Exercise 1
E.3-7. A partial adjusted trial balance of Piper Co at January 31, 2005 shows
the following :
Debit
Credit
Supplies
$ 700
Prepaid Insurance
$ 2,400
Salaries Payable
$ 800
Unearned Revenue
$ 750
Supplies Expense
$ 950
Insurance Expense
$ 400
Salaries Expense
$ 1,800
Service Revenue
$ 2,000
Answer the following questions, assuming the year begins January 1.
a. If the amount in Supplies Exp is the Jan’31 adjusting entry and $ 850 of
supplies was purchased in Jan what was the balance in Supplies on Jan’1.
b.If the amount in Insurance Expense is the January 31 adjusting entry and
the original insurance premium was for one year, what was the total
premium and when was the policy purchased.
c. If $ 2,500 of salaries was paid in January, what was the balance in Salaries
payable at December 31, 2004.
d.If $ 1,600 was received in Jan for services performed in Jan, what was the
balance in Unearned revenue at Dec 31, 2004.
Answer of Exercise 1
a. Ending balance of supplies
+ Adjusting entry
- Purchases
Beginning balance of supplies
$ 700
950
_850
800
b.Total prepaid insurance (400 x 12)
$ 4,800
Amount used (6 x $ 400)
_ 2,400
Present balance
2,400
The policy was purchased six months ago (Augt 1,2004)
c. The entry in January to record salary expense was
Salaries Expense
1,800
Salaries Payable
700
Cash
2,500
Answer of Exercise 1
c. continued…
The beginning balance of Salaries Payable :
Ending balance of salaries payable
$ 800
+ Reduction of salaries payable
_ 700
Beginning balance of salaries payable 1,500
d. Service revenue
Cash received
Unearned revenue reduced
$ 2,000
_ 1,600
400
Ending unearned revenue January 31,2005 $ 750
+ Unearned revenue reduced
_ 400
Beginning unearned revenue Dec 31,2004
1,150
Exercise 2
P.3-7. Presented below are the trial balance and the other information
related to Muhammad Ali, a consulting engineer at December 31, 2005
shows the following :
Debit
Credit
Cash
$ 31,500
Account Receivable
49,600
Allowance for Doubtful Accounts
$
750
Engineering Supplies Inventory
1,960
Unexpired Insurance
1,100
Furniture and Equipment
25,000
Accumulated Depr Furniture and Equipment
6,250
Notes Payable
7,200
Muhammad Ali, Capital
35,010
Service Revenue
100,000
Rent Expense
9,750
Office Salaries Expense
28,500
Heat, Light and Water Expense
1,080
Miscellaneous Office Expense
_ 720
_
_
$ 149,210
$ 149,210
Exercise 2
1.
2.
3.
4.
5.
6.
7.
8.
Fees received in advance from clients $ 6,900.
Services performed for clients that were not recorded by December 31,
$ 4,900.
Bad debt expense for the year is $ 1,430.
Insurance expired during the year $ 480.
Furniture and equipment is being depreciated at 12,5 % per year.
Muhammad Ali gave the bank a 90 day, 10 % note for $ 7,200 on
December 1, 2005.
Rent of the building is $ 750 per month. The rent for 2005 has been
paid, as has that for January 2006.
Office salaries earned but unpaid December 31, 2005, $ 2,510.
Instructions :
a. From the trial balance and other information given, prepare annual
adjusting entries as of December 31, 2005.
b. Prepare an income statement for 2005, a balance sheet, and a
statement of owner’s equity. Muhammad Ali withdraw $ 17,000 cash for
personal use during the year.
Answer of Exercise 2
(a) 1. Service Revenue
6,900
Unearned Service Revenue
6,900
2. Accounts Receivable
4,900
Service Revenue
4,900
3. Bad Debt Expense
1,430
Allowance for Doubtful Accounts
1,430
4. Insurance Expense
480
Unexpired Insurance
480
5. Depreciation Expense—Furniture and Eqp
3,125
Accum. Depr.—Furniture and Equipment
3,125
($ 25,000 x 0.125 = $ 3,125)
6. Interest Expense
60
Interest Payable ($ 7,200 x 0.10 x 30/360)
60
7. Prepaid Rent
750
Rent Expense
750
8. Office Salaries Expense
2,510
Salaries Payable
2,510
Answer of Exercise 2
(b)
Muhammad Ali, Consulting Engineer
Income Statement
For the Year Ended December 31, 2005
Service Revenue ($ 100,000 – $ 6,900 + $ 4,900)
$ 98,000
Deduct Expenses :
Office salaries expense ($ 28,500 + $ 2,510) $ 31,010
Heat, light, and water expense
1,080
Rent expense ($ 9,750 – $ 750)
9,000
Insurance expense
480
Bad debt expense
1,430
Depreciation expense
3,125
Miscellaneous office expense
720
Interest expense
60
Total expenses
46,905
Net income
$ 51,095
Answer of Exercise 2
Muhammad Ali, Consulting Engineer
Balance Sheet
December 31, 2005
Assets
Current assets
Cash
$ 31,500
Accounts receivable(49,600 + $ 4,900) $ 54,500
Less: Allowance for doubtful accounts (2,180)* 52,320
Engineering supplies inventory
Unexpired insurance ($ 1,000 – 480)
Prepaid rent
Total current assets
Furniture and equipment
25,000
Less: Accum. Depreciation (9,375)
Total assets
*($ 750 + $ 1,430)
1,960
620
750
$ 87,150
15,625
$ 102,775
Answer of Exercise 2
Muhammad Ali, Consulting Engineer
Balance Sheet
December 31, 2005
Liabilities and Owner’s Equity
Current liabilities
Unearned service revenue $
Interest payable
Salaries payable
Notes payable
6,900
60
2,510
7,200
16,670
Muhammad Ali, Capital ($ 35,010 + $ 51,095)
86,105
Total liabilities and capital
$ 102,775
Answer of Exercise 2
Muhammad Ali, Consulting Engineer
Statement of Owner’s Equity
For the Year Ended December 31, 2005
Muhammad Ali, Capital, as of January 1, 2005
Add: Net income
Deduct: Withdrawals
Muhammad Ali, Capital, as of December 31, 2005
aMuhammad
Ali, Capital—trial balance
Withdrawals during the year
Muhammad Ali, Capital, as of January 1, 2005
$ 35,010
17,000
$ 52,010
$
52,010a
51,095
( 17,000)
$ 86,105