PRACTICE EXERCISES
PE 3–1A
a.
Yes
b. No
c.
No
e.
Yes
d. Yes
f.
Yes
c.
e.
No
f.
Yes
PE 3–1B
a.
No
b. No
No
d. Yes
PE 3–2A
a.
Unearned revenue
b. Prepaid expense
c.
Accrued revenue
d. Accrued expense
PE 3–2B
a.
Unearned revenue
b. Accrued revenue
c.
Accrued expense
d. Prepaid expense
PE 3–3A
Supplies Expense ..........................................................
Supplies ....................................................................
Supplies used ($2,400 + $3,975 – $1,375).
5,000
5,000
PE 3–3B
Insurance Expense ........................................................
Prepaid Insurance ....................................................
Insurance expired ($7,200 + $4,800 – $8,000).
4,000
4,000
PE 3–4A
Unearned Fees ...............................................................
Fees Earned ..............................................................
Fees earned ($178,900 – $18,650).
160,250
160,250
PE 3–4B
Unearned Rent ...............................................................
Rent Revenue ...........................................................
Rent earned [($10,500/12) × 5 months].
4,375
4,375
PE 3–5A
Accounts Receivable.....................................................
Fees Earned ..............................................................
Accrued fees.
11,600
11,600
PE 3–5B
Accounts Receivable.....................................................
Fees Earned ..............................................................
Accrued fees.
21,750
21,750
PE 3–6A
Salaries Expense ...........................................................
Salaries Payable .......................................................
Accrued salaries [($18,000/5 days) × 4 days].
14,400
14,400
PE 3–6B
Salaries Expense ...........................................................
Salaries Payable .......................................................
Accrued salaries [($34,500/6 days) × 3 days].
17,250
17,250
PE 3–7A
Depreciation Expense ...................................................
Accumulated Depreciation—Equipment ................
Depreciation on equipment.
11,500
11,500
PE 3–7B
Depreciation Expense ...................................................
Accumulated Depreciation—Equipment ................
Depreciation on equipment.
3,800
3,800
PE 3–8A
a. Revenues were understated by $33,300.
b. Expenses were understated by $13,200 ($7,200 + $6,000).
c. Net income was understated by $20,100 ($33,300 – $13,200).
PE 3–8B
a. Revenues were understated by $13,900.
b. Expenses were understated by $14,100 ($2,100 + $12,000).
c. Net income was overstated by $200 ($14,100 – $13,900).
PE 3–9A
a. The totals are unequal. The debit total is higher by $270 ($17,520 – $17,250).
b. The totals are equal since the adjusting entry was omitted.
PE 3–9B
a. The totals are equal even though the credit should have been to Wages Payable instead of Accounts Payable.
b. The totals are unequal. The credit total is higher by $360 ($1,840 – $1,480).
PE 3–10A
a.
Newman Company
Income Statements
For Years Ended December 31
2012
2011
Amount
Percent
Amount
Percent
Fees earned ...................
Operating expenses ......
Operating income ..........
$405,000 100%
263,500 65
$141,500 35%
$375,000 100%
225,000 60
$150,000 40%
b. An unfavorable trend of increasing operating expenses and decreasing operating income is indicated.
PE 3–10B
a.
Bradford Company
Income Statements
For Years Ended December 31
2012
2011
Amount
Percent
Amount
Percent
Fees earned ...................
Operating expenses ......
Operating income ..........
$825,000 100%
684,750 83
$140,250 17%
$
$700,000 100%
602,000 86
98,000 14%
b. A favorable trend of decreasing operating expenses and increasing operating
income is indicated.
EXERCISES
Ex. 3–1
1. Prepaid expense
5. Unearned revenue
2. Accrued revenue
6. Prepaid expense
3. Unearned revenue
7. Accrued expense
4. Accrued expense
8. Accrued expense
Ex. 3–2
Account
Accounts Receivable ...........................
Capital Stock ........................................
Cash ......................................................
Interest Expense ..................................
Interest Receivable ..............................
Land.......................................................
Office Equipment .................................
Prepaid Rent .........................................
Supplies ................................................
Unearned Fees .....................................
Wages Expense ....................................
Answer
Normally requires adjustment (AR).
Does not normally require adjustment.
Does not normally require adjustment.
Normally requires adjustment (AE).
Normally requires adjustment (AR).
Does not normally require adjustment.
Does not normally require adjustment.
Normally requires adjustment (PE).
Normally requires adjustment (PE).
Normally requires adjustment (UR).
Normally requires adjustment (AE).
Ex. 3–3
Supplies Expense ..........................................................
Supplies ....................................................................
Supplies used ($3,915 – $1,750).
Ex. 3–4
$3,650 ($900 + $2,750)
2,165
2,165
Ex. 3–5
a. Insurance expense (or expenses) will be understated. Net income will be overstated.
b. Prepaid insurance (or assets) will be overstated. Stockholders’ equity (retained earnings) will be overstated.
Ex. 3–6
a.
Insurance Expense ........................................................
Prepaid Insurance ....................................................
Insurance expired.
11,200
b. Insurance Expense ........................................................
Prepaid Insurance ....................................................
Insurance expired ($14,800 – $3,600).
11,200
11,200
11,200
Ex. 3–7
a.
Insurance Expense ........................................................
Prepaid Insurance ....................................................
Insurance expired ($4,800 + $15,000 – $5,000).
14,800
b. Insurance Expense ........................................................
Prepaid Insurance ....................................................
Insurance expired.
14,800
14,800
14,800
Ex. 3–8
Unearned Fees ...............................................................
Fees Earned ..............................................................
Fees earned ($45,000 – $9,000).
36,000
36,000
Ex. 3–9
a. Rent revenue (or revenues) will be understated. Net income will be understated.
b. Unearned rent (liabilities) will be overstated. Stockholders’ equity (retained
earnings) at the end of the period will be understated.
Ex. 3–10
a.
Accounts Receivable.....................................................
Fees Earned ..............................................................
Accrued fees.
12,300
12,300
b. No. If the cash basis of accounting is used, revenues are recognized only
when the cash is received. Therefore, earned but unbilled revenues would not
be recognized in the accounts, and no adjusting entry would be necessary.
Ex. 3–11
a.
Unearned Fees ...............................................................
Fees Earned ..............................................................
Unearned fees earned during year.
78,500
b. Accounts Receivable.....................................................
Fees Earned ..............................................................
Accrued fees earned.
23,600
78,500
23,600
Ex. 3–12
a. Fees earned (or revenues) will be understated. Net income will be understated.
b. Accounts (fees) receivable (or assets) will be understated. Stockholders’ equity (retained earnings) will be understated.
Ex. 3–13
a.
Salary Expense ..............................................................
Salaries Payable .......................................................
Accrued salaries [($9,375/5 days) × 2 days].
3,750
b. Salary Expense ..............................................................
Salaries Payable .......................................................
Accrued salaries [($9,375/5 days) × 4 days].
7,500
Ex. 3–14
$37,500 ($41,250 – $3,750)
3,750
7,500
Ex. 3–15
a. Salary expense (or expenses) will be understated. Net income will be overstated.
b. Salaries payable (or liabilities) will be understated. Stockholders’ equity (retained earnings) will be overstated.
Ex. 3–16
a. Salary expense (or expenses) will be overstated. Net income will be understated.
b. The balance sheet will be correct. This is because salaries payable has been
satisfied, and the net income errors have offset each other. Thus, stockholders’ equity (retained earnings) is correct.
Ex. 3–17
a.
Taxes Expense ..............................................................
Prepaid Taxes ...........................................................
Prepaid taxes expired [($9,000/12) × 9 months].
6,750
Taxes Expense ..............................................................
Taxes Payable ..........................................................
Accrued taxes.
34,500
6,750
34,500
b. $41,250 ($6,750 + $34,500)
Ex. 3–18
Depreciation Expense ...................................................
Accumulated Depreciation—Equipment ................
Depreciation on equipment.
2,900
2,900
Ex. 3–19
a.
$325,000 ($750,000 – $425,000)
b. No. Depreciation is an allocation of the cost of the equipment to the periods
benefiting from its use. It does not necessarily relate to value or loss of value.
Ex. 3–20
a.
$7,535 million ($15,082 – $7,547)
b. No. Depreciation is an allocation method, not a valuation method. That is, depreciation allocates the cost of a fixed asset over its useful life. Depreciation
does not attempt to measure market values, which may vary significantly
from year to year.
Ex. 3–21
Income: $3,434 million ($1,714 + $1,720)
Ex. 3–22
a. $579 million
b. 53.7% ($579 ÷ $1,079)
Ex. 3–23
Error (a)
OverUnderstated
stated
1.
2.
3.
4.
5.
6.
Revenue for the year would be ................
Expenses for the year would be ..............
Net income for the year would be ...........
Assets at May 31 would be ......................
Liabilities at May 31 would be ..................
Stockholders’ equity at May 31 would be
Ex. 3–24
$255,000 ($240,000 + $18,000 – $3,000)
$
0
0
0
0
18,000
0
$18,000
0
18,000
0
0
18,000
Error (b)
Over- Understated
stated
$
0
0
3,000
0
0
3,000
$
0
3,000
0
0
3,000
0
Ex. 3–25
a.
Depreciation Expense ...................................................
Accumulated Depreciation—Equipment ................
Depreciation on equipment.
14,500
14,500
b. (1) Depreciation expense would be understated. Net income would be overstated.
(2) Accumulated depreciation would be understated, and total assets would
be overstated. Stockholders’ equity (retained earnings) would be overstated.
Ex. 3–26
1.
2.
3.
4.
5.
Accounts Receivable.....................................................
Fees Earned ..............................................................
Accrued fees earned.
2
Supplies Expense ..........................................................
Supplies ....................................................................
Supplies used.
1
Insurance Expense ........................................................
Prepaid Insurance ....................................................
Insurance expired.
4
Depreciation Expense ...................................................
Accumulated Depreciation—Equipment ................
Equipment depreciation.
1
Wages Expense .............................................................
Wages Payable .........................................................
Accrued wages.
1
2
1
4
1
1
Ex. 3–27
1. The accountant debited Accounts Receivable for $3,750 but did not credit
Laundry Revenue. This adjusting entry represents accrued laundry revenue.
2. The accountant debited rather than credited Laundry Supplies for $1,750.
3. The accountant credited the prepaid insurance account for $3,800 but debited
the insurance expense account for only $800.
4. The accountant credited Laundry Equipment for the depreciation expense of
$6,000, instead of crediting the accumulated depreciation account.
5. The accountant did not debit Wages Expense for $1,200.
The corrected adjusted trial balance is shown below.
E-Z Laundry
Adjusted Trial Balance
July 31, 2012
Debit
Balances
Cash ............................................................................
Accounts Receivable .................................................
Laundry Supplies .......................................................
Prepaid Insurance ......................................................
Laundry Equipment....................................................
Accumulated Depreciation—Laundry Equipment ...
Accounts Payable ......................................................
Wages Payable ...........................................................
Capital Stock ..............................................................
Retained Earnings ......................................................
Dividends ....................................................................
Laundry Revenue .......................................................
Wages Expense ..........................................................
Rent Expense .............................................................
Utilities Expense ........................................................
Depreciation Expense ................................................
Insurance Expense ....................................................
Laundry Supplies Expense .......................................
Miscellaneous Expense .............................................
Credit
Balances
7,500
22,000
2,000
1,400
190,000
54,000
9,600
1,200
40,000
70,300
28,775
185,850
50,400
25,575
18,500
6,000
3,800
1,750
3,250
360,950
360,950
Ex. 3–28
a. $$396 million decrease ($1,487 – $1,883)
21.0% ($396 ÷ $1,883) decrease
b. 2009: 7.8% ($1,487 ÷ $19,176)
2008: 10.1% ($1,883 ÷ $18,627)
c. The net income decreased during 2009 by $396 million, or 21.0%, from 2008,
an unfavorable trend. The percent of net income to net sales also decreased.
Ex. 3–29
a.
Dell Inc.
Net sales ....................................................
Cost of goods sold ...................................
Operating expenses .................................
Operating income (loss) ..........................
Amount
Percent
$
100.0%
82.1
12.7
5.2%
$
61,101
(50,144)
(7,767)
3,190
b. Hewlett-Packard Company (HP)
Amount
Net sales ....................................................
Cost of goods sold ...................................
Operating expenses .................................
Operating income (loss) ..........................
c.
$
$118,364
(89,592)
(17,970)
10,802
Percent
100.0%
75.7
15.2
9.1%
Hewlett-Packard (HP) is more profitable than Dell. Specifically, HP’s cost of
goods sold of 75.7% is significantly less (6.4%) than Dell’s cost of goods sold
of 82.1%. This is partially offset by HP’s higher operating expenses of 15.2%
as compared to Dell’s operating expenses of 12.7%. The net result is that HP
generates an operating income of 9.1% of sales, while Dell generates operating income of 5.2% of sales. Dell must improve its operations if it is to remain
competitive with HP.