounts receivable (+A) .............................................
Service revenue (+R, +SE) ................................
4,000
Insurance expense (+E, SE) ......................................
Prepaid insurance (A) .....................................
($900 ÷ 36 months x 6 months of coverage)
150
Interest expense (+E, SE) ..........................................
Interest payable (+L) ............................................
($13,000 x .12 x 3/12)
390
1,350
2,600
1,800
4,000
150
390
7,263
Income tax expense (+E, SE) ....................................
Income tax payable (+L) ......................................
7,263
To accrue income tax expense incurred but not paid:
Income before adjustments (given)
$30,000
Effect of adjustments (a) through (g)
(5,790) (–$3,500–$1,350–$2,600
Income before income taxes
24,210 –$1,800+$4,000–$150–$390)
Income tax rate
x 30%
Income tax expense
$ 7,263
Financial Accounting, 8/e
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
P4–4.
Req. 1
a.
Deferred revenue
e.
Deferred expense
b.
Accrued expense
f.
Accrued revenue
c.
Deferred expense
g.
Accrued expense
d.
Deferred revenue
h.
Accrued expense
Req. 2
Transaction
Assets
Balance Sheet
Stockholders’
Liabilities
Equity
Income Statement
Revenues Expenses
Net
Income
a.
NE
–5,600
+5,600
+5,600
NE
+5,600
b.
NE
+540
–540
NE
+540
–540
c.
–2,500
NE
–2,500
NE
+2,500
–2,500
d.
NE
–500
+500
+500
NE
+500
e.
–1,500
NE
–1,500
NE
+1,500
–1,500
f.
+4,000
NE
+4,000
+4,000
NE
+4,000
g.
NE
+14,000
–14,000
NE
+14,000
–14,000
h.
NE
+500
–500
NE
+500
–500
Computations:
a.
$8,400 ÷ 6 months = $1,400 per month x 4 months = $5,600 earned
b.
$18,000 principal x .12 x 3/12 = $540 interest incurred
c.
Amount is given.
d.
$3,000 unearned x 2/12 = $500 earned
e.
$9,000 ÷ 12 months = $750 per month x 2 months of coverage = $1,500 incurred
f.
Amount is given.
g.
Amount is given.
h.
Amount is given.
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
P4–5.
Req. 1
a.
Deferred expense
e.
Accrued revenue
b.
Deferred expense
f.
Deferred expense
c.
Accrued expense
g.
Accrued expense
d.
Accrued expense
h.
Accrued expense
Req. 2
Balance Sheet
Stockholders’
Liabilities
Equity
Income Statement
Revenues Expenses
Net
Income
Transaction
Assets
a.
 3,500
NE
 3,500
NE
+ 3,500
 3,500
b.
 1,350
NE
 1,350
NE
+ 1,350
– 1,350
c.
NE
+ 2,600
 2,600
NE
+ 2,600
 2,600
d.
NE
+ 1,800
 1,800
NE
+ 1,800
 1,800
e.
+ 4,000
NE
+ 4,000
+ 4,000
NE
+ 4,000
f.
 150
NE
 150
NE
+ 150
 150
g.
NE
+ 390
 390
NE
+ 390
 390
h.
NE
+7,263
 7,263
NE
+ 7,263
 7,263
Computations:
a.
Amount is given.
b.
Beg. inventory, $500 + Purchases, $1,000 - Ending inventory, $150 = $1,350 used
c.
Amount is given.
d.
Amount is given.
e.
Amount is given.
f.
$900 x 6/36 = $150 used
g.
$13,000 x 12% x 3/12 = $390 interest expense for the period
h.
Adjusted income = $30,000 - $3,500 - $1,350 - $2,600 - $1,800 + $4,000 - $150 $390 = $24,210 x 30% tax rate = $7,263 income tax expense.
Financial Accounting, 8/e
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
P4–6.
Req. 1
(1)
(2)
(3)
(4)
December 31, 2015, Adjusting Entries
Accounts receivable (+A) .........................................
1,820
Service revenue (+R, +SE) ...........................
To record service revenue earned, but not collected.
Insurance expense (+E, SE) .................................
Prepaid insurance (A) .................................
To record insurance expired as an expense.
1,820
(b)
(i)
130
(l)
(c)
6,000
(k)
(e)
1,380
(m)
(f)
130
Depreciation expense (+E, SE)..............................
Accumulated depreciation, equipment (+XA, A)
To record depreciation expense.
6,000
Income tax expense (+E, SE) ...............................
Income taxes payable (+L) ...........................
To record income taxes for 2015.
1,380
Req. 2
Amounts before
Adjusting Entries
Revenues:
Service revenue
Expenses:
Salary expense
Depreciation expense
Insurance expense
Income tax expense
Total expense
Net income (loss)
Amounts after
Adjusting Entries
$64,400
$66,220
55,470
55,470
6,000
130
1,380
62,980
$ 3,240
55,470
$ 8,930
Net income is $3,240 because this amount includes all revenues and all expenses
(after the adjusting entries). This amount is correct because it incorporates the effects
of the revenue realization and expense matching principles applied to all transactions
whose effects extend beyond the period in which the transactions occurred. Net
income of $8,930 was not correct because expenses of $7,510 and revenues of $1,820
were excluded that should have been recorded in 2015.
Req. 3
Earnings per share = $3,240 net income  3,000 shares = $1.08 per share
4-36
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
P4–6. (continued)
Req. 4
Total asset turnover ratio = Sales (or Operating) Revenue  Average Total Assets
= $66,220  [($110,000 + $136,220)/2]
= $66,220  $123,110 = 0.538
The total asset turnover ratio indicates that, for every $1 of assets, Ramirez generated
$0.538 in revenues. Compared to the industry average of 0.49, Ramirez is more
effective at utilizing assets to generate sales than the average company in the industry.
Req. 5
Service revenue (R) ...............................................
Retained earnings (+SE) ................................
Salary expense (E).........................................
Depreciation expense (E)...............................
Insurance expense (E) ...................................
Income tax expense (E) .................................
Financial Accounting, 8/e
66,220
3,240
55,470
6,000
130
1,380
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
P4–7.
Req. 1
December 31, 2014, Adjusting Entries:
(a)
(b)
(c)
(d)
(e)
Supplies expense (+E, SE) ......................................
Supplies (A) ..................................................
600
Insurance expense (+E, SE) ....................................
Prepaid insurance (A) ...................................
800
Depreciation expense (+E, SE) ...............................
Accumulated depreciation (+XA, A) ..............
Wages expense (+E, SE) .........................................
Wages payable (+L) .......................................
Income tax expense (+E, SE) ..................................
Income taxes payable (+L) .............................
600
800
3,700
3,700
640
640
5,540
5,540
Req. 2
TUNSTALL, INC.
Income Statement
For the Year Ended December 31, 2014
Operating Revenue:
Service revenue
$61,360
Operating Expenses:
Supplies expense ($900 - $300)
Insurance expense
Depreciation expense
Wages expense
Remaining expenses (not detailed)
Total expenses
Operating Income
Income tax expense
Net Income
600
800
3,700
640
33,360
39,100
22,260
5,540
$16,720
Earnings per share ($16,720 ÷ 5,000 shares)
4-38
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
P4–7. (continued)
Req. 2 (continued)
TUNSTALL, INC.
Balance Sheet
At December 31, 2014
Assets
Current Assets:
Cash
Accounts receivable
Supplies
Total current assets
Service trucks
Accumulated depreciation
Other assets (not detailed)
Total assets
$42,000
11,600
300
53,900
19,000
(12,900)
8,300
$68,300
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable
$ 3,000
Wages payable
640
Income taxes payable
5,540
Total current liabilities
9,180
Note payable, long term
17,000
Total liabilities
26,180
Stockholders' Equity
Common stock
Additional paid-in capital
Retained earnings*
Total stockholders' equity
Total liabilities and
stockholders' equity
400
19,000
22,720
42,120
$68,300
*Unadjusted balance, $6,000 + Net income, $16,720 = Ending balance, $22,720.
Req. 3
December 31, 2014, Closing Entry:
Service revenue (R) ..................................................
Retained earnings (+SE) ................................
Supplies expense (E) ....................................
Insurance expense (E) ..................................
Depreciation expense (E) .............................
Wages expense (E) ......................................
Remaining expenses (not detailed) (E)..........
Income tax expense (E) ................................
Financial Accounting, 8/e
61,360
16,720
600
800
3,700
640
33,360
5,540
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
ALTERNATE PROBLEMS
AP4–1.
Req. 1
Starbucks Corporation
Adjusted Trial Balance
At September 30, 2015
(in millions)
Cash
Short-term investments
Accounts receivable
Inventories
Prepaid expenses
Other current assets
Long-term investments
Property, plant, and equipment
Accumulated depreciation
Other long-lived assets
Accounts payable
Accrued liabilities
Long-term liabilities
Common stock
Additional paid-in capital
Retained earnings
Net revenues
Interest income
Cost of sales
Store operating expenses
Other operating expenses
Depreciation expense
General and administrative expenses
Interest expense
Income tax expense
Totals
Debit
$
1,148
903
387
966
162
230
479
6,163
Credit
$
3,808
730
540
1,536
897
2
39
3,098
11,903
116
$
4,949
3,665
402
523
636
33
563
21,939
$
21,939
Req. 2
Since debits are supposed to equal credits in a trial balance, the balance in Retained
Earnings is determined as the amount in the credit column necessary to make debits
equal credits (a “plugged” figure).
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
AP4–2.
Req. 1
a.
Deferred expense
e.
Deferred revenue
b.
Deferred revenue
f.
Accrued expense
c.
Accrued expense
g.
Accrued expense
d.
Deferred expense
h.
Accrued revenue
Req. 2
a.
b.
c.
d.
e.
f.
g.
h.
Insurance expense (+E, SE) ......................................
Prepaid insurance (A) .....................................
($3,200 ÷ 6 months x 3 months of coverage)
1,600
Unearned maintenance revenue (L) ..........................
Maintenance revenue (+R, +SE) .......................
($450 ÷ 2 months x 1 month)
225
Wage expense (+E, SE) ............................................
Wages payable (+L) ..........................................
900
Depreciation expense (+E, SE) .................................
Accumulated depreciation (+XA, A) ..................
3,000
Unearned service revenue (L) ...................................
Service revenue (+R, +SE) .................................
($4,200 ÷ 12 months x 2 months)
700
Interest expense (+E, SE)..........................................
Interest payable (+L) ............................................
($18,000 x .09 x 5/12)
675
Property tax expense (+E, SE) ..................................
Property tax payable (+L) ....................................
500
Accounts receivable (+A) .............................................
Service revenue (+R, +SE) ................................
2,000
Financial Accounting, 8/e
1,600
225
900
3,000
700
675
500
2,000
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
AP4–3.
Req. 1
a.
Deferred expense
e.
Deferred expense
b.
Accrued revenue
f.
Deferred expense
c.
Deferred expense
g.
Accrued revenue
d.
Accrued expense
h.
Accrued expense
Req. 2
a.
1,250
Supplies expense (+E, SE) ........................................
1,250
Supplies (A) .....................................................
(Beg. Inventory of $450 + Purchases $1,200 – Ending Inventory $400)
b.
Accounts receivable (+A) .............................................
Catering revenue (+R, +SE) ...............................
7,500
Insurance expense (+E, SE) ......................................
Prepaid insurance (A) .....................................
($1,200 x 2/12 months of coverage)
200
Repairs expense (+E, SE)..........................................
Accounts payable (+L) .......................................
600
Rent expense (+E, SE) ..............................................
Prepaid rent (A) ..................................................
($2,100 x 1/3 months of rent used)
700
Depreciation expense (+E, SE) ..................................
Accumulated depreciation (+XA, A) ..................
2,600
Interest receivable (+A) ................................................
Interest income (+R, +SE)....................................
($4,000 x .12 x 2/12)
80
c.
d.
e.
f.
g.
h.
4-42
7,500
200
600
700
2,600
80
7,389
Income tax expense (+E, SE) ....................................
Income tax payable (+L) ......................................
7,389
To accrue income tax expense incurred but not paid:
Income before adjustments (given)
$22,400
Effect of adjustments (a) through (g) + 2,230 (-$1,250+$7,500
Income before income taxes
24,630 -$200-$600-$700
Income tax rate
x 30% -$2,600+$80)
Income tax expense
$ 7,389
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
AP4–4.
Req. 1
a.
Deferred expense
e.
Deferred revenue
b.
Deferred revenue
f.
Accrued expense
c.
Accrued expense
g.
Accrued expense
d.
Deferred expense
h.
Accrued revenue
Req. 2
Balance Sheet
Stockholders’
Liabilities
Equity
Income Statement
Revenues Expenses
Net
Income
Transaction
Assets
a.
–1,600
NE
–1,600
NE
+1,600
–1,600
b.
NE
–225
+225
+225
NE
+225
c.
NE
+900
–900
NE
+900
–900
d.
–3,000
NE
–3,000
NE
e.
NE
–700
+700
+700
f.
NE
+675
–675
NE
+675
–675
g.
NE
+500
–500
NE
+500
–500
h.
+2,000
NE
+2,000
+2,000
+3,000
NE
NE
–3,000
+700
+2,000
Computations:
a.
$3,200 prepaid insurance x 3/6 months of coverage = $1,600 used
b.
$450 unearned revenue x 1/2 months = $225 earned
c.
Amount is given.
d.
Amount is given.
e.
$4,200 unearned revenue x 2/12 months = $700 earned
f.
$18,000 principal x .09 x 5/12 months = $675 interest expense
g.
Amount is given.
h.
Amount is given.
Financial Accounting, 8/e
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
AP4–5.
Req. 1
a.
Deferred expense
e.
Deferred expense
b.
Accrued revenue
f.
Deferred expense
c.
Deferred expense
g.
Accrued revenue
d.
Accrued expense
h.
Accrued expense
Req. 2
Balance Sheet
Stockholders’
Liabilities
Equity
Income Statement
Revenues Expenses
Net
Income
Transaction
Assets
a.
–1,250
NE
–1,250
NE
+1,250
–1,250
b.
+7,500
NE
+7,500
+7,500
NE
+7,500
c.
–200
NE
–200
NE
+200
–200
d.
NE
+600
–600
NE
+600
–600
e.
–700
NE
–700
NE
+700
–700
f.
–2,600
NE
–2,600
NE
+2,600
–2,600
g.
+80
NE
+80
+80
NE
+80
h.
NE
+7,389
–7,389
NE
+7,389
–7,389
Computations:
a.
Beg. Inventory of $450 + Purchases $1,200 – Ending Inventory $400 = $1,250
used for the period.
b.
Amount is given.
c.
$1,200 prepaid expense x 2/12 = $200 insurance used
d.
Amount is given.
e.
$2,100 x 1/3 = $700 rent used
f.
Amount is given.
g.
$4,000 principal x .12 x 2/12 months = $80 interest earned
h.
Adjusted income = $22,400 - $1,250 + $7,500 - $200 - $600 - $700 - $2,600 + $80
= $24,630 x 30% tax rate = $7,389 income tax expense
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
AP4–6.
Req. 1
(1)
(2)
(3)
(4)
(5)
December 31, 2014, Adjusting Entries
Accounts receivable (+A) ........................................
1,500
Service revenue (+R, +SE) ...........................
To record service revenues earned, but not
collected.
Rent expense (+E, SE) .........................................
Prepaid rent (A)............................................
To record rent expired as an expense.
400
Depreciation expense (+E, SE) .............................
Accumulated depreciation (+XA, A)
To record depreciation expense.
17,500
Unearned revenue (L) ...........................................
Service revenue (+R, +SE) ...........................
To record service revenue earned.
8,000
Income tax expense (+E, SE) ...............................
Income taxes payable (+L) ...........................
To record income taxes for 2014.
6,500
1,500
(b)
(j)
400
(m)
(c)
17,500
(l)
(e)
8,000
(g)
(j)
6,500
(n)
(f)
Req. 2
Amounts before
Adjusting Entries
Revenues:
Service revenue
Expenses:
Salary expense
Depreciation expense
Rent expense
Income tax expense
Total expense
Net income
$83,000
56,000
56,000
$ 27,000
Amounts after
Adjusting Entries
$92,500
56,000
17,500
400
6,500
80,400
$ 12,100
Net income is $12,100 because this amount includes all revenues and all expenses
(after the adjusting entries). This amount is correct because it incorporates the effects
of the revenue and matching principles applied to all transactions whose effects extend
beyond the period in which the transactions occurred. Net income of $27,000 was not
correct because expenses of $24,400 and revenues of $9,500 were excluded that
should have been recorded in 2014.
Financial Accounting, 8/e
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
AP4–6. (continued)
Req. 3
Earnings per share = $12,100 net income  5,000 shares = $2.42 per share
Req. 4
Total asset turnover = Sales (or Operating) Revenue  Average Total Assets
= $92,500  [($136,000 + $158,300)/2]
= $92,500  $147,150 = 0.629
The total asset turnover ratio indicates that, for every $1 of assets, Taos generated
$0.629 of service revenue. This ratio is a measure of the company’s effectiveness at
utilizing assets to generate revenue.
Req. 5
Service revenue (R) ...............................................
Retained earnings (+SE) ..................................
Salary expense (E).........................................
Depreciation expense (E)...............................
Rent expense (E) ...........................................
Income tax expense (E) .................................
4-46
92,500
12,100
56,000
17,500
400
6,500
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
AP4–7.
Req. 1
December 31, 2014, Adjusting Entries:
(a)
(b)
(c)
(d)
(e)
Depreciation expense (+E, SE) ...............................
Accumulated depreciation (+XA, A) ..............
Insurance expense (+E, SE) ....................................
Prepaid insurance (A) ...................................
Wages expense (+E, SE) .........................................
Wages payable (+L) .......................................
Supplies expense (+E, SE) ......................................
Supplies (A) ..................................................
Income tax expense (+E, SE) ..................................
Income tax payable (+L) .................................
3,000
3,000
450
450
2,100
2,100
500
500
3,150
3,150
Req. 2
SOUTH BEND REPAIR SERVICE CO.
Income Statement
For the Year Ended December 31, 2014
Operating Revenue:
Service revenue
Operating Expenses:
Depreciation expense
Insurance expense
Wages expense
Supplies expense ($1,300 balance - $800 on hand)
Remaining expenses (not detailed)
Total expenses
Operating Income
Income tax expense
Net Income
Earnings per share ($5,900 ÷ 3,000 shares)
Financial Accounting, 8/e
$48,000
3,000
450
2,100
500
32,900
38,950
9,050
3,150
$5,900
$1.97
4-47
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
AP4–7. (continued)
SOUTH BEND REPAIR SERVICE CO.
Balance Sheet
At December 31, 2014
Assets
Current Assets:
Cash
Accounts receivable
Supplies
Prepaid insurance
Total current assets
Equipment
Accumulated depreciation
Other assets (not detailed)
Total assets
$19,600
7,000
800
450
27,850
27,000
(15,000)
5,100
$44,950
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable
$ 2,500
Wages payable
2,100
Income tax payable
3,150
Total current liabilities
7,750
Note payable, long term
5,000
Total liabilities
12,750
Stockholders' Equity
Common stock
300
Additional paid-in capital
15,700
Retained earnings*
16,200
Total stockholders' equity
32,200
Total liabilities and
stockholders' equity
$44,950
*Unadjusted balance, $10,300 + Net income, $5,900 = Ending balance, $16,200.
Req. 3
December 31, 2014, Closing Entry:
Service revenue (R) ..................................................
Retained earnings (+SE) ................................
Depreciation expense (E) .............................
Insurance expense (E) ..................................
Wages expense (E) ......................................
Supplies expense (E) ....................................
Remaining expenses (not detailed) (E)..........
Income tax expense (E) ................................
4-48
48,000
5,900
3,000
450
2,100
500
32,900
3,150
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
COMPREHENSIVE PROBLEMS
COMP4–1.
Req. 1, 2, 3, and 5 T-accounts (in thousands)
Cash
Bal.
6 b
a
15 e
c
163 g
d
4 i
f
34 k
Bal. 49
Bal.
b
Bal.
13
94
15
26
25
Bal.
Land
0
13
13
Bal.
22
Wages Payable
Bal.
0
o
16
Bal. 16
Common
Stock
Bal.
d
4
2
Bal.
6
Service
Revenue
Bal. 0
CE 215 c 215
Bal. 0
Supplies
Expense
Bal.
0
l
22 CE
Bal.
0
23
Bal.
h
Bal.
78
Financial Accounting, 8/e
22
18
Accounts Payable
Bal.
0
i
26 e
20
h
27
Bal. 21
Income Tax Payable
Bal. 0
p
11
Interest Payable
Bal.
0
n
1
Bal.
1
LT Notes Payable
Bal.
0
a
15
Bal. 15
Additional Paid-in
Capital
Bal. 80
d
2
Bal.
Depreciation
Expense
Bal.
0
m
10 CE
10
Bal.
0
22
Supplies
13
27 l
Accumulated
Depreciation
Bal.
8
m
10
Bal. 18
Equipment
Bal. 78
Other Assets
Bal.
7
g
15
Bal.
Accounts Receivable
Bal.
5
c
52 f
34
Wages
Expense
Bal.
0
o
16 CE
Bal.
0
82
Bal.
k
Retained
Earnings
Bal.
25
CE
Bal.
Income Tax
Expense
Bal.
0
p
11 CE
11
Bal.
0
16
11
17
41
33
Interest
Expense
Bal.
0
n
1 CE
Bal.
0
Remaining
Expenses
Bal.
0
e
114 CE 114
Bal.
0
4-49
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1
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
COMP4–1. (continued)
Req. 2
a. Cash (+A) ..........................................................
Notes payable (+L) ..................................
b.
c.
d.
e.
f.
g.
h.
i.
15,000
Land (+A)...........................................................
Cash (A) ................................................
13,000
Cash (+A) ..........................................................
Accounts receivable (+A)...................................
Service revenue (+R, +SE) ......................
163,000
52,000
Cash (+A) ..........................................................
Common stock (+SE) ..............................
Additional paid-in capital (+SE)…………..
4,000
Remaining expenses (+E, SE) ........................
Accounts payable (+L) .............................
Cash (A) ................................................
114,000
Cash (+A) ..........................................................
Accounts receivable (A).........................
34,000
Other assets (+A) ..............................................
Cash (A) ................................................
15,000
Supplies (+A) .....................................................
Accounts payable (+L) .............................
27,000
Accounts payable (L) .......................................
Cash (A) ................................................
26,000
j.
No entry required; no revenue earned in 2015.
k.
Retained earnings (SE) ...................................
Cash (A) ................................................
4-50
15,000
13,000
215,000
2,000
2,000
20,000
94,000
34,000
15,000
27,000
26,000
25,000
25,000
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
COMP4–1. (continued)
Req. 3
l.
m.
n.
o.
p.
Supplies expense (+E, SE)..............................
Supplies (A) ............................................
($40,000 in account – $18,000 at year end)
22,000
Depreciation expense (+E, SE) .......................
Accumulated depreciation (+XA, A)........
10,000
Interest expense (+E, SE) ...............................
Interest payable (+L) ................................
($15,000 x .08 x 10/12)
1,000
Wages expense (+E, SE) ................................
Wages payable (+L) .................................
16,000
Income tax expense (+E, SE) ..........................
Income taxes payable (+L) .......................
11,000
22,000
10,000
1,000
16,000
11,000
Req. 4
H & H TOOL, INC.
Income Statement
For the Year Ended December 31, 2015
Operating Revenues:
Service revenue
Operating Expenses:
Depreciation expense
Supplies expense
Wages expenses
Remaining expenses
Total operating expenses
Operating Income
Other Item:
Interest expense
Pretax income
Income tax expense
Net Income
Earnings per share
[$41,000 ÷ 12,000 shares all year]
Financial Accounting, 8/e
$215,000
10,000
22,000
16,000
114,000
162,000
53,000
1,000
52,000
11,000
$ 41,000
$3.42
4-51
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
COMP4–1. (continued)
H & H TOOL, INC.
Statement of Stockholders' Equity
For the Year Ended December 31, 2015
Balance, January 1, 2015
Additional stock issuance
Net income
Dividends declared
Balance, December 31, 2015
Common
Stock
$4,000
2,000
$6,000
Additional
Paid-in
Capital
$80,000
2,000
$82,000
Retained
Earnings
$ 17,000
41,000
(25,000)
$33,000
Total
Stockholders'
Equity
$101,000
4,000
41,000
(25,000)
$121,000
H & H TOOL, INC.
Balance Sheet
At December 31, 2015
Assets
Current Assets:
Cash
Accounts receivable
Supplies
Total current assets
Land
Equipment
Less: Accumulated deprec.
Net book value
Other assets
Total assets
4-52
$ 49,000
23,000
18,000
90,000
13,000
78,000
(18,000)
60,000
22,000
$185,000
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable
$ 21,000
Interest payable
1,000
Wages payable
16,000
Income taxes payable
11,000
Total current liabilities
49,000
Notes payable
15,000
Total liabilities
64,000
Stockholders' Equity:
Common stock
6,000
Additional paid-in cap.
82,000
Retained earnings
33,000
Total stockholders'
equity
121,000
Total liabilities and
stockholders' equity
$185,000
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
COMP4–1. (continued)
Req. 5
Transaction
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
Type of Effect on
Cash Flows
F
I
O
F
O
O
I
NE
O
NE
F
Direction and
Amount of Effect
+15,000
-13,000
+163,000
+4,000
-94,000
+34,000
-15,000
NE
-26,000
NE
-25,000
Req. 6
December 31, 2015, Closing Entry
Service revenue (R) .........................................
Retained earnings (+SE) .........................
Depreciation expense (E) ......................
Interest expense (E) ..............................
Supplies expense (E) ............................
Wages expense (E) ...............................
Remaining expenses (E) .......................
Income tax expense (E) .........................
Financial Accounting, 8/e
215,000
41,000
10,000
1,000
22,000
16,000
114,000
11,000
4-53
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
COMP4–1. (continued)
Req. 7
(a)
Current ratio = Current assets  Current liabilities
= $90,000  $49,000
= 1.84
This suggests that H & H Tool, Inc., has sufficient current assets to pay current
liabilities.
(b)
Total asset turnover = Sales  Average total assets
= $215,000  [($101,000 + $185,000)  2]
= $215,000  $143,000
= 1.50
This suggests that H & H Tool, Inc., generated $1.50 for every dollar of assets.
(c)
Net profit margin
= Net income  Sales
= $41,000  $215,000
= 0.191 or 19.1%
This suggests that H & H Tool, Inc., earns $0.191 for every dollar in sales that it
generates.
For all of the ratios, a comparison across time and a comparison against an
industry average or competitors will need to be analyzed to determine how liquid
(current ratio) the company is and how efficient (total asset turnover) and how
effective (net profit margin) H & H Tool’s management is.
4-54
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
COMP4-2.
Req. 1, 2, 3, and 5
Bal.
a
c
d
g
j
Bal.
Cash
5
20 b
5 e
56 f
8 h
3 k
27
18
28
3
11
10
T-accounts (in thousands)
Accounts
Receivable
Bal.
4
d
14 g
8
Bal.
10
Bal.
Small Tools
Bal.
6
f
3 l
1
Bal.
8
Equipment
Bal.
0
b
18
Bal. 18
Other Assets
Bal.
9
Accounts Payable
Bal.
7
h
11 e
7
i
10
Bal. 13
Bal.
9
Wages Payable
Bal. 0
o
3
Bal. 3
Interest Payable
Bal. 0
n
1
Bal. 1
Common
Stock
Bal.
c
Bal.
6
1
7
Service Revenue
Bal.
0
d
70
CE
70
Bal.
0
Income Tax Expense
Bal.
0
p
4
CE
4
Bal.
0
Financial Accounting, 8/e
Wages Expense
Bal.
0
o
3
CE
3
Bal.
0
Supplies
2
10 l
8
4
Accumulated
Depreciation
Bal.
0
m
2
Bal.
2
Notes Payable
Bal.
0
a
20
Bal.
Income Taxes
Payable
Bal. 0
p
4
Bal. 4
Additional Paid-in
Capital
Bal.
9
c
4
Bal. 13
Depreciation Expense
Bal.
0
m
2
CE
2
Bal.
0
Bal.
i
k
20
Unearned
Revenue
Bal.
j
Bal.
Retained
Earnings
10 Bal.
CE
Bal.
0
3
3
4
16
10
Interest Expense
Bal.
0
n
1
CE
1
Bal.
0
Remaining Expenses
Bal.
0
e
35
l
9 CE
44
Bal.
0
4-55
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
COMP4-2. (continued)
Req. 2
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
4-56
Cash (+A) ..........................................................
Notes payable (+L) ..................................
20,000
Equipment (+A) .................................................
Cash (A) ................................................
18,000
Cash (+A) ..........................................................
Common stock (+SE) ..............................
Additional paid-in capital (+SE)…………..
5,000
Cash (+A) ..........................................................
Accounts receivable (+A)...................................
Service revenue (+R, +SE) ......................
56,000
14,000
Remaining expenses (+E, SE) ........................
Accounts payable (+L) .............................
Cash (A) ................................................
35,000
Small tools (+A) .................................................
Cash (A) ................................................
3,000
Cash (+A) ..........................................................
Accounts receivable (A).........................
8,000
Accounts payable (L) .......................................
Cash (A) ...............................................
11,000
Supplies (+A) .....................................................
Accounts payable (+L) .............................
10,000
Cash (+A) ..........................................................
Unearned revenue (+L) ..........................
3,000
Retained earnings (SE) ...................................
Cash (A) ................................................
10,000
20,000
18,000
1,000
4,000
70,000
7,000
28,000
3,000
8,000
11,000
10,000
3,000
10,000
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
COMP4-2. (continued)
Req. 3
l.
m.
n.
o.
p.
Remaining expenses (+E, SE) ........................
Supplies (A) ............................................
Small tools (A) ........................................
[Supplies used ($12 – 4) and small tools used
($9 – 8)]
9,000
Depreciation expense (+E, SE) .......................
Accumulated depreciation (+XA, A)........
2,000
Interest expense (+E, SE) ...............................
Interest payable (+L) ................................
($20,000 principal x .10 x 6/12)
1,000
Wages expense (+E, SE) ................................
Wages payable (+L) .................................
3,000
Income tax expense (+E, SE) ..........................
Income taxes payable (+L) .......................
4,000
8,000
1,000
2,000
1,000
3,000
4,000
Req. 4
FURNITURE REFINISHERS, INC.
Income Statement
For the Year Ended December 31, 2016
Operating Revenues:
Service revenue
Operating Expenses:
Depreciation expense
Wages expense
Remaining expenses
Total operating expenses
Operating Income
Other Item:
Interest expense
Pretax income
Income tax expense
Net Income
Earnings per share
($16,000 ÷ 70,000]
Financial Accounting, 8/e
$70 000
2,000
3,000
44,000
49,000
21,000
1,000
20,000
4,000
$16,000
$0.23
4-57
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
COMP4-2. (continued)
FURNITURE REFINISHERS, INC.
Statement of Stockholders' Equity
For the Year Ended December 31, 2016
Balance, January 1, 2016
Additional stock issuance
Net income
Dividends declared
Balance, December 31, 2016
Common
Stock
$6,000
1,000
$7,000
Additional
Paid-in
Capital
$9,000
4,000
$13,000
Retained
Earnings
$ 4,000
16,000
(10,000)
$ 10,000
Total
Stockholders'
Equity
$19,000
5,000
16,000
(10,000)
$30,000
FURNITURE REFINISHERS, INC.
Balance Sheet
At December 31, 2016
Assets
Current Assets:
Cash
Accounts receivable
Supplies
Small tools
Total current assets
Equipment
Less: Accum. deprec.
Net book value
$27,000
10,000
4,000
8,000
49,000
18,000
(2,000)
16,000
Other assets
9,000
Total assets
$74,000
4-58
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable
$13,000
Notes payable
20,000
Wages payable
3,000
Interest payable
1,000
Income taxes payable
4,000
Unearned revenue
3,000
Total current liabilities
44,000
Stockholders' Equity:
Common stock
7,000
Additional paid-in capital
13,000
Retained earnings
10,000
Total stockholders' equity
30,000
Total liabilities and
stockholders' equity
$74,000
Solutions Manual
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
COMP4-2. (continued)
Req. 5
Transaction
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
Type of Effect on
Cash Flows
F
I
F
O
O
I
O
O
NE
O
F
Direction and
Amount of Effect
+20,000
-18,000
+5,000
+56,000
-28,000
-3,000
+8,000
-11,000
NE
+3,000
-10,000
Req. 6
December 31, 2016, Closing Entry
Service revenue (R) .........................................
Retained earnings (+SE) .........................
Depreciation expense (E) ......................
Interest expense (E) ..............................
Wages expense (E) ...............................
Remaining expenses (E) .......................
Income tax expense (E) .........................
Financial Accounting, 8/e
70,000
16,000
2,000
1,000
3,000
44,000
4,000
4-59
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
COMP4-2. (continued)
Req. 7
(a)
Current ratio = Current assets  Current liabilities
= $49,000  $44,000
= 1.11
This result suggests that Furniture Refinishers, Inc., has sufficient current assets
to pay current liabilities in the coming period.
(b)
Total asset turnover = Sales (or Operating) Revenue  Average total assets
= $70,000  [($26,000 + $74,000)  2]
= $70,000  $50,000
= 1.40
This suggests that Furniture Refinishers, Inc., generates $1.40 of revenue for
every dollar of assets.
(c)
Net profit margin
= Net income  Sales (or Operating) Revenue
= $16,000  $70,000
= 0.23 or 23%
This suggests that Furniture Refinishers, Inc., earns $0.23 for every dollar in
sales that it generates.
For all of the ratios, a comparison across time and a comparison against an
industry average or competitors will need to be analyzed to determine how liquid
(current ratio) the company is and how efficient (total asset turnover) and how
effective (net profit margin) Furniture Refinishers, Inc.’s management is.
4-60
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CASES AND PROJECTS
FINANCIAL REPORTING AND ANALYSIS CASES
CP4–1.
1. American Eagle paid $99,756 thousand in income taxes in its 2011 fiscal year, as
disclosed in note 2 under “Supplemental Disclosures of Cash Flow Information.”
2. The quarter ended January 28, 2012, was its best quarter in terms of sales at
$1,042,727,000 (this quarter covered the holiday shopping season, the biggest part
of the year for retailers). The worst quarter ended April 30, 2011 (the quarter
following the holiday season). This is a common pattern for retailers. Note 16
discloses quarterly information.
3. Other income (net) is an aggregate of many accounts, but a summary entry for them
all would be:
Other income (net) (-R)…….
5,874,000
Retained Earnings (+SE)
5,874,000
4. As disclosed in Note 6, Accounts Receivable consists of (in thousands):
Franchise receivable
20,108
Marketing cost reimbursement
4,182
Gift card receivable
4,113
Landlord construction allowances
3,672
Insurance claims receivable
2,071
Merchandise sell-offs
1,955
Taxes
1,076
Other
3,133
Total
$40,310
5. Total asset turnover ratio (dollars are in thousands):
Fiscal year
Ended
Sales
Revenue
Average
Total Asset
=
Total Assets*
Turnover
($1,879,998 +$1,950,802)/2
1-28-2012
$3,159,818 
$1,915,400
=
1.650
($2,138,148 + $1,879,998)/2
1-29-2011
$2,967,559 
$2,009,073
=
1.477
($1,963,676 + $2,138,148)/2
1-30-2010
$2,940,269 
$2,050,912
=
1.434
*Total assets are found in Item 6 of the fiscal year ended 2012 10-K.

In fiscal year ended January 28, 2012, American Eagle generated $1.65 in revenues for
each dollar of assets The company’s total asset turnover ratio increased each year,
suggesting that the company became more efficient over time at utilizing assets to
generate sales.
Financial Accounting, 8/e
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–2
1. At the end of the most recent year, Prepaid Expenses and Other Current Assets
was $69,876 thousand. This information is disclosed on the balance sheet.
2. The company reported $183,974 thousand in deferred rent. This information is
disclosed on the balance sheet.
3. Prepaid rent (an asset) usually represents rent that a company has paid in advance
to its landlords. If a company also rents property to tenants, deferred rent (a liability)
usually represents rent that it has collected in advance for which the company has
an obligation to allow a tenant to use the property. Urban Outfitters, however,
reported deferred rent that is related to a variety of lease issues including recording
rent expense greater than the cash paid (described under Summary of Significant
Accounting Policies note). This issue is covered in a more advanced course.
4. Accrued Liabilities would consist of costs that have been incurred by the end of the
accounting period but which have not yet been paid.
5. Interest Income is related to the company’s short-term and long-term marketable
securities (investments).
6. The company’s income statement accounts (revenues, expenses, gains, and
losses) would not have balances on a post-closing trial balance. These accounts
are temporary accounts that have been closed to Retained Earnings.
7. Prepaid Expenses is an asset account. As such, it is a permanent account that
carries its ending balance into the next accounting period. It is not closed at the end
of the period.
8. The company reported basic earnings per share of $1.20 for the year ended
January 31, 2012, $1.64 for the year ended January 31, 2011, and $1.31 for the
year ended January 31, 2010.
9.
Total asset turnover (dollars in thousands):
Fiscal year
Sales
Average
Total Asset

=
Ended
Revenue
Total Assets*
Turnover
($1,794,321 + $1,438,708)/2
1-31-2012
$2,473,801 
$1,616,514.5
=
1.530
($1,636,093 + $1,794,321)/2
1-31-2011
$2,274,102 
$1,715,207
=
1.326
($1,329,009 + $1,636,093)/2
1-31-2010
$1,937,815 
$1,482,551
=
1.307
*Total assets are found in Item 6 of the fiscal year ended 2012 10-K.
In fiscal year ended January 31, 2012, Urban Outfitters generated $1.53 in revenues
for each dollar of assets The company’s total asset turnover ratio increased each year,
suggesting that the company became more efficient over time at utilizing assets to
generate sales.
4-62
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–3.
1. American Eagle Outfitters reported an advertising expense of $73.1 million for the
most recent year (Note 2 under Advertising Costs). Urban Outfitters reported $71.7
million of advertising costs for the year. (See Note 2 under Advertising).
2.
Year
Ended
2012
2011
2010
American Eagle Outfitters
Advertising
Expense /
Net Sales
73,100 / 3,159,818
2.3%
64,900 / 2,967,559
2.2%
60,900 / 2,940,269
2.1%
Urban Outfitters
Advertising
Expense /
Net Sales
71,684 / 2,473,801
2.9%
58,336 / 2,274,102
2.6%
46,827 / 1,937,815
2.4%
Urban Outfitters incurred the higher percentage in all three years. Both firms
increased advertising expense each year, and both firms also increased advertising
expense as a percentage of sales each year.
3.
Advertising/Sales =
Industry
Average
5.55%
American Eagle
Outfitters
2.3%
Urban
Outfitters
2.9%
Both American Eagle and Urban Outfitters are spending less on advertising as a
percentage of sales than the average company in the industry. This might imply that
they are more effective at generating fewer sales per dollar spent on advertising.
Another interpretation is that they are weak in supporting their brand, and sales will
eventually decrease as their brands lose value.
4. Both accounting policies are similar indicating that advertising costs are expensed
when the marketing campaigns become publicly available. Urban Outfitters
capitalizes expenses associated with direct-to-consumer advertising (catalogs) and
amortizes these expenses over the expected period of future benefits. (The
policies are disclosed in note 2 in both annual reports).
Financial Accounting, 8/e
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–3. (continued)
5. Year
Ended
American Eagle
Outfitters
Urban
Outfitters
$2,473,801 = 1.530
$1,616,514.5
2012: Total Asset =
Turnover
Sales
Average
Total Assets
$3,159,818 = 1.650
$1,915,400
2011: Total Asset =
Turnover
Sales
Average
Total Assets
$2,967,559 = 1.477
$2,009,073
$2,274,102
$1,715,207
= 1.326
2010: Total Asset =
Turnover
Sales
Average
Total Assets
$2,940,269 = 1.434
$2,050,912
$1,937,815
$1,482,551
= 1.307
Both companies increased their total asset turnover ratios over time, suggesting
more efficient management of assets to generate revenues. In each year, American
Eagle Outfitters has a higher turnover ratio than Urban Outfitters, suggesting more
efficiency in asset utilization.
6.
Total Asset
Turnover Ratio =
(for fiscal year
ended 2012)
Industry
Average
American Eagle
Outfitters
Urban
Outfitters
1.750
1.650
1.530
Both companies, American Eagle Outfitters and Urban Outfitters, have lower Total
Asset Turnover ratios than the average company in their industry. This suggests
both companies are less effective at utilizing total assets to generate sales. This
ratio is affected by growth strategies in which companies invest in additional
property and equipment or other assets, but the new assets are not yet generating
sales levels of established stores.
4-64
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–4.
2014
Balance
$510,000
Financial
Statement
Income statement
2. Salary expense
73,000
Income statement
 70,000
3. Maintenance supplies expense
13,000
Income statement
No effect
4. Rent receivable
10,000
Balance sheet
No effect
5. Receivables from employees
2,000
Balance sheet
 2,000
6. Maintenance supplies
2,000
Balance sheet
 8,000
14,000
Balance sheet
+14,000
3,000
Balance sheet
 6,000
Account
1. Rent revenue
7. Unearned rent revenue
8. Salaries payable
(1)
Rent Revenue
500,000 (a)
10,000 (b)
510,000
(4)
Rent Receivable
(b) 10,000
(2)
Salary Expense
(e) 70,000
(f)
3,000
73,000
(3) Maintenance
Supplies Expense
Used 13,000
13,000
(5) Receivables
from Employees
(g)
2,000
10,000
(6) Maintenance
Supplies
(h) 7,000
(i) 8,000 13,000 used
(j) 2,000
2,000
(7) Unearned
Rent Revenue
14,000 (c)
14,000
(8)
Salaries Payable
(d)
6,000 6,000 Bal.
3,000 (f)
3,000
(a) from renters
(c) from renters
Financial Accounting, 8/e
Cash
500,000 6,000
14,000 70,000
2,000
8,000
Effect on
Cash Flows
+ $500,000
Inferred
(d) to employees
(e) to employees
(g) to employees
(i) to suppliers
4-65
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–5.
Req. 1
Account
Cash
Maintenance supplies
Service equipment
Accumulated depreciation,
service equipment
Remaining assets
Note payable, 6%
Interest payable
Income taxes payable
Wages payable
Unearned revenue
Common stock
Additional paid-in capital
Retained earnings
Service revenue
Expenses
Unadjusted
Trial Balance
Debit
Credit
25,000
800
90,000
Adjusted
Trial Balance
Debit
Credit
25,000
300
90,000
21,000
44,800
30,000
44,800
10,000
320,600
30,000
44,800
10,000
600
13,020
400
3,600
10,000
40,000
12,000
224,000
13,600
10,000
40,000
12,000
214,000
160,000
320,600
Post-Closing
Trial Balance
Debit
Credit
25,000
300
90,000
183,520
343,620
343,620
10,000
600
13,020
400
3,600
10,000
40,000
52,480
0
0
160,100
160,100
Ending Retained Earnings = Beg., $12,000 + Net income, ($224,000 - $183,520)
Req. 2
(a)
To record the amount of supplies used during 2014, $500, and to reduce the
supplies account to the amount remaining on hand at the end of 2014.
(b)
To accrue interest expense for 2014 (the interest is payable in 2015, computed
as $10,000 x .06 = $600) and to record interest payable.
(c)
To reduce unearned revenue for the amount of revenue earned during 2014
$10,000.
(d)
To record depreciation expense for 2014, $9,000.
(e)
To record 2014 wages of $400 that will be paid in 2015.
(f)
To record 2014 income tax and the related liability, $13,020.
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–5. (continued)
Req. 3
Closing Entry on December 31, 2014:
Service revenue (from the adjusted trial balance) (R) .........
224,000
Retained earnings (+SE) ............................................
Expenses (from the adjusted trial balance) (E) ........
40,480
183,520
Req. 4
Pretax income
x
($224,000 - 170,500) x
$53,500
x
Average income tax rate = Income tax expense
?
=
$13,020
?
=
$13,020
?
=
24.3%
Req. 5
Number of shares issued x
10,000
x
Financial Accounting, 8/e
Average issue price = Total issue amount
?
= $10,000 + $40,000
?
=
$5.00 per share
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–6.
Transaction (a):
1.
This transaction will affect Carey’s financial statements for 14 years (from 2014
through 2027) in conformity with the matching principle. [$14,000 ÷ $1,000 per
year = 14 years]
2. Income statement:
Depreciation expense, as given
3. Balance sheet at December 31, 2016:
Assets:
Office equipment
Less: Accumulated depreciation*
Net book (carrying) value
*$1,000 x 3 years = $3,000.
$1,000 each year
$14,000
3,000
$11,000
4. An adjusting entry each year over the life of the asset would be recorded to reflect
the allocation of the cost of the asset when used to generate revenues:
1,000
Depreciation expense (+E, SE) . . . . . . . .
1,000
Accumulated depreciation (+XA, A) .
Transaction (b):
1. This transaction will affect Carey’s financial statements for 2 years--2016 and 2017-because four month’s rent revenue was earned in 2016, and two months' rent
revenue will be earned in 2017.
2. The 2016 income statement should report rent revenue earned of $20,000
($30,000 x 4/6). Occupancy was provided for only 4 months in 2016. This is in
conformity with the revenue principle.
3. This transaction created a $10,000 liability ($30,000 - $20,000 = $10,000) as of
December 31, 2016, because at that date Carey "owes'' the renter two more
months' occupancy for which it has already collected the cash.
4. Yes, an adjusting entry must be made to (a) increase the Rent Revenue account by
$10,000 for two months’ rent earned in 2017 and (b) to decrease the liability to $0
representing no future occupancy owed (in conformity with the revenue principle).
December 31, 2017--Adjusting entry:
Unearned Rent Revenue (L) .........................
10,000
Rent Revenue (+R, +SE) .......................
10,000
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–6. (continued)
Transaction (c):
1. This transaction will directly affect Carey’s financial statements for two years, with
the expense incurred in 2016 and the cash payment in 2017.
2. The $7,500 should be reported as wage expense in the 2016 income statement
and as a liability on the 2016 balance sheet. On January 5, 2017, the liability will
be paid. Therefore, the 2017 balance sheet will reflect a reduced cash balance and
reduced liability balance. The transaction will not directly affect the 2017 income
statement (unless the adjusting entry was not made).
3. Yes, an adjusting entry must be made to (a) record the $7,500 as an expense in
2016 (matching principle) and (b) to record the liability which will be paid in 2017.
December 31, 2016--Adjusting entry:
Wage expense (+E, SE) ...............................
7,500
Wages payable (+L) .............................
7,500
Note: On January 5, 2017, the liability, Wages Payable, of $7,500 will be paid. Wage
expense for 2017 will not include this $7,500. The 2017 related entry will debit
(decrease) Wages Payable, and credit (decrease) Cash, $7,500.
Transaction (d):
1. Yes, service revenue of $45,000 (i.e., $60,000 x 3/4) should be recorded as earned
by Carey in conformity with the revenue principle. Service revenue is recognized as
the service is performed.
2. Recognition of revenue earned but not collected by the end of 2016 requires an
adjusting entry. This adjusting entry is necessary to (a) record the revenue earned
(to be reported on the 2016 income statement) and (b) record the related account
receivable (an asset to be reported on the 2016 balance sheet). The adjusting
entry on December 31, 2016 is:
Accounts receivable (+A)............................................
45,000
Service revenue (+R, +SE) ..............................
45,000
($60,000 total price x 3/4 completed)
3. February 15, 2017--Completion of the last phase of the service contract and cash
collected in full:
Cash (+A) ..................................................................
60,000
Accounts receivable (A) .................................
45,000
Service revenue (+R, +SE) ..............................
15,000
Financial Accounting, 8/e
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–7.
Req. 1
CRYSTAL’S DAY SPA AND SALON, INC.
Income Statement
For the Year Ended December 31, 2015
Items
Revenues:
Spa fees
Expenses:
Office rent
Utilities
Telephone
Salaries
Supplies
Miscellaneous
Depreciation
Total expenses
Net income
*
**
Cash
Basis Per
Crystal’s
Statement
$1,215,000 See * below.
130,000
43,600
12,200
562,000
31,900
12,400
0
792,100
$ 422,900
$1,102,000
Exclude rent for Jan. 2016 ($130,000 ÷ 13) (g)
No change
See ** below.
Add December 2015 salary ($18,000 ÷ 12) (e)
See *** below.
No change
Given for 2015 (c)
Cash collected for spa fees
Fees earned in prior years (a)
Fees earned in 2015 but not yet collected (b)
Fees earned in 2015
120,000
43,600
11,800
563,500
29,825
12,400
20,500
801,625
$ 300,375
$1,215,000
-142,000
+ 29,000
$1,102,000
$12,200 telephone paid + $1,400 December 2015 telephone bill - $1,800
December 2014 bill paid in 2015 = $11,800
***
Beg.
Purchases
End.
4-70
Corrected
Basis
Explanation of Changes
Supplies (d)
3,125
31,900 29,825
5,200
Used
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–7. (continued)
Req. 2
Memo to Crystal Mullinex should include the following:
(1) Net income was overstated by $122,525 because of inappropriate recognition of
revenue (overstated by $113,000) and expenses (understated by $9,525).
Revenue should be recognized when earned, not when the cash is collected.
Similarly, expenses should be matched against revenue in the period when the
services or materials were used (including depreciation expense).
(2) Some other items the parties should consider in the pricing decision:
(a) A correct balance sheet at December 31, 2015.
(b) Collectability of any receivables (if they are to be sold with the business).
(c) Any liabilities of the spa to be assumed by the purchaser.
(d) Current employees -- how will they be affected?
(e) Adequacy of the rented space -- is there a long-term noncancellable lease?
(f) Characteristics of Crystal’s spa practices.
(g) Expected future cash flows of the business. What is the present value of
those expectations?
Financial Accounting, 8/e
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CRITICAL THINKING CASES
CP4–8.
Req. 1
2015
12/31
(a)
(b)
(c)
(d)
(e)
(f)
4-72
Adjusting Entries
Debit
Supplies expense (+E, SE)…………………
Supplies (A)……………………………….
($4,000 - $1,800 = $2,200)
2,200
Insurance expense (+E, SE)…………………….
Prepaid insurance (A)……………………
($6,000 ÷ 2 years)
3,000
Depreciation expense (+E, SE)…………………
Accumulated depreciation (+XA, A)…….
8,000
Salaries expense (+E, SE)…………………………
Salaries payable (+L)………………………
3,200
Transportation revenue (R, SE) ………
Unearned transportation revenue (+L)……
Transportation revenue is too high and needs to be
reduced and an Unearned Revenue account
created for the appropriate amount.
7,000
Income tax expense (+E, SE)…………………...
Income tax payable (+L)……………………
To record 2014 income tax computation:
Transportation revenue: $85,000  $7,000 = $78,000
Expenses:
$47,000 + $2,200 + $3,000
+ $8,000 + $3,200 = 63,400
Pretax income
$14,600
Income tax expense: $14,600 x 35% = $ 5,110
5,110
Credit
2,200
3,000
8,000
3,200
7,000
5,110
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–8. (continued)
Req. 2
STOSCHECK MOVING CORPORATION
Corrections to 2015 Financial Statements
Amounts
Reported
2015 Income Statement:
Revenue:
Transportation revenue
Expenses:
Salaries expense
Supplies expense
Other expenses
Insurance expense
Depreciation expense
Income tax expense
Total expenses
Net income
December 31, 2015, Balance Sheet
Assets:
Current Assets:
Cash
Receivables
Supplies
Prepaid insurance
Total current assets
Equipment
Less: Accumulated deprec.
Remaining assets
Total assets
Liabilities:
Current Liabilities:
Accounts payable
Salaries payable
Unearned transportation revenue
Income tax payable
Total current liabilities
Stockholders' Equity
Common stock
Retained earnings
Total stockholders' equity
Total liabilities and stockholders'
equity
Financial Accounting, 8/e
Changes
Debit Credit
Corrected
Amounts
$ 85,000
e
7,000
$ 78,000
17,000
12,000
18,000
0
0
0
47,000
$ 38,000
d
a
3,200
2,200
b
c
f
3,000
8,000
5,110
20,200
14,200
18,000
3,000
8,000
5,110
68,510
$ 9,490
$
2,000
3,000
4,000
6,000
15,000
40,000
0
27,000
$82,000
$ 9,000
0
0
0
9,000
35,000
38,000
73,000
$82,000
a
b
2,200
3,000
c
8,000
d
e
f
3,200
7,000
5,110
$ 2,000
3,000
1,800
3,000
9,800
40,000
(8,000)
27,000
$68,800
$ 9,000
3,200
7,000
5,110
24,310
35,000
9,490
44,490
$68,800
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–8. (continued)
Req. 3
Omission of the adjusting entries caused:
(a) Net income to be overstated by $28,510.
(b) Total assets to be overstated by $13,200.
(c) Total liabilities to be understated by $15,310.
Req. 4
(a) Earnings per share:
Unadjusted -- $38,000 net income  10,000 shares = $3.80 per share
Adjusted -- $ 9,490 net income  10,000 shares = $0.95 per share
(b) Total asset turnover:
Unadjusted -- $85,000 revenue  [($0 + $82,000)/2] average total assets = 2.073
Adjusted -- $78,000 revenue  [($0 + $68,800)/2] average total assets = 2.267
Each of the ratios was affected by inclusion of the adjustments with net income,
revenue, and assets decreasing.
 For earnings per share, the numerator net income decreased while the
denominator did not, resulting in a significantly lower figure.
 For the total asset turnover ratio, both the numerator and denominator
decreased, but the denominator average total assets decreased more than the
numerator revenues, causing an increase in the ratio.
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–8. (continued)
Req. 5
To the Stockholders of Stoscheck Moving Corporation:
We regret to inform you that your request for a $30,000 loan has been denied.
Our review showed that various adjustments were required to the original set of
financial statements provided to us. The original (unadjusted) financial statements
overstated net income for 2015 by $28,510 (i.e., $38,000 - $9,490). This overstatement
was caused by incorrectly including $7,000 of revenue collected in advance that had
not been earned in 2015. Further, all of the expenses were understated and income
tax expense had been incorrectly excluded.
Total assets were overstated by $13,200 (i.e., $82,000 - $68,800). Supplies was
overstated by $2,200, prepaid insurance was overstated by $3,000, and the net book
value of the equipment was overstated by $8,000 because annual depreciation was not
properly recognized. Further, total liabilities were understated by $15,310.
A review of key financial ratios indicates that the adjustments caused earnings per
share to decline, although total asset turnover increased from 2.073 to 2.267. The
adjusted ratios, however, would need to be compared to those of other start-up
companies in the same industry.
We require that there be sufficient collateral pledged against the loan before we can
consider it. The current market value of the equipment may be able to provide
additional collateral against which the loan could be secured. Your personal
investments may also be considered viable collateral if you are willing to sign an
agreement pledging these assets as collateral for the loan. This is a common
requirement for small start-up businesses.
If you would like us to reconsider your application, please provide us the current market
values of any assets you would pledge as collateral.
Regards,
(your name)
Loan Application Department,Your Bank
CP4–9.
Req. 1 Cash from Operations:
$36,000
Req. 2 Subscriptions Revenue for fiscal year ended March 31, 2016
($36,000 x 7/36): $7,000
Req. 3 March 31, 2016, Unearned Subscriptions Revenue
($36,000 x 29/36) = $29,000 or $36,000 - $7,000 = $29,000.
Financial Accounting, 8/e
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–9. (continued)
Req. 4
Adjusting entry (cash receipt credited to Unearned Subscriptions Revenue):
Unearned Subscriptions Revenue (L)
9/1
36,000
AJE
7,000
End. 29,000
Subscriptions Revenue (R)
Unearned subscriptions revenue (L) ........................
Subscriptions revenue (+R, +SE) ....................
AJE
End.
7,000
7,000
7,000
7,000
Req. 5
a. $9,000 revenue target based on cash sales:
This target is not clearly defined. Does management mean any cash
subscriptions received during the period? Your region generated $36,000 in
cash subscriptions. By this assumption, your region far exceeded the company’s
target. You may be entitled to a generous bonus due to your strong
performance.
On the other hand, management may mean any sales revenue earned that has
also been received in cash during the period. Under this assumption, sales
revenue earned and received in cash is $7,000 (the accrual accounting basis
amount). If this is the company’s intention of its target, then your region did not
meet the goal, only generating 77.8% of the target. You may need to provide an
analysis to management regarding this below par performance.
This example demonstrates the need for clear communication of expectations by
management.
b. $9,000 revenue target based on accrual accounting:
This situation is the same as the second assumption under a. Your region
earned $2,000 less than expected by the company.
FINANCIAL REPORTING AND ANLYSIS PROJECT
CP4–10.
The solutions to this project will depend on the company and/or accounting period
selected for analysis.
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Solutions Manual
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CONTINUING CASE
CC4-1.
Adjusting Entries:
Debit
a.
b.
c.
d.
e.
f.
g.
h.
i.
Wages expense (+E, -SE)
Wages payable (+L)
7,500
Unearned revenue (-L)
Cleaning service revenue (+R, +SE)
Amount: $24,000 x 2/12 = $4,000 earned
4,000
Utilities expense (+E, -SE)
Utilities payable (+L)
Interest expense (+E, -SE)
Interest payable (+L)
Amount: $30,000 principal x .10 x 8/12 months
7,500
4,000
520
520
2,000
2,000
Accounts receivable (+A)
Cleaning service revenue (+R, +SE)
800
Insurance expense (+E, -SE)
Prepaid insurance (-A)
Amount: $4,200 x 5/24 months
875
Supplies expense (+E, -SE)
Supplies (-A)
Amount: $2,400 beginning + $23,000
purchased - $3,100 ending = $22,300 used
Depreciation expense (+E, -SE)
Accumulated depreciation (+XA, -A)
Interest receivable (+A)
Interest revenue (+R, +SE)
Financial Accounting, 8/e
Credit
800
875
22,300
22,300
8,300
8,300
110
110
4-77
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.