Chapter 1
Chapter 5 Completing the Accounting
Cycle and Classifying Accounts
Questions
1. A work sheet is used to collect and organize the data for preparing adjusting entries, closing entries, and financial statements.
2. The adjustment debits and credits are identified by letter to ensure that they are complete. The letters can also be used to identify the reasons for the entries. The letters also simplify the preparation of the actual adjusting journal entries.
3. Closing entries prepare the revenue, expense, and withdrawal accounts for the upcoming year by giving them zero balances. Closing entries also update the owner’s capital account for the transactions of the year just finished.
4. Closing entries include: (1) closing the revenue accounts, (2) closing the expense accounts, (3) closing the Income Summary account, and (4) closing the withdrawals account.
5. Closing entries zero out the temporary accounts (revenues, expenses, Income Summary, and withdrawals) and transfer these balances to a permanent account (capital). The asset and liability accounts (also permanent accounts) are not affected by closing entries.
6. Both adjusting and closing entries are recorded at the end of the accounting period. Adjusting entries update the accounts for economic transactions that have taken place but not in the form of external transactions. Closing entries update the owner’s capital account and prepare the temporary accounts for use in the next accounting period.
7. The Income Summary account is used to summarize the period’s revenues and expenses. As a result, it momentarily has a balance equal to the net income (or net loss) for the period. (In fact, closing can be accomplished without the Income Summary account by closing the revenue and expense accounts directly to the capital account.)
8. Yes, an error has occurred because Amortization Expense is a temporary account that should be closed. If the item appears on the post-closing trial balance, the amounts of net income, total assets, and owner’s equity are all overstated.
9. This closing entry would have been recorded on June 25, 2005 to close Interest Income to the Income Summary.
Interest Income 340,000
Income Summary 340,000
10. A company’s operating cycle is the average time between paying cash for salaries or merchandise and receiving cash from customers in exchange for goods or services.
11. An unearned revenue is usually a current liability.
12. Assets on a typical balance sheet include current assets; long-term investments; property, plant and equipment; and intangible assets. Liabilities are classified as current and long-term.
13. Property, plant and equipment are tangible long-lived assets used to produce or sell goods and services.
14. Long-term debt due before December 31, 2006 is $114,115,000.
*15. Reversing entries simplify subsequent entries for accrued expenses and revenues by eliminating the need to record the removal of the accrued liability or receivable.
*16. This reversing entry could be made as of the first day of the next fiscal year:
Salaries Payable 500
Salaries Expense 500
QUICK STUDY
QUICK STUDY 5-1
1. BS 4. BS
2. BS 5. BS
3. IS 6. IS
Quick Study 5-2
| | | | | | |
|Account |Dr |C|
| | |r|
|Add: Net income ($184,000 – $125,000) |59,000 | |
|Less: Withdrawals | 32,000 | |
|Ending capital |$77,000 | |
Quick Study 5-4
Sam Hascal, Capital for the December 31, 2011, balance sheet:
Beginning capital $165,000
Less: Net loss ($74,000 – $115,000) 41,000
Less: Withdrawals 32,000
Ending capital $ 92,000
Quick Study 5-5
Income Summary balance after closing revenues and expenses:
Revenues: $35,000 + $3,500 = $38,500
Expenses: $19,000 + $4,000 + $2,300 = –25,300
Credit balance = $13,200
Peter Jontil, Capital balance after all closing entries:
|Beginning balance |$14,000 | | |Peter Jontil, Capital | |
|Add: Net income | 13,200 | | | |14,000 |(Beg. Bal.) |
|Total |$27,200 |OR |(Withdrawals) |6,000 |13,200 |(Net income) |
|Less: Withdrawals | 6,000 | | | |21,200 |(End. Bal.) |
|Ending balance |$21,200 | | | | | |
Quick Study 5–6
|Assets | |Liabilities | |Capital |
|Apr. 30 |250| | | |
|Apr. 30 |
|(2) |60 |100 |(1) |
|(3) |40 |40 |Balance |
| | |-0- |Balance |
QS 5-7
|Assets | |Liabilities | |Capital |
|Oct. 31 |250| | | |
|Oct. 31 |
|(2) |140 |100 |(1) |
|Balance |40 |40 |(3) |
|Balance |-0- | | |
Quick Study 5-8
|SilverStar Automotive |
|Post-Closing Trial Balance |
|October 31, 2011 |
|Account |Debit |Credit |
|Cash |$ 40 | |
|Accounts receivable |20 | |
|Unearned revenue | | $ 10 |
|Capital | |50 |
|Totals |$ 60 |$ 60 |
Quick Study 5-9
1. (f) Journalizing transactions.
2. (g) Posting the transaction entries.
3. (a) Preparing the unadjusted trial balance.
4. (h) Completing the work sheet (optional).
5. (c) Journalizing and posting adjusting entries.
6. (e) Preparing the financial statements.
7. (d) Journalizing and posting closing entries.
8. (b) Preparing the post-closing trial balance.
Quick Study 5-10
1. C 5. B
2. E 6. A
3. A 7. D
4. F
QS 5-11
1. z. 6. f. 11. c. 16. c.
2. g. 7. e. 12. a. 17. z.
3. a. 8. a. 13. c. 18. a.
4. z. 9. b. 14. d. 19. e.
5. c. 10. e. 15. c. 20. b.
Quick Study 5-12
|Jardine Servicing |
|Partial Balance Sheet |
|March 31, 2011 |
|Liabilities | | |
| Current liabilities | | |
| Accounts payable |$14,000 | |
| Unearned fees |26,000 | |
| Notes payable, due February 1, 2012 |45,000 | |
| Current portion of mortgage payable | 56,000 | |
| Total current liabilities | |$141,000 |
| Long-term liabilities | | |
| Mortgage payable | | |
|(less $56,000 current portion) | |59,000 |
| Total liabilities | |$200,000 |
*Quick Study 5-13
|2012 | | | |
|Jan. |1 |Rent Revenue |9,800 | |
| | | Rent Receivable | |9,800 |
| | | To reverse accrued revenue. | | |
| | | | | |
| |20 |Cash |15,500 | |
| | | Rent Revenue | |15,500 |
| | | To record collection of rent revenue. | | |
*Quick Study 5-14
Current assets:
Accounts receivable $15,000
Cash 6,000
Office supplies 1,800
Prepaid insurance 2,500
Total $25,300
Current liabilities:
Accounts payable $10,000
Unearned services revenue 4,000
Total $14,000
|Current ratio = |$25,300 | = 1.81 |
| |$14,000 | |
EXERCISES
EXERCISE 5-1 (15 MINUTES)
|1. |C |5. |C |9. |C |13. |C |
|2. |B |6. |A |10. |C |14. |A |
|3. |D |7. |A |11. |D |15. |A |
|4. |B |8. |D |12. |D |16. |C |
Exercise 5-2 (20 minutes)
Balance Sheet
Adjusted and
Trial Income Statement of
Balance Statement Owner’s Equity
No. Title Debit Credit Debit Credit Debit Credit
101 Cash 3,000 3,000
106 Accounts receivable 13,100 13,100
153 Trucks 41,000 41,000
154 Accum. amortization, trucks 16,500 16,500
193 Franchise 15,000 15,000
201 Accounts payable 7,000 7,000
209 Salaries payable 1,600 1,600
233 Unearned fees 1,300 1,300
301 Bo Webber, capital 37,750 37,750
302 Bo Webber, withdrawals….. 7,200 7,200
401 Plumbing fees earned 49,000 49,000
611 Amortization expense, trucks 5,500 5,500
622 Salaries expense 18,500 18,500
640 Rent expense 6,000 6,000
677 Misc. expenses 3,850 3,850
Totals 113,150 113,150 33,850 49,000 79,300 64,150
Net income 15,150 15,150
Totals 49,000 49,000 79,300 79,300
Exercise 5-3 (25 minutes) Parts 1, 2, and 3
Musical Sensations
Work Sheet
For Year Ended December 31, 2011
|Account |Unadjusted Trial Balance | |Adjusted Trial Balance | |Balance Sheet & Statement of |
| | |Adjustments | |Income Statement |Owner’s Equity |
| |Debit |Credit |
| | |272,000 |(Beg. bal.) |
|(With.) |52,000 | | |
|(Net Loss) |18,830 | | |
| | |201,170 |(End. bal.) |
Exercise 5-4 (20 minutes)
1. (a) Income = $36,800
2. (a)
|Mar. 31 |Income Summary |36,800 | |
| | Capital | |36,800 |
| | To close the income summary account to capital. | | |
|3. (a) | |Capital | |
| | | |63,000 |(Beg. bal.) |
| $63,000 + $36,800 – $17,000 = $82,800 OR |(With.) |17,000 |36,800 |(Net income) |
| | | |82,800 |(End. bal.) |
| | | | | |
1. (b) Net Loss = $60,000
2. (b)
|June 30 |Capital |60,000 | |
| | Income Summary | |60,000 |
| | To close the income summary account to capital. | | |
|3. (b) | |Capital | |
| | | |114,000 |(Beg. bal.) |
|$114,000 – $60,000 = $54,000 OR |(Net loss) |60,000 | | |
| | | |54,000 |(End. bal.) |
| | | | | |
Exercise 5-5 (30 minutes)
| | |Debit |Credit |
| |Rent earned | |99,000 |
| |Salaries expense |35,300 | |
| |Insurance expense |4,400 | |
| |Dock rental expense |12,000 | |
| |Boat supplies expense |6,220 | |
| |Amortization expense, boats |21,500 | |
| |Totals |79,420 |99,000 |
| | Net income |19,580 | |
| |Totals |99,000 |99,000 |
|2011 | Closing entries: | | |
|Dec. 31 |Rent Earned |99,000 | |
| | Income Summary | |99,000 |
| | To close the revenue account. | | |
| | | | |
|31 |Income Summary |79,420 | |
| | Salaries Expense | |35,300 |
| | Insurance Expense | |4,400 |
| | Dock Rental Expense | |12,000 |
| | Boat Supplies Expense | |6,220 |
| | Amortization Expense, Boats | |21,500 |
| | To close the expense accounts. | | |
| | | | |
|31 |Income Summary |19,580 | |
| | Carl Winston, Capital | |19,580 |
| | To close Income Summary. | | |
| | | | |
|31 |Carl Winston, Capital |18,000 | |
| | Carl Winston, Withdrawals | |18,000 |
| | To close the withdrawals account. | | |
Exercise 5-6 (20 minutes)
|2011 |Closing entries: | | |
|Apr. |30 |Plumbing Fees Earned |39,500 | |
| | | Income Summary | |39,500 |
| | | To close revenue to the income summary. | | |
| | | | | |
| |30 |Income Summary |31,100 | |
| | | Amortization Expense, Trucks | |5,500 |
| | | Salaries Expense | |15,750 |
| | | Rent Expense | |6,000 |
| | | Advertising Expense | |3,850 |
| | | To close expense accounts to income | | |
| | |summary. | | |
| | | | | |
| |30 |Income Summary |8,400 | |
| | | Frank Block, Capital | |8,400 |
| | | To close income summary to capital. | | |
| | | | | |
| |30 |Frank Block, Capital |7,200 | |
| | | Frank Block, Withdrawals | |7,200 |
| | | To close withdrawals to capital. | | |
|Block Plumbing Co. |
|Post-Closing Trial Balance |
|April 30, 2011 |
|Acct. No. |Account |Debit |Credit |
|101 |Cash |$ 4,100 | |
|106 |Accounts receivable |12,000 | |
|153 |Trucks |20,500 | |
|154 |Accumulated amortization, trucks | |$ 8,250 |
|193 |Franchise |15,000 | |
|201 |Accounts payable | |7,000 |
|209 |Salaries payable | |1,600 |
|233 |Unearned fees | |1,300 |
|301 |Frank Block, capital | |33,450* |
| |Totals |$51,600 |$51,600 |
*Calculated as:
32,250 + 8,400 – 7,200 = 33,450 or
Exercise 5-7 (20 minutes)
|2011 |Closing entries: | | |
|January 31 |Subscription Revenues |62,000 | |
| |Interest Revenue |450 | |
| | Income Summary | |62,450 |
| | To close revenues to the income summary. | | |
| | | | |
|31 |Income Summary |65,400 | |
| | Amortization Expense, Equipment | |2,000 |
| | Rent Expense | |7,400 |
| | Salaries Expense | |56,000 |
| | To close expense accounts to income | | |
| |summary. | | |
| | | | |
|31 |Kate Goldberg, Capital |2,950 | |
| | Income Summary | |2,950 |
| | To close income summary to capital. | | |
| | | | |
|31 |Kate Goldberg, Capital |4,000 | |
| | Kate Goldberg, Withdrawals | |4,000 |
| | To close withdrawals to capital. | | |
Exercise 5-8 (20 minutes)
2011 Closing entries:
Dec. 31 Services Revenue 72,000
Income Summary 72,000
To close the revenue account to the
income summary.
31 Income Summary 73,400
Amortization Expense, Equipment 4,000
Salaries Expense 42,000
Insurance Expense 3,000
Rent Expense 22,000
Supplies Expense 2,400
To close the expense accounts to the
income summary.
31 Jo Weller, Capital 1,400
Income Summary 1,400
To close the income summary to capital.
31 Jo Weller, Capital 12,000
Jo Weller, Withdrawals 12,000
To close withdrawals to capital.
Exercise 5-9 (20 minutes)
|2011 |Closing entries: | | |
|Sept. 30 |Consulting Fees Earned |68,000 | |
| | Income Summary | |68,000 |
| | To close revenues to the income summary. | | |
| | | | |
|30 |Income Summary |18,750 | |
| | Amortization Expense, Office Equipment | |3,500 |
| | Rent Expense | |1,750 |
| | Wages Expense | |13,500 |
| | To close expense accounts to income | | |
| |summary. | | |
| | | | |
|30 |Income Summary |49,250 | |
| | Sandra Sloley, Capital | |49,250 |
| | To close income summary to capital. | | |
| | | | |
|30 |Sandra Sloley, Capital |19,000 | |
| | Sandra Sloley, Withdrawals | |19,000 |
| | To close withdrawals to capital. | | |
Exercise 5-10 (35 minutes)
Closing entries:
| |2011 | | | |
|(1) |Dec. |31 |Services Revenue |73,000 | |
| | | | Income Summary | |73,000 |
| | | | To close the revenue account to the | | |
| | | | Income Summary. | | |
| | | | | | |
|(2) | |31 |Income Summary |48,100 | |
| | | | Rent Expense | |8,600 |
| | | | Salaries Expense | |20,000 |
| | | | Insurance Expense | |3,500 |
| | | | Amortization Expense | |16,000 |
| | | | To close the expense accounts to the | | |
| | | |income summary. | | |
| | | | | | |
|(3) | |31 |Income Summary |24,900 | |
| | | | Marcy Jones, Capital | |24,900 |
| | | | To close the income summary to capital. | | |
| | | | | | |
|(4) | |31 |Marcy Jones, Capital |24,000 | |
| | | | Marcy Jones, Withdrawals | |24,000 |
| | | | To close withdrawals to capital. | | |
Exercise 5-10 (concluded)
Posted accounts:
|Assets | |Rent Expense |
|Dec. 31 |80,000 | | | |Dec. 31 |8,600 |8,600 |(2) |
| | | | | |Balance |0 | | |
|Liabilities | | | | | |
| | |38,100 |Dec. 31 | |Salaries Expense |
| | | | | |Dec. 31 |20,000 |20,000 |(2) |
|Marcy Jones, Capital | |Balance |0 | | |
|(4) |24,000 |41,000 |Dec. 31 | | | | | |
| | |24,900 |(3) | |Insurance Expense |
| | |41,900 |Balance | |Dec. 31 |3,500 |3,500 |(2) |
| | | | | |Balance |0 | | |
|Marcy Jones, Withdrawals | | | | | |
|Dec. 31 |24,000 |24,000 |(4) | |Amortization Expense |
|Balance |0 | | | |Dec. 31 |16,000 |16,000 |(2) |
| | | | | |Balance |0 | | |
|Income Summary | | | | | |
|(2) |48,100 |73,000 |(1) | | | | | |
|(3) |24,900 |24,900 |Balance | | | | | |
| | |0 |Balance | | | | | |
| | | | | | | | | |
|Services Revenue | | | | | |
|(1) |73,000 |73,000 |Dec. 31 | | | | | |
| | |0 |Balance | | | | | |
| | | | | | | | | |
Exercise 5-11 (10 minutes)
|Jones’ Consulting |
|Post-Closing Trial Balance |
|December 31, 2011 |
|Account |Debit |Credit |
|Assets |$ 80,000 | |
|Liabilities | |$ 38,100 |
|Marcy Jones, Capital | |41,900 |
|Totals |$80,000 |$80,000 |
Exercise 5-12 (12 minutes)
1. Bill Duggan, Withdrawals; Interest Revenue, and Other Expenses have not been closed.
2.
|2011 | | | |
|June 30 |Bill Duggan, Capital |71,000 | |
| |Interest Revenue |1,150 | |
| | Bill Duggan, Withdrawals | |72,000 |
| | Other Expenses | |150 |
| | To close interest earned, withdrawals and | | |
| | other expenses directly to capital. | | |
| | |Bill Duggan, Capital | |
| | | |216,200 | |
|3. $216,200 – $71,000 = $145,200 |OR |71,000 | | |
| | | |145,200 |(Balance) |
Exercise 5-13 (15 minutes) Part A
| | |Adjusted Trial |
| |Account Title | Balance |
| | |Debit |Credit |
| |Accounts payable | |$ 11,000 |
| |Accounts receivable |$ 59,000 | |
| |Accumulated amortization, equipment | |9,000 |
| |Accumulated amortization, truck | |21,000 |
|X |Amortization expense |3,800 | |
| |Cash |29,000 | |
| |Equipment |13,000 | |
| |Franchise |17,800 | |
|X |Gas and oil expense |7,500 | |
|X |Interest expense |4,500 | |
| |Interest payable | |750 |
| |Land not currently used in business operations |52,000 | |
| |Long-term notes payableNote 1 | |35,000 |
| |Notes payable, due February 1, 2012 | |7,000 |
| |Notes receivableNote 2 |6,000 | |
| |Patent |7,000 | |
| |Prepaid rent |14,000 | |
|X |Rent expense |39,000 | |
|X |Repair revenue | |247,000 |
| |Repair supplies |17,000 | |
|X |Repair supplies expense |14,000 | |
|X |Sid Whimsly, capital | |24,050 |
|X |Sid Whimsly, withdrawals |49,000 | |
| |Truck |26,000 | |
| |Unearned repair revenue | | 3,800 |
| |Totals |$358,600 |$358,600 |
b. $24,050 -$3,800 - $7,500 - $4,500 - $39,000 + $247,000 - $14,000 - $49,000 = $153,250.
Analysis component:
Amortization expense, gas and oil expense, interest expense, rent expense, repair revenue, repair supplies expense, and withdrawals are all temporary accounts and do not appear on the post-closing trial balance because their balances were transferred to capital during the closing process leaving each with a zero post-closing balance. The adjusted balance of $24,050 in capital is the balance prior to closing all temporary accounts into it. A capital account balance does appear on the post-closing trial balance but it is the post-closing balance of $153,250 as determined in part (b) above. Therefore, the adjusted capital balance of $24,050 will not appear on the post-closing trial balance
Note to instructor: Reinforce to the student that the question asks which account balances from the adjusted trial balance will not appear on the post-closing trial balance.
Exercise 5-14 (15 minutes)
a. Current assets = $59,000 + $29,000 + $2,000 + $14,000 + $17,000 = $121,000.
b. Property, plant and equipment = -$9,000 - $21,000 + $13,000 + $26,000 = $9,000.
c. Intangible assets = $17,800 + 7,000 = $24,800.
d. Long-term investments = $4,000 + $52,000 = $56,000.
e. Total assets = $121,000 + $9,000 + $24,800 + $56,000 = $210,800.
f. Current liabilities = $11,000 + $750 + $5,000 + $7,000 + $3,800 = $27,550
g. Long-term liabilities = $30,000.
h. Total liabilities = $27,550 + $30,000 = $57,550.
i. Total liabilities and owner’s equity = $210,800.
Exercise 5-15 (30 minutes)
|DOVER PACIFIC TOURS |
|Balance Sheet |
|November 30, 2011 |
|Assets | | | |
| Current assets: | | | |
| Cash | |$ 5,000 | |
| Accounts receivable | |13,000 | |
| Prepaid insurance | |700 | |
| Prepaid rent | |9,000 | |
| Supplies | | 2,250 | |
| Current portion of notes receivable | | 7,500 | |
| Total current assets | | |$ 37,450 |
| | | | |
| Long-term investments: | | | |
| Notes receivable, less $7,500 current portion | | |13,000 |
| | | | |
| Property, plant and equipment: | | | |
| Vehicles |$64,000 | | |
| Less: Accumulated amortization | 17,000 |$47,000 | |
| Office furniture |$ 6,500 | | |
| Less: Accumulated amortization | 3,600 | 2,900 | |
| Total property, plant and equipment | | |49,900 |
| Intangible assets: | | | |
| Copyright | | | 1,000 |
|Total assets | | |$101,350 |
| | | | |
|Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable |$ 11,000 | | |
| Salaries payable |900 | | |
| Unearned touring revenue |23,000 | | |
| Notes payable |4,000 | | |
| Current portion of long-term notes payable | 10,000 | | |
| Total current liabilities | |$ 48,900 | |
| Long-term liabilities: | | | |
| Long-term notes payable, less $10,000 current | | 10,500 | |
| portion | | | |
| Total liabilities | | |$59,400 |
| | | | |
|Owner’s Equity | | | |
| Pat Dover, capital* | | | 41,950 |
|Total liabilities and owner’s equity | | |$101,350 |
*Calculated as Total assets of $101,350 less Total liabilities of $59,400 = $41,950.
Exercise 5-16 (20 minutes)
HaNSON Trucking CoMPANY
Balance Sheet
December 31, 2011
|Assets | | | |
| Current assets: | | | |
| Cash | |$ 7,000 | |
| Accounts receivable | |16,500 | |
| Office supplies | | 2,000 | |
| Total current assets | | |$ 25,500 |
| Property, plant and equipment: | | | |
| Land | |$ 75,000 | |
| Trucks |$170,000 | | |
| Less: Accumulated amortization | 35,000 |135,000 | |
| Total property, plant and equipment | | |$210,000 |
|Total assets | | |$235,500 |
| | | | |
|Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable |$ 11,000 | | |
| Interest payable | 3,000 | | |
| Total current liabilities | |$ 14,000 | |
| Long-term notes payable | | 52,000 | |
| Total liabilities | | |$ 66,000 |
| | | | |
|Owner’s Equity | | | |
| Stanley Hanson, capital | | | 169,500 |
|Total liabilities and owner’s equity | | |$235,500 |
Exercise 5-17 (60 minutes)
a. Withdrawals, tutoring fees earned, rent expense, amortization expense, and advertising expense have zero balances because each account was closed at December 31, 2011 resulting in each balance being transferred to capital leaving a zero balance behind.
b.
|2012 | | | |
|Jan. 15 |Accounts Receivable |8,000 | |
| | Tutoring Fees Earned | |8,000 |
| | To record revenues earned on | | |
| |account. | | |
| | | | |
|Feb. 20 |Advertising Expense |2,000 | |
| | Cash | |2,000 |
| | To record payment for advertising. | | |
| | | | |
|July 7 |Cash |9,000 | |
| | Accounts Receivable | |9,000 |
| | To record collection from customers. | | |
| | | | |
|Dec. 10 |Leda Svenson, Withdrawals |3,000 | |
| | Cash | |3,000 |
| | To record cash withdrawals by owner. | | |
Exercise 5-17 (continued)
b.
|Cash | |Accounts Receivable | |Prepaid Rent |
|Dec 31/11 |2,0|2,000 |Feb| |
|Jul 07/12 |00 |3,000 |20/| |
| |9,0| |12 | |
| |00 | |Dec| |
| | | |10/| |
| | | |12 | |
|Dec 31/11 |20,| | | |
| |000| | | |
| | |17,100 |Dec| |
| | | |31/| |
| | | |11 | |
|Dec 31/11 |
|Account |Debit |Credit |
|Cash |$ 6,000 | |
|Accounts receivable |4,000 | |
|Prepaid rent |3,000 | |
|Office equipment |20,000 | |
|Accumulated amortization, office equipment | |$10,000 |
|Unearned fees | |2,900 |
|Leda Svenson, capital | |17,100 |
|Leda Svenson, withdrawals |3,000 | |
|Tutoring fees earned | |8,000 |
|Advertising expense |2,000 | |
|Totals |$38,000 |$38,000 |
d. Journalize adjustments:
|2012 | | | |
|Dec. 31 |Amortization Expense |2,000 | |
| | Accum. Amort., office equipment | |2,000 |
| | To record annual amortization. | | |
| | | | |
| 31 |Unearned Fees |2,400 | |
| | Tutoring Fees Earned | |2,400 |
| | To record earned fees. | | |
| | | | |
| 31 |Rent Expense |3,000 | |
| | Prepaid Rent | |3,000 |
| | To record expired prepaid rent. | | |
Exercise 5-17 (continued)
d. Post adjustments:
|Cash | |Accounts Receivable | |Prepaid Rent |
|Dec 31/11 |2,00|2,000 |Feb| |
|Jul 07/12 |0 |3,000 |20/| |
| |9,00| |12 | |
| |0 | |Dec| |
| | | |10/| |
| | | |12 | |
|Dec 31/11 |20,0| | | |
| |00 | | | |
| | |17,100 |Dec| |
| | | |31/| |
| | | |11 | |
|Dec 31/11 |
|Dec 31/12 |
|Account |Debit |Credit |
|Cash |$ 6,000 | |
|Accounts receivable |4,000 | |
|Office equipment |20,000 | |
|Accumulated amortization, office equipment | |$12,000 |
|Unearned fees | |500 |
|Leda Svenson, capital | |17,100 |
|Leda Svenson, withdrawals |3,000 | |
|Tutoring fees earned | |10,400 |
|Rent expense |3,000 | |
|Amortization expense |2,000 | |
|Advertising expense |2,000 | |
|Totals |$40,000 |$40,000 |
Exercise 5–17 (continued)
f.
|Svenson’s Tutoring Clinic |
|Income Statement |
|For Year Ended December 31, 2012 |
|Revenue | |$10,400 |
| | | |
|Operating expenses: | | |
| Rent expense |$3,000 | |
| Advertising expense | 2,000 | |
| Amortization expense | 2,000 | |
| Total operating expenses | | 7,000 |
|Net income | |$ 3,400 |
|Svenson’s Tutoring Clinic |
|Statement of Owner’s Equity |
|For Year Ended December 31, 2012 |
|Leda Svenson, capital, January 1 | |$17,100 |
|Add: Investments by owner |$ 0 | |
| Net income | 3,400 | 3,400 |
| Total | |$20,500 |
|Less: Withdrawals by owner | | 3,000 |
|Leda Svenson, capital, December 31 | |$17,500 |
|Svenson’s Tutoring Clinic |
|Balance Sheet |
|December 31, 2012 |
|Assets | | | |
| Current assets: | | | |
| Cash | |$ 6,000 | |
| Accounts receivable | | 4,000 | |
| Total current assets | | |$ 10,000 |
| | | | |
| Property, plant and equipment: | | | |
| Office equipment | |$20,000 | |
| Less: Accumulated amortization | |12,000 | 8,000 |
|Total assets | | |$18,000 |
| | | | |
|Liabilities | | | |
| Current liabilities: | | | |
| Unearned fees | | |$ 500 |
| | | | |
|Owner’s Equity | | | |
| Leda Svenson, capital | | | 17,500 |
|Total liabilities and owner’s equity | | |$18,000 |
Exercise 5–17 (continued)
g. Journalize the closing entries:
| |2012 | | | |
|(1) |Dec. 31 |Tutoring Fees Earned |10,400 | |
| | | Income Summary | |10,400 |
| | | To close the revenue account to | | |
| | |the income summary. | | |
| | | | | |
|(2) |31 |Income Summary |7,000 | |
| | | Rent Expense | |3,000 |
| | | Amortization Expense | |2,000 |
| | | Advertising Expense | |2,000 |
| | | To close the expense accounts | | |
| | |to the income summary. | | |
| | | | | |
|(3) |31 |Income Summary |3,400 | |
| | | Leda Svenson, Capital | |3,400 |
| | | To close the income summary to | | |
| | |capital. | | |
| | | | | |
|(4) |31 |Leda Svenson, Capital |3,000 | |
| | | Leda Svenson, Withdrawals | |3,000 |
| | | To close withdrawals to capital. | | |
Exercise 5–17 (continued)
g. Post the closing entries:
|Cash | |Accounts Receivable | |Prepaid Rent |
|Dec 31/11 |2,0|2,000 |Feb| |
|Jul 07/12 |00 |3,000 |20/| |
| |9,0| |12 | |
| |00 | |Dec| |
| | | |10/| |
| | | |12 | |
|Dec 31/11 |20,| | | |
| |000| | | |
|(4) |3,0|17,100 |Dec| |
| |00 |3,400 |31/| |
| | | |11 | |
| | | |(3)| |
|Dec 31/11 | |
|Dec 31/12 | -0|
| |- |
| |3,0|
| |00 |
|(2) |7,000 |10,400 |(1) | |
|(3) |3,400 |3,400 |Bal. | |
| | |-0- | | |
Exercise 5–17 (concluded)
h.
|Svenson’s Tutoring Clinic |
|Post-Closing Trial Balance |
|December 31, 2012 |
|Account |Debit |Credit |
|Cash |$ 6,000 | |
|Accounts receivable |4,000 | |
|Office equipment |20,000 | |
|Accumulated amortization, office equipment | |$12,000 |
|Unearned fees | |500 |
|Leda Svenson, capital | |17,500 |
|Totals |$30,000 |$30,000 |
*Exercise 5-18 (10 minutes)
Reversing entries are appropriate for adjustments (a) and (e):
2011
Sept. 1 Service Fees Earned 5,000
Accounts Receivable 5,000
To reverse accrued revenues.
1 Salaries Payable 2,400
Salaries Expense 2,400
To reverse accrued salaries.
*Exercise 5-19 (30 minutes)
1. Adjusting entries:
2011
Oct. 31 Rent Expense 3,200
Rent Payable 3,200
To record accrued rent expense.
31 Rent Receivable 750
Rent Earned 750
To record accrued rent revenue.
2. Subsequent entries without reversing:
Nov. 5 Rent Payable 3,200
Rent Expense 3,200
Cash 6,400
To record payment of two months’ rent.
8 Cash 1,500
Rent Receivable 750
Rent Earned 750
To record collection of two months’ rent.
3. Reversing entries and subsequent entries:
Nov. 1 Rent Payable 3,200
Rent Expense 3,200
To reverse the accrual of rent expense.
1 Rent Earned 750
Rent Receivable 750
To reverse the accrual of rent revenue.
5 Rent Expense 6,400
Cash 6,400
To record payment of two months’ rent.
8 Cash 1,500
Rent Earned 1,500
To record collection of two months’ rent.
*Exercise 5-20 (15 minutes)
Current Current Current
Assets Liabilities Ratio F/U
Case 1 $ 78,000 / $31,000 = 2.52 F
Case 2 104,000 / 75,000 = 1.39 F
Case 3 44,000 / 48,000 = 0.92 U
Case 4 84,500 / 80,600 = 1.05 U
PROBLEMS
Problem 5-1A (30 minutes)
Wigger Rentals
Work Sheet
For Year Ended March 31, 2011
| |Account |Unadjusted Trial Balance | |Adjusted Trial Balance | |Balance Sheet & Statement of|
| | | |Adjustments | |Income Statement | |
|Account | | | | | |Owner’s Equity |
|Number | | | | | | |
| | |Debit |Credit |Debit |Credit |
| |Debit |Credit |Debit |
| | | |26,650 |(Beg. bal.) |
|$26,650 – $800 – $15,480 = $10,370 OR |(With.) |800 | | |
| |(Net Loss) |15,480 | | |
| | | |10,370 |(End. bal.) |
Analysis component:
A net loss causes the equity in the accounting equation to decrease. To offset the decrease in equity, liabilities would have to increase and/or assets would have to decrease.
Problem 5-3A (90 minutes) Part 1
CHALLENGER CONSTRUCTION
Work Sheet
For Year Ended September 30, 2011
| |Account |Unadjusted | |Adjusted Trial Balance | |Balance Sheet & Statement |
| | |Trial Balance |Adjustments | |Income Statement |of Owner’s Equity |
|No. | |Debit |Credit | |
|a) |Sept. |30 |Supplies Expense |13,800 | |
| | | | Supplies | |13,800 |
| | | | To record consumption of supplies. | | |
| | | | | | |
|b) | |30 |Insurance expense |8,000 | |
| | | | Prepaid Insurance | |8,000 |
| | | | To record consumption of insurance coverage. | | |
| | | | | | |
|c) | |30 |Amortization Expense, Equipment |18,000 | |
| | | | Accumulated Amortization, Equipment | |18,000 |
| | | | To record amortization. | | |
| | | | | | |
|d) | |30 |Utilities Expense |800 | |
| | | | Accounts Payable | |800 |
| | | | To record accrued utilities costs. | | |
| | | | | | |
|e) | |30 |Wages Expense |3,000 | |
| | | | Wages Payable | |3,000 |
| | | | To record accrued wages. | | |
| | | | | | |
|f) | |30 |Interest Expense |500 | |
| | | | Interest Payable | |500 |
| | | | To record accrued interest expense. | | |
Problem 5-3A (continued) Part 2
|2011 |Closing entries: | | |
|Sept. |30 |Construction Fees Earned |280,000 | |
| | | Income Summary | |280,000 |
| | | To close the revenue account to the | | |
| | | Income Summary account. | | |
| | | | | |
| |30 |Income Summary |178,320 | |
| | | Amortization Expense, Equipment | |18,000 |
| | | Wages Expense | |85,000 |
| | | Interest Expense | |3,500 |
| | | Insurance Expense | |8,000 |
| | | Rent Expense | |26,400 |
| | | Supplies Expense | |13,800 |
| | | Business Taxes Expense | |10,000 |
| | | Repairs Expense | |5,020 |
| | | Utilities Expense | |8,600 |
| | | To close the expense accounts to the Income | | |
| | | Summary account. | | |
| | | | | |
| |30 |Income Summary |101,680 | |
| | | Chris Challenger, Capital | |101,680 |
| | | To close the Income Summary account to capital. | | |
| | | | | |
| |30 |Chris Challenger, Capital |72,000 | |
| | | Chris Challenger, Withdrawals | |72,000 |
| | | To close the withdrawals account to capital. | | |
Problem 5-3A (continued) Part 3
|CHALLENGER CONSTRUCTION |
|Income Statement |
|For Year Ended September 30, 2011 |
|Revenues: | | |
| Construction fees earned | |$280,000 |
|Operating expenses: | | |
| Wages expense |$85,000 | |
| Rent expense |26,400 | |
| Amortization expense, equipment | 18,000 | |
| Supplies expense |13,800 | |
| Business taxes expense |10,000 | |
| Utilities expense | 8,600 | |
| Insurance expense |8,000 | |
| Repairs expense |5,020 | |
| Interest expense | 3,500 | |
| Total operating expenses | | 178,320 |
|Net income | |$101,680 |
|CHALLENGER CONSTRUCTION |
|Statement of Owner’s Equity |
|For Year Ended September 30, 2011 |
|Chris Challenger, capital, October 1 | |$25,320 |
|Add: Investments by owner |$30,000 | |
| Net income | 101,680 | 131,680 |
| Total | |$157,000 |
|Less: Withdrawals | | 72,000 |
|Chris Challenger, capital, September 30 | |$85,000 |
Problem 5-3A (concluded)
|CHALLENGER CONSTRUCTION |
|Balance Sheet |
|September 30, 2011 |
|Assets | | | |
| Current assets: | | | |
| Cash | |$36,000 | |
| Supplies | |5,000 | |
| Prepaid insurance | | 4,400 | |
| Total current assets | | |$45,400 |
| Long-term investments: | | | |
| Land not currently used in operations | | |50,000 |
| Property, plant and equipment: | | | |
| Equipment | |$106,000 | |
| Less: Accumulated amortization | | 58,500 |$47,500 |
| Intangible assets: | | | |
| Copyright | | | 6,000 |
|Total assets | | |$148,900 |
| | | | |
|Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable |$10,400 | | |
| Interest payable |500 | | |
| Wages payable |3,000 | | |
| Current portion of long-term notes payable | 16,000 | | |
| Total current liabilities | |$29,900 | |
| Long-term liabilities: | | | |
| Long-term notes payable (less current portion) | | 34,000 | |
| Total liabilities | | |$63,900 |
| | | | |
|Owner’s Equity | | | |
| Chris Challenger, capital | | | 85,000 |
|Total liabilities and owner’s equity | | |$148,900 |
Analysis component:
a) No, the error will not be discovered in completing the worksheet because it will balance. Net income will be overstated by $8,800 (= $13,800 – $5,000) as a result and Supplies on the balance sheet will be overstated by $8,800.
b) Yes, the error will be discovered in completing the worksheet.
Problem 5-4A (25 minutes)
Part 1
|2011 |Closing entries: | | |
|Dec. |31 |Repair Fees Earned |155,500 | |
| | | Income Summary | |155,500 |
| | | To close revenue to the income summary. | | |
| | | | | |
| |31 |Income Summary |166,600 | |
| | | Amortization Expense, Equipment | |8,000 |
| | | Wages Expense | |107,000 |
| | | Insurance Expense | |1,400 |
| | | Rent Expense | |41,600 |
| | | Office Supplies Expense | |5,200 |
| | | Utilities Expense | |3,400 |
| | | To close expense accounts to income | | |
| | |summary. | | |
| | | | | |
| |31 |Mike Yang, Capital |11,100 | |
| | | Income Summary | |11,100 |
| | | To close income summary to capital. | | |
| | | | | |
| | |Mike Yang, Capital |30,000 | |
| | | Mike Yang, Withdrawals | |30,000 |
| | | To close withdrawals to capital. | | |
Part 2
|MY Autobody |
|Post-Closing Trial Balance |
|December 31, 2011 |
|Acct. No. |Account |Debit | |Credit |
|101 |Cash |$ 26,000 | | |
|124 |Shop supplies |2,400 | | |
|128 |Prepaid insurance |3,900 | | |
|167 |Equipment |96,000 | | |
|168 |Accumulated amortization, equipment | | |$ 8,000 |
|201 |Accounts payable | | |24,000 |
|210 |Wages payable | | |1,000 |
|301 |Mike Yang, capital | | | 95,300 |
| | | | | |
| |Totals |$128,300 | |$128,300 |
Problem 5-5A (30 minutes)
MY AUTOBODY
Income Statement
For Year Ended December 31, 2011
Revenue:
Repair fees earned $155,500
Operating expenses:
Wages expense $107,000
Rent expense 41,600
Amortization expense, equipment 8,000
Office supplies expense 5,200
Utilities expense 3,400
Insurance expense 1,400
Total operating expenses 166,600
Net loss $ 11,100
MY AUTOBODY
Statement of Owner’s Equity
For Year Ended December 31, 2011
Mike Yang, capital, January 1 $136,400
Less: Net loss 11,100
Withdrawals 30,000
Mike Yang, capital, December 31 $95,300
Problem 5-5A (concluded)
MY AUTOBODY
Balance Sheet
December 31, 2011
|Assets | | |
| Current assets: | | |
| Cash |$26,000 | |
| Office supplies |2,400 | |
| Prepaid insurance | 3,900 | |
| Total current assets | |$32,300 |
| Property, plant and equipment: | | |
| Equipment |$96,000 | |
| Less: Accumulated amortization | 8,000 | 88,000 |
|Total assets | |$120,300 |
| | | |
|Liabilities | | |
| Current liabilities: | | |
| Accounts payable |$24,000 | |
| Wages payable | 1,000 | |
| Total current liabilities | |$25,000 |
| | | |
|Owner’s Equity | | |
| Mike Yang, capital | | 95,300 |
|Total liabilities and owner’s equity | |$120,300 |
Analysis component:
As a creditor, I would review the current assets on the balance sheet to determine MY Autobody’s ability to pay current obligations in 2012. At December 31, 2011 MY Autobody has $32,300 in current assets of which $26,000 is cash and accounts payable total $24,000. Therefore, as a creditor, although MY experienced a loss, it appears to have sufficient current assets to meet its current obligations.
Problem 5-6A (25 minutes)
2011 Closing entries:
Dec. 31 Professional Fees Earned 192,000
Rent Earned 26,000
Income Summary 218,000
To close the revenue accounts.
31 Income Summary 142,600
Amortization Expense, Building 20,000
Amortization Expense, Equipment 8,000
Amortization Expense, Franchise 2,000
Wages Expense 62,000
Interest Expense 8,200
Insurance Expense 18,000
Supplies Expense 12,800
Telephone Expense 4,400
Utilities Expense 7,200
To close the expense accounts.
31 Income Summary 75,400
Sig Lloyd, Capital 75,400
To close the Income Summary account.
31 Sig Lloyd, Capital 24,000
Sig Lloyd, Withdrawals 24,000
To close the withdrawals account.
Problem 5-7A (50 minutes) Part 1
LLOYD CONSTRUCTION
Income Statement
For Year Ended December 31, 2011
Revenues:
Professional fees earned $192,000
Rent earned 26,000
Total revenues $218,000
Operating expenses:
Wages expense $62,000
Amortization expense, building 20,000
Insurance expense 18,000
Supplies expense 12,800
Interest expense 8,200
Amortization expense, equipment 8,000
Utilities expense 7,200
Telephone expense 4,400
Amortization expense, franchise 2,000
Total operating expenses 142,600
Net income $ 75,400
LLOYD CONSTRUCTION
Statement of Owner’s Equity
For Year Ended December 31, 2011
Sig Lloyd, capital, January 1 $ 43,800
Add: Investments by owner $100,000
Net income 75,400 175,400
Total $219,200
Less: Withdrawals by owner 24,000
Sig Lloyd, capital, December 31 $ 195,200
Problem 5-7A (continued)
LLOYD CONSTRUCTION
Balance Sheet
December 31, 2011
|Assets | | | |
| Current assets: | | | |
| Cash | |$ 8,000 | |
| Temporary investments | |44,000 | |
| Supplies | | 14,200 | |
| Total current assets | | |$ 66,200 |
| Long-term investments: | | | |
| Notes receivable | | |42,000 |
| Property, plant and equipment: | | | |
| Land | | $90,000 | |
| Building |$260,000 | | |
| Less: Accumulated amortization | 150,000 |110,000 | |
| Equipment |$ 78,000 | | |
| Less: Accumulated amortization | 40,000 | 38,000 | |
| Total property, plant and equipment | | |238,000 |
| Intangible assets: | | | |
| Franchise | | | 28,000 |
| Total assets | | |$374,200 |
| | | | |
|Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable |$ 31,000 | | |
| Interest payable |3,000 | | |
| Unearned professional fees |13,000 | | |
| Current portion of long-term notes payable | 50,000 | | |
| Total current liabilities | |$ 97,000 | |
| Long-term liabilities: | | | |
| Long-term notes payable (less current portion) | | 82,000 | |
| Total liabilities | | |$ 179,000 |
| | | | |
|Owner’s Equity | | | |
| Sig Lloyd, capital | | | 195,200 |
|Total liabilities and owner’s equity | | |$374,200 |
Problem 5-7A (concluded)
Analysis component:
Liabilities must be separated between those that are due within one year of the balance sheet date (current) and those that are due beyond one year of the balance sheet date (long-term) because decision makers must be able to assess whether the business has sufficient current assets to cover its current obligations. If the $50,000 current portion of the $132,000 long-term note was not shown as a current liability on the balance sheet, it would have appeared that Lloyd had sufficient current assets to cover its current liabilities when in fact it does not.
Problem 5-8A (20 minutes)
|2011 |Closing entries: | | |
|March |31 |Revenues |61,350 | |
| | | Income Summary | |61,350 |
| | | To close the revenue account to the income | | |
| | |summary. | | |
| | | | | |
| |31 |Income Summary |49,630 | |
| | | Amortization Expense, Equipment | |700 |
| | | Amortization Expense, Copyright | |350 |
| | | Insurance Expense | |1,950 |
| | | Interest Expense | |330 |
| | | Rent Expense | |7,500 |
| | | Supplies Expense | |1,800 |
| | | Telephone Expense | |2,100 |
| | | Utilities Expense | |900 |
| | | Wages Expense | | 34,000 |
| | | To close expense accounts to the income | | |
| | |summary. | | |
| | | | |
| |31 |Income Summary |11,720 | |
| | | Becky Brenner, Capital | |11,720 |
| | | To close the income summary to capital. | | |
| | | | | |
| |31 |Becky Brenner, Capital |23,500 | |
| | | Becky Brenner, Withdrawals | |23,500 |
| | | To close withdrawals to capital. | | |
Problem 5-9A (40 minutes)
|Brenner Climbing Adventures |
|Income Statement |
|For Year Ended March 31, 2011 |
|Revenues | |$61,350 |
|Operating expenses: | | |
| Wages expense |$34,000 | |
| Rent expense |7,500 | |
| Telephone expense |2,100 | |
| Insurance expense |1,950 | |
| Supplies expense |1,800 | |
| Utilities expense |900 | |
| Amortization expense, equipment | 700 | |
| Amortization expense, copyright | 350 | |
| Interest expense | 330 | |
| Total operating expenses | | 49,630 |
|Net income | |$ 11,720 |
|Brenner Climbing Adventures |
|Statement of Owner’s Equity |
|For Year Ended March 31, 2011 |
|Becky Brenner, capital, April 1 | |$32,200 |
|Add: Net income |$11,720 | |
| Investments by owner | 2,500 | 14,220 |
| Total | |$46,420 |
|Less: Withdrawals for the year | | 23,500 |
|Becky Brenner, capital, March 31 | |$22,920 |
Problem 5-9A (concluded)
|Brenner Climbing Adventures |
|Balance Sheet |
|March 31, 2011 |
|Assets | | | |
| Current assets: | | | |
| Cash | |$ 7,500 | |
| Accounts receivable | |3,350 | |
| Supplies | | 270 | |
| Total current assets | | |$11,120 |
| Long-term investments: | | | |
| Notes receivable | | |10,000 |
| Property, plant and equipment: | | | |
| Equipment | |$20,500 | |
| Less: Accumulated amortization | | 7,000 |$13,500 |
| Intangible assets: | | | |
| Copyright | | | 6,000 |
|Total assets | | |$40,620 |
| | | | |
|Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable |$ 1,200 | | |
| Unearned revenues |11,000 | | |
| Current portion of long-term notes payable | 3,000 | | |
| Total current liabilities | |$15,200 | |
| Long-term liabilities: | | | |
| Long-term notes payable (less current portion) | | 2,500 | |
| Total liabilities | | |$17,700 |
| | | | |
|Owner’s Equity | | | |
| Becky Brenner, capital | | | 22,920 |
|Total liabilities and owner’s equity | | |$40,620 |
Analysis component:
Brenner Climbing Adventures might be tempted to report the notes receivable as a current asset on the March 31, 2011 balance sheet because total current assets would then be greater than total current liabilities giving the misimpression that Brenner is in a position to cover its current obligations.
Problem 5-10A (20 minutes)
1.
|Apex Architectural Designs |
|Income Statement |
|For Year Ended June 30, 2011 |
|Revenues: | | |
| Design fees earned | |$124,000 |
| | | |
|Operating expenses: | | |
| Salaries expense |$64,500 | |
| Supplies expense |2,150 | |
| Amortization expense, office equipment | 1,750 | |
| Telephone expense |1,600 | |
| Amortization expense, office furniture |950 | |
| Utilities expense |750 | |
| Interest expense |720 | |
| Insurance expense | 600 | |
| Total operating expenses | | 73,020 |
|Net income | |$ 50,980 |
| |
| |
|2. $86,000 + $50,980 – $35,000 = $101,980 |
| |
OR
| |NOEL APEX, CAPITAL | |
| | |86,000 |(BEG. BAL.) |
|(WITH.) |35,000 |50,980 |(NET INCOME) |
| | |101,980 |(END. BAL.) |
PROBLEM 5-11A (40 MINUTES)
|IMPRESSIONS DANCE SCHOOL |
|Income Statement |
|For Year Ended September 30, 2011 |
|Revenues: | | |
| Fees earned | |$154,680 |
| Rent earned | | 18,000 |
| Total revenues | |$172,680 |
|Operating expenses: | | |
| Salaries expense |$174,000 | |
| Gas, oil, and repairs expense |29,600 | |
| Amortization expense, building |29,600 | |
| Amortization expense, automobiles | 6,560 | |
| Total operating expenses | | 239,760 |
|Net loss | |$ 67,080 |
|IMPRESSIONS DANCE SCHOOL |
|Statement of Owner’s Equity |
|For Year Ended September 30, 2011 |
|Alisha Bjorn, capital, October 1 | |$168,960 |
|Less: Net loss |$67,080 | |
| Withdrawals | 10,000 | 77,080 |
|Alisha Bjorn, capital, September 30 | |$91,880 |
Problem 5-11A (continued)
2.
Impressions Dance School
Balance Sheet
September 30, 2011
|Assets | | | |
| Current assets: | | | |
| Cash | |$ 10,120 | |
| Accounts receivable | |6,580 | |
| Store supplies | | 2,800 | |
| Total current assets | | |$ 19,500 |
| | | | |
| Long-term investments: | | | |
| Land for future expansion | | |50,000 |
| | | | |
| Property, plant and equipment: | | | |
| Land | | $28,000 | |
| Building |$240,000 | | |
| Less: Accumulated amortization | 144,000 |96,000 | |
| Automobiles |$ 65,600 | | |
| Less: Accumulated amortization | 39,360 |26,240 | |
| Total property, plant and equipment | | |150,240 |
| Intangible assets: | | | |
| Patents | |$ 8,600 | |
| Copyright | | 4,360 | |
| Total intangible assets | | | 12,960 |
| Total assets | | |$232,700 |
| | | | |
| Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable |$ 27,320 | | |
| Unearned fees | 23,500 | | |
| Total current liabilities | |$50,820 | |
| Long-term liabilities: | | | |
| Note payable, due in 18 months | | 90,000 | |
| Total liabilities | | |$140,820 |
| | | | |
| Owner’s Equity | | | |
| Alisha Bjorn, capital | | | 91,880 |
| Total liabilities and owner’s equity | | |$232,700 |
Problem 5-11A (concluded)
Analysis component:
The business experienced a loss for the year ended September 30, 2011, has current assets that are less than current liabilities at September 30, 2011, and, in the longer term, there is a note payable that is due 18 months from September 30, 2011. The business does not have the ability to meet current obligations let alone a new one that would be created by the purchase of a new car. However, if Alisha were to sell the Land for future expansion, a long-term investment, she may be able to meet current liabilities and consider buying a new car. But then there is the issue of the loss: will this be ongoing? If so, the sale of the land might provide only temporary relief and the purchase of the car would complicate things for the business in the long-term.
Problem 5-12A (30 minutes)
Part 1
Wyett North, capital = $499,525 – $28,000 + $125,155 = $596,680
OR
| |WYETT NORTH, CAPITAL | |
| | |499,525 | |(BEG. BAL.) |
|(WITH.) |28,000 |125,155 |* |(NET INCOME) |
| | |596,680 | |(END. BAL.) |
| | | | |
*Net income = Revenues – Expenses
= 414,200 – (27,600 + 25,000 + 3,500 + 22,500 + 41,000 + 126,625 + 6,100 + 36,720)
= 414,200 – 289,045
= 125,155
Problem 5-12A (concluded) Part 2
North Country Rentals
Balance Sheet
March 31, 2011
|Assets | | | |
| Current assets: | | | |
| Cash | |$ 17,000 | |
| Rent receivable | |68,000 | |
| Office supplies | |700 | |
| Prepaid advertising | | 400 | |
| Current portion of notes receivable | | 40,000 | |
| Total current assets | | |$ 126,100 |
| Long-term investments: | | | |
| Notes receivable, less $40,000 current portion | | |103,000 |
| Property, plant and equipment: | | | |
| Land | | $110,000 | |
| Building |$625,000 | | |
| Less: Accumulated amortization | 25,000 |600,000 | |
| Furniture |$ 46,000 | | |
| Less: Accumulated amortization | 3,500 | 42,500 | |
| Total property, plant and equipment | | |752,500 |
| Intangible assets: | | | |
| Patent | | | 3,000 |
|Total assets | | |$984,600 |
| | | | |
|Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable |$ 8,420 | | |
| Interest payable |1,875 | | |
| Salaries payable |2,625 | | |
| Current portion of long-term notes payable | 75,000 | | |
| Total current liabilities | |$87,920 | |
| Long-term liabilities: | | | |
| Long-term notes payable (less current portion) | | 300,000 | |
| Total liabilities | | |$387,920 |
| | | | |
|Owner’s Equity | | | |
| Wyett North, capital | | | 596,680 |
|Total liabilities and owner’s equity | | |$984,600 |
| | | | |
Problem 5-13A (90 minutes)
NOTE: The general ledger accounts are shown at the end of the solution (in both balance column and T-account format) as they would appear after all entries have been posted.
Part 2
Transactions for June:
| | |General Journal | | |Page G1 |
|Date | |Account Titles and Explanations |PR |Debit |Credit |
|2011 | | | | |
|June |1 |Cash |101 |40,000 | |
| | |Computer Equipment |167 |60,000 | |
| | | Sam Near, Capital |301 | |100,000 |
| | | To record the owner’s initial investment. | | | |
| | | | | | |
| |2 |Rent Expense |640 |3,200 | |
| | | Cash |101 | |3,200 |
| | | Paid one month of rent. | | | |
| | | | | | |
| |3 |Office Supplies |124 |2,400 | |
| | | Cash |101 | |2,400 |
| | | Acquired office supplies. | | | |
| | | | | | |
| |10 |Prepaid Insurance |128 |7,200 | |
| | | Cash |101 | |7,200 |
| | | Paid one year’s premium in advance. | | | |
| | | | | | |
| |14 |Salaries Expense |622 |3,600 | |
| | | Cash |101 | |3,600 |
| | | Paid two weeks salary. | | | |
| | | | | | |
| |24 |Cash |101 |13,600 | |
| | | Commissions Earned |405 | |13,600 |
| | | Collected commissions from airlines. | | | |
| | | | | | |
| |28 |Salaries Expense |622 |3,600 | |
| | | Cash |101 | |3,600 |
| | | Paid two weeks salary. | | | |
| | | | | | |
| |29 |Telephone Expense |688 |3,500 | |
| | | Cash |101 | |3,500 |
| | | Paid the telephone bill. | | | |
| | | | | | |
| |30 |Repairs Expense |684 |700 | |
| | | Cash |101 | |700 |
| | | Repaired the computer. | | | |
| | | | | | |
| |30 |Sam Near, Withdrawals |302 |2,850 | |
| | | Cash |101 | |2,850 |
| | | Owner’s withdrawal of cash. | | | |
Problem 5-13A (continued) Part 3
| | |General Journal | | |Page G2 |
|Date | |Account Titles and Explanations |PR |Debit |Credit |
|2011 |Adjusting entries: | | | |
|a) |June |30 |Insurance Expense |637 |400 | |
| | | | Prepaid Insurance |128 | |400 |
| | | | To record expired insurance (2/3 × $600 per month). | | |
| | | | | | | |
|b) | |30 |Office Supplies Expense |650 |800 | |
| | | | Office Supplies |124 | |800 |
| | | | To record the cost of consumed supplies | | | |
| | | | ($2,400 – $1,600). | | | |
| | | | | | | |
|c) | |30 |Amortization Expense, Computer Equip. |612 |1,650 | |
| | | | Accumulated Amortization, Computer Equip. |168 | |1,650 |
| | | | To record amortization. | | | |
| | | | | | | |
|d) | |30 |Salaries Expense |622 |320 | |
| | | | Salaries Payable |209 | |320 |
| | | | To record accrued salaries. | | | |
| | | | | | | |
|e) | |30 |Accounts Receivable |106 |3,500 | |
| | | | Commissions Earned |405 | |3,500 |
| | | | To record accrued commissions. | | | |
Problem 5-13A (continued) Part 4
TOURS-FOR-LESS
Income Statement
For Month Ended June 30, 2011
|Revenues: | | |
| Commissions earned | |$17,100 |
|Operating expenses: | | |
| Salaries expense |$7,520 | |
| Telephone expense | 3,500 | |
| Rent expense |3,200 | |
| Amortization expense, computer equipment | 1,650 | |
| Office supplies expense |800 | |
| Repairs expense |700 | |
| Insurance expense | 400 | |
| Total operating expenses | | 17,770 |
|Net loss | |$ 670 |
TOURS-FOR-LESS
Statement of Owner’s Equity
For Month Ended June 30, 2011
|Sam Near, capital, June 1 | |$ 0 |
|Add: Investment by owner | |100,000 |
| Total | |$100,000 |
|Less: Withdrawals by owner |$2,850 | |
| Net loss | 670 | 3,520 |
|Sam Near, capital, June 30 | |$96,480 |
Problem 5-13A (continued) Part 4
TOURS-FOR-LESS
Balance Sheet
June 30, 2011
|Assets | | |
| Current assets: | | |
| Cash |$26,550 | |
| Accounts receivable |3,500 | |
| Office supplies |1,600 | |
| Prepaid insurance | 6,800 | |
| Total current assets | |$38,450 |
| Property, plant and equipment: | | |
| Computer equipment |$60,000 | |
| Less: Accumulated amortization | 1,650 | 58,350 |
|Total assets | |$96,800 |
| | | |
|Liabilities | | |
| Current liabilities | | |
| Salaries payable | |$ 320 |
| | | |
|Owner’s Equity | | |
| Sam Near, capital | | 96,480 |
|Total liabilities and owner’s equity | |$96,800 |
Problem 5-13A (continued) Part 5
| | |General Journal | | |Page G3 |
|Date | |Account Titles and Explanation |PR |Debit |Credit |
|2011 |Closing entries: | | | |
|June |30 |Commissions Earned |405 |17,100 | |
| | | Income Summary |901 | |17,100 |
| | | To close the revenue account to the | | | |
| | | Income Summary account. | | | |
| | | | | | |
| |30 |Income Summary |901 |17,770 | |
| | | Amortization Expense, Computer Equipment |612 | |1,650 |
| | | Salaries Expense |622 | |7,520 |
| | | Insurance Expense |637 | |400 |
| | | Rent Expense |640 | |3,200 |
| | | Office Supplies Expense |650 | |800 |
| | | Repairs Expense |684 | |700 |
| | | Telephone Expense |688 | |3,500 |
| | | To close the expenses to the income summary. | | | |
| | | | | | |
| |30 |Sam Near, Capital |301 |670 | |
| | | Income Summary |901 | |670 |
| | | To close the Income Summary to capital. | | | |
| | | | | | |
| |30 |Sam Near, Capital |301 |2,850 | |
| | | Sam Near, Withdrawals |302 | |2,850 |
| | | To close withdrawals to capital. | | | |
Problem 5-13A (continued) Part 6
TOURS-FOR-LESS
Post-Closing Trial Balance
June 30, 2011
|Acct. No. |Account | | |
|101 |Cash |$26,550 | |
|106 |Accounts receivable |3,500 | |
|124 |Office supplies |1,600 | |
|128 |Prepaid insurance |6,800 | |
|167 |Computer equipment |60,000 | |
|168 |Accumulated amortization, computer equipment | |$ 1,650 |
|209 |Salaries payable | |320 |
|301 |Sam Near, capital | |96,480 |
| |Totals |$98,450 |$98,450 |
Parts 1, 2, 3, 5
Ledger as of June 30 (using the balance column format):
|Cash |Acct. No. 101 |
|Date |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |1 | |G1 |40,000 | |40,000 |
| |2 | |G1 | |3,200 |36,800 |
| |3 | |G1 | |2,400 |34,400 |
| |10 | |G1 | |7,200 |27,200 |
| |14 | |G1 | |3,600 |23,600 |
| |24 | |G1 |13,600 | |37,200 |
| |28 | |G1 | |3,600 |33,600 |
| |29 | |G1 | |3,500 |30,100 |
| |30 | |G1 | |700 |29,400 |
| |30 | |G1 | |2,850 |26,550 |
|Accounts Receivable |Acct. No. 106 |
|Date |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |30 | |G2 |3,500 | |3,500 |
|Office Supplies |Acct. No. 124 |
|Date |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |3 | |G1 |2,400 | |2,400 |
| |30 | |G2 | |800 |1,600 |
Problem 5-13A (continued) Parts 1, 2, 3, 5
|Prepaid Insurance |Acct. No. 128 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |10 | |G1 |7,200 | |7,200 |
| |30 | |G2 | |400 |6,800 |
|Computer Equipment |Acct. No. 167 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |1 | |G1 |60,000 | |60,000 |
|Accumulated Amortization, Computer Equipment |Acct. No. 168 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |30 | |G2 | |1,650 |1,650 |
|Salaries Payable |Acct. No. 209 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |30 | |G2 | |320 |320 |
|Sam Near, Capital |Acct. No. 301 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |1 | |G1 | |100,000 |100,000 |
| |30 | |G3 |670 | |99,330 |
| |30 | |G3 |2,850 | |96,480 |
|Sam Near, Withdrawals |Acct. No. 302 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |30 | |G1 |2,850 | |2,850 |
| |30 | |G3 | |2,850 |0 |
|Commissions Earned |Acct. No. 405 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |24 | |G1 | |13,600 |13,600 |
| |30 | |G2 | |3,500 |17,100 |
| |30 | |G3 |17,100 | |0 |
Problem 5-13A (continued) Parts 1, 2, 3, 5
|Amortization Expense, Computer Equipment |Acct. No. 612 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |30 | |G2 |1,650 | |1,650 |
| |30 | |G3 | |1,650 |0 |
|Salaries Expense |Acct. No. 622 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |14 | |G1 |3,600 | |3,600 |
| |28 | |G1 |3,600 | |7,200 |
| |30 | |G2 |320 | |7,520 |
| |30 | |G3 | |7,520 |0 |
|Insurance Expense |Acct. No. 637 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |30 | |G2 |400 | |400 |
| |30 | |G3 | |400 |0 |
|Rent Expense |Acct. No. 640 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |2 | |G1 |3,200 | |3,200 |
| |30 | |G3 | |3,200 |0 |
|Office Supplies Expense |Acct. No. 650 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |30 | |G2 |800 | |800 |
| |30 | |G3 | |800 |0 |
|Repairs Expense |Acct. No. 684 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |30 | |G1 |700 | |700 |
| |30 | |G3 | |700 |0 |
|Telephone Expense |Acct. No. 688 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |29 | |G1 |3,500 | |3,500 |
| |30 | |G3 | |3,500 |0 |
Problem 5-13A (continued) Parts 1, 2, 3, 5
|Income Summary |Acct. No. 901 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|June |30 | |G3 | |17,100 |17,100 |
| |30 | |G3 |17,770 | |670 |
| |30 | |G3 | |670 |0 |
Parts 1, 2, 3, 5
Ledger as of June 30 (using the T-account format):
|Cash |101 | |Accounts Receivable |106 | |Office Supplies |124 |
|Jun 1 |40,000 |3,2|Jun 2 | |Jun|3,500 | |
| | |00 | | |30 | | |
|Jun 10 |7,200 |400|Jun 30 | |Jun|60,000 | |
| | | | | |1 | | |
| | |320|Jun 30 | |Jun|670 |100,000 |
| | | | | |30 | | |
|Jun 30 |17,100 |13,|Jun 24 | |Jun|1,650 |1,650 |
| | |600| | |30 | | |
|Jun 30 |400 |400|Jun 30 | |Jun|3,200 |3,200 |
| | | | | |2 | | |
|Jun |700 |700 |Jun 30 | |
|30 | | | | |
|a) |Dec. |31 |Salaries Expense |1,600 | |
| | | | Salaries Payable | |1,600 |
| | | | To record accrued salaries. | | |
| | | | | | |
|b) | |31 |Supplies Expense |5,400 | |
| | | | Supplies | |5,400 |
| | | | To record cost of consumed supplies; | | |
| | | |$9,000 - $3,600 on hand = $5,400 used. | | |
| | | | | | |
|c) | |31 |Interest Expense |2,500 | |
| | | | Interest Payable | |2,500 |
| | | | To record accrued interest expense. | | |
| | | | | | |
|d) | |31 |Unearned Membership Fees |16,000 | |
| | | | Membership Fees Earned | |16,000 |
| | | | To record earned fees; | | |
| | | |$48,000 - $32,000 still unearned = $16,000 earned. | | |
| | | | | | |
|e) | |31 |Accounts Receivable |24,000 | |
| | | | Membership Fees Earned | |24,000 |
| | | | To record accrued fees revenues. | | |
| | | | | | |
|f) | |31 |Amortization Expense, Equipment |30,000 | |
| | | | Accumulated Amortization, Equipment | |30,000 |
| | | | To record amortization. | | |
*Problem 5-14A (concluded)
Part 2
| |2012 |Reversing entries: | | |
|a) |Jan. |1 |Salaries Payable |1,600 | |
| | | | Salaries Expense | |1,600 |
| | | | To reverse accrued salaries. | | |
| | | | | | |
|c) | |1 |Interest Payable |2,500 | |
| | | | Interest Expense | |2,500 |
| | | | To reverse accrued interest expense. | | |
| | | | | | |
|e) | |1 |Membership Fees Earned |24,000 | |
| | | | Accounts Receivable | |24,000 |
| | | | To reverse accrued revenues. | | |
Part 3
|2012 | | | |
|Jan. |4 |Salaries Expense |2,400 | |
| | | Cash | |2,400 |
| | | To record payroll. | | |
| | | | | |
| |15 |Interest Expense |3,000 | |
| | | Cash | |3,000 |
| | | To record interest payment. | | |
| | | | | |
| |21 |Cash ($24,000 + $14,000) |38,000 | |
| | | Membership Fees Earned | |38,000 |
| | | To record collection of membership fees. | | |
ALTERNATE PROBLEMS
PROBLEM 5-1B (30 MINUTES)
Parts 1, 2 and 3
Landmark Tours
Work Sheet
For Month Ended July 31, 2011
| |Account |Unadjusted Trial Balance | |Adjusted Trial Balance | |Balance Sheet & Statement of|
| | | |Adjustments | |Income Statement | |
|Account | | | | | |Owner’s Equity |
|Number | | | | | | |
| | |Debit |Credit |Debit |Credit |
| |Debit |Credit |Debit |
| | | |39,400 |(Beg. bal.) |
|$39,400 – $700 + $255 = $38,955 OR |(With.) |700 | | |
| | | |255 |(Net income) |
| | | |38,955 |(End. bal.) |
Analysis component:
A net income causes the equity in the accounting equation to increase. To offset the increase in equity, liabilities would decrease and/or assets would increase.
Problem 5-3B (90 minutes) Part 1
BOOMER DEMOLITION COMPANY
Work Sheet
For Year Ended June 30, 2011
Balance Sheet
Adjusted and
Unadjusted Trial Income Statement of
Trial Balance Adjustments Balance Statement Owner’s Equity
No. Title Debit Credit Debit Credit. Debit Credit Debit Credit Debit Credit
101 Cash 9,000 9,000 9,000
126 Supplies 18,000 (a) 9,900 8,100 8,100
128 Prepaid insurance 14,600 (b) 11,500 3,100 3,100
167 Equipment 140,000 140,000 140,000
168 Accumulated amort.,
equipment 10,000 (c) 18,000 28,000 28,000
201 Accounts payable 16,000 (d) 700 16,700 16,700
203 Interest payable (f) 200 200 200
210 Wages payable (e) 2,200 2,200 2,200
251 Long-term notes payable 90,000 90,000 90,000
301 Rusty Boomer, capital 66,900 66,900 66,900
302 Rusty Boomer, withdrawals 4,000 4,000 4,000
401 Demolition fees earned 137,000 137,000 137,000
612 Amortization expense,
equipment (c) 18,000 18,000 18,000
623 Wages expense 51,400 (e) 2,200 53,600 53,600
633 Interest expense 2,200 (f) 200 2,400 2,400
637 Insurance expense (b) 11,500 11,500 11,500
640 Rent expense 48,800 48,800 48,800
652 Supplies expense (a) 9,900 9,900 9,900
683 Business tax expense 8,400 8,400 8,400
684 Repairs expense 6,700 6,700 6,700
690 Utilities expense 16,800 (d) 700 17,500 17,500
Totals 319,900 319,900 42,500 42,500 341,000 341,000 176,800 137,000 164,200 204,000
Net loss 39,800 39,800
Totals 176,800 176,800 204,000 204,000
Problem 5-3B (continued) Part 2
| |2011 |Adjusting entries: | | |
|(a) |June |30 |Supplies Expense |9,900 | |
| | | | Supplies | |9,900 |
| | | | To record consumption of supplies. | | |
| | | | | | |
|(b) | |30 |Insurance Expense |11,500 | |
| | | | Prepaid Insurance | |11,500 |
| | | | To record consumption of insurance coverage. | | |
| | | | | | |
|(c) | |30 |Amortization Expense, Equipment |18,000 | |
| | | | Accumulated Amortization, Equipment | |18,000 |
| | | | To record amortization. | | |
| | | | | | |
|(d) | |30 |Utilities Expense |700 | |
| | | | Accounts Payable | |700 |
| | | | To record accrued utilities costs. | | |
| | | | | | |
|(e) | |30 |Wages Expense |2,200 | |
| | | | Wages Payable | |2,200 |
| | | | To record accrued wages. | | |
| | | | | | |
|(f) | |30 |Interest Expense |200 | |
| | | | Interest Payable | |200 |
| | | | To record accrued interest expense. | | |
Problem 5-3B (continued) Part 2
2011 Closing entries:
June 30 Demolition Fees Earned 137,000
Income Summary 137,000
To close the revenue account.
30 Income Summary 176,800
Amortization Expense, Equipment 18,000
Wages Expense 53,600
Interest Expense 2,400
Insurance Expense 11,500
Rent Expense 48,800
Supplies Expense 9,900
Business Tax Expense 8,400
Repairs Expense 6,700
Utilities Expense 17,500
To close the expense accounts.
30 Rusty Boomer, Capital 39,800
Income Summary 39,800
To close the Income Summary account.
30 Rusty Boomer, Capital 4,000
Rusty Boomer, Withdrawals 4,000
To close the withdrawals account.
Part 3
BOOMER Demolition Company
Income Statement
For Year Ended June 30, 2011
Revenue:
Demolition fees earned $137,000
Operating expenses:
Wages expense $53,600
Rent expense 48,800
Amortization expense, equipment 18,000
Utilities expense 17,500
Insurance expense 11,500
Supplies expense 9,900
Business tax expense 8,400
Repairs expense 6,700
Interest expense 2,400
Total operating expenses 176,800
Net loss $ 39,800
Problem 5-3B (continued) Part 3
BOOMER DEMOLITION COMPANY
Statement of Owner’s Equity
For Year Ended June 30, 2011
Rusty Boomer, capital, July 1 $ 36,900
Add: Investments by owner 30,000
Total $ 66,900
Less: Withdrawals by owner $ 4,000
Net loss 39,800 43,800
Rusty Boomer, capital, June 30 $ 23,100
BOOMER Demolition CoMPANY
Balance Sheet
June 30, 2011
|Assets | | | |
| Current assets: | | | |
| Cash | |$ 9,000 | |
| Supplies | |8,100 | |
| Prepaid insurance | | 3,100 | |
| Total current assets | | |$ 20,200 |
| Property, plant and equipment: | | | |
| Equipment | |$140,000 | |
| Less: Accumulated amortization, equipment | | 28,000 | 112,000 |
|Total assets | | |$132,200 |
| | | | |
|Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable |$16,700 | | |
| Interest payable |200 | | |
| Wages payable |2,200 | | |
| Current portion of long-term note payable | 4,000 | | |
| Total current liabilities | |$ 23,100 | |
| Long-term liabilities: | | | |
| Long-term note payable (less current portion) | | 86,000 | |
| Total liabilities | | |$109,100 |
| | | | |
|Owner’s Equity | | | |
| Rusty Boomer, capital | | | 23,100 |
|Total liabilities and owner’s equity | | |$132,200 |
Problem 5-3B (concluded) Analysis component:
(a) This error enters the wrong amount in the correct accounts. The ending balance of the Prepaid Insurance account should be $3,100, but the entry reduces that account by $3,100. Because its unadjusted balance was $14,600, the adjusted balance will be $11,500 (= $14,600 – $3,100), which is $8,400 greater than the correct $3,100 balance. In addition, the Insurance Expense account balance will be only $3,100 instead of $11,500.
The adjusted trial balance columns in the work sheet will be equal, but the error will cause the work sheet’s net income to be overstated by $8,400 because of the understatement of the expense. In addition, the balance sheet columns will include the overstated balance for the Prepaid Insurance account. The Rusty Boomer, Capital account will also be overstated.
This error is not likely to be detected as a result of completing the work sheet. If it is not, the income statement will overstate net income by $8,400, and the balance sheet will overstate the cost of the unexpired insurance and owner’s equity by $8,400.
(b) This error inserts a debit in the balance sheet columns instead of the income statement columns. In the unlikely event that this error is not immediately detected, it will cause the work sheet measure of net income to be overstated because the total debits will incorrectly omit the $6,700 expense for repairs.
In all likelihood, the error will be discovered in the process of drafting the balance sheet because the accountant will realize that repairs expense is not an asset. If it is detected and corrected, the financial statements will be unaffected. However, if the repairs expense is erroneously included on the balance sheet, the reported net income will be overstated by $6,700. On the balance sheet, a nonexistent asset will be reported for the repairs expense and owner’s equity will be overstated by $6,700.
Problem 5-4B (25 minutes)
Part 1
2011 Closing entries:
Dec. 31 Sewing Fees Earned 62,000
Income Summary 62,000
To close the revenue.
31 Income Summary 38,060
Amortization Expense, Equipment 3,000
Wages Expense 28,400
Insurance Expense 1,100
Rent Expense 2,400
Store Supplies Expense 1,300
Utilities Expense 1,860
To close the expense accounts.
31 Income Summary 23,940
Anne Taylor, Capital 23,940
To close the Income Summary account.
31 Anne Taylor, Capital 16,000
Anne Taylor, Withdrawals 16,000
To close the withdrawals account.
Part 2
|Anne’s Tailoring Services |
|Post-Closing Trial Balance |
|December 31, 2011 |
|Acct. |Account |Debit |Credit |
|No. | | | |
|101 |Cash |$13,450 | |
|125 |Store supplies |4,140 | |
|128 |Prepaid insurance |2,200 | |
|167 |Equipment |33,000 | |
|168 |Accumulated amortization, equipment | |$ 9,000 |
|201 |Accounts payable | |21,000 |
|210 |Wages payable | |3,200 |
|301 |Anne Taylor, capital* | | 19,590 |
| |Totals |$52,790 |$52,790 |
|*Beginning capital $11,650 + Net income $23,940 – Withdrawals $16,000 = |
|Ending capital $19,590 |
Problem 5-5B (90 minutes) Part 1
ANNE’S TAILORING SERVICES
INCOME STATEMENT
FOR YEAR ENDED DECEMBER 31, 2011
Revenue:
Sewing fees earned $62,000
Operating expenses:
Wages expense $28,400
Amortization expense, equipment 3,000
Rent expense 2,400
Utilities expense 1,860
Store supplies expense 1,300
Insurance expense 1,100
Total operating expenses 38,060
Net income $23,940
ANNE’S TAILORING SERVICES
Statement of Owner’s Equity
For Year Ended December 31, 2011
Anne Taylor, capital, January 1 $11,650
Add: Net income 23,940
Total $35,590
Less: Withdrawals 16,000
Anne Taylor, capital, December 31 $19,590
Problem 5-5B (concluded)
ANNE’S TAILORING SERVICES
Balance Sheet
December 31, 2011
|Assets | | | |
|Current assets: | | | |
| Cash | |$13,450 | |
| Store supplies | |4,140 | |
| Prepaid insurance | | 2,200 | |
| Total current assets | | |$19,790 |
|Property, plant and equipment: | | | |
| Equipment | |$33,000 | |
| Less: Accumulated amortization | | 9,000 | 24,000 |
|Total assets | | |$43,790 |
| | | | |
|Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable | |$ 21,000 | |
| Wages payable | | 3,200 | |
| Total current liabilities | | |$ 24,200 |
| | | | |
|Owner’s Equity | | | |
| Anne Taylor, capital | | | 19,590 |
|Total liabilities and owner’s equity | | |$43,790 |
Analysis component:
Net income is not a guarantee that a business can meet its current obligations. As a creditor, I would review the current assets on the balance sheet to determine Anne’s ability to pay current obligations during the year 2012. At December 31, 2011 Anne’s Tailoring had $19,790 in current assets and $24,200 in current liabilities. Therefore, as a creditor, I would be concerned that current liabilities exceed current assets indicating that there are insufficient current assets to meet current obligations.
Problem 5-6B (25 minutes)
|2011 |Closing entries: | | |
|Dec. 31 |Photography Fees Earned |47,000 | |
| |Dividends Earned |500 | |
| | Income Summary | |47,500 |
| | To close the revenue account. | | |
| | | | |
|31 |Income Summary |26,266 | |
| | Amortization Expense, Building | |2,000 |
| | Amortization Expense, Equipment | |1,000 |
| | Amortization Expense, franchise | |500 |
| | Wages Expense | |17,000 |
| | Interest Expense | |1,200 |
| | Insurance Expense | |1,425 |
| | Supplies Expense | |900 |
| | Telephone Expense | |421 |
| | Utilities Expense | |1,820 |
| | To close expense accounts. | | |
| | | | |
|31 |Income Summary |21,234 | |
| | Bea Jones, Capital | |21,234 |
| | To close the income summary to capital. | | |
| | | | |
|31 |Bea Jones, Capital |6,000 | |
| | Bea Jones, Withdrawals | |6,000 |
| | To close withdrawals to capital. | | |
Problem 5-7B (50 minutes)
BEA’S PHOTO STUDIO
Income Statement
For Year Ended December 31, 2011
Revenues:
Photography fees earned $47,000
Dividends earned 500
Total revenues $47,500
Operating expenses:
Wages expense $17,000
Amortization expense, building 2,000
Utilities expense 1,820
Insurance expense 1,425
Interest expense 1,200
Amortization expense, equipment 1,000
Supplies expense 900
Amortization expense, franchise 500
Telephone expense 421
Total operating expenses 26,266
Net income $21,234
BEA’S PHOTO STUDIO
Statement of Owner’s Equity
For Year Ended December 31, 2011
Bea Jones, capital, January 1 $67,316
Add: Investments by owner $ 20,000
Net income 21,234 41,234
Total $108,550
Less: Withdrawals 6,000
Bea Jones, capital, December 31 $102,550
Problem 5-7B (concluded)
BEA’S PHOTO STUDIO
Balance Sheet
December 31, 2011
Assets
Current assets:
Cash $ 6,400
Temporary investments 10,200
Supplies 3,600
Total current assets $20,200
Long-term investments:
Notes receivable 35,000
Property, plant and equipment:
Land $ 28,500
Building $60,000
Less: Accumulated amortization 29,000 31,000
Equipment $18,000
Less: Accumulated amortization 3,000 15,000
Total property, plant and equipment 74,500
Intangible assets:
Franchise 8,000
Total assets $137,700
Liabilities
Current liabilities:
Accounts payable $ 2,500
Unearned professional fees 650
Current portion of long-term notes payable 26,400
Total current liabilities $ 29,550
Long-term liabilities:
Long-term notes payable (less current portion) 5,600
Total liabilities $35,150
Owner’s Equity
Bea Jones, capital 102,550
Total liabilities and owner’s equity $137,700
Problem 5-8B (20 minutes)
|2011 |Closing entries: | | |
|Dec. |31 |Consulting Fees Earned |97,000 | |
| |Dividends Earned |2,300 | |
| | Income Summary | |99,300 |
| | To close the revenue accounts. | | |
| | | | |
|31 |Income Summary |108,310 | |
| | Amortization Expense, Equipment | |2,000 |
| | Amortization Expense, Office Furniture | |900 |
| | Amortization Expense, Copyright | |500 |
| | Insurance Expense | |1,200 |
| | Interest Expense | |720 |
| | Supplies Expense | |4,300 |
| | Telephone Expense | |940 |
| | | Utilities Expense | |21,750 |
| | Wages Expense | |76,000 |
| | To close expense accounts. | | |
| | | | |
| |31 |Abby Dehara, Capital |9,010 | |
| | Income Summary | |9,010 |
| | To close the income summary to capital. | | |
| | | | |
|31 |Abby Dehara, Capital |8,000 | |
| | Abby Dehara, Withdrawals | |8,000 |
| | To close withdrawals to capital. | | |
Problem 5-9B (40 minutes)
|Wellness Consulting Services |
|Income Statement |
|For Year Ended December 31, 2011 |
|Revenues: | | |
| Consulting fees earned |$97,000 | |
| Dividends earned | 2,300 | |
| Total revenues | |$ 99,300 |
|Operating expenses: | | |
| Wages expense |$76,000 | |
| Utilities expense |21,750 | |
| Supplies expense |4,300 | |
| Amortization expense, equipment | 2,000 | |
| Insurance expense |1,200 | |
| Telephone expense |940 | |
| Amortization expense, office furniture |900 | |
| Interest expense |720 | |
| Amortization expense, copyright | 500 | |
| Total operating expenses | |108,310 |
|Net loss | |$ 9,010 |
|Wellness Consulting Services |
|Statement of Owner’s Equity |
|For Year Ended December 31, 2011 |
|Abby Dehara, capital, April 1 | |$61,360 |
|Less: Withdrawals by owner |$8,000 | |
| Net loss | 9,010 | 17,010 |
|Abby Dehara, capital, March 31 | |$44,350 |
Problem 5-9B (concluded)
|Wellness Consulting Services |
|Balance Sheet |
|December 31, 2011 |
|Assets | | | |
| Current assets: | | | |
| Cash | |$ 3,500 | |
| Temporary investments | |14,000 | |
| Supplies | | 1,500 | |
| Current portion of notes receivable | | 3,000 | |
| Total current assets | | |$22,000 |
| Long-term investments: | | | |
| Notes receivable (less $3,000 current portion) | | |7,000 |
| Property, plant and equipment: | | | |
| Equipment |$32,000 | | |
| Less: Accumulated amortization | 17,000 |$15,000 | |
| Office furniture |10,200 | | |
| Less: Accumulated amortization | 6,900 | 3,300 | |
| Total property, plant and equipment | | |18,300 |
| Intangible assets: | | | |
| Copyright | | | 7,000 |
|Total assets | | |$54,300 |
| | | | |
|Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable |$ 1,200 | | |
| Unearned professional fees |750 | | |
| Current portion of long-term notes payable | 5,000 | | |
| Total current liabilities | |$ 6,950 | |
| Long-term liabilities: | | | |
| Long-term notes payable (less current portion) | | 3,000 | |
| Total liabilities | | |$ 9,950 |
| | | | |
|Owner’s Equity | | | |
| Abby Dehara, capital | | | 44,350 |
|Total liabilities and owner’s equity | | |$54,300 |
Analysis component:
The business experienced a decrease in equity during 2011 of $17,010 which will have caused assets to decrease and/or liabilities to increase by a net amount of $17,010.
Problem 5-10B (20 minutes)
1.
|Enviro Gardening Services |
|Income Statement |
|For Year Ended October 31, 2011 |
|Revenues: | | |
| Service revenue | |$74,000 |
|Operating expenses: | | |
| Wages expense |$56,000 | |
| Supplies expense |12,400 | |
| Amortization expense, vehicles |5,300 | |
| Amortization expense, gardening equipment | 4,800 | |
| Fuel expense |4,600 | |
| Insurance expense |3,600 | |
| Utilities expense |900 | |
| Telephone expense |850 | |
| Interest expense | 680 | |
| Total operating expenses | | 89,130 |
|Net loss | |$15,130 |
| | |Grant Craig, Capital | |
| | | |38,000 |(Beg. bal.) |
|2. $38,000 – $15,130 – $5,000 = $17,870 OR |(Net loss) |15,130 | | |
| |(With.) |5,000 | | |
| | | |17,870 |(End. bal.) |
Problem 5-11B (50 minutes)
|TelsCo Drill Servicing |
|Income Statement |
|For Year Ended August 31, 2011 |
|Revenues: | | |
| Drill servicing revenue |$106,000 | |
| Interest earned | 1,300 | |
| Total revenues | | $107,300 |
|Operating expenses: | | |
| Wages expense |$ 71,000 | |
| Insurance expense |8,340 | |
| Telephone expense |1,400 | |
| Amortization expense, furniture |1,030 | |
| Utilities expense | 230 | |
| Total operating expenses | | 82,000 |
|Net income | |$ 25,300 |
|TelsCo Drill Servicing |
|Statement of Owner’s Equity |
|For Year Ended August 31, 2011 |
|Angela Telsco, capital, September 1 | |$24,210 |
|Add: Owner investments |$25,000 | |
| Net income |25,300 |50,300 |
| Total | |$74,510 |
|Less: Withdrawals by owner | |17,000 |
|Angela Telsco, capital, August 31, 2011 | |$57,510 |
Problem 5-11B (concluded)
TelsCo Drill Servicing
Balance Sheet
August 31, 2011
|Assets | | | |
| Current assets: | | | |
| Cash | |$5,000 | |
| Accounts receivable | |18,000 | |
| Interest receivable | |140 | |
| Office supplies | | 850 | |
| Total current assets | | |$23,990 |
| Long-term investments: | | | |
| Investment in Nortel shares | | |29,000 |
| Property, plant and equipment: | | | |
| Furniture | |$53,000 | |
| Less: Accumulated amortization | | 21,750 |$31,250 |
| Intangible assets: | | | |
| Franchise | | | 6,320 |
|Total assets | | |$90,560 |
|Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable |$14,950 | | |
| Short-term notes payable |1,600 | | |
| Unearned servicing revenue |2,500 | | |
| Current portion of long-term notes payable | 9,000 | | |
| Total current liabilities | |$28,050 | |
| Long-term liabilities: | | | |
| Long-term notes payable (less current portion) | | 5,000 | |
| Total liabilities | | |$33,050 |
|Owner’s Equity | | | |
| Angela Telsco, capital | | | 57,510 |
|Total liabilities and owner’s equity | | |$90,560 |
Analysis component:
TelsCo Drill Servicing might be tempted to report the investment in Nortel shares as a current asset on the August 31, 2011 balance sheet because total current assets would then be greater than total current liabilities giving the misimpression that TelsCo is in a position to cover its current obligations.
Problem 5-12B (30 minutes)
Part 1
| |Jan Rider, Capital |
|Jan Rider, capital = $121,950 - $3,233* = $118,717 OR | |121,950 |
| |3,233* | |
| | |118,717 |
*Net loss = Revenues – Expenses
= (73,000 + 400) – (350 + 2,625 + 650 + 73,008)
= 73,400 – 76,633
= 3,233 net loss
Part 2
Landmark Tours
Balance Sheet
July 31, 2011
|Assets | | |
| Current assets: | | |
| Cash |$17,800 | |
| Accounts receivable |66,300 | |
| Interest receivable |400 | |
| Notes receivable |28,000 | |
| Prepaid insurance | 18,375 | |
| Total current assets | |$130,875 |
| Property, plant and equipment: | | |
| Furniture |$13,500 | |
| Less: Accumulated amortization | 350 | 13,150 |
| Total assets | |$144,025 |
| | | |
|Liabilities | | |
| Current liabilities: | | |
| Accounts payable |$14,500 | |
| Wages payable |1,008 | |
| Unearned tour revenue | 9,800 | |
| Total liabilities | |$ 25,308 |
| | | |
|Owner’s Equity | | |
| Jan Rider, capital | | 118,717 |
|Total liabilities and owner’s equity | |$144,025 |
Problem 5-13B (90 minutes)
NOTE: The general ledger accounts are shown at the end of the solution (in both balance column and T-account format) as they would appear after all entries have been posted.
Part 2
Transactions for July:
General Journal Page G1
Date Account Titles and Explanations PR Debit Credit
2011
July 1 Cash 101 20,000
Buildings 173 120,000
Cindy Tucker, Capital 301 140,000
Owner invested in the business.
2 Equipment Rental Expense 640 1,800
Cash 101 1,800
Paid one month’s rent.
5 Office Supplies 124 2,300
Cash 101 2,300
Acquired office supplies.
10 Prepaid Insurance 128 5,400
Cash 101 5,400
Paid one year’s premium in advance.
14 Salaries Expense 622 900
Cash 101 900
Paid two weeks’ salary.
24 Cash 101 8,800
Storage Fees Earned 401 8,800
Collected fees from customers.
28 Salaries Expense 622 900
Cash 101 900
Paid two weeks’ salary.
29 Telephone Expense 688 300
Cash 101 300
Paid the telephone bill.
30 Repairs Expense 684 850
Cash 101 850
Repaired the roof.
31 Cindy Tucker, Withdrawals 302 1,600
Cash 101 1,600
Owner withdrew cash.
Problem 5-13B (continued) Part 3
General Journal Page G2
DATE ACCOUNT TITLES AND EXPLANATIONS PR DEBIT CREDIT
2011 ADJUSTING ENTRIES:
July 31 Insurance Expense 637 300
Prepaid Insurance 128 300
To record expired insurance
($5,400/12 = $450/month;
2/3 × $450 per month).
31 Office Supplies Expense 650 750
Office Supplies 124 750
To record the cost of consumed supplies
($2,300 – $1,550).
31 Amortization Expense, Buildings 606 1,200
Accumulated Amortization, Buildings 174 1,200
To record amortization.
31 Salaries Expense 622 180
Salaries Payable 209 180
To record accrued salaries.
31 Accounts Receivable 106 950
Storage Fees Earned 401 950
To record accrued storage fees.
Part 4
LOCKIT CO.
Income Statement
For Month Ended July 31, 2011
Revenue:
Storage fees earned $9,750
Operating expenses:
Salaries expense $1,980
Equipment rental expense 1,800
Amortization expense, buildings 1,200
Repairs expense 850
Office supplies expense 750
Insurance expense 300
Telephone expense 300
Total operating expenses 7,180
Net income $2,570
Problem 5-13B (continued) Part 4
LOCKIT CO.
Statement of Owner’s Equity
For Month Ended July 31, 2011
Cinty Tucker, capital, July 1 $ 0
Add: Investments by owner $140,000
Net income 2,570 $142,570
Total $142,570
Less: Withdrawals by owner 1,600
Cindy Tucker, capital, July 31 $140,970
LOCKIT CO.
Balance Sheet
July 31, 2011
|Assets | | | |
| Current assets: | | | |
| Cash | |$ 14,750 | |
| Accounts receivable | |950 | |
| Office supplies | |1,550 | |
| Prepaid insurance | | 5,100 | |
| Total current assets | | |$ 22,350 |
| Property, plant and equipment: | | | |
| Buildings | |$120,000 | |
| Less: Accumulated amortization | | 1,200 | 118,800 |
| Total assets | | |$141,150 |
| | | | |
|Liabilities | | | |
| Current liabilities: | | | |
| Salaries payable | | |$ 180 |
| | | | |
|Owner’s Equity | | | |
| Cindy Tucker, capital | | | 140,970 |
|Total liabilities and owner’s equity | | |$141,150 |
Problem 5-13B (continued) Part 5
General Journal Page G3
Date Account Titles and Explanations PR Debit Credit
2011 CLOSING ENTRIES:
July 31 Storage Fees Earned 401 9,750
Income Summary 901 9,750
To close the revenue account.
31 Income summary 901 7,180
Amortization Expense, Buildings 606 1,200
Salaries Expense 622 1,980
Insurance Expense 637 300
Equipment Rental Expense 640 1,800
Office Supplies Expense 650 750
Repairs Expense 684 850
Telephone Expense 688 300
To close the expense accounts.
31 Income Summary 901 2,570
Cindy Tucker, Capital 301 2,570
To close the Income Summary account.
31 Cindy Tucker, Capital 301 1,600
Cindy Tucker, Withdrawals 302 1,600
To close the withdrawals account.
Part 6
LOCKIT CO.
Post-Closing Trial Balance
July 31, 2011
Acct.
No. Account Debit Credit
101 Cash $ 14,750
106 Accounts receivable 950
124 Office supplies 1,550
128 Prepaid insurance 5,100
173 Buildings 120,000
174 Accumulated amortization, buildings $ 1,200
209 Salaries payable 180
301 Cindy Tucker, capital 140,970
Totals $142,350 $142,350
Problem 5-13B (continued)
Parts 1, 2, 3, 5:
Ledger as of July 31 (using balance column format):
| | |Cash |Acct. No. 101 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |1 | |G1 |20,000 | |20,000 |
| |2 | |G1 | |1,800 |18,200 |
| |5 | |G1 | |2,300 |15,900 |
| |10 | |G1 | |5,400 |10,500 |
| |14 | |G1 | |900 |9,600 |
| |24 | |G1 |8,800 | |18,400 |
| |28 | |G1 | |900 |17,500 |
| |29 | |G1 | |300 |17,200 |
| |30 | |G1 | |850 |16,350 |
| |31 | |G1 | |1,600 |14,750 |
| | | | |
| | |Accounts Receivable |Acct. No. 106 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |31 | |G2 |950 | |950 |
| | | | |
| | |Office Supplies |Acct. No. 124 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |5 | |G1 |2,300 | |2,300 |
| |31 | |G2 | |750 |1,550 |
| | | | |
| | |Prepaid Insurance |Acct. No. 128 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |10 | |G1 |5,400 | |5,400 |
| |31 | |G2 | |300 |5,100 |
| | | | |
| | |Buildings |Acct. No. 173 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |1 | |G1 |120,000 | |120,000 |
| | | | |
| | |Accumulated Amortization, Buildings |Acct. No. 174 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |31 | |G2 | |1,200 |1,200 |
| | | | |
Problem 5-13B (continued)
| | |Salaries Payable |Acct. No. 209 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |31 | |G2 | |180 |180 |
| | | | |
| | |Cindy Tucker, Capital |Acct. No. 301 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |1 | |G1 | |140,000 |140,000 |
| |31 | |G3 | |2,570 |142,570 |
| |31 | |G3 |1,600 | |140,970 |
| | | | |
| | |Cindy Tucker, Withdrawals |Acct. No. 302 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |31 | |G1 |1,600 | |1,600 |
| |31 | |G3 | |1,600 |0 |
| | | | |
| | |Storage Fees Earned |Acct.No. 401 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |24 | |G1 | |8,800 |8,800 |
| |31 | |G2 | |950 |9,750 |
| |31 | |G3 |9,750 | |0 |
| | | | |
| | |Amortization Expense, Buildings |Acct. No. 606 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |31 | |G2 |1,200 | |1,200 |
| |31 | |G3 | |1,200 |0 |
| | | | |
| | |Salaries Expense |Acct. No. 622 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |14 | |G1 |900 | |900 |
| |28 | |G1 |900 | |1,800 |
| |31 | |G2 |180 | |1,980 |
| |31 | |G3 | |1,980 |0 |
| | | | |
| | |Insurance Expense |Acct. No. 637 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |31 | |G2 |300 | |300 |
| |31 | |G3 | |300 |0 |
Problem 5-13B (continued)
| | |Equipment Rental Expense |Acct. No. 640 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July | 2 | |G1 |1,800 | |1,800 |
| |31 | |G3 | |1,800 |0 |
| | | | |
| | |Office Supplies Expense |Acct. No. 650 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |31 | |G2 |750 | |750 |
| |31 | |G3 | |750 |0 |
| | | | |
| | |Repairs Expense |Acct. No. 684 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |30 | |G1 |850 | |850 |
| |31 | |G3 | |850 |0 |
| | | | |
| | |Telephone Expense |Acct. No. 688 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |29 | |G1 |300 | |300 |
| |31 | |G3 | |300 |0 |
| | | | |
| | |Income Summary |Acct. No. 901 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|July |31 | |G3 | |9,750 |9,750 |
| |31 | |G3 |7,180 | |2,570 |
| |31 | |G3 |2,570 | |0 |
Problem 5-13B (continued) Parts 1, 2, 3, 5
Ledger as of July 31 (using the T-account format):
| Cash |101 | | Accounts Receivable |106 | |Office Supplies |124 |
|Jul 1 |20,000 |1,8|Jul 2 | |Jul|950 | |
| | |00 | | |31 | | |
|Jul 10 |5,400 |300|Jul 31 | |Jul|120,000 | |
| | | | | |1 | | |
| | |180|Jul 31 | |Jul|1,600 |140,000 |
| | | | | |31 | | |
|Jul 31 |9,750 |8,8|Jul 24 | |Jul|1,200 |1,200 |
| | |00 |31 | |31 | | |
| | |950| | | | | |
|Jul 31 |300 |300|Jul 31 | |Jul|1,800 |1,800 |
| | | | | |2 | | |
|Jul 30 |850 |850 |Jul 31 |
|a) |Dec. |31 |Salaries Expense |5,250 | |
| | | | Salaries Payable | |5,250 |
| | | | To record accrued salaries. | | |
| | | | | | |
|b) | |31 |Rent Receivable |675 | |
| | | | Rent Revenue | |675 |
| | | | To record accrued rent revenue; | | |
| | | |$1,125 – $450. | | |
| | | | | | |
|c) | |31 |Office Supplies Expense |3,525 | |
| | | | Office Supplies | |3,525 |
| | | | To record supplies used; | | |
| | | |$4,200 – $675 left on hand = $3,525 used. | | |
| | | | | | |
|d) | |31 |Insurance Expense |450 | |
| | | | Insurance Payable | |450 |
| | | | To record insurance payable. | | |
| | | | | | |
|e) | |31 |Interest Expense |2,250 | |
| | | | Interest Payable | |2,250 |
| | | | To record accrued interest; | | |
| | | |$900 + $900 + $450. | | |
| | | | | | |
|f) | |31 |Unearned Service Fees |11,700 | |
| | | | Service Fees Earned | |11,700 |
| | | | To record fees earned; | | |
| | | |$18,000 – $6,300 still unearned = $11,700 earned. | | |
| | | | | | |
|g) | |31 |Interest Receivable |175 | |
| | | | Interest Revenue | |175 |
| | | | To record accrued interest. | | |
| | | | | | |
|h) | |31 |Accounts Receivable |8,250 | |
| | | | Service Fees Earned | |8,250 |
| | | | To record accrued service fees. | | |
*Problem 5-14B (continued)
Part 2
|2012 | |Reversing entries: | | | |
|Jan. |1 |Salaries Payable | |5,250 | |
| | | Salaries Expense | | |5,250 |
| | | To reverse accrued salaries. | | | |
| | | | | | |
| |1 |Rent Revenue | |675 | |
| | | Rent Receivable | | |675 |
| | | To reverse accrued rent revenue. | | | |
| | | | | | |
| |1 |Insurance Payable | |450 | |
| | | Insurance Expense | | |450 |
| | | To reverse accrued insurance. | | | |
| | | | | | |
| |1 |Interest Payable | |2,250 | |
| | | Interest Expense | | |2,250 |
| | | To reverse accrued interest expense. | | | |
| | | | | | |
| |1 |Interest Revenue | |175 | |
| | | Interest Receivable | | |175 |
| | | To reverse accrued interest revenue. | | | |
| | | | | | |
| |1 |Service Fees Earned | |8,250 | |
| | | Accounts Receivable | | |8,250 |
| | | To reverse accrued service fees. | | | |
Part 3
January 2012 transactions:
|2012 | | | | | |
|Jan. |4 |Salaries Expense | |7,500 | |
| | | Cash | | |7,500 |
| | | To record payment of salaries. | | | |
| | | | | | |
| |12 |Cash | |1,800 | |
| | | Rent Revenue | | |1,800 |
| | | To record receipt of rent revenue; $675 + $1,125. | | | |
| | | | | | |
| |12 |Insurance Expense | |450 | |
| | | Cash | | |450 |
| | | To record payment of insurance. | | | |
*Problem 5-14B Part 3 (concluded)
|2012 | | | | |
|Jan. |15 |Interest Expense | |2,700 | |
| | | Cash | | |2,700 |
| | | To record payment of interest. | | | |
| | | | | | |
| |22 |Cash | |38,075 | |
| | | Note Receivable | | |37,500 |
| | | Interest Revenue | | |575 |
| | | To record receipt of note plus interest; $37,500 + $575. | | | |
| | | | | | |
| |24 |Cash | |11,350 | |
| | | Service Fees Earned | | |11,350 |
| | | To record receipt of service fees; $8,250 + $3,100. | | | |
ANALYTICAL AND REVIEW PROBLEMS
A&R PROBLEM 5-1
Part 1
Net income = $105,000 – ($147,000 – $126,000) = $84,000
Or
Total revenues = $84,000 + $168,000 = $252,000
Part 2
Dec. 31 Revenue 252,000
Income Summary 252,000
To close revenue.
31 Income Summary 168,000
Wages Expense 126,000
Advertising Expense 42,000
To close expenses.
31 Income Summary 84,000
Owner, Capital 84,000
To close the Income Summary to capital.
31 Owner, Capital 105,000
Owner, Withdrawal 105,000
To close withdrawals to capital.
A&R Problem 5-2 Part 1
SANDY’S DELIVERY SERVICE
Work Sheet
For the Year Ended December 31, 2011
| | | | | | | |Balance Sheet |
| | | | | | | |and |
| |Unadjusted | | |Adjusted |Income |Statement of |
| |Trial Balance |Adjustments |Trial Balance |Statement |Owner’s Equity |
|Account |Debit |Credit |Debit |Credit |Debit |Credit |Debit |Credit |Debit |Credit |
|Cash |10,650 | | | |10,650 | | | |10,650 | |
|Accounts receivable | 7,000 | | a) 2,000 | |9,000 | | | |9,000 | |
|Supplies | 4,200 | | |b) 2,600 |1,600 | | | |1,600 | |
|Prepaid insurance | 2,400 | | |c) 800 |1,600 | | | |1,600 | |
|Prepaid rent | 1,800 | | |d) 900 |900 | | | |900 | |
|Delivery trucks |40,000 | | | |40,000 | | | |40,000 | |
|Accounts payable | | 3,130 | | | |3,130 | | | |3,130 |
|Unearned delivery fees | | 4,500 | a) 2,500 | | |2,000 | | | |2,000 |
|Sandra Berlasty, capital | |50,000 | | | |50,000 | | | |50,000 |
|Sandra Berlasty, withdrawals | 3,000 | | | |3,000 | | | |3,000 | |
|Delivery service revenue | |18,500 | |a) 4,500 | |23,000 | |23,000 | | |
|Advertising expense | 600 | | | |600 | |600 | | | |
|Gas and oil expense | 680 | | | |680 | |680 | | | |
|Salaries expense | 5,600 | |e) 400 | |6,000 | |6,000 | | | |
|Utilities expense | 200 | | | |200 | |200 | | | |
| Totals |76,130 |76,130 | | | | | | | | |
|Insurance expense | | |c) 800 | |800 | |800 | | | |
|Rent expense | | | d) 900 | |900 | |900 | | | |
|Supplies expense | | | b) 2,600 | |2,600 | |2,600 | | | |
|Amortization expense, delivery trucks | | |f) 2,000 | |2,000 | |2,000 | | | |
|Accumulated amortization, delivery trucks | | | |f) 2,000 | |2,000 | | | |2,000 |
|Salaries payable | | | |e) 400 | | 400 | | | | 400 |
| Totals | | |11,200 |11,200 |80,530 |80,530 |13,780 |23,000 |66,750 |57,530 |
|Net income | | | | | | | 9,220 | | | 9,220 |
| Totals | | | | | | |23,000 |23,000 |66,750 |66,750 |
A&R Problem 5-2 (concluded) Part 2
|2011 |Adjusting entries: | | |
|a) |Dec. |31 |Accounts Receivable |2,000 | |
| | | |Unearned Delivery Fees |2,500 | |
| | | | Delivery Service Revenue | |4,500 |
| | | | | | |
|b) | |31 |Supplies Expense |2,600 | |
| | | | Supplies | |2,600 |
| | | | | | |
|c) | |31 |Insurance Expense |800 | |
| | | | Prepaid Insurance | |800 |
| | | | | | |
|d) | |31 |Rent Expense |900 | |
| | | | Prepaid Rent | |900 |
| | | | | | |
|e) | |31 |Salaries Expense |400 | |
| | | | Salaries Payable | |400 |
| | | | | | |
|f) | |31 |Amortization Expense, Delivery Trucks |2,000 | |
| | | Accumulated Amortization, Delivery Trucks | |2,000 |
| | | | |
|Closing entries: | | |
| |31 |Delivery Service Revenue |23,000 | |
| | | Income Summary | |23,000 |
| | | | | |
| |31 |Income Summary |13,780 | |
| | | Advertising Expense | |600 |
| | | Gas and Oil Expense | |680 |
| | | Salaries Expense | |6,000 |
| | | Utilities Expense | |200 |
| | | Insurance Expense | |800 |
| | | Rent Expense | |900 |
| | | Supplies Expense | |2,600 |
| | | Amortization Expense, Delivery Trucks | |2,000 |
| | | | | |
| |31 |Income Summary |9,220 | |
| | | Sandra Berlasty, Capital | |9,220 |
| | | | | |
| |31 |Sandra Berlasty, Capital |3,000 | |
| | | Sandra Berlasty, Withdrawals | |3,000 |
ethics challenge
1. THERE ARE SEVERAL COURSES OF ACTION THAT JENNIFER COULD HAVE TAKEN:
a. Probably she should have consulted with the president and told him that the finalized financial statements would not be ready by the time of the meeting. She should explain that delay in final statement preparation is a normal event given the need to wait for final information to prepare accurate adjustments. Possibly the meeting could be rescheduled or Jennifer could have asked how the president preferred her to proceed.
b. The estimation route was not a bad choice in itself. Jennifer probably should have used worst case estimates instead of recording expenses on the low side. Users of financial statements usually prefer knowing worst case scenarios over best case outcomes.
The use of estimates gets the financial statements closer to their final form than ignoring the adjustments completely.
2. Students may offer one of the above alternatives or another response they may think of, given the situation.
focus on financial statements
FFS 5-1
Part 1
|Sarda Electrical Servicing |
|Income Statement |
|For Year Ended December 31, 2011 |
|Revenues | | |
| Electrical fees earned | |$126,600 |
|Operating expenses: | | |
| Salaries expense |$27,000 | |
| Rent expense |21,000 | |
| Amortization expense, truck |3,600 | |
| Amortization expense, tools |2,250 | |
| Insurance expense |1,275 | |
| Interest expense | 900 | |
| Total operating expenses | | 56,025 |
|Net income | |$ 70,575 |
|Sarda Electrical Servicing |
|Statement of Owner’s Equity |
|For Year Ended December 31, 2011 |
|Nymeth Sarda, capital, January 1 | |$ 7,825 |
|Add: Net income |$70,575 | |
| Investments by owner | 20,000 | 90,575 |
| Total | |$98,400 |
|Less: Withdrawals for the year | | 61,500 |
|Nymeth Sarda, capital, December 31 | |$36,900 |
FFS 5-1 (continued)
|Sarda Electrical Servicing |
|Balance Sheet |
|December 31, 2011 |
|Assets | | | |
| Current assets: | | | |
| Cash | |$5,000 | |
| Accounts receivable | |10,500 | |
| Prepaid insurance | |1,050 | |
| Prepaid rent | |7,200 | |
| Electrical supplies | |19,000 | |
| Current portion of notes receivable | | 2,000 | |
| Total current assets | | |$ 44,750 |
| Long-term investments: | | | |
| Notes receivable, less $2,000 current portion | | |10,000 |
| Property, plant and equipment: | | | |
| Tools |$21,000 | | |
| Less: Accumulated amortization | 4,500 |$16,500 | |
| Truck |$40,500 | | |
| Less: Accumulated amortization |21,000 |19,500 | |
| Total property, plant and equipment | | |36,000 |
| Intangible assets: | | | |
| Copyright | | | 5,100 |
|Total assets | | |$95,850 |
| | | | |
|Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable |$21,000 | | |
| Salaries payable |3,150 | | |
| Unearned electrical fees |5,250 | | |
| Notes payable, due June 1, 2012 |2,550 | | |
| Total current liabilities | |$31,950 | |
| Long-term liabilities: | | | |
| Notes payable, due August 31, 2013 | |27,000 | |
| Total liabilities | | |$58,950 |
| | | | |
|Owner’s Equity | | | |
| Nymeth Sarda, capital | | | 36,900 |
|Total liabilities and owner’s equity | | |$95,850 |
FFS 5-1 (continued)
Part 2
|2011 |Closing entries: | | |
|Dec. |31 |Electrical Fees Earned |126,600 | |
| | | Income Summary | |126,600 |
| | | To close credit balance temporary accounts. | | |
| | | | | |
| |31 |Income Summary |56,025 | |
| | | Amortization Expense, Tools | |2,250 |
| | | Amortization Expense, Truck | |3,600 |
| | | Insurance expense | |1,275 |
| | | Interest Expense | |900 |
| | | Rent Expense | |21,000 |
| | | Salaries Expense | |27,000 |
| | | To close debit balance temporary accounts. | | |
| | | | | |
| |31 |Income Summary |70,575 | |
| | | Nymeth Sarda, Capital | |70,575 |
| | | To close Income Summary to capital. | | |
| | | | | |
| |31 |Nymeth Sarda, Capital |61,500 | |
| | | Nymeth Sarda, Withdrawals | |61,500 |
| | | To close withdrawals to capital. | | |
Part 3
|Sarda Electrical Servicing |
|Post-Closing Trial Balance |
|December 31, 2011 |
| |Debits |Credits |
|Cash |$ 5,000 | |
|Accounts Receivable |10,500 | |
|Electrical Supplies |19,000 | |
|Prepaid Insurance |1,050 | |
|Prepaid Rent |7,200 | |
|Tools |21,000 | |
|Accumulated Amortization, Tools | | $ 4,500 |
|Truck |40,500 | |
|Accumulated Amortization, Truck | |21,000 |
|Copyright |5,100 | |
|Notes Receivable |12,000 | |
|Accounts Payable | |21,000 |
|Salaries Payable | |3,150 |
|Unearned Electrical Fees | |5,250 |
|Notes Payable, due June 1, 2012 | |2,550 |
|Notes Payable, due August 31, 2013 | |27,000 |
|Nymeth Sarda, Capital | | 36,900 |
|Totals |$ 121,350 |$ 121,350 |
FFS 5-1 (concluded)
Analysis component:
Nymeth Sarda is not reinvesting profits. This is evident by the amount of his withdrawals: $61,500 which represents 87% of net income ($61,500/$70,575 × 100 = 87%). Reinvesting profits means that as net income causes equity to increase, assets are retained by the business for the purpose of growth rather than withdrawn which depletes assets.
A = L + E
Withdrawals cause equity and assets to decrease which depletes rather
than grows the assets.
FFS 5-2
a.
| |December 31, 2005 | |December 31, 2004 |
|Cash |$ 791 | |$ 1,057 |
|Accounts receivable |2,135 | |1,794 |
|Inventories and prepaid expenses |3,182 | |3,256 |
|Current portion of mortgages and loans receivable | | | |
| |3,723 | |2,795 |
|Total current assets |$ 9,831 | |$ 8,902 |
b.
| |December 31, 2005 | |December 31, 2004 |
|Accounts payable and accrued liabilities |$11,730 | |$11,660 |
|Current portion of long-term debt |6,713 | |8,210 |
|Other current liabilities |8,131 | |5,860 |
|Prepaid annual dues and deposits | 6,032 | | 6,564 |
|Total current liabilities |$32,606 | |$32,294 |
*c.
| |December 31, 2005 |December 31, 2004 |
|Current ratio. |9,831/32,606 = 0.30:1 |8,902/32,294 = 0.28:1 |
*d. The change in the ratio was favourable. ClubLink Corporation had greater current
assets at December 31, 2005 to cover current obligations ($0.30 of current assets to
cover every $1.00 of current liability) than it had at December 31, 2004. However, it
appears that ClubLink Corporation may have difficulty in meeting short-term
obligations.
Critical Thinking Question
CT 5-1
Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity.
Problem(s):
— Delton Property Rentals cannot pay employees in March and the bank will not lend it money
Goal(s)*:
— From the perspective of the bank, the bank needs to follow internal policies and procedures regarding who it is appropriate to lend cash to
Assumption(s)/Principle(s):
— That a decision to lend money will be based on the balance sheet prepared below
Facts:
— as presented in balance sheet below prepared from information provided
Conclusion(s)/Consequence(s):
— the balance sheet was weakened significantly from 2010 to 2011 given that liabilities were 32% of total assets (240,000/750,000 × 100) in 2010 and 98% in 2011 (2,780,000/2,850,000 × 100). It appears that the increase was caused by a note payable used to purchase land and buildings.
— The $2,440,000 note payable requires a $200,000 annual payment and quick assets on hand as of March 31, 2011 total $90,000 (15,000 + 75,000); it appears that Delton Property Rentals will be unable to make the payment.
— Given that accounts receivable have decreased significantly from 2010 to 2011, it could be assumed that sales have decreased in a corresponding manner.
— Accounts payable have increased from $7,000 in 2010 to $340,000 in 2011 yet there are quick assets on hand as of March 31, 2011 totalling $90,000 (15,000 + 75,000); it appears that Delton Property Rentals will be unable to pay its creditors.
— The 2011 quick ratio is: (15,000 + 75,000)/340,000 = $0.26:$1.00 which indicates that Delton will have difficulty meeting its short-term obligations; the 2010 quick ratio was: (40,000 + 215,000)/(7,000 + 29,000) = $7.08:$1.00 which indicates a dramatic deterioration in Delton’s liquidity.
— If the bank lends Delton money, it risks noncollection; on the assumption that the $2,440,000 loan is with the same bank and that it is secured by the land and building, the bank should not lend Delton the money.
*The goal is highly dependent on “perspective.”
CT 5-1 (concluded)
|Delton Property Rentals |
|Balance Sheet |
|March 31 |
|Assets |2011 |2010 |
| Current assets | | |
| Cash |$ 15,000 |$ 40,000 |
| Accounts receivable |75,000 |215,000 |
| Supplies | 8,000 | 50,000 |
| Total current assets |$ 98,000 |$ 305,000 |
| Property, plant and equipment | | |
| Land |$ 675,000 |$ 150,000 |
| Buildings |2,112,000 |430,000 |
| Accumulated amortization, buildings |-165,000 |-150,000 |
| Equipment |45,000 |45,000 |
| Accumulated amortization, equipment | -35,000 | -30,000 |
| Total property, plant and equipment |$2,632,000 |$445,000 |
| Long-term investments | | |
| Notes receivable, due Nov. 30, 2015 | 120,000 | 0 |
|Total assets |$2,850,000 |$750,000 |
|Liabilities | | |
| Current liabilities | | |
| Accounts payable |$ 340,000 |$ 7,000 |
| Unearned fees | 0 | 29,000 |
| Total current liabilities |340,000 |36,000 |
| Long-term liabilities | | |
| Notes payable* | 2,440,000 | 204,000 |
|Total liabilities |2,780,000 |240,000 |
|Owner's equity | | |
| Teal Delton, capital** | 70,000 | 510,000 |
|Total liabilities and owner's equity |$2,850,000 |$750,000 |
Serial Problem, Echo Systems (45 minutes) Part 1
Closing entries and general ledger accounts:
General Journal Page G6
DATE ACCOUNT TITLES AND EXPLANATIONS PR DEBIT CREDIT
2011 CLOSING ENTRIES:
Dec. 31 Computer Services Revenue 403 52,200
Income Summary 901 52,200
To close the revenue account.
31 Income Summary 901 35,940
Amortization Expense, Office
Equipment 612 1,500
Amortization Expense, Computer
Equipment 613 2,250
Wages Expense 623 6,200
Insurance Expense 637 1,080
Rent Expense 640 6,750
Computer Supplies Expense 652 5,430
Advertising Expense 655 5,820
Mileage Expense 676 2,800
Repairs Expense, Computer 684 2,610
Charitable Donations Expense 699 1,500
To close the expense accounts.
31 Income Summary 901 16,260
Mary Graham, Capital 301 16,260
To close the Income Summary account.
31 Mary Graham, Capital 301 14,400
Mary Graham, Withdrawals 302 14,400
To close the withdrawals account.
Note: All accounts with numbers that start with the digit 1 (Assets)
or 2 (Liabilities) are unaffected by the closing process.
Serial Problem (continued)
NOTE: This solution includes all entries from prior months in the accounts. However, the Working Papers shorten the solution by simply showing the balances of the accounts as of December 31, 2011.
| | |Cash |Acct. No. 101 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | |
|Oct. |1 | |G1 |90,000 | |90,000 |
| |2 | |G1 | |9,000 |81,000 |
| |5 | |G1 | |4,320 |76,680 |
| |8 | |G1 | |2,640 |74,040 |
| |15 | |G1 |6,600 | |80,640 |
| |17 | |G1 | |1,410 |79,230 |
| |20 | |G1 | |3,720 |75,510 |
| |22 | |G1 |2,400 | |77,910 |
| |31 | |G2 | |1,400 |76,510 |
| |31 | |G2 | |7,200 |69,310 |
|Nov. |1 | |G2 | |1,000 |68,310 |
| |2 | |G2 |9,300 | |77,610 |
| |5 | |G2 | |1,920 |75,690 |
| |18 | |G2 |3,750 | |79,440 |
| |22 | |G2 | |1,500 |77,940 |
| |28 | |G2 | |1,200 |76,740 |
| |30 | |G2 | |2,800 |73,940 |
| |30 | |G3 | |3,600 |70,340 |
|Dec. |3 | |G4 | |2,100 |68,240 |
| | 3 | |G4 | |1,200 |67,040 |
| | 4 | |G4 |7,500 | |74,540 |
| |10 | |G4 | |1,200 |73,340 |
| |14 | |G4 |3,000 | |76,340 |
| |20 | |G4 |11,250 | |87,590 |
| |28 | |G4 |5,700 | |93,290 |
| |31 | |G4 | |600 |92,690 |
| |31 | |G4 | |3,600 |89,090 |
| | | | | | | |
Serial Problem (continued)
| | |Accounts Receivable |Acct. No. 106 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |6 | |G1 |6,600 | |6,600 |
| |12 | |G1 |2,400 | |9,000 |
| |15 | |G1 | |6,600 |2,400 |
| |22 | |G1 | |2,400 |0 |
| |28 | |G2 |6,450 | |6,450 |
|Nov. |8 | |G2 |8,700 | |15,150 |
| |18 | |G2 | |3,750 |11,400 |
| |24 | |G2 |7,500 | |18,900 |
|Dec. | 4 | |G4 | |7,500 |11,400 |
| |28 | |G4 | |5,700 |5,700 |
| | | | |
| | |Computer Supplies |Acct. No. 126 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |3 | |G1 |2,640 | |2,640 |
|Nov. |5 | |G2 |1,920 | |4,560 |
|Dec. |17 | |G4 |2,310 | |6,870 |
| |31 | |G5 | |5,430 |1,440 |
| | | |
| |Prepaid Insurance |Acct. No. 128 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |5 | |G1 |4,320 | |4,320 |
|Dec. |31 | |G5 | |1,080 |3,240 |
| | | |
| |Prepaid Rent |Acct. No. 131 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |2 | |G1 |9,000 | |9,000 |
|Dec. |31 | |G5 | |6,750 |2,250 |
| | | |
| |Office Equipment |Acct. No. 163 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |1 | |G1 |18,000 | |18,000 |
| | | |
| |Accumulated Amortization, Office Equipment |Acct. No.164 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Dec. |31 | |G5 | |1,500 |1,500 |
| | | | | | | |
Serial Problem (continued)
| |Computer Equipment |Acct. No. 167 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |1 | |G1 |36,000 | |36,000 |
| | | | | | | |
| |Accumulated Amortization, Computer Equipment |Acct. No. 168 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Dec. |31 | |G5 | |2,250 |2,250 |
| | | |
| |Accounts Payable |Acct. No. 201 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |3 | |G1 | |2,640 |2,640 |
| |8 | |G1 |2,640 | |0 |
|Dec. |17 | |G4 | |2,310 |2,310 |
| | | |
| |Wages Payable |Acct. No. 210 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Dec. |31 | |G5 | |800 |800 |
| | | |
| |Unearned Computer Services Revenue |Acct. No. 236 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Dec. |14 | |G4 | |3,000 |3,000 |
| | | |
| |Mary Graham, Capital |Acct. No. 301 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |1 | |G2 | |144,000 |144,000 |
|Dec. |31 | |G6 | |16,260 |160,260 |
| |31 | |G6 |14,400 | |145,860 |
| | | |
| |Mary Graham, Withdrawals |Acct. No. 302 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |31 | |G2 |7,200 | |7,200 |
|Nov. |30 | |G3 |3,600 | |10,800 |
|Dec. |31 | |G4 |3,600 | |14,400 |
| |31 | |G6 | |14,400 |0 |
Serial Problem (continued)
| |Computer Services Revenue |Acct. No. 403 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |6 | |G1 | |6,600 |6,600 |
| |12 | |G1 | |2,400 |9,000 |
| |28 | |G2 | |6,450 |15,450 |
|Nov. |2 | |G2 | |9,300 |24,750 |
| |8 | |G2 | |8,700 |33,450 |
| |24 | |G2 | |7,500 |40,950 |
|Dec. |20 | |G4 | |11,250 |52,200 |
| |31 | |G6 |52,200 | |0 |
| | | | | | | |
| |Amortization Expense, Office Equipment |Acct. No. 612 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Dec. |31 | |G5 |1,500 | |1,500 |
| |31 | |G6 | |1,500 |0 |
| | | |
| |Amortization Expense, Computer Equipment |Acct. No. 613 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Dec. |31 | |G5 |2,250 | |2,250 |
| |31 | |G6 | |2,250 |0 |
| | | |
| |Wages Expense |Acct. No. 623 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |31 | |G2 |1,400 | |1,400 |
|Nov. |30 | |G2 |2,800 | |4,200 |
|Dec. |10 | |G4 |1,200 | |5,400 |
| |31 | |G5 |800 | |6,200 |
| |31 | |G6 | |6,200 |0 |
| | | |
| |Insurance Expense |Acct. No. 637 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Dec. |31 | |G5 |1,080 | |1,080 |
| |31 | |G6 | |1,080 |0 |
| | | | | | | |
| |Rent Expense |Acct. No. 640 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Dec. |31 | |G5 |6,750 | |6,750 |
| |31 | |G6 | |6,750 |0 |
Serial Problem (continued)
| |Computer Supplies Expense |Acct. No. 652 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Dec. |31 | |G5 |5,430 | |5,430 |
| |31 | |G6 | |5,430 |0 |
| | | |
| |Advertising Expense |Acct. No. 655 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |20 | |G1 |3,720 | |3,720 |
|Dec. | 3 | |G4 |2,100 | |5,820 |
| |31 | |G6 | |5,820 |0 |
| | | | | | | |
| |Mileage Expense |Acct. No. 676 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Nov. |1 | |G2 |1,000 | |1,000 |
| |28 | |G2 |1,200 | |2,200 |
|Dec. |31 | |G4 |600 | |2,800 |
| |31 | |G6 | |2,800 |0 |
| | | |
| |Repairs Expense, Computer |Acct. No. 684 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Oct. |17 | |G1 |1,410 | |1,410 |
|Dec. | 3 | |G4 |1,200 | |2,610 |
| |31 | |G6 | |2,610 |0 |
| | | |
| |Charitable Donations Expense |Acct. No. 699 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Nov. |22 | |G2 |1,500 | |1,500 |
|Dec. |31 | |G6 | |1,500 |0 |
| | | | | | | |
| | | |
| |Income Summary |Acct. No. 901 |
|Date | |Explanation |PR |Debit |Credit |Balance |
|2011 | | | | | | |
|Dec. |31 | |G6 | |52,200 |52,200 |
| |31 | |G6 |35,940 | |16,260 |
| |31 | |G6 |16,260 | |0 |
Serial Problem (concluded) Part 2
ECHO SYSTEMS
Post-Closing Trial Balance
December 31, 2011
Acct.
No. Account Debit Credit
101 Cash $89,090
106 Accounts receivable 5,700
126 Computer supplies 1,440
128 Prepaid insurance 3,240
131 Prepaid rent 2,250
163 Office equipment 18,000
164 Accumulated amortization, office equipment $ 1,500
167 Computer equipment 36,000
168 Accum. amortization, computer equipment 2,250
201 Accounts payable 2,310
210 Wages payable 800
236 Unearned computer fees 3,000
301 Mary Graham, capital 145,860
Totals $155,720 $155,720
-----------------------
| |Frank Block, Capital | |
| | | |(Adj. Bal, |
| | |32,250 |Apr. 30) |
|(Withdrawals) |7,200 |8,400 |(Net income) |
| | | |(Post-closing |
| | |33,450 |Bal., Apr. 30) |
| | | | |
|Owner, Capital |
| |147,000 |
| | |
|105,000 |X = 84,000 NI |
| |126,000 |
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 5 321
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
326 Fundamental Accounting Principles, Twelfth Canadian Edition
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
340 Fundamental Accounting Principles, Twelfth Canadian Edition
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
342 Fundamental Accounting Principles, Twelfth Canadian Edition
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346 Fundamental Accounting Principles, Twelfth Canadian Edition
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350 Fundamental Accounting Principles, Twelfth Canadian Edition
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Solutions Manual for Chapter 5 351
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
Solution Manual for Chapter 5 353
Analysis component:
Liabilities must be separated between those that are due within one year of the balance sheet date (current) and those that are due beyond one year of the balance sheet date (long-term) because decision makers must be able to assess whether the business has sufficient current assets to cover its current obligations. If the $26,400 current portion of the $32,000 long-term note was not shown as a current liability on the balance sheet, it would have appeared that Bea’s Photo Studio had sufficient current assets to cover its current liabilities when in fact it does not.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 5 381
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
384 Fundamental Accounting Principles, Twelfth Canadian Edition
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 5 385
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 5 387
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
412 Fundamental Accounting Principles, Twelfth Canadian Edition
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Solutions Manual for Chapter 5 413
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
418 Fundamental Accounting Principles, Twelfth Canadian Edition
| |2011 | | | |
|(1) |Oct. 31 |Revenue |100 | |
| | | Income Summary | |100 |
| | | To close the revenue account. | | |
| | | | | |
|(2) |31 |Income Summary |140 | |
| | | Expenses | |140 |
| | | To close the expenses account. | | |
| | | | | |
|(3) |31 |Capital |40 | |
| | | Income Summary | |40 |
| | | To close the income summary to capital. | | |
| | | | | |
|(4) |31 |Capital |20 | |
| | | Withdrawals | |20 |
| | | To close withdrawals to capital. | | |
| |2011 | | | |
|(1) |Apr 30 |Revenue |100 | |
| | | Income Summary | |100 |
| | | To close the revenue account. | | |
| | | | | |
|(2) |30 |Income Summary |60 | |
| | | Expenses | |60 |
| | | To close the expenses account. | | |
| | | | | |
|(3) |30 |Income Summary |40 | |
| | | Capital | |40 |
| | | To close the income summary to capital. | | |
| | | | | |
|(4) |30 |Capital |20 | |
| | | Withdrawals | |20 |
| | | To close withdrawals to capital. | | |
Analysis component:
It is reasonable to assume that the $375,000 in addition to the owner’s original investment was used to acquire capital assets. Since the purpose of capital assets is to generate revenues, borrowing to purchase them is generally considered a good reason to borrow (provided the debt can be serviced).
1.81 is less than the industry average of 2.2 so compares unfavourably. However, a current ratio of 1.81 is generally considered to be favourable.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 5 319
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
322 Fundamental Accounting Principles, Twelfth Canadian Edition
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380 Fundamental Accounting Principles, Twelfth Canadian Edition
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