Chapter 4 Solution of fundamental of financial accouting by EDMONDS (4th edition)

ANSWERS TO QUESTIONS - CHAPTER 4

1. The two fundamental equality requirements of the double-entry accounting system are: (1) assets must equal claims and (2) debits must equal credits.

2. Debit means left side of an account and credit means right side of an account.

Debits CreditsAssets increase decreaseLiabilities decrease increaseCommon Stock decrease increaseRetained Earnings decrease increaseRevenues decrease increaseExpenses increase decreaseDividends increase decrease

3. The balance of an account is the difference between total debits and total credits to the account. The account balance should normally be on the increase side of the account. For example, cash should normally have a debit balance (i.e., total debits > total credits).

4. The three primary asset sources are (1) assets acquired from owners, (2) assets borrowed from creditors, and (3) assets produced by a business in its operating activities.

5. The three primary asset uses are (1) assets used by a business in the process of producing revenues, (2) assets used to pay liabilities, and (3) assets distributed to owners.

6. The cost to acquire long-lived assets (i.e., building, equipment) is recorded in an asset account. An asset/expense adjustment is necessary to recognize the portion of the cost used in producing the current period revenue. When depreciation of the asset is recorded, depreciation expense is debited (increased) and accumulated depreciation, a contra asset account, is

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credited (increased). Recording depreciation reduces total assets.

7. An asset/revenue adjustment is an adjustment that records the accrual of revenue. An example would be interest earned on a note receivable at the end of the accounting period. This entry would require a debit to interest receivable (asset) and a credit to interest revenue.

8. A liability/expense adjustment is an adjustment that records an expense that had been incurred but not paid for. An example would be accrued salaries at the end of the accounting period. This entry would require a debit to salaries expense and a credit to salaries payable (liability).

9. An asset/expense adjustment records assets that have been used during the period. Examples would include the use of office supplies during the period and depreciation expense for the period.

Supplies used:Supplies Expense, debited (increased)Supplies, credited (decreased)

Depreciation expense: Depreciation Expense, debited (increased)Accumulated Depreciation, credited (increased)

10. A liability/revenue adjustment is made to record the performance of a service that had been paid for in advance. For example, Company A received $600 in advance on May 1 for 12 months of accounting services. At December 31, a liability/revenue adjustment is necessary to recognize eight months of service provided. The entry would require a debit to unearned revenue (decrease) and a credit to revenue earned (increase).

11. A debit to an expense account increases the expense. Since expenses act to decrease retained earnings and

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stockholders’ equity, a debit to an expense account ultimately reduces retained earnings and stockholders’ equity.

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12. Debit Balance Credit BalanceAssets LiabilitiesDividends Common StockExpenses Retained Earnings

Revenues

13. The ledger accounts are used to prepare financial statements.

14. The purpose of a journal is to maintain a chronological record of all business transactions.

15. Special journals are used to record only specific types of transactions such as cash receipts in a cash receipts journal and cash payments in a cash disbursements journal. The general journal is used to record all types of transactions that are not recorded in special journals.

16. The ledger is a collection of all accounts of the organization. It is the primary information source for the financial statements.

17. The five-step recording process consists of the following:(1) Preparing and analyzing source documents.(2) Journalizing the transactions from the source

documents.(3) Posting the transaction data from the journal to the

ledger.(4) Determining the account balances and testing the

equality of the debits and credits.(5) Using the ledger accounts to prepare financial

statements.

18. Closing entries transfer the balances of the nominal (temporary) accounts to retained earnings.

19. The information recorded in the general journal includes the date, account title, and amount of each transaction. In some cases explanations are added following each entry.

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20. The trial balance is a listing of all accounts and amounts in a debit/credit format to test the equality of the debits and credits.

21. The trial balance should be prepared when there is a need to test the equality of the debits and credits.

22. The process of transferring information from journals to ledgers is called posting.

23. The terms “debit” and “credit” originated from terms used in the bookkeeping system used by Italian merchants in the 15th century. The system was described by Luca Pacioli in a mathematics text and spread throughout Europe when the text was published.

24. The concept of independent auditors originated in the United Kingdom.

25. Footnotes contain information describing the accounting policies and procedures used by the business. Footnotes may also be used to explain complex transactions affecting the financial statements or to provide additional information which makes the financial statements more understandable.

26. The MD&A explains different aspects of the company’s past performance and future plans. For example, the MD&A could explain the reasons for sales trends or the company’s plans for future expansion.

27. The Securities and Exchange Commission (SEC) is a governmental organization responsible for overseeing financial reporting requirements under the Security Exchange Act of 1933 and 1934. The SEC has the power to establish accounting rules, but allows the accounting profession to do so.

Companies whose stock (ownership interest in corporations) trades on public stock exchanges are required to register with the SEC.

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SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 4

EXERCISE 4-1A

Both students were correct. Debbie was correct that debits increase account balances and credits decrease account balances, if she is referring to assets, expenses, or distributions. However, Josh is correct that credits increase account balances and debits decrease account balances if he is referring to liability, common stock or retained earnings accounts.

EXERCISE 4-2A

AccountCategory

Used to Increase This

Account

Used to Decrease This

AccountCash Debit Credit

Notes Payable Credit Debit

Common Stock Credit Debit

Equipment Debit Credit

Other Operating

Expense

Debit Credit

Accumulated

Depreciation

Credit Debit

Dividends Debit Credit

Service Revenue Credit Debit

Retained Earnings Credit Debit

Rent Expense Debit Credit

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EXERCISE 4-3A

Account Normal Balance

a. Cash Debitb. Common Stock Creditc. Depreciation Expense Debitd. Accumulated Depreciation

Credit

e. Notes Payable Creditf. Unearned Revenue Creditg. Service Revenue Credith. Dividends Debiti. Land Debitj. Prepaid Rent Debit

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EXERCISE 4-4A

Assets = Liabilities + Stockholders’ Equity

Debit Credit Debit Credit Debit CreditIncrease

Decrease

Decrease

Increase

Decrease

Increase

Contra Assets RevenueDebit Credit Debit Credit

Decrease

Increase

Decrease

Increase

ExpenseDebit Credit

Increase

Decrease

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EXERCISE 4-5A

Event Account Debited Account Crediteda. Acquired cash from

the issue of common stock.

Cash Common Stock

b. Provided services for cash.

Cash Service Revenue

c. Paid cash for salaries expense.

Salaries Expense Cash

d. Borrowed cash from a local bank.

Cash Notes Payable

e. Incurred other operating expense on account.

Other Operating Expense

Accounts Payable

f. Purchased land for cash.

Land Cash

g. Provided services on account.

Accounts Receivable

Service Revenue

h. Recorded accrued interest at the end of the period.

Interest Expense Interest Payable

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EXERCISE 4-6Aa.

Cash Common StockDebit Credit Debit Credit

$10,000 $10,000

This is an asset source transaction. Assets are increased; liabilities are increased.

b.Supplies Accounts Payable

Debit Credit Debit Credit$500 $500

This is an asset source transaction. The asset supplies is increased and the liability is increased.

c.Cash Land Notes Payable

Debit Credit Debit Credit Debit Credit$5,000 $20,000 $15,000

This transaction is part an asset source and part an asset exchange. Assets are increased by a net amount of $15,000 (Land is increased by $20,000, but cash is decreased by $5,000). Liabilities are increased by $15,000, the amount of the note.

d.Accounts Receivable Service Revenue

Debit Credit Debit Credit$4,000 $4,000

This is an asset source transaction. Assets are increased by $4,000 and revenue increases stockholders’ equity by $4,000.

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EXERCISE 4-7A

ASSETS = LIABILITIES +STOCKHOLDERS’

EQUITY

Cash = Accounts Payable

+ Common Stock

1. 24,000 2.15,000 8. 3,400 5. 5,000 1. 24,0006. 47,000 4.24,000 Bal.

1,600Bal.24,000

7. 6,200 8. 3,4009. 3,000 Dividends

Bal.31,800

9. 3,000

Bal.3,000Accounts Receivable

3. 65,000 6.47,000 Service RevenueBal.18,000

3. 65,000

7. 6,200Van Bal.

71,2002. 15,000Bal.15,000

Salaries Expense

4. 24,000Accumulated

Depr.Bal.24,000

10.4,000*Bal.4,000 Other Operating

Exp.5. 5,000Bal.5,000

Depreciation Expense

10. 4,000Bal. 4,000

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*[($15,000 $3,000) 3] = $4,000

b. Total Assets = $60,800 ($31,800 + $18,000 +$15,000 $4,000)

c. Net Income = $38,200 ($71,200 $24,000 $5,000 $4,000)

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EXERCISE 4-8A

Event Number Account Debited Account Credited

a. Cash Common Stock

b. Accounts

Receivable

Service Revenue

c. Operating

Expense

Cash

d. Cash Unearned Revenue

e. Depreciation

Expense

Accumulated

Depreciation

f. Salaries Payable Cash

g. Notes Payable Cash

h. Unearned

Revenue

Service Revenue

i. Accounts Payable Cash

j. Cash Accounts Receivable

k. Office Equipment Cash

l. Interest Expense Interest Payable

m. Interest

Receivable

Interest Revenue

n. Dividends Cash

o. Supplies Accounts Payable

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EXERCISE 4-9A

Stockholders’ EquityEventNo.

Type of

EventAssets = Liabiliti

es+

Common Stock +

Retained Earnings

a. AS + Debit NA NA + Creditb. AS + Debit +

Credit

NA NA

c. AU

Credit

Debit NA NA

d. AS + Debit +

Credit

NA NA

e. AE + Debit Credit

NA NA NA

f. AU

Credit

Debit NA NA

g. AE + Debit

Credit

NA NA NA

h. AS + Debit +

Credit

NA NA

i. CE NA +

Credit

NA Debit

j. CE NA +

Credit

NA Debit

k. AU

Credit

Debit NA NA

l. CE NA Debit NA + Creditm. AS + Debit NA NA + Credit

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n. AU

Credit

NA NA Debit

o. AU

Credit

NA NA Debit

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EXERCISE 4-10A

General Journal

Date Account Titles Debit Credit

a. Cash 5,000Unearned Revenue 5,000

b. Supplies 900Cash 900

c. Accounts Receivable 16,000Service Revenue 16,000

d. Equipment 36,000Cash 8,000Notes Payable 28,000

e. Repairs Expense 1,700Accounts Payable 1,700

f. Cash 21,500Land 18,000Gain on Sale of Land 3,500

g. Cash 12,200Accounts Receivable 12,200

h. Accounts Payable 800Cash 800

i. Prepaid Insurance 5,400Cash 5,400

j. Interest Expense 1,800Interest Payable 1,800

k. Depreciation Expense 6,000Accumulated Depreciation 6,000

l. Insurance Expense 4,800Prepaid Insurance 4,800

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EXERCISE 4-11A

Huang CompanyTrial Balance

December 31, 2005

Account Titles Debit Credit

Cash $ 30,000Accounts Receivable 8,500Office Supplies 1,800Prepaid Insurance 5,400Office Equipment 25,000Accumulated Depreciation $ 8,000Land 12,500Accounts Payable 4,000Unearned Revenue 22,000Common Stock 15,000Retained Earnings 11,200Dividends 5,000Service Revenue 63,000Rent Expense 18,000Salaries Expense 11,000Depreciation Expense 4,500Advertising Expense 1,500

Totals $123,200 $123,200

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EXERCISE 4-12A

a.Closing Entries Debit Credit

1. Service Revenue 85,500Interest Revenue 1,800

Retained Earnings 87,300

2. Retained Earnings 44,800Depreciation Expense 4,800Advertising Expense 2,500Rent Expense 9,600Salaries Expense 26,000Supplies Expense 1,900

3. Retained Earnings 2,000Dividends 2,000

b.Retained Earnings, 2008

Beginning Retained Earnings $ 6,800Add, Net Income 42,500Less, Dividends (2,000)Ending Retained Earnings $47,300

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EXERCISE 4-13Aa.

Custom Computer ServicesT-Accounts

Cash Accounts Payable Common Stock Retained Earnings

Debit Credit Debit Credit Debit Credit Debit Credit1. 20,000 9.8,000 3. 12,500 1.20,000 -0-4. 16,000 8. 800 Bal.

20,0005. 4,000 Bal.5,300

6. 18,0007. 8,200 Unearned

RevenueDividends

9. 8,000 Debit Credit Debit Credit10.1,000

12.4,000

7. 8,200 10.1,000

Bal.49,200 Bal.4,200 Bal.1,000

Interest Payable Service RevenueDebit Credit Debit Credit

Accounts Rec. 13.1,500 2.20,000Debit Credit Bal.1,500 12. 4,000

2. 20,000 6.18,000

Bal.24,000

Bal. 2,000 Notes PayableDebit Credit

Supplies 4.16,000 Interest ExpenseDebit Credit Bal.

16,000Debit Credit

8. 800 11. 600 13.1,500

Bal. 200 Bal.1,500

Office Equipment Operating Expense

Debit Credit Debit Credit5. 4,000 3.

12,500Bal.4,000 Bal.

12,500

Acc. Depr. Depr. ExpenseDebit Credit Debit Credit

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14.1,200

14.1,200

Bal.1,200

Bal.1,200

Supplies ExpenseDebit Credit

11. 600Bal. 600

EXERCISE 4-13A (cont.)b.

Custom Computer ServicesTrial Balance


Cash $ 49,200Accounts Receivable 2,000Supplies 200Office Equipment 4,000Accumulated Depreciation $ 1,200Accounts Payable 5,300Unearned Revenue 4,200Interest Payable 1,500Notes Payable 16,000Common Stock 20,000Dividends 1,000Service Revenue 24,000Interest Expense 1,500Operating Expenses 12,500Depreciation Expense 1,200Supplies Expense 600

Totals $72,200 $72,200

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EXERCISE 4-14A

a. Out of balance; credits will be higher, credits are greater by $800; Accounts Receivable is understated by $800.

b. Not out of balance; the liability account, accounts payable, will be overstated by $1,800 and the asset account, cash, will be understated by $1,800.

c. Out of balance; credits are understated by $900; the Notes Payable is understated by $900.

d. Out of balance; debits are overstated, the asset account, cash, is overstated by $3,600.

e. Not out of balance; the asset account, Prepaid Rent, is understated by $1,500, and expense account, Rent Expense, is overstated by $1,500.

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EXERCISE 4-15Aa.

Advance Lawn CareGeneral Journal, 2005


1. Accounts Receivable 80,000Service Revenue 80,000

2. Operating Expenses 5,600Accounts Payable 5,600

3. Cash 82,000Accounts Receivable 82,000

4. Salaries Expense 42,000Cash 42,000

5. Accounts Payable 6,500Cash 6,500

6. Dividends 5,000Cash 5,000

d. Closing Entries

7. Service Revenue 80,000Retained Earnings 80,000

8. Retained Earnings 47,600Operating Expenses 5,600Salaries Expense 42,000


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EXERCISE 4-15A (cont.)

b. and d.Advanced Lawn Care

T-Accounts, 2005

Cash Accounts Payable Common StockDebit Credit Debit Credit Debit Credit

Bal.

15,000Bal.

6,200Bal.

12,0003. 82,000 4.

42,0005. 6,500 2. 5,600

5. 6,500 Bal.

5,300Retained Earnings

6. 5,000 Debit CreditBal.

43,500Bal. 6,300

cl 47,600 cl 80,000Accounts

Receivablecl 5,000

Debit Credit Bal.

33,700Bal.9,5001.80,000 3.

82,000Dividends

Bal.7,500 Debit Credit6. 5,000 cl 5,000Bal. -0-

RevenueDebit Credit

cl 80,000 1.80,000Bal. -0-

Operating Expenses

Debit Credit2. 5,600 cl 5,600Bal. -0-

Salaries Expense

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Debit Credit4. 42,000 cl 42,000Bal. -0-

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EXERCISE 4-15A (cont.)c.

Advanced Lawn CareEffect of Transactions on the Financial Statements for 2005

Balance Sheet Income Statement

Assets = Liab. + Stockholders’ Equity

Rev. Exp. = Net Inc.

No. Cash +Accts. Rec. =

Acc. Pay. +

Comm.

Stock+

Ret. Earn.

Bal. 15,000 + 9,500 = 6,200 + 12,000

+ 6,300 NA NA NA

1. NA + 80,000 = NA + NA + 80,000 80,000 NA = 80,0002. NA + NA = 5,600 + NA + (5,600) NA 5,600 = (5,6003. 82,000 +(82,000) = NA + NA + NA NA NA = NA4. (42,000)+ NA = NA + NA + (42,000) NA 42,000 = (42,0005. (6,500) + NA = (6,500) + NA + NA NA NA = NA6. (5,000) + NA = NA + NA + (5,000) NA NA = NABal. 43,500 + 7,500 = 5,300 + 12,00

0+ 33,700 80,000 47,600 = 32,400

d. Net Income = $32,400e. Change in retained earnings = $27,400 ($33,700 $6,300)

The difference between the change in retained earnings and net income is the $5,000 dividend to the shareholders. The distribution reduces retained earnings but does not decrease net income.

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EXERCISE 4-16Aa., e. & f.

Assets = Stockholders’ Equity

Cash Accounts Rec. Retained Earnings2006 2006 20062. 32,000 1. 45,000 2. 32,000 cl 45,000Bal.32,000 Bal.

13,000Bal.45,000

2007 20073. 13,000 3. 13,000 Service RevenueBal.45,000 Bal. -0- 2006

cl 45,000 1. 45,000Bal. -0-2007

-0-

b. & g.Hubbard Company

Effect of Transactions on the Financial Statements for 2006 and 2007


Rev. Exp. = Net Inc. Cash Flows

No. Cash +Acct. Rec. = +

Com. Stock +

Ret. Earn.

20061. NA + 45,000 = NA + NA + 45,000 45,000 NA = 45,000 NA2. 32,000 + (32,000

)= NA + NA + NA NA NA = NA 32,000

OABal. 32,000 + 13,000 = -0- + -0- + 45,000 45,000 -0-= 45,000 32,000

NC2007

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3. 13,000 + (13,000)

= NA + NA + NA NA NA = NA 13,000 OA

Bal. 45,000 + -0-= -0- + -0- + 45,000 -0- -0-= -0- 13,000 NC

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c. 2006 Revenue = $45,000

d. 2006 Cash Flows From Operating Activities = $32,000

e. See T-accounts above.

f. See T-accounts above.

g. See the Statements Model above.

h. 2007 Net Income = $-0-2007 Cash Flows From Operating Activities = $13,000.

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EXERCISE 4-17Aa. b. & e.


Accounts Rec. Accounts Pay. Retained Earnings

Debit Credit Debit Credit Debit Credita112,000 a2 2,000 cl 1,600 cl 12,000Bal.12,000

Bal.2,000

Bal.10,400

Supplies Service RevenueDebit Credit Debit Credit

a2 2,000 b. 1,600 cl 12,000 a112,000

Bal. 400 Bal. -0-


b. 1,600 cl 1,600Bal. -0-

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Cortez Consulting ServicesEffect of Transactions on the Financial Statements for 2005


Revenue

Exp. = Net Inc. Cash Flows

No.Accts. Rec. + Supplie

s=

Accts. Pay. +

Common Stock +

Ret. Earn.

1. 12,000 + NA = NA + NA + 12,000 12,000 NA = 12,000 NA2. NA + 2,000 = 2,000 + NA + NA NA NA = NA NAa1. NA + (1,600)= NA + NA + (1,600) NA 1,600 = (1,600) NABal. 12,000 + 400 = 2,000 + -0- + 10,400 12,000 1,600 = 10,400 NC

d. Net income is $10,400; Net Cash Flow from Operating Activities is $-0-. $12,000 of revenue earned was on account, but none was collected; $1,600 of supplies were used, but none were paid for.

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e.General Journal


Closing Entries

Dec. 31 Service Revenue 12,000Retained Earnings 12,000

Retained Earnings 1,600Supplies Expense 1,600

Closing entries are posted to the T-accounts in part a.

Cortez Counsulting ServicesAfter-Closing Trial Balance

December 31, 2005


Accounts Receivable $12,000Supplies 400Accounts Payable $ 2,000Retained Earnings 10,400

Totals $12,400 $12,400

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EXERCISE 4-18Aa. & b.

Utah MiningJournal Entries for 2005


a. 3/1 Prepaid Rent (Lease) 54,000Cash 54,000

b. 12/31

Rent Expense 45,000*

Prepaid Rent 45,000

*($54,000 12) = $4,500 per month; $4,500 x 10 mo. = $45,000.

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Utah MiningHorizontal Statements Model for 2005


Income Statement Statement

Event Cash

+ Prepaid Rent =

Comm. Stock

Ret. EarnRevenue Expense = Net Inc.

ofCash Flows

1. 70,000 NA 70,000 NA NA NA NA 70,000 FA2. (54,00

0)54,000 NA NA NA NA NA (54,000) OA

3. 75,000 NA NA 75,000 75,000 NA 75,000 75,000 OAa1. NA (45,000

)(45,000

)NA 45,000 (45,000

)NA

Bal. 91,000 9,000 70,000 30,000 75,000 45,000 30,000 91,000 NC

d. Revenue $75,000Expense (45,000 ) Net Income $30,000

Cash Flows From Operating Activities:Cash Received from Revenue $75,000Cash Payment for Expense (54,000)

Net Cash Flow from Operating Activities$21,000

e. Prepaid Rent: $9,000 ($54,000 $45,000)

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EXERCISE 4-19Aa.

Debit CreditSalaries Expense 6,500

Salaries Payable 6,500

b. Revenue $12,000Salaries Expense (6,500)Net Income $ 5,500

Cash Flows From Operating Activities:Cash Received from Revenue $12,000Cash Payment for Expense -0 -


c. Liability = $6,500

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Cash Computer Depreciation Expense

a.28,000

a.28,000

b. 6,000*

Accumulated Depr.

b. 6,000

*($28,000 $4,000) 4 = $6,000 depreciation per year

c. Historical Cost $28,000Less: Accumulated Depreciation (6,000)Book Value $22,000

d. Revenue $12,000Depreciation Expense (6,000)Net Income $ 6,000

e. Cash Flows From Operating Activities:Cash Received from Revenue $12,000


f. 2008 Depreciation Expense = $6,000 (the same as for 2007)

g. Historical Cost $28,000Less: Accumulated Depreciation (12,000)**Book Value, 12/31/08 $16,000

**(2007 $6,000 + 2008 $6,000)

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EXERCISE 4-21A

a. Asset Source Transaction

Assets = Liabilities + Stk. Equity

Cash Notes Payable80,000 80,000

b. Claims Exchange Transaction

Assets = Liabilities + Stk. Equity

Interest Payable Interest Expense4,800

4,800*

*$80,000 x .09 x 8/12 = $4,800

c. Revenue $25,000Interest Expense (4,800)Net Income $20,200

d. Cash Flows From Operating Activities:Cash Received from Revenue $25,000


e. Liabilities:Notes Payable $80,000Interest Payable 4,800

Total Liabilities $84,800

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EXERCISE 4-21 (cont.)

f. Two transactions occur in the repayment of the note in 2004: (1) the accrual of the remaining interest,$2,400; and (2) the payment of the principal and interest ($80,000 + $7,200).


Cash Notes Payable Interest Expense2.

87,200

2. 80,000 Bal.80,000

1. 2,400*

Bal. -0-

Interest PayableBal.4,800

2. 7,2001. 2,400Bal. -0-

*$80,000 x .09 x 4/12 = $2,400

g. Transaction 1 is a claims exchange transaction; transaction 2 is an asset use transaction.

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Cash Unearned Revenue

Service Revenue

3/1 72,000 12/3160,000

3/172,000 12/3160,000*

Bal.12,000

*$72,000 x 10/12 = $60,000c.

Effect of Transactions on Financial Statements

Balance Sheet Income Statement Statement of

Date Assets = Liab. + S. Equity


Cash Flows

3/172,000

= 72,000 + NA NA NA = NA 72,000 OA

12/31

NA =(60,000)

+ 60,00060,000

NA = 60,000 NA

Bal.72,000

12,000 60,00060,000

NA60,000

72,000NC

d. Revenue $60,000Expenses -0-Net Income $60,000

Cash Flows From Operating Activities:Cash Received from Revenue $72,000


e. Liabilities = $12,000 (See T-accounts above.)

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EXERCISE 4-23A

Accounts ReceivableDebit Credit

Beg. Bal. 57,000 Coll. 134,000Rev. 126,000End. Bal. 49,000

$134,000 of cash was collected. [($57,000 + $126,000) $49,000]

EXERCISE 4-24A

Accounts PayableDebit Credit

Beg. Bal.20,000Paid 73,000 Exp. 75,000

End Bal. 22,000

$73,000 of cash was paid for expenses [($20,000 + 75,000) $22,000].

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SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 4

PROBLEM 4-25A

No. Account Balance No. Account Balance

a. Supplies Expense Debit o. Dividends Debit

b. Prepaid Rent Debit p. Interest Receivable Debit

c. Accumulated Depr. Credit q. Land Debit

d. Equipment Debit r. Notes Payable Credit

e. Interest Payable Credit s. Salaries Expense Debit

f. Service Revenue Credit t. Certificate of Deposit Debit

g. Supplies Debit u. Interest Revenue Credit

h. Accounts Payable Credit v. Rent Expense Debit

i. Depreciation Expense Debit w. Common Stock Credit

j. Unearned Revenue Credit x. Cash Debit

k. Loss on Sale of Equipment Debit y. Salaries Payable Credit

l. Gain on Sale of Land Credit z. Accounts Receivable Debit

m. Truck Debit aa. Insurance Expense Debit

n. Operating Expense Debit bb. Prepaid Insurance Debit

cc. Retained Earnings Credit

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PROBLEM 4-26A

Event Type of Event Account Debited Account Credited

1. AS Cash Common Stock

2. AU Salaries Expense Cash

3. AS Cash Unearned Revenue

4. AU Utilities Expense Cash

5. AS Accounts Receivable Service Revenue

6. AS & AE EquipmentCash &Notes Payable

7. AU Dividends Cash

8. AS Supplies Accounts Payable

9. AS Cash Service Revenue

10. AE Prepaid Rent Cash

11. AU Notes Payable Cash

12. AU Operating Expenses Cash

13. AU Accounts Payable Cash

14. AE Office Furniture Cash

15. AU Depreciation Expense Accumulated Depr.

16. AU Rent Expense Prepaid Rent

17. CE Unearned Revenue Service Revenue

18. CE Interest Expense Interest Payable

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PROBLEM 4-27AGeneral Journal

No. Date Account Titles Debit Credit

a. Oct. 1 Prepaid Rent 3,500Cash 3,500

Dec. 31 Rent Expense ($3,500 x 3/12) 875Prepaid Rent 875

b. Apr. 1 Cash 60,000Notes Payable 60,000

Dec. 31 Interest Expense1 3,150Interest Payable 3,150

c. Oct. 1 Equipment 31,000Cash 31,000

Dec. 31 Depreciation Expense2 1,300Accumulated Depreciation 1,300

d. Apr. 1 Certificate of Deposit 12,500Cash 12,500

Dec. 31 Interest Receivable3 375Interest Revenue 375

e. June 15 Supplies 2,400Accounts Payable 2,400

Dec. 31 Supplies Expense ($2,400 $250) 2,150Supplies 2,150

f. July 1 Cash 8,100Unearned Revenue 8,100

Dec. 31 Unearned Revenue ($8,100 x 6/12) 4,050Service Revenue 4,050

g. Mar. 1 Prepaid Insurance 2,400Cash 2,400

Dec. 31 Insurance Expense ($2,400 x 10/12) 2,000Prepaid Insurance 2,000

1$60,000 x 7% = $4,200; $4,200 x 9/12 = $3,150.2$31,000 $5,000 = $26,000; $26,000 5 = $5,200; $5,200 x 3/12 = $1,300.3$12,500 x 4% = $500; $500 x 9/12 = $375.

4-37

PROBLEM 4-28Aa.

The Travel CompanyGeneral Journal, 2005

Event Account Titles Debit Credit

1. Cash 12,500Common Stock 12,500

2. Supplies 500Accounts Payable 500

3. Prepaid Rent 3,400Cash 3,400






Adjusting Entries

9. Supplies Expense ($500 $110) 390Supplies 390

10. Rent Expense ($3,400 x 3/12) 850Prepaid Rent 850

11. Salaries Expense 1,400Salaries Payable 1,400

4-38

PROBLEM 4-28A (cont.)b.

The Travel CompanyT-Accounts


Cash Accounts Payable Common Stock1. 12,500 3. 3,400 7. 8,000 2. 500 1. 12,5006. 14,500 7. 8,000 5.

10,200Bal.12,500

8. 1,200 Bal.2,700

Bal.14,400

Dividends

Salaries Payable 8. 1,200Accounts Rec. 11.

1,400Bal. 1,200

4.16,000 6.14,500

Bal.1,400

Bal.1,500 Service Revenue4. 16,000

Supplies Bal.16,000

2. 500 9. 390Bal. 110 Operating

Expenses5. 10,200

Prepaid Rent Bal.10,200

3. 3,400 10. 850Bal. 2,550 Salaries Expense

11. 1,400Bal. 1,400

Supplies Expense9. 390Bal. 390

Rent Expense

4-39

10. 850Bal. 850

4-40

PROBLEM 4-28A (cont.)c.

The Travel CompanyTrial Balance

December 31, 2005


Cash $14,400Accounts Receivable 1,500Supplies 110Prepaid Rent 2,550Accounts Payable $ 2,700Salaries Payable 1,400Common Stock 12,500Dividends 1,200Service Revenue 16,000Operating Expenses 10,200Salaries Expense 1,400Supplies Expense 390Rent Expense 850

Totals $32,600 $32,600

4-41

PROBLEM 4-28A (cont.)d.

The Travel CompanyFinancial Statements

For the Year Ended December 31, 2005

Income Statement

Service Revenue $16,000

ExpensesOperating Expenses $10,200Salaries Expense 1,400Supplies Expense 390Rent Expense 850

Total Expenses (12,840)

Net Income $ 3,160

Statement of Changes in Stockholders’ Equity

Beginning Common Stock $ -0-Plus: Stock Issued 12,500Ending Common Stock $12,500

Beginning Retained Earnings -0-Plus: Net Income 3,160Less: Dividends (1,200)Ending Retained Earnings 1,960

Total Stockholders’ Equity $14,460

4-42

PROBLEM 4-28A d. (cont.)

The Travel CompanyBalance Sheet

As of December 31, 2005

AssetsCash $14,400Accounts Receivable 1,500Supplies 110Prepaid Rent 2,550

Total Assets $18,560

LiabilitiesAccounts Payable $ 2,700Salaries Payable 1,400

Total Liabilities $ 4,100

Stockholders’ EquityCommon Stock 12,500Retained Earnings 1,960

Total Stockholders’ Equity 14,460

Total Liabilities and Stockholders’ Equity $18,560

Statement of Cash FlowsFor the Year Ended December 31, 2005

Cash Flows From Operating Activities:Inflow from Customers $14,500Outflow for Expenses (11,400)

Net Cash Flow from Operating Activities $ 3,100

Cash Flows From Investing Activities -0-

Cash Flows From Financing Activities:Inflow from Stock Issue 12,500Outflow for Dividends (1,200)

Net Cash Flow from Financing Activities 11,300

Net Change in Cash 14,400Plus: Beginning Cash Balance -0-Ending Cash Balance $14,40

0

4-43

PROBLEM 4-28A (cont.)e.Date Account Titles Debit Credit

Closing Entries

Dec. 31

Service Revenue 16,000


Dec. 31


Operating Expenses 10,200Salaries Expense 1,400Supplies Expense 390Rent Expense 850

Dec. 31


Dividends 1,200

4-44

PROBLEM 4-28A (cont.)f.

The Travel CompanyT-Accounts Closing Entries , 2005


Cash Accounts Payable Common StockBal.14,400

Bal.2,700

Bal. 12,500

Salaries Payable Retained EarningsAccounts

ReceivableBal.

1,400cl 12,840 cl 16,000

Bal.1,500 cl 1,200Bal. 1,960

Supplies DividendsBal. 110 Bal. 1,200 cl. 12,00

Bal. -0-

Prepaid Rent Service RevenueBal.2,550 cl 16,000 Bal.

16,000Bal. -0-

Operating Expense

Bal.10,200

cl 10,200

Bal. -0-

Salaries ExpenseBal.1,400 cl 1,400Bal. -0-

Supplies ExpenseBal. 390 cl 390Bal. -0-

Rent Expense

4-45

Bal. 850 cl 850Bal. -0-

4-46

PROBLEM 4-28A f. (cont.)f.

The Travel CompanyAfter Closing Trial Balance

December 31, 2005


Cash $14,400Accounts Receivable 1,500Supplies 110Prepaid Rent 2,550Accounts Payable $ 2,700Salaries Payable 1,400Common Stock 12,500Retained Earnings 1,960

Totals $18,560 $18,560

4-47

PROBLEM 4-29Aa.

Northeast Welding General Journal, 2001




3. Cash 2,400Unearned Revenue 2,400






Adjusting Entries

9. Rent Expense ($3,000 x 11/12) 2,750Prepaid Rent 2,750

10. Unearned Revenue ($2,400 x 4/12) 800Service Revenue 800


4-48


Northeast WeldingT-Accounts, 2001


Cash Accounts Payable Common Stock1. 20,000 2. 3,000 8.

14,5005.

17,0001. 20,000

3. 2,400 7.12,000

Bal.2,500

Bal.20,000

6. 32,500 8.14,500

Bal.25,400

Service Revenue

Salaries Payable 4. 38,50011.1,600 10. 800

Accounts Receivable

Bal.1,600

Bal.39,300

4. 38,500 6.32,500

Bal. 6,000 Unearned Revenue

Salaries Expense

10. 800 3. 2,400 7. 12,000Prepaid Rent Bal.

1,60011. 1,600

2. 3,000 6. 2,750 Bal.13,600

Bal. 250Operating Expenses

5. 17,000Bal.

17,000

Rent Expense9. 2,750Bal. 2,750

4-49


Northeast WeldingTrial Balance

December 31, 2001


Cash $25,400Accounts Receivable 6,000Prepaid Rent 250Accounts Payable $ 2,500Salaries Payable 1,600Unearned Revenue 1,600Common Stock 20,000Service Revenue 39,300Operating Expenses 17,000Salaries Expense 13,600Rent Expense 2,750

Totals $65,000 $65,000

4-50


Northeast WeldingFinancial Statements


Income Statement


ExpensesOperating Expenses $17,000Salaries Expense 13,600Rent Expense 2,750


Net Income $ 5,950



Beginning Retained Earnings -0-Plus: Net Income 5,950Ending Retained Earnings 5,950


4-51

PROBLEM 4-29A d. (cont.)Northeast Welding

Balance SheetAs of December 31, 2001

AssetsCash $25,400Accounts Receivable 6,000Prepaid Rent 250


LiabilitiesAccounts Payable $ 2,500Salaries Payable 1,600Unearned Revenue 1,600









Cash Flows From Financing Activities:Inflow from Stock Issue 20,000



0

4-52


Closing Entries

Dec. 31



Dec. 31


Operating Expense 17,000Salaries Expense 13,600Rent Expense 2,750

Northeast WeldingT-Accounts for Closing Entries, 2001



Bal.2,500

Bal. 20,000

Salaries Payable Retained EarningsAccounts Rec. Bal.

1,600cl 33,350 cl 39,300

Bal. 6,000 Bal. 5,950Unearned Revenue


Service Revenue

Bal. 250 cl 39,300 Bal.39,300Bal. -0-

Operating Expenses

Bal.17,000

cl 17,000

Bal. -0-

4-53

Salaries ExpenseBal.13,600

cl 13,600

Bal. -0-

Rent ExpenseBal. 2,750 cl 2,750Bal. -0-

4-54


Northeast WeldingAfter Closing Trial Balance

December 31, 2001


Cash $25,400Accounts Receivable 6,000Prepaid Rent 250Accounts Payable $ 2,500Salaries Payable 1,600Unearned Revenue 1,600Common Stock 20,000Retained Earnings 5,950

Totals $31,650 $31,650

4-55

PROBLEM 4-29A (cont.)g.

Northeast WeldingGeneral Journal, 2002


1. Salaries Payable 1,600Cash 1,600

2. Cash 20,100Service Revenue 20,100

3. Cash 15,000Notes Payable 15,000

4. Land 12,500Cash 12,500








4-56

PROBLEM 4-29A g. (cont.)

Northeast WeldingGeneral Journal, 2002


Adjusting Entries

12. Unearned Revenue 1,600Service Revenue1 1,600

13. Rent Expense2 3,550Prepaid Rent 3,550

14. Interest Expense3 1,125Interest Payable 1,125

1 $2,400 x 8/12 = $1,6002 ($3,000 x 1/12) + ($3,600 x 11/12) = $3,5503 $15,000 x 9% x 10/12 = $1,125

4-57


Northeast WeldingT-Accounts, 2002



Bal.2,500

Bal.20,000

2. 20,100 1. 1,600 9.32,000 7.35,200

3. 15,000 4.12,500 Bal.5,700

8. 42,500 5. 3,6009.32,000 Salaries Payable Retained Earnings10.28,000

Bal.1,600

Bal. 5,950

11. 5,000 1. 1,600Bal.20,300

Bal. -0- Dividends

11.5,000Accounts Rec. Unearned

RevenueBal.

5,000

Bal.6,000 Bal.1,600

6. 64,000 8.42,500 12.1,600 Service RevenueBal.

27,500Bal. -0- 2. 20,100

6. 64,000Prepaid Rent Interest Payable 12. 1,600

Bal. 250 14. 1,125 Bal.85,700

5. 3,600 13.3,550 Bal. 1,125

Bal. 300 Operating Expenses

7.35,200

Land Notes Payable Bal.35,200

4. 12,500 3.15,000

4-58

Bal.12,500

Bal.15,000

Salaries Expense

10.28,000

Bal. 28,000


Interest Expense14. 1,125Bal. 1,125

4-59


Northeast WeldingTrial Balance

December 31, 2002


Cash $ 20,300Accounts Receivable 27,500Prepaid Rent 300Land 12,500Accounts Payable $ 5,700Interest Payable 1,125Notes Payable 15,000Common Stock 20,000Retained Earnings 5,950Dividends 5,000Service Revenue 85,700Operating Expenses 35,200Salaries Expense 28,000Rent Expense 3,550Interest Expense 1,125

Totals $133,475 $133,475

4-60


Northeast WeldingFinancial Statements


Income Statement


ExpensesOperating Expenses $35,200Salaries Expense 28,000Rent Expense 3,550Interest Expense 1,125


Net Income $17,825


Beginning Common Stock $20,000Plus: Stock Issued -0-Ending Common Stock $20,000

Beginning Retained Earnings 5,950Plus: Net Income 17,825Less: Dividends (5,000)Ending Retained Earnings 18,775


4-61


Northeast WeldingBalance Sheet

As December 31, 2002

AssetsCash $20,300Accounts Receivable 27,500Prepaid Rent 300Land 12,500


LiabilitiesAccounts Payable $ 5,700Interest Payable 1,125Notes Payable 15,000





4-62


Northeast WeldingStatement of Cash Flows



Net Cash Flow from Operating Activities $ (2,600)

Cash Flows From Investing Activities:Outflow to Purchase Land (12,500)

Net Cash Flow from Investing Activities (12,500)

Cash Flows From Financing Activities:Inflow from Borrowed Funds 15,000Outflow for Dividends (5,000)


Net Change in Cash (5,100)Plus: Beginning Cash Balance 25,400Ending Cash Balance $20,30

0

4-63



Closing Entries

Dec. 31



Dec. 31


Operating Expenses 35,200Salaries Expense 28,000Rent Expense 3,550Interest Expense 1,125

Dec. 31


Dividends 5,000

4-64


Northeast WeldingT-Accounts for Closing Entries, 2002



Bal.5,700

Bal. 20,000

Interest Payable Retained EarningsAccounts Rec. Bal.

1,125cl 67,875 Bal. 5,950

Bal.27,500

cl 5,000 cl 85,700

Bal.18,775

Notes PayablePrepaid Rent Bal.

15,000Dividends

Bal. 300 Bal. 5,000 cl 5,000Bal. -0-

Land Service RevenueBal.12,500

cl 85,700 Bal.85,700Bal. -0-

Operating Expenses

Bal.35,200

cl 35,200

Bal. -0-


cl 28,000

Bal. -0-

Rent Expense

4-65

Bal. 3,550 cl 3,550Bal. -0-

Interest ExpenseBal. 1,125 cl 1,125Bal. -0-

4-66


Northeast WeldingAfter Closing Trial Balance

December 31, 2002


Cash $20,300Accounts Receivable 27,500Prepaid Rent 300Land 12,500Accounts Payable $ 5,700Interest Payable 1,125Notes Payable 15,000Common Stock 20,000Retained Earnings 18,775

Totals $60,600 $60,600

4-67

PROBLEM 4-30A

Entry Date Description of Transaction

January 1 Acquired $12,500 cash from the issuance of common stock.

February 15 Collected $13,000 cash for services to be performed in the future.March 10 Purchased supplies on account.

April 1 Purchased office equipment by paying cash and issuing a note for the balance.

May 1 Paid cash in advance to rent space.

May 20 Performed services on account.

June 15 Paid cash for salaries.

August 28 Performed services for cash.

August 30 Paid a cash dividend to stockholders.

September 19 Received cash from customers on account.

October 31 Paid cash for property taxes.

December 31 Recognized $2,700 of depreciation expense.

December 31 Recognized $2,025 of expense for supplies that had been used during the period.

December 31 Recognized $6,400 of rent expense. Cash had been paid in a prior transaction.

December 31 Recognized revenue that had been earned during the period. Cash had been received in a prior transaction.

4-68

PROBLEM 4-31Aa.

Chen EnterprisesEffect of Transactions on Financial Statements for 2002

Balance Sheet Income Statement Stmt. ofEvent Assets = Liab. + S. Equity Rev. Exp. = Net Inc. Cash Flows

1. + NA + NA NA NA + FA2. + + NA NA NA NA NA3. + NA + + NA + + OA4. + + NA NA NA NA + OA5. + NA + + NA + NA6. + + NA NA NA NA NA7. + NA NA NA NA NA IA8. + NA NA NA NA NA + OA9. + NA NA NA NA NA IA

10. + NA NA NA NA NA OA11. + NA NA NA NA NA IA12. NA NA + OA13. NA NA NA NA FA14. NA NA NA NA IA15. NA NA NA NA OA16. NA + NA + NA17. NA + NA + NA18. NA + + NA + NA19. + NA + + NA + NA20. + NA + + NA + NA21. NA + NA + NA22. NA NA + NA23. NA NA + NA

4-69

PROBLEM 4-31A (cont.) b.Chen Enterprises T-Accounts, 2002

Cash Accounts Payable Common Stock1. 10,000 7. 5,000 14. 3,250 2. 3,250 1. 10,0003. 600 9. 500 15. 650 6. 650 Bal.

10,0004. 3,000 10. 400 16. 1258. 5,500 11. 2,400 17. 100 Dividends

12. 2,500 Bal. 225 13. 1,50013. 1,500 Bal. 1,50014. 3,250 Unearned Revenue15. 650 18. 2,100 4. 3,000 Service Revenue

Bal. 2,900 Bal. 900 3. 6005. 6,500

Accounts Receivable Salaries Payable 18. 2,1005. 6,500 8. 5,500 21. 450 Bal. 9,200

Bal. 1,000 Bal. 450Interest Revenue

Supplies 19. 406. 650 23. 975 20. 45

10. 400 Bal. 85Bal. 75

Salaries ExpenseNotes Receivable 12. 2,500

9. 500 21. 450Bal. 500 Bal. 2,950

Advertising ExpenseCertificate of

Deposit16. 125

11. 2,400 Bal. 125Bal. 2,400

Utilities ExpenseInterest Receivable 17. 100

19. 40 Bal. 10020. 45Bal. 85 Supplies Expense

23. 975Equipment Bal. 975

2. 3,2507. 5,000 Depreciation Exp.Bal. 8,250 22. 750

Bal. 750Accumulated Depr.

22. 750

4-70

Bal. 750

4-71


Chen EnterprisesTrial Balance for 2002


Cash $ 2,900Accounts Receivable 1,000Supplies 75Notes Receivable 500Certificate of Deposit 2,400Interest Receivable 85Equipment 8,250Accumulated Depreciation $ 750Accounts Payable 225Unearned Revenue 900Salaries Payable 450Common Stock 10,000Dividends 1,500Service Revenue 9,200Interest Revenue 85Salaries Expense 2,950Advertising Expense 125Utilities Expense 100Supplies Expense 975Depreciation Expense 750

Totals $21,610 $21,610

4-72

PROBLEM 4-32A



1. + NA + NA NA NA + FA2. + NA + + NA + NA3. NA NA + OA4. + NA + + NA + + OA5. NA NA NA NA FA6. + + NA NA NA NA + OA7. + + NA NA NA NA NA8. +(+) + NA NA NA NA IA9. + NA NA NA NA NA OA

10. + NA NA NA NA NA + OA11. NA NA + OA12. NA NA + NA13. NA NA + NA14. NA NA + NA15. NA + + NA + NA

4-73

PROBLEM 4-33A

Error Number

Is the Trial Balance Out of Balance? By What Amount?

Which is Larger: Debit or Credit Column?

a. YES 90 Debit

b. YES 620 Debit

c. NO NA NA

d NO NA NA

e. YES 4,000 Debit

f. YES 400 Credit

4-74

PROBLEM 4-34Aa.1. Debits would be greater by $3,290.

2. Debits and credits would be equal, but assets are understated and liabilities are understated.

3. Debits and credits would be equal; both assets and equity (revenue) would be understated by $2,000.

4. Debits and credits would be equal; total debits would also be correct but cash would be understated and accounts receivable would be overstated.

5. Debits and credits would be equal; assets and liabilities would both be overstated.

6. Debits and credits would be equal; liabilities would be understated and equity would be overstated.

b.Event No. Assets = Liabilities + Stk. Equity

1. Overstated No Effect No Effect2. Understated Understated No Effect3. Overstated No Effect Overstated4. No Effect No Effect No Effect5. Overstated Overstated No Effect6. No Effect Understated Overstated

4-75

PROBLEM 4-34A (cont.)

c.


Cash ($1,100 + $800 - $10000 + $500 $300)

$7900

Accounts Receivable ($1,770 $500)

$1,270

Supplies $420Prepaid Insurance $2,400Office Equipment ($6800 $90) $6,710Accounts Payable ($1,500 + $800 + $600 $300) $2,600Notes Payable $1,000Common Stock $1,800Retained Earnings $4,000Dividends $400Service Revenue ($19,600 - $10,000)

$9,600

Rent Expense $3,600Salaries Expense $9,000Operating Expenses $2,500Utilities Expense $600

Totals $26,900 $26,900

4-76

PROBLEM 4-35A a.

Atwood CorporationGeneral Journal, 2003


Jan. 1 Cash 60,000Common Stock 60,000

Mar. 1 Prepaid Rent 19,200Cash 19,200

Apr. 1 Cash 40,000Notes Payable 40,000

Apr. 14 Supplies 600Accounts Payable 600

June 1 Office Equipment 30,000Cash 30,000

June 30 Cash 36,000Unearned Revenue 36,000

July 5 Accounts Payable 400Cash 400

Aug. 1 Accounts Receivable 6,600Service Revenue 6,600

Aug. 8 Cash 4,000Service Revenue 4,000

Sept. 1 Salaries Expense 24,000Cash 24,000

Sept. 9 Cash 5,000Accounts Receivable 5,000

Oct. 5 Accounts Receivable 18,400Service Revenue 18,400

Nov. 2 Dividends 800Cash 800

4-77

PROBLEM 4-35A a. (cont.)

Atwood CorporationGeneral Journal (cont)


Adjusting Entries

Dec. 31 Unearned Revenue ($36,000 6/12)

18,000


Dec. 31 Interest Expense1 3,000Interest Payable 3,000

Dec. 31 Depreciation Expense2 3,500Accumulated Depreciation 3,500

Dec. 31 Salaries Expense 1,800Salaries Payable 1,800

Dec. 31 Rent Expense ($19,200 x 10/24)

8,000

Prepaid Rent 8,000

Dec. 31 Supplies Expense ($600 $50) 550Supplies 550

1$40,000 x 10% = $4,000; $4,000 x 9/12 = $3,000.2$30,000 5 = $6,000; $6,000 x 7/12 = $3,500.

4-78


Atwood Corporation T-Accounts

Cash Accounts Payable Common Stock1/1 60,000 3/1 19,200 7/5 400 4/14 600 1/1 60,0004/1 40,000 6/1 30,000 Bal. 200 Bal.60,0006/3036,000

7/5 400

8/8 4,000 9/1 24,000 Retained Earnings9/9 5,000 11/2 800 Unearned Revenue Bal. -0-Bal.70,600 12/31

18,0006/3036,000

Bal.18,000 Dividends11/2 800

Accounts Receivable Bal. 8008/1 6,600 9/9 5,000 Interest Payable10/518,400

12/313,000 Service Revenue

Bal.20,000 Bal. 3,000 8/1 6,6008/8 4,00010/518,400

Supplies Salaries Payable 12/3118,000

4/14 600 12/31 550 12/311,800 Bal.47,000

Bal. 50 Bal. 1,800Salaries Expense

Prepaid Rent Notes Payable 9/1 24,0003/1 19,200 12/31

8,0004/1 40,000 12/31 1,800

Bal.11,200 Bal.40,000 Bal. 25,800

Interest ExpenseOffice Equipment 12/31 3,000

6/1 30,000 Bal. 3,000Bal.30,000

Rent Expense12/31 8,000

Accumulated Depr. Bal. 8,00012/313,500Bal. 3,500 Depreciation

Expense12/31 3,500Bal. 3,500

4-79

Supplies Expense12/31 550Bal. 550

4-80


Atwood CorporationTrial Balance

December 31, 2003


Cash $ 70,600Accounts Receivable 20,000Supplies 50Prepaid Rent 11,200Office Equipment 30,000Accumulated Depreciation $ 3,500Accounts Payable 200Unearned Revenue 18,000Interest Payable 3,000Salaries Payable 1,800Notes Payable 40,000Common Stock 60,000Dividends 800Service Revenue 47,000Salaries Expense 25,800Interest Expense 3,000Rent Expense 8,000Depreciation Expense 3,500Supplies Expense 550

Totals $173,500 $173,500

4-81


Atwood CorporationFinancial Statements


Income Statement


ExpensesSalaries Expense $25,800Interest Expense 3,000Rent Expense 8,000Depreciation Expense 3,500Supplies Expense 550


Net Income $ 6,150



Beginning Retained Earnings -0-Plus: Net Income 6,150

Less Dividends (800)Ending Retained Earnings 5,350


4-82


Atwood CorporationBalance Sheet


AssetsCash $70,600Accounts Receivable 20,000Supplies 50Prepaid Rent 11,200Office Equipment 30,000Less: Accumulated Depreciation (3,500)


LiabilitiesAccounts Payable $ 200Salaries Payable 1,800Interest Payable 3,000Notes Payable 40,000Unearned Revenue 18,000





4-83


Atwood CorporationStatement of Cash Flows




Cash Flows From Investing Activities:Outflow to Purchase Computer (30,000)


Cash Flows From Financing Activities:Inflow from Stock Issue 60,000Inflow from Borrowed Funds 40,000Outflow for Dividends (800)



0

4-84


Closing Entries

Dec. 31



Dec. 31


Salaries Expense 25,800Interest Expense 3,000Depreciation Expense 3,500Rent Expense 8,000Supplies Expense 550

Dec. 31

Retained Earnings 800

Dividends 800

4-78

PROBLEM 4-35A e. (cont.)

Atwood CorporationT-Accounts for Closing Entries, 2003


Cash Accounts Payable Common StockBal.70,600 Bal. 200 Bal.

60,000

Unearned Revenue Retained EarningsAccounts Receivable Bal.

18,000cl 40,850 cl 47,000

Bal.20,000 cl 800Bal. 5,350

Salaries PayableSupplies Bal. 1,800 Dividends

Bal. 50 Bal. 800 cl 800Bal. -0-

Interest PayablePrepaid Rent Bal. 3,000 Service Revenue

Bal.11,200 cl 47,000 Bal.47,000Bal. -0-

Notes PayableOffice Equipment Bal.

40,000Salaries Expense

Bal.30,000 Bal.25,800

cl 25,800

Bal. -0-

Accumulated Depr. Interest ExpenseBal. 3,500 Bal. 3,000 cl 3,000

Bal. -0-

Depreciation ExpenseBal. 3,500 cl 3,500Bal. -0-



4-79


Atwood CorporationAfter Closing Trial Balance

December 31, 2003


Cash $ 70,600Accounts Receivable 20,000Prepaid Rent 11,200Supplies 50Office Equipment 30,000Accumulated Depreciation $ 3,500Accounts Payable 200Unearned Revenue 18,000Interest Payable 3,000Salaries Payable 1,800Notes Payable 40,000Common Stock 60,000Retained Earnings 5,350

Totals $131,850 $131,850

4-81

PROBLEM 4-36A a.

Hawkins Rentals, General Journal, April 2007


Apr. 1 Cash 40,000Common Stock 20,000Notes Payable 20,000

Apr. 1 Prepaid Rent 3,600Cash 3,600

Apr. 1 Wedding Decor 30,000Cash 30,000

Apr. 6 Supplies 220Cash 220

Apr. 9 Cash 500Unearned Revenue 500

Apr. 10

Cash 850

Accounts Receivable 1,200Rental Revenue 2,050

Apr. 15

Salaries Expense 960

Cash 960

Apr. 16

Cash 450

Accounts Receivable 450

Apr. 23

Utilities Expense 233

Accounts Payable 233

Apr. 25

Advertising Expense 240

Cash 240

Apr. 30

Cash 1,150

Accounts Receivable 1,600

4-82

Rental Revenue 2,750

Apr. 30

Salaries Expense 960

Cash 960

4-83

PROBLEM 4-36A (cont.)

d.

Hawkins RentalsGeneral Journal, May 2007


Adjusting Entries

Apr. 30

Supplies Expense ($220 $80) 140

Supplies 140

Apr. 30

Interest Expense ($20,000 x 9% x 1/12)

150

Interest Payable 150

Apr. 30

Rent Expense ($3,600 12) 300

Prepaid Rent 300

Apr. 30

Depreciation Expense* 450

Accumulated Depreciation 450

* ($30,000 $3,000) 5 = $5,400; $5,400 12 = $450

4-84

PROBLEM 4-36A (cont.) b. and d.

Hawkins RentalsT-Accounts, April 2007

Cash Accounts Payable Common Stock4/1 40,000 4/1 3,600 4/23 233 4/1 20,0004/9 500 4/1 30,000 Bal. 233 Bal. 20,0004/10 850 4/6 2204/16 450

4/15960 Unearned Revenue Retained Earnings

4/30 1,150 4/25

240 4/9 500 Bal. -0-

4/30

960 Bal. 500

Bal. 6,970 Rental RevenueInterest Payable 4/10 2,050

Accounts Receivable 4/30 150 4/30 2,7504/10 1,200 4/16 450 Bal. 150 Bal. 4,8004/30 1,600Bal. 2,350 Notes Payable Salaries Expense

4/1 20,000 4/15 960Supplies Bal. 20,000 4/30 960

4/6 220 Bal. 1,920Bal. 220

4/30

140 Utilities Expense

Bal. 80 4/23 233Bal. 233

Prepaid Rent4/1 3,600 Advertising ExpenseBal. 3,600 4/25 240

4/30

300 Bal. 240

Bal. 3,300Depreciation Expense

Wedding Decor 4/30 4504/1 30,000 Bal. 450Bal. 30,000

Rent ExpenseAccumulated Depr. 4/30 300

4/30

450 Bal. 300

Bal. 450Supplies Expense

4/30 140

4-85

Bal. 140

4-86

PROBLEM 4-36A b. and d. (cont.)

T-Accounts, April 2007 (cont)


Interest Expense4/30 150Bal. 150

4-87


Hawkins RentalsUnadjusted Trial Balance

April 30, 2007


Cash $ 6,970Accounts Receivable 2,350Prepaid Rent 3,600Supplies 220Wedding Decor 30,000Accounts Payable $ 233Unearned Revenue 500Notes Payable 20,000Common Stock 20,000Rental Revenue 4,800Salaries Expense 1,920Utilities Expense 233Advertising Expense 240

Totals $45,533 $45,533

d. See parts a. and b.

4-88

PROBLEM 4-36A (cont.)e.

Hawkins RentalsAdjusted Trial Balance

April 30, 2007


Cash $ 6,970Accounts Receivable 2,350Supplies 80Prepaid Rent 3,300Wedding Decor 30,000Accumulated Depreciation $ 450Accounts Payable 233Unearned Revenue 500Interest Payable 150Notes Payable 20,000Common Stock 20,000Rental Revenue 4,800Salaries Expense 1,920Utilities Expense 233Advertising Expense 240Depreciation Expense 450Rent Expense 300Supplies Expense 140Interest Expense 150

Totals $46,133 $46,133

4-89


Hawkins RentalsFinancial Statements

For the Month Ended April 30, 2007

Income Statement

RevenueRental Revenue $4,800

Total Revenue $4,800

Operating ExpensesSalaries Expense 1,920Utilities Expense 233Advertising Expense 240Depreciation Expense 450Rent Expense 300Supplies Expense 140Interest Expense 150


Net Income $1,367





4-90

PROBLEM 4-36A f. (cont.)

Hawkins RentalsBalance Sheet

As of April 30, 2007

AssetsCash $ 6,970Accounts Receivable 2,350Supplies 80Prepaid Rent 3,300Wedding Decor $30,000Less: Accumulated Depr. (450) 29,550


LiabilitiesAccounts Payable $ 233Interest Payable 150Unearned Revenue 500Notes Payable 20,000




Total Liab. and Stockholders’ Equity

$42,250

4-91

PROBLEM 4-36A f. (cont.)

Hawkins RentalsStatement of Cash Flows

For the Month Ended April 30, 2007

Cash Flow From Operating Activities:

Inflow from Customers $ 2,950Outflow for Expenses (5,980)

Net Cash Flow from Operating Activities

$(3,030)

Cash Flow From Investing Activities:Outflow for Wedding Decor (30,000

)Net Cash Flow from Investing Activities

(30,000)

Cash Flow From Financing Activities:

Inflow from Stock Issue 20,000Inflow from Loan 20,000

Net Cash Flow from Financing Activities

40,000

Net Change in Cash 6,970Plus: Beginning Cash Balance -0-Ending Cash Balance $ 6,970

4-92

PROBLEM 4-36A (cont.)g.


Closing Entries

cl Rental Revenue 4,800Retained Earnings 4,800

cl Retained Earnings 3,433Salaries Expense 1,920Utilities Expense 233Advertising Expense 240Depreciation Expense 450Rent Expense 300Supplies Expense 140Interest Expense 150

4-93

PROBLEM 4-36A g. (cont.)Hawkins Rentals

T-Accounts for Closing Entries - April 30, 2007


Cash Accounts Payable Common StockBal. 6,970 Bal. 233 Bal.

20,000

Unearned Revenue Retained EarningsAccounts Receivable Bal. 500 cl 3,433 cl 4,800Bal. 2,350 Bal. 1,367

Interest PayableSupplies Bal. 150 Rental Revenue

Bal. 80 cl 4,800 Bal. 4,800Bal. -0-



Bal. 3,300 Bal. 1,920 cl 1,920Bal. -0-

Wedding Decor Utilities ExpenseBal.

30,000Bal. 233 cl 233

Bal. -0-

Accumulated Depr. Advertising ExpenseBal. 450 Bal. 240 cl 240

Bal. -0-

Depreciation ExpenseBal. 450 cl 450Bal. -0-

Rent ExpenseBal. 300 cl 300Bal. -0-


Interest ExpenseBal. 150 cl 150

4-94

Bal. -0-

4-95

PROBLEM 4-36A (cont.)h.

Hawkins RentalsAfter Closing Trial Balance

April 30, 2007


Cash $ 6,970Accounts Receivable 2,350Supplies 80Prepaid Rent 3,300Wedding Decor 30,000Accumulated Depreciation $ 450Accounts Payable 233Notes Payable 20,000Interest Payable 150Unearned Revenue 500Common Stock 20,000Retained Earnings 1,367

Totals $42,700 $42,700

4-96

SOLUTIONS TO EXERCISES -SERIES B - CHAPTER 4

EXERCISE 4-1B

Both students were correct. Trisha was correct if her entry was recorded for the party receiving the land. Tony’s entry was correct if his entry was recorded for the party giving up the land.

EXERCISE 4-2B

AccountingElements

Used to Increase This Element

Used to Decrease This

ElementAssets Debit Credit

Contra Asset Credit Debit

Liabilities Credit Debit

Common Stock Credit Debit

Retained

Earnings

Credit Debit

Revenue Credit Debit

Expense Debit Credit

Dividends Debit Credit

4-97

EXERCISE 4-3B

Account Normal Balance

a. Land Debitb. Dividends Debitc. Accounts Payable Creditd. Unearned Revenue Credite. Consulting Revenue Creditf. Salaries Expense Debitg. Accumulated Depreciation

Credit

h. Cash Debiti. Prepaid Insurance Debitj. Common Stock Credit

4-98

EXERCISE 4-4B


+ Common Stock

Debit Credit Debit Credit Debit CreditIncrease

Decrease

Decrease

Increase

Decrease

Increase

Accounts Receivable

Notes Payable Dividends

Debit Credit Debit Credit Debit CreditIncreas

eDecrea

seDecreas

eIncreas

eIncreas

eDecreas

e

Accumulated Depr.

Service Revenue

Debit Credit Debit CreditDecrea

seIncreas

eDecreas

eIncrease

Other Operating Exp.

Debit CreditIncreas

eDecreas

e

4-99

EXERCISE 4-5B

Event Account Debited Account Crediteda. Provided services

on account.Accounts Receivable

Service Revenue

b. Paid cash for operating expense.

Operating Expense Cash

c. Acquired cash from the issue of stock.

Cash Common Stock

d. Purchased supplies on account.

Supplies Accounts Payable

e. Purchased equipment for cash.

Equipment Cash

f. Paid cash dividend to stockholders.

Dividends Cash

g. Provided services for cash.

Cash Service Revenue

h. Recognized accrued salaries at the end of the period.

Salaries Expense Salaries Payable

4-100

EXERCISE 4-6Ba.

Cash Notes PayableDebit Credit Debit Credit

$5,000 $5,000

This is an asset source transaction. Assets are increased; liabilities are increased.

b.Cash Supplies


This is an asset exchange transaction. The asset supplies is increased and the asset cash is decreased.

c.Cash Land Notes Payable

Debit Credit Debit Credit Debit Credit$3,000 $10,000 $7,000

This transaction is part an asset source and part an asset exchange. Assets are increased by a net amount of $7,000 (Land is increased by $10,000, but cash is decreased by $3,000). Liabilities are increased by $7,000, the amount of the note.

d.Cash Service Revenue


This is an asset source transaction. Assets are increased by $800 and stockholders’ equity (revenue) is increased by $800.

4-101

EXERCISE 4-7B



+ Common Stock

1. 48,000 2.25,000 9. 4,400 4. 8,000 1. 48,0006. 65,000 5.34,000 Bal.

3,600Bal.48,000

8. 9,200 7. 5,0009. 4,400 Service Revenue

Bal.53,800

3. 85,000

8. 9,200Accounts

ReceivableBal.94,200

3. 85,000 6.65,000Bal.20,000

Salaries Expense

5. 34,000Bal.34,000

Van2. 25,000 Other Operating

Exp.Bal.25,000

4. 8,000

Bal. 8,000Accumulated

Depr.10.5,000*


Bal.5,000 10. 5,000Bal. 5,000

Dividends7. 5,000Bal. 5,000

*[($25,000 $5,000) 4] = $5,000

4-102

b. Total Assets = $93,800 ($53,800 + $20,000 +$25,000 $5,000)

c. Net Income = $47,200 ($94,200 $34,000 $8,000 $5,000)

4-103

EXERCISE 4-8B

Event Number Account Debited Account Credited

a. Cash Notes Payable

b. Cash Unearned Revenue

c. Depreciation

Expense

Accumulated

Depreciation

d. Salaries Payable Cash

e. Accounts

Receivable

Service Revenue

f. Notes Payable Cash

g. Operating

Expense

Cash

h. Supplies Accounts Payable

i. Interest Expense Interest Payable

j. Unearned

Revenue

Service Revenue

k. Accounts Payable Cash

l. Office Equipment Cash

m. Cash Accounts Receivable

n. Interest

Receivable

Interest Revenue

o. Dividends Cash

4-104

EXERCISE 4-9B

Stockholders’ EquityEventNo.

Type of

EventAssets = Liabiliti

es+

Common Stock +

Retained Earnings

a. AE + Debit

Credit

NA NA NA

b. AS + Debit NA NA + Creditc. AU

Credit

Debit NA NA

d. AS + Debit +

Credit

NA NA

e. AU Credit

Debit NA NA

f. AS + Debit NA + Credit NAg. AE + Debit

Credit

NA NA NA

h. AE + Debit

Credit

NA NA NA

i. AU

Credit

Debit NA NA

j. AS + Debit +

Credit

NA NA

k. CE NA +

Credit

NA Debit

l. AU

Credit

NA NA Debit

4-105

m. CE NA Debit NA + Creditn. AU

Credit

NA NA Debit

o. AS + Debit NA NA + Credit

4-106

EXERCISE 4-10B

General Journal


a. Accounts Receivable 19,000Service Revenue 19,000

b. Equipment 24,000Cash 4,000Notes Payable 20,000

c. Supplies 530Cash 530

d. Cash 3,000Unearned Revenue 3,000

e. Cash 8,400Accounts Receivable 8,400

f. Repairs Expense 1,700Accounts Payable 1,700

g. Cash 13,400Land 10,000Gain on Sale of Land 3,400

h. Prepaid Insurance 2,300Cash 2,300

i. Accounts Payable 1,200Cash 1,200

j. Insurance Expense 800Prepaid Insurance 800

k. Depreciation Expense 6,200Accumulated Depreciation 6,200

l. Interest Expense 800Interest Payable 800

4-107

EXERCISE 4-11B

Blue CompanyTrial Balance

December 31, 2006


Cash $ 28,800Accounts Receivable 26,000Office Supplies 10,000Prepaid Rent 19,200Office Equipment 64,000Accumulated Depreciation $ 12,000Land 80,000Accounts Payable 12,000Unearned Revenue 52,000Common Stock 80,000Retained Earnings 18,000Dividends 20,000Service Revenue 184,000Operating Expense 50,000Salaries Expense 50,000Depreciation Expense 6,000Advertising Expense 4,000

Totals $358,000 $358,000

4-108

EXERCISE 4-12B

a.Closing Entries Debit Credit


2. Retained Earnings 55,490Depreciation Expense 3,150Interest Expense 1,150Operating Expense 31,550Rent Expense 4,200Salaries Expense 11,200Supplies Expense 4,240


b.Retained Earnings, 2008

Beginning Retained Earnings $32,650Add, Net Income (Loss) (7,090)Less, Dividends (1,750)Ending Retained Earnings $23,810

4-109

EXERCISE 4-13Ba.

Cellular Services, Inc.T-Accounts

Cash Accounts Payable Common Stock Retained Earnings

Debit Credit Debit Credit Debit Credit Debit Credit1. 80,000 6.27,2004. 30,400 1. 80,000 -0-2. 64,000 10. 3,200 Bal.

80,0005. 52,800 Bal.6,400 Dividends

6.27,200

Debit Credit

7.4,000 Unearned Revenue

7. 4,000

8.16,000

Debit Credit Bal.4,000

9. 14,200 13. 4,800 9. 14,200Bal.163,800

Bal.9,400 Service Revenue

Debit CreditAccounts Rec. 3. 56,000Debit Credit Interest Payable 13. 4,800

3. 56,000 5.52,800

Debit Credit Bal.60,800

Bal. 3,200 11. 4,160Bal.4,160 Operating

ExpensesDebit Credit

Supplies Notes Payable 4.30,400

Debit Credit Debit Credit Bal.30,400

10. 3,200 14.2,400

2. 64,000

Bal. 800 Bal.64,000

Depr. Expense

Debit Credit12.3,200

Office Equipment Bal.3,200

Debit Credit8. 16,000 Supplies ExpenseBal. Debit Credit

4-110

16,00014.2,400

Bal.2,400

Acc. Depr.Debit Credit Interest Expense

12.3,200

Debit Credit

Bal.3,200

11.4,160

Bal.4,160

4-111

EXERCISE 4-13B (cont.)b.

Cellular Services, Inc.Trial Balance


Cash $163,800Accounts Receivable 3,200Supplies 800Office Equipment 16,000Accumulated Depreciation $ 3,200Accounts Payable 6,400Unearned Revenue 9,400Interest Payable 4,160Notes Payable 64,000Common Stock 80,000Dividends 4,000Service Revenue 60,800Operating Expenses 30,400Depreciation Expense 3,200Supplies Expense 2,400Interest Expense 4,160

Totals $227,960 $227,960

4-112

EXERCISE 4-14B

a. Out of balance; debits are overstated; debits are greater by $400.

b. Out of balance; credits are understated; credits are smaller by $1,200.

c. Not out of balance; the liability account, Notes Payable, will be understated by $400 and the revenue account, Revenue, will be overstated by $400.

d. Out of balance; debits are overstated, the asset account, Cash, is overstated by $1,800.

e. Not out of balance; the asset account, Office Supplies, is understated by $520, but the asset account, Office Equipment, is overstated by $520.

4-113

EXERCISE 4-15Ba.








d. Closing Entries


8. Retained Earnings 82,980Operating Expenses 11,980Salaries Expense 71,000


4-114

EXERCISE 4-15B (cont.)

b. and d.Tony’s Burgers

T-Accounts, 2006

Cash Accounts Payable Common StockDebit Credit Debit Credit Debit Credit

Bal.

13,000Bal.

3,600Bal. 9,900

3.

124,000

4.71,000

5.13,600 2.11,980

5.13,600 Bal.

1,980Retained Earnings

6.11,000 Debit CreditBal.

41,400Bal. 9,000

cl 82,980 cl118,000

Accounts Receivable

cl 11,000

Debit Credit Bal.

33,020Bal.9,5001.

118,000

3.

124,000

Dividends

Bal.3,500 Debit Credit6. 11,000 cl11,000Bal. -0-

Service RevenueDebit Credit

cl118,000

1.118,000Bal. -0-

Operating Expenses

Debit Credit2. 11,980 cl 11,980

4-115

Bal. -0-

Salaries ExpenseDebit Credit

4. 71,000 cl 71,000Bal. -0-

4-116

EXERCISE 4-15B (cont.)c.

Tony’s BurgersEffect of Transactions on the Financial Statements for 2006




No. Cash +Accts. Rec. =

Acc. Pay. +

Comm.

Stock+

Ret. Earn.

Bal. 13,000 + 9,500 = 3,600 + 9,900 + 9,000 NA NA NA NA1. NA +118,000 = NA + NA + 118,000 118,00

0 NA =118,000 NA

2. NA + NA = 11,980 + NA + (11,980) NA 11,980 =(11,980) NA 3. 124,000 +(124,00

0)= NA + NA + NA NA NA = NA 124,000 OA

4. (71,000)+ NA = NA + NA + (71,000) NA 71,000 =(71,000) (71,000) OA5. (13,600)+ NA = (13,600) + NA + NA NA NA = NA (13,600) OA6. (11,000)+ NA = NA + NA + (11,000) NA NA = NA (11,000) FABal. 41,400 + 3,500 = 1,980 + 9,900 + 33,020 118,00

0 82,980 = 35,020 28,400 NC

d. Net Income = $35,020e. Change in retained earnings = $24,020 ($33,020 $9,000)

The difference between the change in retained earnings and net income is the $11,000 dividend paid to the stockholders. The dividend reduces retained earnings but does not decrease net income.

4-117

EXERCISE 4-16Ba., e. & f.


Cash Accounts Rec. Retained Earnings2006 2006 20062. 25,000 1. 40,000 2. 25,000 cl 40,000Bal.25,000 Bal.

15,000Bal.40,000

2007 20073. 15,000 3. 15,000 Service RevenueBal.40,000 Bal. -0- 2006

cl40,000 1. 40,000Bal. -0-2007

-0-b. & g.

Chambers CompanyEffect of Transactions on the Financial Statements for 2006 and 2007



No. Cash +Acct. Rec. = +

Comm. Stock +

Retained

Earnings

20061. NA + 40,000 = NA + NA + 40,000 40,000 NA = 40,000 NA2. 25,000 + (25,000

)= NA + NA + NA NA NA = NA 25,000

OA

4-118

Bal. 25,000 + 15,000 = -0- + -0- + 40,000 40,000 -0-= 40,000 25,000 NC

20073. 15,000 + (15,000

)= NA + NA + NA NA NA = NA 15,000

OABal. 40,000 + -0-= -0- + -0- + 40,000 -0- -0-= -0- 15,000

NC

4-119


c. 2006 Revenue = $40,000

d. 2006 Cash Flows From Operating Activities = $25,000

e. See T-accounts above.

f. See T-accounts above.

g. See the Statements Model above.

h. 2007 Net Income = $-0-2007 Cash Flows From Operating Activities = $15,000

4-120

EXERCISE 4-17Ba. b. & e.


Accounts Rec. Accounts Pay. Retained Earnings

Debit Credit Debit Credit Debit Credita125,000 a26,000 cl 5,500 cl25,000Bal.25,000

Bal.6,000

Bal.19,500

Supplies Service RevenueDebit Credit Debit Credit

a2 6,000 b.5,500 cl25,000 a125,000

Bal. 500 Bal. -0-


b. 5,500 cl 5,500Bal. -0-

4-121

EXERCISE 4-17B (cont.)c.

Harrison Consulting ServicesEffect of Transactions on the Financial Statements for 2007



No.Accts. Rec. + Supplie

s=

Accts. Pay. +

Common Stock +

Retained

Earnings

1. 25,000 + NA = NA + NA + 25,000 25,000 NA = 25,000 NA2. NA + 6,000 = 6,000 + NA + NA NA NA = NA NAa1. NA + (5,500)= NA + NA + (5,500) NA 5,500 = (5,500) NABal. 25,000 + 500 = 6,000 + -0- + 19,500 25,000 5,500 = 19,500 NC

d. Net income is $19,500; Net Cash Flow from Operating Activities is $-0-. $25,000 of revenue was earned on account, but none was collected; $5,500 of supplies were used, but none were paid for.

4-122


e.General Journal


Closing Entries

Dec. 31 Service Revenue 25,000Retained Earnings 25,000

Retained Earnings 5,500Supplies Expense 5,500

Closing entries are posted to the T-accounts in part a.

Harrison Consulting ServicesAfter-Closing Trial Balance

December 31, 2005


Accounts Receivable $25,000Supplies 500Accounts Payable $ 6,000Retained Earnings 19,500

Totals $25,500 $25,500

4-123

EXERCISE 4-18Ba. & b.

California CompanyJournal Entries for 2007


a. 3/1 Prepaid Rent (Lease) 48,000Cash 48,000

b. 12/31

Rent Expense 40,000*

Prepaid Rent 40,000

*($48,000 12) = $4,000 per month. $4,000 x 10 mo. = $40,000.c.

California CompanyHorizontal Statements Model


Income Statement

Cash +Prepaid

Rent= Comm.

Stock +Ret. Earn

Rev. Exp. = Net Inc. Cash Flows1. 50,000 NA 50,000 NA NA NA NA 50,000 FA2. (48,00

0)48,000 NA NA NA NA NA (48,000)

3. 60,000 NA NA 60,000 60,000 NA 60,000 60,000 OA4. NA (40,00

0)NA (40,000) NA 40,000 (40,00

0)NA

Bal.

62,000 8,000 50,000 20,000 60,000 40,000 20,000 62,000 NC

4-124

EXERCISE 4-18B

d. Revenue $60,000Expense (40,000 ) Net Income $20,000

Cash Flows From Operating Activities:Cash Received from Revenue $60,000Cash Payment for Expense (48,000)


e. Prepaid Rent: $8,000 ($48,000 $40,000)

4-116

EXERCISE 4-19Ba.

Debit CreditSalaries Expense 9,600


b. Revenue $12,000Salaries Expense (9,600)Net Income $2,400

Cash Flows From Operating Activities:Cash Received from Revenue $12,000Cash Payment for Expense -0 -


c. Liability = $9,600

4-117



Cash Computer Depreciation Expense

a.40,000

a.40,000

b.11,000*

Accumulated Depr.

b.11,000

*($40,000 $7,000) 3 = $11,000 depreciation per year

c. Historical Cost $40,000Less: Accumulated Depreciation (11,000 ) Book Value $29,000

d. Revenue $14,000Depreciation Expense (11,000 ) Net Income $ 3,000

e. Cash Flows From Operating Activities:Cash Received from Revenue $14,000


f. 2008 Depreciation Expense = $11,000 (the same as for 2007)

g. Historical Cost $40,000Less: Accumulated Depreciation (22,000)**Book Value, 12/31/08 $18,000

**(2007 $11,000 + 2008 $11,000)

4-118

EXERCISE 4-21B

a. Asset Source Transaction


Cash Notes Payable60,000 60,000

b. Claims Exchange Transaction


Interest Payable Interest Expense4,500 4,500*

*$60,000 x 10% x 9/12 = $4,500

c. Revenue $10,000Interest Expense (4,500)Net Income $ 5,500

d. Cash Flows From Operating Activities:Cash Received from Revenue $10,000


e. Liabilities:Notes Payable $60,000Interest Payable 4,500


4-119


f. Two transactions occur in the repayment of the note: (1) the accrual of the remaining interest ($1,500) and (2) the payment of the principal and interest ($66,000).


Cash Notes Payable Interest Expense2.

66,000

2. 60,000 Bal.60,000

1. 1,500*

Interest PayableBal.4,500

2. 6,0001. 1,500

*$60,000 x .10 x 3/12 = $1,500

g. Transaction 1 is a claims exchange transaction; transaction 2 is an asset use transaction.

4-120



Cash Unearned Revenue

Service Revenue

6/1 60,000 12/3135,000

6/160,000 12/3135,000*

Bal.25,000

*$60,000 x 7/12 = $35,000c.



Date Assets = Liab. + S. Equity


Cash Flows

6/160,000

= 60,000 + NA NA NA = NA 60,000 OA

12/31

NA =(35,000)

+ 35,00035,000

NA = 35,000 NA

Bal. 60,000

25,000 35,00035,000

-0- =35,000

60,000NC

d. Revenue $ 35,000Expenses -0-Net Income $ 35,000

Cash Flows From Operating Activities:Cash Received from Revenue $60,000


e. Liabilities = $25,000 (See T-accounts above.)

4-121

EXERCISE 4-23B

Accounts ReceivableDebit Credit

Beg. Bal. 58,000 Coll. 130,000Rev. 126,000End. Bal. 54,000

$130,000 of cash was collected. [($58,000 + $126,000) $54,000]

EXERCISE 4-24B

Accounts PayableDebit Credit

Beg. Bal.40,000Paid 107,000 Exp. 95,000

End Bal. 28,000

$107,000 of cash was paid for expenses [($40,000 + 95,000) $28,000].

4-122

SOLUTIONS TO PROBLEMS SERIES B - CHAPTER 4

PROBLEM 4-25B

No. Account Balance No. Account Balance

a. Common Stock Credit p. Depreciation Expense Debit

b. Retained Earnings Credit q. Service Revenue Credit

c. Certificate of Deposit Debit r. Notes Payable Credit

d. Interest Expense Debit s. Notes Receivable Debit

e. Accounts Receivable Debit t. Supplies Debit

f. Interest Revenue Credit u. Utilities Payable Credit

g. Insurance Expense Debit v. Consulting Revenue Credit

h. Interest Payable Credit w. Interest Receivable Debit

i. Cash Debit x. Supplies Expense Debit

j. Dividends Debit y. Salaries Expense Debit

k. Unearned Revenue Credit z. Equipment Debit

l. Operating Expense Debit aa. Salaries Payable Credit

m. Accumulated Depr. Credit bb. Land Debit

n. Accounts Payable Credit cc. Prepaid Insurance Debit

o. Office Equipment Debit

4-123

PROBLEM 4-26B

Event Type of Event Account Debited Account Credited

1. AS Cash Common Stock

2. AU Salaries Expense Cash

3. AS Cash Unearned Revenue

4. AU Utilities Expense Cash

5. AS Accounts Receivable Service Revenue

6. AS & AE EquipmentCash &Notes Payable

7. AU Dividends Cash

8. AS Supplies Accounts Payable

9. AS Cash Service Revenue

10. AE Prepaid Rent Cash

11. AU Notes Payable Cash

12. AU Operating Expenses Cash

13. AU Accounts Payable Cash

14. AE Office Furniture Cash

15. AU Depreciation Expense Accumulated Depr.

16. AU Rent Expense Prepaid Rent

17. CE Unearned Revenue Service Revenue

18. CE Interest Expense Interest Payable

4-124

PROBLEM 4-27B

General Journal

No. Date Account Titles Debit Credit

a. Sept. 1 Prepaid Rent 15,000Cash 15,000

Dec. 31 Rent Expense ($15,000 x 4/12) 5,000Prepaid Rent 5,000

b. Oct. 1 Cash 22,500Notes Payable 22,500

Dec. 31 Interest Expense1 450Interest Payable 450

c. Sept. 1 Equipment 9,700Cash 9,700

Dec. 31 Depreciation Expense2 480Accumulated Depreciation 480

d. June 1 Certificate of Deposit 11,000Cash 11,000

Dec. 31 Interest Receivable3 385Interest Revenue 385

e. April 15 Supplies 2,000Accounts Payable 2,000

Dec. 31 Supplies Expense4 1,700Supplies 1,700

f. July 1 Cash 3,600Unearned Revenue 3,600

Dec. 31 Unearned Revenue5 1,800Service Revenue 1,800

g. Feb. 1 Prepaid Insurance 5,100Cash 5,100

Dec. 31 Insurance Expense6 4,675Prepaid Insurance 4,675

1($22,500 x 8%) x 3/12 = $4502($9,700 $2,500) 5 = $1,440; $1,440 x 4/12 = $480 3($11,000 x 6%) x 7/12 = $3854$2,000 $300 = $1,7005$3,600 x 6/12 = $1,8006$5,100 x 11/12 = $4,675

4-125

PROBLEM 4-28Ba.

Copeland CompanyGeneral Journal, 2006

Event Account Title Debit Credit


2. Supplies 600Accounts Payable 600






8. Dividends 700Cash 700

Adjusting Entries

9. Supplies Expense ($600 $100) 500Supplies 500



4-126

PROBLEM 4-28B (cont.)b.

Copeland CompanyT-Accounts, 2006


Cash Accounts Pay. Common Stock1.20,000 3.

12,0007. 6,500 2. 600 1. 20,000

6. 5,900 7. 6,500 5. 8,970 Bal.20,000

8. 700 Bal.3,070

Bal.6,700 Dividends8. 700

Accounts Rec. Bal. 7004.11,500 6. 5,900Bal.5,600 Service Revenue

Salaries Payable 4. 11,500Prepaid Rent 11.

2,200Bal.11,500

3.12,000 10.4,000

Bal.2,200

Bal.8,000 Operating Expenses

5. 8,970Supplies Bal.8,970

2. 600 9. 500Bal. 100 Salaries Expense

11.2,200Bal.2,200

Supplies Expense9. 500Bal. 500

Rent Expense10.4,000Bal.4,000

4-127

PROBLEM 4-28B (cont.)c.

Copeland CompanyTrial Balance

December 31, 2006


Cash $ 6,700Accounts Receivable 5,600Supplies 100Prepaid Rent 8,000Accounts Payable $ 3,070Salaries Payable 2,200Common Stock 20,000Dividends 700Service Revenue 11,500Operating Expenses 8,970Salaries Expense 2,200Supplies Expense 500Rent Expense 4,000

Totals $36,770 $36,770

4-129

PROBLEM 4-28B (cont.)d.

Copeland CompanyFinancial Statements


Income Statement


ExpensesOperating Expenses $8,970Salaries Expense 2,200Supplies Expense 500Rent Expense 4,000


Net Income (Loss) $ (4,170)



Beginning Retained Earnings -0-Less: Net Loss (4,170)Less: Dividends (700)Ending Retained Earnings (4,870)


4-130

PROBLEM 4-28B d. (cont.)

Copeland CompanyBalance Sheet


AssetsCash $ 6,700Accounts Receivable 5,600Supplies 100Prepaid Rent 8,000


LiabilitiesAccounts Payable $ 3,070Salaries Payable 2,200


Stockholders’ EquityCommon Stock 20,000Retained Earnings (4,870)




Cash Flows From Operating Activities:Inflow from Customers $ 5,900Outflow for Expenses (18,500)

Net Cash Flow from Operating Activities $(12,600)


Cash Flows From Financing Activities:Inflow from Issue of Stock 20,000Outflow for Dividends (700)


Net Change in Cash 6,700Plus: Beginning Cash Balance -0-Ending Cash Balance $ 6,700

4-131

PROBLEM 4-28B (cont.)e.Date Account Titles Debit Credit

Closing Entries

Dec. 31



Dec. 31


Operating Expenses 8,970Salaries Expense 2,200Supplies Expense 500Rent Expense 4,000

Dec. 31

Retained Earnings 700

Dividends 700

4-132

PROBLEM 4-28B (cont.)f.

Copeland CompanyT-Accounts, 2006 (Closing Entries)



Bal.3,070

Bal. 20,000

Salaries Payable Retained EarningsAccounts Rec. Bal.

2,200cl 15,670 cl 11,500

Bal.5,600

cl 700

Bal.4,870

Supplies DividendsBal. 100 Bal. 700 cl 700

Bal. -0-

Prepaid Rent Service RevenueBal.8,000

cl 11,500 Bal.11,500Bal. -0-

Operating Expenses

Bal.8,970

cl 8,970

Bal. -0-


cl 2,200

Bal. -0-


4-133

Rent ExpenseBal.

4,000cl 4,000

Bal. -0-

4-134

PROBLEM 4-28B f. (cont.)

Copeland CompanyAfter Closing Trial Balance

December 31, 2006


Cash $ 6,700Accounts Receivable 5,600Supplies 100Prepaid Rent 8,000Accounts Payable $ 3,070Salaries Payable 2,200Common Stock 20,000Retained Earnings 4,870

Totals $25,270 $25,270

4-135

PROBLEM 4-29Ba.

Bricker EnterprisesGeneral Journal, 2006









Adjusting Entries


9. Salaries Expense 900Salaries Payable 900

4-136


Bricker EnterprisesT-Accounts - 2006

Assets Liabilities Stockholders’ Equity

Cash Accounts Pay. Common Stock1. 13,000 2. 4,000 7.

11,5004.13,500 1. 13,000

5. 25,150 6. 8,500 Bal.2,000 Bal.13,000

7.11,500Bal.14,150

Service Revenue

Salaries Payable 3. 27,0009. 900 Bal.

27,000Accounts

ReceivableBal. 900

3. 27,000 5.25,150Bal. 1,850 Salaries Expense

6. 8,500Prepaid Rent 9. 900

2. 4,000 8. 3,000 Bal. 9,400Bal. 1,000

Operating Expenses

4. 13,500Bal.

13,500


4-137


Bricker EnterprisesTrial Balance

December 31, 2006


Cash $14,150Accounts Receivable 1,850Prepaid Rent 1,000Accounts Payable $ 2,000Salaries Payable 900Common Stock 13,000Service Revenue 27,000Salaries Expense 9,400Operating Expenses 13,500Rent Expense 3,000

Totals $42,900 $42,900

4-138


Bricker EnterprisesFinancial Statements


Income Statement


ExpensesOperating Expenses $13,500Salaries Expense 9,400Rent Expense 3,000


Net Income $ 1,100





4-139

PROBLEM 4-29B d. (cont.)Bricker Enterprises

Balance SheetAs of December 31, 2006

AssetsCash $14,150Accounts Receivable 1,850Prepaid Rent 1,000


LiabilitiesAccounts Payable $ 2,000Salaries Payable 900








Cash Flows From Investing Activities: -0-

Cash Flows From Financing Activities:Inflow from Stock Issue 13,000



0

4-140

PROBLEM 4-29B (cont.) e.Date Account Titles Debit Credit

Closing Entries

Dec. 31



Dec. 31


Operating Expenses 13,500Salaries Expense 9,400Rent Expense 3,000

Bricker EnterprisesT-Accounts for Closing Entries, 2006



Bal.2,000

Bal.13,000

Salaries Payable Retained EarningsAccounts

ReceivableBal. 900 cl 25,900 cl 27,000

Bal. 1,850 Bal. 1,100

Prepaid Rent Service RevenueBal. 1,000 cl 27,000 Bal.

27,000Bal. -0-

Operating Expenses

Bal.13,500

cl13,500

Bal. -0-

Salaries ExpenseBal.9,400 cl 9,400

4-141

Bal. -0-


4-142


Bricker EnterprisesAfter Closing Trial Balance

December 31, 2006


Cash $14,150Accounts Receivable 1,850Prepaid Rent 1,000Accounts Payable $ 2,000Salaries Payable 900Common Stock 13,000Retained Earnings 1,100

Totals $17,000 $17,000

4-143

PROBLEM 4-29B (cont.)g.



1. Salaries Payable 900Cash 900

2. Cash 8,500Service Revenue 8,500

3. Cash 6,000Notes Payable 6,000








4-144

PROBLEM 4-29B g. (cont.)



Adjusting Entries

11. Rent Expense1 4,375Prepaid Rent 4,375

12. Interest Expense2 180Interest Payable 180

1($4,000 x 3/12) +($4,500 x 9/12) = $4,3752$6,000 x .09 x 4/12 = $180

4-145


Bricker EnterprisesT-Accounts - 2007



Bal.2,000 Bal.13,000

2. 8,500 1. 900 8.20,000 6.19,2503. 6,000 4. 4,500 Bal.1,2507. 40,500 8. 20,000

9. 14,000 Salaries Payable Retained Earnings10. 6,000 Bal. 900 Bal. 1,100

Bal.23,750

1. 900

Bal. -0- DividendsAccounts Rec. 10. 6,000

Bal.1,850 Interest Payable Bal.6,0005.42,000 7.40,500 12. 180Bal.3,350 Bal. 180 Service Revenue

2. 8,500Prepaid Rent Notes Payable 5. 42,000

Bal. 1,000 3. 6,000 Bal.50,500

4. 4,500 11.4,375 Bal.6,000Bal. 1,125 Salaries Expense

9. 14,000Bal.

14,000

Operating Expenses

6. 19,250Bal.

19,250


4-146

Interest Expense12. 180Bal. 180

4-147


Bricker EnterprisesTrial Balance

December 31, 2007


Cash $23,750Accounts Receivable 3,350Prepaid Rent 1,125Accounts Payable $ 1,250Interest Payable 180Notes Payable 6,000Common Stock 13,000Retained Earnings 1,100Dividends 6,000Service Revenue 50,500Salaries Expense 14,000Operating Expenses 19,250Rent Expense 4,375Interest Expense 180

Totals $72,030 $72,030

4-148


Bricker EnterprisesFinancial Statements


Income Statement


ExpensesOperating Expenses $19,250Salaries Expense 14,000Rent Expense 4,375Interest Expense 180


Net Income $12,695


Beginning Common Stock $ 13,000Plus Stock Issued -0-

Ending Common Stock $13,000

Beginning Retained Earnings 1,100Plus Net Income 12,695Less Dividends (6,000)

Ending Retained Earnings 7,795


4-149


Bricker EnterprisesBalance Sheet


AssetsCash $23,750Accounts Receivable 3,350Prepaid Rent 1,125


LiabilitiesAccounts Payable $ 1,250Interest Payable 180Notes Payable 6,000





4-150


Bricker EnterprisesStatement of Cash Flows





Cash Flows From Financing Activities:Inflow from Borrowed Funds 6,000Outflow for Dividends (6,000)

Net Cash Flow from Financing Activities -0-

Net Change in Cash 9,600Plus: Beginning Cash Balance 14,150Ending Cash Balance $23,75

0

4-151



Closing Entries

Dec. 31



Dec. 31


Operating Expenses 19,250Salaries Expense 14,000Rent Expense 4,375Interest Expense 180

Dec. 31


Dividends 6,000

4-152


Bricker EnterprisesT-Accounts for Closing Entries, 2007



Bal.1,250

Bal.13,000

Interest Payable Retained EarningsAccounts Rec. Bal. 180 cl 37,805 Bal. 1,100

Bal.3,350 cl 6,000 cl 50,500Notes Payable Bal. 7,795


Bal.1,125 DividendsBal.

6,000cl 6,000

Bal. -0-

Service Revenuecl 50,500 Bal.

50,500Bal. -0-

Operating Expenses

Bal.19,250

cl 19,250

Bal. -0-

Salaries ExpenseBal.

14,000cl 14,000

Bal. -0-

Rent ExpenseBal.4,375 cl 4,375Bal. -0-

4-153

Interest ExpenseBal. 180 cl 180Bal. -0-

4-154


Bricker EnterprisesAfter Closing Trial Balance

December 31, 2007


Cash $23,750Accounts Receivable 3,350Prepaid Rent 1,125Accounts Payable $ 1,250Interest Payable 180Notes Payable 6,000Common Stock 13,000Retained Earnings 7,795

Totals $28,225 $28,225

4-155

PROBLEM 4-30B

Entry Date Description of Transaction

January 1 Acquired $20,000 cash from the issue of common stock.

February 10 Collected $4,000 cash for services to be performed in the future.

March 5 Paid cash for supplies.

April 10 Purchased office equipment by paying cash and issuing a note for the balance.

April 30 Paid cash to rent space for the future.

May 1 Performed services on account.

June 1 Paid cash for salaries.

August 5 Performed services on account.

August 10 Paid a cash dividend to stockholders.

September 10 Received cash from customers on account.

October 1 Paid cash for property taxes.

December 31 Recognized $1,000 of depreciation expense.

December 31 Recognized $800 of expense for supplies that had been used during the period.

December 31 Recognized $4,400 of rent expense. Cash had been paid in a prior transaction.

December 31 Recognized revenue that had been earned during the period. Cash had been received in prior transactions.

4-156

PROBLEM 4-31Ba.

Mickey’s DinerEffect of Transactions on Financial Statements


1. + NA + NA NA NA + FA2. + + NA NA NA NA NA3. + NA + + NA + + OA4. + + NA NA NA NA + OA5. + NA + + NA + NA6. + + NA NA NA NA NA7. + NA NA NA NA NA IA8. + NA NA NA NA NA + OA9. + NA NA NA NA NA IA

10. + NA NA NA NA NA OA11. + NA NA NA NA NA IA12. NA NA + OA13. NA NA NA NA FA14. NA NA NA NA IA15. NA NA NA NA OA16. NA + NA + NA17. NA + NA + NA18. NA + + NA + NA19. + NA + + NA + NA20. + NA + + NA + NA21. NA + NA + NA22. NA NA + NA23. NA NA + NA

4-157


Mickey’s Diner T-AccountsCash Accounts Payable Common Stock

1. 40,000 7. 8,000 14.14,000 2. 14,000 1. 40,0003. 2,000 9. 4,800 15. 1,260 6. 3,000 Bal.

40,0004. 12,000 10. 1,260 16. 1,6008. 14,000 11. 9,600 17. 1,200 Dividends

12. 8,000 Bal. 4,540 13. 4,00013. 4,000 Bal. 4,00014.14,000

Unearned Revenue

15. 1,260 18. 8,800 4. 12,000 Service RevenueBal.17,080 Bal. 3,200 3. 2,000

5. 24,000Accounts Receivable Salaries Payable 18. 8,800

5. 24,000 8. 14,000 21. 3,000 Bal.34,800Bal.10,000 Bal. 3,000

Interest RevenueSupplies 19. 200

6. 3,000 23. 3,060 20. 33610. 1,260 Bal. 536Bal. 1,200

Salaries ExpenseNotes Receivable 12. 8,000

9. 4,800 21. 3,000Bal. 4,800 Bal. 11,000

Cert. of Deposit Advertising Expense11. 9,600 16. 1,600Bal. 9,600 Bal. 1,600

Interest Receivable Utilities Expense19. 200 17. 1,20020. 336 Bal. 1,200Bal. 536

Supplies ExpenseEquipment 23. 3,060

2. 14,000 Bal. 3,0607. 8,000Bal.22,000 Depreciation Expense

22. 2,800Accumulated Depr. Bal. 2,800

22. 2,800

4-158

Bal.2,800

4-159


Mickey’s DinerTrial Balance

December 31, 2007


Cash $ 17,080Accounts Receivable 10,000Supplies 1,200Notes Receivable 4,800Certificate of Deposit 9,600Interest Receivable 536Equipment 22,000Accumulated Depreciation $ 2,800Accounts Payable 4,540Unearned Revenue 3,200Salaries Payable 3,000Common Stock 40,000Dividends 4,000Service Revenue 34,800Interest Revenue 536Salaries Expense 11,000Advertising Expense 1,600Utilities Expense 1,200Supplies Expense 3,060Depreciation Expense 2,800

Totals $88,876 $88,876

4-160

PROBLEM 4-32B



1. + NA + NA NA NA + FA2. +(+) + NA NA NA NA IA3. + NA NA NA NA NA OA4. NA NA NA NA FA5. NA NA + OA6. + NA + + NA + NA7. NA NA + OA8. + NA + + NA + + OA9. + + NA NA NA NA + OA

10. + + NA NA NA NA NA11. NA NA + NA12. + NA NA NA NA NA + OA13. NA NA + NA14. NA NA + NA15. NA + + NA + NA

4-161

PROBLEM 4-33B

Error Number

Is the Trial Balance Out of Balance? By What Amount

Which is Larger, Debit or Credit Column?

a. NO NA NA

b. YES 500 Debit

c. YES 320 Credit

d. YES 6,000 Credit

e. NO NA NA

f. YES 8,400 Credit

4-162

PROBLEM 4-34B

Corrections:1. Cash is overstated by $270 (270 Cash).

2. Cash is understated and Accounts Receivable is overstated by $430 (+430 Cash; 430 Accounts Receivable).

3. Accounts Payable is understated by $450 (+450 Accounts Payable).

4. Equipment is understated by $20,000 (+20,000 Equipment).

5. Salaries Expense is overstated and Rent Expense is understated by $200 (+200 Rent Expense; 200 Salary Expense).

Corrected Trial Balance:

Kona CompanyTrial Balance

As of April 30, 2006


Cash ($7,150 + $430 $270) $ 7,310Accounts Receivable ($40,000 $430)

39,570

Supplies 2,400Prepaid Insurance 3,200Equipment ($56,800 + $20,000) 76,800Accounts Payable ($8,950 + $450)

$ 9,400

Notes Payable 32,000Common Stock 96,000Retained Earnings 56,720Dividends 6,000Service Revenue 40,000Rent Expense ($7,200 + $200) 7,400Salaries Expense ($26,400 $200)

26,200

Operating Expense 65,240

Totals $234,120 $234,120

4-163

PROBLEM 4-35B a.

Moon Walk Company General Journal, 2008


Jan. 30 Cash 75,000Common Stock 75,000

Feb 1 Prepaid Rent 24,000Cash 24,000

Mar. 1 Cash 20,000Notes Payable 20,000

Apr. 10 Supplies 5,300Accounts Payable 5,300

June 1 Computer 27,000Cash 27,000

July 1 Cash 50,000Unearned Revenue 50,000

July 20 Accounts Payable 1,800Cash 1,800

Aug. 15



Sept. 15

Cash 19,000


Oct.1 Salaries Expense 20,000Cash 20,000

Oct. 15 Cash 25,000Accounts Receivable 25,000

Nov. 16



4-164

Dec. 1 Dividends 6,000Cash 6,000

PROBLEM 4-35B a. (cont.)

General Journal (continued)


Dec. 31

Unearned Revenue1 25,000


Dec. 31

Interest Expense2 1,500

Interest Payable 1,500

Dec. 31

Depreciation Expense3 5,250

Accumulated Depreciation 5,250

Dec. 31

Salaries Expense 4,500


Dec. 31

Rent Expense4 11,000

Prepaid Rent 11,000

Dec. 31

Supplies Expense5 4,820

Supplies 4,820

1$50,000 x 6/12 = $25,0002($20,000 x 9%) x 10/12 = $1,5003($27,000 3) x 7/12 = $5,2504($24,000 24) x 11 = $11,0005($5,300 $480) = $4,820

4-165

PROBLEM 4-35B b. (cont.)

Moon Walk Company T-Accounts

Cash Accounts Payable Common Stock1/30 75,000 2/1 24,000 7/20 1,800 4/10 5,300 1/30 75,0003/1 20,000 6/1 27,000 Bal. 3,500 Bal. 75,0007/1 50,000 7/20 1,8009/15 19,000 10/1 20,000 Retained Earnings10/15

25,00012/1 6,000 Unearned Revenue Bal. -0-

Bal.110,200

12/3125,000

7/1 50,000

Bal. 25,000 DividendsAccounts Receivable 12/31

6,0008/15 32,000 10/15

25,000Salaries Payable Bal. 6,000

11/1637,000

12/31 4,500

Bal. 44,000 Bal. 4,500 Service Revenue8/15 32,000

Prepaid Rent 9/15 19,0002/1 24,000 12/31

11,000Interest Payable 11/16

37,000Bal. 13,000 12/31 1,500 12/31

25,000Bal. 1,500 Bal.

113,000Supplies

4/10 5,300 12/31 4,820 Salaries ExpenseBal. 480 Notes Payable 10/120,000

3/1 20,000 12/314,500Computer Bal. 20,000 Bal.24,500

6/1 27,000Bal. 27,000 Interest Expense

12/311,500Accumulated Depr. Bal. 1,500

12/31 5,250Bal. 5,250 Rent Expense

12/3111,000

Bal.11,000


4-166

12/315,250Bal. 5,250

Supplies Expense12/314,820Bal. 4,820

4-167


Moon Walk CompanyTrial Balance

December 31, 2008


Cash $110,200Accounts Receivable 44,000Prepaid Rent 13,000Supplies 480Computer 27,000Accumulated Depreciation $ 5,250Accounts Payable 3,500Unearned Revenue 25,000Salaries Payable 4,500Interest Payable 1,500Notes Payable 20,000Common Stock 75,000Dividends 6,000Service Revenue 113,000Salaries Expense 24,500Interest Expense 1,500Rent Expense 11,000Depreciation Expense 5,250Supplies Expense 4,820

Totals $247,750 $247,750

4-168


Moon Walk CompanyFinancial Statements


Income Statement


ExpensesSalaries Expense $24,500Interest Expense 1,500Rent Expense 11,000Depreciation Expense 5,250Supplies Expense 4,820


Net Income $65,930


Beginning Common Stock $ -0-Plus Stock Issued 75,000

Ending Common Stock $ 75,000

Beginning Retained Earnings -0-Plus Net Income 65,930Less Dividends (6,000)

Ending Retained Earnings 59,930


4-169


Moon Walk CompanyBalance Sheet


AssetsCash $110,200Accounts Receivable 44,000Supplies 480Prepaid Rent 13,000Computer 27,000Less: Accumulated Depreciation (5,250)


LiabilitiesAccounts Payable $ 3,500Salaries Payable 4,500Interest Payable 1,500Notes Payable 20,000Unearned Revenue 25,000





4-170


Moon Walk CompanyStatement of Cash Flows




Cash Flows From Investing Activities:Outflow to Purchase Computer (27,000)


Cash Flows From Financing Activities:Inflow from Stock Issue 75,000Inflow from Borrowed Funds 20,000Outflow for Dividends (6,000)



0

4-171

PROBLEM 4-35B (cont.)e.Date Account Titles Debit Credit

Closing Entries

Dec. 31



Dec. 31


Salaries Expense 24,500Interest Expense 1,500Depreciation Expense 5,250Rent Expense 11,000Supplies Expense 4,820

Dec. 31


Dividends 6,000

4-172

PROBLEM 4-35B e. (cont.)

Moon Walk CompanyT-Accounts for Closing Entries, 2008


Cash Accounts Payable Common StockBal.

110,200Bal. 3,500 Bal. 75,000

Unearned Revenue Retained EarningsAccounts Receivable Bal.

25,000cl 47,070 cl 113,000

Bal.44,000 cl 6,000Salaries Payable Bal. 59,930

Bal. 4,500Prepaid Rent Dividends

Bal.13,000 Interest Payable Bal. 6,000 cl 6,000Bal. 1,500 Bal. -0-

Supplies Service RevenueBal. 480 cl113,000 Bal.

113,000Bal. -0-

Notes PayableComputer Bal.


Bal.27,000 Bal. 24,500 cl 24,500Bal. -0-

Accumulated Depr. Interest ExpenseBal. 5,250 Bal. 1,500 cl 1,500

Bal. -0-

Depreciation ExpenseBal. 5,250 cl 5,250Bal. -0-


Supplies ExpenseBal. 4,820 cl 4,820Bal. -0-

4-173


Moon Walk CompanyAfter Closing Trial Balance

December 31, 2008


Cash $110,200Accounts Receivable 44,000Prepaid Rent 13,000Supplies 480Computer 27,000Accumulated Depreciation $ 5,250Accounts Payable 3,500Unearned Revenue 25,000Salaries Payable 4,500Interest Payable 1,500Notes Payable 20,000Common Stock 75,000Retained Earnings 59,930

Totals $194,680 $194,680

4-175

PROBLEM 4-36B

Note: The journal entries are provided for the use of the instructor.

Hawkins RentalGeneral Journal May, 2007


May 1 Cash 420Accounts Receivable 1,200

Rental Revenue 1,620

May 2 Supplies 300Accounts Payable 300

May 7 Cash 2,500Accounts Receivable 2,500

May 8 Unearned Revenue 500Rental Revenue 500

May 10


Cash 233

May 15


Cash 2,100

May 15

Prepaid Insurance 1,200

Cash 1,200

May 16


Cash 300

May 20

Dividends 300

Cash 300

May 27

Utilities Expense 310


4-176

May 31

Cash 625

Accounts Receivable 1,100Rental Revenue 1,725

4-177

PROBLEM 4-36B (cont.)

Hawkins RentalsGeneral Journal, May 2007 (cont.)


May 31


Cash 2,100

Adjusting Entries

May 31

Supplies Expense ($80 + $300 $40)

340

Supplies 340

May 31

Interest Expense ($20,000 x 9% x 1/12)

150

Interest Payable 150

May 31

Rent Expense 300

Prepaid Rent 300

May 31

Depreciation Expense* 450

Accumulated Depreciation 450

May 31

Insurance Expense ($1,200 12 x 1/2)

50

Prepaid Insurance 50

*($30,000 $3,000) 5 = $5,400; $5,400 12 = $450

4-178

PROBLEM 4-36B (cont.) a., b. and c.

T-Accounts, May 2007

Cash Accounts Payable Common StockBal. 6,970 5/10 233 Bal. 233 Bal. 20,0005/1 420 5/15 2,100 5/1

0233 5/2 300

5/7 2,500 5/15 1,200 5/16

300 5/27

310 Retained Earnings

5/31 625 5/16 300 Bal. 310 Bal. 1,367 5/20 300 5/31 2,100 Unearned Revenue Dividends

Bal. 4,282 Bal. 500 5/20

300

5/8 500 Bal. 300Accounts Receivable Bal. -0-

Bal. 2,350 5/7 2,500 Rental Revenue5/1 1,200 Interest Payable 5/1 1,6205/31 1,100 Bal. 150 5/8 500Bal. 2,150

5/31150

5/311,725

Bal. 300 Bal. 3,845Prepaid Rent

Bal. 3,300 5/31 300 Salaries ExpenseBal. 3,000 Notes Payable 5/1

52,100

Bal. 20,000

5/31 2,100

Prepaid Insurance Bal. 4,2005/15 1,200Bal. 1,200 Utilities Expense

5/31 50 5/27

310

Bal. 1,150 Bal. 310

Supplies Insurance ExpenseBal. 80 5/31 505/2 300 Bal. 50Bal. 380

5/31 340 Depreciation ExpenseBal. 40 5/31 450

Bal. 450Wedding Decor

4/1 30,000 Rent ExpenseBal. 30,000 5/31 300

4-179

Bal. 300Accumulated Depr.

Bal. 450 Supplies Expense 5/31 450 5/31 340 Bal. 900 Bal. 340

4-180

PROBLEM 4-36B a., b. and c. (cont.)

T-Accounts, May 2007 (cont)

Interest Expense5/31

150

Bal. 150

4-181

PROBLEM 4-36B (cont.) Note to Instructor: The unadjusted trial balance is not required but is included for information purposes.

Hawkins RentalsUnadjusted Trial Balance

May 31, 2007


Cash $ 4,282Accounts Receivable 2,150Prepaid Rent 3,300Supplies 380Prepaid Insurance 1,200Wedding Decor 30,000Accumulated Depreciation $ 450Accounts Payable 310Interest Payable 150Notes Payable 20,000Dividends 300Common Stock 20,000Retained Earnings 1,367Rental Revenue 3,845Salaries Expense 4,200Utilities Expense 310

Totals $46,122 $46,122

4-182


Note: This trial balance is not required in the problem, but is provided for the use of the instructor.

Hawkins RentalsAdjusted Trial Balance

May 31, 2007


Cash $ 4,282Accounts Receivable 2,150Prepaid Rent 3,000Supplies 40Prepaid Insurance 1,150Wedding Decor 30,000Accumulated Depreciation $ 900Accounts Payable 310Interest Payable 300Notes Payable 20,000Common Stock 20,000Retained Earnings 1,367Dividends 300Rental Revenue 3,845Salaries Expense 4,200Utilities Expense 310Insurance Expense 50Depreciation Expense 450Rent Expense 300Supplies Expense 340Interest Expense 150

Totals $46,722 $46,722

4-183


Hawkins RentalsFinancial Statements

For the Month Ended May 31, 2007

Income Statement

Rental Revenue $ 3,845

Operating ExpensesSalaries Expense $4,200Supplies Expense 340Depreciation Expense 450Insurance Expense 50Utilities Expense 310Rent Expense 300Interest Expense 150


Net Operating Income (Loss) $(1,955)


Beginning Common Stock $20,000Plus Stock Issue -0-Ending Common Stock $20,000

Beginning Retained Earnings 1,367Less: Net Loss (1,955)Less: Dividends (300)Ending Retained Earnings (888)


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Hawkins RentalsBalance Sheet

As of May 31, 2007

AssetsCash $

4,282Accounts Receivable 2,150Supplies 40Prepaid Rent 3,000Prepaid Insurance 1,150Wedding Decor $30,000Less: Accumulated Depr. (900) 29,100


LiabilitiesAccounts Payable $ 310Interest Payable 300Notes Payable 20,000


Stockholders’ EquityCommon Stock 20,000Retained Earnings (888)


Total Liab. and Stk. Equity $39,722

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PROBLEM 4-36B f. (cont.)

Hawkins RentalsStatement of Cash Flows

For the Month Ended May 31, 2007

Cash Flow From Operating Activities:

Inflow from Customers $ 3,545Outflow for Expenses (5,933)

Net Cash Flow from Operating Activities

$ (2,388)

Cash Flow From Investing Activities:Net Cash Flow from Investing Activities

-0-

Cash Flow From Financing Activities:

Outflow for Dividends (300)Net Cash Flow from Financing Activities

(300)

Net Change in Cash (2,688)Plus: Beginning Cash Balance 6,970Ending Cash Balance $ 4,282

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Note: The closing journal entries are not required but are included for the use of the instructor.


Closing Entries

cl Rental Revenue 3,845Retained Earnings 3,845

cl Retained Earnings 5,800Salaries Expense 4,200Interest Expense 150Depreciation Expense 450Rent Expense 300Supplies Expense 340Insurance Expense 50Utilities Expense 310

cl Retained Earnings 300Dividends 300

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Hawkins RentalsT-Accounts for Closing Entries, May 31, 2007


Cash Accounts Payable Common StockBal. 4,282 Bal. 310 Bal.

20,000

Interest Payable Retained EarningsAccounts Receivable Bal. 300 Bal. 1,367

Bal. 2,150 cl 5,800 cl 3,845cl 300

Notes Payable Bal. 888Prepaid Rent Bal.

20,000Bal. 3,000 Dividends

Bal. 300 cl 300Bal. -0-

Prepaid InsuranceBal. 1,150 Rental Revenue

cl 3,845 Bal. 3,845Bal. -0-

Supplies Salaries ExpenseBal. 40 Bal. 4,200 cl 4,200

Bal. -0-

Wedding Decor Interest ExpenseBal.30,000 Bal. 150 cl. 150

Bal. -0-

Accumulated Depr. Depreciation ExpenseBal. 900 Bal. 450 cl. 450

Bal. -0-

Rent Expense

Bal. 300 cl. 300Bal. -0-

Supplies Expense

Bal. 340 cl. 340Bal. -0-

Insurance Expense

Bal. 50 cl. 50Bal. -0-

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Hawkins RentalsT-Accounts for Closing Entries, May 31, 2007 (cont.)

Assets + Liabilities + Stockholders’ Equity

Utilities ExpenseBal. 310 cl. 310Bal. -0-

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Note: The after closing trial balance is not required, but is provided for the use of the instructor.

Hawkins RentalsAfter Closing Trial Balance

May 31, 2007


Cash $ 4,282Accounts Receivable 2,150Prepaid Rent 3,000Supplies 40Prepaid Insurance 1,150Wedding Decor 30,000Accumulated Depreciation $ 900Accounts Payable 310Interest Payable 300Notes Payable 20,000Common Stock 20,000Retained Earnings 888

Totals $41,510 $41,510

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1. The May 31, 2007, retained earnings balance does not equal the net loss for May because the account had a beginning balance of $1,367 and there was a $300 dividend that reduced retained earnings but did not affect the amount of net income.

2. The balance in the accumulated depreciation account reflects two months’ depreciation expense, while the income statement amount represents only one month’s depreciation.

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ATC 4-1

a. From January 28, 2000 to February 2, 2001, Dell’s Retained Earnings was increased by $2,177 of net earnings, but it was decreased by $2,598 from “Purchases and retirements” of common stock. The net result of these events was to decrease Retained Earnings by $421.

b. Dell Computer Corporation is a direct marketer of personal computers and other computer equipment.

c. No.

d. At February 2, 2001 the “Other” account in Stockholders’ equity had a (negative) balance, therefore, it would be shown as a debit balance.

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ATC 4-2a.

Mabry CompanyT-Accounts, 2002


Cash Accounts Pay. Common StockBal.12,000

2. 6,000 Bal.4,000

Bal.10,000

4. 32,000 5.19,000

5.19,000

3.18,000

6b.13,200

Bal.3,000

Bal. 5,800 Retained EarningsInterest Payable Bal.

4,700Accounts

ReceivableBal. 300

Bal. 6,000 4.32,000

6b.1,200 6a. 900 Service Revenue

1. 36,000 Bal. -0- 1. 36,000Bal. 10,000

Bal.36,000


12,000Operating Expenses

2. 6,000 7. 5,000 6b.12,000

3. 18,000

Bal. 1,000 Bal. -0- Bal.18,000

Equipment Interest ExpenseBal.25,000

6a. 900

Bal. 900

Accumulated Depr.

Rent Expense

Bal. 7. 5,000

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12,0008. 1,200 Bal.5,000Bal.13,200


8. 1,200Bal. 1,200

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ATC 4-2 a. (cont.)



Cash Accounts Pay. Common StockBal.5,800 2a. 8,400 Bal.

3,000Bal.10,000

4. 52,000 5.20,000

5.20,000 3.24,000

Bal.29,400

Bal.7,000

Retained EarningsSalaries Payable Bal.

15,600Accounts

Receivable7. 2,100

Bal.10,000

4.52,000

Bal.2,100

Service Revenue

1. 48,000 1. 48,000Bal. 6,000 Bal.

48,000

Prepaid Rent Operating Expenses

Bal.1,000 3. 24,0002a. 8,400 2b.

1,000Bal.

24,0006. 7,000

Bal.1,400 Rent Expense2b. 1,000

Equipment 6. 7,000Bal.25,000

Bal. 8,000

Accumulated Depr.

Salaries Expense

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Bal.13,200

7. 2,100

8. 1,200 Bal.2,100Bal.14,400


8. 1,200Bal. 1,200

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ATC 4-2 a. (cont.)



Cash Accounts Pay. Common StockBal.29,400

1. 2,100 Bal.7,000

Bal.10,000

5. 55,000 3a. 9,000 6.33,000

4.32,000

7. 2,000 6. 33,000

Bal.6,000

Bal.42,300

Retained Earnings

Salaries Payable Bal.28,300

Accounts Receivable

Bal.2,100

Bal. 6,000 5.55,000

1. 2,100 Service Revenue

2. 56,000 Bal. -0- 2. 56,000Bal. 7,000 Bal.

56,000

Prepaid Rent Operating Expenses

Bal. 1,400 4. 32,0003a. 9,000 3b.

1,400Bal.

32,0008. 7,500

Bal. 1,500 Rent Expense3b. 1,400

Equipment 8. 7,500Bal.25,000

Bal. 8,900

7. 5,000Bal.

20,000

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Accumulated Depr.

9. 1,000

Bal.14,400

Bal. 1,000

7. 4,000 9. 1,000Bal.11,400

Gain on Sale of Eq.

7. 1,000Bal. 1,000

ATC 4-2 a. (cont.)

Mabry Company

Income Statements

2002 2003 2004

Service Revenue $36,000 $48,000

$56,000

Gain From Sale of Equipment

-0- -0- 1,000

Total Revenue 36,000 48,000 57,000

ExpensesOperating Expenses (18,000

)(24,000

)(32,000

)Rent Expense (5,000) (8,000) (8,900)Interest Expense (900) -0- -0-Salaries Expense -0- (2,100) -0-Depreciation Expense (1,200) (1,200) (1,000)


(35,300)

(41,900)

Net Income $10,900 $12,700

$15,100

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ATC 4-2 a. (cont.)

Mabry Company

Balance Sheets

2002 2003 2004

AssetsCash $ 5,800 $29,40

0$42,30

0Accounts Receivable 10,000 6,000 7,000Prepaid Rent 1,000 1,400 1,500Equipment 25,000 25,000 20,000Less: Accumulated

Depreciation(13,200

)(14,400

)(11,400

)Total Assets $28,600 $47,40

0$59,40

0

LiabilitiesAccounts Payable $ 3,000 $

7,000$

6,000Salaries Payable -0- 2,100 -0-

Total Liabilities 3,000 9,100 6,000

Stockholders’ EquityCommon Stock 10,000 10,000 10,000Retained Earnings 15,600 28,300 43,400

Total Stockholders’ Equity 25,600 38,300 53,400

Total Liab. and Stockholders’ Equity

$28,600 $47,400

$59,400

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ATC 4-2 a. (cont.)

Mabry Company

Statements of Cash Flows

2002 2003 2004

Cash Flow from Operating Act.Cash received from revenue $32,00

0$52,00

0$55,00

0Cash paid for rent (6,000) (8,400) (9,000)Cash paid for operating

expense(19,000

)(20,000

)(33,000

)Cash paid for interest (1,200) -0- -0-Cash paid for salaries -0- -0- (2,100)

Net Cash Flow from Operating Act.

5,800 23,600 10,900

Cash Flow From Investing Act.Cash from sale of equipment

-0- -0- 2,000

Net Cash Flow from Investing Act.

-0- -0- 2,000

Cash Flow From Financing Act.Payment of note (12,000

)-0- -0-

Net Cash Flow from Financing Act.

(12,000)

-0- -0-

Net Change in Cash (6,200) 23,600 12,900Add Beginning Cash 12,000 5,800 29,400Ending Cash Balance $

5,800$29,40

0$42,30

0

b. The company is collecting more of its accounts receivable. Sales have been increasing but accounts

4-200

receivable has been decreasing. The company has been paying accounts payable at an even rate. It pays what it charges in that year.

c. Depreciation decreased because the company sold some of its equipment and did not purchase new equipment.

d. Net income increased because sales increased more than the related expenses.

e. Net income increased because sales increased more than the related expenses again.

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ATC 4-3a.The fiscal year-ends should be matched to the companies as follows:

January 31, is the closing date for Toys R Us, Inc. By January 31, the Christmas rush is over.

August 31, is the closing date for Dekalb Genetics Corp. Students may be surprised about this if they think of the end of August as a busy time for farmers, which it is since the fall harvest is near. However, Dekalb sells seeds to farmers who plant during the spring. Dekalb was recently acquired by Monsanto.

July 31, is the closing date for Vail Resorts, Inc. Clearly, a ski resort company would not want to close its books on December 31. Thus, July 31, before the ski season gets underway, appears to be a good time to end the fiscal year at a ski resort.

November 30, is the closing date for K & B Homes. Summer and fall, when the weather is warm and dry, is a busy time for a construction company, so it would not want to close its books on August 31, or July 31. December 31, or January 31, might also be a good time for a construction company to close its books. One reason companies sometimes close their books on dates other than December 31, is to reduce the cost of their independent audit. CPA firms are very busy at the end of the calendar year since more companies close their books on this date than any other. Therefore, a company might be able to get its audit performed at a lower price if it ends its fiscal year at a slow time of year for auditors.

There are no requirements regarding when companies close their books, so students should be reminded that the four companies presented here are just that -- four companies. Just because K & B Homes closes its books on November 30, does not mean that all companies in the construction business do.

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ATC 4-4

The three major components of the 10-K are the financial statements, footnotes to the financial statements, and management’s discussion and analysis.

The financial statements included are the income statement, statement of changes in stockholders’ equity, the balance sheet, and the statement of cash flows. The footnotes to the financial statements explain the information contained in the financial statements. They explain the type of accounting procedures used and the way certain calculations are made. The notes to the financial statements are considered an integral part of the financial statements. The auditor has responsibility for both the financial statements and the notes to the financial statements.

The section referred to as management’s discussion and analysis (MD&A) is used to explain different aspects of a company’s performance during a period. Since it expresses management’s perspective, the auditor has a lesser responsibility for what is contained in this section.

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ATC 4-5

Some of the points the student may mention include:

Ms. Hughes does not understand the role of the auditor. The audit report does not indicate that the company can achieve 25% growth per year for the next five years. The auditor is merely stating that the current financial statements have been prepared in conformity with GAAP and present a fair picture of the company at the time of the financial statements.

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ATC 4-6

Some points that students may mention include the following:

One of the Summer months (May or June) could be a good time to end the fiscal year. This is traditionally a slow time for auto sales, just before the year-end close outs start. Ending the fiscal year during a slow period is beneficial for the company. There is less business activity and more resources can be allocated to completing the year end closing process. It also more evenly spreads the work load for the office personnel so that the year-end closing is not done in a peak activity month.

It is beneficial for the accountant to move to a closing date other than December 31. This is the year end that more businesses use and using any other month will help to spread out the work load for the accountant. Also, the first three and one half months of the year are tax season for accountants. Consequently, moving the year end to something other than these months will assist the accountant.

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ATC 4-7

a. This answer represents one acceptable solution out of many possible alternatives. Eight identifiable events for Argon and seven for Rogan are shown below under accounting equations. The financial statements on the following pages are drawn from the information contained in the equations. Note that the unit of measure is “sheep” rather than “dollars.” The value of the land provided by the father’s initial contribution had to be estimated. Since Argon purchased additional land at a price of 2 sheep per acre, the father’s contribution, which occurred on the same day, was assumed to have the same value (i.e., 2 sheep per acre).

ARGONASSETS = LIABILITIES + STK. EQUITY

Explanation Sheep

+ Land

+ Fence

=Shee

p Pay.

+ Int. Pay +

Com. Stock +

Ret. Ear.

1. Acq. from Owner

300 40 340

2. Purchase Land

(20) 20

3. Sold Land 9 (6) 34. Sheep

Revenue 75 75

5. Purchase Fence

(50) 50

6. Loan 400 4007. Interest

Expense 24 (24)

8. Depr. Exp. (10)

(10)

Ending Balances

714 + 54 + 40 = 400 + 24 + 340 + 44

ROGANASSETS = LIAB. + STK. EQUITY

1. Explanation Sheep + Land = Com Stk.

+ Ret. Ear.

2. Acq. from Owner 300 40 3403. Sheep Revenue 37 374. Dead Sheep

Expense (2) (2)

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5. Predator Expense (5) (5)6. Acquired from

Wife 170 170

7. Sheep Revenue 16 16Ending Balances 516 + 40 = -0- 510 46

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ATC 4-7 a. (cont)

ARGONFINANCIAL STATEMENTS

Income statement

Balance Sheet Sheep Flow Statement

Rev. 75 Assets: Operating Act.Gain 3 Sheep 714 Inflow from Rev. 75Int. Exp. (24) Fence 50 Investing Act.Dep. Exp. (10) Acc. Dep. (10) Purchased Land (20

)Net Inc. 44 Land 54 Built Fence (50

)

Total Assets 808 Sold Land 9

Liabilities Net from Inv. (61) Sheep Pay. 400 Financing Act. Int. Pay. 24 Owner Invest. 30

0Stk. Equity Borrowing 40

0 Com. Stock 340 Net from Fin. 700 Ret. Ear. 44 Net Change in

Sheep714

Total Liab. & S. Eq.

808

ROGANFINANCIAL STATEMENTS

Income statement

Balance Sheet Sheep Flow Statement

Rev. 53 Assets: Operating Act.Dead S. Ex. (2) Sheep 516 Inflow from Rev. 53Pred. Exp. (5) Land 40 Outflow for Exp. (7)Net Inc. 46 Total Assets 556 Net from Oper. 46

Stk. Equity Financing Activity

Com. Stock 510 Acq. from Owner 470

Ret. Earn. 46 Net Change in Sheep

516

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Total Liab. & Eq.

556

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ATC 4-7 (cont.)

b. The following answers are based on the financial statements shown on the previous page.1. Rogan’ equity is larger with a total of 556 compared

to Argon’s total of 384.2. Rogan produced the larger amount of net income

with a total of 46 versus Argon’s 44.3. Based on conventional accounting standards Rogan

would be assigned heir to the family fortune.

c. Argon has seven more acres of land than Rogan. Remember that Argon purchased an additional ten acres and sold three of them. Since the land has increased in value by one sheep per acre, Argon’s holdings are worth seven more sheep than Rogan’s. Notice that this factor alone would make a difference in the determination of which twin should be considered heir. If the land were valued at market, Argon would recognize a gain that was seven sheep larger than the gain recognized by Rogan. Accordingly, Argon’s net income would be 5 sheep larger rather than two sheep smaller than Rogan’s earnings. So net income would be:

Argon Rogan44 46+7 +051 46

d. Note that 75 newborn sheep were produced by Argon’s herd which at the end of the period contained 714 sheep. Accordingly, these data suggest a return ratio of approximately 10.5% (i.e., 75 714). Similarly, Rogan experienced a return ratio of approximately 10.3% (i.e., 53 516). Certainly, these ratios could be refined by adjusting the revenue figure to account for the possibility of expected losses due to predators and illness. Likewise, the denominator could be adjusted to account for timing factors such as the date that Rogan married his wife. However, the rough estimate of an approximate 10% return should be sufficient to compare with the interest cost of approximately 6% (i.e., 24 400). Accordingly, the borrowing activity (leverage) appears to have been a profitable strategy.

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ATC 4-7 (cont.)

e. Rogan lost approximately 1% of his herd to predators (i.e., 5 516). Applying this percentage to Argon’s herd suggests that he saved approximately 7 sheep (i.e. 714 x .01) by building the fence. Since the fence cost approximately 10 sheep per year of useful life (i.e. 50 5) the decision to build the fence appears to have been a financial failure. The condition will worsen in future periods when the size of Argon’s herd is reduced by the repayment of the sheep that he borrowed. The possibility of the fence providing protection from illness was not considered because the case states that the fence was specifically designed to protect against predatory animals.

f. The shepherd may have been willing to accept a smaller return because he was not required to worry with caring for the herd. Also, he is protected from certain risks. For example, if a substantial number of sheep die from illness, Argon is still committed to return 424 healthy sheep.

g. If half of Argon’s 714 sheep die from illness, he would be unable to repay his debt of 424 sheep. Rogan would lose 258 sheep (i.e., 516 2). However, since he has no debt, he would also retain an equity base of 258 sheep. Accordingly, Argon would be bankrupt but Rogan would still be in business. Financial risk is shown in financial statements by reporting the amount of liabilities that companies have incurred. The level of this risk can be measured with a debt-to-assets ratio. Other forms of disclosure such as footnotes or management’s discussion and analysis could be used to provide more detailed information regarding the level of financial risk.

h. The ethical quality of the management team should always be considered when making investment decisions. The relevance of the marriage issue is a matter of personal judgment. However, managers who engage in deceptive practices in order to overstate profitability are displaying a quality of dishonesty that can result in the demise of any company. Wise investors weigh management integrity heavily in their investment decisions.

i. There is no single correct solution to this requirement. Those willing to accept risk are likely to favor Argon, while those being more risk averse are likely to favor

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Rogan. The important thing to focus on in this requirement is logical consistency.

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ATC 4-8

Note: This solution was accurate as of December 15, 2001. However, the EDGAR database is subject to update at any time, so this solution will likely be “dated” at the time you assign this case to your students.

These data are from the May 31, 2001, financial statements and dollar amounts are in millions.

a. Nike began operations in 1968.

b. Nike owns Bauer, a manufacturer of equipment for ice, street, and field hockey.

c. Nike has approximately 22,700 employees.

d. Amounts in millions as of May 31, 2001

Assets = Liabilities + Shareholders’ Equity$5,819.6 $2,325.1(1) $3,494.5

1Liabilities must be computed: Assets Shareholders’ Equity = Liabilities

e. Nike’s revenues and net earnings for 2000 and 2001 were:

1999 2000 2001

Revenue $8,776.9 $8,995.1 $9,488.8

Net Earnings 451.4 579.1 589.7

Nike’s performance has been improving over the past three years.

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Chapter 4 Solution of fundamental of financial accouting by EDMONDS (4th edition)

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Transcript of Chapter 4 Solution of fundamental of financial accouting by EDMONDS (4th edition)